Americold Realty Trust Q4 FY2021 Earnings Call

Greetings and welcome to the Americold Realty Trust Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Henderson, Investor Relations. Thank you, Scott, you may begin.

Good afternoon. Thank you for joining us today for Americold Realty Trust fourth quarter 2021 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.americold.com. This afternoon's conference call is hosted by Americold’s Chief Executive Officer, George Chappelle; Chief Commercial Officer, Rob Chambers; Chief Financial Officer, Marc Smernoff. Management will make some prepared remarks, 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 NFFO. Full definitions of these non-GAAP financial measures and reconciliations to comparable GAAP financial measures is contained in the supplemental information package available on the company's website. Now, I will turn the call over to George Chappelle.

Thank you, Scott, and welcome to our fourth quarter 2021 earnings conference call. This afternoon I will summarize our 2021 results and then discuss current market conditions that are impacting our full year 2022 guidance. Rob will then provide an update on our recent pricing initiatives and Marc will review results in more detail providing commentary on full year guidance. But before I begin, I would like to take a moment to comment on my appointment as permanent CEO that was announced this afternoon. Having spent decades in operational roles in the food industry, I've been responsible for many cold storage operations, including providers like Americold and many of its competitors. I've always considered Americold the industry leader in quality and customer service. As I've worked with the team over the past few months, I have been impressed by their commitment to delivering operational excellence and disciplined growth. I am very excited to be here and look forward to getting to know more of you in the future. Onto our results. While consumer demand for temperature controlled food remains strong, COVID-related supply chain and labor disruptions continue to impact the global food supply chain. At the time of our last earnings call in early November, Delta was the dominant COVID variant and it seemed to be peaking in various regions of the world. Businesses including us and our customers were making progress in adapting to Delta. However, by late November, the Omicron variant began to rapidly spread worldwide. This highly contagious variant introduced more uncertainty and disruption into an already strained supply chain, and the impact of Omicron can be seen in our results. For the full year, our global warehouse same-store pool generated total revenue growth of 0.3% while we experienced an NOI decline of 5.8% on a constant currency basis. AFFO per share was $1.15 and aligned with our guidance. The main factors that led to these results were the following: First, a meaningful decrease in the year-over-year economic and physical occupancy across the same store pool of 327 basis points and 500 basis points respectively. The same pressures were also felt in the non-same store pool, which is made up of recent acquisitions and completed developments. Second, as discussed on last quarter's call, there was a significant increase in our labor, power, and other expenses beginning in the latter part of the third quarter. As we were not able to offset all of this cost pressure immediately through price increases in our warehouse segment business, there is a lag period. Rob will provide an update on our progress in this area. However, we remain on track to exit the first quarter with a run rate to cover all known inflation in our cost structure. Third, a reduction in throughput volumes also created a drag on contribution dollars in our warehouse business. For the full year, our same-store pool throughput volume decreased 2.8%. The non-same store pool was also impacted by throughput volume declines. While we've made significant progress on the price increases in our warehouse business, we also need the throughput volume to recover for our contribution dollars to fully normalize. Let me now discuss current market conditions that are underpinning our 2022 AFFO per share guidance of $1 to $1.10. Many of these challenging conditions carry over from 2021. Beginning with the revenue side, as in many other labor-intensive industries, labor availability continues to be a challenge for our food production customers, which negatively impacts their production levels. This, in turn, negatively impacts our economics and physical occupancy as well as throughput volumes. We are confident our manufacturing customers have the desire to increase production and satisfy rising demand. However, the labor challenges continue to be a barrier. Once labor normalizes, we are confident inventory will return to historic norms. Economic and physical occupancy in our portfolio and the overall cold storage industry continues to be significantly below pre-COVID levels. Our economic and physical occupancies for the 2021 same-store pool averaged approximately 77% and 68.4% respectively. Our 2019 same-store pool, the most recent pre-COVID year, averaged 79.4% and 75.4%. A similar pattern existed in USDA data; overall total holdings in cold storage are down 8% to 10% throughout 2021 compared to 2019 levels. Our commercialization efforts, particularly our fixed commitment structures, help us to mitigate part of the decline in overall holdings. Throughput volumes have been equally impacted over the year, driven by the same challenges. These are expected to be lower than pre-COVID levels in the near term. The fast rise of the Omicron variant further strained an already challenging labor environment. Many of our customers saw an increase in absenteeism late in 2021 and into 2022, as did we. Omicron has delayed labor recovery by three to six months and proven how fragile the operating environment is. On to the cost side of the equation, inflation in the global food supply chain remains a significant concern. In many of our markets, we raised wages beginning in the third quarter last year to remain competitive. While we believe we are paying competitive wages today, inflation remains a concern there and there is still a possibility wages will rise again. We have taken action through price increases to address the cost pressures we faced last year, and we will seek to offset additional inflation through operating efficiencies. But we may take pricing actions outside of our normal course general rate increases if needed. As a reminder, there is a lag period between when cost increases occur and when the price increase will take effect. Omicron has proven that our ability to predict when economic and physical occupancy levels will fully recover is impossible. So we'll refrain from doing so going forward. The global food supply chain continues to be strained and is not operating anywhere near normalized levels. Our 2022 guidance has these assumptions embedded in our range, which Marc will discuss. I've outlined some significant near-term challenges in our business due to the large amount of uncertainty created by COVID, inflation, and the challenging labor environment. The good news is that structurally, our business model remains intact and end consumer demand for temperature-controlled food remains strong. Prior to COVID, industry standard fill rates adjusted were 98.5%. Now it is not uncommon to see fill rates in the 70% range. During my many years in the food industry, I have never seen general fill rates at such a low level. Additionally, our retail customers have struggled to keep store shelves fully stocked. All of our customers are keenly focused on producing more food, returning to normalized inventory levels in support of higher fill rates and satisfying unmet consumer demand. At the end of the day, the state of the current food supply chain is challenged for all participants: food producers, retailers, food service companies, restaurants, the cold storage industry including Americold, and ultimately the end consumer. We are absolutely confident that our food manufacturing customers want to satisfy unmet demand. When they are able to produce more, we are fully prepared to accept their inventory and support their business with our strategic network of facilities and best-in-class customer service. At this point, I wanted to quickly highlight the recognition we received for our ESG efforts. For 2022, Americold is included in a list of America's most responsible companies, and we are very proud of this achievement. Additionally, in 2021, the Global Cold Chain Alliance awarded 41 of our facilities gold, silver, or bronze certifications as part of its energy excellence recognition program, bringing our total at year-end to 203. As of today, 84% of our warehouse segment portfolio is now certified in this program. Lastly, for the past two years, the Americold team has continued to work in an unprecedented and extremely challenging operating environment in order to protect the integrity of the global food supply chain. We firmly believe that our success continues to rely on having a best-in-class team, and we continue to take action to ensure this remains the case. Over the past year, we've adjusted wages and offered enhanced incentive programs for our frontline associates, and will continue to do so to remain competitive in the marketplace and ensure Americold remains a rewarding place to work. With that, I will turn it over to Rob.

