Westrock Coffee Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 12, 2024

There are 8 speakers on the call.

Operator

Thank you for standing by, and welcome to WestRock Coffee Company's 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer I would now like to hand the call over to Melissa Calangruccio, Investor Relations. Please go ahead.

Speaker 1

Thank you, and welcome to WestRock Coffee Company's 4th quarter 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 Q4 earnings release issued earlier today. This information is available on the Investor Relations section of the 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 current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements.

Speaker 1

Please refer to today's press release and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today. 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 is my pleasure to turn the call over to Scott Ford, our Co Founder and Chief Executive Officer.

Speaker 2

Thank you, Melissa, and good afternoon, everyone. Thank you for joining us today. The year 2023 was a significant transition year for WestRock. When we entered last year, we knew it was going to be a long year of system upgrades and equipment installations. And as we explained on our quarterly calls throughout the year, the impact of these upgrades on our business were material and sometimes painful even if wholly necessary.

Speaker 2

We now enter 2024 on the backside of a number of important system migrations, capital equipment upgrades and with the new extract and ready to drink facility in Conway, Arkansas on schedule for delivery of our first commercially available products next month. After enduring the expenses brought about by these significant upgrades and improvements, we now enter the year 2024 with the infrastructure in place to scale this business multiple fold and with our current adjusted EBITDA run rate already 30% to 40 percent above our year end results for 2023. This is due to the unrelenting and unwavering work by the entire WestRock team, our vendor partners and our customers. My heartfelt gratitude extends to each and every one of them. As we turn to 24, I'll remind you that we announced our 2024 annual adjusted EBITDA forecast in connection with our Select Milk joint venture and convertible note offering announcements last month.

Speaker 2

Today, we're pleased to reiterate that our guidance for our expected adjusted EBITDA for the year 2024 should be up somewhere between 30% 75% for the year. We have recently enjoyed several new contract wins on each of our platforms from roast and ground coffee and tea to single serve cups to extracts and to ready to drink finished goods. And while the impact of most of these new wins is slated to come online in the back half of the year, some are already starting to make modest contributions to our profitability even now. I'd like to thank everyone who has supported us through the long 2 year process of modernizing and expanding our incumbent facilities as well as constructing the new extract and RTD facility in Conway. It's required tremendous effort, persistence and patience on everyone's part and it is a delight to be able to walk through these plans today and see the new commercial realities of these investments coming to life.

Speaker 2

We chose to bear the pain of fully modernizing all parts of our business in 2023, so that when the new Conway facility was launched, those challenges would be seen in our rearview mirror and not in our face. It was an extremely difficult year because of this. There's no doubt about that. But we are now thrilled that these challenges are behind us and then we are extremely excited for 2024. And with that, I'll turn the call over to Chris Pledger, our CFO, for a review

Speaker 3

of our financial results. Thanks, Scott, and good afternoon, everyone. When we took the company public in August of 2022, we did so to reposition the company to capture the consumer shift to single serve coffee and cold coffee products. Our financial performance both in the 4th quarter and in our full year 2023 results continues to reflect this shift by the consumer and our work to capture it. In terms of our financial performance, company net sales for the Q4 of 2023 were $215,000,000 compared to $227,700,000 for the Q4 of 2022.

Speaker 3

Consolidated gross profit for the Q4 of 2023 were $34,800,000 and included $900,000 of non cash mark to market losses compared to $34,300,000 for the Q4 of 2022 that included $2,700,000 of non cash mark to market losses. This drove consolidated adjusted EBITDA of $13,700,000 for the Q4 of 2023 compared to $17,500,000 for the Q4 of 2022. The delta between these two numbers is almost entirely the result of a one time compensation accrual reversal in the Q4 of 2022 that was not repeated in 2023. Adjusting for the accrual reversal, consolidated adjusted EBITDA would have been essentially flat quarter over quarter. In our Beverage Solutions segment in the 4th quarter, we continue to see strength in our single serve cup platform as well as our sales of flavors, extracts and ingredients, which grew 30%.

Speaker 3

This was partially offset by continued softness in our traditional roasting ground coffee business. In the Q4 of 2023, our Beverage Solutions segment contributed $175,100,000 of net sales, which is a decrease of approximately 9% compared to the Q4 of 2022. Beverage Solutions gross profit was $31,000,000 for the quarter, down 4% compared to the Q4 of 2022. Adjusted EBITDA from our Beverage Solutions segment for the quarter was $11,700,000 compared to $15,200,000 for the prior year Q4. This decline as previously stated was almost entirely the result of a one time compensation accrual reversal in the Q4 of 2022 that was not repeated in Q4 2023.

