Greetings, and welcome to Americold Realty Trust's First Quarter 2024 Earnings Call. 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.

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 of 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.

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 the significant improvement 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 a $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 have 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 the 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 helps smooth out the seasonality in our business and also acts 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 and 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 over two years ago. 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 costs 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 cost, reliable, and 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 USD 36 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 in 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.

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 12th 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 multicustomer 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 multicustomer major market distribution center in Dubai, at DP World's Port of Jebel Ali Free Zone for USD 35 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 logistics solutions. This strategic combination will result in unprecedented optimization of temperature-sensitive food flows in and out of the countries of the Gulf Cooperation Council and provide redistribution opportunities across the region. Our collaboration with CPKC and DP World illustrates Americold's unique ability to 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 USD 36 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. 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.

Thank you, Rob. Today, I'll discuss our capital position and 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, consisting of cash on hand and revolver availability, and our net debt to pro forma core EBITDA was approximately 5.4x. 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 zero 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 trend in 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 for 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 2024. With regards 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 the 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 delivering our stated return on invested capital. Turning to our managed and Transportation segments NOI. For the full year, we are 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 and $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.

Thanks, Jay. It's been a great quarter for growth in 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 margin goal by almost a full year. The improvement in metrics speaks to the sustainability of the 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 and 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?

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

Maybe on the occupancy front, maybe tell us in 1Q, where did occupancy end up versus your expectation? And I guess how should we think about the cadence of the trajectory of occupancy through the balance of the year?

Yes. Good question, Samir. It came in 345 basis points below prior year. That was exactly in line with expectations. If you look at the path to the midpoint of our current guide, our revised guide, we would have to increase economic occupancy 400 basis points sequentially in the next three quarters. We think that's very achievable, and that's why we haven't changed our occupancy guide. So we feel really good about it.

Yes. It's important to remember that we are comparing against a build that is not typical due to our seasonal patterns, and what you're really seeing is a return to the more usual seasonality of our occupancy.

Okay, got it. And I guess the other topic investors are focused on is clearly throughput. So maybe talk around kind of what you're seeing, how do you think throughput will sort of will play out, let's say, in the second quarter? I know you've talked about an improvement in the second half. Is that sort of what you're still expecting?

It is, Samir. And we were down 750 basis points year-over-year in the first quarter. That was exactly in line with where we said we would be. We said the first quarter would very closely mirror the fourth quarter of last year, and it did. We're not revising the guide because we think it's very much in line with the original guidance we put out. But one piece of good news is really in April; for the first time, we saw a year-over-year improvement in throughput. So if you remember, we signaled that that might happen closer to the end of the second quarter. We're seeing it a little bit more towards the beginning of the second quarter. So that's some positive news. No change to the guide. It's in line with our previous expectations, but a little bit of positive news comes through in April.

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

I wanted to further discuss the ERP rollout. Could you tell me when it went live during the quarter? Also, as we look ahead for the rest of the year, what improvements or developments should we anticipate as it gets fully integrated into the system?

Yes. I'll pass it over to Jay for some additional comments, but the new software was launched on Monday of this week, not in the first quarter as we initially expected. The improvements we noted that positively impacted the first quarter stem from process changes and enhancements we implemented since the start of the year in preparation for the new software. To maximize the software’s effectiveness, we needed to adjust our work processes accordingly, and starting these adjustments early resulted in faster outcomes than we predicted. We are confident that the system is fully on track to provide the benefits we outlined when sharing details about the investment. Everything is proceeding as planned, and Jay, feel free to add anything.

Sure. George did a pretty good job; I'll give you a couple of examples. I mean before you turn on a new billing system, you're going to improve your processes associated with billing. So we actually saw incremental type of value-added services under the new processes that we otherwise would not have done. So that was a benefit we saw in the quarter. And improving our procurement processes and reducing costs, we also saw benefits. And labor management, we also saw benefits. So it was different process improvements you want to do before you roll out an ERP implementation. We had not forecasted any benefits in the quarter and have seen at least $2 million of benefit in the quarter of just pure process improvement. And now that the system is going live, we're seeing more benefits as we move through the year.

One follow-up to that. What benefits are assumed in the guide as far as the rollout from here? It sounds like you picked up an incremental $2 million in Q1 that you weren't forecasting. Just kind of curious, like what, the ERP itself, like when you were initially putting out guide, was including as far as the benefit?

I would say that all of those benefits, Josh, primarily hit the handling area of our business. And one of the reasons that our handling business has done so well, increasing the margins, along with all the workforce metrics that have come in line like they said they would, is these process improvements that Jay is talking about. We have budgeted those originally in our original guide in the handling area of the business because much of the improvement helps there. It's part of our incremental guidance to now 9% of the year, accelerating that objective by a full 12 months. We're now guiding to 9%. And you can assume that the systems benefits that drive the handling increase are all embedded in that guide. It's a component to getting us now to 9% handling margins a full year ahead of when we thought we could achieve it.