Thank you, George. I'll provide a brief update on our pricing initiatives related to our warehouse business, and comment on our commercialization efforts. We discussed on our last call, beginning in the third quarter, we raised hourly wages in many of our locations, to retain our associates and recruit top talent. The impact of these wage increases is reflected in our fourth quarter results. In order to offset these and other inflationary pressures, we have taken action by increasing the pricing of our warehouse business. Please remember, our pricing for our customers is very prescriptive, and we do not take a one-size-fits-all approach. As you can see on page 37 of our IR supplemental, we were able to increase our service revenue per throughput pallet in our same store on a constant currency basis by 3.8%, with this improvement accelerating through the quarter. The most meaningful increases occurred in December, up 5.9% versus the prior year's month of December. As a reminder, our customer mix is made up of the following: approximately 30% of our warehouse revenue is with smaller customers, where our pricing can be adjusted at any time with a 30 to 45-day notice. We took action on this customer group, and almost all of this increase is in our fourth quarter results. Approximately 70% of our warehouse revenue is with our Top 100 customers. About half of these customers have contracts with formulaic mechanisms in place to allow us to equitably adjust our pricing as long as there has been a demonstrable increase in our costs. The remaining half of these customers have negotiation clauses that require a good faith negotiation to increase pricing. For the Top 100, we initiated these conversations in the third and fourth quarters of 2021. And a meaningful amount of these pricing increases are in our fourth quarter 2021 results. The remaining will be reflected in our results throughout the rest of the first quarter of 2022. Second quarter 2022 results should show a full period of all pricing increases in place. As a reminder for our Top 100 customers, we usually need to see the elevated costs for at least 60 days before we can either trigger our price increases or begin negotiations. This is the lag period, as George mentioned. Please remember our normal course escalators, or general rate increases, have historically ranged from 2% to 4% across both stores and services rates for our customers. These are used to cover normal levels of inflation and our cost to serve our customers—not just labor, but power costs, property taxes, insurance, and warehouse supplies equipment. We see that if our costs are outpacing our GRIs, we will revisit our pricing initiatives again and take similar action with our customers. Onto our commercialization efforts, at quarter end within our global warehouse segment, rent and storage revenue from fixed committed contracts increased on an absolute dollar basis to $356 million, compared to $284 million at the end of the fourth quarter of 2020. On a combined pro forma basis, we derived 39.3% of rent and stored revenue from fixed commitments storage contracts. Within our global warehouse segment, we had no material changes to the composition of our top 25 customers, who account for approximately 49% of our global warehouse revenue on a pro forma basis. Additionally, our churn rate remained low at approximately 3.3% of total warehouse revenues. This metric demonstrates we're not losing a meaningful amount of customers; they're simply not using as much of our infrastructure and services while their production volumes are lower. Finally, our global development pipeline remains strong. Now I'll turn it over to Marc.