Speaker 3

In our Sustainable Sourcing and Traceability segment, we started to see a return to more normal operating results as sales net of intersegment revenues were $39,800,000 during the Q4 of 2023, an increase of 13% compared to the Q4 of 2022. Adjusted EBITDA from our SS and T segment for the quarter was $2,100,000 which is $200,000 less than the prior year Q4. Turning to our annual results. For the full year 2023, total company net sales were 800 and $64,700,000 which is essentially flat compared to the full year 2022. Consolidated gross profit for full year 2023 was $139,900,000 and included $100,000 of non cash mark to market gains.

Speaker 3

By comparison, consolidated gross profit for the full year 2022 was 152,800,000 dollars and included $3,500,000 of non cash mark to market losses. Consolidated adjusted EBITDA in 2023 was $45,100,000 compared to $60,100,000 for the prior year. For 2023, our Beverage Solutions segment contributed $722,900,000 of net sales, which is an increase of approximately 5% compared to the prior year. Adjusted EBITDA for our Beverage Solutions segment was $41,600,000 compared to $54,000,000 for the full year 2022. In 2023, our SS and T segment contributed sales net of intersegment revenues of $141,800,000 representing a 22% decrease compared to 2022.

Speaker 3

Adjusted EBITDA from our SS and T segment for the year was $3,500,000 compared to $6,100,000 for the prior year. Moving on to our capital expenditures. During the Q4, we deployed approximately $43,000,000 of CapEx primarily related to our Conway extract and RTD facility. With respect to Conway, we now expect our total CapEx spend to settle around $315,000,000 and as we ended 2023, we had already spent approximately $155,000,000 of that amount. Our largest outlays of capital expenditures on the facility will take place over the next 6 months and then we'll start to see that spending step down in the back half of this year.

Speaker 3

At quarter end, we had approximately $147,000,000 of consolidated unrestricted cash and undrawn revolving credit commitments. Our consolidated net leverage ratio at December 31, 2023 was 4.4 times based on 4th quarter annualized adjusted EBITDA. As previously disclosed, we recently issued $72,000,000 of convertible notes, which mature in February of 2029. The notes combined with covenant flexibility included as part of our recent credit agreement amendment will allow us to fund the Conway facility expansion and our investment in the Select Milk joint venture. We believe that these are key investments that position WestRock to capitalize on the expanding customer demand for RTD products.

Speaker 3

Turning to our outlook for 2024. As noted in our business update in February, we expect consolidated adjusted EBITDA to between $60,000,000 $80,000,000 for fiscal 2024. This guidance range is necessarily broad to account for the range of results we may experience as we begin operations in our new extract and RTD facility and the commercialization of customers in that facility. As we exit 2023, we do so with strength in the areas we expect to drive growth in future years, single serve cups and flavors, extracts and ingredients and a new approach to pricing in our traditional roasting ground business, which we expect to drive results in 2024. We are also turning the page on an ERP conversion and new and single serve scale up that pressured our 2023 results in the first half of the year.

Speaker 3

The business is off to a solid start in 2024 and we're pleased with our performance thus far in the Q1 with our adjusted EBITDA results coming in line with our expectations. Given the wide range of adjusted EBITDA guidance for the year, which is largely determined by the ramp and commercialization of our Conway facility, we'll continue to update you on the progress and how it may impact our outlook for the year. With that, I'll turn the call back over to the operator for questions.

Operator

Thank Our first question comes from the line of Todd Brooks of The Benchmark Company. Your question please, Todd.

Speaker 4

Hey, thanks for taking my question and good to talk to you all. A couple of questions about Conway. In the release and Scott you talked to this, you detailed both plural customers and plural product commercialization that will hit in April. If I'm remembering correctly, that's actually a month or 2 ahead of schedule for what we had been talking about. So kudos on that.

Speaker 4

But are there any details you can tell us about these initial commercializations and any early looks into how, no pun intended fluidly the customer acceptance program is going with the new facility?

Speaker 2

Sure. Hey, Todd. So the good news is we are ahead of schedule on every one of the line installation projects. We also have good news and that we have a number of customers that are in commercialization in the commercialization process now. There are windows across.

