Americold Realty Trust

NYSE:COLD

Earnings Call Analysis

Americold Realty Trust Reports Strong Financial Growth Amid Consumer Demand Challenges

In Q3 2024, Americold Realty achieved an 11% increase in AFFO, reaching approximately $100 million or $0.35 per share. Same-store NOI grew 11% to $201 million, driven by robust warehouse services margins of 14%. However, economic occupancy fell to 77%, with lower throughput volumes attributed to ongoing weak consumer demand. For 2024, the company expects AFFO per share between $1.44 and $1.50, a 16% increase. Despite inflation pressures, rent and storage revenue is projected to grow 4.5% to 5%, while same-store NOI growth will be 10% to 12%, facilitated by the ongoing benefits from their technology initiatives.

A Challenging Economic Environment

During the third quarter of 2024, Americold Realty Trust faced challenges primarily due to ongoing weakness in consumer demand. Despite expectations of a recovery in consumer spending, the company noted that the persistence of inflation has continued to strain volumes in the food sector. This sentiment was echoed by other food manufacturers, indicating that the path to recovery could take longer than anticipated.

Financial Performance Metrics

Americold generated an adjusted funds from operations (AFFO) of approximately $100 million, or $0.35 per share, reflecting an 11% increase year-over-year. Same-store net operating income (NOI) was approximately $201 million for the quarter, also up by 11% from the previous year. Notably, the company achieved a services margin of 14%, a significant improvement of nearly 11 percentage points from the prior year. This performance demonstrates Americold's operational efficiency even amidst softer demand.

Operational Efficiency and Productivity Gains

The implementation of Project Orion, a new technology program, is driving increased efficiency and productivity. The company has realized an incremental $100 million in NOI attributable to improved workforce performance and optimized operations. Additionally, Americold began to unlock the potential of embedded AI functionalities within its systems, which could lead to further enhancements in customer service and operational metrics.

Guidance Adjustments Reflect Market Conditions

Americold has adjusted its full-year guidance due to current market conditions. For 2024, the company expects same-store revenue growth in the range of 1.5% to 3.5%, with a projected decline in economic occupancy of 425 to 525 basis points. In terms of throughput volume, a decrease of 2.5% to 4.5% is anticipated, reflecting the ongoing struggles in consumer demand. Conversely, rent and storage revenue growth per economic occupied pallet is expected to increase by 4.5% to 5%. Importantly, the company's same-store constant currency NOI growth is now forecasted to be between 10% and 12%.

Strong Commitment to Development and Future Growth

Americold continues to invest in expansion, with a development pipeline exceeding $1 billion. Recent projects include a $148 million automated facility in Dallas-Fort Worth and further expansions in Dubai and Kansas City. The company expects to significantly exceed its earlier guidance for development starts, now projecting $300 million to $350 million in the upcoming year. This continuous investment reflects Americold's confidence in future market demands and its position in the cold storage industry.

Sustainability and ESG Initiatives

Americold has reported progress on its sustainability initiatives, achieving an impressive GRESB score of 81 out of 100, leading its peer group. This commitment to ESG principles not only aligns with modern investor expectations but also highlights the company's focus on being a responsible corporate citizen.

Market Sentiment and Future Outlook

The leadership team remains cautiously optimistic about future performance, particularly as they expect some recovery in consumer spending during the latter half of 2025. The company has positioned itself to leverage upward trends in economic conditions when they occur. CEO George Chappelle emphasized that despite immediate challenges in occupancy, profits are projected to continue an upward trajectory, underpinning Americold's resilience as a top-tier operator within its industry.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to Americold Realty Trust Third Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kevin Reed, Vice President, Investor Relations. Thank you. You may begin.

[Kevin Reed, executive]

Good morning. Thank you for joining us today for Americold Realty Trust's Third 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.

Today'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 the 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 third quarter 2024 earnings conference call. I would like to begin this call by extending our sympathies to everyone affected by the recent severe weather events in the U.S. and Europe. Our associates planning and proactive outreach to our customers has been exceptional in maximizing safety and limiting disruption. The Americold Foundation, which is designed to help our associates in times of need is actively providing support to those affected in the Americold family, and we hope for the quickest possible recovery to all.

This morning, I am pleased to announce our financial results and key operational metrics for the quarter. I will then discuss our updated outlook for the remainder of the year. Rob will provide an update of our recent customer initiatives and growth activity and Jay will discuss our capital position, liquidity and provide an update to full year 2024 guidance.

I'll begin with an overview of some key financial achievements for the quarter. We generated AFFO of approximately $100 million or $0.35 per share, an increase of over 11% from Q3 of last year. Same-store NOI was approximately $201 million in the quarter, up 11% from prior year and remains on track to deliver double-digit growth for the full year. This performance was driven once again by continued strength of our same-store warehouse services where we delivered a third consecutive quarter of double-digit margins coming in this quarter at 14%, up almost 11 percentage points from prior year.

Our productivity continues to increase as we remain focused on workforce performance and extracting increasingly more benefits out of our new technology program, Project Orion. Approximately 18 months ago, we said we believed our warehouse services business could add $100 million in NOI to our bottom line through workforce hiring, retention and productivity. Through the first 3 quarters of the year, we have already achieved an incremental $100 million of warehouse services NOI versus prior year.

