Earnings Transcript for APPH - Q1 Fiscal Year 2022

Operator: Good day, ladies and gentlemen. Thank you for standing by. And welcome to the AppHarvest First Quarter 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]. I would now like to turn the conference over to your host for today’s call, Travis Parman.

Travis Parman: Thank you for joining us for the AppHarvest first quarter 2022 earnings call. I'm Travis Parman, Chief Communications Officer for AppHarvest. Joining me in Kentucky 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 and slide presentation are available on our investor website at investors.appharvest.com. On today's call, we will begin with prepared remarks from 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 like to turn the call over to Jonathan.

Jonathan Webb: Thanks, Travis. The AppHarvest team delivered on our top priorities for the first quarter, one ramping up production in the second growing season at our current facility in Morehead, Kentucky. And two, remaining on track to open three new farms selling salad greens, berries, and additional tomatoes by the end of the year. Through March, we sold nearly 7 million pounds of tomatoes coming from our Morehead farm for $5.2 million, representing our highest net sales quarter to-date. The timeline for opening our new farms is also on schedule and will be a phased approach to ramp up production. We anticipate they will begin contributing to net sales and production beginning in Q3 with Berea that will accelerate in Q4 when Richmond and Somerset are expected to be operational as well. We expect these three farms to one, accelerate our sales growth; two, enable us to become financially self-sufficient; and three, attract new investment that would allow us to continue to grow our high tech farm network in Central Appalachia and beyond. We also continue to make progress on FarmCo, our proposed joint venture with Mastronardi to build and operate CEA facilities throughout the U.S., with the potential to significantly expand our footprint nationally. If agreement can be reached, we anticipate top benefits will include improved geographic reach, revenue growth, liquidity and financing options for continued expansion. As the CEA industry continues to grow at rapid pace, the importance of connecting at-scale produce supply to a world class distribution network has become more clear. This is something we've had in place with our distribution partner, Mastronardi, since before we went public early last year. As our new farms come online later this year we believe there's great potential in further leveraging our existing distribution agreement, not only from selling new and higher value crop types through the Mastronardi network, but also from improving ability to ship direct to large national customers, such as Wendy’s. Shipping direct boosts net sales by saving transportation costs both on the AppHarvest and Mastronardi side. And it's an option that's increasingly available to us as our quality and execution continue to improve. In fact, our percentage of direct shipments which used to be in the single digits was above 20% in the first quarter this year. Finally, we continue to do business in a more sustainable way as one of only a handful of publicly-traded public benefit corporations that is also B Corp certified. Last month, we received preliminary approval for recertification of our B Corp status with an expected score of 95.4, a 15% improvement over our initial certification in 2019. I'm proud that we're at the forefront to move agriculture to a more sustainable future with strong ESG principles as our foundation. As a sign of our continued commitment and strong track record in this area, we will also release our third sustainability report in the coming weeks. I will now ask our President, David Lee to share more details on our Q1 results. David?

