Whole Earth Brands, Inc. (NASDAQ:FREE) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Good morning and welcome to the Whole Earth Brands’ First Quarter 2023 Results Conference Call. All participants will be in the listen-only mode. After today’s presentation there will be an opportunity to ask questions. Please also note today’s event is being recorded. At this time, I would like to turn the conference call over to Jeff Sonnek, Investor Relations at ICR. Sir, please go ahead.

Jeff Sonnek: Thank you and good morning. Today’s presentation will be hosted by Irwin Simon, the company’s Executive Chairman; Michael Franklin, the company’s Chief Executive Officer; and Bernardo Fiaux, Chief Financial Officer; Brian Litman, Chief Accounting Officer; and Andy Cherry, VP of Finance Branded CPG North America and Global FP&A are also on today’s call and will be available for Q&A. The comments during today’s call and the accompanying presentation contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management’s current expectations and beliefs as well as a number of assumptions concerning future events.

Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company’s filings with the SEC. We’ll also refer to certain non-GAAP financial measures today. Please refer to the tables included in the earnings release, which can be found on the Investor Relations website, investor.wholeearthbrands.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. Additionally, we have provided a supplemental earnings presentation on the Investor Relations website that may be useful in your analysis of the company’s performance.

With that, I’d now like to turn the call over to Mr. Simon. Go ahead, Irwin.

Irwin Simon: Thank you, Jeff, and thank you all for joining our call today. We had an exciting inflection point in our business and I, alongside the board of directors, feel incredibly confident about the future of our business. Significant changes have been made in our organization and it is clear as highlighted in our Q1 results, we’re gaining momentum in our relentless focus on profitability. Michael has done an excellent job in his first four months and we’re thrilled to announce that Michael has now officially agreed to join the company full-time and remove his interim tag. Our confidence in Michael’s leadership is evident and the changes he is making we fully support. I’m looking forward to his leadership during our next chapter of growth.

Additionally, I’m also happy to be joined by Bernardo Fiaux, who we welcome to the team after more than seven years with Kraft Heinz. In my early interactions with Bernardo, his energy and passion for the consumer sector is evident, and his dedication to building a great leadership team will be a value-added to our leadership team. I’d also like to congratulate Jeff Robinson, President of Mafco Worldwide on his performance; Nigel Willerton, our General Manager now of North America; and Rajnish Ohri, our President and CEO of International; and Rishi Daing, our Chief Commercial Officer of North America. With that, I want to welcome the new team and the exciting times ahead. I would now like to turn the call over to Michael.

Michael Franklin: Thanks, Irwin. Good morning everyone, and thank you for taking the time to join the call. I’m honored to officially be in the full-time CEO seat. As I said on our last call, I believe that there are significant opportunities for this business that will create long-term shareholder value, and I am excited to lead the many talented individuals across our global platform. Since I have started, those initial beliefs have only been reaffirmed. I am grateful for the Board support and I look forward to updating all of you on our progress. These last few months have comprised of in-depth reviews, focused on where we were, where we are, and where we want to go. Aligning strategy and goals, cross-functionally is a critical component of ensuring the organization is collectively focused on our critical corporate priorities.

The interactions that I’ve had over the course of several months prove to be immensely valuable, and I continue to be impressed by the depth, quality and enthusiasm of our team. The leadership changes announced on April 25 both in structure and personnel are the product of this engagement and are aimed at simplifying our structure, fostering teamwork, and enhancing collaboration at all levels. Streamlining our operations and enhancing cross-functional activities are key corporate priorities as we strive to enhance our productivity and generate sustainable long-term growth. We now have three Presidents and Chief Operating Officers that will lead respectively, our North America Branded CPG business, our International Branded CPG business, and our Flavors & Ingredients segment.

In all three roles we have promoted from within and focused on giving high performers more responsibility inside our organization. Nigel Willerton has been names Whole Earth Brands’ President and COO of Branded CPG North America. You may recall Nigel’s name, given his founding of Wholesome Sweeteners prior to our acquisition of the business in February, 2021. Nigel led Wholesome for nearly two decades as its CEO, making it one of the largest organic and fair trade sweetener companies in the United States. Wholesome is our largest business within the branded CPG segment, and we are thrilled to have Nigel here to help us continue driving momentum with that brand, as well as cross pollinate success factors across our other brands and operations.