Furthermore, last quarter, we highlighted our expectation that we could deliver services margins of 11% for the full year 2024, an increase from our original expectations. Services margins were higher in Q3, partly due to an overdelivery on throughput volumes versus our forecast. That said, we believe the new base for our annual warehouse services margins is 12%.

Project Orion system deployment continues to enable efficiencies in North America and Asia Pac as our workforce gains more experience with the juice. Further, it provides a platform for us to exploit the very latest technology available in the industry. For example, we recently completed a review of the artificial intelligence capabilities embedded in our new systems with one of our strategic technology partners. They were able to use a proprietary AI discovery tool to identify over 400 embedded and native AI opportunities specific to our systems and business, including further improvements in customer service, productivity, forecasting and activity-based pricing that without the power of AI would be very difficult to identify.

Our technology partner commented that the artificial intelligence capability implemented via Project Orion provides us the ability to leapfrog previously achieved technology innovation and reshape industry performance standards. We are confident our technology strategy will both support and enable profitable growth for the foreseeable future.

The improvements in productivity through both workforce management and Project Orion has enabled us to grow our business through a challenging time of weak consumer demand. The continuing theme we hear during food manufacturers and distributors quarterly earnings calls is that volumes remain pressured as the end consumer continues to be strapped from the cumulative effects of inflation. While a full recovery of consumer demand and a return to growth is expected, it does appear it will take longer than originally anticipated. For example, Kraft Heinz commented on its third quarter earnings call that it expects that demand will be softer for longer. Given this backdrop, we continue to control the controllable within our business and grow our earnings through productivity and growing our organic sales pipeline, which sets us up for outsized organic growth as consumer demand recovers.

Turning to our 4 core priorities. Customer service remains very strong across the company. One of our most recent fully automated developments, which went live just a year ago in Russellville, Arkansas was awarded site of the year by 1 of our largest customers for a flawless startup and ramp to full capacity highlighting the design, build and operating capability of our automation group. While economic occupancy dipped in the third quarter to approximately 77%, rent and storage revenue derived from fixed commitment storage contracts came in at approximately 58%. The quality of our infrastructure, breadth of our warehouse services we provide and commitment to best-in-class customer service all drive the highest fixed commit contract percentage of revenue in the industry.

A safe, well-trained and productive workforce is critical to offering a broad suite of warehouse services and high customer service levels across our global network. As we've said many times in the past, it's the services part of our business that customers value the most as it provides incrementally more supply chain benefit than just simply storing a pallet and keeping it cold. Over time, we expect to expand the services we offer to organically grow and provide even more supply chain capabilities to our customers. The continued refinement of our hiring and retention processes have resulted in a perm to temp hours ratio of 75:25, which is flat year-over-year. Associate turnover finished the quarter at 32%, a 600 basis point improvement upon the second quarter and well below pre-Covid levels of 40%.

Our third key metric, the percentage of associates with less than 12 months of service now stands at 21% and has improved 100 basis points since the second quarter. Our workforce continues to mature and grow and experience and our warehouse services margin continued to improve in tandem.

In the third quarter, same-store rent and storage revenue per economic occupied pallet on a constant currency basis increased by almost 4% versus the prior year and same-store services revenue per throughput talent on a constant currency basis increased by 11%. 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. As we discussed last quarter, we expect our warehouse service pricing comps to compress in the fourth quarter as we lap those increases from prior year.

As we stated last quarter, we are tracking to exceed our $200 million to $300 million guide for announced development starts in 2024, and I am pleased to announce that we now exceeded our guidance with our plan to build a $148 million automated expansion in the Dallas-Fort Worth market. This build will further our automation strategy in a very desirable market with the scale to consolidate large customers where inventory fragmentation can be a problem for customers requiring large amounts of space.

We also completed the expansion of a building we own with our JV partner, RSA in Dubai. The building is rapidly filling up and gives us confidence that when our previously announced 40,000 pallet building in the [indiscernible] goes live next year, it will also fill up quickly.

Through our partnerships, we have many opportunities currently in underwriting and expect next year to be very active as our new development pipeline continues to exceed $1 billion over the next few years.

Turning to guidance. We are maintaining our current AFFO per share guidance range of $1.44 to $1.50, which represents an approximately 16% increase from 2023.

Before I turn the call over to Rob, I would like to provide a brief update on our ESG progress. Last week, GRESB released its annual benchmark scores, and I'm happy to report our score increased to 81 out of 100. We finished first in standing investments in GRESB's predefined peer group, which further highlights our commitment to delivering our sustainability goals and objectives. With that, I will turn it over to Rob.

[Robert Chambers, executive]

Thank you, George. 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. At Americold, we believe customer service is the key to growing market share in the long run. Our activity-based pricing model ensures that we develop rates that enable us to offer pricing to both allow us to win in the market while also ensuring an appropriate margin across each of the services we provide.

