Westrock Coffee Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 11, 2023

There are 7 speakers on the call.

Operator

Welcome to WestRock Coffee Company's First Quarter 2023 Earnings Conference Call. My name is Jules, and I'll be coordinating your call today. Following prepared remarks, we will open the call to your questions with instructions to be given at the time. I'll now hand the call over to Clay Krumlovski with ICR.

Speaker 1

Thank you, and welcome to WestRock Coffee Company's Q1 2023 earnings conference call. Today's call is being recorded. With us are Mr. Scott Ford, Co Founder and Chief Executive Officer and Mr. Chris Pledger, Chief Financial Officer.

Speaker 1

By now, everyone should have access to the company's Q1 earnings release issued earlier today. This information is available on the Investor Relations Section of WestRock Coffee Company's website at investors. Westrockcoffee.com. Certain comments made on this call include forward looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on management's Please refer to today's press release and other filings with the SEC for a more detailed discussion of the Factors that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.

Speaker 1

Also, discussions during the call will use some non GAAP financial measures as we describe business performance. The SEC filings as well as the earnings press release provide reconciliations of these non GAAP financial measures to the most directly comparable GAAP measures. And with that, it's my pleasure to turn the call over to Scott Ford, our Co Founder and Chief Executive Officer. Scott?

Speaker 2

Good afternoon, everyone, and thank you, Clay. It's good to be here with you all today. I'm pleased to be able to share a quick word on our Q1 operating results, Update you on the 2 most important areas of focus for our team in 2023 and share my views on our progress towards achieving The strategic goals we laid out when we went public last summer. As noted in the headline of our release, net sales for the Q1 Increased 10% year over year on a consolidated basis and 22% in our Beverage Solutions segment. The most significant contributors being 44% increase in our single serve cup volumes and the flow through of last year's coffee price rise.

Speaker 2

Clearly, We continue to work through scaling up the single serve and extract units as capacity constraints, new physical expansions And the resulting operating efficiency challenges impacted our EBITDA pull through in the Q1. Thankfully, these pressures are beginning to wane As we brought additional manufacturing single serve capacity online late in Q1 and we are turning on our new extract expansion in North Carolina over the next few weeks. Turning to our 2 key business priorities for 2023. First, our team remains Focused on successfully launching our new extract and ready to drink facility in Conway, Arkansas. I'm pleased we remain on track with this project With anticipated product launches beginning in the Q1 of 2024, rolling through a ramp up over the remainder of the year.

Speaker 2

In addition to the timely launch of the Conway facility, the second topic the team is constantly aware of is the available revenues, Cost and margins of our core coffee and tea business. So amidst the excitement of growth, new customer relationships, new product launches, We remain ever vigilant on our price points, costs, operating metrics, efficiencies and returns as this is a competitive commodity processing business. Our single serve scale up effort has been tremendously challenging due largely to equipment shortages, But we are now meeting those challenges as new machines are online and our in stock levels are now back at industry leading standards. The flavors, extracts and ingredients business continues to show itself as both a tremendous source of growth and as a powerful generator of leads for all of our product lines. And the Conway extract and RTD facility continues on pace with ever growing interest from an even broader customer base than we envisioned when we set out on this path.

Speaker 2

With that, I'll turn the call over to Chris, and then I'll give a quick wrap up, and he and I will be glad to answer your questions. Chris?

Speaker 3

Thanks, Scott, and good afternoon, everyone. I'll begin my remarks with an overview of our Q1 results, and then I'll provide an update on our 2023 outlook. As we stated from our very first earnings call, we measure our financial success based on adjusted EBITDA on both an absolute dollar basis And on our growth rate compared to prior periods and in the Q1 of 2023, our consolidated adjusted EBITDA was $8,500,000 A decrease of approximately $2,900,000 compared to the Q1 of 2022. There are 3 main factors driving these results. First, as mentioned on our last quarterly call, it has taken us longer and cost more in terms of equipment, labor and materials to absorb the 44% year over year growth in our single serve cut volumes.

