Westrock Coffee Company, LLC (NASDAQ:WEST) Q2 2023 Earnings Call Transcript

Westrock Coffee Company, LLC (NASDAQ:WEST) Q2 2023 Earnings Call Transcript August 12, 2023

Operator: Hello and welcome to the Westrock Coffee Company’s Second Quarter 2023 Earnings Conference Call. My name is Gigi 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: Good afternoon and welcome to Westrock Coffee Company’s second 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 second 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?

Scott Ford: Thank you for joining us this afternoon. Thank you, Clay. In a few moments Chris Pledger, our CFO, will review our second quarter financial performance and preview our thinking on the second half of 2023. Calendar year 2023 carries meaningful costs related to major equipment and systems upgrades and additional overhead expense required to prepare us for the next few years. These impacts are largely transitory in nature and best behind us rather than in front of us as we prepare to open our new Conway facility. At each decision point along the way over the past year, we chose securing our success and launching the new extract and RTD plant in Conway over maximizing this year’s earnings. But before I turn the call over to Chris for his update, allow me to spend a few minutes updating you on this new Conway facility.

As followers of West know, Conway is our single most important and impactful project. It’s successful completion and commercial production launch will radically alter the overall profitability and trajectory of the company. Our recent $119 million equity raise provides the funding necessary for the timely completion of the packaging lines originally envisioned and announced; a high speed camera line, a high speed glass bottle line, multi-serve bottle line, and BIB and bulk packaging capabilities. But importantly, this recent raise also funds the installation of a second and third can line and a state-of-the-art product development lab and pilot plant. Today we are pleased to announce that the original can and glass bottle packaging lines are sold out.

We have more customer demand than available capacity for our multi-serve line and we’ve begun discussions with prospective customers who we expect to speak for the available capacity of our two new can lines before they even come online. In addition to this material good news our recent fundraising also enables us to invest in one to three new aseptic or ESL cold chain multi-soft bottle lines, two to three years ahead of our original five year plan assumption. While we’re still working out the details of this specific investment, we’re confident that we have multiple paths available to us to bring this capability online much sooner than originally foreseen. These new multi-serve bottle lines together with the glass bottle line, three can lines and three aseptic bag-in-box lines will enable us to produce a range of products including ready-to-drink beverages concentrate and our exciting new line of energy products for retail and food service customers as well as our branded CPG customers.

So in simple terms, what does this mean to our EBITDA forecast and the timing there for the Conway facility once complete? We previously estimated this plant would be full in 2027 and that once full would generate approximately $100 million in incremental annual EBITDA from the packaging lines previously announced. Due to the developments we are announcing today, we now estimate our once full annual EBITDA run rate will be closer to 125 million to 150 million. Just 12 months ago when we went public, we laid out our intention to build a 500,000 square foot combined manufacturing and distribution facility that would house a collection of dry and extract based coffee packaging equipment and serve as a distribution center. We then updated that plan, given the strong customer demand for our product, by adding a separate standalone 500,000 square foot distribution center as a companion operation to the manufacturing plant and by increasing the RTD lines we would install in the original building.

What was simply an idea to fill in industry niche has now been upsized multiple times over with the vast majority of those products, some 70% to 80% of the original and expanded capacity, already spoken for by customers. This is nine months before the first product ever rolls off the line. We are obviously very encouraged by these recent developments. The exponential upsizing of this project over the past year was brought about by customer demand for the types of products this facility will produce and the work of the most extraordinary team I’ve ever been a part of. Our sales and product development teams have worked tirelessly with customers and in our labs. The engineering production operations and construction crews are on the verge of completing not only one world class, 0.5 million plus square foot facility, but two of them.

Our procurement, accounting and support teams have worked non-stop to ensure the raw materials and neural networks are in place and appropriately scaled up before we even turn on the lights. And our core investors and lenders have stepped forward to provide the financial resources required for this rapid escalation. I believe we are on the verge of building a uniquely purposeful and profitable global business and I’m not alone in that assessment. The Westrock Coffee leadership team has been enhanced by the arrival of some of the most seasoned professionals in the beverage creation and production industry. This includes more than a dozen new leaders each with more than 20 years of experience for key roles in project management, plant management, manufacturing, accounting, quality assurance and quality control, and in the engineering, installation and operation of the same equipment we are installing in Conway from major CPGs and product manufacturers such as Pepsi, Dairy Farmers of America, [Indiscernible], Yum!, General Mills, [Indiscernible], etc; just to name a few.

The impact this combined business has on millions of smallholder farmers and their families in 35 countries around the world is literally life changing. And our unending thanks goes to our customers who have selected us as their coffee, tea and extract partner and have stayed with us through the challenge of our very rapid scale up; the employee group that delivers on this mission daily, often without recognition or praise; the communities we live and work in which have cheered for us incessantly and extended a helping hand over and over again; and our investors who took a meaningful chance and supported us along this entire journey. All of these people deserve our thanks, our continued candor, and financial success for themselves. Our aim is to deliver just exactly that over the next three to five years.

At this point in time, I’ll turn the call over to Chris, and let him take you through a review of our current operations and financial results.

