AppHarvest, Inc. (NASDAQ:APPH) Q4 2022 Earnings Call Transcript

AppHarvest, Inc. (NASDAQ:APPH) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good day and thank you for standing by. And welcome to AppHarvest Q4 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation there’ll be a question-and-answer session. 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 fourth quarter 2022 and full year 2022 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.

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 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. In 2022, the AppHarvest team delivered on our commitment to quadruple the AppHarvest Farm Network now totaling color 165 acres under glass in what we believe is the largest simultaneous build out of controlled environment agriculture infrastructure in U.S. history. AppHarvest has become one of the top three U.S. CEA operators by acreage, along with our distribution partner Mastronardi Produce and our new Chief Operating Officers, former employer Windset Farms. In 2022, we also succeeded in diversifying our crop portfolio to include strawberries, salad greens, and more varietals of tomatoes and now we’ve added cucumbers to. We expect this diversification to support stability in our sales, where there may be price volatility on one variety or commodity.

We believe we’re unlikely to see it in whole categories or across multiple varieties. It also allows us opportunities to choose when or where to grow more lucrative produce mixes. Going forward, we expect to further diversify our portfolio with peppers and more varietals of existing crops. And we’ve already done this at our flagship 60-acre high-tech indoor farm in Morehead, Kentucky. Currently, in its third harvesting season, we’ve added new varietals of premium snacking tomatoes sold under the sunset brand as Flavor Bombs and Sugar Bombs. The new CEA facilities in AppHarvest farm network are the 15-acre salad green facility in Berea, Kentucky, believed to be the world’s largest high-tech indoor farm for autonomously harvested salad greens, featuring a touchless growing system.

It supplies the Queen of Greens brand, washed-and-ready-to-eat salad. AppHarvest Somerset is a 30-acre strawberry farm supplying multiple brands from Mastronardi, including wildberries. Somerset also will grow long English cucumbers during the annual summer refresh for strawberries. AppHarvest Richmond is our second 60-acre tomato farm. The first 30 acres were planted in late 2022 and the initial harvest was this January. We expect to plant the second 30 acres later this year. Combined with Moorhead we expect to grow nearly 1.5 million tomato plants across the combined 120 acres. I want to thank the entire AppHarvest team for their hard work and perseverance and accomplishing this milestone. A build out of this size is challenging as is and we were able to bring three new farms into operation by year in 2022 despite headwinds such as COVID-19 an ongoing supply chain challenges.

In addition to this achievement, we also realized the 60% increase in net sales over the prior year with fiscal year 2022. Net sales of $14.6 million, the addition of new sales of higher price tomato varietals strawberries and salad greens in the fourth quarter, as well as higher market prices for tomatoes helped drive this increase. Our business is now at an inflection point as we move from construction and development phase to one focused on maximizing production and operational efficiency. This January, mark the first time that all four facilities in the AppHarvest farm network. We’re shipping commercially to top national grocery store chains, restaurants, and food service outlets. For fiscal year 2023, we expect our new COO; Tony Martin with his extensive CAE experience to help accelerate our path to profitability.

Tony is working to optimize production, revenue and cost across our four farm network and has rolled out a strategic plan across all operations to focus the team on profitability. I’ll now turn it over to Tony to share more details on our business strategy. Tony?

Photo by Louis Hansel on Unsplash

Tony Martin: Thank you, Jonathan. Good afternoon. Some recent media coverage of the CEA sector reminds me of the quote attributed to the great Mark Twain reports of my death are greatly exaggerated. It’s true that inflationary factors particularly those around energy costs, are challenging a number of players in the industry who struggled to compete in part due to a lack of scale. However, there is still a strong rationale for cost efficient CEA and sustainably grown domestic produce. The USA has become heavily reliant on imported fruits and vegetables. According to the USDA, nearly two-thirds of the fresh fruits and vegetables are imported. It’s estimated that 20,000 additional CEA acres are needed in the U.S. just to displace the current volume of vine crops imports from Mexico, consumers are demanding healthy, great tasting sustainable products.

And increasingly those customers are concerned about where their food comes from, and its effects production has on people and the planet. These factors are driving growth. Major food retailers increasingly are interested in CEA for the reliability it offers in terms of quantity and quality. That’s based on its climate resilient, more sustainable year round growing approach, and it uses far fewer resources than traditional open field farming. CEA produce often can be picked, packed, shipped, and on a store shelf within 24 hours compared to 10 days or longer with imported product. That means longer shelf life and less waste for the retail seller. That translates into higher margins. Benefits also accrue to the end consumer with better quality and longer lasting product.