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

You mentioned you're now expecting throughput margins of 9% for the full year, even though margins were 10.7% in the first quarter. So is there any seasonality with margins we should be thinking about? Or are you just maybe being a little conservative with the guide? Just any color on how we should think about the service margin trends as the year progresses would be helpful.

Yes. Thanks for that, Vince. And you're right, we're guiding to 9%, which just a few short months ago was very aspirational and now it's part of our plan. So I feel really good about getting to 9%. I just want to say that in terms of making a commitment in our guidance. It's a much different place than we were six months ago. It is slightly down from 10.7% in the first quarter. But these process improvements we just mentioned are early days in terms of the impact. And we think getting to a 9% platform based on margins for our handling platform based on the systems and process improvements now is not in any way conservative, quite frankly. It's a very strong guide considering where we were, and the sustainability of margins is something we need to be very confident in. We are at the 9% level. We're just maybe being a little conservative, having turned on the actual systems literally Monday of this week. And typically, I think most people would expect a slight productivity loss when you turn on a new system. I think that's pretty typical and then a quick rebound. So there's a little bit of that. But I would focus on our guide to 9% handling margins for the year, which again, not that long ago, was an aspirational target.

And then just switching gears a little, I'm looking at Page 23 of the supplemental, and I noticed physical occupancy was at its lowest level since '21. Can you discuss some of the drivers there? I mean you mentioned a weaker consumer, but I thought a slowdown in end demand could actually lead to higher occupancy levels, or are there any notable trends in food production that have really changed? Just any color on the kind of physical occupancy side of things would be great.

Yes. I'd say the biggest impact on the physical occupancy side, Vince, goes back to a comment Jay just made, where we were lapping a counter-seasonal level of inventory last year. So last year, I believe our economic occupancy was around 84.4% at the end of the first quarter. Incredibly high, driven by manufacturers producing ahead of demand as they finally had labor to do that and wanted to create some space between customer service and their production facilities. We're lapping that now. And as I said, we landed economic occupancy almost exactly where we thought it would. We said it would replicate the fourth quarter economic occupancy, and I think we did that. We brought it down about the same amount year-over-year. And we're not changing our guide because if you look at where we end the first quarter, it's about 400 basis points improvement to get to the midpoint of our guide over the next three quarters. Seasonality should do that. So that's really the story on occupancy.

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

George, can you elaborate on the throughput dynamics and the service margins? Last quarter, you mentioned that you expected throughput to decline by about 7.5%, which is in line with what actually occurred, but you also indicated that service margins might decrease slightly. Is this primarily due to some of the GRIs and other measures you've implemented, along with labor considerations? Please break down the factors that are influencing that margin.

Yes. We do hit the components. I mean first of all, you're correct. The throughput came in exactly where we said it would this quarter. We said it would be very much like the fourth quarter. But the throughput margins are driven by the exact two components you mentioned. First is price. We said our price in handling was up 10.8% in the quarter year-over-year. That is certainly going to drive margins. No question about it. But the big story has really been productivity. I mean we've reached levels of permanent hours, permanent associate hours in our system that are now 78%. That's significantly higher than the last two quarters. We've reached retention to be at pre-COVID levels. I mean the workforce has become more stable, more time in job, more engaged, and more productive. So it is both of those, pricing over 10% year-over-year and the productivity driving the margins. I'm not sure we've split that out in the past, and I don't have a split handy, to be honest. I don't think neither do you.

All I can say is that we exceeded expectations this quarter by achieving the labor margin metrics that George mentioned. This led to a quicker translation into NOI than we anticipated. We experienced significant improvements in our temporary labor and began to see efficiencies in our permanent labor. This was the main factor that contributed to our over-delivery and allowed us to elevate our handling margins above 9% sooner than expected.

And maybe just to follow up on the throughput. We did say in April for the first time we saw a year-over-year improvement. That would be showing up a few months earlier than we had thought in our original guide. So there is reason to believe that the throughput could improve. But our guide is up significantly, not dependent on that happening.

Next question comes from the line of Mike Mueller with JPMorgan.

Going back to the service margin questions. If you're expecting throughput volumes to improve in 2H, what are the factors that are driving the margin down relative to what you had in Q1? Was there anything, I guess, abnormal contributing to the 10% to 11% margin print in the quarter?