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Chris Pledger: Thanks, Scott, and good afternoon, everyone. Since this is the first opportunity we have to talk about our recent capital markets activity, I’ll begin my remarks by providing some context for both our recent equity raise and credit agreement amendment. After that, I’ll provide an overview of our second quarter results and end with an update on our 2023 outlook. As Scott mentioned, when we went public last August, we did so with a two part strategy; first, we wanted to expand our flavors, extracts and ingredients platform to the build out of our Conway extract and RTD facility and, second, we wanted to expand internationally with our blue chip customer base. Our go-public transaction was designed to provide us with all the capital we needed to jumpstart that plan.

As we began 2023, a few things became apparent. First, customer demand for the products we plan to produce out of our Conway facility exceeded our expectations, both in terms of volume and in the variety of formats our customers wanted. Second, this customer demand and the opportunities that presented were growing faster than our ability to access the capital we needed to fund them under the terms of our existing credit facility. And third, the overall US macroeconomic picture with higher inflation, higher interest rates and the turmoil in the banking sector, created uncertainty around expectations for consumer demand and 2023. Collectively, these factors led us to conclude we needed to build a fortress around our balance sheet to ensure we have the capital necessary to fund the expanded opportunities we were seeing out of our Conway extract and RTD facility, and to take advantage of any other opportunities that arose along the way.

To accomplish this goal, we look to our lending syndicate to adjust our covenant package, while at the same time we sought to raise 100 million in equity we could use to keep leverage low, even through the now expanded build out of the Conway facility. Despite the macroeconomic environment, we were able to successfully execute on both. First, we have a world-class lending syndicate who worked with us to develop a covenant package better suited for the opportunities we’re trying to capitalize on in our Conway facility within the accelerated window in which they were being presented. We then were able to raise approximately 119 million through the sale of common stock at $10 per share, our go-public price. We raised 69 million from two existing Westrock Coffee investors, Haslam family and Brown Brothers Harriman, which we took as a strong vote of confidence in our team, our strategy, and how we have gone about executing that strategy.

We also raised 50 million from two new investors who were excited for the opportunity to partner with us as we grow our business. The expansion of our extracts and our RTD business in Conway is the gateway to future EBITDA expansion and remains our top strategic priority and key enabler of future growth. The equity investments and credit agreement amendment form part of a capital plan that ensures the complete build out of the now expanded Conway facility and allows us to remain active as we look for other opportunities to grow the business. Shifting to our second quarter results, total company net sales for the second quarter were 224.7 million compared to 223.4 million for the second quarter of 2022. Consolidated top line momentum was driven by 11% sales growth in beverage solutions, which was partially offset by a 33% decrease in net sales in sustainable sourcing and traceability.

Gross profit, excluding the impact of mark-to-market adjustments, decreased 5.6 million to 34.7 million due to a combination of one-time cost associated with our ERP conversion, one-time cost associated with the rapid scale up of our single-serve platform, and higher coffee and production labor cost in beverage solutions compared to the prior year quarter. Consolidated adjusted EBITDA was 11.3 million compared to 13.3 million for the second quarter of 2022. On a segment basis, our beverage solution segment contributed 189.7 million of net sales for the second quarter of 2023, which represents year-over-year growth of 11%. Adjusted EBITDA for the second quarter of 2023 was 11.7 million, compared to 12.5 million for the prior year second quarter.

Overall, our beverage solution segment benefited from 51% growth in the sales of flavors, extracts and ingredient products year-over-year and although we did not see the economic benefits of our growth in single-serve volume in our second quarter, we feel confident that the operational improvements are in place to drive improved financial performance from this platform in the back half of the year. Turning to our SS&T segment, sales net of inter-segment revenues were 35 million during the second quarter of 2023, a decrease of 33% compared to the second quarter of 2022, which was driven by lower sales volume as global coffee roasters continue to roast through their buffer stock and we experienced an unfavorable sales mix. Adjusted EBITDA for the quarter was negative 400,000 compared to positive 800,000 for the prior year second quarter.

With respect to capital expenditures, during the second quarter, we deployed approximately 35 million of CapEx, primarily related to our Conway extract and RTD facility. And at quarter end, we had approximately 120 million of consolidated unrestricted cash and undrawn revolving credit commitments. Our consolidated net leverage ratio at June 30 was 4.9 times based on LTM adjusted EBITDA, but if you take into account the aggregate gross proceeds from our equity raise, which closed earlier this month, our consolidated net leverage ratio at June 30 would have been 2.7 times based on LTM adjusted EBITDA. We believe these investments provide sufficient liquidity to achieve our near-term growth targets and capital expenditure needs. Turning to our outlook for 2023, today, we are reaffirming the guidance we provided in late June for adjusted EBITDA to reflect flat to up 10% growth over 2022.

As we look to the back half of 2023, there are several headwinds that are now behind us. The first is our ERP conversion, which collectively cost us $4 million to $5 million in gross profit in the first half of the year. These costs will be out of our run rate for the second half of 2023. Secondly, the operational challenges of scaling up our single-server platform and the related cost, which cost us approximately 4 million in the first half of 2023, are largely behind us. These costs will be out of our run rate in the second half of 2023 as well. In addition, in the back half of 2023, we will benefit from new sales coming online, improved operational efficiencies throughout our manufacturing operation, and pricing improvements, which help offset higher material and labor costs we experienced over the past four quarters.

