Americold Realty Trust, Inc. (NYSE:COLD) Q1 2024 Earnings Call Transcript May 9, 2024
Americold Realty Trust, Inc. misses on earnings expectations. Reported EPS is $0.03419 EPS, expectations were $0.3. Americold Realty Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to Americold Realty Trust First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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: Good afternoon. Thank you for joining us today for Americold Realty Trust’s first quarter 2024 earnings conference call. In addition to the press release distributed this afternoon, 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, 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 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: Thank you, Kevin and thank you all for joining our first quarter 2024 earnings conference call. This afternoon, I am pleased to announce our financial results for the quarter and will 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 provide a detailed walkthrough of our updated full year 2024 guidance. Let’s begin with a snapshot of some key financial achievements for the quarter. We generated AFFO of $104.9 million or $0.37 per share, an increase of over 28% on a per share basis year-over-year. Our performance on a constant currency basis was driven in large part by significant improvements in our same-store services margins, where we delivered a record first quarter of 10.7%.
This was a 671 basis point improvement year-over-year, which resulted in an incremental $22 million of NOI or roughly $0.08 a share in the first quarter. As growth appears to be slowing across the industrial REIT sector, we continue to demonstrate our ability to drive profitable organic growth across our platform. In the first quarter of 2023, we announced $100 million strategic investment in our ERP infrastructure, which is showing early positive returns. The system’s first phase went live Monday of this week and we’ve made numerous process improvements leading up to this launch that have resulted in enhanced revenue recognition, better labor and cost management and helped drive our strong first quarter results. We are encouraged with the sustainable results to-date and expect this system to deliver returns in line with our previously disclosed expectations.
It’s important to note our new system comes with AI capability embedded in the software which we can utilize and customize to ensure we exploit the technology to its maximum potential going forward. On to our priorities. Our laser-focus on customer service has been one of the main reasons our properties stay in such high demand and this is evidenced in our same-store economic occupancy which held solid in the quarter at approximately 81%. A key driver of our strong economic occupancy is continued progress selling fixed commitment contracts. Rent and storage revenue derived from fixed commitment storage contracts, came in this quarter at 54.2%, 200 basis points higher than the previous quarter and a 24% increase over the first quarter of 2023.
We continue to move customers to these contracts which help smooth out the seasonality in our business and also act as a leading indicator of positive things to come as customers sign them in anticipation of volume growth in the future. Our second priority, labor management, is one in which we have made significant strides in recent quarters. Continued improvement of our hiring and retention metrics have resulted in a perm-to-temp hours ratio of 78:22, which is a 3 percentage point year-over-year increase in a company record, putting us well on our way to our publicly stated goal of 80:20. Additionally, we continue to make progress on our turnover which is 40% and is now in line with pre-COVID levels and an 800 basis point drop since last quarter.
Lastly, our percentage of associates with less than 12 months of service now stands at 29%. This has improved 300 basis points since last quarter and is approaching the pre-COVID level of 23%. We introduced disclosure around labor management two plus years ago and at the time we said making progress was a prerequisite to establishing sustainable, reliable services margins. Having now largely recovered our labor metrics to pre-COVID levels, supported by new leaders, systems and processes. Our same-store constant currency services margin significantly improved to 10.7%, which is a first quarter record for Americold, resulting in an incremental $22 million of NOI or roughly $0.08 of AFFO per share year-over-year. The commercial and operational infrastructure we have put in place gives us the confidence that improved services margins will be sustainable and sets us up extremely well as consumer demand increases.
Moving to pricing. In the first quarter, same-store rent and storage revenue per economic occupied pallet on a constant currency basis increased by 3.9% versus the prior year, and same-store services revenue per throughput pallet on a constant currency basis increased by 10.8%. Both were driven by pricing we put in place in the second half of 2023, coupled with the general rate increases at the start of this year. 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. As always, we will continue to take a surgical approach to our pricing initiatives to continue to drive margin dollars and increase margin percent. Moving to development.
I’m very happy to report progress on our two strategic partnerships. First, we broke ground last week in Kansas City on a $127 million project on the Canadian Pacific Kansas City rail line. This is the inaugural project in our partnership and will deliver unique value-add services enabling lower costs, reliable and more environmentally-friendly storage and transport across much of North America. Second, we broke ground early this week in Dubai in support of our partnership with DP World. The $35 million project will support both the local Dubai market and the surrounding area redistribution. We are very pleased to have both partnerships inaugural projects under active construction. Lastly, today we are announcing a new lower-risk, highly-accretive expansion in Sydney, Australia.