Yes. I would like to clarify that we have not changed our guidance on throughput; it remains the same as initially provided. Recently, our results for April showed that, for the first time, the year-over-year throughput is positive. However, I want to emphasize that this was not included in our guidance. We are sticking to our original projections. The margin improvements we've achieved are primarily due to our pricing strategy, advancements in our workforce, and the early results from our system process improvements ahead of launching our ERP system. The decrease in services margin from 10.7% to 9% reflects our commitment to reach 9%, which we have accomplished nearly a year early in terms of our guidance. This represents a significant improvement for our company, contributing $22 million in incremental NOI in the first quarter, which we previously estimated would be worth around $100 million. The projected decrease from 10.7% to 9.9% in the guidance is simply a result of implementing the new system and the associated training for thousands of employees, anticipating a slight decline in productivity during this transition. Such productivity adjustments are expected with any ERP implementation, and we are no exception. Additionally, as Jay mentioned, we have observed a significant variance in the handling margin rates due to all the factors I just mentioned, and we need to ascertain what the new baseline will be. However, we believe it will be at least 9%.

And to answer your other question on one-timers that benefited our handling margin in Q1, there were no material one-timers that elevated the handling margin in Q1.

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

I want to go back to the topic of expense savings. Clearly, labor is a significant factor, and service costs are also a major component. I understand you've mentioned reducing the number of temporary workers, but could you elaborate on the other aspects? Are you cutting hours, or what measures are you taking regarding labor beyond just increasing the number of permanent workers? Additionally, I've noticed a decrease in your depreciation for non-real estate and a reduction in interest expenses. Are you spending less overall or postponing costs related to equipment, maintenance, or other areas? Ultimately, we're trying to understand the decline in service margins this quarter to 9%. Is much of this related to costs that you will need to reinvest if throughput improves? I'm looking for a comprehensive view of what is driving these changes with specific examples.

I don't know how specific I can get, Craig, on the call here, but I can walk through the components of our handling services margins improvement and explain why we think they're very, very sustainable at the 9% level regardless of the throughput guidance. I'll just note again, we haven't changed our throughput guidance. It's exactly the same as the revised guide. It's driven in first part by pricing. Pricing was increased, I think 10.8% year-over-year in our handling environment. So there's the component, first component, which is higher pricing for the same services. Two is our workforce has become productive. And what I've always described about that is that if it takes five people to move 50 pallets an hour and you then turn that into three people to move 50 pallets an hour, you are doing the same work content with less people. That's what we've achieved. There's a thousand tactics along the way as to how we've achieved it. There are some big movers like our retention improvement to pre-COVID levels, our workforce having more time in their job with turnover declining, etc., all the metrics that we've talked about already. So it's really a combination of those things combined with now new processes and a new ERP system laid on top of it, which gave us some unexpected early returns, as we mentioned in the prepared remarks. So I don't know that I can go into a lot more detail than that, but those are the broad components, and they all come together to create outsized handling margins. And I understand using the words, 10.7% to 9% is a decline. That's mathematically correct. I understand that. But I'd just remind everybody again, this is an objective that we said was aspirational just three or six months ago, and now we're saying it's here. It's in our guide, and it's going to deliver incrementally a huge amount of NOI, and that's why we're excited about it.

Regarding interest expense, we are generating a small amount of additional cash flow that will be used to pay down the revolver, which will help reduce interest expenses. Additionally, some of the interest expense related to our announced projects is being reclassified as capitalized interest. Overall, while interest expenses are not decreasing significantly, they are influenced by these projects and the increased capitalized interest. As for other costs, we remain committed to our maintenance CapEx guidance, having spent $1.7 million more in Q1 compared to the same quarter last year, which is typically our lightest quarter. We plan to spend the remainder of our budget to reach the $80 million to $90 million CapEx target for the rest of the year. Therefore, our spending will increase in the remaining three quarters, and we are not cutting any spending to meet our targets.

You maintained the same throughput, so future expectations for throughput are at the lower end or even positive by the year's end. However, I believe your initial expectations may have assumed some interest rate cuts that might not occur, which means the consumer could remain somewhat weaker. Assuming you're looking at a range of plus zero to three compared to zero to negative three, will the margins still be able to hold at 9% despite potentially needing more labor? Is that how it works? Or, if there is a rapid increase in throughput, will margins be negatively affected in the short term due to labor demands?

The commitment to the 9% margin aligns with our current plan. We don't see any risk of compression with changes in throughput. To clarify, we have not altered our throughput guide; it remains unchanged from our initial expectations. I did mention some positive news regarding throughput in April, which was the first month showing a year-over-year increase. This doesn't guarantee similar results in the following month, but we are looking for positive trends, and we have recently observed one with April's results. Our guide stays the same, and any changes in throughput will not impact our margin profile. We are managing the business according to the variable nature of throughput, and we have reached a level that gives us full confidence in maintaining the 9% margins for the rest of the year.

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

Just a follow-up on the previous question. On the labor efficiency that you're achieving, maybe you can wrap that around a different set of KPIs, like services provided per employee or worker idle times; maybe that's come down, maybe something a little bit closer to on the ground.