In the third quarter, same-store rent and storage revenue for economic occupied pallet on a constant currency basis increased by approximately 4% versus the prior year. Same-store constant currency services revenue for throughput pallet increased by 11%. As a result, 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, and approximately 3% of total warehouse revenues, consistent with historical churn rates. As George mentioned, we continue to be successful in increasing our fixed commitments with customers. And in the third quarter, rent and storage revenue derived from fixed commitment storage contracts, came in at approximately 58%, a 14th straight quarterly record for America. We continue to successfully climb towards our stated target of 60% fixed commits. However, we do want to give a reminder that as we get closer to that goal, it becomes more difficult given the nature and structure of our client base.

Americold continues to be a 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 from 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 a cold storage provider of choice.

As George mentioned, we're pleased to announce plans for Americold to develop an automated expansion in the Dallas/Fort Worth market. This expansion will be built on land already owned by Americold. This $148 million expansion will add 50,000 pallet positions and 19 million cubic feet to our portfolio and is underwritten with an ROIC in the range of 10% to 12%. This building will be uniquely positioned in the market as it will feature our proven best-in-class automation and will be accessible by rail, and it will have a task conventional capacity. We anticipate significant customer demand based on our current pipeline and look forward to breaking ground in Q1 of 2025 and expect to open the facility in Q4 of 2026. This facility is a great example of executing our development strategy of both delivering major market expansions and implementing world-class automation. We expect to further this strategy in coming quarters.

With this announcement, we have exceeded the high end of our development start guidance for the year, having announced $305 million in development projects. We are also pleased to announce the completion of the Dubai expansion project. This conventional multicustomer expansion project in our RSA JV is approximately 11,000 pallet positions and over 2 million cubic feet. As a reminder, we announced the formation and investment into this JV in 2023, and we are a 49% owner of the RSA JV. The facility is now ramping in line with underwriting expectations.

In addition to these announcements, we are also pleased to note that our 4 in-progress development projects all remain on track from a timing and underwriting standpoint. As a reminder, these include our 37,000 pallet position expansion in Allentown, Pennsylvania. This $85 million major market expansion will add 15 million cubic feet and is on track to open in Q2 of 2025. Our 40,000 pallet position greenfield in the port of [indiscernible] in Dubai. This $35 million facility is the flagship bill with DP World is on track to open in Q2 of 2025. Our 22,000 pallet positioned Greenfield facility in Kansas City, Missouri. This $127 million building is a flagship build with CPKC and is on track to open in Q2 of 2025. Our 13,000 pallet position expansion in Sydney, Australia. This $30 million expansion is anchored by one of Australia's largest grocers and is on track to open in Q1 of 2026.

We continue to make progress ramping the 5 automated developments that were completed last year. 3 of these automated facilities are supporting food manufacturers in Atlanta, Georgia; Russellville, Arkansas; and Spearwood, Australia, and our proven solutions are performing well and are delivering in line with expectations. These automated facilities house several of our largest customers at both their key manufacturing and distribution locations. The service levels being delivered by our best-in-class automation are shining examples of Americold's design and implementation capabilities.

To reiterate what George mentioned earlier, the Russellville, Arkansas site was awarded site of the year by 1 of our largest customers, a true testament to our automation technology capabilities at work.

Regarding our 2 customer dedicated automated retail distribution facilities in Lancaster, Pennsylvania and Plainville, Connecticut, we continue to be thoughtful in our approach. The current system performance has given us increased confidence in our ramp schedule as well as the long-term success of these facilities. We are actively working with our customer to increase the volumes first in our Pennsylvania facility followed shortly by our Connecticut facility and ramp up throughout the course of next year, and we anticipate seeing the benefits of the ramp in the second half of 2025.

We are proud of our ability to grow even in this difficult consumer environment. Our leading-edge Supply Chain Solutions group is laser-focused on the analytics behind the design needs that matter the most to our customers, including first, how to best optimize our customer supply chain by consistently presenting solutions that drive savings and improve performance; second, how to build and operate the most efficient buildings in the industry by maximizing the cubic footage of the buildings and using the Americold operating system to drive efficiency; third, when to deploy automation versus utilizing conventional solutions by analyzing the discrete work content of the customer and specific market; fourth, with the most impactful value-added services are that Americold can provide by having facilities at every node in the supply chain where we're able to offer dozens of value-added services; and fifth, how to create environmentally friendly cold chain solutions through Americold's VaaS portfolio and partnership network.

Americold's customers view us as an extension of their own supply chain organization. And this has made clear in the long-term committed and global nature of our relationships. That type of trust is built over decades of industry leadership. As George mentioned, our new development pipeline continues to exceed $1 billion in projects across our 3 development priorities, expansions, customer-dedicated builds and partnership-focused builds. Even with having announced developments in 5 of the last 6 quarters and exceeding the high end of our development start guidance in 2024, our pipeline remains robust. Separately, for new business targeted at driving same-store occupancy, our pipeline of opportunities is very high and represents a significant growth opportunity.