The USD36 million project will support a large Australian retailer already located on the site as we enable their growth. We expect this expansion to be completed in Q1 of 2026. Turning to our full year guidance. As a result of the progress we have made driving organic growth through improvements and productivity, labor management and pricing in combination with our ability to manage our variable cost structure, we are raising our full year 2024 AFFO per share guidance to a new range of $1.38 to $1.46 with a midpoint of $1.42, an increase of $0.05 per share. This represents an approximately 12% increase from 2023 and an approximately 28% increase from 2022. At the midpoint of the new range, our same-store NOI growth guide has increased roughly 300 basis points to over 11%.
Before I turn it over to Rob, let me comment on our ESG initiatives. In April, we posted our fifth annual ESG report on our website. We are very pleased to publish the most comprehensive report in the cold storage industry. Our report focuses on our efforts in promoting energy excellence through innovation and new technology adoption, investing in our associates, and giving back to our communities. I encourage you to read this robust sustainability report as it details Americold’s sustainability goals and our unwavering commitment to corporate responsibility. With that, I will turn it over to Rob.
Rob Chambers: Thank you, George. As George mentioned, I will provide an update on our recent customer initiatives and growth activity. Pricing initiatives. We remain very focused on our pricing initiatives and are working diligently to ensure that we both offset inflationary pressures and price our business to reflect the value of the service we provide to our customers. In the first quarter, same-store rent and storage revenue per economic occupied pallet on a constant currency basis increased by 3.9% versus the prior year, 5% excluding the reduction of certain power surcharges. Same-store constant currency services revenue per throughput pallet increased by 10.8%. Our pricing actions in 2024 are driven by first, as our longer-term customer agreements come up for renewal, we continue to revisit our pricing structures in order to ensure renewals are priced at market rates inclusive of the inflationary impacts over the past several years.
We have made great progress in this area. Second, we continue to benefit from our in-place annual contractual rate escalations on these current customer agreements. The majority of our annual increases or GRIs for 2024 went in during Q1. Third, as it relates to longer-term agreements, we will maintain our in-year targeted pricing and power surcharge initiatives to address known inflation, which has moderated in certain areas of our business. And fourth, all new business and shorter-term agreements are being priced with a current and forward view of our cost structure. Within our Global Warehouse segment, we had no material changes to the composition of our top 25 customers, who account for approximately 50% 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 rates. We have also continued our upward trajectory regarding fixed commitments. This quarter, rent and storage revenue derived from fixed commitment storage contracts came in at 54.2%, an increase of $21.1 million on an annual basis, a 12 straight quarterly record for Americold. Growth and development. Regarding growth, we continue to evaluate and execute on development opportunities across the three primary areas of focus we have mentioned in the past. Our CPKC and DP World collaborations, expansion projects, and customer dedicated build-to-suit developments. With regard to our strategic collaborations, first, as George mentioned, last week, we broke ground on our flagship development with CPKC in Kansas City.
As a reminder, we are building a conventional multi-customer major market distribution center on CPKC’s intermodal terminal in Kansas City that will be approximately 22,000 pallet positions and 14 million cubic feet for a total investment of $127 million. We also broke ground on our flagship building with our other strategic partnership, DP World. As a reminder, in December, we announced our plans through our RSA JV, to build a conventional multi-customer major market distribution center in Dubai at DP World’s Port of Jebel Ali Free Zone for USD35 million. This development in Jebel Ali will be the first of its kind to combine Americold’s global temperature-controlled infrastructure with DP World’s port infrastructure and end-to-end logistic solutions.
This strategic combination will result in unprecedented optimization of temperature-sensitive food flows in and out of the countries of a Gulf Cooperation Council and provide redistribution opportunities across the region. Our collaboration with CPKC and DP World illustrate Americold’s unique ability, create value by working with our global leaders in adjacent areas of the supply chain. We expect our investment in these partnerships to grow significantly over the next few years as we continue to identify opportunities to jointly grow our business. Through these relationships, we have a $500 million to $1 billion potential development pipeline. With respect to expansion in major markets, as George mentioned, today we are announcing a new dedicated conventional expansion project in Sydney, Australia, anchored by one of the country’s largest grocers.
This expansion will add mission-critical infrastructure in a capacity-constrained market currently operating at greater than 90% occupancy and is anticipated to add approximately 13,400 incremental pallets to our current capacity of roughly 18,700 pallets in that market. The total investment will be approximately USD36 million. We are excited about both CPKC and DP World developments and the Sydney expansion and look forward to updating you on other future plans soon. Automation update. We continue to make progress ramping the five development projects that were 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.
Our two customer-dedicated automated retail distribution facilities in Lancaster, Pennsylvania and Plainville, Connecticut while completed, continue to ramp, albeit slower than expected. As we stated last quarter, we are being thoughtful in the ramp up, given the level of complexity and the importance of customer service. We are very encouraged by the significant and sustainable organic growth that we are delivering as well as the pace and scale of our inorganic growth activities. Now, I’ll turn it over to Jay.