Thank you, Rob. Today, we will provide updates on our fourth quarter and full-year results. I will also provide our outlook for 2022. For the fourth quarter, we reported total company revenue of $716 million and total company NOI of $161 million, which reflects a 37% increase and a 6% increase year-over-year respectively. Corporate SG&A totaled $49 million for the fourth quarter as compared to $40 million in the prior year, reflecting our external growth over the past year net of synergies and higher stock compensation expense. This growth was partially offset by a decrease in our annual performance based cash incentive compensation expense. Core EBITDA was $124 million for the fourth quarter, an increase of 5.6% year-over-year, and our core EBITDA margin decreased 511 basis points to 17.3%. Our fourth quarter AFFO was $82 million or $0.31 per diluted share. Now let's turn to our results within our global warehouse segments. For the fourth quarter, global warehouse segment revenue was $554 million, an increase of 36% compared to the prior year. This growth was driven by the recently completed acquisition and ramp of recently completed development projects, paired with contractual and market-driven rate escalation. This growth was partially offset by the impact of food supply chain disruptions, resulting in lower economic occupancy and throughput in our same-store portfolio. Warehouse segment NOI was $151 million for the fourth quarter, an increase of 3.6%. The increase in warehouse NOI is driven by our recently completed acquisitions, largely offset by the impact of inflationary pressures across our global portfolio. Global warehouse segment margin was 27.2% for the fourth quarter, an 849 basis points decrease compared to the same quarter of the prior year, due to lower margin acquisitions and inflationary cost pressures. Now I'll turn to our same-store results within our global warehouse segments. For the fourth quarter, our same-store global warehouse segment revenue was $379 million, up 2.5% year-over-year, and 2.7% on a constant currency basis. Same-store global warehouse NOI was $126 million, down 8.2% year-over-year, and a decrease of 8.1% on a constant currency basis. Same-store global warehouse NOI margin decreased 389 basis points to 33.2%. The ongoing disruption in food production, combined with the challenging labor market and elevated inflation continue to weigh on our same-store results. For the fourth quarter, same-store global rent and storage revenue increased by 2.9% year-over-year and increased by 3.1% on a constant currency basis. This was driven primarily by rate escalation, partially offset by a decline in economic occupancy. Our same-store economic occupancy was 79.5%, which reflects a decrease of 129 basis points from last year's fourth quarter economic occupancy, as we were impacted by reduced food production levels but stable consumer demand. The occupancy decline was partially offset by a 4.9% increase in our constant currency average storage rate for economic power driven by rate escalations and business mix, consistent with the fourth quarter seasonal increase on a sequential basis, economic occupancy improved approximately 285 basis points from the third quarter. Our same-store global rent and storage NOI increased by 2.8% year-over-year and 3% on a constant currency basis. This was due to rate escalations, partially offset by lower economic occupancy and higher costs inclusive of power, property taxes, and insurance year-over-year. Same-store global rent and storage NOI margin decreased five basis points to 68.4% due to the same factors. Same-store global warehouse service revenue for the fourth quarter increased by 2.3% year-over-year, and 2.4% in a constant currency basis. This revenue growth was driven by rate increases in business mix, which increased our constant currency warehouse service revenue per throughput pallet by 3.8%. This was partially offset by a 1.3% decline in throughput. Our same-store global warehouse services NOI decreased by 46.3% year-over-year, and 46.4% in a constant currency basis. This was primarily driven by higher labor costs and warehouse supplies due to elevated inflation. Same-store warehouse services NOI margin was 7.5% for the quarter, a decrease of 684 basis points from the prior year. Now, let me summarize our full-year 2021 results. Total revenues were $2.7 billion and global warehouse segment revenues were $2.1 billion, a 36.6% and a 34.6% increase respectively. Total NOI was $630 million and global warehouse segment NOI was $586 million, an increase of 14.2% and 12.7% respectively. For the same store pool, global warehouse segment revenue grew by 1.3% or 0.3% on a constant currency basis, and same-store NOI decreased 4.9% or 5.8% on a constant currency basis. Core EBITDA was $475 million, an increase of 11.4% or 11% on a constant currency basis. AFFO was $299 million, or $1.15 per diluted share, using a weighted average share count of 261 million. Finally, we announced $168 million of development starts and completed $766 million of global acquisitions. At this point, I will briefly comment on a