We continue to see customers look to outsource to a trusted partner with global scale who can manage the complexity of their supply chains. This has resulted in a new business pipeline that represents revenues of over $200 million on a probability-weighted basis, and includes growth with both existing customers and would add new names to the portfolio. Our strategic account management and field sales teams are well positioned to capitalize on this pipeline and drive occupancy growth in our same-store portfolio. 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 $3.5 billion. We had total liquidity of approximately $922 million, consisting of cash on hand and revolver availability. Our net debt to pro forma core EBITDA was approximately 5.5x. Our expansion projects in Allentown, Pennsylvania; Sydney, Australia; Dallas Fort Worth, Texas; and our greenfield developments in Kansas City, Missouri and Dubai have increased investment spend that will continue for the foreseeable future with a robust pipeline of development projects that George and Rob discussed. Please see Page 37 of the IR supplement for additional details on our development projects.

Turning to our updated full year 2024 guidance. As George mentioned, we are affirming our AFFO per share to be in the range of $1.44 to $1.50, an approximate 16% increase from 2023's AFFO. Before reviewing the individual components of this guidance that are set forth on Page 40 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 third quarter of 2023 is presented on Page 36 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 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 1.5% to 3.5%. Let me provide more detail around the key drivers of this guide. With respect to occupancy and throughput volumes, as we discussed over the past quarter, our previous occupancy guidance planned for a normal Q4 holiday season with manufacturers and retailers increasing inventory levels in advance of increased consumer demand during the holiday season.

The most recent reports from food manufacturers and producers show the consumer continues to be strained by the cumulative effect of inflation, resulting in continued volume challenges. And as a result, we have seen a slower inventory build in October. Based on the current consumer outlook, recent commentary by food producers and inventory levels at the end of October, we are reducing our full year expectations for economic occupancy to a decline in the range of 425 to 525 basis points compared to 2023 and throughput volume to decrease in the range of 2.5% to 4.5%.

With respect to pricing, we expect constant currency rent and storage revenue for economic occupied pallet growth to be in the range of 4.5% to 5%. And constant currency services revenue per throughput pallet growth to be in the range of 9% to 10%. 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 in GRI step-ups and the commercialization of market-based pricing for contracts that we underwrite or renewed.

Lastly, with regard to pricing, comps are expected to compress in Q4 of this year as we anticipate a relatively benign environment associated with inflation-based rate actions. For the full year, our same-store constant currency NOI growth is now forecasted to be in the range of 10% to 12%. Based on productivity and pricing supported by new systems and processes, we now believe we can deliver services margins of over 12% for the full year 2024. Please note that services margins were higher in Q3, partly due to a slight over-delivery on throughput volumes at an approximate 50% contribution margin.

With regards to the 2024 non-same-store pool, as can be seen on Page 32 of the IR supplement a non-same-store pool generated $0 of NOI in the third quarter 2024. For the full year 2024, we expect the non-same-store pool to generate NOI in the range of negative $2 million to negative $5 million. We expect to manage and Transportation segment NOI to be in the range of $43 million to $47 million, and we expect core SG&A to be in the range of $221 million to $225 million.

For the full year, we expect interest expense to be in the range of $133 million to $136 million, with approximately $12 million of interest being capitalized year-to-date. Full year cash taxes is expected to be in the range of $7 million to $9 million and maintenance capital expenditures is expected to be in the range of $80 million to $90 million.

Regarding development, with the announcement of the automated development in Dallas-Fort Worth, we are increasing our guidance range to $300 million to $350 million of announced development starts in 2024. Please keep in mind that our guidance does not 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 our results for the third quarter highlights, we continue to improve the operational efficiency of our business and generate double-digit AFFO and same-store NOI growth. We continue to deploy capital on a low-risk, highly accretive developments driven by our strategic partnerships, expansions of our own buildings and customer dedicated developments. We are positioned to grow at an accelerated rate once volume returns, as evidenced by the increased warehouse services margins this quarter on relatively small sequential throughput gains.

Our technology implementation is helping us expand margins just 6 months after going live, and with the embedded AI functionality in our new systems, we expect to identify additional opportunities to further enhance our business.

Unlike traditional industrial REITs, we have the ability to generate outsized organic profit by being a best-in-class operator, which we have done consistently this year. As always, I want to give thanks to the over 13,000 associates around the world for their hard work and dedication every day. It's their professionalism and dedication, even when faced with the difficult conditions such as extreme weather that gives our customers the confidence they can always rely on Americold. Thank you again for joining us today, and we will now open the call for your questions. Operator?

[Operator]

[Operator Instructions] The first question is from Nick Thillman from Baird.

[Nicholas Thillman, analyst]

Kind of wanted to touch on occupancy. It seems as though it eroded even further into 3Q. And I just want to get a little bit more color on kind of what you're seeing there. Maybe just where you're seeing softness. Is it geographically broad-based maybe on the asset type, are you seeing it across all 3 nodes of your asset classes? Or are you seeing it in the vintage of the assets? Just kind of touch on occupancy a little bit.

[George Chappelle, executive]

Nick, thanks for the question. I would say that the primary driver of our occupancy decline is consumer demand and it is broad-based. The whole system runs on consumer demand, and it's not related, particularly to a sector or a region. It's more consumer-driven. So that's what I'd say there. Keep in mind, though, we're comping tough comps from last year, 2023. We had occupancy in the mid-80s or very close to the mid-80s, almost the entire year. And that has an effect on the year-over-year numbers. But it's really broad-based consumer demand declining and not related to a sector.

