Westrock Coffee Company, LLC (NASDAQ:WEST) Q4 2022 Earnings Call Transcript

Westrock Coffee Company, LLC (NASDAQ:WEST) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Hello. And welcome to the Westrock Coffee Company’s Fourth Quarter 2022 Earnings Conference Call. My name is Valerie. I will be your conference coordinator today. Following prepared remarks, we will open the call for your questions with instructions to be given at that time. I will now hand the call over to Clay Crumbliss of ICR. Please begin.

Clay Crumbliss: Thank you. And welcome to Westrock Coffee Company’s fourth quarter 2022 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. By now, everyone should have access to the company’s fourth quarter 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 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.

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’s my pleasure to turn the call over to Scott Ford, our Co-Founder and Chief Executive Officer.

Scott Ford: Good afternoon, everyone, and thank you, Clay. I am delighted to be here with you as we report our fourth quarter and full year 2022 financial results. As noted in the headlines of our release, our year-over-year adjusted EBITDA growth was 23% for the fourth quarter and 27% for fiscal year 2022. These are fabulous results and I am grateful to the entire Westrock Coffee team who worked tirelessly all year to deliver. Ask anyone on the team and they can tell you 2022 was a year of unbelievable accomplishment amidst staggering challenges. We became a public company during a very difficult time for the public equity markets and have been one of the best performing new issues of 2022. This transaction allowed us to delever our balance sheet and provided us access to enough capital to build out not only the first, but also the second phase of our new Conway, Arkansas extract and ready-to-drink facility.

With well over half of the capacity of this combined facility already under sales contracts with leading RTD coffee brands, we are excited to be positioned to enter a completely new era of EBITDA creation over the next two years to three years. And while we plan for the future, we operate in the here and now. In 2022, we encountered significant number of operational level challenges. We began 2022 with the onset of the Omicron COVID variant which delayed an expected economic recovery and then faced a surge of inflation and gasoline price hikes through the summer, all of which negatively impacted our business. Our year ended with the late arrival of significant production equipment for our single-serve and extract units, which created customer delivery issues and negatively impacted our cost and margins.

Our team had to fight for every inch of progress in every season of what could have otherwise been a fairly impressive and reasonably easy year. Yet through all the good and the bad of 2022, our team worked tirelessly to deliver record adjusted EBITDA up 20%, while also making significant advances on integrating and improving our internal operations, sales and support functions. These advances, coupled with the recent arrival in on-boarding of our long-delayed manufacturing equipment have set us up for another record year in 2023, even as we continued to spend as needed to build the scaled platform necessary to monetize the value of our new Conway extracts and RTD plant, which when fully online is set to expand our EBITDA, not by percentage factors, but quite possibly by multiples.

Before I turn the call over to Chris Pledger, our CFO, let me say a word about two acquisitions we made over the past few months. In November, we closed on the acquisition of Kohana Coffee, an extract in RTD business in Richmond, California. This acquisition was important for us and that it allowed us to add several new customers on our beverage solutions platform, and more importantly, it allowed us to accelerate the development, production and distribution of RTD products in cans and multi-serve bottles for key existing customers. Similarly the acquisition of Bixby Roasting in February allowed us to expand our growing influencer-led sales channel and add two outstanding sales executives to our team. Miles Fisher and Remington Hotchkis are going to be impact players for Westrock Coffee overtime.

These kind of incremental gains expand our platform and help drive growth as we build for our future. They are exactly the kind of acquisition opportunities we remain focused on today. With that, I will turn the call over to Chris who will walk you through our recent financial performance.

Chris Pledger: Thanks, Scott, and good afternoon, everyone. I will begin my remarks with an overview of our fourth quarter and our full year 2022 results and then I will provide some commentary on our outlook for 2023. Total company net sales for the fourth quarter increased 20% year-over-year to $227.7 million, while gross profit excluding the impact of mark-to-market adjustments decreased $1 million to $37 million. Our sales growth was driven by 57% increase in single-serve cut volumes and increased pricing from the pass-through of higher underlying green coffee prices for the quarter. This growth was partially offset by a 6% decrease in roast and ground coffee volumes. The year-over-year decrease in gross profit was driven by higher material and production labor costs due to inflation, in-period and out-of-period inventory adjustments and our continued efforts to absorb the 57% growth year-over-year in single-serve cut volumes.

