Whole Earth Brands, Inc. (NASDAQ:FREE) Q4 2022 Earnings Call Transcript

Whole Earth Brands, Inc. (NASDAQ:FREE) Q4 2022 Earnings Call Transcript March 13, 2023

Operator: Good morning and welcome to the Whole Earth Brands Fourth Quarter and Full Year Fiscal 2022 Results Conference Call. At this time all participants will be in 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 over to Jeff Sonnek, Investor Relations from ICR. Sir, please go ahead.

Jeff Sonnek: Thank you and good morning. Today’s presentation will be hosted by Irwin Simon, Executive Chairman; Michael Franklin, Interim Chief Executive Officer; and Duane Portwood, Chief Financial Officer. 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 Irwin Simon, Executive Chairman. Irwin.

Irwin Simon: Good morning everyone and thank you, Jeff. And thanks to everyone for joining the call. I’m happy to be here today to introduce our Interim CEO, Michael Franklin. On December 12th, we announced a CEO transition plan where Michael took on the Interim CEO role in addition to a seat on our Board of Directors. Since Michael’s appointment to the Board, he has immersed himself in the business and has made excellent contributions. Already, Michael has demonstrated to the team why he’s the right guy for the job. The Board and the team has been impressed by his early contributions, and we continue to be excited for what is to come. His objective approach and experience working with organizations to enhance operational efficiencies and focus on long-term value creation makes him the ideal candidate for the CEO position.

Michael has been extremely busy over the last 90 days, and I look forward to our continued partnership in the coming years. We feel great about the opportunities that lie ahead for Whole Earth with our leading portfolio of better-for-you brands and the innovation that we are bringing to the market. With that, I’d like to turn the call over to Michael for his remarks. Michael.

Michael Franklin: Thank you for that introduction Irwin. Good morning, everyone and thank you for taking the time to join the call. As you know, in August 2022, I joined the Whole Earth Brand’s Board of Directors. I joined the Board because of my belief in the business and my desire to add value and help the team achieve its full potential. Since becoming Interim CEO, my belief in the long-term opportunity for the business has only been reinforced. This is a business with great people, great brands, and immense potential to create significant value for shareholders. With that said, 2022 was a challenging year, a year where the company fell short of its forecasts and expectations, hence the need for positive change. Improvements are being made, strategies updated, and action plans are being implemented.

Our plan is to provide the investment community with a detailed presentation on our strategic action plan and long-term financial goals in the third quarter of this year. Our CFO, Duane Portwood, will review the fourth quarter full year 2022 results and introduce our 2023 guidance. Before passing the call to Dwayne, I’d like to briefly share some of my initial observations, as well as some areas of immediate focus that we are uniting around to maximize our competitive strengths while optimizing our operations to achieve our goal of generating stable and sustainable long-term profitable growth. Since joining the board and assuming my leadership position, I have traveled extensively, meeting with our teams across the world in locations including Alabama, Chicago, Czech Republic, Dubai, Houston, London, Mexico, and Paris.

My approach has been to be an active listener, understand both the positive and negative influences of our corporate culture, and to challenge the status quo. I want to make sure that as we evolve our strategy to drive top line growth, improve operational effectiveness, and increase margins and cash flow I understand the specific challenges and opportunities faced by our operating management teams. I believe that this investment in meeting people face to face was an important first step in developing our plan for the future. In my travels, I was incredibly impressed by the depth and quality of our team, as well as the great deal of enthusiasm from our people at the operating level. The Board and I have high expectations for the future of this business.

Building the strategy together is essential to making sure the company meets or exceeds expectations in the future. As you will see in our guidance, while we believe the path forward is full of opportunities, 2023 will be a building year for our longer-term financial goals. Accordingly, we anticipate 2023 will be similar to 2022 in terms of financial results. This year, we will be focusing on improving our operations and creating a foundation from which we can deliver sustained, profitable growth. Today, our business has unnecessary complexities that we are starting to simplify. While we have both short and long-term opportunities, we anticipate it will take 24 months to capture the full benefit of many of our initiatives. As I said at the beginning of my remark, I believe Whole Earth has significant opportunities for success.

To demonstrate my beliefs and commitment, I have asked that until the business has stabilized, I receive no cash salary for my role and that I only receive equity incentive compensation as I deeply believe in the value creation opportunities for all stakeholders. Globally, our CPG product assortment is well positioned in the current environment with a host of brands that support and drive unique consumer preferences, while also offering entry level price points for consumers that are feeling the effects of high inflation. The branded portfolio is supported by our private label and ingredients businesses, which helps us to develop stronger and broader customer relationships as well as significant purchasing scale. Our diversification extends to channel presence, product assortment, and geographical reach.

