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spk05: Good day and thank you for standing by. Welcome to the App Harvest fourth quarter and full year 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question, you will need to press star one on your telephone. If you require any further assistance, please press star zero. Now, it is my pleasure to hand the conference over to your host today, Kavi Beccari. Thank you. Please go ahead.
spk03: Thank you for joining us on the App Harvest fourth quarter and full year 2021 earnings call. I'm Kaveh Bakhtiari, VP Finance and Investor Relations for App Harvest. 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 Lauren Eggleton, chief financial officer. A copy of our earnings release and slide presentation is available on our investor website at investors.appharvest.com. On today's call, we will begin with prepared remarks from Jonathan and the rest of 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.
spk06: Thanks, Kaveh. I'm proud of the progress our team made in our first full year of operations and as a public company. From our initial farm in Morehead, Kentucky, we produced over 18 million pounds of tomatoes, achieving over $9 million in net revenue and distributing product to thousands of top grocery stores and restaurants last year. And we expect to more than double that in total company sales in 2022. By the end of this year, we're on track to quadruple our number of farms, opening three new farms in addition to Morehead. We expect these farms to accelerate our sales growth, enable us to be financially self-sufficient, and attract new investment that would allow us to continue to grow our high-tech farm network in Central Appalachia and beyond. We're only in the first inning when it comes to the growth of the controlled environment agriculture industry in the United States, and App Harvest is extremely well positioned to grow within CEA. We're partnered with the top players in the industry, and we see growing demand for our large national customers. These customers are looking to significantly increase their local U.S. supply of fresh fruits and vegetables, especially from at-scale, full-product line providers like AppHarvest, who also operate in a more sustainable way while carrying out a mission that includes supporting good jobs in agriculture. Our plan to meet this growing demand puts nature first, boosted by world-class technology inside a network of high-tech indoor farms. We believe our high-tech farms are advantaged over the long term versus other small-scale approaches, as the benefits of passive solar and rainwater recapture help to make our facilities less natural resource intensive. We recognize that a leading approach must be backed by a world-class operation, and that's why we took the step last week to reduce primarily non-operations headcount and open positions in our corporate office by approximately 50%. We structured the business to better align around farm operations, a process that impacted nearly every department across the company. We expect this action will generate around $16 million in annualized run rate savings for us to reinvest in the business, which David and Lauren will discuss in greater detail. Turning to the fourth quarter, we continue to deliver on our top priority of efficient harvesting at Moorhead while remaining on track with the timeline on our three new farms. We accomplished this while achieving net sales results that were a little better than expected as we finished the year. With a solid performance on shipping premium tomatoes and a slight tailwind from higher tomato pricing, we delivered on the 2021 annual outlook that we shared in August. And we're confident in our ability to achieve the 2022 outlook that we introduced today. To sum up, we're making progress toward our long-term goal of building AppHarvest into one of the most trusted sustainable food companies in the world and into a leading applied technology company serving the global CEA industry with robotics and software solutions. Though we've had some challenges as we have ramped up over our first two growing seasons, we've applied those lessons learned and we remain on track to complete one of the biggest CEA build-outs in the world in 2022. With a steadily improving operation at Moorhead, a more streamlined corporate center, and a more robust operating playbook for three new farms opening this year, our teams are focused on core business improvement and positive operating cash flow generation. And let me be clear, these actions are taken with the intention of enabling us to secure the additional funding needed to keep pursuing our goal to get to 12 farms by the end of 2025. Finally, As one of a handful of traded public benefit corporations that is also B Corp certified, we're spearheading the move to a sustainable future for agriculture with ESG principles as our foundation. I will now ask our President David Lee to give more detail on our year-end results and year ahead. David?
