Whole Earth Brands, Inc. (NASDAQ:FREE) Q2 2023 Earnings Call Transcript

Whole Earth Brands, Inc. (NASDAQ:FREE) Q2 2023 Earnings Call Transcript August 9, 2023

Whole Earth Brands, Inc. misses on earnings expectations. Reported EPS is $-0.13 EPS, expectations were $-0.07.

Operator: Good morning, and welcome to the Whole Earth Brands Second Quarter 2023 Results Conference Call. [Operator Instructions]. At this time, I’d 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; Rajnish Ohri and Jeffrey Robinson, the company’s recently appointed interim co-Chief Executive Officers; and Bernardo Fiaux, Chief Financial Officer; Nigel Willerton, President and COO of Branded CPG North America region, 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 our Investor Relations website, investor.wholeearthbrands.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. Additionally, we’ve 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 produced second quarter revenue of $132.9 million and generated $18.2 million of adjusted EBITDA. We continue to demonstrate meaningful progress with our margin improvement initiatives in the second quarter, along with a top line performance that was consistent with the prior year quarter on a constant currency basis and ahead of last year, when taking into account our strategic decisions to decrease wholesome bulk sugar sales to avoid incremental tariffs. On a consolidated basis, our second quarter adjusted gross profit margin was 30.4%, which was 50 basis point improvement sequentially and marked our second consecutive quarter of margin improvement.

Our adjusted gross profit margin has improved approximately 150 basis points as compared to our fourth quarter of 2022. The entire global team remains laser-focused on stabilizing, streamlining and evolving our operations to drive enhanced productivity, sustainable margin improvement. Our supply chain reinvention is on track and will play a critical role in rightsizing our cost basis, freezing up additional dollars for growth investments in support of our diverse portfolio of global brands. I want to emphasize our confidence in the future of our business, Whole Earth Brands is a global leader in better-for-you sweetener and reduced sugar categories. Our product assortment is well positioned with a portfolio of brands that address unique consumer preferences and offer entry-level price points for consumers that are feeling the effects of the ongoing macroeconomic headwinds.

We also have strategic sourcing relationships across both our businesses that represent competitive moats and provide surely a supply for all our key accounts. With approximately 3 in 4 consumers aiming to limit or avoid refined sugar, our portfolio of great brands and products are increasingly relevant in today’s marketplace. Our mission to help consumers achieve a healthier lifestyle positions us for success, and we continue to have our sights set on disrupting the massive $100 billion total addressable refined sugar market, which is being displaced by fast-growing organic and natural sweeteners. With that, I’ll shift to some corporate matters that I recognize are top of mind for the investment community. The Board and the special committee are continuing their work on evaluating beyond solicited non-binding take private proposal from Subaba Holdings Free LLC.

Suffice it is to say we have shareholders’ best interested minds are methodically working through the evaluation of this offer as well as potential strategic alternatives that are focused on maximizing value for all our stakeholders. When appropriate, we will update you on any and all developments. As recently announced in mid-July, we shared some further updates to our leadership structure to accommodate the strategic alternative process. The Board appointed Rajnish Ohri, who was our President and Chief Operating Officer of International businesses for the branded CPG segment and Jeff Robinson, who was our President of the Flavor and Ingredients segment to act as our Interim Co-Chief Executive Officer effective July 16. Both are highly capable executives bringing together more than 60 years of experience that will be value in ensuring continuing the near term as the Board Committee completes its special evaluation of potential strategic alternatives.

Rajnish 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 achieving outstanding results. He is a dynamic leader, and we are pleased to have him represent our branded CPG segment as an interim co-CEO. Complementing Rajnish is Jeff Robinson, who is leading our Flavor and Ingredients segment and is interim co-CEO. Under his leadership, the business has been executing extremely well, most notably with the acceleration of growth that we experienced over the past 2 years. We’re excited to build on this success and reinvest in new applications for our ingredient business to continue to further diversify our sales channel.

Both Rajnish and Jeff have made important contributions and are tasked with carrying forward our efforts to streamline our operations as a need to reinvigorate global growth and enhance our margin profile. As you may know, I’m a big hockey fan and to quote [indiscernible] the 1980 U.S. Olympic Gold team Coach, Herb Brooks, who famously said, “great moments are born from great opportunities.” This feels especially appropriate today. We are energized by the opportunities that lie ahead for our businesses. We believe we’re aligned with extremely powerful health and wellness trends and especially of our operating team is excellent with this group of Rajnish and Jeff combined with the depth of Nigel Willerton’s experience as founder and former CEO of our largest business, Wholesome Sweeteners, is absolutely huge for us.