Complementing Nigel is Rajnish Ohri, who has transitioned into the role of President and COO of our International Branded CPG business. Rajnish was formerly VP and Managing Director of Branded CPG EMEA region. He is a seasoned entrepreneur and an accomplished business operator with more than 30 years of experience in the CPG industry across various geographies and cultures. He has demonstrated his ability to drive growth in underdeveloped markets and achieve outstanding results. He is a dynamic leader in our organization and we are happy to have him lead a broader international team. These leadership changes are important components to helping us manage the CPG business as one strategic unit, which demonstrates our commitment to enhanced collaboration, streamline decision making, and build scale for future growth.

This move is consistent with our philosophy of operating as one company, one business, one team, all working towards a cohesive common goal. Looking ahead as we continue to pursue new opportunities and navigate a rapidly evolving global marketplace, our consolidated approach will enable us to stay agile, innovative, and competitive. I’m excited to be working closely with Nigel and Rajnish to accomplish our goals across our entire Branded CPG business. Within our Flavors & Ingredients segment, we have been fortunate to have a long-term content in the leadership of Jeff Robinson. Under his leadership, this business has been executing very well, most notably, with its track record of double digit revenue growth for more than a year now. We are looking forward to building on this success and reinvesting in new applications for our Ingredients business to continue to further diversify our sales channels.

In addition, we are also making a concerted effort to reinvest and support our most valuable asset, our people. One of those initiatives includes implementing an employee stock purchase plan. We want our teams to not only think like an owner, but to have the opportunity to become an owner and share the equity value creation we hope to achieve. We also recently announced our intention to return back to the office, to continue to support and build a unified culture in the organization. Individuals can be productive both at home and in the office, but our top priority is building a strong and collaborative culture, and that requires us being in person together. We have several other exciting initiatives internally that we are looking forward to rolling out to continue to build a culture of excellence, excitement, and energy.

I’m also happy to share that our plan to shut down our Alabama manufacturing facility is progressing according to planned. We are in the process of moving our equipment into new lower cost environment with established co-manufacturers, and those lines should be up and running by the end of the third quarter this year. This will assist us in controlling costs, delivering margin, managing working capital, and ensuring that we are delivering on our commitments with customers. In summary, I’m encouraged by the changes we are making and the support it will provide to our global operation. We have an energized team that can make an impact. My job is putting them in a position to succeed. We are pleased with the initial result of these efforts, and we will continue to build on our early successes in the year ahead.

Before I pass the call over to our new CFO, Bernardo Fiaux, I also want to welcome Bernardo to our leadership team at Whole Earth Brands. Bernardo joins us at an important inflection point where we look to capitalize on a number of opportunities that lie in front of us. His demonstrated experience coupled with his hands-on energetic approach should elevate our team as we embark on the next chapter of growth. With that, Bernardo, over to you.

Bernardo Fiaux: Thank you, Michael, and good morning to everyone. Before I get into the financial performance, I’d like to express my excitement on joining Whole Earth. Firstly, I believe in the power of the company’s mission, which is to enable healthier lifestyles, helping people enjoy life’s everyday moments and the celebrations that bring us together. The brand portfolio and geographic reach set this company to be uniquely positioned to meet these growing consumer needs and drive value in one of the fastest growing categories in the CPG industry. In the world for only two weeks, I already see a significant amount of opportunities to reduce costs, especially from a supply chain perspective and focus on new growth channels, as well as drive more nimble revenue growth management.

I believe that my experiences at Kraft Heinz and 3G Capital will build upon the solid foundations that my predecessor, Duane Portwood and the broader finance and the accounting team have put in place here. My aim is to help the business generate sustainable long-term value for our stakeholders, and I’m looking forward to sharing more details with you during our upcoming investor conference in the third quarter. With that, let me walk you through our first quarter financial performance. As a reminder, please refer to our non-GAAP reconciliations at the end of the press release for additional detail, and I encourage you to view our supplemental earnings presentation on our Investor Relations website. For the first quarter ended March 31, 2023, consolidated product revenue grew 1.4% to $132.4 million versus prior year quarter.

