AppHarvest, Inc. (NASDAQ:APPH) Q1 2023 Earnings Call Transcript

AppHarvest, Inc. (NASDAQ:APPH) Q1 2023 Earnings Call Transcript May 10, 2023

AppHarvest, Inc. misses on earnings expectations. Reported EPS is $-0.26 EPS, expectations were $-0.22.

Operator: Good afternoon and thank you for standing by. Welcome to the AppHarvest First Quarter 2023 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. Travis Parman, Chief Communications Officer. Please go ahead.

Travis Parman: Thank you for joining us on the AppHarvest first quarter 2023 earnings call. I’m Travis Parman, Chief Communications Officer for AppHarvest. Joining me today are several members of the senior management team including Jonathan Webb, Founder and CEO; Tony Martin, Chief Operating Officer and Board Member and Loren Eggleton, Chief Financial Officer. The earnings release is available on our Investor website at investors.appharvest.com. On 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.

The 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 more 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, Travis. $13 million, AppHarvest achieved $13 million in net sales for Q1, 2023, that’s nearly 90% of our sales for the full year of 2022. We’re working hard to make these farms as productive as possible, as quickly as possible. In 2022, we quadrupled the number of farms in our network. With our flagship farm in Moorhead now in its third harvest season, we’re seeing fantastic progress. Production is looking great and Morehead is regularly setting weekly performance records. This quarter marked the first time that all four farms were shipping commercially to top national grocery store chains, restaurants, and food service outlets. That means we still have lots of room for upside as we fully plant the new farms and continue to increase production.

This year, we are laser focused on achieving operational excellence, as we work to ramp up production and revenue from the four farms with an increasingly diversified crop portfolio. As you know, Mastronardi is our exclusive marketing and distribution partner. Paul Mastronardi and his team have been tremendous mentors to our team and great problem solvers as we work to ramp up production and improve core operations. We are pleased that our board member Tony Martin agreed to join us starting this past January as Chief Operating Officer to help us with that journey. As you likely recall, Tony is a veteran in the controlled environment agriculture industry. We already are benefiting tremendously from his experience and the resources he readily brings to the table.

In the brief time, Tony has been with us as COO. He already is shaping a culture of measurement accountability, collaboration, responsiveness and learning. Farming is not for the faint of heart. Fortunately, AppHarvest mission has helped us attract a purpose driven team with the faith and grit to keep moving us forward on a path to profitability. I believe Tony can help us accelerate our path to profitability and positive operating cash flow. Tony is working to optimize production, revenue and costs through the strategic Project New Leaf. I’ll welcome Tony to the call to share more details on progress in the first quarter.

Tony Martin: Thank you, Jonathan. Last quarter, we shared details on the next phase of Project New Leaf, pur five points strategy to focus operational efforts across the farms. As you can see from our net sales for Q1, we’re strengthening our core business plan and is driving better results. The first of our strategic initiatives leveraging our relationship with Mastronardi as the largest domestic producer for Mastronardi produce and the U.S., it’s critical that we work as strategic partners driving mutually beneficial results. We are actively focused on increasing the cross functional integration between the Mastronardi and AppHarvest teams as we bring new products to market. For example, this quarter, we accelerated our plan to plant long English cucumbers at Somerset.

The Mastronardi team were instrumental in facilitating the crop changeover and were able to quickly place the new product with their customers. Just as variety is the spice of life. Variety also matters in CEA. We are leveraging Mastronardi’s industry knowledge to further diversify our crop portfolio through more favorably priced varietals of tomatoes. We are trialing high wire cucumber growing in Somerset to improve yield and trialing mini cucumbers to round out our product offering. Another area where we’re seeing progress is in better understanding Mastronardi’s produce grading guidelines. Working directly with their teams, we are achieving higher compliance rates, and obtaining better pricing for our tomatoes. We have successfully completed our food safety audits at the Morehead, Somerset and Richmond farms.

