Americold Realty Trust

NYSE:COLD

Earnings Call Analysis

Americold Shows Strong Financial Growth Amid Challenging Environment

In Q2 2024, Americold Realty Trust reported a significant financial uptick, with AFFO increasing by 36% to $109 million and core EBITDA rising by nearly 25% year-over-year. The company's same-store NOI grew by 19.3% driven by operational efficiencies and strategic initiatives. Americold raised its full-year AFFO guidance to $1.44-$1.50 per share, projecting a 16% increase from 2023. Key growth drivers included new business wins, pricing initiatives, and technological advancements through Project Orion. Despite a challenging consumer environment, Americold’s focus on fixed contracts and customer service has ensured continued growth and stability.

Financial Performance

Americold Realty Trust reported a strong second quarter in 2024. The Adjusted Funds from Operations (AFFO) grew to approximately $109 million or $0.38 per share, showing a significant 36% year-over-year increase. The core EBITDA reached $165 million, up by 24.7% from the previous year, leading to an impressive EBITDA margin of 25%. This performance was mainly driven by the same-store warehouse services which achieved double-digit margins for the second consecutive quarter, specifically 13.2% this quarter.

Guidance and Projections

Americold increased their full-year AFFO per share guidance to a range of $1.44 to $1.50, representing an approximately 16% increase from 2023. The updated forecast for same-store constant currency revenue growth is between 2% to 4%, with same-store NOI growth guidance rising to 11% to 14% largely due to higher service margins. This margin growth is partly attributed to Project Orion, their transformation program focused on implementing standard processes and improving business analytics capabilities.

Customer and Market Insights

The company highlighted their strong customer relationships and low churn rate of around 3%. Around 51% of global warehouse revenue comes from their top 25 customers, who continue to show a preference for fixed commitment storage contracts that offer greater revenue stability. In the second quarter, rent and storage revenue from these fixed contracts accounted for 56.6% of their storage revenue, marking the 13th consecutive quarterly record for Americold.

Pricing Strategies

Americold continues to emphasize proactive pricing strategies. In the second quarter, they managed to uphold their pricing power with a 7.2% increase in same-store rent and storage revenue per economic occupied pallet and a 12% increase in same-store constant currency services revenue per throughput pallet. These efforts help to offset inflationary pressures and reflect the added value of their services.

Growth and Expansion Initiatives

Americold is making substantial investments in growth projects. Notable activities include the groundbreaking on a $30 million expansion project in Sydney, Australia, the $85 million expansion project in Allentown, Pennsylvania, a $127 million facility in Kansas City with CPKC, and a $35 million development with DP World in Dubai. The expansion in Sydney aims to add approximately 13,400 pallets to their current capacity, while Allentown will add about 37,000 pallet positions.

Technological Advancements

Project Orion, launched in early May, aims to streamline various business operations. Despite initial implementation challenges, the project already contributed to higher margins by improving operational efficiencies. Future phases of the project are expected to generate further growth and efficiency gains through advanced functionalities like embedded artificial intelligence.

Market Dynamics and Future Outlook

Although throughput volumes have seen a decline by 2% to 4% due to continuing consumer strain under inflationary pressures, the company remains optimistic. There is hope for improvement if interest rate cuts increase consumer disposable income. The company is also tracking towards the high end or exceeding its guidance range of $200 million to $300 million in announced development starts for 2024.

Earnings Call Transcript 2024-Q2

[Operator]

Greetings, and welcome to Americold Realty Trust Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Kevin Reed, Vice President, Investor Relations. Thank you, Mr. Reed, you may begin.

[Kevin Reed, executive]

Good afternoon. Thank you for joining us today for Americold Realty Trust Second Quarter 2024 Earnings Conference Call. In addition to the press release distributed this morning, we have filed a supplemental package with additional detail on our results, which is available in the Investor Relations section on our website at www.ir.americold.com.

This afternoon's conference call is hosted by Americold's Chief Executive Officer, George Chappelle, President of the Americas, Rob Chambers; and Chief Financial Officer, Jay Wells. Management will make some prepared comments, after which we will open up the call to your questions. On today's call, management's prepared remarks may contain forward-looking statements. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. A number of factors could cause actual results to differ materially from those anticipated.

Forward-looking statements are based on current expectations, assumptions and beliefs as well as information available to us at this time and speak only as of this date they are made and management undertakes no obligation to update publicly any of them in light of new information or future events.

During this call, we will discuss certain non-GAAP financial measures, including, but not limited to, core EBITDA and AFFO. The full definitions of these non-GAAP financial measures and reconciliations to the comparable GAAP financial measures are contained in the supplemental information package available on the company's website.

Now I will turn the call over to George.

[George Chappelle, executive]

Thank you, Kevin, and thank you all for joining our second quarter 2024 earnings conference call. This afternoon, I am pleased to announce our financial results for the quarter and will also highlight key operational metrics. I will then discuss our updated outlook for the remainder of the year. Rob will provide an update on our recent customer initiatives and growth activity and Jay will discuss our capital position, liquidity and provide a detailed walk-through of our updated full year 2024 guidance.

I'll begin with an overview of some key financial achievements for the quarter. We generated AFFO of approximately $109 million or $0.38 per share, an increase of over 36% from Q2 last year. We also generated core EBITDA of $165 million, an increase of 24.7% year-over-year, resulting in an industry-leading EBITDA margin of 25%.

Our performance was driven in large part by continued strength of our same-store warehouse services where we delivered a second consecutive quarter of double-digit margins coming in this quarter at 13.2%. To put this in an earnings growth context, increased warehouse services margins resulted in an incremental $40 million of NOI or roughly $0.14 per share in the second quarter versus prior year, underscoring our ability to drive consistent, profitable organic growth in a challenging macro environment.

