AppHarvest, Inc. (NASDAQ:APPH) Q2 2022 Earnings Conference Call August 3, 2022 4:30 PM ET
Company Participants
Kaveh Bakhtiari – Vice President of Investor Relations
Jonathan Webb – Founder & Chief Executive Officer
David Lee – President
Julie Nelson – Chief Operating Officer
Loren Eggleton – Chief Financial Officer
Conference Call Participants
Ben Theurer – Barclays
Brian Holland – Cowen & Company
Kristen Owen – Oppenheimer
Operator
Good day, and thanks for standby. Welcome to the AppHarvest Q2 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions] Please be advised that today’s conference is being recorded.
I would now like to hand the conference over to your speaker today Kaveh Bakhtiari. You may begin.
Kaveh Bakhtiari
Thank you for joining us on the AppHarvest second quarter 2022 earnings call. I’m Kaveh Bakhtiari, VP Investor Relations for AppHarvest. Joining me today are several members of the senior management team including; Jonathan Webb, Founder and CEO; David Lee, Board Member and President; Julie Nelson Chief Operating Officer; and Loren Eggleton, Chief Financial Officer. The earnings release is available on our investor website at investors.appharvest.com. Please note that there is no slide presentation accompanying today’s call. We’ll begin with prepared remarks from the team then we’ll open the call to questions.
Before we start, I’d like to remind you that comments today regarding the company’s future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Safe Harbor provisions of the Securities Laws. These statements are made based on management’s current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations.
In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see our most recent SEC filings.
And now I’d like to turn the call over to Jonathan.
Jonathan Webb
Thanks, Kaveh. Before I go into detail on the quarter, let me start by saying thanks to those who have made inquiries about our well-being and contributed to relief efforts around the devastation caused by massive flooding in Eastern Kentucky. Though we have not identified any damage to our facilities from flooding, we recognize that the impact of the region is massive and will require months if not years to recover. We are organizing mission days with our team to volunteer for relief efforts. I encourage those of you who would like to help consider donations, direct those towards team Eastern Kentucky flood relief and the foundation for Appalachia, Kentucky’s crisis fund. You can find more details and ongoing opportunities to support recovery efforts by following our social media on LinkedIn, Twitter, Facebook and Instagram.
Turning now to the business. The AppHarvest team made significant strides forward in the second quarter. We continue to deliver improved operating results at our farm in Morehead, Kentucky. We also continued making progress on our farm development that will quadruple our facilities by opening three new farms by the end of the year. And those farms would diversify our crops by adding salad greens, berries and cucumbers as well as more tomatoes. We also have been making good progress on securing non-dilutive financing to support our expansion including the recently announced $50 million in USDA-backed loans.
Turning to the second quarter, we sold six million pounds of tomatoes from the Morehead farm for 4.4 million and a 39% increase in quarterly net sales year-over-year. Our team continues to make progress in improving quality, reducing distribution fees and in selling higher-priced varieties, which Julie will review in more detail.
Importantly this quarter, we entered the home stretch for our new farm development. We continue to expect the Berea, Richmond and Somerset farms will be operational by year-end with Berea set to begin its first commercial shipments of salad green soon. These farms have generated a lot of interest and enthusiasm from top national customers who have been visiting them this quarter.
In Q4, Richmond and Somerset are expected to begin shipping tomatoes and strawberries as well. This quarter we’ve continued to focus on operational execution to maximize quality and yield of our produce and to expand our high-tech farm network to serve the growing demand for more sustainable fresh fruits and vegetables in the US.
Demand for locally sourced produce has continued to increase and the recent headlines including inflation, water use restrictions and geopolitical instability have only served to add to that interest. Finally continuing to do business in a way that’s better for people and planet remains a top priority of ours as one of only a handful of publicly traded public benefit corporation that is also B-Corp certified.
On June 1, we announced recertification of our B-Corp status, with a score of 95.4%, which represents a 15% improvement over our initial certification in 2019. Additionally, we earned a certified living wage company designation, and established a Board of Directors level Sustainability and Oversight Committee. I’m proud of our continued commitment, and strong track record in this area especially, during a time of increased production and farm network expansion. I encourage all AppHarvest stakeholders, to read more about our progress in this area, and our third sustainability report that we issued in June.