This is a strength that continues to drive the underlying growth of our entire branded CPG segment. Our flavors and ingredients segment is a dominant market leader with high barriers to entry, a strong free cash flow generator, and a global leadership position that will support our broader growth initiatives as we further diversify and grow Whole Earth Brands. This diversification in both revenue and cash flow is particularly valuable in a public company environment. Strategically improving our operational execution is an area of the business that we can continue to push forward. As has been discussed over the past several quarters, our manufacturing inconsistency at the Alabama facility cost us dearly in 2022. We still have important work to complete in 2023 with respect to optimizing our network and returning the business to an asset light state.

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This will assist us in controlling costs, delivering margin, managing working capital, and ensuring that we are delivering on our commitments with customers. Further reflecting on 2022 as I alluded to earlier, it was a year of challenges. Some of these were brought about by the pandemic and macroeconomic forces. Variables such as shifting consumer spending and preferences, labor complexities, rampant inflation, interest rates, and foreign exchange movements. It must be said some of our challenges were operational footfalls that are far along in being resolved. Taken together, our margins were under pressure despite our pricing, de-rationalization, and productivity strategies. We see 2023 as a year of stability and evolution. Our manufacturing footprint optimization will play a critical role in our strategy to right size our cost base, and we will continue to thoughtfully execute our SKU rationalization efforts.

We also intend to start reinvesting in our strong portfolio of brands. This was an area that was negatively impacted by the operating environment over the past couple of years, but as a core tenet of effective brand building and growing household penetration, you can expect us to commit more dollars to areas such as trade spend and marketing in the year ahead. Our near-term focus is to draw the best out of our culture while making sure that corporate function is there to serve the business rather than the other way around. We are already in the process to reframe our structure to be more efficient. We carry too many costs for a business this size, and this is being addressed in real time. Our leverage is also higher than our long-term goal of net debt-to-EBITDA of three times, which will be one of our financial targets we outlined at our Investor Day.

We will achieve this through free cash flow generation for debt reduction and EBITDA growth. In summary, I am confident that our outlook is positive, but I also believe that it’s necessary to make some select reinvestments in our organization including our greatest asset, our people. We will take our strong foundation and reinforce it for the long term. It is imperative that we repair our margin profile as it is the primary means by which we will generate higher growth of operating cash flows. In turn, this will allow us to delever the business and position the company to take advantage of the multitude of consolidation opportunities that we see in the marketplace today. Before passing the call over to Duane, I wanted to address the recent press that many of you may have seen regarding Erythritol.

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 50 countries, including the European Union, Canada, Argentina, Australia, Japan among others. The recently released report is contrary to decades of proven scientific research. Like any through product we sell, we will continue to monitor and work with local authorities and industry experts to ensure that we are delivering the highest quality products to our loyal customers. With that, I’ll pass the call over to Duane to go over Q4 results and 2023 guidance. Duane?

Duane Portwood: Thank you and good morning to everyone. 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 the supplemental earnings presentation on our Investor Relations website. For the fourth quarter ended December 31, 2022 consolidated product revenue grew 4.7% to $138.9 million versus the prior year quarter. On a constant currency basis, product revenues increased 7.0% versus the prior year fourth quarter. The increase was driven by increased pricing. Reported gross profit was $28.3 million compared to $38.7 million in the prior year fourth quarter. The decrease was largely driven by cost inflation, costs associated with the supply chain reinvention project, and $2.5 million of headwinds from favorable noncash amortization of purchase accounting adjustments related to inventory revaluations in the prior year period that did not recur this year.

These were only partially offset by the benefits of our pricing actions. Adjusted gross profit was $40.1 million compared to $45.2 million in the prior year period. Reported gross profit margin was 20.4% in the fourth quarter of 2022 compared to 29.2% in the prior year period. Adjusted gross profit margin was 28.9% compared to 34.0% in the prior year. The majority of this decline was primarily a function of higher cost of goods sold due to cost inflation and increased prices. This resulted in higher sales to protect year-over-year gross profit dollars, but on a percentage basis, results in a lower gross profit margin. In addition, the decrease was due to cost inflation above these price increases including increased sugar tariffs as demand for our organic sugar continues to be strong.