[Nicholas Thillman, analyst]

Okay. it seemed as though like you expected 3Q though the comps would get a little bit better because you've talked about the counter seasonality. So I guess as you're looking forward, do you think that even like some of these fixed commitment contracts as they come up for renewal in your discussions, have you been having any issues of further like erosion in that sort of number or pushback from customers on that front?

[George Chappelle, executive]

Well, as you saw in the third quarter, we grew it again for the 14th consecutive quarter. That's on a net revenue basis. So it's in line with all the other gains we've had in fixed commits. We continue to see customers willing to commit to our space given the locations and the services provide. But Rob, maybe you can add a little color there.

[Robert Chambers, executive]

Sure. We had another good renewal quarter of fixed commitments and then we grew the overall total in terms of both absolute dollars and percentages. When I think about the goal that we put out there of getting this into the 60s, we certainly pulled that goal forward. And we're now on the precipice of that almost a year earlier than our own internal expectations. And so we're very proud of our continued progress there. And think that we'll continue to make gains. Although, as I said in my prepared remarks, once you get up close to 60%, just the structural nature of the business, it starts to get a little bit more difficult. So there's always going to be a portion of this business that's transactional, and we're okay with that.

[George Chappelle, executive]

Let me just add one more thing on [indiscernible] before we go to the next question. And -- you saw our handling margin performance year-over-year, we've added $100 million of NOI just through the first 3 quarters of the year. The primary driver of that has been workforce productivity, but there has been a lot of price that went into that business as well to rightsize the margins.

We always planned on losing a little bit of occupancy through that process. The pricing, as you know, has been pretty significant over the last year. We lost far less occupancy than we planned. By far, the biggest issue with occupancy is consumer demand. But for the beginning of $100 million year-over-year of NOI to lose a de minimis amount of occupancy for a very short period of time given the pipeline that Rob discussed in his prepared remarks, was a very good business decision. So that has an effect, although it's pretty small.

[Jay Wells, executive]

And Rob mentioned in the prepared remarks that we have a very good pipeline of new business. So going into next year, we really feel that even in a tough consumer environment, pushing pricing and NOI on the services side that we have the pipeline of new business in order to grow occupancy even in a tough environment.

[Operator]

The next question is from Mike Mueller from JPMorgan.

[Michael Mueller, analyst]

I guess first on the -- when you talked about the 12% service margins. Is that the bogey just for this year? Or do you think that's a more sustainable level for kind of going forward?

[George Chappelle, executive]

I'd say 12%, Mike, is the new base for going forward. We don't expect to go backwards at all. It doesn't mean every quarter will be at 12%. That's why we highlighted the annual being 12%, but that is our new target going forward. And if you walk back 14.5% to 12%, it's related to the throughput over delivery, and as Jay mentioned the 50% flow-through of incremental business there. So it highlights how accretive when the volume comes back, how accretive the profit is.

[Michael Mueller, analyst]

Got it. And then last question on the, I guess, the 10% year-over-year increase in service revenues per throughput pallet, considering that throughput volumes are still down year-over-year, occupancies are weaker. Are you getting any customer pushback on those level of increases from an optical standpoint?

[George Chappelle, executive]

I think the issue there, Mike, is we said pricing comps would compress in the fourth -- in the third and fourth quarter, second half of the year, you saw the rent in storage pricing compress this quarter to just under 4%. The pricing we're lapping in the handling area really happens in the fourth quarter, but you'll see those -- that pricing compress between now and the end of the year. And when you get to the end of the year, you'll see that our pricing has come back in line with, let's say, normal business.

[Operator]

The next question is from Samir Khanal from Evercore ISI.

[Samir Khanal, analyst]

George, I guess I just wanted to ask you on the occupancy side here. Look, I know demand is challenged. The consumers is stretched -- but where do you think we are? I mean, are we getting close to a point where we may start to see a trough maybe at this point in occupancy this year. I know you've lowered occupancy a few times. Any green shoots out there as you think about the revenue side of the business? Would love to get your thoughts.

[George Chappelle, executive]

Yes, sure. So 1 green shoot is our partnerships, right? They're not demand-driven builds. I mean we're putting -- they're not consumer demand-driven builds. I mean we're putting infrastructure on ports and railways that just doesn't exist today. So when you think of our development pipeline, when you think of our partnerships with DP World and CPKCs, that's not consumer driven. We're just putting infrastructure in place where it doesn't exist today, where we can essentially take business that exists today, move it into a much more efficient, much more greener transportation and overall supply chain environment. So that's a green shoot simply because it's not time to consumer demand.

Beyond that, I think the -- our views on recovery are all in the second half of next year. We don't see really things changing dramatically between now and the end of the first quarter for sure. I've said multiple times, the first quarter in the food industry is not necessarily a high activity quarter with very little holiday activity, et cetera. And we think the second half of the year is when we could see occupancy gains and see business return to a more normalized growth level.