On a constant currency basis, product revenue increased 2.8% versus the prior year first quarter. The growth acceleration as compared to previous quarters is largely attributed to a decline in the wholesale ingredient sales. So as a conscious decision we made to avoid incremental import tariffs that would have jeopardize profitability. Reported gross profit was $32.3 million compared to $39.6 million in the prior year first quarter. Adjusted gross profit was $39.5 million compared to $42.8 million in the prior year period. The decrease was largely driven by cost inflation, partially offset by pricing actions. Reported gross profit margin was 24.4% in the first quarter of 2023 compared to 30.3% in the prior year period. Adjusted gross profit margin was 29.9% compared to 32.8% in the prior year.

The decline was primarily a function of higher cost of goods sold due to the cost inflation partially mitigated through increased price. This resulted in higher sales to protect year-over-year gross profit dollars, but on the percentage basis results in a lower gross profit margin. In addition, the decrease was due to cost inflation at both price increases, including increased sugar tariffs as demand for our organic sugar continues to be strong. Compared to Q4, adjusted gross profit margin has improved 100 basis points reversing the trend of consecutive declines in 2022. Consolidated operating income was $3 million compared to operating income of $7.1 million in the prior year first quarter. Consolidated net loss was $19.8 million compared to net income of $2.7 million in prior year period.

The net loss was exacerbated by high interest expense and book income tax of over $10 million. We expect cash tax payments between $4 million to $5 million net of refunds for the full year in 2023. Finally, consolidated adjusted EBITDA was $16.6 million compared to $17.8 million in the prior year first quarter. The decrease was partially due to an unfavorable foreign currency impact of $0.4 million due to the strengthening of the U.S. dollar. Excluding the foreign currency impact consolidated adjusted EBITDA decreased 4.4%. Detailing the segment results for Q1. Branded CPG product revenues decreased $1.8 million or 1.7% to $102 million for the first quarter of 2023, compared to $103.8 million for the same period in prior year. On a constant currency basis, segment product revenues were essentially flat compared to prior year as higher prices were offset by lower volumes.

As I mentioned before, deceleration [ph] is largely attributed to lower ingredient sales where we made a conscious decision to reduce sales of organic sugar to avoid incremental import tariff penalties [ph]. Operating loss for the Branded CPG segment was $0.8 million in the first quarter of 2023 compared to operating income of $6.5 million for the same period in prior year. The decrease was driven by the impact of cost inflation, higher cost associated with our supply chain renovation project, and unfavorable impact from a stronger U.S. dollar. Flavors & Ingredients segments product revenue increased 13.3% to $30.4 million for the first quarter of 2023 compared to $26.8 million for the same period in the prior year. On a constant currency basis, segment product revenues increased 14.5%, primarily due to strong volume growth of 8.3%, driven by growth in the licorice extracts resulting from the company’s commercial expansion and innovation efforts.

Pricing was also a significant contributor increasing 6.2% versus prior year. This was the eighth consecutive growth of top line growth and the sixth consecutive part of double-digit top line growth for the Flavors & Ingredients segment. Operating income for the same segment was $9.5 million in the first quarter of 2023 compared to operating income of $7.8 million in prior year period. The increase was primarily driven by revenue gains and favorable product mix, partially offset by $1.6 million of favorable purchasing accounting adjustments in the prior year period related to inventory reevaluations that did not reoccur in the current quarter. Operating expenses for corporate for the first quarter of 2023 were $5.7 million compared to $7.2 million in the prior year period.

The decrease was due to lower compensation expense driven by favorable adjustments and transaction related costs in the prior year that did not repeat. Moving to cash flow and balance sheet. Cash provided by operating activities for the first quarter ended March 31, 2023 was $4.1 million, and capital expenditures for the same period was $1.6 million, which resulted in approximately $2.5 million of free cash flow and adjusted free cash flow of $7.4 million. As of March 31, 2023, we had cash and cash equivalents of $26.6 million and $427.6 million of long-term debt net of unamortized debt issuance costs. Our long-term debt decreased from year-end 2022 by approximately $5 million as a result of revolver pay down of $4 million and more and more amortization of $0.9 million.