Last quarter, we highlighted our expectation that we could deliver services margins of 9% for the full year 2024, a year ahead of our original expectations, which would equate to approximately $100 million of incremental NOI on an annualized basis. Given the current productivity of our workforce, driven by over 2 years of hiring and retention progress, I am happy to report we are now on pace to exceed the $100 million target this year.

Combined with new business wins, pricing initiatives, and continued systems and process improvements, global warehouse same-store NOI grew 19.3% year-over-year. Before I touch on our core priorities, I would like to provide an update on Project Orion. As a remainder in February 2023 we announced our transformation program Project Orion designed to drive future growth and achieve our long-term strategic objectives through investment in our technology and business processes across our global platform.

The primary goals of this project are to implement standard processes, reduce manual work and incrementally improve our business analytics capabilities. Highlights of the project include implementing centralized customer billing, a human capital management platform, next-generation warehouse maintenance capabilities and global procurement functionality to name a few. Even before the system went live, we saw numerous process improvements that led to increasing margins as we change the way we work to fit the system in Q1.

We went live in North America and Asia Pacific with the first phase of Project Orion in early May, and I'm pleased to report that we have had very little disruption internally or externally during and since the implementation. The rollout of Project Orion has been a contributing factor to our strong second quarter results. We expect it to continue to help drive growth and efficiency as we become more proficient in its use, expand its use across more geographies and functions and unlock incremental functionality included in our new systems such as embedded artificial intelligence.

On a final note regarding technology, we experienced negligible disruption from the recent CrowdStrike outages that happened across the globe a few weeks ago. Now let me review our top priorities and how they contributed to our results.

Customer service is at the heart of what we do and a key driver of both occupancy and our continued progress in selling fixed commitment contracts. Our goal is to be the global cold storage provider of choice by delivering the highest quality customer experience through our people, our infrastructure and our innovation. While economic occupancy showed a slight dip in this quarter to 78.1%, rent and storage revenue derived from fixed commitment storage contracts increased to 56.6%, 240 basis points higher than the previous quarter and 810 basis points higher than the second quarter 2023. The continued growth of these fixed commitment contracts is a result of delivering the best-in-class customer experience to our high-quality infrastructure.

Our customers' willingness to engage in these contracts speaks to the quality of our assets and also acts as a leading indicator of positive things to come as customers sign them in the anticipation of volume growth in the future. With respect to labor management, it's critical to our business that we have a safe, productive and well-trained workforce to service our customers as efficiently as possible. Over the last 2.5 years, we've disclosed the key metrics in this area related to hiring, permanent labor content, retention and workforce maturity to ensure the foundation we've built to support high levels of productivity is very visible and should inspire confidence in the sustainability of our warehouse services margins.

As we've said many times before, it's the services part of our business that customers value the most as it provides incremental supply chain benefit beyond simply storing the pallet and keeping it cold. The performance of our workforce not only ensures we service customers well within the dozens of individual services we currently offer, but also allows us to innovate and develop new services that further attract customers to our facilities. The continued refinement of our hiring and retention processes have resulted in a perm to temp hours ratio of 76-24 and which is flat year-over-year and a slight decline sequentially due to the seasonality of agricultural harvest that drives the change in work content required from the first quarter to the second.

Associate turnover finished the quarter at 38%, a 200 basis point improvement upon the first quarter. Our third key metric, our percentage of associates with less than 12 months of service now stands at 23%, has improved 600 basis points since the first quarter. As our workforce retention maturity have improved, it should be no surprise our warehouse services margins have improved in tandem.

Moving to pricing. In the second quarter, same-store rent and storage revenue per economic occupied pallet on a constant currency basis, increased by 7.2% versus the prior year and same-store service revenue per throughput pallet on a constant currency basis increased by 12%. Both were driven by pricing put in place in the back half of 2023, coupled with general rate increases or GRIs, at the beginning of 2024. Pricing comps will compress in the second half of this year as we lap those increases. Our current outlook on pricing looks stable as we anticipate a relatively benign environment for inflation-based rate actions.

With regards to development, our priority is to only invest in highly accretive growth projects. The $200 million to $300 million guide for announced development starts in 2024, which is up from $100 million to $200 million last year and tracking to potentially exceed the current range is committed to growth that will generate shareholder value across our 3 primary areas of focus. Our strategic partnerships with Canadian Pacific Kansas City Railway and DP World. Expansion projects, which are most often occupied by existing customers and customer dedicated build-to-suit developments.

Our strategic partnerships are excellent examples of Americold's unique ability to create value for our shareholders by partnering with global leaders who are experts in adjacent areas of the supply chain where we can leverage each other's capabilities to identify opportunities to jointly grow our businesses. Through these collaborations, we have $500 million to $1 billion of potential development pipeline.

Regarding expansions, I'm pleased to announce that last week, we broke ground on roughly a $30 million expansion project in Sydney, Australia. Also in the quarter, we broke ground on an $85 million expansion project in Allentown, Pennsylvania. As a reminder, both expansions were announced in previous quarters as well as the groundbreaking of our inaugural greenfield projects with our strategic partnerships, a $127 million development in Kansas City with CPKC and our $35 million development with DP World in Dubai.

Our planned development starts tracking towards the high end of our guidance for the year and further underwriting is progressing well. Whether it's a development or an expansion, we focus on design excellence, specific customer needs and actual work content that will take place within the walls of the facility. We are the only cold storage company with both automated and conventional facilities along all 3 nodes of the supply chain, a testament to our design skills, operational capabilities and knowledge of the overall end-to-end supply chain from farm to fork. Given the customer demand for our unique industry skills, I feel very confident our inorganic growth plans will continue to drive profitable growth for the foreseeable future.