During the quarter, we recorded a noncash goodwill impairment charge of $46.5 million. Most of this charge related to our North America branded CPG reporting unit and was driven by a number of factors, including rising costs, supply chain investments and increased discount rates. Consolidated operating loss was $46.2 million, including the $46.5 million noncash goodwill impairment charge compared to operating income of $6.4 million in the prior year fourth quarter. Consolidated net loss similarly reflects the impact of the impairment charge and was $60.3 million compared to a net loss of $0.4 million in the prior year period. Consolidated adjusted EBITDA was $20.2 million compared to $20.6 million in the prior year fourth quarter. The decrease was primarily due to unfavorable foreign currency impact of $0.9 million due to the strengthening U.S. dollar.

Excluding the foreign currency impact, consolidated adjusted EBITDA increased 2.4%. Now shifting to the segment results for Q4. Branded CPG segment product revenue increased $3.8 million or 3.6% to $109.4 million for the fourth quarter of 2022 compared to $105.6 million for the same period in the prior year. On a constant currency basis, segment product revenue increased 6.0% compared to the prior year, driven primarily by pricing actions. Overall, volume was down 2.4% due to the discontinuance of certain private label SKUs at the beginning of 2022. Excluding the impact of the SKU rationalization, Branded CPG volume was essentially flat versus the prior year quarter. Operating loss for the Branded CPG segment was $47.7 million in the fourth quarter of 2022 compared to operating income of $4.4 million for the same period in the prior year.

The decrease was primarily driven by the aforementioned noncash goodwill impairment charge that falls within the Branded CPG segment. To a lesser extent, operating loss was also impacted by costs associated with our supply chain reinvention project, the impact of cost inflation, and an unfavorable impact from a stronger U.S. dollar, partially offset by pricing actions. Our Flavors & Ingredients segment continues to perform well with product revenue up 8.6% to $29.5 million for the fourth quarter of 2022 compared to $27.1 million for the same period in the prior year. On a constant currency basis, segment product revenue increased 11.0% primarily due to strong volume growth of 5.6%, driven by growth in liquid extracts and pure derivatives, resulting from the company’s commercial expansion and innovation efforts.

Pricing was also a significant contributor, increasing 5.4% versus prior year. This was the fifth consecutive quarter of double-digit top line constant currency growth for the Flavors & Ingredients segment. Operating income for the Flavors & Ingredients segment was $8.4 million in the fourth quarter of 2022 compared to operating income of $7.6 million in the prior year period. The increase was primarily driven by revenue gains, partially offset by $2.5 million of headwind that I noted previously associated with the favorable amortization of purchase accounting adjustments in the prior year period related to inventory revaluations that did not reoccur in the current quarter. Operating expenses for corporate for the fourth quarter of 2022 were $6.9 million compared to $5.7 million in the prior year period.

Now I will briefly cover our full year results. As a reminder, we acquired Wholesome on February 5, 2021. I will speak to reported results, which include Wholesome for the full year of 2022. Additionally, we will provide some select Pro Forma results as if we owned Wholesome for the entirety of 2021 to assist in your analysis of the organic growth of the combined portfolio. For the year ended December 31, 2022, consolidated product revenues grew 9.0% on a reported basis to $538.3 million versus the prior year. On a Pro Forma basis, organic constant currency product revenue increased 7.1% compared to the prior year. Consolidated operating loss was $24.6 million compared to operating income of $22.8 million in the prior year. Consolidated adjusted EBITDA decreased 3.7% to $79.2 million, which included $3.9 million of unfavorable foreign currency.

Excluding the impact of foreign currency, consolidated adjusted EBITDA increased 1.1% for the full year. Now moving to cash flow and the balance sheet. Cash used in operating activities was $5.8 million, and capital expenditures were $8.9 million for the year ended December 31, 2022. Although free cash flow in 2022 will be negative $14.7 million due to increased working capital investment and approximately $22 million in cash add-backs, primarily related to the supply chain reinvention, we did achieve our goal of generating positive free cash flow in the fourth quarter, generating approximately $9.5 million, driven by lower working capital, which reversed a portion of the build we had seen in the first three quarters. With respect to 2023, we anticipate free cash flow in the positive mid-single-digit millions as lower working capital requirements and significantly reduced cash add-backs will largely be offset by increased interest costs.