I’m as excited today as I was when we bought these businesses in CPG, we’re making great progress at operational improvements, which have resulted in improved service and in Flavors and Ingredients. The opportunities we saw 3 years ago are being realized through the team’s extremely tactical approach to identifying new opportunities. We are fortunate to have an excellent group of leaders across both our operating segments and I look forward to working alongside with the team to support the long-term growth of this business. With that, I’ll pass the call over to Rajnish and Jeff for some summary remarks on their respective business units. Rajnish?

Rajnish Ohri: Thank you, Irwin. Good morning, everybody, and thank you for taking the time to be on the call. Before I summarize my comments on Q2 results and lay out the macro picture of our Branded CPG business, let me first say that I’m very excited to take on the role to lead our CPG business along with our very experienced, talented and enthusiastic global team. In my previous role as President of the International division, I have traveled extensively and seen firsthand the enthusiasm of our teams and the strength of our business. I am very optimistic and strongly believe that we are uniquely placed to provide to all our consumers options towards leading a healthier lifestyle. In my previous role, I have been part of the leadership team, which has been laying the foundation of our midterm strategy by assessing where we were, where we are and where we want to go, and therefore, build a clear vision to align corporate goals to optimize costs and built in efficiencies, innovate and provide healthier consumer options.

I reaffirm that the team continues to remain focused in building all these corporate priorities. Coming to our Q2 summary, our branded CPG business generated revenue of $102.3 million, which was down 1.2% on a constant currency basis, driven primarily by our planned strategic decision to decrease the volume of wholesome bulk sugar sales in the ingredient channel, hence to avoid paying incremental tariffs, which if paid lead to lower margins and reduced profitability. This strategy is well in line with our continued effort to optimize our channel mix and drive margin improvement, gross profit dollar growth and cash flows. Excluding the decrease in wholesome bulk sugar sales, which accounted for a 4% decline in segment revenues, branded CPG constant currency revenue increased 2.8%, which confirms and demonstrates the resiliency of our portfolio.

Our branded CPG portfolio is well positioned in the current environment with a diverse assortment of strong brands which serve all the 3 consumer points: value, premium and private label. Our product assortment and geographical reach are a great strength to constantly drive results. We are the largest importer of organic sugar in the United States and also believe we are the largest buyer of agave syrup in the world. With the offerings we have, the channel and the price mix our portfolio provides, we are very well positioned to help retailers improve their merchandise and address evolving consumer needs to healthier options. In North America, approximately 80% of our revenues are generated within unmeasured channels such as club, e-commerce, food service, private label and ingredients.

We continue to see healthy growth in unmeasured channels during the second quarter and private label continues to be an emphasis given economic pressure that is influencing consumer spending. Within our tracked channels, which represent 20% of North America revenue, we had planned for an expected near-term slowdown in velocity due to the price increases and reduction in trade promotions. However, as we’ve progressed through the year, we believe we are now in a much better position with improved production and subsequent customer service levels to reach an inflection point and regain shelf space and distribution. In the international branded CPG business, we continue to gain and grow in our key markets. Also in line with our strategy, we are focused to drive our natural portfolio with a range of new products coming to market in early 2024.

Simultaneously, we have a very robust product innovation pipeline to position ourselves to grow in adjacencies. Finally, on our ongoing North America supply chain reinvention project, which is so very critical for driving down our per unit cost and thereby improving margin. I’m very pleased to share that we are on track and are advancing our transition rapidly. A true measure of this success is that our customer service levels on a year-to-date basis are back to optimal levels. We ceased production at the Alabama facility at the end of June and are preparing the facility to be offered for sublease later in 2023. The new facility [indiscernible] is on the final stages and the first production runs have been successfully running since April ’23.

Chutima Chaochaiya/Shutterstock.com

Now before I hand over to Jeff, I would like to recognize all our employees across different geographies who work with great enthusiasm in servicing and providing healthier alternatives for our consumers. And last but not the least, a big shout out to our North America supply chain team for a job well done, both in time and efficiency. Thank you, and over to you, Jeff. Jeffrey Robinson, Whole Earth Brands, Inc. – President of Whole Earth Brands Flavors & Ingredients Division and Interim Co-CEO Thank you, Rajnish. Flavors and Ingredients is a strong free cash flow generator with key barriers of entry and a global leadership position that support our broader growth and diversification initiatives at Whole Earth Brands. This diversification in both revenue and cash flow is valued in a fluent environment such as this, which has allowed us to deliver greater consistency in our operating results.