I will now ask our President, David Lee to share more detail on Q2 results. David?
David Lee
Thanks, Jonathan. The AppHarvest team continued to raise the bar in the second quarter delivering strong operational performance, at Morehead that resulted in a 39% increase in net sales year-over-year, with improved labor and quality trends compared to the prior year. We also continued to make impressive progress, with our farm network expansion, all while navigating an economic environment characterized by challenging supply chain, and inflationary issues.
Importantly, we also delivered on one of our key priorities to fund our growth, with non-dilutive means by closing on $50 million, across two loan guarantees from the USDA late last week, that will fund completion of our 30-acre Somerset berry farm. Loren, will have more to share on the balance sheet in a moment, but I’m pleased with our team’s ability to secure lower cost sources of funding, in a higher cost lending environment.
In a period of global, geopolitical conflict, water resource limitations and food security disruptions, we believe AppHarvest’s business model positions us well, against incumbents to grow and sell domestically with the three new farms, we expect to bring online this year. We also have made progress on the previously announced potential joint venture FarmCo.
If completed, we expect this deal to give AppHarvest a broader, national footprint and additional network scale for more attractive unit economics. We are also in exclusive negotiations, with an institutional investor. And if FarmCo closes, it is expected to have the benefit of additional committed capital for expansion.
With the backdrop, where the domestic need for controlled environment agriculture continues to grow, and where it’s become clear that the US remains significantly underbuilt, our growth at AppHarvest is limited in large part only, by available capital and the time line to build new farms.
As one of the largest CEA operators in the US, we believe that we are at an advantage when it comes to meeting the consistent, consumer demand for fresh local produce, as our facilities harvest almost year-round through the coldest months of the year, top grocery chains and restaurants like the more consistent volume, and more consistent quality, that CEA can offer.
We’ve made substantial progress this year in ramping up, the net sales and operational execution at Morehead, and in expanding our commercial scale, with the three new farms that we expect to open this year. On the back of this progress the structuring, financing and new project pipeline, if the potential FarmCo joint venture, if completed is a significant achievement for our shareholders. The fundamental improvements, we’re driving in the core business, are key to our success. And with more detail on that piece, I’d like to ask our Chief Operating Officer, Julie Nelson, to review operational highlights. Julie?
Julie Nelson
Thank you, David. In the second quarter, the harvest from our second growing season at Morehead, improved on several key operating metrics. We achieved an increase in percent of premium grade tomatoes, reduced our distribution fee percentage versus the prior year-end quarter, increased our labor productivity and sold six million pounds of tomatoes at a net sales price of $0.72 per pound. This represents, a 39% increase in quarterly net sales year-over-year.
The team drove these results through additional sales of higher-priced tomato varietals, compared to last year, stronger overall tomato market pricing and enhanced training and productivity. Taken together, these improvements helped us to offset some of the 15% to 20% impact to our overall yield, from the plant health issue that we reported in Q1. That condition was the key driver, in reducing our overall production in the quarter by 2.6 million pound versus the prior year.
The ultimate effect of this issue was slightly higher than our original forecast, of 10% to 15% of our 2022 yield, as we removed some extra plants in the affected area in an abundance of caution. Additionally, we made the strategic decision not to extend the harvesting run of the replanted rows any longer than the rest of the original second season crop, to maximize the benefit from the third growing season, which will begin planting soon.
This means we no longer expect the shift of a portion of our second quarter sales and production into the third quarter, which has some impact to our overall net sales outlook that Loren will cover in greater detail in a moment.
Operationally, we continue to see steady improvements in our day-to-day performance. Our percentage of premium tomatoes increased versus the same quarter last year, as enhanced training and protocols are making an impact.
We’re seeing steady improvements in productivity, both on the growing and packhouse sides and this has translated to reduced overtime. I’m pleased with our progress, which I believe still has room for improvement, including from network efficiencies as we deploy key learnings across our three new facilities as they come online.
As a last point, we increased our percentage of direct shipments by over five percentage points versus the first quarter. Shipping direct is key to serving large national customer accounts at a high level and it’s also a tailwind to net sales as it lowers transportation costs.