As of December 31, 2022 we had cash and cash equivalents of $28.7 million and $432.2 million of long-term debt, net of unamortized debt issuance costs. Our long-term debt increased from year-end 2021 by approximately $49 million, primarily due to $51 million of draws on the revolving credit facility. These proceeds were used to fund a portion of the Wholesome earn out payment in the first quarter and to fund increased net working capital levels, primarily related to higher levels of inventory, resulting from increased costs and to improve customer service as well as timing. At December 31, 2022, there was $76 million drawn on our $125 million revolving credit facility. Reducing leverage over the intermediate term is a top corporate priority.

For 2023, however, we expect our leverage ratio to remain at current levels. Before I cover our outlook for 2023, I’d note that we’ve initiated actions to close our Decatur, Alabama production facility. We took control of the facility in the summer of 2021 as a result of financial difficulties that the co-packer was experiencing. Subsequently, we experienced supply difficulties resulting from labor force availability challenges due to the pandemic. During 2022, we worked hard to improve manufacturing production and restore customer service levels as separate as a result of the supply difficulties. While I’m pleased to say that we were successful in that regard, it is clear that the costs associated with that facility are structurally too high which was the basis for the decision to shut down this operation.

Our team is already shifting this production to other co-packers across our network who have the advantage of greater scale so that we can lower our per unit cost to levels that are more appropriate. As a result, you can expect some onetime expenses associated with these actions in 2023. Now shifting to our full year 2023 outlook. 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 revenue 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 quarterly guidance, we do expect the first quarter to be the lowest quarter in terms of overall adjusted EBITDA and adjusted EBITDA margin.

Finally, we expect total capital expenditures to be approximately $9 million. That concludes our prepared remarks. Operator, now back to you. Please open the call for questions and answers.

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Q&A Session

Operator: . And our first question comes from the line of Brian Holland with TD Cowen. Please proceed with your questions.

Brian Holland: Yeah, thanks, and good morning. If I could start with the Erythritol where Michael, you made comments towards the end of your prepared remarks. Maybe just a couple of questions there. One, can you give us a sense of how much exposure your portfolio has to that specific sugar replacement? And then appreciate your points about kind of the long-term research that’s been done around Erythritol. But obviously, that is going to — I don’t know how much of an impact that’s going to have with respect to whatever the consumer response will be to the Cleveland Clinic report. So any sense yet from retailers or customers or consumers, excuse me, how they feel about what’s coming out of the Cleveland Clinic and how they might respond?

Michael Franklin: Yup, thanks Brian. I’m happy to take that. So with regard to Erythritol, similar chart what I shared in our prepared remarks, we’ll continue to monitor the situation closely. And for us, like any ingredient, any product that we sell, we don’t disclose what amount of that product account for what percent of sales and we won’t be doing that on this call. With respect to customers, retailers, and partners that we have, look for us, we’re working with our customers. We’re working with our retailers. We’re making sure that, obviously, we want to deliver the best products to our loyal customer base. And so we continue to see, obviously, consumers continuing to purchase these products and for us making sure that we’re reacting on the forefront and adjusting accordingly, we’ll continue to monitor that over the coming months and the existing reaction.

Brian Holland: Okay. As we think about the 2023 outlook, I’m just curious if there’s any assumption for adverse impact to your products that do have exposure to Erythritol, if you made any assumptions for any decline in consumption as with respect to that?

Michael Franklin: Yes, I mean, we’ve obviously — we’re putting together our 2023 plan. We included that in terms of what we could see from a consumer perspective. But the truth is we continue to see demand for our products continue to be strong. We’re working through it now and that is reflected for our 2023.

Brian Holland: Yes. .

Irwin Simon: Mike, just let me say something about Erythritol. I think guys, again, I think every week, there’s a study that comes out in regards to the ingredient in the product. And I’ve been through it many, many times. And I think as we’re governed by the FDA and we’re governed by a lot of regulatory, we’re going to ensure for safety and health of our consumers. But I think ultimately out there, there’s a lot of products out there besides Whole Earth, and there’s a lot of products out there that contain Erythritol. And actually, Erythritol is one of the highest ingredients to increase because of corn and that coming from Ukraine. So I hear you on that, and I think we’re going to keep an eye on it. And if there’s an ingredient as substitute, we will do that.

But it’s not the whole thing that makes up our business. That’s not what — we’re not just in the Erythritol business. And so far, as Mike said, we’re not seeing a major impact from it and we’ll absolutely keep an eye on it. But I think we’re used to this, but with the Cleveland Clinic or the different associations come out with a finding, and this is something that’s been going on for seven years, and I’m not sure of all the signs behind it, too. So Mike.