On that note, we continue to generate solid revenue growth in our Flavors and Ingredients segment in the second quarter with a 4% constant currency increase on top of a 9.9% increase in the second quarter of 2022 and a 15.3% increase in the second quarter of 2021, which combines for a 25% 2-year comp. We will continue to face tougher comparisons for the next few quarters, but we remain encouraged by some of the long-term opportunities that we see in the end markets that we serve that will drive continued growth. Our success will be supported by our deep experience, focus and continued efforts to grow each of our product solutions, all of which are based on our ability to be nimble and to identify specific uses and functions for our various licorice products.

In my 32 years working for the Mafco business, I’ve never been more excited about what lies ahead for our suite of product solutions. We have developed a set of commercial initiatives aimed at driving adoption of our natural licorice-based ingredients in our end markets across food and beverage, personal care, pharmaceuticals and industrial. For instance, within the confection market, we are helping our customers comply with new regulatory requirements in the European Union for product purity. In food, we continue to focus on improving the taste profiles of better-for-you products especially for lingering after-taste. Within personal care, our products are used in a wide variety of cosmetics, skin care and in oral care products by many brands that are growing their presence globally.

And finally, I’d note that we are well positioned as a potential substitute for certain PFAS forever chemicals that have been recently regulated in the U.S. and EU. Our products have unique attributes that can replace PFAS’ chemical functions in some specific manufacturing processes, which demonstrates how unique and diverse the licorice root is. Beyond the commercial success, our business is also advantaged by the significant improved cost structure following our footprint optimization projects, which is allowing us to better compete. Taken together, our team has the right focus and the tools necessary to drive growth, and we’re very excited about the future for this business. With that, Bernardo, over to you.

Bernardo Fiaux: Thank you, Jeff, and good morning to everyone. I will start by walking through our second 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 supplemental earnings presentation on our Investor Relations website. For the second quarter ended June 30, 2023, consolidated product revenues decreased 0.5% to $132.9 million versus the prior year quarter. On a constant currency basis, product revenues were essentially flat versus the prior year second quarter. Reported gross profit was $33.4 million compared to $37.3 million in the prior year second quarter. Adjusted gross profit was $40.4 million compared to $42.6 million in the prior year period.

The decrease was largely driven by cost inflation, partially offset by pricing actions. Additionally, the prior year period included approximately $900,000 of favorable noncash purchase accounting adjustments related to the inventory valuations that did not reoccur. Reported gross profit margin was 25.1% in the second quarter of 2023 compared to 27.9% in the prior year period. Adjusted gross profit margin was 30.4% compared to 31.9% in the prior year. The decline versus prior year was primarily a function of higher cost of goods sold due to cost inflation in excess of realized price increases. However, as compared to the first quarter, adjusted gross profit margin improved 50 basis points and as compared to the fourth quarter of 2022, adjusted gross profit margin is up approximately 150 basis points, demonstrating the team’s hard work to recover lost margin.

Consolidated operating income was $3 million compared to operating income of $7.7 million in the prior year second quarter. Consolidated net loss was $5.5 million compared to net income of $1.3 million in the prior year period. The net loss was driven by the lower operating income as well as increased interest expense. Finally, consolidated adjusted EBITDA was $18.2 million compared to $19.7 million in the prior year second quarter. Consolidated adjusted EBITDA decreased 7.6% with negligent FX impact in the quarter. Detailing the segment results for the second quarter. Branded CPG segment product revenues were $102.3 million for the second quarter of 2023, a decrease of $1.8 million or 1.7% compared to $104.1 million for the same period in the prior year.

On a constant currency basis, segment product revenues were down 1.2% compared to prior year as 4.8% growth from pricing actions was more than offset by a 6% decline due to lower volumes. As Rajnish noted, excluding the planned decrease in wholesome bulk sugar sales, segment constant currency revenues increased 2.8%. Operating income for the Branded CPG segment was $1.5 million in the second quarter of 2023 compared to operating income of $5.6 million for the same period of the prior year. The decrease in operating income was primarily due to cost inflation, including the sales of higher cost inventory as well as other discrete costs such as higher severance expenses and an impairment of fixed assets of $0.8 million related to either production lines at our Decatur, Alabama facility.

Flavor Ingredients segment product revenues increased 4% on both a reported and constant currency basis to a new quarterly record for segment revenue since the company has been public, of $30.6 million for the second quarter of 2023. Operating income for the Flavor Ingredients segment was $9 million in the second quarter of 2023, which matched that of the prior year period. Operating expenses for corporate for the second quarter of 2023 were $7.4 million compared to $6.9 million in the prior year period. The increase was primarily due to an increase in stock-based compensation and severance, which was partially offset by lower volumes expenses. Now I’ll briefly cover our June year-to-date results. For the 6-month period, ended June 30, 2023, consolidated product revenues grew 0.5% on a quarter basis to $265.3 million versus the prior year 6-month period.