[Robert Chambers, executive]

The other thing I would add to that as a green shoot is what George mentioned earlier, which is just our organic sales pipeline. So the pipeline that is focused on driving business into our existing infrastructure, that is very healthy. I mean when we probability weight our existing pipeline, the new business there is over $200 million in terms of opportunities. And we have a very efficient, very highly trained sales force that includes dedicated account management, field sales teams, our supply chain solutions organization, all who are focused on closing those opportunities and driving occupancy into our same-store portfolio. And when we look at the breadth and the maturity of that sales pipeline for our same-store, we're encouraged by the fact that it should be driving occupancy growth in the time line that George outlined.

[George Chappelle, executive]

In the last comment, what you'll notice is that we've been talking about weak consumer demand for at least a few quarters now, if not longer. We've continued to grow earnings right through every single decline in throughput and occupancy. We believe we can still do that. We have tailwinds in our systems environment. We have tailwinds in our productivity environment. So while occupancy is not a bright spot, earnings is and we'll continue to grow earnings straight through the first half of next year. And when volume does return, as evidenced by the handling margins, it flows through so accretively, we feel like we'll be positioned to grow faster than anybody in the industry.

[Samir Khanal, analyst]

Okay. Got it. And I guess on the pricing side, I mean, pricing is still very strong, I guess, on the services side. So I'm just trying to understand, as we think about, let's call it, the next 12 to 24 months, is -- do you think this is sustainable given what inflation has done and how we think about the overall business from a pricing power perspective?

[George Chappelle, executive]

Yes. What I was mentioning earlier, Samir, is that if we said pricing comps would compress in the second half of this year, you've seen the rent and storage pricing compressed this quarter, what you'll see next quarter is the handling margins compress. So the handling pricing we're lapping was primarily fourth quarter based, the rent and storage pricing were lapping was primarily third quarter based. So that explains kind of the outsized handling pricing, but go ahead.

[Robert Chambers, executive]

Yes. I'd add to that. I mean, we continue to be very confident in our ability to price ahead of inflation. First of all, we are -- we're proactively creating solutions for our customers that are driving efficiency and savings into their supply chain. So by us creating those solutions, that helps create the headroom that we need to continue to price our business the way that we need to be successful. So we're confident there. I think also most of our customers that we deal with every day run their own manufacturing facilities. They run their own retail distribution centers. So they know that there's cost increases every year to continue to run this business and they want us to invest in our business so that we can support them the right way. So we're confident in our ability to continue to price ahead of inflation.

And the last thing I would add is that the majority of our revenue is commercialized under long-term agreements that have prenegotiated annual general rate increases. So we have a forward view of where we're going on the majority of our base business. And while we expect that pricing will come back in line with kind of more normalized GRIs going forward and not be as outsized, it still should be accretive when we think about it in the context of pricing ahead of inflation.

[Jay Wells, executive]

Yes. And if you triangulate our full year guide to what it means in Q4, it really gets to a 4% type price increase on both storage and services because we really have lapped at this point in time, all the inflation-based pricing that we took last year.

[George Chappelle, executive]

And I guess that's my point on the services pricing, Samir, rent and storage normalized in the third quarter, you'll see the normalization of the warehouse services pricing in the fourth.

[Operator]

The next question is from Vince Tibone from Green Street.

[Vince Tibone, analyst]

Inventory in your portfolio turned around 11x per year prior to COVID, and now it's down to around 9x. Do you still think returning to 11x inventory turns is realistic over the next 2 years once the consumer health improves? Or have you identified anything structural that may mean different inventory strategies, lower inventory turns on a more permanent basis?

[George Chappelle, executive]

No. I think, Vince, if you go back in time and you quoted the numbers exactly right. The driver of the move from 11% or 11 turns to 9 was really driven by the Agro acquisition that we made prior to me joining the company, but 4 or 5 years ago, that business turned far less than the Americold base business. And when you meld those together, the churns become 9%. That's the real issue on how we went from 11% to 9%. There's nothing else going on in the core business. If you strip out the Agro acquisition, I think our turns would be close to 11%, but the point is that acquisition that we knew going into it is a slower turning business just because of the commodities and the customers that business serves.

[Vince Tibone, analyst]

That's helpful. So think about maybe once the consumer improves and more steady-state business, like what is the right level of inventory turns in your mind for the portfolio? Is there still upside the overall portfolio from 9%? Or is that all being pretty stable?

[George Chappelle, executive]

No, no, no. There's upside. I mean, we're at pretty low throughput numbers at the moment given consumer demand as consumer demand increases and we normalize, let's say, trends in the industry where we grow 1% to 3% a year, et cetera, then turns will increase. There's no question. But if you combine the Agro acquisition with suppressed consumer demand, those are the 2 reasons why the turns are where we are. And again, our base business, ex Agro is turning in line with historical activity.

[Robert Chambers, executive]

And Vince, an area where Americold is a clear leader here, is in the retail side of the business. Today, it's in the 20% to 25% range of our overall portfolio, but we see outsized growth kind of idiosyncratically for Americold in that space. And that tends to be a business that turns much faster than your traditional food manufacturing business. So -- so as we see outside growth there, it will also pull the overall portfolio up.