Speaker 3

That said, our single serve Production received a major boost in the Q1 when we installed and commercialized new single serve cup machines in February March. With the addition of these machines, we have been able to improve our customer service levels and turn our focus to delivering the efficiency improvements That come from being able to optimize our single serve platform. While we do not expect immediate earnings growth from our single serve operations in the second quarter, We remain optimistic that we should be able to drive improved financial performance from this platform over the back half of the year. In addition to the single serve equipment installations in our Little Rock, Arkansas facility, at the beginning of the Q1, we transitioned our North Carolina facilities from the legacy And might I say antiquated ERP system onto the modern cloud based platform we utilize for all of our other WestRock Coffee operations. This brings our entire company onto a common ERP platform that we will leverage as we expand.

Speaker 3

As a result of the conversion, our Manufacturing operation was offline for approximately 2 weeks in early January. That downtime, coupled with a gradual ramp back up to full production, Negatively impacted our service levels for our roast and ground coffee in January February. The good news is that our ERP system, Along with the manufacturing operations tied to it in North Carolina are running now as they should. The net impact of the conversion downtime As well as the challenges scaling our single serve platform account for approximately $4,000,000 in missed gross profit in the quarter, which flows down dollar for dollar to adjusted EBITDA. Finally, our Sustainable Sourcing and Traceability segment or SS and T Experienced a 36% decline in net sales in the Q1 of 2022.

Speaker 3

As the disruption in global Supply chains brought about by the COVID pandemic normalizes and coffee roasters roast through their stockpiled buffer stocks, We are not surprised to see a reduction in sales volume as SS and P customers normalize their coffee inventory levels. We expect to continue to see this trend through at least the next With that in mind, let's walk through the financial results. Total company net sales for the Q1 increased 10% year over year to $205,400,000 Our sales growth was driven by the 44% increase in single serve cut volumes referenced earlier And increased pricing from the pass through of higher underlying green coffee prices during the quarter. This growth was partially offset by a 3% decrease in roast and ground coffee volumes And the 36% decrease in net sales in our SS and T segment. Gross profit, excluding the impact of mark to market adjustments, Decreased $4,200,000 to $33,100,000 due in part to higher material and production labor costs compared to the prior year quarter, The negative impacts of the production stoppage is part of the ERP conversion and our continued efforts to absorb the 44% growth in year over year single serve at volume.

Speaker 3

These impacts on our gross profit had a flow through effect on our consolidated adjusted EBITDA, which as mentioned above was $8,500,000 for the quarter. On a segment basis, our Beverage Solutions segment contributed $181,200,000 of net sales for the Q1 of 2023, which represents year over year growth of 22%. Adjusted EBITDA for the Q1 was $8,400,000 compared to $10,400,000 for the prior year first Turning to our SS and T segment. Sales, net of intersegment revenues, were $24,200,000 during the Q1 of 2023, a decrease of 36% compared to the Q1 of 2022. Adjusted EBITDA for Quarter was breakeven compared to approximately $1,000,000 for the prior year Q1.

Speaker 3

With respect to our capital expenditures, During the Q1, we deployed approximately $20,000,000 of CapEx, the majority of which was growth capital related to our Conway extract and RTD facility. These expenditures primarily consisted of infrastructure spending and equipment payments for our glass and can lines. In addition, we deployed $3,000,000 of growth CapEx tied to the continued single serve capacity expansion in our Little Rock, Arkansas facility. In the Q1 of 2023, we added new single serve machines, and we expect to add additional machines in the coming quarters, which should allow us to be able to capitalize on increased customer demand, while also improving the overall efficiency of our single serve cup operations. At the quarter end, we had approximately $144,000,000 of consolidated unrestricted cash and undrawn revolving credit commitments.

Speaker 3

Our consolidated net leverage ratio as of March 31 was 4.3x based on LTM adjusted EBITDA. We believe we have ample access to liquidity to achieve our near term growth targets and capital expenditure needs. Despite the headwinds we experienced in the Q1, we continue to expect adjusted EBITDA to grow between 10% 25% for the year, which translates to a range of $66,000,000 to $75,000,000 in adjusted EBITDA. This guidance represents our current expectations regarding the performance of the business. However, actual results may differ materially from these estimates.

Speaker 3

With that in mind, I'll hand the call back over to Scott for some closing comments.

Speaker 2

Thanks, Chris. In closing today, I'd like to offer a word on our strategic progress. As when we went public last year, our vision, Simply stated is to achieve the attractive economics available to a scaled player serving the largest and most complex Retail restaurant and CPG customers in the world of coffee and to do that in a way that fosters fair market pricing all the way through the supply chain To our farmer partners in 35 origin countries, I remain very excited about not only what we are building and the ultimate value it will create for all of us Collectively, but also about our meaningful progress along that journey at this point in time. With that, I'll hand the call back over to the operator for questions.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from the line of Ben Bienvenu from Stephens. Your line is now open.