I don't have any of that data to disclose, Ki Bin. I will remind you the metrics that we've been disclosing for over two and a half years, we said would have to improve for us to improve our services margins. They all have improved. Our permanent employee content in the company has never been higher at 78%. Our retention is now back to pre-COVID levels. We're climbing up the ladder of associates in the job for greater than 12 months. That's probably more of a timing issue than anything else right now. We believe we're actually at pre-COVID levels. So those are our disclosures around labor. We said when they improve, the services margin would improve. We said they correlate really, really well, and they have improved, and we've delivered record services margins. So I think our labor disclosure is very sufficient to track the performance of the margins in the handling area of the company, and it's proven to be very accurate this quarter.

And going back to your throughput comments about it being positive slightly in April. Do you think that was concentrated to any kind of particular tenant that might have had, I don't know, like a big harvest or something? Or was that pretty wide across the system? And second to that, your physical occupancy being down 760 basis points, if you can provide an April update on that as well.

I would say our physical occupancy, and maybe I'll ask Rob to comment on this, we would expect the gap in physical occupancy in a normal seasonal year to be widest between fixed commits and the physical exactly this time of the year, at the end of the first quarter and then go from a seasonal flow there. But maybe, Rob, if you want to comment on the fixed commits impact, that would be good.

Sure. So that's right, George. I mean our expectation is that gap is going to be the widest now this time of the year. I think our expectation as we go through the rest of the year is that the gap between physical and economic occupancy will close. As far as whether or not we saw any specific customer or any specific node in the supply chain, and it was maybe there was a bigger gap, I would say protein is the one sector. And you see that in our customers' earnings releases, where protein is one that's down more than others, like our consumer packaged goods or our retail sector. So we want to see continued improvement in the protein sector, and we think we'll see the gap between physical and economic occupancy close between now and the end of the year.

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

I just want to focus on the full year guide. I mean if you annualize the first quarter number, I think that would put you above the new range that you set out. I know Q1 is usually the low point of the year; you expect throughput to trend a little bit higher. You expect occupancy to rebound with seasonality. It seems like even the non-established NOI was peaking to the negative side this quarter and it should recover. So why did you not increase your guidance by more? I guess why does that imply the quarterly run rate should trend a little bit lower throughout the year?

Yes. And I'll take this one. As I mentioned earlier, our maintenance CapEx, though higher than Q1 of last year, was only $17.9 million, so that means we're going to incur at the midpoint, another $67 million of maintenance CapEx in the following three quarters. So that does cause a reduction in AFFO and part of why it's more flattening out for the remainder of the year within our guidance.

In the past, this situation typically didn’t occur, right? Historically, shouldn’t your occupancy help balance that out? Since your occupancy is currently around 80% and is expected to increase a few hundred basis points, wouldn’t that higher occupancy counteract the CapEx increase?

I don't understand that point, Mike. We have an occupancy guide in our revised guide, and we need to reach the mid to achieve the $1.42. Everything else will align with that. One unusual aspect of our business is that we usually have a very low CapEx expenditure in the first quarter because projects typically start a bit later in January and pick up after the new year. As Jay mentioned, if you account for the remaining CapEx over the next three quarters, we believe that addresses everything you're describing. That's why you can't simply multiply the $0.38 by four to reach a figure for the year compared to our projections.

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

First, I just wanted to follow up on occupancy; it looked like that countercyclical build continued into the second quarter last year. So within the full year economic occupancy guidance that you maintained, flat to down 100 basis points, do the year-over-year occupancy headwinds, do they worsen in the second quarter before improving? Or do you see the improvement beginning sooner than that? And then I guess just following up, I wanted to see if you could discuss what you're seeing so far in the second quarter to that end in terms of economic occupancy, as we're through the first week or so in May.

I would say when it comes to economic occupancy, the way I look at it is if you take where we ended the year at the end of the first quarter, which was 345 basis points down from prior year and exactly in line with where we believed it would end, it was driven by the counter-seasonal inventory. That's the drop in occupancy. We've explained that, etc. If you look for the remaining part of the year, the next three quarters, we would have to sequentially improve occupancy, economic occupancy, over that time period 400 basis points to get to our midpoint guidance. But we're very comfortable with that within the context of a year that is back to our counter-seasonal environment. So that's how we view the guide going forward, and that's why we are comfortable with the guide and have not changed it. When it comes to April and economic occupancy, I don't have any data on that. I mentioned the throughput data because it was something we were tracking. But I don't have any data on economic occupancy for April, other than to say it's in line with our guide for the year because if it wasn't, we would have been aware of that.

Yes. I think as we get further into the second quarter, we should see occupancy start to trend up. Historically it's been a slow start to the second quarter in regards to booking stabilizations, performance returns, leading to a continuation of occupancy increases.

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