Whole Earth Brands, Inc. (NASDAQ:FREE) Q3 2023 Earnings Call Transcript

Whole Earth Brands, Inc. (NASDAQ:FREE) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Good morning and welcome to Whole Earth Brands Third Quarter 2023 Results Conference Call. All participants will be in a 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’d like to turn the conference call over to Jeff Sonnek, Investor Relations of ICR. Sir, please go ahead.

Jeff Sonnek: Thank you, and good morning. Today’s presentation will be hosted by Rajnish Ohri and Jeffrey Robinson, the company’s Co-Chief Executive Officers; and Bernardo Fiaux, Chief Financial Officer. Nigel Willerton, President and CEO of Branded CPG North America Region; and Irwin Simon, the company’s Executive Chairman, 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 the 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 the 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. Ohri. Please go ahead.

Rajnish Ohri: Good morning, everybody and thank you for taking time to be on the call. This is the second quarter since Jeff and I took over as Co-CEOs, and I’m very pleased on the way our business is evolving despite some very challenging macroeconomic and geopolitical situations around the world. For today’s call, I will begin by providing an update on the consolidated numbers for the quarter, and then shift to an update on the progress of our Branded CPG business. We produced consolidated third quarter revenue of $134.4 million and generated $21 million of adjusted EBITDA. Our adjusted gross profit margin of 31.6% is an improvement of 80 basis points versus the prior year period. Since Q4 of 2022, our adjusted gross profit margin has expanded 270 basis points, which makes our third consecutive quarter of improvement.

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Q&A Session

The performance is directly linked to the focus of our entire organization on stabilizing, streamlining and evolving our operations to drive enhanced productivity and sustainable margin improvement. The outcomes from those efforts are also key to driving improved cash flow to support our growth initiatives and reduce leverage, both of which we advanced during the third quarter, and Bernardo, in his presentation, will share more details about it. As mentioned in the previous calls, within our Branded CPG business, our core focus continues to be on simplification, our global structure and removing complexity, reinvention and optimizing our North America supply chain and leveraging our brand strength and expand into adjacent categories. Branded CPG segment product revenues were $103.3 million, representing a decrease of 2% versus the prior year, or a decrease of 2.9% on a constant currency basis.

Excluding the planned decrease in Wholesome bulk sugar sales, segment constant currency revenue was essentially flat at 4.7% growth due to pricing was offset by a 4.6% decline in non-bulk sugar sales volume. As a reminder, the reason to limit bulk sugar sales was to avoid paying incremental tariffs, which would negatively impact our margins and profitability. However, going forward and considering the current sugar prices, we may consider selling some of our bulk sugar to manage inventories and generate additional cash. Operating income for the Branded CPG segment for the quarter has shown significant improvement, growing approximately 31% versus prior year. The increase in operating income reflects, in part, the improved efficiency across the operations and the selection of the channel oblique product mix, as well as lower supply chain reinvention costs and lower sugar import tariffs.

These improvements are an outcome of our thoughtful plan to streamline our management structure, manufacturing operations and decision matrix. We have now established a globally interconnected network of cross-functional teams with a clear objective of identifying opportunities that enhance productivity and drive efficiency. As we speak, these dedicated teams continue to look into areas of the business, including new rationalization, co-packer efficiency optimization, the refinement of product formulations, the strategic sourcing of raw material and logistics consolidation. We believe this will further lead to systematically removing excess costs at all levels of our operations, strengthen our margin profile and result in improved free cash flow performance.

The North America supply chain reinvention project is well on track and near its completion. The Alabama facility is closed, and the co-packer in Perry, Texas is up and running with all necessary certification and quality audits needed to service our customers. We are very proud of our supply chain team who has led this very complicated transition without compromising our service, which I’m pleased to say, remains at high levels of approximately 99%. With this consistency in service levels, our commercial team in North America CPG Branded business is working hard to regain lost distribution across different customer accounts. Our unmeasured channels, which account for approximately 80% of our Branded CPG revenue in North America is healthy and growing in all segments, clubs, e-commerce and food service.