The percentage of direct shipments may fluctuate from quarter-to-quarter due to commercial factors, but it’s an option that’s increasingly available to us, as our quality and execution improve. For comparison, our percentage of direct shipments was in the single digit when we were just starting out last year.
Now I’ll turn the call over to our CFO, Loren Eggleton, who will review our financial performance and outlook in greater detail. Loren?
Loren Eggleton
Thanks, Julie. I’ll start by briefly reviewing our second quarter results, give an update on our development progress and then discuss the 2022 outlook. We achieved second quarter net sales of $4.4 million, as compared to $3.1 million in the same quarter last year.
The increase was driven by selling higher-priced tomato varieties compared to last year, a stronger overall market for tomato pricing and enhanced training and productivity improvements at Morehead resulting in a lower distribution fee.
The second quarter net loss of $28.7 million was an improvement versus the prior year net loss of $32 million, despite preparation costs related to the opening of our three new farms expected to be online by year-end.
Despite the investments in expansion and growth this year, we trimmed our second quarter adjusted EBITDA loss to $17.9 million from $22.6 million last year, as we were able to more than offset that increase through the restructuring we announced in February.
Through June, we realized savings of approximately $5.3 million versus our prior baseline and continued to expect annual SG&A savings of approximately $16 million on a run rate basis.
Let me turn next to our progress on farm development and financing. Construction continues on our previously announced CEA facilities that will quadruple our farm network. The three additional farms are expected to be operational by the end of the year.
The 15-acre Berea, Kentucky salad green facility is about 91% complete; the 60-acre Richmond, Kentucky tomato facility is approximately 86% complete; and the 30-acre Somerset, Kentucky berry facility is about 84% complete.
We expect to ramp up each facility with a phased approach, that brings on additional acreage over time. Similar to the opening of the full 60-acres at Morehead, we expect that the first phased opening of this kind will be at the Berea facility starting this quarter.
Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $50.9 million, with about $40 million in availability remaining on our credit facilities. During the quarter, we sold 3.1 million shares for $8.8 million via the committed equity facility with B. Riley Principal Capital that we established late last year.
In terms of capital expenditures for the full year 2022, we estimate that approximately $85 million to $90 million in remaining CapEx, which accounts for the completion of the three construction projects underway. Of this total, we anticipate that approximately $30 million remains to be funded with balance sheet cash.
As we draw upon our existing credit line arrangements with equilibrium in the recently closed USDA loan guarantees to satisfy the majority of CapEx. We estimate that USDA loan will release cash collateral from our JPMorgan facility and that approximately $28 million in net cash to our end of quarter cash balance of $51 million, for a total of approximately $79 million in pro forma cash balance.
The estimated $30 million in balance sheet cash needed to satisfy our 2022 CapEx would be a draw on this amount. With the addition of the USDA loan guarantees, we strengthened our set of available financing options.
In addition to the availability on the committed equity facility with B. Riley, we also intend to realize liquidity from our Berea salad greens farm, the last facility in our network that remains unlevered as of today.
Now let me turn to our full year 2022 net sales and adjusted EBITDA outlook. We now expect to be closer to the lower end of our original guidance range and have tightened our full year 2022 net sales outlook to $20 million to $25 million reflecting incremental yield impact from the plant health issue at Morehead and potential supply chain delays that could affect the timing of initial commercial shipments from our three new farms.
Regarding adjusted EBITDA loss we also tightened our range around the lower end of guidance for the year and now expect a loss of $80 million to $85 million reflecting the adjustments to the net sales outlook higher cost of goods sold inflationary impacts and the end of season maintenance improvements Julie mentioned.
With that, I’ll turn it back over to our VP of Investor Relations, Kaveh Bakhtiari.
Kaveh Bakhtiari
Thank you, Loren. Operator, we’ll now begin to take questions.
Question-and-Answer Session
Operator
Certainly, [Operator Instructions] And our first question comes from Ben Theurer of Barclays. Your line is open.
Ben Theurer
Yes. Thank you very much and good afternoon. First of all, hopefully you and your families were all safe with the floodings and hopefully there’s — it’s not going to get worse in coming weeks. Now to the business just on the outlook and maybe a little bit of clarification if you can help us frame some of the changes I understand that you’re obviously facing some of maybe potential supply chain constraints to get on time with those three facilities that need to be up and running as maybe not on — as much on time as you were initially hoping for which is obviously out of control.