[George Chappelle, executive]

A lot of our partnerships too, Vince, if you think of port operations and rail operations, they're amongst the highest churn activities in our overall portfolio. I mean you've got a shift on loading cargo. It sits in our facility for maybe 4, 5, 6, 7 days and then it's on to its final destination. Same thing with CPKC. I mean if you deliver in a year's time or -- to our Kansas City facility right on the CPKC rail line, the inventory is likely to stay there less than 5 days. So some of the business we're putting online now with our partnerships is going to turn as fast or faster than anything in the portfolio.

[Operator]

The next question is from Josh Dennerlein from Bank of America.

[Joshua Dennerlein, analyst]

I wanted to explore your platform and your approach to implementing tech. It seems like you guys are using outside resources, competitors going [indiscernible] most of it in-house. Why do you think your approach is the right one for your team?

[George Chappelle, executive]

Yes. I think our approach is the right one, Josh, because when I look at things like AI and I see tens of billions of dollars of investment in AI and AI infrastructure, I see the hiring of the big tech companies or tech talent out of universities, et cetera, there's no way, in my mind, I can compete with that. I mean in terms of how to implement that type of capability. So it seems pretty obvious to us that partnering with the biggest and best companies who are -- whose core business is developing tech, including AI and providing that via cloud services almost automatically to customers is a quicker, cheaper and more efficient way to implement tech.

As you know, we implemented our ERP early May, and we're already talking about incremental results it's delivering. So we're very confident we have the right strategy. We can point to the bottom line right now and show you where it delivered results, and I think that in of itself [indiscernible] pick the right strategy.

[Joshua Dennerlein, analyst]

Okay. And is there anything being rolled out in the next 12 months that we should be aware of or maybe anything that's like being rolled out and then turns on and can kick things kind of into a different year?

[George Chappelle, executive]

Continuing to roll out our ERP system, right, where we're continually finding benefits in our North American and Asia Pac business as we mine the data we now have that we never had before. So that's a tailwind. We will be implementing it in Europe. That will be a huge tailwind. It's an environment we have not been able to consolidate yet due to COVID and some other restrictions that prevented us from being there and doing the work we want to do. That will be a huge benefit to Europe.

And then lastly, as I mentioned on the call, we're going to start to explore with some embedded in generative AI. We have some relatively simple things we can test with that are still productivity gains, but starting slowly, but we believe that it seems like all others do that, that could be a massive game changer for our business. So it's all technology we have in-house. It's all technology we have experts partnered with, who have implemented it before and can show us how it can help our business. And I think this is probably one of the most significant tailwinds we have going forward.

[Operator]

The next question is from Ki Bin Kim from Truist Securities.

[Ki Bin Kim, analyst]

As we start to look forward, I was curious how much benefited pricing per pallet or pricing per throughput volume benefit from kind of inflationary pass-through that hit this year that won't repeat next year? Just kind of level set how we model out estimates for next year?

[Unknown Executive]

Yes. I mean look, I think from a pricing standpoint, next year, we would be anticipating increases in that low to mid-single-digit range, which gets back to more historical pricing that you've seen out of the company. And then there'll be -- there's the typical cost increases, wage increases, insurance increases, all those things. Our team puts productivity goals against those to try and offset as much of that as possible. And then the delta between those 2 becomes margin opportunity for us.

So not really ready to give cost guidance for next year. But from a top line pricing standpoint, I'd be thinking about it that way.

[George Chappelle, executive]

And I think the last point that Rob may want to highlight, I mean, we have said and we will maintain slight margin improvement year-over-year through our GRI. So that's -- that's a much longer burn for accretive margin -- accretive margins of significance. But every year, there's a de minimis margin improvement there that will build over time. That is the model. We don't price to a breakeven. We price to a slight increase in profit because over time, that helps grow our business.

[Ki Bin Kim, analyst]

Okay. And can you remind us what your GRI is typically without inflation impact?

[Robert Chambers, executive]

It's -- our GRIs are what I just described. It's what gets us to that low to mid-single digit.

[Operator]

The next question is from Michael Carroll from RBC.

[Michael Carroll, analyst]

Can you guys provide some color on the Dallas development that you plan on breaking ground? I mean what gives you confidence that this market needs this space, especially given the amount of supply that has already been delivered over the past few years. I mean, are you seeing customers that are actively asking you to be in Dallas right now, which -- correct me if I'm wrong, I don't think you have too much exposure right now?

[George Chappelle, executive]

We have like 5 or 6 facilities in the Dallas Fort Worth area. Some are relatively small, some bigger. The opportunity for us in Dallas, I'll hand it over to Rob in a second is to build a facility of scale that large customers consolidate various pallots of inventory in that market into a single location. That's the motivation. It's a consolidation play there. We have facilities there. We know the market very well, and we feel very strongly that it's an opportunity and maybe, Rob, do you want to give a little more color.

[Robert Chambers, executive]

Yes. This is a great example of where it's important to recognize that this is not a commoditized space in this industry. So we're building a building that uniquely positions us to continue to gain market share in that market. We're already a big player there, but this facility is going to be exactly what our customers are asking for, which is they want a level of automation and hybrid automation, which is exactly what we're doing here, which is adding an automated storage and retrieval system, expansion with a facility that's already there. This is an expansion that already has conventional capacity. This is a facility that is going to be rail served, which is very important in that market. It's going to allow customers that we have today that are constrained from growing because of occupancy in that market to be -- to consolidate their inventory into one facility and become extremely efficient compared to the way that they're situated today.