Lastly, I want to briefly address our updated full year guidance. Given the progress we have made driving organic growth through productivity and efficiency improvements, pricing and in combination with the investments we have made in our technological infrastructure we are raising our full year 2024 AFFO per share guidance to a new range of $1.44 to $1.50 with a midpoint of $1.47, an increase of $0.05 per share from previous guidance and represents an approximately 16% increase from 2023.

At the midpoint of the new range, our same-store NOI growth guide has increased to 12.5%. Before I turn the call over to Rob, I would be remiss not to touch on the new cold storage landscape with the recent entrance of another publicly traded cold storage company. We think this is an extremely positive event for the industry, bringing more investment dollars to the sector and helping show cold storage as an attractive asset class within industrial real estate.

As it relates to Americold, having a true public peer in the space, helps make us more competitive and ultimately more efficient and productive for our customers and investors.

With that, I will turn it over to Rob.

[Robert Chambers, executive]

Thank you, George. As George mentioned, I will provide an update on our recent customer initiatives and growth strategy, starting with pricing initiatives. Our pricing initiatives continue to be a strength at Americold as we work tirelessly to ensure we price our business to reflect the value of the service we provide to our customers. We also have and will continue to price our services to offset inflationary pressures as they arise.

In the second quarter, same-store rent and storage revenue per economic occupied pallet on a constant currency basis, increased by 7.2% versus the prior year. Same-store constant currency services revenue per throughput pallet increased by 12% as a result of rate actions, better revenue capture and incremental value-added services. We've made great progress in this area.

Within our Global Warehouse segment, we had no material changes to the composition of our top 25 customers who account for approximately 51% of our global warehouse revenue on a pro forma basis. Our churn rate continues to remain low at approximately 3% of total warehouse revenues, consistent with historical churn rate. As George mentioned, we continue to be successful with increasing our fixed commitments with customers. Within the second quarter, rent and storage revenue derived from fixed commitment storage contracts came in at 56.6%, an increase of approximately $20 million on an annual basis and a 13th straight quarterly record for Americold.

As our customer base composition, low churn rate and progress on fixed commitments demonstrate, Americold continues to be the first choice for the world's largest food manufacturers and grocery retailers when it comes to their temperature-controlled supply chain needs. Our customers want world-class service and to partner with a provider who can support them at every node in the supply chain for production advantaged locations to major market distribution centers and then ultimately to retail distribution centers. This is a major competitive advantage and uniquely positions Americold within our industry to be the cold storage provider of choice.

Turning to growth initiatives. Last quarter, we updated you on the groundbreaking with of the inaugural projects with both of our strategic partnerships, the $127 million facility with CPKC and a $35 million facility with DP World. As George mentioned, we are pleased to announce the groundbreaking on both the roughly $30 million expansion project in Sydney, Australia and the $85 million expansion project in Allentown, Pennsylvania. As a reminder, the Sydney project is a new dedicated conventional expansion project anchored by one of Australia's largest grocers and will add mission-critical infrastructure in a capacity-constrained market currently operating at greater than 90% occupancy. It is anticipated to add approximately 13,400 incremental pallets to our current capacity of roughly 18,700 pallets in that market.

The Allentown project is a new conventional multi-customer expansion, there will be approximately 37,000 pallet positions and approximately 15 million cubic feet. Both projects are on track from a timing and underwriting perspective, and we look forward to updating this progress in future quarters. In addition to these new projects, we continue to make progress ramping the 5 automated developments that we completed last year. Three of these automated facilities are supporting food manufacturing in Atlanta, Georgia, Russellville, Arkansas and Spearwood, Australia, and our proven solutions are performing well and delivering in line with expectations. These automated facilities house several of our largest customers of both their key manufacturing and distribution locations. The service levels being delivered by our best-in-class automation to exceed industry standards and are a testament to Americold's technical design and implementation capabilities.

Given the success of our automation facilities in this sector, we expect to announce future automated expansions in the coming quarters. We continue to be thoughtful as we proceed with our 2 customer dedicated automated retail distribution centers in Lancaster, Pennsylvania and Plainville, Connecticut. Given the level of complexity and the importance of the customer relationship, we are being delivered in our approach. At Americold, we're interacting with major global customers, both current and prospective every day and a consistent theme in our discussions is the gradual recovery of consumer demand and we're positioning ourselves to take market share by providing best-in-class solutions.

The development projects we mentioned earlier highlight the significant market opportunity that exists and we are focused on converting that opportunity into outsized growth for Americold. What we're hearing from our customers is the need to partner with someone who understands how to build efficiency and resiliency into their operations to support their future growth.

Americold growth strategy is anchored in being able to create these solutions, and we have developed this capability to a level that is industry-leading. Our Supply Chain Solutions organization is the only group of supply chain scientists in the industry to develop automation in every node of the supply chain and are laser focused on the science and the analytics behind the design needs that matter most to our customers, including: first, how to best optimize our supply chain. Customers who engage our Supply Chain Solutions group are consistently presented with solutions that drive savings and improved performance as compared to their current network. Our team is utilizing industrial IoT and machine learning applications to drive speed to market with these solutions.

Second, how to build and operate the most efficient facilities in the industry. Americold facilities maximize the cubic footage of the buildings by being 13% more dense than our closest competitor, driving efficiency for our customers and return on invested capital for Americold. The Americold operating system ensures best practices that are utilized across our entire network.

Third, went to deploy automation versus utilizing conventional solutions. Our Supply Chain Solutions group analyzes the discrete work content associated with the customer or market, which we are building to determine if and when automation is appropriate versus adding conventional capacity. The result is a tailored solution that meets the needs of our customer or market without unnecessary added cost.

