Capacity lead times stretch into years (STKL)
We presented our Oatly Pre-IPO black book yesterday. The company’s third U.S. facility is being constructed in Forth Worth, Texas. The Fort Worth City Council approved the project in January. The production facility will be 280,000 square feet. The site is currently a 1.1M square foot property consisting of cold and dry storage. Oatly is expected to spend a minimum of $36M in total construction costs before December 2024. In Oatly’s prospectus, the location is undisclosed, as seen below, but scheduled for production in 2023. The lead time provides some insight into how long it takes oat milk capacity to be added. Oatly is currently experiencing production challenges at its Utah facility, and demand continues to outstrip supply. The beneficiaries of Oatly’s tight capacity are the competition, many of which are supplied by SunOpta.
On-premise recovery (BUD)
Consumers are spending more on-premise, according to CGA’s survey of 1,600 consumers in Texas, Florida, Illinois, and New York over May 7-10. 77% of respondents said they were spending the same or more at bars and restaurants compared to pre-pandemic levels. 67% of respondents said they visited on-premise locations for food-driven occasions since they re-opened, while 22% have visited for drink-driven occasions. Still, 28% of consumers said they would wait for the pandemic to be eradicated before returning to on-premise. A minority of consumers are spending more in the on-premise channel in the re-opening phase, which is more than making up for the minority that continues to be cautious about resuming pre-pandemic activities.
AppHarvest’s first-quarter results (APPH)
AppHarvest reported Q1 sales of $2.3M in line with guidance. The company sold 3.8M pounds of tomatoes grown in part of its facility in its first quarter. The company is now growing and harvesting from its entire facility. EBITDA was a loss of $12.4M compared to a $14 to $16M loss guidance. AppHarvest realized $.61 per pound. At my local grocery store, greenhouse-grown tomatoes sell for $2.49 per pound. The company captures a fraction of the end retail sale, which speaks to its power in the channel.
Management reiterated sales guidance of $20-25M for the year. Management lowered EBITDA guidance to a loss of $48-52M from a loss of $43-45M due to the recent acquisition of Root AI and other investments. Q1 results and guidance are not as important as management’s signals for the future. Management's message was full speed ahead. Management’s commentary on the call was long on climate change and agricultural doom and short on the underlying business model of selling products at a margin that generates attractive returns on capital. Management is ambitiously planning on additional facilities and additional crops without proving it should. Selling tomatoes at $.61 per pound while spending $145-155M on constructing two new sites seems incongruent. Expanding into leafy greens and berries will be more challenging than tomatoes without a brand. More investment in the brand and less on CAPEX is the strategy Oatly took. Time will tell which is better (our opinion should be obvious).
AppHarvest is on our short list because it is too early in its growth to be a good public stock. The company has not proven anything yet except that it can grow tomatoes and build its indoor facility. On the other hand, the valuation reflects a high level of optimism about future prospects and the belief that management’s projections are accurate. The company invested significant sums in its facility, but it sells produce at $.61 per pound. It is difficult to earn high returns on capital at $.61 per pound for anything grown with high investment costs. Indoor-grown cannabis sells for $1,900 per pound in comparison. AppHarvest is also competing with outdoor farms with significantly lower capital requirements and fixed expenses.