Speaker 4

Hey, good afternoon. How are you all?

Speaker 5

Good, Ben. How are you doing?

Speaker 4

Good, fine. So I want to start on a comment that you made, Scott, just as it relates to bigger picture demand and the breadth of that demand being larger than you originally As you continue to make progress on scaling up Conway, can you talk about How demand continues to shape up in conversations with either existing or prospective customers?

Speaker 2

Yes, sure. We've given some general framework around percentages of the facility And we will do a full update. We're thinking at the end of the Q3 as we wrap Kind of the main contracts that are going to go into Conway that will be up and running in early 2024. But essentially, We're turning on a large glass line. It is sold out and we have a waiting list.

Speaker 2

We're turning on a large retort canning line and it is well over 50% sold out. We're turning on a multi serve bottle line and we're actually we have been running A line like it in Kohana and we are having to up the size of that line sevenfold to be able to make room for the demand that we've got coming in. We have demand for other product lines That are not in the Phase 12 that we're turning on in Conway and it's that is actually where we're spending a lot of our time with customers right now. Now that the first three lines are for the most part spoken for, what are the 4th and 5th lines we'll turn on, And we're literally negotiating contracts with people for those at this current point in time.

Speaker 4

Okay. That's great. Maybe with respect to kind of a continued situation where demand continues to exceed your ability to supply it And thinking about, in addition to the organic growth plans that you have, some of the M and A that you've done, I'd be curious to hear about Your continued appetite for M and A to help meet the demand that's coming or bring additional Capabilities to the organization. And then when you think about kind of interest rate Environments and perhaps a tighter banking system that we've seen develop over the course of the year year to date, How has that impacted how fertile the landscape is for M and A and potentially asking prices that you see out in the market?

Speaker 2

Well, Ben, that is one complicated question. So, let me unpack it this way. We are in the multi serve bottle, single serve ready to drink can and glass bottle. That is a very interesting industry structure right now. There are a number of really good players that are in that space.

Speaker 2

It wouldn't surprise me over time if there was some form of consolidation in it. But at this point in time, we are head down On and this is to the second part of your question, we are head down focused on making sure we deliver what we signed up to deliver. We are constantly aware as anybody would be of the current market, the banking climate, Where we are in terms of cushion that we've got available to us in terms of our own capitalization, How much our customers are asking us to bite off versus how much we can comfortably bite off with the capital structure that we've got. And we're going back and forth through that with our Board, with our key shareholder partners that are on the Board and also with our customers Because what's really clear is there is a service and a set of products that we are maybe not uniquely, but we are certainly distinctly Qualified to provide that the major CPG retail brands in the country are looking to buy A lot more of than they can get their hands on today and we want to be the first and last call that they make to meet those needs.

Speaker 2

How that plays through the industry over time is beyond my pay grade on today's Q1 call, But you're asking the right questions. And if I look at the history of this team, we will probably be a player In that space at the right time, but right now the time is to make sure we execute and deliver against what our customers are lined up for.

Speaker 4

Okay, very good. And one more if I could quickly on the shorter term just for this year's guidance, Good to see that reiterated. I know it's a milestone on the way to continued ramp in EBITDA as we move forward. I want to ask about the $4,000,000 impact to net profit in the quarter. Was that contemplated in the prior guidance range?

Speaker 4

And if not, is there something about the remainder of the year that makes you more optimistic such that you maintain your guidance for 2023?

Speaker 2

Yes. And Chris will actually take you through the guidance, but let me own something here broadly. So Chris talked about the fact that our roasting ground operations in North Carolina were down for 2 weeks. We did not plan on that. That was not in our guidance.

Speaker 2

That was a few $1,000,000 of the miss in the overall grand scheme of things. And the only person responsible for that is me. We had a series of mock conversions that were perfect all through the fall. We had every anticipation we would be able to do that Change the conversion in 3 to 4 days. We had 2 customers who had an emergency That needed supplies that they couldn't get from another vendor and I made the decision to front run the conversion And I made a mistake in doing that and I cost us the downtime, I cost us the EBITDA from the missed sales And the cleanup and it's not the IT department's fault.