At March 31, 2023, there were $72 million drawn on our $125 million revolving credit facility. On April 24, 2023, we enter into an amendment to our lower agreement, which temporarily increases the consolidated total leverage ratio covenant to provide near-term flexibility and improve access to our revolving credit facility. The consolidated total leverage ratio will temporarily increase between 0.25 and 0.5 times in the next four quarters, and then return to a regional maximum leverage ratio of 5.5 times by the end of second quarter of 2024. Even though, if you’re comfortable where we stand, even the challenging microeconomic environment, we decided to take a conservative approach and add more flexibility to our balance sheet at minimum cost.

Reducing leverage to 3 times its company’s top priority. By 2023, we expect our leverage ratio to remain constant, but we are taking immediate actions where we can to reach our goal. Let’s shift to our full year 2023 outlook that we are reiterating today. As a reminder, our outlook is presented on a reported basis, which includes the impact of foreign currency translation and our expectations for growth represented on an organic basis. For 2023, we expect consolidated product revenues to be in the range of $550 million to $565 million, representing growth of 2% to 5%. We expect consolidated adjusted EBITDA to be in the range of $76 million to $78 million. While we are not providing quality guidance, we do expect the first quarter to be the lowest quarter in terms of overall adjusted EBITDA and adjusted and adjusted margin, followed by sequential improvement over the remaining quarters of the year.

Our top priority cash flow generation and the results of the past two quarters is a reflection of that and what’s to come. Finally, we expect total capital expenditures to be approximately $9 million. And that concludes my prepared remarks. Michael, now back to you. Thank you.

Michael Franklin: Thank you, Bernardo. As you can see in our results today, our primary focus is on driving profitable growth, which was reflected in our improved margin performance. As we discussed on our Q4 call, we had a slightly negative impact on our net sales performance due to the press surrounding Erythritol. I wanted to reiterate that since 1991 in the U.S., the FDA has approved Erythritol for use in foods and drinks and has certified it as generally recognized as safe. Similarly, Erythritol has been approved for use in more than 60 countries, including the European Union, Canada, Argentina, Australia, Japan, among others. We strive to provide our loyal customers with safe and high quality products, and as always, we’ll continue to monitor any updates with all of our products.

Following the news, we saw an immediate impact on our sales, but those sales have continued to recover. Additionally, as Bernardo mentioned, Wholesome ingredient volume declines had a significant impact on our branded CPG segment due to quota limitations. For the branded CPG segment, the impact was a 4% reduction in branded CPG revenues. Excluding ingredient sales, all other branded CPG revenues increased by approximately 4% overall for Q1 2023 as compared to Q1 2022 on a constant currency basis. Despite those impacts, we were able to deliver a solid adjusted EBITDA performance with improved margin execution, which is a result we aim to continue to build upon. Part of our reorientation of our leadership is to streamline our corporate structure.

We will continue to find efficiencies wherever possible. Overall, a good start to the year, and we remain enthusiastic about the opportunities we have ahead. Before opening the call to Q&A, I would like to thank our team members all around the globe for their continued efforts that make our company better every day. With that, I would like to open the call for Q&A. Operator?

Q&A Session

Operator: Thank you. [Operator Instructions] And your first question comes from the line of Bobby Burleson from Canaccord. Please go ahead.

Operator: Thank you. And your next question comes on the line of Rob Dickerson from Jefferies. Please go ahead.

Operator: Thank you. And your next question comes from the line of Scott Mushkin from R5 Capital. Please go ahead.

Operator: Thank you. [Operator Instructions] And your next question comes to the line of Ryan Meyers from Lake Street Capital Market. Please go ahead.

Operator: Thank you. And your next question comes to the line of JP Wollam from ROTH Capital. Please go ahead.

Operator: Thank you. Mr. Franklin, there are no further questions at this time. Please proceed.

Michael Franklin: Thanks Jeff, and thank you all for joining our call today. We appreciate your support and look forward to continuing to update you on our progress. Most importantly, I just wanted to take the opportunity to also thank all of our team members globally for their dedication and efforts. With that, thank you everyone.

Operator: Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.