AppHarvest, Inc. (APPH) Q3 2022 Earnings Call Transcript

AppHarvest, Inc. (NASDAQ:APPH) Q3 2022 Earnings Conference Call November 7, 2022 4:30 PM ET

Company Participants

Travis Parman - Chief Communications Officer

Jonathan Webb - Founder & Chief Executive Officer

Loren Eggleton - Chief Financial Officer

David Lee - President

Conference Call Participants

Brian Holland - Cowen

Ben Theurer - Barclays

Kristen Owen - Oppenheimer

Operator

Good day and thank you for standing by, welcome to the AppHarvest, Inc Third Quarter 2022 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. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Travis Parman, Chief Communications Officer. Please go ahead.

Travis Parman

Thank you for joining us on the AppHarvest third quarter 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; Loren Eggleton, Chief Financial Officer; and David Lee, President and Board Member. 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 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.

Jonathan Webb

Thanks, Travis. As I believe all of you understand, historically, the third quarter is a low revenue period for us based on our annual refresh and replanting of our Morehead farm to prepare for the next growing season. That is the case again this year and our focus has been to take lessons learned and to apply them to what we hope to be a robust growing season that has already started.

The domestic need for CEA continues to grow. We believe that the U.S. remains significantly underbuilt. It's estimated that the U.S. has about 6,000 acres of CEA compared to Europe at nearly 520,000 acres. According to USDA reports, the value of U.S. fruit and vegetable imports rose to a record level in 2021 and has been projected to keep increasing in 2022. Changing weather patterns ranging from mega drought in the Southwest of the U.S. to more frequent flooding to catastrophic wind events are making it harder than ever for open field farmers to predict the duration of their growing seasons and to have conditions that result in quality harvest.

Major food retailers have demonstrated increasing interest in high-tech indoor farms for their ability to derisk fruit and vegetable production with a more climate resilient, more sustainable year-round growing solution that uses far fewer resources. And we continue to have top national grocery stores visit our new farms. 165 acres, nearly 8 million square feet -- that will be the size of our 4 farm network once completed. We believe that's the largest simultaneous CEA build-out in the U.S. I'm proud that the AppHarvest team has set new standards for developing such at-scale CEA infrastructure by working to quadruple our number of farms by the end of this year. These farms once completed, will diversify our crops by adding a variety such as salad greens, berries, cucumbers as well as more tomatoes. On October 26, we announced the start of commercial shipments from our new 15-acre Berea Salad Greens farm. This farm features a touchless growing system with autonomous harvesting. We're in the process of opening Berea on a phased approach beginning with 5 acres.

We're working to bring on additional productive acreage this year. At capacity, AppHarvest Berea will have about 35 million lettuce plants growing at a time which is expected to be able to harvest the equivalent of an estimated 10 miles of lettuce per day. Salad greens from AppHarvest Berea will be used in the new Queen of Greens washed-and-ready-to-eat packet salad brand. And last week, we announced the opening of our 30-acre Somerset berry farm. The team planted nearly 1 million strawberry plants for this season and we already have started commercial shipments of wildberries for our customer Mastronardi Produce. In addition to strawberries, we expect to alternate the crop seasonally with English cucumbers. Construction continues on our 60-acre Richmond farm which we expect will allow us to double our capacity to grow tomatoes when completed.

Combined with the Morehead farm, the Richmond facility is expected to enable us to grow nearly 1.5 million tomato plants per season. We expect to plant the first half of the Richmond farm this November. We also have been making good progress on securing non-dilutive financing to support our expansion, including the recently announced $50 million USDA-backed loans and a $30 million loan for Mastronardi Produce, $15 million of which has been funded and $15 million of which remains to be funded. We continue to evaluate financing alternatives, including a potential sale leaseback of our Berea salad greens farm to Mastronardi Produce to fund further development and growth. Loren will share more details on our strategy later. Regarding our flagship farm in Morehead, our team has taken lessons learned and applied them to what we expect to be a good growing season.

Planting for the third growing season at Morehead is complete and harvesting is expected to begin in early November. The crop is healthy and shows none of the plant health issues that we have previously encountered. The team continues to make progress in improving quality, reducing our distribution fee and selling in higher-priced. This quarter, we've continued to focus on operational execution to maximize quality and yield of our produce for the upcoming season. We expect to keep benefiting from enhanced training and productivity improvements put in place. The team has also made progress with robust recruitment efforts to staff our 3 new farms. Demand for locally sourced produce has continued to increase and the recent headlines regarding water use restrictions and food and security caused by geopolitical instability should only serve to add to that interest.