But if we look into some of the revisions on top -line and then ultimately into the EBITDA number how much can you attribute to external factors just the delays of supply chain and so on? And how much would you think is an internal issue that’s being caused just by potential inefficiencies or certain delays in the ramp-up to better understand how much was external, how much was internal on that minor guidance revision? That would be my first question. Thank you.
David Lee
Thanks, Ben. This is David Lee and we appreciate you emphasizing with the community here which is very close to the reason why we started this company. But we are grateful that our facilities so far remains safe and intact. With regard to your question on guidance, I think the first thing to note is you heard in our statement that we’re pleased with the performance through Q2 out of our first farm Morehead.
And while as you noted, Julie mentioned there was some increase in the amount of plant health damage 15% to 20% versus our 10% to 15% we largely met expectations you heard in Loren’s commentary regarding our net sales through Q2. So our core business the part that as you mentioned we are operating in control remains healthy and strong and growing at 39% on our core is really beginning to pay off.
And I’ll note we’re getting better and better through Julie and her leadership on things like the pricing we’re realizing, the amount we’re direct shipping and our labor productivity and recall that one of our new farms is very similar in its output as our existing farm Morehead. This is the Richmond facility.
You heard in our guidance that we talked about “potential supply chain issues” in the start-up of the three farms which we still believe we still expect and are targeting to have up and running this calendar year. And you’ve also heard that we intend to began harvesting in Q4 the output of those farms.
So from those statements I think you can infer that our tightening around the lower end of the range is driven significantly by tempered expectations on the start-up timing new facilities that we are still expecting to be up in a matter of months given where we sit now in the calendar year. I don’t know if that helps but I wanted to use what’s out there publicly to try to give you some color commentary.
Ben Theurer
Okay. No that was very good David. Thanks for that. And then second question if I may. On the — just on the operational side, and what you’ve been working on the improvements and obviously, you’ve benefited from a relatively good pricing environment as well this quarter, which was already the case in 1Q as well. So, if we think about the pricing environment which is to a degree out of your control, while on the other side what’s within your control, where do you think you stand on the part that you can control in terms of efficiency versus what you would say this is my internal target.
I want to get x amount of premium. I want to be as efficient on harvesting. I want to get this volume out on a quarterly basis with plant health and so on. So, where do we stand on the journey just to understand where we could be with that one single facility in a more of an optimal environment of operation?
Julie Nelson
Thank you, Ben. This is Julie. As David mentioned, our focus on core operations is really paying off and we continue to see steady and importantly, sort of, sustainable improvements quarter-after-quarter on our labor metrics in Morehead.
Our productivity importantly continues to rise and while we do have additional room to grow so to speak we’re excited to see the productivity in our farm and in our packhouse continue to rise quarter-after-quarter. And this importantly is happening as we’re increasing the complexity of the tasks our frontline execute.
As mentioned in the prepared comments, we have planted this year additional premium varieties in Morehead and we expect to increase further the amount of premium varieties that we plant in Morehead and in Richmond for the next season.
And so this is an element of our productivity that we’re keeping a close eye on to make sure that we continue to improve while we’re increasing the complexity of the crops that we grow.
I’d also add that due to sort of policy and engagement with the frontline, we’ve also seen our absentee rate decline and we’ve seen our overtime hours decline in Q2 as well which is significant.
David Lee
Yes Ben just let me jump in. This is David. Julie and her team have done an amazing job. But if you think about — you asked about pricing, exogenous market factors, you can look at the USDA data for B stakes and you’ll see exogenously the market for Q1, Q2, Q3, the whole market not us has consistently been up year-on-year. That — we don’t control that though we really enjoy being part of a rational market that is widely consumed frequently.
And as you recall from our previous releases, we know that that exogenous market tends to revert back to its traditional levels of pricing within a quarter or two. But the three things we control that Julie has done a great job on quality, higher quality is higher priced fruit. That’s number one. That’s the productivity step she’s talking about.