Speaker 2

So when we talk about the various product packaging format, glass bottle, can or multi serve bottle, the cold room. We have commercialization projects going on, on all three of them. There's a sequential start up. The multi serve bottle is coming on 1st, the can is coming on 2nd, the glass line is coming on 3rd, and we are about 2 months ahead of schedule on every one of those physical installs, which allows us I don't know that it's going to get any more product in through the pipeline in the year 2024, but it allows us the opportunity to maybe be able to do that. And if we stay on this schedule and everybody commercializes in their window and stays on time and wants us to ramp it up faster, we could be at the high end of our range.

Speaker 2

If everybody kind of goes about normal pace, we ought to be at the middle part of our range. That's how we built the EBITDA forecast for this next year.

Speaker 4

Okay, that's helpful. And any detail, I know you said multi serve first, any detail on the type of customers that we should be watching for and when that April delivery turns into product on the shelf?

Speaker 2

So that should turn into product on the shelf in early summer as they hit large retailer resets. I don't want to go into who it is, but obviously these are large leading brands in the coffee space that are rolling ready to drink out in various form factors, and this is some of them that we're doing for them.

Speaker 4

Them. Okay, great. And then my final question, I'll jump back in queue. You talked about the pace of commercialization defining where you fall in the $60,000,000 to $80,000,000 guidance range. I want to strip out FE and I though and talk about both single serve, which there was a tough first half with the equipment delays last year.

Speaker 4

And then Roast and Ground, where we've really kind of seen a little bit of a collapse in customer demand here in the second half of this year. Within that $60,000,000 to $80,000,000 guidance, there'll be variability around FE and I commercialization. But what are the thoughts and variability around contributions that you're expecting from single serve and roasting prep? Thanks.

Speaker 2

Do you want to take that?

Speaker 4

Sure. Yes.

Speaker 3

No, I think I know what I would

Speaker 2

say, but yours would be

Speaker 3

smarter. No, no, no, no. I think this is Chris. In terms of how we built our outlook for 2024, we looked at what was the run rate of the business as we got to the back half of the year. And then

Speaker 2

we look at what are

Speaker 3

the customer wins that we have that are coming online in 2020 4. And so that's what helped really inform the bottom part of our range. And so we feel good about the run rate as Scott talked about in his comments as we exit 2023. We feel good about kind of based on the base business being able to get to the bottom end of our range. And then what we do after that is really Conway dependent.

Speaker 4

Okay, great. Thanks, Chris.

Speaker 2

Much smarter answer.

Operator

Thank you. Our next question comes from the line of Ben Bienvenu of Stephens Inc. Your question please, Ben.

Speaker 5

Hey, good afternoon. I want to ask as it relates to the ramping of the Conway facility and recognizing the inherent variability in how your customers choose to commercialize. To what degree can you shepherd that onboarding such that you don't end up with a rush of volume and more concentrated windows kind of increasing the risk of ramping smoothly versus helping to gate the process to scale up as ratably as you're able and what I recognize is a significant ramp up.

Speaker 2

Yes, it's a super question and it's obviously one that reflects you've been through this before. What we are doing to try to mitigate the rush for the door is we are actually committing to production based on when people come in for commercialization. And so we have kind of forced, right, if you really want it in X timeframe, you've got to come to commercialization now. And for our let me call them our anchor tenants, they have their own process that's all part of the contract of their anchor tenant relationship with us. But when we start talking about the dozen others that are trying to come through the door right now on the commercialization, we actually are lining that up with production.

Speaker 2

And if they come, then they get production in their window. If they need to wait and delay, then their production window slides out too. And that's been a great clarifier of the importance of hitting your window when it's available for the commercialization side for the brands, all of them, they're like us. Nobody wants to spend any money until you have to, and nobody wants to do anything until you have to. But if you do want to hit a reset window with your retail customers, then you've got to have production.

Speaker 2

And if you're going to have production, you've got to be in your commercialization window. And that was the only way we could kind of bring some ramp up walk through that people could actually do to what would otherwise be a very chaotic rush for the door as you clearly understand. So that's what we're doing. Whether that works exactly right or not, we don't know, which is why we've offered the guidance that says, we know what the base business is capable of doing. We don't quite know how that will all flow through.

Speaker 2

We're going to give you some guesses and a range around it. And as Chris laid out very smartly, I think that captures the same story.

Speaker 5

Yes. Okay. Thanks, Scott. Chris, as we think about margins through the year, recognizing mix and utilization will be a really important factor. Should we think of the range of outcomes for margins being such that if the ramp happens faster, could there be margin pressure actually?

Speaker 5

Is there fixed cost deleveraging for us to consider? Or are you adding equipment as the commercialization happens and you have what is a shell today? Help us think in our mind's eye what that process looks like and what the implications for margins are.