Fourth, what the most important value-added services are that Americold can provide. By having a portfolio that includes facilities at every node in the supply chain, we are able to offer dozens of value-added services that drive our same-store warehouse revenue per economically occupied pallet, 16% higher than our closest competitor.

Fifth, how to create an environmentally friendly cold chain solutions, as an example, driving energy efficiency into our buildings. Americold has over 200 buildings in our network that have been recognized by the Global Cold Chain Alliance's Energy Excellence program. That is more than 14x the number of buildings recognized in the rest of the industry combined. Another example includes our CPKC solution that will convert over 15,000 truckload shipments a year into rail shipments, a much greener mode of transportation. Our customers view Americold as an extension of their own supply chain organization as evidenced by the long-term committed and global nature of our relationships. That type of trust is not built overnight. It's built over decades of industry leadership.

Now I'll turn it over to Jay.

[Jay Wells, executive]

Thank you, Rob. Today, I will discuss our capital position and liquidity and update our full year guidance. Starting with our balance sheet. At quarter end, total net debt outstanding was $3.3 billion. We had total liquidity of $554 million, consisting of cash on hand and revolver availability, and our net debt to pro forma core EBITDA was approximately 5.3x.

As we discussed last quarter, our expansion in Allentown, our greenfield developments in Kansas City and Dubai and our new expansion project in Sydney increased investment spend in the second quarter and will continue for the remainder of this year. Please see Page 38 of the IRS supplement for additional details on our development projects.

Turning to our updated full year 2024 guidance. As George mentioned, we are increasing our AFFO per share to the range of $1.44 to $1.50, an approximate 4% increase at the midpoint and an approximate 16% increase from 2023's AFFO. Before reviewing the individual components of this guidance that are set forth on Page 41 of the IR supplement, let me quickly remind everyone of the 2024 same-store pool for the Global Warehouse segment. This pool has 226 facilities which is approximately 96% of the total number of properties in our warehouse segment.

A summary of the 2024 same-store pool historic performance for the second quarter of 2023 is presented on Page 33 of the IR supplement. We have 9 facilities that are in our 2024 non-same-store pool.

Now turning to the individual components of our updated AFFO guidance and starting with our Global Warehouse segment, we expect full year 2024 same-store constant currency revenue growth to be in the range of 2% to 4%. Let me provide more detail around the key drivers of this updated guide. With respect to occupancy and throughput volumes, as we discussed over the past quarter, our previous occupancy guide planned for a good summer grilling season with manufacturers and retailers increasing promotional activities to drive consumer demand. The most recent reports from food manufacturers and producers show the consumer continues to be strained by stubborn inflationary pressures resulting in continued volume challenges. While not new news, it does warrant attention as throughput volumes continue to be muted.

Based on the current economic outlook and recent commentary by food producers, we are reducing our expectations for economic occupancy to decline in the range of 200 to 300 basis points compared to 2023 and throughput volume to decrease in the range of 2% to 4%. With respect to pricing, we expect constant currency rent and storage revenue for economic occupied pallet growth to be in the range of 4% to 5% and constant currency services revenue per throughput pallet growth to be in the range of 7% to 8%. As a reminder, the pricing guidance reflects our continued pricing and power surcharge initiative to cover known inflation. It also reflects our annual contractual escalation and GRI step-ups and the commercialization of market-based pricing for contracts that we underwrite or renew.

Lastly, with regards to pricing, comps are expected to compress in the second half of this year as we anticipate a relatively benign environment associated with inflation-based rate actions.

For the full year, we are increasing our same-store constant currency NOI growth to now be in the range of 11% to 14%. This increase is being driven by higher services margins. Based on productivity and pricing, supported by new systems and processes, we now believe we can deliver services margins of over 11% for the full year 2024. Please note that service margins were higher in Q2, partly due to the implementation of Phase 1 of Project Orion and a new procurement system, which delayed certain Q2 operating expenses into Q3. If you just out these delayed expenses, same-store NOI is forecast to grow sequentially from the first half to the second half of 2024.

With regard to the 2024 non-same-store pool, as can be seen on Page 33 of the IR supplement, the non-same-store pool generated negative $2 million of NOI in the second quarter 2024. For the full year 2024, we expect the non-same-store pool to generate NOI in the range of negative $7 million to positive $1 million. We expect to manage and transportation segment's NOI to be in the range of $42 million to $47 million. We still expect for SG&A to be in the range of $219 million to $229 million.

Turning to interest expense. For the full year, we are lowering our interest expense range to approximately $133 million to $141 million, a reduction of $2 million at the midpoint due to an increase in capitalized interest. There is no change to our full year cash taxes or maintenance capital expenditures guide. Regarding developments. As George mentioned, we are tracking to be at the high end or to potentially exceed the current guidance range of $200 million to $300 million of announced development starts in 2024.

Please keep in mind that our guidance doesn't include the impact of acquisitions, dispositions or capital markets activity beyond that, which has been previously announced, and please refer to our IR supplement for detail on the additional assumptions embedded in this guidance.

Now let me turn the call back to George for some closing remarks.

[George Chappelle, executive]

Thanks, Jay. As the operational and financial results of the second quarter highlights, it's been another great quarter for growth at Americold. The effort put in by our team over the past 2.5 years to build a stable productive workforce, enhanced with our recent technology implementation, has created a solid foundation for sustained, predictable growth. While the company has never operated better, we have stepped up our investment in inorganic growth by investing almost double the amount of money and announced development starts of last year and now look to exceed those expectations due to the high demand for our design and construction services, coupled with our world-class operating model.