Brian Holland: Last one for me. Michael, you talked about I think, providing a long-term outlook later this year. I think what the company has spoken to in the past as far as long-term targets are mid-single-digit organic growth, mid- to high single-digit adjusted EBITDA growth. Can you just — certainly, when there’s a CEO transition, obviously, by the time of this guidance was given, the environment has been very dynamic ever since then. Has anything from your perspective changed such that it should structurally alter the outlook that was out there prior to your arrival, are those goals generally still attainable, or is something structurally altered such that any of that wouldn’t be attainable down the road?

Michael Franklin: Yes, look, we’re excited to provide a more fulsome presentation of our long-term goals and how we plan on getting there in the third quarter of this year. We look forward to hosting an Investor Day to do that. But no, I think in terms of our long growth algorithm, I think that it’s relatively consistent, looking to grow our revenue base by mid to high single digit. And EBITDA concurrently, rather relentless focus on cash flow this year. But in the third quarter, we’ll share on that long growth in terms of our financial targets.

Brian Holland: I will leave it there. Thanks. Best of luck.

Michael Franklin: Thanks Brian.

Operator: Our next question is from the line of Rob Dickerson with Jefferies. Please proceed with your questions.

Robert Dickerson: Great, thank you so much. Look, I mean, I guess I’ll just ask kind of from just given this is the first time, as Brian was saying, we have access to Mike and also maybe for Irwin. By the way commentary just about kind of all the opportunities ahead, right, still see a lot of opportunity could still grow nicely on the go forward. Just I guess given since you kind of got there in August, Mike, you said you traveled decent amount. I’m sure you’ve been speaking with the Board frequently. Maybe just kind of spend a minute kind of talking about maybe where you saw certain opportunities not captured that were already available to you, maybe kind of like what some of the low-hanging fruit is mostly on the top line, I guess? And then just kind of as you set course now, like we’ll hear more in Q3, but like what are you doing now, what’s different?

Michael Franklin: Yes. Look, I’d say when I initially joined the Board — at the Board back in August, to what — from my initial impression where this is a really strong business, help the underlying business with tremendous opportunity for growth that on the — in the Branded CPG segment, we’re in the early innings for where we can take this business. And I’d say above all levels, I think I was incredibly encouraged by the depth and quality of our team at the operating level. I think the more time that I spend with the team, the more conviction that I gained in the business. In terms of low-hanging fruit and opportunities that we’re excited about, I think — one of the first opportunities we identified was our manufacturing footprint.

How do we simplify and return our business to an asset-light state, that’s something that is of increased focus for us, right? How do we get the product to customers in one truck across many of our brands? And then understanding, we have a great, strong international business. How do we reinvest in that business? How do we provide our teams abroad with the adequate resources to grow materially? And in North America, I think a lot of the frustration and challenges that we’ve had in 2022 largely stem from look, the operating macro environment wasn’t easy and our primary focus is making sure that we deliver the highest customer service levels. And so putting our customers first, making sure that we put the right products to our customers, making sure that we’re reinvesting in marketing, trade and innovation.

All that taken together, hopefully, we’re continuing to be excited about what’s in store for 2023 and beyond.

Robert Dickerson: Alright, got it. So I mean it basically sounds like a little bit more operational kind of headwind that you felt hope to kind of dig out of that through your own efficiency plan. When you think about the investment side, what you said there are areas to kind of reinvest which I guess would imply kind of SG&A goes up a little bit, maybe there’s some more trade going in. You kind of just mentioned international. I mean do you kind of view it as some of the U.S. brands have been underinvested then because I mean it feels like there was decent innovation coming out of that side of the business. We haven’t really heard as much about the international side of the business, even though that was kind of part of the plan upfront, it was like equal and crush it in emerging markets, but really didn’t hear much about equal in emerging markets.

So maybe just kind of spend a second on kind of where you think some of the investment could go? And then I have a quick follow-up.

Michael Franklin: Happy to answer that. Look, our international — we’re incredibly excited about. Any opportunity that we can grow from a distribution perspective, especially in our international segments is incredibly important for us. If you look at India, for example, that business from 2021 to 2022 nearly tripled. No different is what we’re seeing in material growth in China with that business growing over 50% year-over-year. I think it’s for us, it’s identifying high-growth regions and making sure that we’re supplying the product in those regions and making sure that we’re delivering it catered towards those local preferences. So when it comes to international, we’ll touch more about this, obviously, at our Investor Day. But yes, international continues to be an important book area.