Estimates for the period from 2020 to 2026 show a more than $2.2 billion opportunity for CEA grown products. We believe the AppHarvest model is sustainable, both from an environmental and social impact perspective. Vertical farming relies on electrical lighting and municipal water contrasted with our approach that leverages sunshine and rainwater first, boosted with technology as needed to grow at scale. The advantage is clear. As the team ramps up production and works to optimize efficiency across the farm network, we follow a five point strategy. We’re calling this the next phase of Project New Leaf. It will focus our efforts on operations across all the farms. The first element is to leverage deeper synergies with our marketing and distribution partner Mastronardi Produce.

Mastronardi has extensive resources and experience in the CEA sector. We will collaborate with them as the true strategic partner for mutually beneficial results. The next is improving labor efficiency. We are leveraging experienced agricultural workers to drive efficiency. We are strategically deploying them to help supplement the work and to train local crop care specialists and Pacos team members. We are implementing a new incentive program at the farms to drive productivity. This includes training, quality assurance, performance measurement, and performance management components, improving enterprise wide feedback through clear KPIs and cross organizational information sharing. We are implementing a new reporting format to improve efficiencies to create more opportunity to share ideas, and to pursue best-in-class solutions across four farm network.

This format is designed specifically for the management of farm financial performance, productivity in terms of yield, quality and efficiency, reporting occurs weekly with each farm team, farm general managers and other key stakeholders comparing performance to our KPIs. We’re initiating comprehensive spending reviews. The team is further scrutinizing our suppliers to determine their ROI to our core operations. As part of this assessment, we’re also identifying opportunities where it makes sense to in-source versus outsource and reducing third-party spend when possible, aligning the company to milestones for a five-year strategic vision. Agriculture and crop decisions often require more than a single fiscal period, payback periods on investment decisions they also exceed more than one-year.

For Project New Leaf, to be successful every team member needs to understand the full strategic vision. We must contemplate decisions over the appropriate period and the key milestones to achieve in years one through five. When producing at this massive scale, even small, incremental improvements in core operations can have a huge impact. As our crop care specialists become more efficient, and we test and identify which crop varietals perform best in our environment, we can become more productive. This requires fine tuning over the course of multiple crop cycles. The expected benefit is that we greatly improve the reliability of our forecasting. And pardon the pun, we’re seeing the fruits of our labor at our flagship farm in Moorhead. With two years under our belts, we’re finding that ramping up to full production at Morehead will come around the 36-month mark.

Moorhead now on its third harvest season is performing significantly better on its KPIs. We expect that applying our learnings from Morehead will help us reduce the curve to operational excellence at the three new farms. Based on my experience, I see tremendous opportunity for AppHarvest. I believe we can leverage the state-of-the-art indoor farms to become a significant and profitable producer in an ecosystem that increasingly needs it. Now over to Loren to, review our Q4 and full year 2022 results.

Loren Eggleton: Thanks, Tony. I’ll start by briefly reviewing our fourth quarter and FY 2022 results, our financing and then move to the 2023 outlook. We reported fourth quarter net sales of $4.5 million compared to net sales of $3.1 million in the fourth quarter of 2021. Going forward, we will report overall net sales by produce type rather than a metric of pounds sold. This change in reporting is driven by the diversified crop portfolio that is expected to include tomatoes, salad greens, strawberries, and cucumbers. It also helps resolve our distribution partners concerns related to proprietary pricing information. In Q4, 2022, we recorded a net loss of $93.3 million and a non-GAAP adjusted EBITDA loss of $24.1 million as we work to rapidly expand our farm network.

This is compared to a prior year net loss of $88.4 million and non-GAAP adjusted EBITDA loss of $18.3 million. Following a third-party recoverability assessment, we also recorded a non-cash impairment charge of $50.1 million, which reduced the carrying value of certain long-lived assets. We achieved our previously revised guidance for full year 2022 as announced in the third quarter. We delivered net sales of $14.6 million as compared to $9.1 million for the prior year, an increase of 60% year-over-year. This increase in net sales was driven by a combination of higher market prices for tomatoes and addition of new sales of higher priced tomato varietals, strawberries and salad greens in the fourth quarter. Supply chain related delays at AppHarvest Berea and AppHarvest Somerset affected the timing of commercial shipments from both farms resulting in net sales at the lower end of the previously forecasted range of $14 million to $17 million.