We've continued to grow our business through one of the most challenging consumer times in recent history. Over time, the consumer will strengthen and buying habits will normalize. And when that happens, we are positioned well to grow at a highly accretive and accelerated rate. As always, I want to give thanks to the over 15,000 associates around the world for their hard work and dedication every day. It's their best-in-class customer service efforts that provide the foundation for our future. For this, I say thank you. We could not do this without you.

Thank you again for joining us today, and we will now open the call for your questions. Operator?

[Operator]

[Operator Instructions] The first question comes from the line of Mike Mueller, JPMorgan.

[Michael Mueller, analyst]

As it relates to, I guess, the lighter throughput volumes, are there any categories specifically that are driving this? And then do you expect to end the year in positive territory based on the forecast at the end of '24?

[George Chappelle, executive]

Mike, I would say that no, we don't expect to end up in positive territory on throughput for the year will be down year-over-year based on our updated guide. And it's not one category that's driving the throughput down. I would say it's an overall weak consumer in an environment where pricing in the grocery store is suppressing volume. That's been the case now for well over a year, and I think has reached a tipping point very recently. But it's the same story. It's high prices in the grocery store. It's a consumer with less disposable income and it's -- as I said, it's been that trend for the last 12 months.

[Jay Wells, executive]

Yes, it's Jay. Just to hit a little bit more on that. I mean, if you look year-over-year, throughput is going to need that. If you look at post about 1%, if you do the back half of our guide. But if you look at sequentially with seasonality, our throughput is going to improve in the back half of the year if you look sequentially.

[Michael Mueller, analyst]

Got it. Okay. So by year-end, if we're looking at 4Q, you were expecting to be in the positive territory, it sounds like.

[Robert Chambers, executive]

Sequentially.

[George Chappelle, executive]

Sequentially, not year-over-year, I think I was answering year-over-year. Jay is going through sequentially. He's 100% correct. There will be a slight seasonal lift in the back half of the year sequentially from today, let's say, but year-over-year, we will be down in both the third and the fourth quarter.

[Operator]

Next question comes from the line of Samir Khanal with Evercore ISI.

[Samir Khanal, analyst]

George, I guess my question is around economic occupancy. How should we think about that, I know you kind of gave guide -- you updated guidance for this year, but I'm talking even more beyond this year, given that when you look at economic occupancy and the physical occupancy, I mean, there's a spread of about 900 basis points right now. And my only question is, given the macro out there and the challenges and slowdown you spoke about I mean could customers sort of deviate from this sort of safety stock idea and say, look, why are we paying for space that we're not using at this point. So maybe you could provide a bit more color on that into next year.

[George Chappelle, executive]

Yes. I would say that although the gap between physical and economic is 900 basis points, it has narrowed since the first half of the year by a couple of hundred basis points. We expect it to narrow further through the second half of this year. When does it come back? It comes back when a consumer has disposable income that comes closer to the pricing in the grocery store, just as we said, manufacturers do reduce safety stuff when demand is down and demand is down, which is why I believe our economic occupancy is down when it comes back as the consumer strengthens, and I think there's hope for that in the second half of the year with potential interest rate cuts and other activity, putting more money in the consumer's pocket.

I think the potential for that is certainly in next year, but maybe even the second half of this year. There seems to be a lot more aggressive talk around interest rate cuts that will help consumer disposable income that will close the gap to current pricing at the grocery store that will raise demand that will raise the safety stock and the whole system grows again. So it's all linked to the consumer, Samir. And right now the consumer has never been weaker.

[Robert Chambers, executive]

And then maybe just one other point that I would add, Samir, is look, we've been in this environment now where it's been a tough consumer for a number of quarters in a row and yet every quarter, you see our fixed commitments in terms of absolute dollars and percentages go up. We're on 13th straight quarter. We're over 56% now, another $20 million this quarter. So I think what you should take from that is that both Americold and our customers continue to benefit from the stability that, that provides.

It also, I think, as we said in the script, shows that they believe that the second half has the potential in it as I do but it does require some consumer health. And it's good to see that now many, many people are talking about the consumer, not only in our industry but in other industries and it seems as though consensus around interest rate cuts is building pretty quickly. So if help is on the way, we're very confident that, that will help our business. It will help occupancy. It will certainly help throughput and those tailwinds that I think could be as soon as the second half of this year should carry into next.

[Samir Khanal, analyst]

Got it. And then just as a follow-up here on pricing for the warehouse business. It still seems to be pretty solid here. I know we talked about inflation moderating, but it feels like you're still getting good pricing power above inflation here. Does that guide you provided that 4% to 5% and then 7% to 8% for the services side. Does that sort of -- can you sustain those levels into next year? Or is that sort of [indiscernible]?

[George Chappelle, executive]

Yes. What we said on the -- in the prepared remarks is we expect those comps to narrow in the second half of this year. The pricing that you see in the results this quarter all happened in the second half of last year and also in the GRIs we took at the beginning of this year. So those comps will narrow. And based on the outlook for inflation, we see today, we see the pricing environment is very benign. So I would say the bulk of our pricing going forward, if nothing changes, will be our annual GRIs with some exceptions along the way that always exists, whether it's new services or profile adjustments, et cetera. I'd call that normal course business.

But when it comes to pricing actions, specific pricing actions, we don't see any necessary where inflation is today. And you probably will see those pricing comps compress in the second half as well as next year, they'll probably be more normalized, not back to pre-COVID, but I would say, more normalized.

[Jay Wells, executive]

Yes. If you triangulate our full year guide, it shows that back half of the year, we get to more normal type of increases of 3% to 4% so that's really what's built into our back half guidance.

[Operator]

Next question comes from the line of Josh Dennerlein with Bank of America.

[Joshua Dennerlein, analyst]

George, just wanted to kind of circle up on the service margins. The second quarter in a row where they've come in double digits. Just -- how are you thinking about where they ultimately like stabilize from here?