spk10: Thanks, Jonathan. I'm also pleased with our strong finish to our first year. We focused on the fundamentals of our business and delivered our top priorities – continuing to improve operational performance at Moorhead and remaining on track to quadruple our number of farms this year, all while successfully navigating a challenging supply chain environment. We also completed a significant reduction in force and issued a 2022 outlook that we expect will more than double our top line and keep adjusted EBITDA in line with last year, despite rising cost pressures, and a much larger farm network compared to last year. We believe that completing our current development phase puts us in a prime position to deliver positive operating cash flow with our four farm network. 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 that and be self-sufficient. The fundamental improvement we are driving in our business has been key to our success in this area. We have seen strong early results from appointing Julie Nelson as our head of operations over the summer. That's why I'm especially pleased to announce her promotion to chief operating officer, leading both farm development and operations. With her deep operations experience from PepsiCo, Julie's data-driven approach has been instrumental in leveraging performance management to drive accountability, to enhance our training programs to improve productivity, and to implement a new supply chain process. The operational rigor that Julie and her team are implementing is a critical part of our profitable growth plans as we continue to scale operations across four farms and diversify with new crops. Now, I'd like to ask Julie to review operational highlights. Julie?
spk00: Thank you, David. In the fourth quarter, the harvest from our second growing season at Moorhead began to ramp up, and we sold nearly 4.4 million pounds of tomatoes for over $3 million. This resulted in net sales price of 69 cents per pound, almost double the price we achieved in the third quarter. The team drove these results with a more favorable ratio of premium tomatoes and better gross market prices for tomatoes. We continued to expect the main driver of our financial results to be delivery on our operational KPIs, which, as Jonathan noted, is the focus of the organization. Encouragingly, through the first few weeks of Q1 2022, when compared to our Q4 results, we are tracking to saleable yield of 3 million plus more pounds of tomatoes in Q1 than Q4, quality levels and tomato gross market prices in line with Q4, and distribution fee expenses in line with our internal projections, despite increases in the cost of freight. The inflation impacting other industries has affected our business as well, and we have been executing an aggressive plan to attack it. First, by planning for it within our financial outlook, then by significantly reducing our own cost structure, and by supporting our partners as they work with end customers to pass along price increases. Now let me hand it back over to David Lee.
spk10: As a pioneer in the industry, AppHarvest also is seeing potential benefits as the controlled environment agriculture sector, or CEA sector, continues to mature. Working closely with our distributor, Mastro Nardi Produce, we are reaching the top 25 national grocery store chains and restaurants. In fact, we've been sold in more than 1,000 stores, and Mastro Nardi confirms that buyers are appreciating the reliable quality and consistent volume that CEA farms can deliver as compared to open field agriculture. We expect this to result in our ability to continue to take additional shelf space in the produce aisle. You no doubt have noticed the increasing investment in CEA coming from some of these top retail customers, private equity, and other ESG-focused investors in addition to the general market. This recognition of the quality and sustainability benefits of CEA stands to benefit the entire sector. In summary, Our focus on the fundamentals is paying off. Our premium volumes have increased, and our quality is steadily improving. We've implemented robust cost containment measures and believe these actions will lead to more consistent and improved operating and financial performance. We remain confident in the fundamentals of our core business, the continued growth of our industry, and in our ability to drive positive operating cash flow as we soon transition from heavy building to scaling network operations. Before I turn it over to our CFO, Lauren Eggleton, I'd like to acknowledge the appointment of Kevin Willis to the App Harvest Board of Directors that was announced earlier this month. Kevin is Senior Vice President and CFO of Ashland, a global public specialty material company, and joins the board as Chairman of the Audit Committee. Kevin is a seasoned leader who brings expertise, talent, and independence to the board. and we expect his appointment will accelerate our efforts to create long-term value for all shareholders. Now, over to Lauren, who will review our financial performance and outlook in greater detail. Lauren?
