Westrock Coffee Company, LLC (NASDAQ:WEST) Q1 2023 Earnings Call Transcript

Westrock Coffee Company, LLC (NASDAQ:WEST) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Hello. And welcome to the Westrock Coffee Company’s First Quarter 2023 Earnings Conference Call. My name is Jose and I will be coordinating your call today. Following prepared remarks, we will open the call to your questions with instructions to be given at that time. I will now hand the call over to Clay Crumbliss with ICR.

Clay Crumbliss: Thank you. And welcome to Westrock Coffee Company’s first quarter 2022 earnings conference call. Today’s call is being recorded. With us are Mr. Scott Ford, Co-Founder and Chief Executive Officer; and Mr. Chris Pledger, Chief Financial Officer. By now, everyone should have access to the company’s first quarter earnings release issued earlier today. This information is available on the Investor Relations section of Westrock Coffee Company’s website at investors.westrockcoffee.com. Certain comments made on this call include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.

Please refer to today’s press release and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Also discussions during the call will use some non-GAAP financial measures as we describe business performance. The SEC filings, as well as the earnings press release, provide reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. And with that, it’s my pleasure to turn the call over to Scott Ford, our Co-Founder and Chief Executive Officer.

Scott Ford: Good afternoon, everyone, and thank you, Clay. It’s good to be here with you all today. I’m pleased to be able to share a quick word on our first quarter operating results, update you on the two most important areas of focus for our team and ’23 and share my views on our progress towards achieving the strategic goals we laid out when we went public last summer. As noted in the headline of our release net sales for the first quarter, increased 10% year-over-year on a consolidated basis, and 22% in our beverage solution segment. The most significant contributors being the 44% increase in our single serve cup volumes and the flow through of last year’s coffee price rise. Clearly, we continue to work through scaling up the single serve and extract unit as capacity constraints, new physical expansions and the resulting operating efficiency challenges impacted our EBITDA pull through in the first quarter.

Thankfully, these pressures are beginning to wane as we brought additional manufacturing single serve capacity online late in Q1 and we are turning on our new extract expansion in North Carolina over the next few weeks. Turning to our two key business priorities for ’23. First, our team remains focused on successfully launching our new extract and ready to drink facility in Conway Arkansas. I’m pleased we remain on track with this project, with anticipated product launches beginning in the first quarter of ’24 rolling through a ramp up over the remainder of the year. In addition to the timely launch to the Conway facility the second topic the team is constantly aware of is the available revenues, cost and margins of our core coffee and tea business.

Pixabay/Public Domain

So amidst the excitement of growth, new customer relationships, new product launches, we remain ever vigilant on our price points cost, operating metrics, efficiencies and returns as this is a competitive commodity processing. Our single serve scale up effort has been tremendously challenging, due largely to equipment shortages. But we are now meeting those challenges as new machines are online and in stock levels are now back at industry leading standards. The flavors extracts and ingredients business continues to show itself as both a tremendous source of growth and as a powerful generator of leads for all of our product lines. And the Conway extract and RTD facility continues on pace with ever growing interest from an even broader customer base than we envisioned when we set out on this path.

With that, I’ll turn the call over to Chris. And then I’ll give a quick wrap up and he and I will be glad to answer your questions. Chris.

Chris Pledger: Thanks, Scott. And good afternoon, everyone. I’ll begin my remarks with an overview of our first quarter results and then I’ll provide an update on our 2023 outlook. As we stated from our very first earnings call, we measure our financial success based on adjusted EBITDA on both an absolute dollar basis and on our growth rate compared to prior periods. And in the first quarter of 2023 our consolidated adjusted EBITDA was $8.5 million, a decrease of approximately $2.9 million compared to the first quarter of 2022. There are three main factors driving these results. First, as mentioned on our last quarterly call, it has taken us longer and cost more in terms of equipment, labor and materials to absorb the 44% year-over-year growth in our single serve cut volumes.

That said our single serve production received a major boost in the first quarter when we installed and commercialized new single serve cut machines in February and March. With the addition of these machines, we have been able to improve our customer service levels and turn our focus to delivering the efficiency improvements that come from being able to optimize our single serve platform. While we do not expect immediate earnings growth from our single serve operations in the second quarter, we remain optimistic that we should be able to drive improved financial performance from this platform over the back half of the year. In addition to the single server equipment installations in our Little Rock Arkansas facility, at the beginning of the first quarter, we transitioned our North Carolina facilities from the legacy and might I say antiquated ERP system onto the modern cloud based platform we utilize for all of our other West Rock coffee operations.

This brings our entire company onto a common ERP platform that we will leverage as we expand. As a result of the conversion our risk and ground manufacturing operation was offline for approximately two weeks in early January. That downtime coupled with a gradual ramp back up to full production negatively impacted our service levels for our roasting ground coffee in January and February. The good news is that our ERP system along with the manufacturing operations tied to it North Carolina are running now as they should.