David Lee: Thanks, Jonathan. This is a pivotal year at AppHarvest and I'm pleased with our execution in the first quarter. We continue to drive strong operational performance at Morehead, and we remain on track with our farm network expansion, all while navigating an economic environment characterized by challenging supply chain and inflationary issues. In the first quarter, we successfully executed both. Importantly, we began to realize savings from the aggressive actions we took last quarter to reduce our cost structure. We remain on target with our 2022 outlook, which we continue to expect will more than double our top line and keep adjusted EBITDA in line with last year, despite rising inflation and a much larger farm network compared to 2021. We believe the build out of our current development phase is well-timed. In this time of global geopolitical conflict, water resource limitations and food security disruptions, we believe AppHarvest business model positions us well against incumbents to grow and sell domestically with three more farms coming online this year. We see our ability to deliver fresh fruits and vegetables as relatively insulated from global supply chain disruptions. As one of the largest CEA operators in the U.S., we also believe that we are at an advantage when it comes to meeting the consistent consumer demand for fresh produce, as our local facilities harvest almost year round, and through the coldest months of the year. We feel well-positioned with a larger farm network and diversification of crops this year, to keep taking on increasing share of dinner plates and grocery slots. Over the long term, we expect that the completion of our current development phase puts us in a prime position to deliver positive operating cash flow on the back of our four farm network at a steady state. Thinking beyond the four farms, we plan to develop additional facilities only after securing the required capital. And we remain confident in our ability to do so and be self-sufficient. We believe we have made substantial progress over the last quarter of the structuring, financing, and new project pipeline for the potential FarmCo joint venture, which could be a significant expansion of the AppHarvest-Mastronardi partnership. As part of our previously announced first quarter restructuring, we have enabled our teams to focus on driving and improving the core business and can dedicate appropriate support to pursue such strategic initiatives. We are in later stage discussions with several parties, who could provide off balance sheet funding for our growth plan. So backed by our initial farm that's ramping up to higher levels of net sales and production, the nearly 50% cut to non-operations headcount and other operational efficiencies implemented in February, and the expanding commercial scale of our three new farms opening this year, our team's focus remains on driving core business improvement and generating positive operating cash flow. The fundamental improvement we're driving in the business is 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 first quarter, the harvest from our second growing season at Morehead accelerated and we sold 6.9 million pounds of tomatoes, compared to 3.8 million pounds sold in the first quarter last year. This resulted in a net sales price of $0.75 per pound, which was $0.14, or 23% above the net sales price per pound in the same quarter last year. The team drove these results through additional sales of higher priced tomato varieties compared to last year, and a more favorable ratio of USDA grade number one tomatoes or what we refer to as premium grade tomatoes. We continue to expect the main driver of our financial results to be delivering on our operational objectives and quality. Encouragingly, we've been able to deliver steady improvement in this area despite headwinds including the mitigation efforts related to the plant health issue we discussed last quarter. We expect the impact of this issue to be toward the higher end, but still within the range of 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, and replanted with new seedlings. This was one of several proactive steps our team took to contain the issue and to protect the overall harvest, which we believe we've been successful in doing. We expect the end result of these actions will shift a portion of our second quarter sales and production into the third quarter with our overall annual net sales outlook unchanged, which Loren will cover in greater detail. Operationally, we continue to see steady improvements in our day to day operations. Our percentage of premium tomatoes increased in the first quarter versus the same quarter last year, as better training and protocols are making an impact. Early in the quarter, we rolled out a new productivity enhancement, a clip and shoot method that combines two crop care tasks into a single activity, which saves time and is better for plant health. It's something we're planning to deploy in our new vine crop facilities when they come online toward the end of the year. Finally, we're doing a solid job of keeping a lid on our distribution expense. We are managing it in line with our internal projection despite inflation in trade. Solid controllable cost performance and increasing retail prices for fresh fruits and vegetables together reinforced the progress we've made at Morehead and is the ideal environment in which to open our three new farms later this year. Now I'll turn the call over to our CFO, Loren Eagleton who will review our financial performance and outlook in greater detail. Loren?

