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    AMERICOLD REALTY TRUST (COLD)

    COLD Q2 2024: 13th Record Fixed Commitments, Double-Digit Margins

    Reported on Aug 8, 2024 (Before Market Open)
    Pre-Earnings Price$28.95Last close (Aug 7, 2024)
    Post-Earnings Price$28.95Open (Aug 8, 2024)
    Price Change
    $0.00(0.00%)

    What went well

    • Robust Fixed Commitment Growth: Customers continue to lock in long‐term contracts—evidenced by a 13th consecutive quarterly record of fixed commitments—which supports stable revenues and long‐term visibility despite soft occupancy trends.
    • Operational Efficiency and Margin Expansion: Enhanced workforce productivity, process improvements, and new system implementations (e.g., Project Orion) have driven warehouse service margins into double digits and improved overall efficiency, creating potential for further margin expansion.
    • Strong Pricing Power Coupled with Excellent Customer Service: The company’s ability to pass through inflation via GRIs and maintain high service levels has resulted in consistent pricing strength and low churn, positioning it favorably to sustain and grow revenue even in a challenging consumer environment.

    What went wrong

    • Weak Throughput and Consumer Demand: Multiple questions highlighted that throughput volumes are down year-over-year with only a modest sequential lift, largely due to a weaker consumer environment and high grocery prices limiting demand.
    • Compression of Pricing Comps: Guidance indicates that the current strong pricing, driven by last year's rate actions and GRIs, is expected to compress in the second half of the year, potentially reducing revenue growth if the underlying inflationary pressures continue to wane.
    • Economic Occupancy Concerns: Even though fixed commitment contracts are growing, the significant gap (approximately 900 bp) between physical and economic occupancy remains, suggesting that if consumer conditions do not improve—especially without effective interest rate cuts—American cold storage assets could face long-term occupancy and margin pressure.

    Q&A Summary

    1. Rent Growth
      Q: How will 2025 rent and occupancy perform?
      A: Management emphasized that despite lower occupancy, EPS growth remains strong through aggressive price pass-through and margin expansion driven by persistent labor inflation, with future rate cuts expected to boost demand.

    2. Fixed Commitments
      Q: Why increase fixed commitments amid low occupancy?
      A: They explained that customers are locking in space for future demand recovery, signaling confidence in long‐term volume despite current soft occupancy.

    3. Throughput Volumes
      Q: What’s driving lower throughput volumes?
      A: Management noted that overall weak consumer demand is lowering throughput—with no single category identified—while expecting some sequential improvement later in the year.

    4. Economic Occupancy
      Q: How will economic occupancy trend?
      A: The gap between physical and economic occupancy is narrowing as customers secure fixed commitments, and this trend should continue as consumer demand gradually improves.

    5. Service Margin Levels
      Q: Where will service margins normalize?
      A: After adjusting for deferred expenses, service margins are expected to settle around 11%, reflecting process improvements and efficient cost management.

    6. Margin Aspirations
      Q: Is a 15% service margin achievable?
      A: Management believes that reaching 15% is feasible over time by enhancing value-added services and building on ongoing workforce improvements.

    7. Margin Drivers
      Q: What primarily drives margin improvement?
      A: They attributed about 75% of the improvement to a more experienced, highly productive labor force, with system upgrades providing additional support.

    8. GRI Guidance
      Q: What GRIs are expected in low inflation?
      A: In a benign inflation scenario, annual GRIs are forecast to be around 3.5%–4.5%, plus incremental pricing work on renewals and new contracts.

    9. Labor Productivity
      Q: How has labor productivity impacted margins?
      A: Enhanced labor productivity—delivering over 10% efficiency gains year-over-year—has reduced hours per pallet, contributing significantly to margin improvements.

    10. Promotional Impact
      Q: Why didn’t promotions boost throughput?
      A: Despite strong promotional spending, exceptionally high retail prices limited consumer response, preventing expected increases in throughput.

    11. Cyber Impact
      Q: How did the cyber incident affect throughput?
      A: The incident resulted in a $0.03 EPS loss without any subsequent normalization adjustment to throughput metrics.

    12. Consumer Assumptions
      Q: What consumer factors underpin current guidance?
      A: Guidance assumes only a modest seasonal lift, with potential improvement tied to upcoming interest rate cuts that could boost disposable income.

    13. Competitive Dynamics
      Q: How do you compete with the new public peer?
      A: The focus remains on delivering superior customer service and a full suite of value-added solutions, which differentiates them even in competitive markets.

    14. Future Systems
      Q: Will there be further system investments post-Orion?
      A: Buoyed by Project Orion’s success, management is poised to invest further in system enhancements that drive efficiency and margin gains.

    15. Tenant Inventory
      Q: What about tenant inventory levels?
      A: Management noted that current low demand discourages tenants from overstocking, with plans to rebuild inventories only once consumer demand picks up.

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