Scott Ford: The net impact of the conversion downtime as well as the challenges scaling our single serve platform accounted for approximately $4 million in [indiscernible] gross profit in the quarter, which flow goes down dollar-per-dollar to adjusted EBITDA. Finally, our sustainable sourcing and traceability segment or SS&T experienced the 36% decline in net sales in the first quarter of 2022. As the disruption in global supply chains brought about by the COVID pandemic normalizes and coffee roasters rose through their stockpiled buffer stocks we are not surprised to see a reduction in sales volume as SS&T customers normalize their coffee inventory levels. We expect to continue to see this trend through at least the next quarter. With that in mind, let’s walk through the financial results.

Chris Pledger: Total company net sales for the first quarter increased 10% year-over-year to $205.4 million. Our sales growth was driven by the 44% increase in single serve-cut volumes referenced earlier and increased pricing for the past through of higher underlying green coffee prices during the quarter. This growth was partially offset by a 3% decrease in roasting ground coffee volumes and the 36% decrease in net sales in our SS&T segment. Gross profit excluding the impact of mark to market adjustments decreased $4.2 million to $33.1 million due in part to higher material and production labor costs compared to the prior year quarter. The negative impacts of the production stuff are just part of the ERP conversion, and our continued efforts to absorb the 44% growth in year-over-year single serve-cut volume.

These impacts on our gross profit had a floater effect on our consolidated adjusted EBITDA which as mentioned above was 8.5 million for the first quarter. On a segment basis, our beverage solution segment contributed 181.2 million of net sales for the first quarter of 2023, which represents a year-over-year growth of 22%. Adjusted EBITDA for the first quarter was 8.4 million, compared to 10.4 million for the prior year first quarter. Turning to our SS&T segment. Sales net of intersegment revenues were 24.2 million during the first quarter of 2023 a decrease of 36% compared to the first quarter of 2022. Adjusted EBITDA for the quarter was breakeven compared to approximately 1 million for the prior year first quarter. With respect to our capital expenditures during the first quarter, we deployed approximately 20 million of CapEx, the majority of which was growth capital related to our Conway extract and RTD facility.

These expenditures primarily consisted of infrastructure spending, and equipment payments for our glass and catalogs. In addition, we deployed $3 million to growth CapEx tied to the continued single serve capacity expansion, and our Little Rock Arkansas facility. In the first quarter of 2023, we added new single serve machine, and we expect to add additional machines in the coming quarters, which should allow us to be able to capitalize on increased customer demand, while also improving the overall efficiency of our single serve cup operations. At the quarter end, we had approximately $144 million of consolidated unrestricted cash and undrawn revolving credit commitments. Our consolidated net leverage ratio as of March 31, was 4.3 times based on LTM adjusted EBITDA.

We believe we have ample access to liquidity to achieve our near term growth targets and capital expenditure needs. Despite the headwinds we experienced in the first quarter, we continue to expect adjusted EBITDA to grow between 10% and 25% for the year, which translates to a range of $66 million to $75 million and adjusted EBITDA. This guidance represents our current expectations regarding the performance of the business. However, actual results may differ materially from these estimates. With that in mind, I’ll hand the call back over to Scott for some closing comments.

Scott Ford: Thanks, Chris. In closing, today, I’d like to offer a word on our strategic progress. As when we went public last year, our vision, simply stated, is to achieve the attractive economics available to a scale player, serving the largest and most complex retail restaurant and CPG customers in the world of coffee. And to do that in a way that fosters fair market pricing all the way through the supply chain to our pharma partners in 35 origin countries. I remain very excited about not only what we are building and the ultimate value that we create for all of us collectively, but also about our meaningful progress along that journey at this point in time. With that, I’ll turn the call back over to the operator for questions.

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Q&A Session

Operator: Thank you. At this time, we will conduct the question and answer session. [Operator Instructions] Our first question comes from the line of Ben Bienvenu from Stephens. Your line is now open.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Matt Smith of Stifel. Your line is now open.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Joseph Feldman at the Telsey Advisory. Your line is now open.

Operator: Thank you. At this time, I’m seeing no more questions. So I’d like to hand it off to Scott Ford, CEO for closing remarks.

Scott Ford: Well, I appreciate the depth of work that the guys that get on the phone and ask us questions and go through this. I appreciate what you guys do in your models one thing, but also in terms of what you’re doing trying to understand the business. We are a business that is changing rapidly. We’re also fairly small. Nobody is going to lay up tonight except us and worry about all the ins and outs of our small little details here. But we appreciate the fact that you take the time to do the work to provide coverage. When we were at this stage in [Alto] I had one analyst that would give us the time of day, one. And we’ve gotten three here that have asked us great questions and show that they’re paying attention and doing the work and so we just want to say thank you. You know where we are. We’re around all the time. All we do is this. If we can ever be of help, please reach out. Thank you guys very much. Have a great afternoon.

Operator: Thank you for your participation in today’s conference. This concludes the program. You may now disconnect.