[George Chappelle, executive]

Well, we did just over 13% in the quarter. And then as you remember, Jay mentioned some expense that was deferred to the third quarter. So if you rationalize that, we get to just over 11%, and that's where we adjusted the guide. So if I use 11% of the base, our retention metrics are excellent pre -- better than pre-COVID. The systems tailwinds we have are just beginning the system. We've just turned on May 6. So we do think there are tailwinds there. So is there some upside to the 11%, we believe there is as the system gets better used and better understood.

But at this point, throughput is still a headwind. So if I net those 2 together, we're very comfortable with the 11% and all I can say is that's where we are right now.

[Jay Wells, executive]

I mentioned as part of implementing Project Orion and our new procurement system, certain POs were delayed as part of the process. So we could not buy certain types of material for our services type business. And if you normalize out that $5 million, it gets the first half of the year at 11.2%. So that's how we're saying the run rate. That's really what the run rate looks like.

[Joshua Dennerlein, analyst]

Okay. And what about, George, I think in the past, you've talked about maybe aspirationally hitting 15% on the service margins. Do you think that's still kind of good aspirational goal on the service margin and achievable?

[George Chappelle, executive]

I think even more achievable than ever before, given where the margins landed this quarter given we still have the system tailwinds, and we're still not done with retention and all the work we put into that. In fact, that work will never end. So I would say they're less aspirational than they have ever been to get to 15%. But I'd still say that it takes some commercial work to get there, and that is a different set of muscles than offsetting inflation. So maybe you can comment on that, Rob. But I think the commercial work is probably the long fold intent.

[Robert Chambers, executive]

Yeah. We're continuing to focus on driving pricing. We know that it will be compressed, but we want to see inflation plus with regard to what we're able to accomplish. And then the other area commercially that helps our services margin as incremental value-added services. And we've been very focused on understanding and implementing services that our customers want us to do that help both them be successful with their supply chain and Americold drive our services margins. And where we seen success with that. We have many, many individual properties that generate services margins in excess of what those aspirational goals are. So we know that we'll be successful getting there.

[George Chappelle, executive]

So still aspirational, but much less so given the performance over the last 3 quarters and the fact that we believe in the sustainability of those margins based on not only the disclosures we've made around our labor, but also the fact that we feel like there's nowhere to go but improve those numbers even from where we sit today.

[Operator]

Next question comes from the line of Greg McGinniss with Scotiabank.

[Greg McGinniss, analyst]

So we understand this is likely difficult to parse. But could you give us your thoughts on how much of the warehouse service margin increase you think is driven by a more experienced labor pool, the process improvements highlighted last quarter and then the ERP implementation?

[George Chappelle, executive]

I would say that the 2.5 years of work we did on hiring, retention, a number of different -- I mean, literally, hundreds of activities below that to support what I just said, that's the lion's share of the improvement. We just have a more stable, more productive better trained, better engaged workforce.

Now the other things are definitely contributing factors around systems, in particular, to give people the visibility of how to manage labor better. But I would say at least 75% of that is just the labor, training, the hiring, the retention, the engagement, essentially all the work we've done on the workforce. And of course, the other things help, but they're more supporting an already well-trained workforce.

[Robert Chambers, executive]

And the ERP system is improving our revenue capture of our value-added services. So that is providing us benefit but as George said, definitely, the labor side is where the biggest benefit is.

[Operator]

Next question comes from the line of Michael Carroll with RBC Capital Markets.

[Michael Carroll, analyst]

Rob, I wanted to follow up on another question earlier regarding the fixed commitments. Can you kind of explain why companies are taking down more fixed commitments even though the occupancy is trending lower. I mean is there a risk that they will hand back this space? Or are they looking further out thinking that they're going to need it in the near-term and they're going to want to take down those commitments to ensure that they have it.

[Robert Chambers, executive]

Yes. It's the latter, Mike. I mean our customers in conversations, they're looking to the future and that they're recognizing that there will be a time that demand will recover and increase and they want to make sure they have their space available to them. So I think the Americold has built a very strong muscle in terms of the way that we go to market with those fixed commitments and the fact that, that represents what we believe market rates should be when we offer fixed commitments.

And then our customers see the benefit not just in terms of the stability of making sure that space is available for them now, but ultimately, because they really do believe that, that volume will be there as we go into busy season this year and then out into the future. Remember, those fixed commitments tend to be multiyears in length. They're not short-term fixed commitments. Those are multiyear fixed commitments, and that's the way our customers are viewing them.

[Michael Carroll, analyst]

Okay. And what are your customers telling you right now? I mean are they happy with their current inventory levels given the current market challenges? Or guess when do they want to rebuild their inventories. I mean are they too short now and they need to rebuild it soon? Or is this a longer-term type rebuild that we're talking about?

[George Chappelle, executive]

Mike, I think customers would prefer higher demand, higher revenue, better volume, cutting inventory because demand is down doesn't make many customers happy. What they want is higher demand so they can invest in new products and new activities. And right now, the demand situation is suppressing all of that. So during my past in these environments, I've been through a few what you're hoping for is some consumer help to get traffic up, get volume up and the inventory plan takes care of itself once volume is growing.

[Operator]

Next question comes from the line of Vince Tibone with Green Street.

[Vince Tibone, analyst]

Some of your earlier comments suggest that you think the consumer should be healthier soon. Just in terms of '24 guidance, what are you implicitly assuming as it relates to the health of the consumer. Are you expecting some back half improvement in the new kind of throughput and occupancy ranges you provided? Or just if you can give us a sense of what macro assumptions you have baked into guidance, that would be helpful.