one-time stock grant we awarded to certain non-EVP associates in the fourth quarter. The grant is being amortized over the next two years, with $4 million already incorporated in our Q4 results. Our non-cash share-based compensation expense will increase by approximately $11 million in 2022 and $5 million in 2023. As a reminder, we exclude non-cash share-based compensation from AFFO. Now turning to external growth, today, we announced an expansion project in Barcelona for approximately $15 million. This is a conventional build and will support the growth of existing and new customers in the consumer packaged goods and protein sectors. Spain is a key producer and exporter of protein, and our two distribution sites in Barcelona are within 20 miles of the port, which is one of the largest ports in the Mediterranean. We're excited to continue to grow our footprint in this strategic market. Turning to acquisition, on November 12, we closed on a previously announced acquisition of a newly completed cold storage facility in Denver, which replaced a smaller leased facility we exited within the market. On November 15, we closed on the previously announced acquisition of Lago Cold Stores in Brisbane, Australia. All of these investments were or will be match funded using a combination of cash, equity forwards that we had previously raised, and our multi-currency revolver. Now turning to our balance sheet and capital markets activity, during the quarter, we exercised $1.4 million of previously raised forward shares for approximately $55 million in net proceeds to help fund our development and acquisitions. Additionally, in December, we closed on a $150 million increase to our multicurrency revolver and $50 million increase to our term loan A. These actions improve our already strong liquidity and increase our fixed-rate debt positions. At quarter end, total debt outstanding was $3.1 billion. We have total liquidity of $803 million consisting of cash on hand and revolver availability. Our net debt to pro forma core EBITDA was approximately 6.1x. Turning to our full-year 2022 guidance. For the full year, we expect AFFO per share in the range of $1 to $1.10. Please refer to page 46 of our IR supplemental for detail on the additional assumptions embedded in this guidance. While George already provided an update on the current environment, let me provide some additional commentary around this guidance. COVID-related supply chain and labor disruptions continue to impact the global food supply chain in 2022. And this can be seen in our occupancy and throughput. Achieving the high end of our guidance range would result from macro-economic factors driving an improvement in food manufacturing, which would result in higher levels of occupancy and throughput volumes. The lower end implies the occupancy levels and throughput volumes deteriorate. The low end of guidance implies wage and inflationary costs running at elevated levels above our expectations, taking into account the lag Rob previously mentioned, the high end implies inflationary pressures moderate. Please note that we ended 2021 with total SG&A expense inclusive of stock compensation of $182 million. Our 2022 range is $210 million to $229 million inclusive of stock compensation. At the midpoint, the increase is approximately $37 million. The key drivers of this increase are the resumption of performance-based annual cash incentive compensation, incremental non-cash share-based compensation expense from the stock retention grants I discussed earlier, increased IT spend as we begin to transition to more software-as-a-service solutions and inflationary pressures on corporate salaries and other overheads such as travel, insurance, and benefits. We are guiding to development starts in 2022 in the range of $100 million to $200 million this year. Additionally, please note that we have six development projects that are expected to be completed later this year. As a reminder, these projects will initially be a drag on overall warehouse NOI as they ramp the stabilization. We estimate an initial in-year startup cost associated with these projects of $10 million to $12 million in the aggregate. Our 2022 same-store pool now includes 216 facilities, which is approximately 90% of the total properties in our warehouse segments. I would like to point out that our new same-store pool includes almost all the properties from our AM-C, Casper’s, Hall and Agro acquisition that were completed in 2020. We have not yet fully implemented our commercialization practices such as fixed commitment or the Americold operating system into these facilities. While both our legacy properties and recent acquisitions continue to be impacted by the current market environment, our legacy sites continue to benefit from our operational practices and business systems, which helps offset some of the pressure felt in this environment. Finally, please keep in mind that our guidance does not include the impact of acquisitions, dispositions, or capital market activity beyond that, which has been previously announced. Now let me turn the call back to George for some closing remarks.