Direct shipping. Direct shipping means there’s less of a contract to net sales in that there are less costs for logistics.
And then the third is these varietals that we’re beginning to plant are fundamentally different in willingness to pay which was different in the quarter and we’re continuing to learn, not just for Morehead but Richmond. So, there is a lot we control that I would say as Julie mentioned there’s a lot more room to improve but we’re seeing steady improvement from our operations team.
Ben Theurer
Okay, perfect. Thanks Julie, thanks David.
Operator
And our next question will come from Brian Holland of Cowen & Company. Your line is open.
Brian Holland
Yes, thanks. Good afternoon and I’ll echo Ben’s thoughts and best wishes for you and your community during this time. And if I could also tack on to Ben’s question just to kind of, probe a bit further here on the guidance revision on the topline. So, it sounds like that this is not resulting from execution that execution is performing as you’d expect good progress there.
It sounds like it’s more about commercializing the product that’s coming out of the subsequent three new facility. So, you can correct me if I’m wrong about any of that. But assuming that that is the catalyst for bringing the number down, just help us understand what changed from Q1 to Q2 that made you feel like — because presumably that would have been part of the guide at some point anyway. So this seems like it’s really just a timing that would push some of this revenue generation out to next year. Just curious to understand what’s behind that timing?
Jonathan Webb
Yes, Brian. As we kind of land the plane, so to speak, on these next projects, construction it’s — we all know the supply chain issues. Our teams managed incredibly well, but going from 70% to 100%, you just got to get everything in line. And our team has really just been actively managing these projects around the clock.
And again, to put this in perspective, we’re talking several million square feet of facilities that are going to go operational this year with the diversity of crop all three different designs, so leafy green berries and vine crops, and the complexity of that landing the plane on all three has been something that we’re managing in real time.
And we’re coming in very close on timing but slipping a little bit as we’re fine-tuning on construction. But like David has already mentioned, we anticipate all three of those facilities to be operational this year and to be selling product at all three of those facilities in Q4, but just making some revisions as we’re closing in on the completion of these three facilities and going live and launching them.
Brian Holland
Okay. I appreciate the color. And I just presumably that as we flow down to the EBITDA line, it’s less about any execution issues and more about just incremental cost pressures that we’re seeing on board? I mean is there anything specific that we would point to there.
Loren Eggleton
But, if you think about the adjusted EBITDA line, largely I would characterize our execution all the way [indiscernible] adjusted EBITDA strong, that the core business — even the construction part that Jonathan was just articulating, has done a great job. I want to characterize the time line for these three new facilities from our public comments Brian, you know that they’re going to be up this year. You know that several are going to be harvesting soon.
So, even a change in approach and expectations by a week or two could result in us targeting the lower end of both the previous guidance range on top line as well as on adjusted EBITDA. We have not disclosed any significant large inflationary shocks to our business model. We manage our inflation quite well.
Now, we all have inflation, but that has not been part of our disclosures. And that’s why I really would characterize this as a function of timing on new facilities versus a fundamental issue in our core business which continues to be strong.
Brian Holland
Okay, got it. Thanks for the color. I guess moving kindly to the financing side, starting to look out to next year, and I can’t speak for my peers but I have contribution from subsequent farms in the model beyond what we’re talking about bringing online this year. Help us think about how far out that time line pushes from securing funding and getting started on subsequent facilities. Is there any directional guidance you can provide there?
David Lee
Yes, we can. And I just want to remind you Brian that, I’m sure you remember what we said on unit economics. So here what we’re talking about when is the new proven Dutch glass greenhouse, that’s large and technology-enabled produce positive unit economics.
If you look at the industry — forget about what we’ve said, if you look at the empirical evidence in the industry, those that use Dutch glass proven new technology at scale like us, have seen good unit economics in about year three plus after commissioning a large new set of facilities like ours.
Now that varies, you see perhaps some shorter time periods for green leafy, which tends to be more automated and sometimes longer periods for vine crop. We’ve been very consistent in our recent guidance in expecting what has been demonstrated empirically from similar facilities globally.
So for us, we think about three — three-plus year time frame is when we expect significant contribution to come from the farms that we commission. I hope that helps. And you know the timing of Morehead and the timing we’ve just disclosed from the new facilities. And from that you can begin to model I think the timing of that positive return on invested capital over the life of these facilities.