Our private label business also continues to provide us opportunities to grow, and we are well-positioned to service customer needs across the entire portfolio. Within our international Business CPG, we are experiencing category headwinds, especially in the non-material side of the business. While this trend is limiting our ability to drive our new distribution gains, this is also impacting our competitors across the category. And as a result, we have not seen any significant changes in our market shares, which demonstrates the confidence and loyalty our consumers have in our brands. The evolving trends towards the choice of natural and better-for-you products provides an opportunity for us to meet consumer expectations through our assortment of leading better-for-you brands across Europe, Asia and Africa.

Globally, we continue our focus on category adjacencies and have a strategy in place to drive new product launches in identified growth categories that are aligned to our core business and distribution strengths. Within North America, we are energized by the overcoming of our supply chain challenges, which allows us to shift our focus to further building our diversified portfolio. In fact, I’m excited to announce that we have recently brought on a new Senior Leader to help us advance this work and drive these very important initiatives. In summary, I want to emphasize the renewed excitement within our CPG Business. We see tremendous opportunity to build this business and believe that we have created alignment across our entire talented and committed team.

I want to make sure I take this opportunity to thank all of them for their focus and individual efforts. I now hand over to Jeff.

Jeffrey Robinson: Thank you, Rajnish. Flavors & Ingredients is a strong free cash flow generator with key barriers to entry and a global leadership position that supports our broader growth and diversification initiatives at Whole Earth Brands. This diversification and our revenue growth in new markets and new opportunities in our traditional markets have driven the continuous improvement in our operating results. We continue to generate solid revenue growth in Flavors & Ingredients in the third quarter with a 3.6% constant currency increase, which compares against a 16.9% increase in the prior year period. We will continue to face tougher comparisons for the next few quarters, but we remain encouraged by some of the long-term opportunities we see in the end markets 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 identify specific uses and functions for our various licorice products. More specifically, we are seeing continued concern by customers in the European Union over regulatory changes requiring rigorous product purity, which provides us with opportunities to grow our sales and wallet share in licorice extracts in 2024. Our licorice extract sales grew in other sales segments during 2023 through our ability to provide functional and environmentally-friendly alternatives to specific per and polyfluorinated substances or PFAS. These environmental concerns reinforce a movement towards naturally derived ingredients, and we look to expand these applications in 2024 and beyond.

We continue to invest in development for all of our sales segments, including new investments in consumer-facing categories such as ingredients for personal care products. Beyond our sales and business development, we continue to streamline our operations and improve service from our global manufacturing, quality and logistics and are planning new actions for 2024. Future improvements in efficiency will further improve our competitiveness and our value proposition for our customers. With that, Bernardo, over to you.

Bernardo Fiaux: Thank you, Jeff and good morning to everyone. I will start by walking through our third 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 third quarter ended September 30th, 2023, consolidated product revenues decreased 0.6% to $134.4 million versus the prior year quarter. On a constant currency basis, product revenues decreased 1.5% versus the prior year third quarter. Reported gross profit was $37.5 million compared to $35 million in the prior year third quarter. Adjusted gross profit was $42.5 million compared to $41.7 million in the prior year period.

The increase was driven by a decrease in port duties, lower freight costs and improved sales mix resulting from our planned reduction in bulk sugar sales. Reported gross profit margin increased to 27.9% in the third quarter of 2023 compared to 25.9% in the prior year period. Adjusted gross profit margin expanded to 31.6% compared to 30.8% in the prior year. Our adjusted gross profit margin has improved 270 basis points in 2022 year-end, a testament to our team’s focus on maximizing productivity and driving sustainable margin improvement. This margin recovery will serve as a foundation for higher profitability next year. Consolidated operating income was $6.7 million compared to operating income of $6.8 million in the prior year third quarter.