Thanks, Marc. I'd like to reiterate how pleased I am to join Americold on a permanent basis and lead the company's next chapter. We are committed to providing best-in-class service for our customers. And I'd like to thank our customers for their confidence in us. I'm also incredibly proud of our 16,000 plus associates who are the heart of our business. I want to extend a special thank you to each of them for their hard work and dedication every day. I look forward to spending more time with them in the near future. Thank you again for joining us today, and we will now open the call for your questions. Operator, please open the call for Q&A.

Thank you. Our first question is from David Rodgers with Baird.

Yes. Good evening, everyone. I wanted to start with you, George, if I could first congratulations on your appointment as CEO, but two questions around that if I could you, the board and management were pretty clear that this is not a possible outcome. And so probably comes as a little bit of a surprise. So one, wanted to give you the chance to talk about kind of what the change of heart was that kind of brought you to this permanent position. And then two, maybe what do you see is kind of the focus of your tenure here, as the CEO in replacement of Fred.

Yes, thank you, Dave, appreciate the question. I consistently said when asked that, look, Americold was the industry leader in cold storage, and that anybody would have been privileged to lead the company. I certainly felt that way from the very beginning. In my case, I was coming out of retirement, even though it was a relatively short retirement. And those decisions aren't individual decisions. It took a little bit of time to work through. But what I can tell you is once a decision was made, joining Americold was probably the easiest professional decision I've ever made in my life. And like I said in my prepared remarks, I couldn't be more happy to be here. So moving on to the second part of your question, I would say the top three priorities for me are starting literally immediately: One, labor management, enhancing our recruitment and retention processes, reducing our dependence on temp labor, increasing our ratio of permanent labor. And we know when we increase permanent labor, we get, number one, far more productivity, which transfers into lower costs for throughput pallets. So that's one. Number two, I think the industry has suffered in customer service driven by COVID and labor issues. I want to make sure that when we build back our labor force, we come back with customer service levels that are not only at pre-COVID levels but best-in-class. I can tell you as a customer, nothing means more than best-in-class customer service. And we're committing to getting back to those levels. And then lastly, ensuring our development projects remain on track. We believe in each of those business cases. But development projects are not immune to the current macroeconomic environment. Nor are they immune to the supply chain issues. So they require constant attention. They're very complex builds. And we remain dedicated to making sure they stay on track, particularly with respect to the business case. So I hope that answers your question.

It did. Thank you. And if I could follow up on operations, maybe related to Rob's comments around pricing and the increases that you've been able to achieve. Rob, thanks for your pointing out page 37. It's a good table. But how do we kind of track through the pricing increases on that table? We can see the labor increases, but as you look at kind of either same store revenues on a throughput basis, or economic or physical occupancy, they really haven't caught up in the fourth quarter relative to those labor cost increases. So maybe a little bit more color on that and how you're thinking about that tracking through 2022?

Yes, sure. Thank you. I mean, for us, what we thought out is, we've engaged in conversations with the majority of those customers. And ultimately, I think we still consistently feel like we will see the full impact of the price increases that we put in will be felt really coming out of the first quarter into the second quarter. At that point, we will have offset that inflation that we've seen, particularly on the services side of the business.

Our next question comes from Mike Mueller with JPMorgan.

Yes. Hi. The sequential revenue growth in service revenue per throughput pallet, it was about 3.8% in the quarter, in the prior few quarters, it was mid to high 4s year-over-year growth. So I was wondering, what drove that deceleration?

Yes, there's a number of things that factor into that which include business mix. So obviously, going in and throughout the year you had lower throughput volume overall, we have a slight shift overall in business mix to less volume and less value-added services. So without lower volume, you tend to have less value-added services. And I think given the state of the supply chain some of the challenges, what we saw is product moving through more quickly and fewer value-added services being done within our warehouse to get the product more quickly to the end consumer.

But Mike, it’s Scott, I just want to follow the 3.8%, which was the revenue yearly for throughput pallet in the same store. It actually, as Rob called out, accelerated throughout the year. So that was the average for the quarter. But remember, Rob worked the prices in there. You saw that increase to 5.9% in December as those increases come in, that’s the way it worked its way through the quarter.

Yes, got that. Definitely picked up on that. Appreciate that. And then I guess, in your conversations with customers, have you had any instances where customers who were on fixed commitments have actually wanted to back off just because of the past couple of years’ experience?

We haven't. I think all of our customers, George mentioned, recognize that there is a goal to get back to pre-COVID production levels. And as folks are able to bring labor back on, I think everybody is going to be rising around a similar timeframe. And so that leaves everybody to wanting to make sure that space is available for them when production ultimately does come back. So we haven't been, even in our prepared remarks, referenced the fact that our fixed commitments have continued to grow quarter-over-quarter and year-over-year. So it's still a structure we're very comfortable with.

Our next question comes from Craig Millman with KeyBanc Capital Markets.

Thanks, everyone. And George, I apologize, I kind of cut off on Dave's first question, but I just wanted to kind of follow up. Just because when we had chats around the prior interactions, I kind of asked you directly if you thought you'd be kind of the guy permanently in the seat. And you were almost adamant that you wouldn't be. And it's been not that long with the time period since then. Could you just go through kind of what change in your view that got you comfortable with being the permanent guy? And also just how deep you got, and the search firms got into interviewing external candidates?