Brian Holland
Okay. Understood. Thanks helpful. I’ll leave it there and get back in the queue. Thanks everyone.
Operator
And our next question will come from Kristen Owen of Oppenheimer. Your line is open.
Kristen Owen
Hi. Good afternoon. I will echo my thoughts with your community. A lot of really interesting progress that you’ve made this quarter. I wanted to follow-up on a question about EBITDA and less about the unit economics per se, but piecing apart Loren what you described as the EBITDA improvement year-over-year in the second quarter, you’ve had the restructuring, but you’ve also outlined some of the ramp costs. I’m just wondering how we should think about that going into next year? What costs or what cost savings come with you into 2023? And what sticks around maybe from a ramp perspective or other costs that we should think about?
Loren Eggleton
Yeah. So I think just real quick we’ll talk about maybe on a quarterly basis, how we think about the rest of the year in terms of expenses as well. So similar to Q3 of last year because of the crop turn and the refresh Q3, this year will be our lowest sales quarter of the year. In Q3, we’ll have a very small amount of sales out of Morehead and potentially a small amount of sales higher portion at Berea. We expect that Q4 will be our largest sales quarter to-date with the expectation that all farms are completed and planted by then.
In terms of run rate operating expenses, which I think you’re kind of asking about here. We expect to see continued favorability in Q3 and Q4 from our cost saving measures that we’ve enacted in the first half of this year. I would say that once we kind of get into Q4, that’s kind of where we would expect to be kind of going forward on run rate operating expenses. In terms of adjusted EBITDA loss in Q3, I think that would be relatively in line with what we’ve seen in Q2 with Q4 making up the difference with our adjusted EBITDA loss guidance range.
Kristen Owen
That’s really helpful. I wanted to ask also about the financing that you announced earlier this week. I wanted to ask also about the financing that you announced earlier this week. And just sort of thinking about balance sheet management, it’s not quite a like-for-like swap with the JPMorgan facility. I think you discussed in your prepared remarks how that frees up some of your restricted cash. So I guess confirmation or some additional detail around that would be helpful. And related it seems like that was a pretty involved process that you had to go through to first secure that JPMorgan facility ahead of the USDA backed financing. But now that you have a template for that kind of transaction I’m just wondering how replicable that is and how we should think about that kind of transaction going forward? Thank you.
Loren Eggleton
Yeah. So getting through the USDA loan guarantee process can be very lengthy and it can depend on the circumstances of the project. Now that we’ve proven that these loan guarantees are available for CEA facilities, they will certainly continue to be one of the options we consider for our facility financing needs going forward. These loans also generally acquire a new Greenfield project an existing loan in place or a completed project. For the Somerset one that we just announced this week we have the JPMorgan loan already in place, which we could easily take out.
With Berea which is currently unlevered and currently under construction and expected to be completed in the coming months we are exploring different financing options and a USDA guaranteed loan could be a solution. But we also believe there are other attractive permanent financing options that may be available to us on a quicker timeline. And so we’ll hope to have more to share on that topic soon. As it relates to your balance sheet question, so the USDA loan takes out the JPMorgan loan. So the JPMorgan loan was $46 million with a cash collateral and restricted cash of $48 million. And so that will free up on a net basis $28 million in cash with $20 million going to effectively a prepaid for the remaining cost of the Somerset project.
David Lee
Hey, Kristen let me jump in. This is David Lee. I want to underscore Loren and the finance team achievement. This is a big deal. The JPM facility was 364 days. This is a 23-year attractive between I think Loren 6% to 7% interest rate facility and it’s a strong statement that the USDA will back proven infrastructure and controlled environment ag like ours for the long haul. And why we can’t make promises going through the arduous process, I think we’re one of the very few that know how to do it. I know how to do it with a great outcome. So while we have lot of non-dilutive financing projects underway for Berea, as Loren noted, I think this is an important precedent for the industry not just for us.
Kristen Owen
Thank you so much. I’ll leave it there.
Operator
Thank you. And I’m showing no further questions at this time. This will conclude today’s conference. Thank you for participating. You may now disconnect.
Be the first to comment