spk04: Thanks, David. I'll start by briefly reviewing our fourth quarter and full year results, give an update on our development progress, and then move to the 2022 outlook. We achieved fourth quarter net sales of $3.1 million. As compared to no sales in the fourth quarter of 2020, before our Moorhead farm was operational. Fourth quarter net loss of $88.4 million was driven by a $59.9 million impairment of goodwill and intangible assets, which we discussed in our preliminary results release on January 31st. Our fourth quarter adjusted EBITDA loss was $18.3 million. In terms of yield, we generated approximately 4.4 million pounds of tomatoes for sale, or nearly 3 million pounds above our third quarter production levels. For the full year of 2021, we achieved net sales of $9.1 million versus our previously announced outlook of $7 to $9 million. Improving quality and higher than projected tomato market prices in Q4 enabled us to deliver sales results above the high end of our 2021 net sales guidance. We recorded a net loss of $166.2 million and adjusted EBITDA loss was $69.9 million. That performance is slightly better than our previous outlook of an adjusted EBITDA loss of $70 to $75 million, primarily driven by higher sales, improved operating performance, and better cost containment. Let me turn next to our progress on farm development and financing. Work continues on our previously announced CEA facilities under construction. 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 68% complete. The 60-acre Richmond, Kentucky tomato facility is approximately 65% complete. And the 30-acre Somerset, Kentucky berry facility is about 55% 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 Moorhead. We expect that the first phased opening of this kind will be at the BREA facility starting this summer. As David mentioned, we believe the completion of our current development phase with our four-farm network to be an important milestone. It enables us to be financially self-reliant and 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 year with cash and cash equivalents of $151 million. and we have approximately $59 million in availability remaining on our credit facility with equilibrium capital. 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. Lastly, there remain two of our facilities, Berea and Somerset, which we have yet to announce permanent financing for, but that we believe can become additional sources of liquidity through asset-backed loan structures. We are currently negotiating these types of financing arrangements with interested parties and are highly confident that these two farms can raise incremental capital in a similar fashion to Moorhead and Richmond. In terms of capital expenditures for the full year 2022, we expect to invest approximately $140 to $150 million, which accounts for the completion of the three construction projects underway and the related equipment needed to run them. Importantly, Of this total, we anticipate only $40 million or so will need to be funded with balance sheet cash as we expect our existing credit line arrangements with Equilibrium and J.P. Morgan to satisfy the majority of our 2022 CapEx needs. Now let me turn to our full year 2022 net sales and adjusted EBITDA outlook. For now, we are limiting guidance to full year 2022 only. We expect to deliver total company net sales in the range of $24 to $32 million this year, driven by production from Moorhead. We expect a contribution in the mid-single-digit million range from the three new farms, based on their estimated completion dates toward the end of the year. Additionally, our outlook for Moorhead also accounts for steps we recently took to mitigate the impacts of a disease affecting some of our tomato plants there, which we estimate could reduce yields by between 10 and 15 percent in 2022. As mentioned, however, these effects are already reflected in our 2022 outlook, and the proactive steps we took to mitigate the issue appear to have been well-timed and effective. Regarding adjusted EBITDA, our full year 2022 loss expectation is in the range from $70 to $80 million. We're just modestly higher than the $69.9 million in 2021, despite the expected quadrupling of the size of our farm network and significant year-over-year inflation. Similar to others, we have observed cost spikes in a number of important areas of our business, such as a 20-plus percent increase year-over-year in the cost of freight, a 16 percent increase in health care, as well as significant increases in cost for electricity, natural gas, and the paper products that we use in our packaging. The good news is our outlook reflects the anticipated negative impacts from inflation, which we have moved aggressively to mitigate. We're also cautiously optimistic such increases won't continue at these levels throughout the year. If inflationary pressures continue, we are prepared to take additional steps to reduce our cost structure similar to the action we just completed, which resulted in approximately $16 million in annualized savings. I remain confident in our team's continued ability to operate efficiently, and I'm proud of the progress we've made to streamline the organization to position the company and our shareholders for future profitable growth. With that, I'll turn it back over to our VP of Finance and Investor Relations, Kaveh Bakhtiari.
spk03: Thank you, Loren. With that, operator, we'll now begin to take questions.
spk05: Thank you, sir. As a reminder to all participants, if you would like to ask a question, please press star 1 on your phone. Again, please press star followed by the number 1 on your telephone keypad. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brian Holland with Cowan & Company. Your line is open.