Loren Eggleton: Thanks, Julie. I'll start by briefly reviewing our first quarter results, give an update on our development progress, and then move to the 2022 outlook. We achieved first quarter net sales of $5.2 million, as compared to $2.3 million in the first quarter of last year. The increase was driven by higher production during the quarter, compared to Morehead’s phased initial opening as well as achieving a higher average net price per pound. The first quarter net loss of $30.6 million was only incrementally higher than the $28.5 million in the first quarter of last year, despite costs associated with significantly higher production in Morehead, a $2 million onetime expense associated with our February restructuring and preparation costs related to the opening of our three new farms later this year. In line with expectations during this high growth period, our first quarter adjusted EBITDA loss was $18 million, compared to $12.4 million last year. While we naturally saw higher operational cost, due to the production ramp up in Morehead this year, we were able to partially offset that increase through the restructuring we announced last quarter. Through March we realized savings of approximately $1.4 million versus our prior baseline and continue to expect annual SG&A savings of approximately $16 million or run rate basis. Let me turn it next to our progress on farm development and financing. Construction continues on our previously announced CEA facilities. The three farms remain on schedule and we expect them to begin operating by the end of the year. The 15 acre Berea, Kentucky salad greens facility is about 79% complete. The 60 acre Richmond, Kentucky tomato facility is approximately 75% complete and the 30 acres Somerset, Kentucky berry facility is about 65% 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 phase opening of this kind will be at the Berea facility starting this summer. As David mentioned, the completion of our current development phase with our four farm network is an important milestone. We believe it enables us to be self-sufficient and to use only the funding we have secured so far to generate positive operating cash flow over time. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $98 million and we have approximately $58 million in availability remaining on our credit facilities. As we announced in December, we also established a $100 million committed equity facility with B. Riley Principal Capital that we have yet to draw upon. In terms of approach we continue to prioritize non-dilutive sources of capital, and we are currently engaged in discussions for financing on our Berea salad greens facility. We remain highly confident that this high tech indoor farm can raise incremental capital in a similar fashion to the others, based on its strong return profile and higher degree of automation. Additionally, as both Jonathan and David mentioned, in regard to strategic initiatives, such as the proposed FarmCo joint venture with Mastronardi, we continue to work with both private financial companies and the government sector, including the USDA to explore opportunities for funding. In terms of capital expenditures for the full year 2022 we expect to invest approximately $140 million to $150 million which accounts for the completion of the three construction projects underway. Of this total, we anticipate approximately $40 million to be funded with balance sheet cash. As we draw upon our existing credit line arrangements with Equilibrium and JPMorgan to satisfy the majority of our 2022 CapEx. Now let me turn to our full year 2022 net sales and adjusted EBITDA outlook. We continue to expect to deliver total company net sales in the range of $24 million to $32 million this year. We anticipate that the yield loss from the plant condition we mentioned earlier, which is already reflected in our original guidance, will impact our second quarter results from a timing perspective, as some production and sales will shift from Q2 into Q3, where we expect the growing season to be extended, and the affected rows at Morehead. So in terms of quarterly sales cadence, it's not unreasonable to expect a sales dip in Q2 versus Q1 based on this shift. We expect to deliver more significant year-over-year net sales in Q3, driven by the extended harvest, and especially in Q4 when all three new farms are expected to be open. In summary we expect no change to the overall net sales outlook for the year. Regarding adjusted EBITDA our full year 2022 loss expectation remains in the range from $70 million to $80 million, or just modestly higher than $69.9 million in 2021 despite significant investments associated with the expected quadrupling of our farm network, and significant year-over-year inflation. With that, I'll turn it back over to our Chief Communications Officer, Travis Parman.

Travis Parman : Thank you, Loren. Operator, we will now begin to take questions.

Operator: Thank you. [Operator Instructions] And our first question coming from the line of Brian Holland with Cowen. Your line is open.

Brian Holland : Thanks. Good afternoon, everyone. Couple of quick ones, just to kind of get started. You talked about the improvement in the mix of direct shipments. Just curious if you can remind us what do you sort of view at this stage as the optimal mix? I mean, are you there in the low 20s? Or is that a number that can get materially higher from here in the next, few quarters or a couple of years?