[George Chappelle, executive]

Yes. I appreciate that, Vince. We've baked no optimism into the second half of the year. Just as we did in the last quarter, we've taken a very I would say, realistic view of demand. And while we have a very slight seasonal lift in the second half, it is much more slight than we would in normal years. Even we've even muted the seasonality a bit to take account for the current demand environment. So while I am optimistic because I think there's a lot of noise on interest rate cuts, even aggressive interest rate cuts, and I think that can help a lot. That that gives me the optimism I expressed a little earlier on the call. However, when it comes to our guide, that optimism is not in the volume guide at all.

[Vince Tibone, analyst]

Great. That's helpful. And then switching gears, I'm just curious, how would you describe the competitive dynamics between Americold and your new public peer just -- the tenants often lease space from both of you in the same market? How often are you competing for tenants and ultimately, like how hard is it for tenant to maybe switch cold storage providers in a single market. If you can provide some comments around this line, that would be helpful.

[George Chappelle, executive]

Yes, I'll start, and I'll hand it over to Rob. But we've been competing with everybody in this space for years. So none of that changes. I mean every deal that we look at, we're never the only ones there. And I would say every entrant in the space is normally invited to every deal. So when it comes to the customer overlap, there is some, as you can imagine, because geography matters when you're looking at cold storage facilities and there's a natural overlap there. But Rob, why don't you go into a more detail.

[Robert Chambers, executive]

Yes. I mean I would say, Vince, it's probably pretty rare to see large customers tend to single stores 100% of their outsourced cold chain. So there tends to be shared wallet across several competitors when you're talking about the large players in the space, not always within the same geography because customers like to try to have large piles of their inventory in one location and not bifurcated across multiple facilities. So what you see is generally maybe customers with one provider in a certain region, but maybe multiple providers across several regions.

We're obviously very proud of the fact that we have extremely high market share with the largest food manufacturers, the largest grocery retailers, we think that those best-in-class companies like partnering with Americold as a best-in-class company. When it comes to the competitive dynamic, it all starts with customer service. Customer service is the most important thing to our customer after you go down from customer service, location is probably next, and after location, it would be priced. So we're focused on delivering the best-in-class customer service, the most comprehensive suite of value-added services. And then from there, we think the rest takes care of itself.

[Jay Wells, executive]

I'll just highlight the value-added services. The reason we're -- we're still focused on our services margins, our services capability, our workforce, et cetera, that's where you can delineate yourself from a competitor. That's where you can add value to a manufacturer or a retailer by doing more work within your facility, freeing up work and theirs to do other things, which most often is produce more product or sell more products. So one area where I think there is a lot of competitive advantage across the space is in the value-added services area, and that's why we're so intent on running it well and expanding it.

And ultimately, it's why we've made the investment that we have in our Supply Chain Solutions group. And it's an area where in my prepared remarks have talked a lot about the differentiators that, that group provides. And whether it be the supply chain optimization work that we're able to perform the design capabilities that we have, the green solutions that we're building. All of those capabilities are differentiators that we've invested significantly in and really resonate with our customer base.

[Operator]

Next question comes from the line of Nick Thillman with Baird.

[Nicholas Thillman, analyst]

Maybe touching a little bit on throughput. Looking at just 2Q, it's still down year-on-year. Can you like adjust what that number would be. I know there's a cybersecurity incident in 2023 in second quarter. So what that number would be if you adjust that on a normalized number, just kind of looking at what they would be year-on-year for volumes?

[George Chappelle, executive]

I don't know that we ever went back and adjusted volume, Nick. We always said there was $0.03 of earnings lost in that quarter as a result of the cyber incident. But I don't think we ever went back and said normalized throughput and normalized well, throughput is the big issue. So I don't want to recall ever doing that. So I don't think I can comment on that. We did say we lost $0.03 of earnings in the quarter. That was in our results. So I don't think we did normalize throughput.

[Robert Chambers, executive]

Yes. And for me, again, I'm a sequential guy. If you look at Q1, we were at [ 86, 81, ] Q2 we were at [ 87, 17, ] which is a normal sequential trend. So hard to breaking apart more than that. But I would say our sequential throughput trend is normalizing post all the different disruptions that has happened in the past.

[Nicholas Thillman, analyst]

Okay. That's helpful. And then just touching on unit economics or just kind of that service margin side of the business. I'm just looking at kind of the labor component of that, is that more so the actual productivity of labor? Or have you also like reduced kind of hours for employees or just staffing levels in general, just given the lower volume? Can you give like a mix between those 2 components?

[George Chappelle, executive]

Yes. If you adjust -- if volume goes down and labor goes down commensurately, margins don't increase, right? I mean that's the way the math works. So if you look at productivity, which is what we've been driving through the system, we're doing the same amount of work on a relative basis with less people because they are more productive. And the example I've used in the past is that we had a year ago, 10 people and they could move 2 pallets an hour, that's 20 pellets an hour. Those same 10 people are now moving 10 pallets an hour. We're moving 100 pallets an hour now. We need less people to move more pallets.

So that's kind of how productivity works. And we've been driving that very, very hard for the last year, as you know, well, 2.5 years when it comes to rebuilding the workforce, but now seeing improvements in services margins the last 3 quarters, and that's a result of productivity taking hold via training and other activities, engagement that says the same people can move more pallets in an hour than they could 3 quarters ago.

[Jay Wells, executive]

Yes. No, that's a key productivity set we follow. And if you look at year-over-year, it's taken our folks it's better than 10% less time to move a single pallet. And that's really the productivity side, not cutting the labor force side.

[Operator]

Next question comes from the line of Ki Bin Kim with Truist Securities.

[Ki Bin Kim, analyst]

Just want to go back to the general rate increase topic. If we had a benign inflationary environment of, let's say, like 2%, what does that get you in terms of just organic GRI price increases going forward?