spk07: Yeah, thanks, and appreciate all the color around the update. I'm curious, and forgive me if you made any reference to this, but just some update on your Root AI robotics acquisition and the harvesting tools, how they've been deployed and the progress they're making.
spk10: Thanks, Brian. This is David Lee. The good news is we're very pleased with the progress of how we've been using our technology from Root AI. One metric we track is that our picking speed actually from our robots are two times faster already than when we initially made our acquisition. And importantly, we've already deployed the initial version of the labor management software solution that goes well beyond robotics. It's about managing the information flow in these controlled environment ag facilities. So we're very excited about the technology. And, you know, we remain confident, as we mentioned in previous calls, that there's sufficient appetite from new external investors to spin out what we're now calling our tech co-business. But we're not providing a material update on that initiative in this quarterly release.
spk07: Understood. Thank you. And then you've made reference to kind of the retail landscape. obviously encouraging to hear about the increased distribution. I'm wondering if you could just kind of talk about that retail landscape. And given the broader supply chain issues and product shortages, including, you know, the produce space, obviously you're limited by your capacity. And I'll presume that, you know, the interest in your product exceeds that. your capacity today. But I'm wondering if that delta has widened at all in recent months for the exact reason that you referenced earlier, that retailers are seeing the product and beginning to appreciate the relative supply security as compared to conventional techniques.
spk06: Yeah, Brian, the demand for CEA production in the U.S. continues to strengthen and grow. You know, all I would say across all the grocer network, we mentioned that we, through Mastronardi, reach over 25 of the top 20 grocers in the U.S. The grocer demand, as well as food service demand, continues to strengthen across products, and that's for us why we're focused on getting these three additional farms online, and we're focused on being able to have a diversity of crop by the end of the year to service that demand, and we don't see that slowing down anytime soon. And then for us, it's about quality and reliability and consistency on a year-round basis. So the demand side is there, and for us, it's simple head-down execution between now and the end of the year.
spk07: Appreciate the color. I'm mindful there are others on the line. I'll ask one more and then get back in the queue. But Just thinking about the construct of the fiscal 22 revenue guide, I'm wondering what's being assumed to the extent you can discuss from the yield side and from the price side. So how those two factors come together, you know, just thinking about kind of level of conservatism that's being built in, because obviously that's going to be a question that gets asked as you think about the kind of growth that you're projecting, you know, hey, how are they going to get there? Are they getting there from yields? Or is there an assumption of getting price through? So just wondering if you can help us segment those two factors into the revenue number. Thank you. Sure.
spk10: It's a great question. First, Brian, it's important since we're a new public company to reiterate our overall philosophy on guidance. You recall that in the summer we changed our guidance for 2021 because we wanted to have a balanced view and guide to numbers we believe we could achieve and hit. And that has not changed in the guidance that we've offered today. I would say while we are not breaking out today the components, for example, of net price per pound, you will note that in our results in Q4, we were extremely pleased with what we saw in the marketplace. One of those factors you and I have discussed can be viewed as outside our control. And in fact, in previous quarters, we talked about how over a 10-year period, tomato prices in general revert back to the mean. even if they enter a trough relatively quickly. While we can't predict what the results would be, the Q4 results are encouraging. I'm going to turn it to Julie in a moment because in the first two weeks of this quarter, while it's very early, there are some interesting signs for our progress against our achievement in 2022. Julie, can you offer some perspective in that first two-week period?
spk00: Sure, yes. We are, as I mentioned, As mentioned earlier, we are on track to sell over 3 million more pounds in Q1 versus Q4. There are two key drivers of this increase in yield. In the first part of Q4, we were ramping up production following our summer refresh, and the harvest actually began at the end of October. In Q1, we expect to have a full three months of production. In addition, as our plants mature, we increase their density. So we should have higher output per square meter as we get further into the season.
spk10: And that's really the primary driver, as Lauren mentioned in his comments, as we think about our composition of farms. Moorhead is very important for those operational factors. Lauren can provide any additional commentary on how to think about the remainder of the guidance, but we're really focused on Moorhead and standing up these three facilities. Does that answer your question, Brian?