Jay Wells: Thank you, Rob. Today, I will discuss our capital position liquidity and update our full year guidance. Beginning with our balance sheet. At the end of the quarter, total net debt outstanding was $3.2 billion. We had total liquidity of $732.5 million, consistent of cash on hand and revolver availability and our net debt to pro forma core EBITDA was approximately 5.4 times. As we discussed last quarter, our previously announced expansion in Allentown, Pennsylvania, our Greenfield developments in Kansas City, Missouri and Dubai, and our new expansion project in Sydney, Australia will increase investment spend in the second quarter of this year. Please see Page 33 of the IR supplement for additional details on our development projects.
Turning to our full year 2024 guidance. We are increasing our AFFO per share to the range of $1.38 to $1.46, an approximate 4% increase at the midpoint and approximately a 12% increase from 2023’s AFFO per share result. Before reviewing the individual components of this guidance that are set forth on Page 35 of the IR supplement, let me quickly remind everyone of the new 2024 same-store pool for the Global Warehouse segment. This pool now 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 first quarter of 2023 is presented on Page 32 of the IR supplement. We have 10 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 still expect full year 2024 same-store constant currency revenue growth to be in the range of 2.5% to 5.5%. Let me provide more detail around the key drivers of this updated guide. With respect to occupancy and throughput volumes, we still expect economic occupancy to be in the range of 0 to a decline of 100 basis points compared to 2023, and throughput volume to decrease in the range of 1% to 3%. As we are forecasting an improved trended throughput versus the 7.6% decline in the first quarter of 2024. With respect to pricing, we still expect constant currency rent and storage revenue for economic occupied pallet growth to be in the range of 3% to 4% and constant currency service 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. For the full year, we are increasing our same-store constant currency NOI growth to now be in the range of 9.5% to 13%. This increase is being driven by higher services margins. Just three to six months ago, our hope was to exit 2024 with a run rate services margin of 9%. Based on productivity and pricing supported by new systems and processes, we now believe we can deliver services margins of 9% for the full year of 2024. Regard to the new 2024 non-same-store pool, as can be seen on Page 30 of the IR supplement, the new non-same-store pool generated negative $3.5 million of NOI in the first quarter 2024.
For the full year 2024, we now expect a non-same-store pool to generate NOI in the range of negative $7 million to positive $1 million. As Rob previously mentioned, our automated retail distribution facilities in Lancaster, Pennsylvania and Plainville, Connecticut are ramping slower than expected. However, we still anticipate to deliver our stated return on invested capital. Turning to our Managed and Transportation segments’ NOI, for the full year, we’re lowering the expected range from $45 million to $50 million to a new range of $42 million to $47 million versus approximately $48 million of NOI in 2023 due to continued softness in the freight market. Regarding SG&A expense for the full year, we still expect total SG&A to be in the range of $247 million to $261 million, inclusive of $23 million to $25 million of stock compensation expense and $5 million to $7 million of ERP amortization.
For the full year, we still expect core SG&A to be in the range of $219 million to $229 million. Turning to our interest expense. For the full year, we are lowering our interest rate expense range to approximately $135 million to $143 million, a reduction of $6 million at the midpoint. With respect to full year cash taxes, there is no change to the 2024 cash taxes range of $9 million to $12 million. As a reminder, most of the corporate income taxes we pay at Americold relate to our international operations. Q1 2024 maintenance capital expenditures was $17.9 million, a $1.7 million increase versus Q1 2023. There is no change to our maintenance capital expenditure guide. As a reminder, for the full year, we expect this investment to be approximately $80 million to $90 million.
Regarding developments, we reiterate our expectation to announce development starts aggregating between $200 million to $300 million in 2024. Please keep in mind that our guidance does not include the impact of acquisitions, dispositions, 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: Thanks, Jay. It’s been a great quarter for growth at Americold with breaking ground on developments with our two strategic partners, CPKC and DP World, in addition to announcing a strategic expansion in Sydney, Australia, we continue to fuel our development pipeline for future profitable growth. What really separates Americold from most industrial REITs is the ability for our logistics operating company to generate organic growth through delivering mission-critical services in the global food supply chain as efficiently as possible. The labor metrics we’ve disclosed and tracked for over two years now have correlated to the increased margins we said would come with a productive, stabilized workforce, which has allowed us to accelerate our 9% services margins goal by almost a full year.
The improvement in metrics speaks to the sustainability of a warehouse services results and the solid foundation we have built beneath them. The early returns on process improvement as part of our ERP implementation speak to the productivity and organic growth still ahead of us, even as we guide towards a second double-digit year of NOI growth in our same-store pool. It’s worth noting our results are accelerating at a time when consumer demand has been receding. When consumer demand does accelerate, we believe our investments in new systems and processes will prepare us to grow profit faster and more sustainably than many other operators. I want to give thanks to the over 15,000 associates around the world for their unwavering support and dedication, who bring their best-in-class customer service with them every day.
For this, I say thank you for all your efforts. 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?
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