On a constant currency basis, product revenues increased 1.4% compared to prior year period. Consolidated operating income was $6.1 million compared to $14.8 million in the prior year period. Consolidated adjusted EBITDA decreased 7.2% to $34.8 million. Moving to cash flow and balance sheet. Cash provided by operating activities for the 6 months ended June 30, 2023, was $4.9 million, and capital expenditures for the same period were $2.7 million, which resulted in approximately $2.2 million of free cash flow and adjusted free cash flow of $12 million. As of June 30, 2023, we had cash and cash equivalents of $24.1 million and $427 million of long-term debt and amortized debt issuance costs. Our long-term debt decreased from year-end 2022 by $5.875 million as a result of repayments of $4 million and mandatory repayments of the term loan of $1.875 million.

At June 30, 2023, there were $72 million drawn on our $125 million revolving credit facility. During the second quarter of 2023, we entered into an interest rate swap agreement to manage exposure to our interest rate risk related to variable interest rates of our term loan facility. The agreement converts the variable interest rate on $183.3 million of the term loan, representing 50% of the notional amount of the facility to a rate of 4.265% through February 2026. As a result, we expect to realize approximately $1 million of interest savings in the second half of 2023. We remain committed to a conservative financial policy and we’ll continue to be proactive in our approach to mitigating risk. Reducing leverage is the company’s top priority, and our primary focus is to accomplish this through organic needs.

For 2023, we still expect our leverage ratio to remain constant, but we are taking immediate actions where we can to reach our goal. Now shifting to our outlook, which we are reaffirming 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 are presented 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. Our top priority is cash flow generation and the results of the past 3 quarters is a reflection of that focus. We expect total capture expenditures to be approximately $9 million.

Finally, with respect to our cash add-backs, we continue to expect a decline in as we complete our supply chain renovation projects in the second half of the year, including known and forecasted events, we anticipate an order of $4 million for the remainder of the year. Thank you. That concludes my remarks. Operator, please open the call for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Scott Mushkin with R5 Capital.

Scott Mushkin: Irwin, I think I’d be a little remiss not mentioning on this call, the amazing acquisition you did on the other business. So congratulations on that.

Irwin Simon: Thank you, Scott, and thanks for your nice note.

Scott Mushkin: So just looking at that — the debt structure, is there anything you guys can do to get that down more quickly. I mean, I guess it’s also in context of the strategic review going on, just seems organically having it come down, it’s going to take a real long time.

Irwin Simon: So Scott, I think there’s a couple of things absolutely we can do in driving sales and driving cash. And we have a plan that gets our debt down over the next couple of years. I think what’s important to also understand is — in regards to Whole Earth business, we carry about $220 million of inventory as we buy out our licorice ingredient business and making sure we have supply and that’s why we have exclusives because we do have great supply out there and making sure we have lots of sugar and that we’re not going into quota. So we do carry and if you remember, that’s the old hay days, we had the [indiscernible] we had this with [indiscernible] for our inventories. So is there different ways that we could finance our inventories?

Is there additional cash? Is there additional costs that we take out of this business. And I know the team is looking at that, and we’ve identified lots of areas how we can reduce cash. So working on the balance sheet is something that we’re doing. I think the team in regards to our swap that we just did and brought interest rates down to half of the — down to the 4% level. So that is big, big focus. So looking at inventories is a big one, looking at taking additional costs out of there. And I think the other big thing is what Jeff and Rajnish talked about the opportunities in growing our sales and there’s some great opportunities in growing our sales. We haven’t realized any of the benefits yet. We go into [indiscernible] and getting [indiscernible] and some of the things there.

So there’s lots of levers out there for us to pull and there’s lots of things we’re working on to get additional cash to ensure that our debt levels come down. But in the next couple of years, there is a good plan in place to bring our cash — to bring our debt levels down below 4%.

Scott Mushkin: And then looking at the strategic review that you guys have underway, what else — I mean, obviously, there’s the offer out there, what else do you think if you were going to look at the possibilities of the strategic review, what else should we be considering?

Irwin Simon: Listen, I think, again, here’s a company that was brought together 3 years ago and basically has had some successes during COVID and where were some of the challenges going to our own production and some of the other challenges, we got caught with some of the higher interest rates. But with that sale is important, where our strategic opportunities for us I think what’s important here is the base, we got a great base business here, and there’s levers to pull, but the board and the special committee today are looking at strategic alternatives and you know what strategic alternatives are. So there is a thorough review up there. But the good news is we’re starting with a real good company. It’s not like we’re in trouble.