spk07: Yes, it does. I appreciate it, David. Thank you.
spk05: Your next question comes from the line of Ben Toyer with Barclays. Your line is open.
spk08: Perfect. Thank you very much, and congrats on the results. The first question is just following up a little bit on what you're seeing within your facilities and on the yield. Obviously, you hit the guidance on the higher end slightly exceeded, but if you look into some of the operational issues and the yield that's coming out, how much of a further sequential improvement, and you've just mentioned that you're trailing about 3 million pounds better on a quarterly basis, but just to understand what would be like an optimal level in terms of volume in a quarter, and What does it need to get to that level? That would be my first question.
spk10: Well, first, it's important to remind, and this is David Lee, by the way, thank you for the question. We have the benefit within our Moorhead facility to be now enjoying essentially the third season in harvest. And the lessons learned from the first two, which include a planned refresh this year, means that you will see similar quarterly variation in our annual results. It's one of the reasons why we're guiding to the full year But as I mentioned in the previous question by Brian, the impact of yield and the impact on market pricing from our guidance perspective is based on what we deliver, having now experienced two full seasons and a refresh. If you recall, when we were first going public a short year ago, we had not even fully stood up or received any empirical data on what can we produce. We now have the benefit of better management, with Julie Nelson, but we also have history and data. Beyond that, I don't think I can break out for you the components. I can tell you we do look at yield for number one quality USDA, non-number one USDA, but we're not breaking that detail out for you as you look at Moorhead as it contributes to our overall annual guidance.
spk08: Perfect. And then, I mean, you... kind of have a capex number out there, and let's call it about $140, $160 million. That's very much the cash balance you currently have. So you have all the financing and construction financing, right? I think I missed that on the prepared remarks, just to be sure, like how you're going to plan on the financing and how we should think about the cash flow. in 2022, how much of CapEx is actually going to be funded out of your cash bonds and how much is coming for project finance? Could you clarify that?
spk04: Yeah. Hey, Ben. It's Lorne Eggleton. So, you know, we've got $151 million in cash, $59 million in availability on our equilibrium credit facility, and we still have the JP Morgan credit facility. We estimate that with our 2022 CapEx plans, that we're only going to be using approximately $40 million of cash on the balance sheet after the credit facilities, and that's not including the CEF facility. Okay, perfect. Thank you very much.
spk05: Your next question is from the line of Kristen Owen with Oppenheimer. Your line is open.
spk01: Great. Thank you so much for taking the question. The pricing, I want to come back to this question about pricing and not so much to understand, you know, what the assumptions are in 2022, but to really understand how the changes that you are making on the operational side are influencing your net pricing. Because this 69 cents that you're reporting in the quarter, that's obviously a function of both the yield of number one tomatoes but also the market pricing that you're receiving. So I'm wondering if you could just help us parse out how much of that incremental pricing you're achieving as a result of that improved yield, and then I'll have a follow-up. Thank you.
spk10: Yeah, just before I turn to Julie, who really runs the business for us, just a reminder, Kristen, there are three components of net pricing for us that we drove in our Q4 performance. The first obviously is the absolute amount of high quality number one tomatoes, which as you know yields a significantly higher price in market. That's obviously most important. But the second is the extent to which we can leverage direct ship customers and not expend against the distribution expense associated with it for those high quality tomatoes. And we've identified examples of those customers in previous quarters, but they're very large food service and retail customers. we eliminate another takeout of our gross sales to net sales. And then the third piece is beyond those two, we have actually more varieties. And we look forward to 2022 when we'll have three additional facilities with berries and green leafy and another tomato facility. But even within what we have at Moorhead, there are different varieties that command different prices that all contribute to our realized benefit on net sales per pound. Julie, is there any other color you'd want to offer?