So -- this is a great example of us using our design capabilities, understanding exactly what the market needs and building something that our customers are asking for, where -- and that's in comparison to some of that speculative build that may have been there that is not what our customers are asking for. So our operating platform, technology solutions and supply chain analytics are going to create -- make sure that this building is very successfully.

[George Chappelle, executive]

And, just to double back again, Mike, we know that market very well. We have 5 or 6 facilities there. We have a very specific plan for this building, as Rob just outlined, and this is by no means speculative. We've got a very solid plan behind it.

[Michael Carroll, analyst]

Okay. And then correct -- I'm sorry if I missed this, but is this considered a customer build or customers asking for you and you kind of have some anchors already really to take down space? Or is this more of a market-driven build?

[Robert Chambers, executive]

Yes. So we have our existing customers in that market asking for more space. It's not a -- it will be multi-tenanted. So -- but it will be filled with pipeline that is largely our existing customer base.

[Operator]

The next question is from Todd Thomas from KeyBanc Capital Markets.

[Todd Thomas, analyst]

George, with regards to the services segment, as margins continue expanding even as the demand environment remains softer for longer. When volumes do stabilize, and/or recover from these levels, how will service margins trend with the mix of fixed and variable costs just given that they're already in the low double digits? How should we think about that?

[George Chappelle, executive]

Well, you saw the effect of a relatively small sequential throughput gain well below 200 bps, what it did to the margin expansion primarily because as Jay stated, the flow-through was right at 50% as we calculated it. So volume is going to help a lot. I think volumes could help us get to our 15% target sooner than we thought. I mean, 14.5% in the third quarter with, again, a relatively small volume gain is there.

So I would say our 15% target is well within reach. Once we get a little bit of consumer demand back in the system. And then productivity is still coming. So one of the discussions we're having is where is our new aspirational goal. Now we haven't answered that question yet, but it's pretty clear that 15% is probably a little on the low side.

[Todd Thomas, analyst]

When demand does pick up, will margins sort of improve immediately? Or is there a lag? And should we expect margins to be a little bit more volatile early on in a recovery?

[Jay Wells, executive]

This is Jay. I mean, as George said, if you look at pure variable costs associated, it does fall -- flow through at a 50% contribution margin. So definitely accretive to overall margin for the services side of the business. If you'd argue that if it happens quickly and we have a little bit of inefficiencies, maybe it would drop down to a 40% contribution margin that might -- that might be a little slower, but definitely would still benefit our overall services margin.

[Operator]

The next question is from Blaine Heck from Wells Fargo.

[Blaine Heck, analyst]

George, I appreciate your commentary on the expected timing of an inflection in the back half of next year. But I guess following up on that, what do you think needs to happen specifically to ensure that happens? And what signals should we be looking for? Is it all about interest rates and inflation moderating, spurring stronger consumption. I guess, how does inventory rationalization play into the software conditions. And are there any other major industry dynamics that need to improve, and we should be monitoring before we think we can see more of that inflection in operations?

[George Chappelle, executive]

Yes. I firmly believe it's one of the very first things you mentioned, which is inflation moderating and interest rates coming down each of which create lower prices in the food store and/or more disposable income in the consumers' pocket. To me, that is the secret that that's what will spur demand. Certainly hope there's an interest rate cut later today and maybe a couple more in the first quarter next year. But I think it's all about getting the consumer a little bit more disposable income, which as history says, they will convert into store purchases for food very, very quickly. So to me, that's the impetus and that's what we need to see.

[Robert Chambers, executive]

And then the only other thing I would remind you of is while that is obviously the macro tailwind that will be helpful. We're extraordinarily proactive in going out and driving occupancy into our facilities regardless of what the macro is doing with our sales organization, account management organization, supply chain group. And that pipeline that we have is very encouraging.

[Blaine Heck, analyst]

Great. That's really helpful. And apologies if I missed anything on this, but can you talk about the transaction market today? Are there any potential acquisitions that look interesting to you? What would pricing have to look like to make you all interested in deals. And I guess, how do you think about your current preference between acquisitions and development?

[George Chappelle, executive]

Well, as you can see by our development pipeline, which still remains over $1 billion, even after all the activity we did this year, including just raising the guide on development starts this quarter. So we're very, very bullish on development. We're always very excited about M&A., always. There's no -- we don't view that as something that we're not always interested in. But the problem is valuation. And valuation for us is very simple. We're only buying companies that are accretive day 1, and we feel as though we shouldn't hand our multiple out being 1 of the best providers in the industry to smaller companies that often don't have the level of maturity and/or expertise that we have. So we're disciplined in that way. And we feel like we add value to acquisitions as we should, but all within a very responsible framework of valuation, which says given our position in the industry, we should not be paying our multiple for smaller, less efficient, less capable companies.

So that's how we feel about M&A. Again, always excited, always participate, but very, very bullish on a very strong development pipeline, which we control and which will accelerate very, very quickly as these partnership opportunities exit underwriting.

[Operator]

This concludes the question-and-answer session and today's call. You may disconnect your lines at this time. Thank you for your participation.