Irwin Simon: And Rob, we have Canderel, which is a tremendous well-known brand that is really strong in France, really strong in the UK and Belgium, and there’s so many opportunities for expansion there. And like Mike said, I mean, when you said international was to be a big part of this. And I think — listen, we’ll go back and complained a lot on COVID, but there are certain things whether it’s currency and other things that happen that hurt us. But international has tremendous opportunity, and we have some strong brands over there. I mean we mentioned Canderel, the brand awareness. And basically, we’re only in a few countries today in Europe with tremendous expansion. Mike said before, what we’ve done in Middle East, India, and China is tremendous in a short period of time, and he has lots of opportunities there.

Robert Dickerson: Got it, great. Thanks guys. And then just quickly, just on gross margin for the year. I mean, obviously, gross margins kind of continued to decelerate. There’s a little price cost dynamic. You called out Q1 being more pressured quarter or the most pressure quarter of the year on the EBITDA side. But I’m just curious, as you think about the plan for 2023 trade spend, price cost relationship, etcetera, are you thinking kind of more of like a flattish gross marginish year-over-year and then maybe a little higher SG&A, which maybe puts a little pressure on the EBITDA margin in the near term or just any color on the gross margin side would be great? And that’s all. Thanks so much.

Duane Portwood: Hey Rob, this is Duane. I appreciate the question and good morning. Yes, from a full year perspective, we do expect adjusted gross margins to be pretty consistent overall with 2022. The order of events is going to be a little different in the sense that like I mentioned, in the first quarter both from a gross margin perspective and an EBITDA margin perspective will be on the smallest of the quarter. So both dollars and margin rates are expected to improve as the year goes on. And at the end, we will — we expect to finish fairly consistent. On the SG&A side, yes, there’s investments going on there. We’re in — we’re increasing our marketing spend by around 25% year-on-year to make sure that we’re supporting our launches, supporting the initiatives around the globe with a little bit of emphasis towards North America. So that’s where a lot of the SG&A investment will come from as well.

Robert Dickerson: Perfect, thank you.

Operator: Our next question is from the line of Bobby Burleson with Canaccord. Please proceed with your questions.

Bobby Burleson: Yeah, good morning. So just curious on the top line guidance kind of parsing out the full year benefit of price increases versus kind of volume expectations, what do you kind of — what’s implied in terms of volume directionally versus 2022 from a growth perspective?

Michael Franklin: Hey Bobby. Good morning, we expect growth to be, I guess, I’ll call it more balanced than we saw in 2022. From a Branded CPG perspective, most of the growth was price. I would say 2023, most will be price, it just won’t be as acute. Now one of the things we do have in our expectation set is a little bit more SKU rationalization, particularly as it relates to our Ingredient business on Wholesome. So that business may decline just a little bit. That’s by choice, given where sugar prices are and what our sugar quota is. So absent that dynamic, we expect more volume growth than we saw in 2022. But we’ve got a little bit of price to go full year effect plus some pricing that we’re actually factoring on now, but expect volume growth to be maybe two-ish times what we saw in 2022.

And Flavors & Ingredients a little different dynamic there, great volume growth obviously in 2022. We do expect both positive price and positive volume in our Flavors & Ingredients, but that will be slightly more weighted towards price in 2023.

Bobby Burleson: Okay, great. And then just on the Erythritol, I understand there’s some — you guys have out there said kind of highlight Erythritol not just as an ingredient in the back, but really blazing on the front of the package. Curious kind of what the costs might be or timing around repackaging, if that’s necessary, like whether or not customers or partners are interested in maybe a different way of presenting those products that don’t highlight Erythritol on the front, just curious what the operational impact might be in terms of any costs or timing there of making those changes if in fact, there’s interest in doing that?

Michael Franklin: Yes, thanks Bobby. Look, I think for us, right, I think we’ll continue to monitor how the recent press translates to consumer demand. I think for us, what we see is — it’s not any different than any product that we sell, right. And any — receive on any product that anyone sells. For us, it’s making sure that we have the action plans in place to make the changes that we need. If we need to reform the products, we’re working obviously to make sure that we can do that, and we’ll have the backups in place and repackaging if that’s what we ultimately need. But the truth is today where we are, we continue to have strong conviction in our products and there’s nothing that’s happening or changing overnight. But like any business and you’re managing risk, you’re making sure that you have the plans in place.

But no, for us, we can do this relatively quickly with any of our products. And we go through this with all of our SKUs, not just ones that have Erythritol.