spk00: Thanks, David. One of the key drivers of our ability to deliver premium product is the quality of our labor. And our investments in hands-on training and performance management have been paying off. Our labor productivity and, importantly, our labor quality has been steadily improving since the beginning of Season 2. I'd also add some additional commentary on our distribution expense. We have both freight and handling charges that make up our distribution expense. To manage freight, we work closely with our distributor, Mastronardi Produce, to ensure our truck utilization, meaning the amount of product we have on the trailer, is as high as possible. We're also working, as David mentioned, with Mastronardi to maximize the number of shipments that we make that go directly to customers, and this reduces miles. in term reducing freight expense, and also importantly reduces handling charges that we might otherwise incur in their distribution facilities.
spk01: I appreciate that color. It actually dovetails into my next question, which is really about as you start to layer in these additional products, talking about leafy greens toward the end of next year, And understand that these will not contribute to the 2022 performance. But as we're thinking about sort of the long-term business model here, can you just update us on how you're thinking about that mix of incremental product on the overall impact of P&L sort of exiting 2022, and how we think about just the seasonality of the business at a full run rate in 2023?
spk04: Hey, Kristen, it's Lauren. You know, I think we tried to mention on the call of the net sales outlook for the year, the 24 to 32, we expect, you know, the new farms, so the 15-acre leafy at Berea, the 30-acre berry at Somerset, as well as the new 60-acre tomato in Richmond, to contribute approximately mid-single-digit millions of that outlook. And so again, all three of those we expect to be online and producing by the end of this calendar year.
spk00: One thing that I would add is with the addition of three new farms, we have a great opportunity to realize SG&A leverage for our management team across the three farms, and we have purchasing leverage as well. So we'll see... some cost improvement associated with the entry of the new farms.
spk10: Chris, and one note that you're hearing on this call that may seem different, although it's not different operationally, is as you heard me say, we're really focused on the rigor and the basics of operating what we can control. So as a result, we're guiding to only 2022 because we have line of sight to 2022, and we're really focused on what we can achieve in the range of guidance But that range of guidance does include a contribution from these three new farms because, as you've heard, on all three of them, we're greater, well over 50% complete, which is why we're comfortable including it in our guidance.
spk01: Thank you. I appreciate all the color.
spk05: Your last question is from the line of Raj Sharma with B. Riley. Your line is open.
spk09: hello good afternoon guys um i just wanted to um ask about the farm economics from from what you've indicated earlier uh just you know this question really trying to understand have unit economics the revenues and even uh long-term you know sort of run rate fully loaded have those unit economics changed at all given recent challenges and learnings? I mean, should we assume any changes longer term due to supply chain costs at all? Could you comment on that, please?
spk10: Sure. Well, Raj, thank you for the question. Our unit economics, since we are just now coming into our own in our third season and our first farm, is really about our long-term guidance. And as you've noted, We are not providing any update or changing our long-term guidance. When you think about our business with regard to your question on the recent environment, we have the privilege of serving primarily a U.S.-driven business for which there is excess demand today. And as you've heard us say for our new farms, we purchased a number of the materials in advance. And so relative to the news of today versus other investments, some of our investors have made, we feel very good about our ability to deliver against unit economics for our business. But more than that, we really are not offering any change in perspective today on our long-term guidance.
spk09: Got it. Got it. And then this is a question on just could you give more color on the competitive dynamics, you know, Mexican imports, just the recent suspension of avocado imports. I know you're not growing avocados, but any sort of impacts, do you foresee any competitive changes that you foresee going forward?
spk06: The tailwinds are at our back, Raj. I mean, what you just saw with the avocado import restriction coming out of Mexico into the U.S., it's very real. And You've got Fortune 100 and Fortune 500 grocers that are holding that liability that's going on their shelf, and people are very aware of it. So, again, you could look at the LA Times article that came out a month or two months ago with tomato imports that were being restricted from Mexico into the U.S. This, again, will continue to escalate over time, and I think is is something that will ultimately benefit the CEA industry in the U.S. as we clean up our agriculture system in North America.
spk09: Got it. Great. Thank you for answering my questions. I'll take it offline.
spk05: There are no more questions to queue. That ends our question and answer session as well as our call for today. Everyone, thank you for participating. Stay safe and well. Have a good day.
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