Yes, well, I can tell you is that there was nothing professional or Americold-based, let's say in my comments, when I said I was not a candidate. It was about being retired and being retired with a family and working through the decision to come back to work full time, which is everybody knows is a massive commitment. So it had nothing to do with Americold. It had nothing to do with the industry. It has nothing to do other than the personal situation I was in at the time, and the decision to leave that personal situation and go back to working full time. So and that did take a while to make sure it was the right decision for me and in my particular circumstances. So that was it. When it comes to the search process, I know it was extensive. I know it had a number of highly qualified candidates. I think I mentioned and it probably was with you that it would attract a lot of incredibly talented people because it's, Americold is an industry leader that has been an industry leader for a long time and has the capability to attract that type of talent. So that's really, I can't really add any more to it.

That's helpful, then just on the expense side sounds like your top tenants, you kind of gave some retention bonuses or true ups to kind of non-executives. Sounds like about $16 million in total. I don't know if it's more than that. I know you said there was $4 million, maybe in the fourth quarter or so, maybe $20 million.

Correct. It's about $20 million spread over, it'll hit three years, but it's $4 million that was already in this fourth quarter, $11 million, which will impact next year or 2022, and $5 million impacting 2023.

Okay, and then I'm just trying to figure out what kind of cushion you guys gave yourself in 2022 above that 2% to 4% to absorb some maybe higher use of contract labor in the near term or just kind of higher wages above and beyond normal inflation.

Yes, so I think what our guide implies. And if you look, in particular in our same-store where we're guiding actually negative two to flat really, while we're getting the benefit of all the rate increases Rob mentioned, our guidance is that the disruption in the industry, and I think you've seen this both in the USDA report for last year, and even the January report that was just filed just the other day, that the starting inventory, the state of the inventory has not yet fully recovered, we're still seeing negative year-over-year comps, which are weighing in on the overall guidance. So if you think about our outlook for the year, and the implications that same-store guide entails is, at the midpoint we don't expect to see a significant recovery in 2022, or degradation as I mentioned in my prepared remarks. If we do see improvement in occupancy, that will help us get to the upper end of our range. It'll also drive associated throughput. If we see degradation of occupancy and associated throughput, that'll get us closer to the lower end of the range.

Our next question comes from Emmanuel Korchman with Citi.

Hey, it's Michael Bellman here with Manny. George, in your opening comments, you said your ability to predict when economic and physical occupancy levels will fully recover was impossible. And I assume the same goes for the expense recapture in terms of amount and timing, that you just don't yet have the confidence. And it's basically impossible to understand. You ended your comments with some, yes, about sort of what you're doing to your customers and all that. I'm wondering if we can spend some time on the investor side of things. Obviously, it's been a pretty tumultuous four months. And actually, if you go back prior to you getting there, there was a number of missteps that arguably led to the board deciding to bring three new members on and terminate the prior CEO, and two what I really understand from your vantage point. Now that you've made the decision to join the board and offer your advice as a retiree. You've now made the decision to be active and fix the problems. What confidence do you give to a shareholder both that could be existing and that could be wanting to buy your stock about when you believe earnings will recover? And I'm sure you've looked at the numbers last year, it was supposed to be a $50 for this year, that's where the street was thinking prior to the declines after the 3Q print. Even this year it was supposed to be a $40. If you go back a year or so, being at $1, 50% down, at what point will those earnings come back so that shareholders can start underwriting that level? And what confidence can you give them?

Yes, no, very good question. I appreciate the sentiment. Look, my objective is in the short term control what we can control, right, that's labor management. I mentioned getting back to a permanent workforce that on a percentage basis is far higher than it is today. It's controlling our development projects to ensure that they come in on time, on budget and hit the yield that we published. What I can't control is the recovery of the food industry, when it occurs, and how fast it occurs. What I can tell you based on my years in the food industry is that when you have service levels at 70%, which I referenced in my prepared remarks, and you also have unmet demand, the likes of which is higher than anything I've ever experienced in decades in the food industry with very large customers, very large manufacturers. What I can tell you is they want to produce more, they view that as a huge opportunity. And they will do everything they can to produce more, so my confidence that it will come back, historic inventory levels at Americold specifically and in the cold chain in general will come back. I can't be more confident of that. But I can't tell you is when but when it does, if we do a good job on things we control, labor and development being the two biggest ones, I am confident that investors will see the type of performance they expect from us. The issue was when it comes back and in my prepared marks I was being as honest as I could. I can't tell you when it’s going to happen.