Speaker 3

As we in terms of Conway, I mean, we have the expense turning on in sequence with the ramp. And so I don't expect the ramp of Conway really to create margin compression as you take on the fixed cost. I feel good about how that's going to kind of sequence itself out. In terms of kind of product mix and margin improvement, I think you're going to continue to see growth in our single serve, which is the higher margin part of our business. You're going to continue to see FE and I growth in kind of our base business with extracts.

Speaker 3

I think there were 30% up in the Q4. And then we start layering on the products for Conway that come on in we start selling them in April and the volumes really start to ramp in the back half of the year, you're going to continue to see growth from that.

Speaker 5

Okay, great. Thanks so much.

Speaker 6

Yes.

Operator

Thank you. Our next question comes from the line of Matt Smith of Stifel. Your question please, Matt.

Speaker 7

Hi, good afternoon. Wanted to ask when we consider cash flow in 2025, you talked about Conway being about a $355,000,000 capital investment that implies $200,000,000 or so to go. Should we think of that being spent in the first half and then a moderating level of spend in the second half? And preproduction costs were about $5,000,000 in the 4th quarter. Should that continue at a similar level in the first half?

Speaker 7

Or does that step down as commercially salable product production begins in April?

Speaker 3

Well, I think in terms just to make sure we're talking about the same numbers. From the Conway CapEx spend, we expect that to be 315 dollars and through the end of the year, we spent $155,000,000 Is that are we on the same page there?

Speaker 7

I had the numbers wrong there. I appreciate the clarification.

Speaker 3

Yes. From a cash flow free cash flow perspective, I mean, we've got the as we talked about on the call, I think the highest spend months for the or spend quarters for the project for the Q1 and Q2 of this year. And we'll start to see that step down in the back part of next year. And then we expect to start generating free cash flow in the second, probably Q3 of next year as you turn that spend off.

Speaker 7

Thank you. And the preproduction costs, should those continue to persist through the first half of this year? Or now that you're producing salable product beginning in April, do those start to tail off?

Speaker 3

They start to they should start to tail off. Right now,

Speaker 2

it's the preproduction in Conway itself is going to the balance sheet. Absolutely. And that was released on a pro rata basis over the next 2 years as the volume fills, which was the comment Chris was making about the margins into either I think it was to Ben's question a minute ago. Correct.

Speaker 7

Okay. Thank you for that clarification. And just one more, you talked about a new approach in pricing in the roast and ground business. Can you talk about that a little more? I know previously pricing was more of a pass through as you locked in green coffee costs for your customers.

Speaker 7

It sounds like that may be changing.

Speaker 2

It's actually not the structure of the contract, which I would say is what you're referring to there. We're not changing the structure of the contract. What we've been doing as part of the modernization of the roast and ground coffee business, and these are the plants that are in North Carolina that we acquired a few years ago. We are in the middle of a massive well, we have just finished a massive systems rebuild and the systems rebuild has allowed us to get to a level of cost transparency by machine, by operator, by shift that was not available previously. So that kind of data system installation, which has been unbelievably burdensome to the operations, the current financial operations of 2023 suffered because we had to slow down, drag out, rebuild, turn lines off, get this automation in.

Speaker 2

Well, as we've had it running now for about the last 5 or 6 months, our ability to clearly see exactly where our costs are, not on an average basis, not on an average basis across products, not on an average basis across lines or an average basis across customers, but specifically to the detail of the very SKU running on that line with that operator and that shift. And when we are able to do that, we are able to better price, sometimes we are able to give lower prices to our customers, lower conversion through the contract formula that you talked about. And sometimes we require higher because we realize that's actually a pinch point in the market where we need to charge more just given the demand in that specific SKU and that specific slot. And so that ability to get really honed in on our cost has allowed us to go customer by customer, SKU by SKU and rationalize the price to the right point, higher or lower. And that's the methodology that Chris is talking about and it's all brought about.

Speaker 2

It is worth several large wins to us already in 2024 that are coming our way. And those large wins help fill a high fixed cost throughput based set of facilities. And that all hinge from the decisions we made to if we're going to have a bad year in 2023, have a bad year in 2023 and do all the work so that when you turn on Conway in 20 24 and 20 25, you catch everybody asleep at how powerful the earnings can be off of this business. That's our whole strategy over the next 2 years.

Speaker 7

Thank you, Scott. I'll leave you there and pass it on.