Despite these headwinds, our consolidated adjusted EBITDA for the fourth quarter was $17.5 million, an increase of approximately 23% compared to the fourth quarter of 2021, driven by reductions in SG&A, primarily related to personnel cost savings. For the full year 2022, net sales were $867.9 million, while gross profit excluding the impact of mark-to-market adjustments was $156.3 million, an increase of 10% compared to full year 2021. Consolidated adjusted EBITDA for 2022 grew 27% to $60.1 million coming in at the low end of our guided range. As we outlined in our third quarter call, our 2022 financial results were impacted by three main factors. First, the Omicron COVID variant in the first quarter followed by rapidly rising inflation through the middle part of the year had a significant negative impact on U.S. consumer spending.

This impacted our business in the form of lower product sales and our away-from-home channels, particularly in restaurants and convenient stores, and inflation impacted labor cost freight and material costs across all of our products. Second, it took longer and cost more in terms of equipment, labor and materials to absorb the 50% year-over-year growth in our single-serve cup orders. As Scott mentioned, we have put additional manufacturing equipment into service in the first quarter of 2023, which is leveling out these service issues and we have additional equipment coming online in the second quarter, which will free up additional capacity. As we continued to grow our single-serve platform, we feel very good about our ability to more efficiently monetize these increased product volumes.

Finally, our team has performed really well in 2022, staying disciplined and focusing on the levers we have to pull in order to respond to these significant macroeconomic and operational challenges. On a segment basis, our beverage solutions segment contributed $192.6 million in net sales for the fourth quarter of 2022, which represents year-over-year growth of 28%. Adjusted EBITDA in the fourth quarter of 2022 was $15.2 million, increasing 31% compared to the prior year fourth quarter. For the full year, our beverage solutions segment generated $54 million adjusted EBITDA, a 30% increase over 2021, driven by 50% growth in our single-serve cut volumes and 8% growth in our flavors, extracts and ingredients products, which were partially offset by a 7% decrease in roast and ground coffee volumes.

As we said before, an important part of our growth algorithm is the mix shift over time into our higher margin single-serve and flavors, extracts and ingredient products. We continued to see that shift in customer demand and our 2022 results validates this continuing trend. Turning towards our sustainable sourcing and traceability segment or SS&T, sales net of intersegment revenues were $35.1 million during the fourth quarter of 2022, a decrease of 12% compared to the fourth quarter 2021. Adjusted EBITDA was $2.3 million in the fourth quarter of 2022, compared to $2.7 million in the prior year fourth quarter. The decrease is primarily attributable to decreased volumes in the quarter. For the full year, our SS&T segment contributed sales net of intersegment revenues of $182.6 million and adjusted EBITDA of $6.1 million growing 24% and 7%, respectively, compared to 2021.

These increases are driven by a higher average sales price per pound for green coffee, which grew 35% year-over-year, as sales volume decreased approximately 9% from 2021 levels. The increase in average sales price per pound is directly correlated to global commodity prices. During the year, the volume of green coffee from our SS&T segment that is utilized by our beverage solution segment grew 173%, which is important and that it keeps margin within the system and it expands the coverage of our traceable and transparent supply chain. With respect to our capital expenditures, during the fourth quarter, we incurred approximately $40 million of CapEx, $30 million of which was growth capital related to our extract and RTD facility in Conway, Arkansas.

These expenditures primarily consisted of infrastructure spending and equipment deposits for our glass and can lines. In addition, we incurred $5 million of growth CapEx tied to the continued single-serve capacity expansion in our Little Rock, Arkansas facility. This single-serve CapEx is already having a benefit in 2023 as new machines are allowing us to increase production to align with customer demand and to improve the overall efficiency of our single-serve cup operation. On a project basis, we continued to anticipate that the total CapEx cost of Phases 1 and 2 of our Conway extract and RTD facility will be $275 million and that once it’s fully online, we will generate approximately $100 million in EBITDA per year. As Scott mentioned, this project remains on time and on budget, and we look forward to the first product being produced in Conway in the first quarter of 2024.