We reported a net loss of $176.6 million for 2022 compared to a loss of $166.2 million for the prior year, this increase in net loss was driven by the ramp up of production at the three new farms. In terms of non-GAAP adjusted EBITDA loss, we achieved our revised guidance with a loss of $72 million versus a prior outlook of non-GAAP adjusted EBITDA loss in the range of $67 million to $72 million. Turning now to our balance sheet and liquidity, we ended the year with cash and cash equivalents of $54.3 million. In the fourth quarter of 2022, we utilized our ATM with Cowen selling 475,600 shares that in proceeds of approximately $932,000, leaving $97.6 million still available on the ATM facility. In February 2023, we completed our follow-on offering to raise $46 million before deducting the underwriter’s discount, commissions and estimated operating expenses.

We expect to use the net proceeds from this offering for working capital and general corporate purposes as we ramp up production and sales from the four farms. Because we have focused on non-dilutive capital, this is the first public offering that we have made since going public over two years ago. Going forward, we will lean in on our past success with generating non-dilutive capital. In Q3, we secured $50 million in USDA guaranteed loans with Greater Nevada Credit Union at AppHarvest Somerset and in December, we completed the $127 million sale leaseback of the Berea farm to Mastronardi Berea LLC with an initial annual lease rate of 7.5% over 10 years. Some of the proceeds from the sale leaseback repaid the $30 million bridge loan from Mastronardi, announced in Q4 and the first two years of prepaid rent at the Berea facility.

We also focused on cost containment efforts to restructure the organization and to create operational efficiencies that we estimate will result in approximately $26 million in annualized savings in 2023. In terms of capital expenditures, we expect to spend approximately $60 million to $65 million in 2023. To account for final project details at the Richmond Berea and Somerset facilities and ongoing maintenance across the four farm network nearly $10 million of this CapEx spend requirement was previously funded and should not be a reduction in balance sheet cash this year. Let me turn next to what we expect for 2023 and beyond. As Jonathan mentioned, we quadrupled our farm network in 2022 and diversified our crop portfolio to include strawberries, salad greens, and more varietals of tomatoes.

In 2023, we also added cucumbers with this significant infrastructure in place coupled with the project newly strategy Tony is leading focus on operations across the farm network. We expect to nearly triple our net sales year-over-year in 2023. We believe in our ability to be self-sufficient and to generate positive operating cash flow over the longer term with our four farm network. As we’ve stated in the past, we plan to expand capacity, but only after becoming profitable across the farm network and securing the required capital. Operations in the first quarter of 2023 continue to ramp up as expected. AppHarvest Berea is opening on a phased approach as previously announced, and we anticipate the third five-acre salad greens growing area to be planted in the late first quarter of 2023.

AppHarvest Somerset, which grows both strawberries and cucumbers, has already planted about 45,000 long English cucumber plants in advance of the full seasonal summer refresh for the facility. This smaller planting will allow us to calibrate packaging equipment and assess harvesting capabilities before a full planting the long English cucumbers. Harvesting of the cucumbers is anticipated in the second quarter of 2023. With all four facilities in the AppHarvest farm network now commercially shipping in Q1, 2023 under a variety of brands from Mastronardi Produce, we expect to see significant year-over-year net sales increases throughout 2023 and even more in 2024. We anticipate 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.

We are applying lessons learned at Morehead to accelerate our path to operational excellence at each of the three new farms with the potential to achieve positive adjusted gross profit in 2024. In 2025, we expect to achieve positive adjusted EBITDA status for farm operations. With this trajectory, we believe that we may be able to achieve positive adjusted EBITDA status on a consolidated basis in 2026. In summary, AppHarvest achieved multiple key business milestones for the full year 2022 that we believe will accelerate our path to profitability. We quadrupled the AppHarvest farm network by year end 2022. And as of January 2023, each of the facilities in the four farm network were shipping commercially. We diversified our crop portfolio to include strawberries, salad greens, and more varietals of tomatoes, and added cucumbers in 2023.

We expect this diversification to support stability in our sales. We achieved the lower end of our revised full year 2022 guidance despite several headwinds. We shifted our business focus in Q1, 2023 to maximizing production and operational efficiency with the rollout of the next phase of Project New Leaf our five-point strategic plan across all operations. We remain confident in our ability to be self-sufficient and to generate positive operating cash flow over the longer term with the four farm network. AppHarvest expects to nearly triple its net sales year-over-year in 2023. With that, I’ll turn it back 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: And thank you. And our first question comes from Brian Holland from Cowen. Your line is now open.