Bobby Burleson: Okay, fantastic. Thank you.

Operator: Our next question comes from the line of Scott Mushkin with R5 Capital. Please proceed with your questions.

Scott Mushkin: Hey guys, thanks for taking my questions. So, it seems and I know Michael, you’re still thought as the Interim CEO, but the way you kind of addressed the call, it seems like it’s more permanent. So how are we viewing that?

Michael Franklin: Hey Scott, thanks for the question. So, from my perspective when I had the opportunity, obviously, as we talked about to join the Board in August and ultimately join in a full-time role obviously at the beginning of January, I think for me, I had — when I had stepped into this role, the idea was asking for the Interim title was to reserve the ability to make sure that I was the right person. I want to make sure that the team felt like I was the right person and that the Board felt similarly to make sure that I was the right person to lead the company. I think from initially from out of the gate, I took the role knowing that I might be doing this, that I plan on doing this full time and the Interim title was only temporary.

My full intention is to be here for the long term, the more time, like I said, spending with the team, the more excited I am about what the future holds, and I’m looking forward to being part of the team on that journey. So for me, this is — I’m here for the long term, and I’m excited about the future prospects of this business.

Scott Mushkin: Great. And then this question is actually, I think, probably more for Duane. When we look at your — and you laid out the first quarter being lowest EBITDA. As we look at the other side of the ledger, the cash needs of the business, how should we think about that same way and how significant do you think it will be in the first quarter and then maybe lay out the year?

Duane Portwood: Scott, I appreciate the question and good morning. No, I think that — my first year with the company was obviously a very dynamic year. Lots going on operationally, lots going on organizationally and the like and operationally as well. I would say this from a cash needs perspective and a net working capital perspective, I don’t expect working capital to be a source of funds for the full year. I think where we’re at, as we exited 2022, we’re actually in a pretty healthy position, both in terms of inventory. We made good strides in Q4 in bringing some of that — some of that down and kind of what remains in inventory at the end of 2022 is more of the cost impact that we saw throughout the year. So based on what we know about costs right now, I think most of that is kind of woven its way into the balance sheet.

So that shouldn’t have as dramatic of an impact. We’re very healthy from a vendor perspective and our relations there and our payables balances and our receivables are in a good spot. So I would say we’re starting 2023, probably not as hungry as we were in 2022 from a net working capital perspective. So as we — it will be lumpy as we go through the year. I actually don’t see Q1. There are some puts and takes, but I don’t expect huge movements in working capital in Q1. Q2 and Q3, there might be a little bit more of an appetite just given timing on some sugar type purchases and the like. And then as we finish the year, again, I would expect a kind of single-digit millions use of cash overall in net working capital given our growth. But I don’t expect the massive kind of fluctuations that we saw in 2022 overall as the year progresses.

Scott Mushkin: Perfect. And then my final question would be, as you look at your EBITDA guidance, let’s kind of walk us through the idea of what could take you above that and what could maybe take you below it and kind of as you guys look at the year?

Duane Portwood: Yes, I think so right now, currency is year-on-year, isn’t too much of an impact, probably a little bit of a pressure in Q1. And then if current spot rates hold, then that should kind of level out as the year progresses. So that could probably be either a help or hurt at this stage. Volume, we think we have a good plan, a good budget, good operating budget in terms of volumes that we’re going after and how we’re supporting them. We are anticipating some, like I said, some decrease in our Ingredients business. If we were to get better quota and the like, then we could more aggressively go after that business and do a little bit better from an EBITDA perspective. I think the — we have good execution plans in place and kind of are on track with what we’re doing in Decatur.

So again, I think we’re pretty balanced in how we’re approaching that. If we can execute a little quicker, that might be a little bit better from an EBITDA perspective vice versa, if we don’t execute it like we want. But again, I think it’s a pretty balanced portfolio. So really, the big — probably the big driver will be volume growth, and there is certainly opportunity to beat the numbers that we have out there and beat the budget if that can come to fruition.

Scott Mushkin: Perfect, thanks for taking my questions. Appreciate all the color.

Operator: Our next question is from the line of Ryan Meyers of Lake Street Capital Markets. Please proceed with your questions.

Ryan Meyers: Hey, good morning guys. Thanks for taking my questions. First one for me, just wondering if you can talk about what you’re seeing from a demand perspective across the different product categories and maybe the different channels?