Photo by Sebastian Gómez on Unsplash

That means we’ve been able to increase the number of direct shipments, reduce transportation costs, and the number of food miles traveled, so our fruits and vegetables arrive on the shelves fresher and with less waste. In Berea, we’re working on our food safety certification, so that we can also do more direct shipments from that facility. We meet regularly with the Mastronardi sales and marketing team on format packaging, in line bagging, and other product specifications for some of their largest clients. This level of collaboration between our companies is especially important as we launch new products. It helps to ensure that we can coordinate sufficiently time for packaging and placement in the marketplace. Our second strategic imperative, improving labor efficiency.

Our labor fulfillment is at the level we need it to be. We aren’t experiencing any concerns with labor shortages. The development of the new productivity bonus program is now underway. As part of our work, we are further defining the assessment criteria and methodology, verifying the tracking database and measuring performance. At Moorhead, we’re already seeing results, where their teams are meeting the performance threshold necessary for productivity bonuses to kick in. The new bonus program will identify and provide opportunities for retraining any underperforming team members that will enable them to improve their performance and further help the enterprise overall to be more efficient. It also allows us to be more selective when identifying and placing high performing team members.

We expect the full bonus program to be implemented across the four farm network in the 2023-2024 growing season. Our third strategic imperative, improving the feedback loop. As we strive to become a world class production facility, communication is key to our continuous improvement process, and to working more efficiently. We’ve established a regular cadence of management meetings across the farm network. These meetings help us avoid working in silos and we constantly measure performance against our annual operating plan, or AOP. Each week, we meet with the farms to review performance metrics, such as yield, labor efficiency, transportation, utility consumption, and production revenue. We compare actual results to the plan. The reporting is then cascaded to the four firm general managers, and executive leadership.

We also discuss opportunities for improvement both in our meetings by farm and at the four farm general managers meeting. Opportunities to enhance our practices and drive results are shared and discuss because of our massive scale, even small changes to processes and equipment configurations now can have a much larger impact in the future when all four farms are at full production. This meeting cadence has enabled us to address issues from pests to plant health in a timely manner. This helps to prevent small concerns from escalating and to identify any retraining opportunities as quickly as possible. We are even realizing on the benefit of insights from the new facilities, having been operational for a few months. Our fourth strategic initiative, initiating comprehensive spending reviews.

As the saying goes, a bargain at a bargain unless it’s something you need. Our production and procurement teams continue to review our suppliers and vendors on a case-by-case basis to determine their return of investment to core operations and to reduce third-party spend when possible. We are also collaborating with the Mastronardi sales and marketing team to ensure alignment and efficiency when sourcing packing materials for new product launches. Next quarter will be our first full review of these expenditures. Our fifth strategic initiative, aligning our team members to milestones outlined in our five-year strategic vision. As we work to create a culture of transparency, all team members need to fully understand the five year strategic plan for Project New Leaf to be successful, and the importance of their contribution to our collective success.

Following each quarterly call, we’ll be hosting team meetings to share performance results, what went well, where we have opportunities for improvement and what we need to do to achieve our key milestones, and to celebrate our successes. We’re also augmenting our talent pool by bringing on the right people at the right level to support core operations. We recently hired a business analyst to establish and track key metrics across the four farm network, insights on pick and pack rates per hours, hours of crop work per square meter, pounds picked versus packed versus shipped will help us take a data driven approach to continuous improvement. We have hired several food safety professionals to lead our food safe practice. We have added experienced growers for our diversified crop portfolio as we look to expand varietals.

What I’m seeing this quarter is that there’s a maturity building in the organization to better manage issues and to mitigate any material impact from challenges. We’re working more collaboratively with our customer Mastronardi, which is driving higher revenues, cost savings and product quality. And we still have two facilities that are not yet fully producing. Both Berea and Richmond are opening in planned phases. We are finding it takes about three years to fully ramp up a facility to scale. We are working to shorten that time by applying lessons learned across the four farm network. Salad greens at Berea, and strawberries and cucumbers at Somerset, our new product status. We expect our future performance to improve each quarter as we gain more experience under our belts.