I will now ask our Chief Financial Officer, Loren Eggleton to share more details on our performance in the third quarter. Loren?

Loren Eggleton

Thanks, Jonathan. I'll start by briefly reviewing our third quarter results, give an update on our development progress and then discuss the 2022 outlook. We achieved third quarter net sales of $524,000 as compared to $543,000 in the same quarter last year. The plant health issues we discussed earlier this year negatively impacted our yields during the third quarter. However, our net price per pound was higher in Q3 than in the same quarter last year.

The third quarter net loss of $24 million was higher than the net loss in the corresponding period of the prior year of $17.3 million, largely due to the change in fair value of the private warrants last year which was partially offset by lower SG&A costs this year. Despite the investments and expansion and growth this year, we improved our third quarter adjusted EBITDA loss to $12 million from $16.5 million last year.

Let me turn next to our progress on farm development and financing. Construction continues at the previously announced CEA facilities which, once completed, will call quadruple our farm network. Additionally, in the fourth quarter, we have started commercial shipments at both the 15-acre Berea salad green facility and a 30-acre Somerset berry facility. As Jonathan mentioned, the Berea facility is opening in a phased approach similar to our Morehead farm. We'll also follow this model at the 60-acre Richmond tomato facility expected to be operational by year-end. We are planning to bring Richmond online in 2 phases, with the first 30 acres expected to be planted by year-end and the second 30 acres expected to be planted in 2023.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $36.2 million with about $25 million in availability remaining on our credit facilities. During the quarter, we sold 542,000 shares for $1.4 million via the ATM facility with Cowen and 360,000 shares for $1.3 million on a committed equity facility with B. Riley Principal Capital. In terms of capital expenditures, we estimate spending approximately $85 million to $95 million in remaining CapEx during the next 2 quarters for the completion of the 3 construction projects underway. $50 million to $55 million of which is expected to be spent in Q4, with the remaining $35 million to $40 million expected to be paid in Q1 of next year.

Total expected CapEx spend increased by approximately $30 million due to supply chain disruptions, construction delays as well as scope modifications related to automation and configuration of equipment, food safety and office space. During the quarter, we closed on $50 million in USDA guaranteed loans with Greater Nevada Credit Union. The loans are backed by our Somerset farm with a current interest rate of 6.45% and a 23-year term, for the first 3 years being interest payments only. This loan permitted us to repay the previous JP Morgan credit facility and freed up $48 million in restricted cash which was replaced by $22 million in restricted cash dedicated towards the remaining construction costs of Somerset.

We also recently announced a $30 million credit facility with Mastronardi Produce backed by our Berea farm, $15 million of which has been funded and $15 million of which remains to be funded. In connection with our entry into this credit facility, we have engaged in discussions with Mastronardi Produce related to a potential sale leaseback transaction that we are currently pursuing on the Berea farm.

Now let me turn to our full year 2022 net sales and adjusted EBITDA outlook. We now expect our full year 2022 net sales outlook to be in the range of $14 million to $17 million, reflecting the supply chain-related construction delays that we've experienced at our 3 new farms affecting the timing of commercial shipments.

Regarding adjusted EBITDA loss, we are also updating our outlook range for the year and now expect a loss in the range of $67 million to $72 million, reflecting the reductions in costs from the farm delays as well as the cost saving measures we have implemented in the second half of this year, including a reduction in corporate staff. We continue to staff our farm operations to support the core business. Since the beginning of 2022, we have grown from about 500 employees to about 700 and expect to be around 800 employees by year-end. We also expect to hire more as we ramp up production at our Richmond farm next year.

Now I'll turn the floor over to David Lee.

David Lee

Thanks, Loren. As we continue to get more experience in the sector, we are fortunate to have access to more executives with controlled environment agriculture experience who appreciate our mission-based work. We recently added Tony Martin to the Board. Tony is a CEA industry veteran from Windset Farms.

Windset is one of the largest CEA producers and marketers of indoor grown crops in North America with more than 250 acres in the United States and Canada. At Windset, Tony supported both significant infrastructure and revenue growth. Tony will have the opportunity to engage with the strong general managers that we've already put in place at each farm and to provide valuable guidance. As a result, we are able to leverage Tony's deep CEA expertise, including the areas of facilities, staffing and operations. That means we can streamline our organization. With Tony's guidance, our general managers at each farm will keep working to increase the level of rigor and discipline in the operation as we endeavor to make fruit and vegetable production more consistent and reliable, similar to consumer packaged goods manufacturing.

Tony's accessibility to the team also frees me up to focus on my Board responsibilities. 2 years ago, as we began our public company journey, the Board asked me temporarily to take an additional management responsibility in the role of President. I will step down from that role later this year. I feel that it's important that I model the cost containment and streamlining that's critical for the organization to deliver shareholder value.