Operator

Thank you. Our next question comes from the line of Sarang Bora of Telsey Group. Please go ahead Sarang.

Speaker 6

Great. Thank you. I'll just ask a question on Conway as well. When you look at the picture, it's great to see the facility opening in April. It is a 3 year progress for you on the production side.

Speaker 6

So when you look at the facility and your plans for how you plan to open different production lines, can you help us understand a little differently saying how much of the plant will be operating in 2024? Will you be like about 70% running on Conway by like 25% and then the other 30% opens in like fully operational by end of 2026? I'm just trying to see like how the production ramps up over a 3 year period from Conway?

Speaker 2

Yes, terrific question, one that we spend a lot of time on ourselves. Let me attempt to answer it this way. This might be this might I hope this is helpful and pleasure you can clean this up if I get it wrong. And Blake, you can go file an 8 ks if I step too far over the phone. What the best way to understand Conley is that it is a 2 year onboarding, but whatever you can get onboarded in 2024 essentially becomes full run rate in 2025.

Speaker 2

So we are better to commercialize this goes back to the question that Ben asked a minute ago. We are better to commercialize more customers in 2024 and slow production to just meeting our contractual commitments in 2024 so that we get everybody lined up to run-in full in 2025. And so if you go through the way that Chris laid out the way we built our forecast, if Conway comes in at the low end of Conway in 2024 because we commercialize more and we get everybody ready to run-in late, late, late 2024 2025. Well, instead of picking up $10,000,000 or $20,000,000 of EBITDA, you can pick up $50,000,000 to $70,000,000 of EBITDA from the customers that are already in the door and all we have to do is sit there and run the machines. And when you put that on top of the core business that Chris talked about at 60, you can see why people when they look at you, while this business could generate, if we can just commercialize in 'twenty four, this business can generate $125,000,000 of EBITDA in 'twenty five if we don't make a single additional sale.

Speaker 2

The power that has been built up in the last 2 years while we suffered and spent the money to take lines offline, to get them automated and to get the MIS system built in is really much more powerful than anything I've read about. But we'll just have to deliver that and that's just life.

Speaker 6

Well, that's very helpful. I'll ask you about one more big initiative that you announced this quarter about the JV with select milk producer. Can you help us walk through like how this JV will work? And I know you do the concentrate, they do the milk, but then how the revenues kind of flow through your P and L? And just help us a little bit more about the rationale of this JV and some of the operating things in this JV?

Speaker 6

Thank you.

Speaker 2

Yes, sure. It's a fifty-fifty JV. We're each going to put money up to capitalize it. The JV itself will then go borrow money to finish out the equipment and then that equipment will be put into a facility that Select is building and we will become a lease tenant of the Select facility, if you will. The way that we will, for the most part, book revenues through is through the sale of extracts because that's the largest use product that we deliver out of this.

Speaker 2

And then there will be a conversion profit that will come out through the fifty-fifty JV, if you will. So you will see the extract sales come out of our flavors, extracts and ingredients division. And then you will also see in that same division, the pickup of our 50% interest in whatever the residual profitability is of the conversion work. And you'll see that come in at and above the EBITDA line. It's a very powerful earnings adder that we're saving up for everybody in 2026.

Speaker 6

That's great. Thank you. Good luck.

Speaker 2

Thank you.

Operator

Thank you. I would now like to turn the call back to Scott Ford for closing remarks. Sir?

Speaker 2

Thank you very much. We appreciate it, operator. And gentlemen, thank you for getting on with your questions. Thank you for your interest. We are super excited and I'd just say that we were talking before the call started.

Speaker 2

There's not really any news in the release we put out because we told everybody this essentially exactly where we were 2, 3 weeks ago. The news is, we are off to a great start in 2024 and the plans that we have for 2024 through the commercialization and then monetizing some of that should give us a really good year and it's setting 25 up to be absolutely fantastic. And we've got to walk the walk, but we are months ahead of schedule on the physical side. Our customers are starting to match with us on the commercialization and product development work, and we are super excited about getting that plant on. Meanwhile, back in the core business, we have been we've spent an enormous amount of time and energy and money through lost EBITDA from taking things down and actually suffering through the windows of turning MIS systems up in the old business, all of that's going to come back on is coming back on now and we're seeing it in our results now and we're excited about it.

Speaker 2

And if people want to get on board with us, great. And if they want to bet against us and say, let's see you do it, let's do that too. I just I love it. So thanks for tuning in. See you all later.

Operator

And this concludes today's conference call. Thank you for participating. You may now disconnect.

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