Moorhead is achieving significant production records in its third season. And by leveraging some of the experienced talent from Morehead at Richmond, we’ve been able to avoid some of the challenges that Moorhead encountered in its first year of operations. I’m proud of the progress we’re making. I expect to see more operational efficiencies, leading to increased performance in Q2. Now, over to Lauren to review the Q1 2023 financials.

Loren Eggleton: Thanks, Tony. As Jonathan mentioned, we reported first quarter net sales of $13 million, compared to net sales of $5.2 million in the first quarter of 2022, an increase of approximately $7.8 million year-over-year. With all four farms and network now shipping on a variety of brands for Mastronardi Produce, we expect to see significant year-over-year in net sales increases throughout 2023. We expect that trend to continue in 2024, as we leverage more of the farm acreage and work to optimize production. As we announced at the end of FY 2022, we’re now reporting overall net sales by produce type rather than a metric of pounds sold. Looking at net sales by crop type, in Q1 we sold almost $11 million in tomatoes, more than $1 million in strawberries, over $800,000 in salad greens and nearly $200,000 in cucumbers.

In Q1, 2023, we recorded a net loss of $33.6 million and a non-GAAP adjusted EBITDA loss of $23.2 million as we work to ramp up production across our farm network. This compares to a prior year net loss of $30.6 million and a non-GAAP adjusted EBITDA loss of $18 million. This increase was primarily driven by cost-of-goods sold at the new farms, including the removal of strawberry plants and acceleration of long English cucumber production in Somerset that we announced last quarter. Turning now to our balance sheet and liquidity, we ended the quarter with cash and cash equivalents of $50 million. We have taken aggressive steps to address liquidity, and we continue to explore additional financing alternatives, including third-party transactions, such as a sale leaseback on another of our high-tech farms.

In February 2023, we completed our public follow on offering that raise gross proceeds of $46 million before deducting the underwriting discount commissions, and estimated operating expenses. We expect to use the net proceeds from this operating for working capital and general corporate purposes as we ramp up production and sales from the four farms. In terms of capital expenditures beyond Q1, we expect to spend approximately $40 million to $45 million in 2023. For final project details at the Richmond, Berea and Somerset facilities. Approximately $17.7 million of this CapEx spend range will come from an included in restricted cash and other assets as of March 31. In-line with expectations, we saw an increase in the cost of goods sold during the first quarter of 2023.

This $20.8 million increase in COGS every year was due primarily to the costs related to the ramp up of operations at the three new farms and the change in crop production at Somerset. As we shared last quarter, we expect to see significant SG&A annualized savings in FY 2023. For Q1, our SG&A was reduced by more than half down to $10 million, compared to $21 million for the first quarter in 2022. These savings are primarily driven by corporate restructuring actions taken in 2022, reductions in executive stock compensation, and operational efficiencies. Operations in the first quarter of 2023 continue to ramp up as expected. We are seeing significant progress at Morehead in terms of their key performance indicators, and the number of team members qualifying for productivity bonuses.

We’re applying lessons learned from Morehead to accelerate our path to operational excellence at each of the three new farms. We’re especially seeing results at Richmond in terms of labor efficiency, plant health and premium production. To sum up the quarter, we beat consensus with net sales of $13 million divided by the net sales of almost $11 million in tomatoes, and more than $1 million of strawberries. Yet recognize we still have work to do in terms of adjusted EBITDA. We’ve reduced SG&A by $11 million in Q1 2023, more than half of Q1, 2022 total spend. We continue to believe in our ability to be self-sufficient and to generate positive operating cash flow over the longer term with our four farm network. We remain confident in our FY 2023 guidance of net sales to be in the range of $40 million to $50 million and non-GAAP adjusted EBITDA loss to be in the range of $67 million to $76 million.

With that, I’ll turn it over to our Chief Communications Officer, Travis Parman.

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

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Q&A Session

Operator: [Operator Instructions] The first question comes from Ben Theurer with Barclays. Your line is now.

Operator: Please stand by for our next question. The next question comes from Kristen Owen with Oppenheimer. Your line is now open.

Operator: I show no further questions at this time. This concludes today’s conference call. Thank you for participating. You may now disconnect.