Finally, we expect to see improvement in our SS&T segment, as sales volume and sales mix return to more normal levels. Just a reminder that this guidance is an estimate of what the company believes is realizable, as of the date of this call, and actual results may vary from this guidance, and the variations may be material. With that, I’ll hand the call back over to Scott for a few closing remarks.

Scott Ford: Thanks, Chris. 14 years ago, we started a small coffee export operation in Rwanda, in order to ensure that farmers in that region received a fair market price for their crop. Many said it couldn’t be done. That business ended up creating the world’s first fully digitally traceable coffee supply chain, which paved the way for major consumer brands to demand digital price transparency, all the way back to the farmer at origin. It literally changed pricing discussions for the entire global industry. We then launched a roasting business in the United States, and got into the single serve cup manufacturing business when Keurig’s patents ran out. Many said we could not possibly be successful in such a highly technical venture against an operator with such manufacturing scale.

Today, we are one of the leading providers of these products to some of the largest branded retailers in the world. We then purchased the largest provider of coffee and tea to restaurants and c stores unluckily three weeks before COVID shut them down for almost a year. Many predicted we would certainly fail because several others similarly situated did. We survive that and took the nascent Coffee Extract business that was resident in that business, and the core team that had created it, and launched what will soon be the largest roast to extract to ready to drink plant in the country. And today, we are pleased to share that not only is that plant being considerably upsized, accelerated, and is essentially fully funded, but its capacity is largely sold out and under contract.

I believe that completing the plant, and producing and packaging the contracted product is well within the reach of this team, now that the capital structure impediments have been fully removed. With that, I’d like to thank you for your interest in Westrock and I’ll turn the call back over to the operator for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Ben Bienvenu from Stephens Inc.

Ben Bienvenu: Hey, thanks. Good afternoon.

Scott Ford: Good afternoon.

Ben Bienvenu: So Scott, I wanted to start off, kind of picking up where you left off with, the expansion of the Conway facility, the update to the long-term incrementally, but from that facility, I think you said 125 million to 150 million versus the original 100 million by 2027. First, is the timeframe still the same by 2027 to get to that 125 million to 150 million? And then second, when you cited some of the equipment delays that are impacting this year, to what degree to those linger into next year and how should we think about the bridge from 2023 to that substantially higher EBITDA run rate?

Scott Ford: Yeah, so first of all, the timeframe is substantially the same. We’re using the fifth year of the model, if you will, 2027 when we look at the up and running EBITDA. As we’re currently looking at it right now, we will have a fairly hefty, very low debt balance sheet at that point in time and so my guess is we won’t just run it off flat and we will actually look to continue to invest CapEx to grow our EBITDA but in the current model, where we are assuming that we go on and let the leverage largely completely unwind, that is apple-to-apple against what we originally forecast when we went public in our SPAC and so we think that’s the apple-to-apple comparison. So the lift, although essentially at the same timeframe, comes at a moment when we should experience fairly low leverage and is incremental because of the sales and the additional lines that we’ve been able to put in and get contracted over the last 12 months.

As it goes to the equipment delays in single serve — I’m sorry, did I —

Ben Bienvenu: Nope, you got it right where I was going to follow up, perfect.

Scott Ford: Yeah, so that equipment is all in, we have rebuilt of the almost 20 different machines that had to be installed or rebuilt, we are down to only three rebuilds left, that equipment is up and running. Our metrics have largely come back into line with our experience before we went through the scale up without the equipment that didn’t come in. We were very pleased with where we sit at that point, we have built inventory, we are ready for the fall, you can always have some other problem, but the problem that we rode through for a year, where we had a material uptick in demand and the equipment that we had planned to have in to deliver it didn’t come in, that is behind us.

Ben Bienvenu: Okay, that’s great to hear. My second question kind of pivots to the balance sheet of it. Chris, I think you cited, if you want to call it, pro forma leverage of 2.7 times at June 30 with the new investment that you’ve secured, would you expect to maintain the balance sheet at that level moving forward, even as you ramp up the capital spend? And then if you could talk a little bit about why you chose to bring on additional equity investors versus scaling up the balance sheet in the backdrop that we have and why that makes the most sense.

Chris Pledger: Well, the thing for us, in terms for — I guess, from the leverage standpoint, I’ll answer that one first. The 2.7 on a pro forma basis, I mean, that’s going to grow a little bit, my guess is probably 100 basis points or so as we get into the teeth of the CapEx spend, which we kind of start now through the end of the first to second quarter of next year. But our goal is to keep leverage low throughout the process and we were able to do that really in from a — we started with a credit agreement and an expansion of our covenant package and then went and raised the equity for two reasons; first of all that we wanted to be able to — we can use that obviously that as we grow Conway, but the other thing is to make sure that from an equity perspective that we’ve got the dry powder, if we want to look at or as other things arise in the future.