George, can you help us, again, I remember when we start getting a read, it was even read or reread our note, it was pretty definitive that you weren't going to take the CEO seat. Look, I'm extraordinarily happy that you're in it. But obviously, it does come as a surprise. Can you just talk through a little bit on the timing because I assume acting as an Interim CEO, the decision that you were making may be very different than if you were sitting in the seat for the longer term. I view it as a caretaker versus someone who's strategically thinking about the business, the organization, and the management team. There's a lot of things that you would do as a permanent CEO that you wouldn't do as an interim. And so when was the switch made? And how much time due diligence have you really spent in the organization? And I recognize you there now, it's been four months, but what activities have you done? But how much more is coming, right? Is the board active? You have three new board members, including yourself. I don't know if you're going to add someone else in for an independence perspective, but like a new board, are they going to strategic review? Are you going to re-change the executive management team? How much more change just from an organization, but about all the industry stuff. But clearly, the board thought there was an issue in the way the company was being run. So I think I'm really trying to get at is, what else should we be expecting in terms of changes from an organizational capital deployment? Everything that goes into it from the CEO perspective?

Yes, thanks for the question. First off, though, I’d never considered myself a caretaker. I had joined the board, I had a very vested interest in Americold being successful as a board member, and I was given the support of the board to act as a leader, not as a caretaker. There's very little that's changed in my posture or my decision-making, literally since I arrived as the interim leader. So the mindset has been - the mindset and energy has been consistent throughout the time period. So there's absolutely zero change. In terms of changes in the company, I've said a number of times, in my mind, there is nothing flawed with the business model of Americold. It is a vital component of the food cold chain; it's not an optional component. It's a vital component. Our task right now is to get our house in order and the things we can control. I mentioned labor management, that I mentioned the development projects, and be ready to accept all of the inventory we possibly can when food producers can produce and to service customers that service levels that are at least 98.5%, if not higher, when that occurred. That would have been exactly what I said had somebody asked me what the goal was four months ago, and it's the exact same answer today.

Our next question comes from Michael Carroll with RBC Capital Markets.

Yes, thanks. Obviously, the macro environment still remains fairly dynamic right now, I guess, with the current Russia conflict. It seems like that's going to materially impact fertilizer and food exports. I mean will this or could this further disrupt food production? And how has this impacted your recovery outlook or expectations on the business?

Well, obviously, very recent news, will it have an impact on our European business? I'm sure it will. Right. I mean, it's hard to imagine that something of this magnitude, as unfortunate as it is, would not have an impact on European business. How that manifests itself? I honestly don't know. I'm sure you could theorize that energy may be an issue for sure. And it could be some others. You mentioned a couple. I can't really predict it. But I can tell you we're extremely focused on it. We were on the phone with our European team this morning. We discussed this but I think it's wait and see at least for the next couple of weeks to see what happens.

Okay, then within your, I mean, you obviously have a pretty global portfolio and the supply chains pretty interlinked. I mean, will the weakness mainly be in Europe or could you see issues in your Australian and South American and potentially US portfolio, I guess, how insulated is the US portfolio from this?

Look, I think if you step back and look, the US portfolio is being impacted in the supply chain challenges that are being discussed are really global in nature. So they're not unique to Europe, they're not unique to US. They're not unique to the other geographies that we operate in. So we're seeing global challenges, similar challenges around the globe around labor, labor availability, power, inflation. So we're addressing those on all fronts, Mike. So I don't think we see unique things. If you step back many of the geographies that we serve tend to be breadbasket geographies where there are producers of food that we do export around the globe, right. So we'll have to be seeing how import flows, import-export flows change as a result of what's going on in Europe. But the general markets we serve are our breadbaskets.

And maybe I'll just add, if I was to think of impacts in geographies such as North America or Australia, New Zealand, it probably is more on the import-export side and how those flows change given recent events, and less so in country and that's at least what we think today. But we'll see again, as you can imagine, it's an incredibly fluid situation and very new.

Our next question comes from Samir Khanal with Evercore ISI.

Good afternoon, everybody. Hey, Marc, you've talked about the guidance a little bit earlier, maybe help us understand what's sort of baked into the low end of guidance. I know, you talked about a factoring and deterioration or occupancy. I mean, can you help us sort of quantify that, I just try to understand a bit more how the worst-case scenario and maybe on the other side of the high end, what occupancy you're assuming?

Yes, so if you look at our economic occupancy and these occupancies just remind everyone, are the average for the quarter. But we're roughly carrying in Q4, roughly 144 basis points, defining year-over-year across the portfolio. And so roughly, if you think about our guidance going into next year, it really carries that rough year-over-year decline forward. So we're thinking somewhere, occupancy should be on a year-over-year basis. And we're between 100 to 200 basis points down on average throughout the year. So what gets us improvement, obviously, is if we see a quicker recovery, and we see greater occupancy and throughput, that will drive us up to the upper end of the range; if the market continues to deteriorate, and I think you've seen this both in the USDA report both for last year, and even the January report that was just filed just the other day, that the starting inventory, the state of the inventory has not yet fully recovered, we're still seeing negative year-over-year comps, which are weighing in on the overall guidance. So if you think about our outlook for the year, and the implications that same store guide entails is we, at the midpoint, we don't expect to see a significant recovery in 2022, or degradation as I mentioned in my prepared remarks; if we do see improvement in occupancy, that will help us get to the upper end of our range. It'll also drive associated throughput. If we see degradation of occupancy and associated throughput, they'll get us closer to the lower end of the range.