I want to commend the team for the hard work that has gone into getting our soon to be 4-farm network in place to generate new revenue streams from a diversified set of crops. I look forward to continue to support this team and this mission to improve food security with a climate resilient solution that provides good jobs at Appalachia.

Now Jonathan will close out our prepared remarks.

Jonathan Webb

I want to thank David for his leadership guiding us through the process to go public and I'm happy that David Lee will continue in his AppHarvest Board position. David helped our team lay the groundwork and strategy for our 4-farm network to put the enterprise on a path to profitability. We're fortunate that our mission-based work has brought us such great talent like David Lee to help us get firmly established.

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

Travis Parman

Thank you, Jonathan. Operator, we'll now begin to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Brian Holland with Cowen.

Brian Holland

I guess I'll just start with some of the delays that were referenced with the new facilities. I guess I wasn't anticipating kind of the magnitude of impact. So if you could just provide an understanding of what exactly happened to maybe push back the time line as it pertains to your 2022 targets?

Jonathan Webb

Yes, Brian, this is Jonathan. Well, the magnitude is the sheer size and scale of each facility. So as the timing on those facilities as we're at the finish line on each project, we're landing a jumbo jet with each 1 of these. You've been through them, Brian so, a delay to get each 1 of these launched is going to have a material impact at the end of the year. The good thing is that -- that's a short-term problem as we're just dealing with supply chain issues. Example is in 1 facility, we had an electrical panel that we were simply waiting for and something as small as that can delay the launch of the entire facility. So that's 1 example that as we get each 3 up and online, as you saw, the strawberries are fully planted.

So we have 1 million plants now in Somerset. We're spinning up Berea in multiple phases and we'll have Richmond planted this year as well so all 3 facilities will be up and online by the end of the year. But as we closed out here at the finish line, supply chain issues like everywhere else, we're squeezing us here at the finish line.

Brian Holland

I appreciate the color, Jonathan. If I could shift to -- good to hear that the third growing season is off to a healthy start. Can you just remind us, the health issue that's kind of weighing on you year-to-date. What gives you the confidence that we're not going to see 1 of those? I guess what I'm trying to ask is, if I think about the phasing of the harvest, when did that issue hit you last year? When do we get comfortable that you're maybe over any hurdles such that health issues are of little to no concern? I understand that, that's probably a bit dynamic and there's always something out there. But I'm just wondering if I can understand a little bit better how that works?

Jonathan Webb

Yes -- well, crops are in at multiple facilities now, tomatoes, strawberries, lettuce and the plant health across all facilities. I can say with strong conviction looks much better than where we've started previously. And that's really some of the painful learning lessons of just the work of standing up this business and being able to take those lessons and going into the next season. So we look strong in the facilities where we have planted. And then we're also going to benefit from a diversity of crop where we're not just pigeonholed into growing not only on crop but 1 type of tomato but we're going to have a whole host of variety of crops with different not only just tomatoes but salad greens and berries. So that won't be as large of an issue going forward given the fact that we'll have diversity across our product lines. But as we start and go into all these facilities, the plant health is looking very strong at the moment.

Brian Holland

And last one from me. Just thinking about, obviously, as we worked on ramping these facilities. And it's obviously a tremendously dynamic environment and a heavy lift. And we're in a tough cost environment as you mentioned, supply chain, etcetera? Just curious where else we see room to either streamline -- like where is the optionality here to make sure that as we ramp these facilities, we're keeping costs contained and giving yourself sufficient runway to scale these facilities up?

Jonathan Webb

Yes, it's -- Brian we're, we have the benefit of having our 4 assets now and moving from a development and construction company to a pure-play operations company. And we're going to continue to work to streamline the business. And as we stand up each 1 of these facilities, how can we leverage savings across the facilities? How can we leverage the team across facilities and David had mentioned earlier, Tony Martin. Tony is a veteran that we're very fortunate to have here with us in Kentucky now. And he's looking with our team as well on how do, we better operationalize the team we have here across all 4 facilities.

Operator

One moment for our next question. Our next question comes from Ben Theurer with Barclays.

Ben Theurer

Just wanted to follow-up a little bit on the delay issues and some of the things on the build-out. If I listen to it right during your prepared remarks, you said there's about a $30 million impact on the CapEx because of the delays. Can you elaborate a little bit more on what the exact CapEx impact here is where those $30 million are coming from? Is that because of just the material got more expensive and you haven't secured the prices? Is it because of the cost of shipment that's part of it and slows into CapEx? Just to understand a little bit what's been driving that that would be my first question?