David Lee: Thanks for the question, Brian. This is David Lee. We haven't provided specific guidance on our targeted mix. I can tell you we've highlighted it as a key driver in managing -- remember, our net sales are improved to the extent to which we ship direct to increasingly larger customers that we're targeting with Mastronardi. So at this point I can't directly answer your question. What I can point to is that the performance in the quarter, as we mentioned in our scripts is a pretty significant increase in net sales. Remember, that reflects not just how many pounds we produce and sell, but also the realized net sales mix associated with whether we're paying for those logistical expenses or not. And 125%, up, year-on-year is one thing, but if you look at our most recent quarterly performance, it might be more useful for you, given our last quarterly release, talking about over a 65% close to a 68% sequential increase in net sales. We highlighted in the call that we've benefited to a certain extent with varietals with better pricing. But, frankly, Julie Nelson and the team has driven strong operational improvements that do include our ability in the future to ship directly to customers. So I think that's all the color we can provide at this point.

Brian Holland : No, I appreciate that, David, and maybe another tough one to answer but I'll try. Can you sort of help characterize the net price or the realized net price per pound lift in Q1, both sequentially and year-over-year, between improved production, i.e., more grade one versus the introduction of other varietals?

Loren Eggleton: Yeah, Hey, Brian, it’s Loren. For the most part, most of the lift is going to be attributable to selling of the higher priced varieties such as tomato on the vine, TOV as well as Campari. We did see -- you were talking about the distribution fees. We did see a slight pickup and improvement on the distribution fee, but most of the pickup to that $0.75 both sequentially from Q4 as well as from Q1 of last year, is going to be attributed to selling higher price varieties.

Brian Holland : And then you mentioned the sequential dip expected in Q2 ‘22. I'm also curious about the pricing, the seasonality component, right. I mean, I know last year, Q2 was impacted by sort of, the issues experienced as part of the first harvest. But I've just -- just to level set everyone kind of expectations for pricing sequentially from a market perspective, where they should go from here?

Loren Eggleton: Yeah, another good question. I think historically, and seasonally, we see that tomato pricing kind of comes down, towards the summer from here. But looking at recent USDA data on the varieties that we sell, we did see modest increases in prices from March to April. We don't know what that's going to look like over the next couple of months. But we would expect that as we get into the summer months, it will be lower than the winter months.

Brian Holland : And then just last one from me, mindful of -- I’ll get out of the way, AppHarvest 2.0, the holding co structure that was discussed last year, seems well suited to capture -- for lack of a better term opportunity for CEA and AppHarvest, in particular presented by not just geopolitical conflict, but climate issues, etc. How those conversations with potential partners evolve? And when should we expect maybe an update to that end?

David Lee: It's a great question, Brian. This is David Lee again. Remember, when we discussed our refocus restructuring. The first objective was to ensure the team could focus on the core business. The core business being to ensure that Morehead produces more and more but also to quadruple the number of farms by the end of 2022. And that core focus priority one, we feel very pleased with the results we're presenting today and our affirmation of the year. That said, while we talk about our core number one focus, we've been extremely active. And frankly, the restructuring of taking out 50% of the non-working headcount has allowed us to appropriately resource these strategic initiatives that you're mentioning. In the script, you've heard both Jonathan and I talk about solid progress on those game changing strategic initiatives. We're not highlighting on this call those because we wanted to ensure that we reestablished credibility on the core focus of our operations. But as mentioned, we characterized our conversations as extremely positive in all dimensions, frankly, particularly in the area of FarmCo, where we already have a great relationship with Mastronardi. But we have the potential, and we believe we'll realize it one day to deepen it. At this point, I don't want to distract our investors or our analysts with a timetable on those strategic initiatives. I want to keep the conversation focused on the good news on our core business.

Brian Holland : Appreciate the color. I'll leave it there. Best of luck. Thank you.

Operator: Our next question’s coming from the line of Ben Theurer with Barclays. Your line is open.

Ben Theurer : Perfect. Well, good afternoon, and thanks very much. Congrats on the results. Just maybe along the lines, and what we've been seeing, obviously, you've talked about the restructuring, taking cost out, and much appreciate the kind of sequential, how we should think about the top line. But could you also shed some light on how we should think about sequentially on some of the SG&A expenses and how that's been trending, because we saw this like nice cadence, quarter-after-quarter come down. And it's like, paying off all the initiatives you've been doing. So how should we think over the next couple of quarters on that SG&A line, which is obviously still a relevant line? And to understand a little bit, all the initiatives you've been doing? And where is this heading to, will be my first question?