[George Chappelle, executive]

Yes. I'll ask Rob to comment in a minute, but as you know, they come in different sizes depending on the size of the customer, whether it's a contracted customer or WRA agreement, et cetera.

But Rob, why don't you go through the detail.

[Robert Chambers, executive]

Yes. Yes. I mean, look, I would say in a normal environment, you're sitting around 3.5% to 4.5% on annual GRIs. And then there's incremental pricing work that we always are focused on if we have contracts that are coming up for renewal that may have been below market or the focus that we have on new business and the forward view that we take on pricing there. So GRIs end up in that 3.5% to 4.5% and then there's opportunity for upside with other pricing levers that we take.

[Ki Bin Kim, analyst]

Okay. And given a new competitor, at least in the public space, I'm sure you've gone through some of the disclosures. I also just curious kind of high level I'm sure there's things that you do really well and other people do well, too. Are there other avenues that you think there are for improvement? And I guess, what's the chance that Project Orion goes to like there's another Project Orion 2 going forward?

[George Chappelle, executive]

Look when it comes to product Orion, we're emboldened by the success of Project Orion and we'll clearly invest in systems in other areas of the company. I think we've got a very strong talent for implementing systems and implementing systems in a way that drive earnings per share. So we're very emboldened by that. When it comes to our new public competitor, we've been competitors for a long, long time. We don't really see a lot of change in that. We did take a look at the S11. We published a document on our website. We highlighted some areas where we think we're a little bit better. And I'm sure there are areas where we're not as good. I think I've been saying that for a couple of years now. But the point is we now feel like we have a competitor. We're very competitive people. And we expect to continue to grow and do very well.

[Operator]

Next question comes from the line of Craig Mailman with Citi.

[Craig Mailman, analyst]

Maybe just hitting on sort of the trajectory here or risk to rent growth or occupancy as we head into '25. Just looking at your exploration schedule, I mean, 71% of the kind of fixed commit rents expire through '26. And there's a good amount of slack in the system from a physical occupancy standpoint and you look at the USDA numbers, I mean you're still below 2016 levels, right, and your tenants are under margin pressure. Just at what point do they say, we'll keep the space but you were on rent reductions, right? Like you're talking 3.5% to 4.5% GRI increases in a low inflationary environment. But they've been getting hit over the head with kind of inflationary cost increases the last couple of years and that their customer is stretched. And even with potential rate declines here, you've unemployment ticking up, you have wage growth slowing, like the customer could be under pressure here for a while going forward.

So I'm just kind of trying to put all the pieces together. I know your margins are going higher and that's a positive. But on the other side, right, end user demand is down. You're seeing economic occupancy fall, you're seeing physical occupancy fall and most real estate supply and demand, right, rents eventually fall in that scenario. So I'm just trying to kind of really bridge all of the comments on the call that get a sense of as we head into 2025, I mean, should we be putting a break on expectations here for continued kind of same-store growth the same way you've had it this year.

[George Chappelle, executive]

Well, I was going to say the only thing not falling is our earnings per share, right, Craig? I mean they're up consistently every quarter this year second -- 2 quarters this year in a row. So look, all the pricing we pass through to our customers has to do with the inflation we incur. I would say 90% of that was labor inflation. As you know, labor is the biggest expense we have in our company. We're not going to give labor decreases in our company. I'm pretty sure our customers aren't either. So there's no room for price decreases in our business. We haven't expanded margins on price when it comes to inflation, we've recovered the inflation.

Now we expanded margins by working better internally, as we talked about on the call, and that's what's driven our AFFO per share up both quarters this year and will continue to improve with the new systems we have in place. Throughput in occupancy has been a problem for a year now. I think there's hope because there's wide recognition that interest rates are coming -- interest rate cuts are coming. And that will increase disposable income significantly for the for the customers that you mentioned or consumers that hit the customers you mentioned. And I think there's a positive outlook there if those interest rates come. But we continue to grow our AFFO. We can do that under any environment as we have said multiple times, and we don't see an end to that growth.

[Robert Chambers, executive]

And then the point that I would add, I mean, look, as George said, over the last 12 months plus, we've been in this environment. You've seen us continue to grow our fixed commitments. You've seen our churn rate remain consistent. And the reason for that is customer service. I said earlier on the call that customer service is what is the most important factor to our customers because when you have a provider that provides for service, a 3% or a 4% GRI pales in comparison to the cost associated with poor service. So our focus there on providing best-in-class customer service is why our customers stay with Americold, it's our relationships with those big customers is decades long, and I think we'll just continue to see that grow.

[Operator]

Next question comes from the line of Todd Thomas with KeyBanc Capital Markets.

[Todd Thomas, analyst]

Just last quarter, you mentioned some positive commentary out of the CAGNY conference around the consumer and the potential lift in throughput that was being discussed through retailer marketing efforts. You're talking about lower throughput now in the second half of the year. Just any sense sort of what changed between then and now and why the promotional activity has not translated?

[George Chappelle, executive]

Yes. I think, number one, the promotional activity did occur. There was a lot of spending around the summer grilling season going into Memorial Day and straight through July 4. So it was not a lack of promotional spending. The problem is the prices in the store are so high right now, even discounted. The consumer did not rise to the occasion of buying more products and it just gives you an idea of how big the price gap is between selling price at the store and what the consumer has for disposable income. So every activity that we thought would occur did the promotional spending was very heavy. It just didn't squeeze the gap between price and what a consumer is willing to pay close enough and it gives you an idea, I guess, when we talk about 20% to 40% higher prices in the grocery store, depending on the category, while promotional activity is normally aggressive.

It typically doesn't go to 40%. And I think the gap left between even the net promotional price and the consumer was too wise. It's as simple as that.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.