Loren Eggleton

Yes, Ben, the increase in expected CapEx was due to expenses incurred to offset the length of delays and startup of new facilities and what we've talked about in an environment of supply chain disruptions and construction delays. This is in addition to enhancements and scope related to automation and configuration of equipment, especially as you think about all of the automation in the lines at the Berea facility. In addition, food, safety and other office-based requirements which were not in the initial scope of the projects. A lot of things that have been delayed as Jonathan mentioned earlier, the electrical panels, we've had to try to come up with our own solutions to get these farms online faster. And so sometimes, we didn't want to wait for the solution to solve itself.

So that added to some of the expense. As we think about the 3 facilities, I would say approximately 1 half of that increase so that incremental CapEx spend was related to our Richmond facility. The remaining was probably split approximately half between Berea and Somerset.

Ben Theurer

Okay. And then on the financing side, congrats on securing by the way, this $30 million loan for Mastronardi. Was that necessary to basically cover those $30 million in CapEx is this just sort the -- like kind of the of it?

Loren Eggleton

Not necessarily immediately but we view it more as something to kind of help us as we evaluate this potential sale leaseback transaction.

Ben Theurer

Okay, got you. And then just -- yes, go ahead.

Jonathan Webb

Well, I just think it shows a strengthening of the relationship between us and Mastronardi and we've really -- we're going from one facility, one product to quadrupling that size and facilities all across the produce aisle. And they're showing that they're going to be a strong partner with us. And I think Loren and team have done a great job on finding non-dilutive capital sources and this was another example of that. But it's also an example of the strengthening of the relationship with our partner, Mastronardi.

Ben Theurer

Okay. And then if I can squeeze in one last more on the operational side. Is there a way I mean, obviously, you have those health issues. You had a couple of other quality issues about a year ago. So as you learn and go through the fact that you have the relationship with Mastronardi which is a well-established player with many years of experience within CEA. Have you thought or are you actually working together with them to not incur more of these issues? Because obviously -- now you're opening up a bunch of new facilities, right? You've just opened 2. There's 1 more coming. So what can you do working with them to avoid any issues, speeding Berea, be it in Somerset or the Richmond when -- is yet to come?

Jonathan Webb

Yes, the short answer is absolutely. And yes, we're not only working with Mastronardi but again, Tony Martin being here and his CEA experience. And then frankly, our team, this is -- our -- you look at we shipped our first product in early of '21. By the end of the year, we'll have products, wide-ranging products out the door. But our team is going to really be able to take those learning lessons over the last 18 months. And again, let's be cautious here but the plant health and all the facilities across all the crops look stronger than it's ever looked. So one that's learning lessons our team will carry forward but doubling down with Mastronardi, absolutely is something we're actively doing to ensure that we can get good product out the door and on store shelves as quickly as possible.

Operator

One moment for our next question. Our next question comes from Kristen Owen with Oppenheimer.

Kristen Owen

Just dovetailing on some of those last comments, I mean coming into that third year mark on Morehead, you'll have the 4 farms up and running by year-end. A few other items to get in place but in a lot of ways, you sort of hit this moment where you've gotten the things that you wanted to get in place or at least nearly there. So as we start to think about maybe 2023, the year ahead, what are some of the operational milestones or business milestones that you and investors should be looking for?

Jonathan Webb

Well, it's -- now we can focus on our -- the assets we have which are these 4 CEA facilities that span nearly 8 million square feet across product type and what we're going to be focused on is operational efficiency, streamlining the business. And obviously, getting to a place where these farms are throwing off cash and producing as planned. So right now, we're going into '23, just focused on these 4 farms and getting them up and efficiently running as quickly as possible.

Kristen Owen

Great. So if I were to ask you to expand a little bit on that, particularly around the operating costs. You talked about going from employees, 700 employees to 800 by year-end and then ramping a bit more for Richmond, how we should be thinking about OpEx coming into 2023? And if you could maybe share some of the benefits of the automation that you're putting in place and help us think about how that influences your total capital spend or OpEx spend next year?

Loren Eggleton

Yes, part of it is different facilities have different needs, high amount of automation in Berea for the salad green facility. We're going to have different needs in Somerset for the strawberry facility but then really just sharing our team too, we say enterprise athletes and having talented people that can be cross-functional across the organization as we're fixing and solving problems. So it's different needs of different facilities but also being able to share our team across the facilities and try to capture operational efficiencies where we can.

Operator

Thank you, I'm showing no further questions at this time. Thank you for your participation in today's conference. This concludes the program. You may now disconnect.