Loren Eggleton: Yeah, so I would say, first, we're very pleased with our performance on adjusted EBITDA in Q1. And I don't know if you're indirectly trying to get to inflation on this. But like all companies we have to manage to inflation. Our overall increase in COGS in Q1 due to inflation was relatively low, and was largely driven by higher energy costs, which were mitigated by effective efforts to avoid the high peak demands on electricity, as well as offsetting some productivity gains from the Morehead facility. For us, thankfully, sunlight and rainwater are still free and we would expect that the adjusted EBITDA to be in line with expectations.

David Lee: Ben, this is David Lee, just to add a little bit more color. Sometimes when people use the term SG&A for a company in hyper growth, we need to clarify. I mean, recall the timing of taking up that 50% of what we call non-production FTEs. You would expect any company that does that significant reduction in what I would characterize more as corporate SG&A to still realize in the flow of a given fiscal year, continued benefit x the onetime costs we all know, companies take when they make those hard decisions. I think that's in addition to the great points Loren’s made on our ability to manage our inflation, given how much more efficient we are than open field farming. But as you would suspect in any major corporation, when you take out the corporate SG&A, you don't realize it immediately in the first couple of quarters post thereafter. I hope that can give you a little bit of color commentary, since we're not offering any quarterly specific guidance other than affirming the year.

Ben Theurer: Perfect. That makes sense. Thanks, Loren. Thanks, David. And then my second question is really, along the lines of what Brian was alluding to, obviously the better price with better mix, and you've mentioned that you were able to just sell higher value product, and that basically drove the price up. So how should we think about our progress in the fourth quarter, what's going to be the mix between like the commodity piece, maybe some more of that higher value added tomatoes or just on the vine? And how much of an importance is it going to play that you get the berry facility, given the fact that berry prices tend to be not too not too low on a per pound basis in any given fourth quarter. So just to get a feel about the average price for the year.

David Lee: Yeah, I think with Q4, it's going to get -- you're going to see -- we're going to four operating facilities. So we're going to have not just different tomato varieties, but different salad green varieties, different berry varieties. And so we're going to see a lot of different produce types there. I would expect that will kick off especially on the tomato facilities, and including Morehead will kick off a new growing season. So I would expect as of right now that we would continue to use the mix that we have of TOB, [indiscernible] and Campari. But that could change.

Jonathan Webb: Yeah, and Ben, this is Jonathan. I mean, I think it's important to note that at the end of the year, we will be a fruit and vegetable company at scale. And we started with our very proud facility at Morehead our first facility, a tomato facility, but we're really realizing the potential of that harvest at the end of the year meant spreading across a variety of fruits and vegetables and able to start to focus on how we can optimize for the best varieties that are playing in the market. So at the end of the year, we'll be able to toggle back and forth between those varietals as Julie is running all four of these facilities across crop type.

Ben Theurer: Okay, perfect. Thank you very much.

Jonathan Webb: Thanks.

Operator: And our next question is coming from the line of Kristen Owen with Oppenheimer. Your line is open.

Kristen Owen: Hi, thank you for taking the question. Wanted to start first on the B Corp certification and the progress that you made this year? And wanted to ask really what the drivers of that improvement are. And as you are going out and looking for these alternative, non-dilutive sources of capital if that's playing any role in your ability to secure a lower cost of capital?

Jonathan Webb: Well, for us sustainability is it's about resiliency. And Loren mentioned it a moment ago. I mean, thankfully, sunshine and rainwater are free. And we run completely on recycled rainwater. Yes, that, you know, that's great for our B Corp score, and we want to have the highest score possible. But for us, again, it's about how do we build resiliency into our model? You look at the drought in California, Lake Mead, the Colorado River, water prices are going to be skyrocketing in the areas of the country where agriculture is highly focused. We don't have any water cost. So yes, we care about the B Corp score. Yes, we're thrilled that the B Corp score is going up. But for us, it's how do we use sustainability to ultimately build a resilient model over time, and I think that score is simply a reflection of what we already have in place here at the company.