Michael Franklin: Yes, from — as we finished Q4, it was a bit of a microcosm for the full year 2022 in terms of as we think about North America, the non-major channels continue to grow nicely. The major channels, we continue to work through and make sure we’re servicing our customers in those channels appropriately. As we enter 2023, the areas of focus remain the same. And right now, I think we feel pretty good about the demand in the marketing and trade investments that we’re putting behind the demand in North America. From an international perspective, we gained share in almost every market throughout last year, and those were in markets where we already have a pretty high share to begin with. And the teams continue to again operate well, stock shelves well, and the like.

So the demand is there even in Europe where kind of different macroeconomic environment going on, share is very healthy and actually growing. So again, as we — as demand doesn’t — is not really the issue as far as that goes. And then from a Flavors & Ingredients perspective, as I said in my remarks and kind of some other questions, the team has done a great job of opening up new avenues for the liquorish extract and that continues to grow and continue to deemphasize tobacco and the like. So product demand is pretty healthy across the board. And in North America, we just got to help that out with good execution.

Ryan Meyers: That’s good to know. And then the price increases that you guys have implemented, what kind of feedback have you got from your larger customers and maybe how receptive have they been to these price increases?

Duane Portwood: I think, I guess, Mike, you can correct me where I’m wrong. So more than half of the price impact for 2023 is the full year impact of price increases that have already been implemented, executed throughout 2022. With the new price increases, it’s customer-by-customer, SKU-by-SKU battle. I would say — I would — I guess, I’d characterize it as those conversations aren’t getting easier. They’re getting more difficult and some of the conversations are successful as far as getting what we asked for. Some of them are less successful of getting maybe a little bit less than we asked for. But it’s not — I wouldn’t say we’re still living in interesting times, maybe three, four years ago, talking about price increases, you just — we wouldn’t even get past the first five or six syllables, whereas now the conversation continues to be fulsome, but they’re not easy conversations.

Ryan Meyers: Great, thanks for taking my questions.

Operator: Thank you. Our final question comes from the line of Alex Arnold with Odeon Capital. Please proceed with your questions.

Arthur Arnold: Hey guys, thanks for taking my questions. A bunch of it has been covered, but a couple of sort of housekeeping ones. Is there any thought about costs in your guidance related to the Alabama shutdown or is that something that we’ll find out as it comes?

Michael Franklin: We do have as I mentioned before, for 2022 the challenges and the opportunities that we had with Decatur, Alabama, were kind of front and center and obviously, a big use of cash as we completed 2022. The cost to fully exit and then get our co-packers sped up like they need to be set up, it’s incorporated in the adjusted EBITDA guidance. Now I am adjusting those costs out to put a finer pin point to it, is that we had around 22 million and change of cash add-backs related to the Decatur in 2022. In 2023, I expect that to drop in half with about 50% of those costs being borne in the first quarter of this year. So I expect dramatic improvement actually in the cash cost of what we’re doing from a supply chain perspective and a big majority of that will be finished or I should say, about half of that will be finished in Q1 and then through — as we look at Q2, Q3 and Q4 kind of even spend there given the timing of what we want to do with Decatur.

So that’s where we — that’s how we see the year progressing there.

Arthur Arnold: Okay, great. And then in terms of cost of goods, are there — are you seeing any abatement in your supply chain?

Michael Franklin: We are seeing — it’s — I would say, last year, it was — cost inflation was pervasive. It didn’t matter whether it was raw materials, whether it’s packaging, wages, logistics, so on and so forth. This year, as we finish 2022 and are living in 2023 now, there are places where we’re seeing cost decreases, transportation, logistics to a certain extent. There’s places where we’re seeing — we continue to see some inflation, whether that’s raw materials like dextrose. This year, we are seeing inflation in our Wholesome business, whether it’s sugar prices, whether it’s honey prices, whether it’s agave prices, all of those are under pressure right now. So it’s a mixed bag in terms of what’s kind of going up and what’s coming down. It’s — the nice thing is it’s not pervasive, and we are seeing opportunities for decreased costs in pockets, but it’s not — it’s select pockets and there is other pockets where we continue to work through cost increases.

Arthur Arnold: Great, alright, thanks a lot guys.

Operator: Thank you. At this time we have reached the end of our question-and-answer session. I’ll now turn the floor back to management for closing comments.

Irwin Simon: Operator, nothing to add from our end.

Michael Franklin: Yes. No operator we appreciate it. Thank you to everyone for joining the call.

Operator: This will conclude today’s conference. Thank you for your participation. You may now disconnect your lines at this time.