At quarter end, we had approximately $192 million of consolidated unrestricted cash and undrawn revolving credit commitments. Our consolidated net leverage ratio at December 31st was 2.9 times based on fourth quarter annualized adjusted EBITDA. We believe we have ample access to liquidity to achieve our near-term growth targets and capital expenditure needs. As we look ahead to 2023, we expect adjusted EBITDA to grow between 10% and 25%, which translates to a range of $66 million to $75 million in adjusted EBITDA. This guidance represents our current expectations regarding the performance of the business. However, actual results may differ materially from these estimates. We expect our 2023 financial performance to be driven by several significant new customer and product wins that will come online in 2023.

Growth in our extract volume as our expansion project in Concord, North Carolina is complete in May and we benefit from the volume growth that expansion allows. Growth in single-serve cup volumes as we get the full year benefit of the increased single-serve volume we experienced in the second half of 2022. Growth in RTD can sales as we continued to scale our operations in Richmond, California. And operational improvements we are putting in place to more efficiently monetize all of these opportunities. We will continue to closely manage costs in our existing business, while we continued to invest in the equipment, and more importantly, in the team that will deliver the growth to come from our Conway extract and RTD facility in 2024. With that, I will hand the call back over to the Operator for questions.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Todd Brooks of Benchmark. Your line is open.

Todd Brooks: Hey. Thank you. Good evening, gentlemen. Couple of questions from me.

Scott Ford: Hi, Todd.

Todd Brooks: One, just looping back to the equipment delay that you talked about in later in Q4 that’s kind of slip into Q1. Is generally the size the impact so that we can think about what type of drag that was on Q4 results?

Scott Ford: Yeah. This is Scott. Hey, Todd. Frankly, you would get debate. The reality is, those are the main line that was late, was due in October and is now coming in May. It was coming out of Europe where everybody was kind of slow to get back though. We were able to fill part of that gap, might go into Israel and getting a couple of machines that could alleviate, I would say, most of the burden of being cut short. And if you look at the aggregate picture, absent that, I think, it probably cost us a few million bucks. There are people that would say, well, on a net-net basis, because orders came in this sequence instead of that when it might not have cost us quite that much, but I think it probably cost us a few million dollars in EBITDA and it was a major pain in the neck with our customers.

So it was a really nasty spell. I’d say the good news that came out of that is, when we look at all of the things that are going on in Conway, we changed all of our program management and we now put every call — every vendor on the phone every week and we are doing site visits to actually see it. Don’t tell me that it’s being done. We are going to send somebody, our Head of Engineering in Europe for the next three weeks right now of walking through and laying eyes on exactly the machine that’s coming our way and we have changed some of the payment terms so that we kind of get some of that level back out. So it’s a multitude of factors there, almost all of them are bad and almost all of them are now behind.

Todd Brooks: Great. Thanks, Scott. And then I think when you were talking about 50% of the capacity under contract at Conway, you are not talking about the blended capacity between Phase 1 and Phase 2, could actually have filled some more of that incremental capacity with the two new phases during the course of this quarter?

Scott Ford: Yeah. So you are right. It is — we are referencing not only Phase 1 to Phase 2 and the thing that I would say that, most important take away from the Conway expansion is that, as we accelerated liquid extract into that facility, which we used to do in North Carolina and we were playing around wins that we break win and if to bring that into Conway, bringing liquid extracting at the scale we are bringing to them, we will support our customers other bottling facilities where they desperately need help. It will help support our operations on the West Coast and the East Coast, and it is engendering a number of conversations about product, SKUs and customer relationships that quite frankly were never on our list of, I would say, benefit that came out of accelerating the liquid extract space.

So 50% is a rough number for the whole combined series of packaging lines that are going in, but the acceleration of the extract manufacturing is what is really starting to change the conversation with our customers, because the need for these or it’s really hard to explain the depth of the need that is in the market for these products, Todd.