Speaker 2

It wasn't the accounting department's fault. It wasn't the operations team's fault. It was mine. And so that's the majority of the miss. The good news, as Chris said, that is behind us.

Speaker 2

The team did a miraculous job of digging out of that. That system is up and running and puts us in a place to go forward rapidly with all of the issues that are attendant to the First question you asked over the next couple of years and we really ran out of time to be able to do it other than in that window And I botched it and I'm old enough and had been through 20 of these and should have known better and I missed it. Now Chris, if you want to take it from there About what that means for 2023, feel free.

Speaker 3

Yes. So I mean, so obviously that's not something we contemplated whenever we provided our original guidance. But the reality is that the guidance is more art than science. And so we've got a lot of really good things That are in the pipeline and a lot of really good things that we're working on. So as we sit here today, like I said, we weren't expecting that Beginning of the year, but in terms of what does that mean over the rest of the year, there's a lot to play for as we continue on And we're excited about the position we have.

Speaker 3

We think there's a lot of good opportunity to execute on and we'll be in a good spot at the end of the year.

Speaker 4

Yes. Okay, understood. Thanks for taking my questions. And Scott, your contrition is admirable.

Speaker 2

Well, it's also true. So it has that. Thanks, Dave.

Operator

Thanks. Thanks, guys. Thank you. Please stand by for our next question. Our next question comes from the line of Matt Smith of Stifel.

Operator

Your line is now open. Hi, good afternoon.

Speaker 2

Good afternoon. Good afternoon.

Speaker 6

I had a question about the supply chain inefficiencies and specifically around the Bringing the K Cup volume up, I think it was up 44% in the quarter. But it sounds like those higher supply chain costs We'll continue into the Q2 even though you've got some new equipment up and running. So can you talk about what's still weighing on the profitability in that business And what gets better in the second half to allow that incredible sales volume growth to flow through to the profit line?

Speaker 2

Right. Great question. Let me just back up one quick second. We had a very large single serve manufacturing machine that was due in last October When we agreed to take on the lift in volume, that machine did not come in until February. What we did was We put together other machines to stand in the gap, but no matter what else we could throw at it when we were left without the delivery, we were behind.

Speaker 2

And when you get behind, 2 things happen. Your volume drops, obviously, relative to the orders that are coming in. You get penalized and paid fees for missing delivery at volume levels. You then have to throw overtime, You run machines up against breakdown, you don't get to do maintenance, your efficiencies drop, your waste increases And now your output on a dollar of input, whether that be labor, material, machine time, whatever, all of that suffers. That did not relieve until the very end of Q1 when the new machines were finally in installed and started to catch up.

Speaker 2

We have already caught up on the volume. We are already back at 98%, 99% in stocks with all of our customers. The expensive fees for volume misses have stopped and our efficiencies are starting to turn as we get to go through And take each machine apart, rebuild it, do proper maintenance on it. And we're seeing lifts 50% 100% in the efficiency of the individual machine, now that we're able to finally take it offline, rebuild it and properly tool it. So this is one of those things where you only get this kind of uptick in volume a few times in your career.

Speaker 2

And then when you get shorted the equipment that you built the model on, there is nothing to do except throw bodies at it and effort at it And it was a mess, but as Chris said, with that machine coming in and frankly 2 others that we were able to get alongside it, With those machines and we've been able to catch up on our numbers and with our numbers now we can take machines offline and with machines offline we're starting to run our efficiencies back down And we've run these machines at a P and L level on a per cup basis, much better than we're running them now in the past. And I have every expectation we'll get back to that now that we can take them offline in service.

Speaker 6

Okay. Thank you for that. And Because you maintained fairly high service levels and on shelf, have you been able to hold on to all of the contract volume that was initially One for that business?

Speaker 2

We have not been able to hang on to all of it, but I think all of it is back in play. And I would expect that over the next year, we will have all of that and more back given the current set of circumstances.

Speaker 6

Okay. And just one more for me. It sounded like the $4,000,000 in disruption costs was a flow through to gross profit as well. So if we look at gross margin and we adjust for those costs, there was some nice expansion sequentially. Could you talk about the benefits Gross margin relative to the Q4 again if we add back in that disruption cost?