Kristen Owen: Great, and any comments you can make as far as the influence that, that could have on your borrowing costs, certainly seeing many more opportunities to have ESG linked lines of credit. So and any color you can provide on those discussions.

David Lee: This is David Lee. One of the bright spots that we've seen as a team is great access to non-dilutive financing to invest in our growth of new facilities. When you look at the facility of even Morehead, and how we've been able not just to finance its pre-construction, but on the other side of having a facility that uses completely recycled rainwater, but also, frankly, is producing a product for which there's no line of sight to an end of demand through Mastronardi. It means that you can bank roll those facilities, those infrastructure investments that you've seen us deliver on. I think that's a big part of being relevant to consumers, relevant to customers that Mastronardi serves. And while I don't think we've realized the full benefit of that in market, it is important and shows up I think, even in the financings off balance sheet that we've announced to date. Frankly, I know we have work to do on the equity side to get credit with equity investors for the credibility, we're reestablishing. But I can imagine that those fundamental tailwinds with a consumer, that fundamental demand for products grown in Appalachia, they use a fraction of all the things we don't like and provide the great nutrition we do like, that will show up. I think it's a mid to long term process. But we are only counting on great financial results today to receive the financing that we need.

Kristen Owen: That's super helpful. Thank you so much. Just a follow-up, switching gears a little bit. I wanted to ask about the leafy greens facilities. Obviously, we've had a lot of evolution of the CEA industry since you initially announced your growth plans. I'm just wondering if you can speak to some of the incremental learnings or technology that have come into place that give you sort of the strength of the runway that you're expecting as we close the year in that facility?

Jonathan Webb: Yeah, so not only will this be, one of the largest CEA facilities growing leafy greens, not only in the country, but in North America and arguably, beyond. Definitely one of the most technologically advanced and, we started with the hardest crop type first, which is tomatoes, and really strengthened our team and capabilities. The leafy green facility is dramatically different in many ways, highly automated, a fraction of the employees and in great, great ability to shift varieties. So if a grocer says a couple of months out that we want this type of crop mix, Julie and team will quickly be able to pivot that facility and fill demand. And we're very excited to have that leafy green facility online, the back half of this year and the market runway ahead of us to fill that market as is there.

David Lee: Kristen, one other point that Jonathan is making, that I want to make sure you hear is one of the things that's actually similar to our output in Morehead is there's ready demand, and world class distribution agreement with Mastronardi. So every great pound of product that comes out of Berea though, it's a different variety, this will be true with the berries too. For us, we just have to focus on growing, because we have a partner that has already secured demand and has already talked to many customers about ensuring that what we produce will be sold in market, which is a wonderful asset for us at AppHarvest.

Jonathan Webb: Yeah, and we're not just a leafy green grower. I think that's important too. We are a full produce company. We'll have strawberries, multi variety of tomatoes, multi variety of leafy greens. And I think it's important to note that we don't just grow salad greens, but we will be one of the largest salad green operators at the end of the year. But that's just one of many mixes, we'll be able to bring to the grocer that gives us full reach throughout that produce aisle.

Julie Nelson: And finally, I would just add that as we scale to four farms, between now and the end of the year, we also have the ability to leverage our core operational functions across not one farm but now four. So functions like logistics and purchasing, maintenance. And of course, our operations leadership are now working across four farms, which gives us very good cost leverage.

Kristen Owen: That's really helpful. Thank you for all the color I'll leave it there.

Operator: Thank you and I'm showing no further questions at this time. Ladies and gentlemen, that concludes our conference for today. Thank you for your participation. You may now disconnect.