Got it. And I guess, George, the second question here is, I guess what have you heard from your food manufacturing customers, given your background as to when you think will get back to sort of a normalized inventory level? I know, you said it's sort of solid and certainly out there. But based on kind of your context, what do you hearing directly from them?

What I'm hearing is that when they can attract the necessary labor and have enough time to train them, make them productive, and establish an efficient workflow, inventories will increase, which makes perfect sense to me. That's how it works. However, they cannot guarantee timing. This connects to some points I made in my prepared remarks. We've seen situations where optimism emerged, but then we faced setbacks like Omicron. This has truly been a shock to the system, illustrating how quickly situations can change, which has discouraged people from attempting to predict the future. I understand their strong motivation to ramp up production since producing food for sale is their primary focus, and I have spent considerable time in that area. They take it very seriously. However, until the labor issue is resolved, they are essentially constrained. Moreover, timing is not even a topic people want to discuss because it is highly variable depending on labor availability.

Our next question comes from Ki Bin Kim with Truist Securities.

Thanks and good evening, everyone. Just want to back to your ability to push on inflationary costs to your tenants. I might have missed it, but I don't think I got a full answer on that in terms of like, what percent is actually, what percent of your customers including those? Are variable, I guess you push it all through but especially those on a kind of fixed contract basis that what percent of your customers are actually taking on the increases, how much of the increases have been pushed through?

Yes, we have talked with our entire customer base, including our Top 100 customers, those not in the Top 100, and customers on fixed commitment contracts. The cost challenges Americold faces are largely driven by broader macroeconomic factors and are not unique to our company. The discussions have been constructive, and our contracts provide for adjustments related to costs that are beyond our control, which applies to most of these costs. Therefore, we have been able to engage in these discussions with all our customers.

And maybe I can add having been a customer on this not too distant past, that a strength of Americold is to be very analytical in the discussions. So to put forth a price increase justified on actual data on customer performance and a cost base that the customer can relate to. I think that's incredibly helpful when passing these price increases through and a big part of the reason that they have hit 100% of the portfolio and have gone through the system exactly, as Rob mentioned, and in line with our guidance led for that exiting the first quarter of this year, we will have recovered all known inflation and our cost structure as scheduled.

Okay. And in terms of your G&A increase, you’re guiding towards almost a $40 million increase. I don't think there's — I don't cover all REITs, but that's probably I got the point of the biggest ones, especially in light of your spot price which is in challenge still situation. I just think that G&A increase, these are a little more attention. Can you just help us understand why that size of magnitude and break it down a little bit further to understand what's happening?

Yes, hey Ki, it’s Marc. As I said in my prepared remarks, the key drivers of the increase are really the resumption of performance-based cash incentive compensation. So obviously, with the performance in 2021, that was not accrued or included in the year-end results; it wasn't earned. But we do, in our plan going forward, we do plan for that in the ordinary course. Additionally, on top of that, we talked about in my prepared remarks, the incremental $11 million of non-cash share expense are related to the retention program, the share-based retention program that was put in place this year. So those two items make up more than half of that increase. On top of that, one of the things we're doing in IT is we're transitioning more of our software as we integrate businesses to a software-as-a-service platform. So what that does is it puts a little more operational expense in G&A. But it actually saves us maintenance CapEx over time. So from AFFO perspective, those types of investments should be neutral. And then the last thing we continue to see is just inflationary cost pressures still on overall wage environment insurance, travel, etc., etc. So those other additional costs that are embedded in our G&A to your normal annual treadmill costs are what make up the cost.

Our next question comes from Joshua Donovan with Bank of America.

Yes. Hey, everyone. I wanted to ask about the 8-K, the executive severance benefits plan. Is that — is the changing control payouts new or if it's not new, is it different than what it was previously? And if so, why?

No, they're consistent with what they previously were. I think we changed our function in terms of employment agreements going to the standard program. And you'll see that the terms of benefits are very consistent if you look at our proxy from last year.

Okay, I guess maybe why would this needed? Like the new one than the old one? Just because you have a new CEO or?

Yes, I think it's something in terms of one of the things that our board has been working on in terms of moving towards the best practices that they see in the industry, and we're following the best practice.

Thank you. That concludes our question-and-answer session. Thank you for your participation. You may now disconnect.