Speaker 3

Yes. I think what you're seeing is you're seeing growth in our higher margin products. You're seeing continued if you look at the mix shift of The company and the mix shift of the sales that we have, you're seeing continued growth in single serve and you're seeing continued growth in our flavors, extracts and ingredients, which is The higher margin business that we do. And so the whole thesis of going public was that we're going to see over a period of time, You'll continue to see the mix shift from hot black coffee in a bag or in a frac pack to single serve cups Into the cold flavors, extracts and ingredients products that we have in the highest part of our margin. And so that margin lift that you're seeing is just that playing itself out.

Speaker 6

Okay. Thanks for that. I'll pass it

Operator

on. Thank you. Please stand by for our next question. Our next question comes from the line of Joseph Feldman of the Telsey Advisory Group. Your line is now open.

Speaker 5

Great. Hey guys, thanks for taking the question. I wanted to ask About the new Conway facility and the demand seems like it's through the roof. I guess the question I have is, what gives you confidence, A, you'll get it open on time and up and running quickly? And B, how do you even prioritize the customer volume and when do you start to think about the next It sounds like you could already have another one of these things if you could.

Speaker 2

Hey, Joe. Thanks for the question. Well, you can't assume anything, right? If you look at the discussion we just had on machines in the single serve Plant, you can imagine how paranoid we are about machines and delivery of being on time in Conway. And the financial proposition That the largest shareholders that came into the business when we went public, basically underwrote is The functioning properly in a proper timeframe of the Conway facility.

Speaker 2

So we have a completely dedicated crew. We have probably added 20 people that have done these jobs before from plant managers to engineering staff To senior engineers that have built and run plants like this, to product development people, to quality control people who came out of Plants that make these very products and they are separated out and held in a separate team in operations. There's a project management team That is run by a former military guy where no meeting goes past 1 minute overtime and everything gets done. And We are actually sending people to every vendor to physically walk the lines with our suppliers To make sure that we are seeing the wiring cables, the harnesses, the steel is cut, etcetera, etcetera. So I can't guarantee it, but we are doing everything Corporately possible to ensure that it gets installed on time and on budget.

Speaker 2

And frankly, there are always a handful of issues, But I am very pleased with how that team is delivering. Frankly, we have our weekly executive update, and it Just coincidentally was right before this call and I am amazed at how well that entire functioning group Is delivering that project. As it turns to what we would do after that, We don't have the balance sheet to do what would come after that as we sit here today. And so we either have Answer the question, do we want to say yes and do something about that? Or we better to let that slide 2 or 3 years and answer that question then?

Speaker 2

And that's really something that's up to our Board and something that they review just like they would any other kind of strategic move along the way.

Speaker 5

Got it. No, that's very helpful. Thank you. And then, I guess one other question maybe more Chris, I apologize if I missed it when you talked about the year a little bit, but can you give a little more flavor for the top line? I appreciate the EBITDA Commentary you gave, but maybe on in terms of overall sales or any of the puts and takes we should think about for the rest of the year?

Speaker 3

Well, I think it's we didn't give sales guidance this year because we focus on EBITDA. We talked about that at End of our when we issued our original guidance. But I mean sales have come in quite frankly As we've expected, if you look at sort of customer demand across the different products that we have, we expect to continue to see growth year over year in terms of sales And more growth coming through single serve and flavors, extracts and ingredients as you continue to see those products continue to take a higher percentage of The overall sales that we have within the business.

Speaker 5

Got it. Got it. That's great. Well, thanks guys. I'll turn it over to the next person.

Speaker 5

Thank you.

Speaker 6

Thank you.

Operator

Thank you. At this time, I'm seeing no more questions. So I'd like to hand it off to Scott Ford, CEO for closing remarks.

Speaker 2

Well, I appreciate the depth of Work that the guys that get on the phone and ask us questions and go through this, I appreciate what you guys do in your models, one thing, But also in terms of what you're doing trying to understand the business, we are a business that is changing rapidly. We're also fairly small. Nobody is going to lay up tonight except us and worry about all the ins and outs of our small little details here. But we appreciate the fact that you take Time to do the work, to provide coverage. When we were at this stage in Alltel, I had one analyst that would give us the time of day, one.

Speaker 2

And we've gotten 3 here that have asked us great questions and show that they're paying attention and doing the work. And so we just want to say thank you.

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