Jacob Henry: Thank you. And hi, this is Jacob Henry on for Brian Holland. I’m wondering how we should think about the ramp-up in Morehead as a proxy for the three new facilities. What learnings from Morehead? Are you able to take into account? And is there anything about the contract of the new farms that will impact the time line of scale out either one way or the other?

Tony Martin: So I’ll answer the first part of your question, and I’ll get you to repeat the second part because I had difficulty with the audio. With regards to the learnings at Morehead, Morehead was challenged last year with a virus in the crop that was endemic worldwide in tomato production called the tomato brown fruit rugose virus. Unfortunately, it had a dramatic effect on the production of tomatoes and the quality of tomatoes that Morehead produced. This year, through extensive hygiene protocols, starting with the acquisition of the seed through the germination of the seed through the introduction of the plant in the greenhouse and a solid approach on integrated pest management where pest management people started with the initial delivery of the crop into the greenhouse.

We have been able to manage the greenhouse where we are virtually free of the virus. That’s not to say we’re without it, we’ve had 2,500 plants affected by 700,000 plants in our Moorehead facility, a feature of less than a third of percent. And so, we take those learnings and we apply them to Richmond. Richmond is free of the virus and as a result, both in Morehead and in Richmond, we are without economic damage or a reduction in our expected results from those farms this year. Now could I have your second part of your question?

Jacob Henry: Yes, thank you that was great. The second part is just about, I guess, on the other two facilities; Berea and Somerset, is there anything different about the contract of those farms given their growing different crops that will impact the time line to ramp up the full scale?

Tony Martin: Oh yes, most certainly, each crop has its unique requirement, and Berea is a highly technical, very advanced touchless greenhouse. As a result, there’s great integration between technology and agriculture. And we have to learn the management of both. I’ll just give you an indication as to how we’re succeeding when we started the pack line in Berea, we processed about 400 cases in the first week. Yesterday, we did 12,000 cases. And as a result, as production increases, we’re demonstrating our ability to pack it. The other thing that’s occurring is that we’re modifying the varieties that we grow. So – in the beginning, you trial certain seed type, certain lettuce types. They have a certain characteristics. As we progress, we are optimizing on the varieties we’re growing and the pack types we’re capable of producing.

Lastly, the methods by which we pack are expanding. We now pack in four ounce, six ounces, eight ounce, one pound clamshells. We pack in one pound, three-pound bags, and we’re now selling to both retail and institutional clients. Our goal is that every ounce every lease of salad is packed and placed in premium packaging to premium clients. With regards to strawberries, strawberries grow, of course, on plants. There’s a flowering and a natural cycle of strawberries. Strawberries can be grown from rootstock or can be grown from plugs. The varietal that we chose was a UC Davis variety given to us by or selected for us by Mastronardi. It produces wonderful fruit and – but strawberries can be a challenging crop. They’re not free of either pest or sometimes disease.

And as a result, we had to remove about 7.5 acres of strawberry production due to a broad might that was brought in at propagation. Going forward, like the learnings we had in Morehead, we’ll test – we’ll test the seedlings prior to entry into the greenhouse. In addition, it’s given us the opportunity to trial the equipment for cucumber production as we move through the quarter in anticipation of a volume.

Jacob Henry: Great, that’s all great information. Thank you. On a different note, how should we think about modelling SG&A in 2023 mindful of where you finished the year as well as other factors like labor costs and cost improvements?

Loren Eggleton: Yes, so just in terms of general P&L timing. So as we announced today, expecting net sales of $40 million to $50 million for the year and at this time, we would expect that Q2 will be the highest sales quarter of this year followed by Q4 and then Q1. And then lastly Q3, which has historically been our lowest sales quarter of the year, because of the summer refresh and the buying crops. We would expect that cost of goods sold slightly more than doubles from 2022 as we increase production in three new farms. However, and to your question, on SG&A because of the restructuring actions that we took last year or throughout last year, we would also expect that SG&A should decline by nearly 40% to 50% from 2022.

Jacob Henry: Okay, thank you. And then last one from me. Regarding the enhanced relationship with Mastronardi that was mentioned earlier, can you provide additional color around what deeper synergies with Mastronardi could look like?