Q4 2022 Whole Earth Brands Inc Earnings Call
Speaker 1: And that.
Speaker 1: The.
Speaker 2: Good morning. Welcome to the whole airspreads fourth quarter.
Speaker 2: and full year fiscal 2022 results conference call. At this time, all participants will be in listen-only mode.
Speaker 2: After today's presentation, there will be an opportunity to ask questions.
Speaker 2: Please also note today's event is being recorded.
Speaker 2: At this time, I'd like to turn the conference over to Jeff Sonick, Investor Relations and ICR. Please go ahead.
Speaker 3: Thank you and good morning. Today's presentation will be hosted by Erwin Simon, Executive Chairman, Michael Franklin, Interim Chief Executive Officer, and Duane Portwood, Chief Financial Officer.
Speaker 3: 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 Security Litigation Reform Act of 1995.
Speaker 3: All statements other than statements of historical facts are considered forward-looking statements.
Speaker 3: These statements are based on management's current expectations and beliefs, as well as the number of assumptions concerning future events.
Speaker 3: 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.
Speaker 3: So, 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 earrings release, which can be found on the Investor Relations website, investor.wholeearthbrands.com.
Speaker 3: for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. Additionally, we've provided a supplemental earnings presentation on the investor relations website that may be useful in your analysis of the company's performance.
Speaker 3: With that, I'd now like to turn the call over to Erwin Simon, Executive Chairman.
Speaker 4: goodone.
Speaker 5: 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 the CEO transition plan where Michael took on the interim CEO role in addition to a seat on our board of directors.
Speaker 5: Since Michael's appointment to the board, he has immersed himself in the business and has made excellent contributions.
Speaker 5: Already, Michael has demonstrated to the team why he's the right guy for the job.
Speaker 5: The board and the team has been impressed by his early contributions and we continue to be excited for what is to come.
Speaker 5: His objective approach and experience working with organizations to enhance operation efficiencies and focus on long-term value creation makes him the ideal candidate for the CEO position.
Speaker 5: Michael has been extremely busy over the last 90 days and I look forward to our continued partnership in the coming years.
Speaker 5: 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.
Speaker 5: With that, I'd like to turn the call over to Michael for his remarks. Michael.
Speaker 6: Thank you for that introduction, Erwin. Good morning, everyone, and thank you for taking the time to join the call.
Speaker 6: As you know, in August 2022, I joined the Whole Earth Brand's Board of Directors.
Speaker 6: 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.
Speaker 6: This is a business with great people, great brands, and immense potential to create significant value for shareholders.
Speaker 6: With that said, 2022 was a challenging year. A year where the company fell short of its forecast and expectations.
Speaker 6: Hence, the need for positive change.
Speaker 6: Improvements are being made, strategies updated, and action plans are being implemented.
Speaker 6: 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.
Speaker 6: Our CFO , Duane Portwood, will review the fourth quarter full year 2022 results and introduce our 2023 guidance.
Speaker 6: Before passing the call to Duane, 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.
Speaker 6: meeting with our teams across the world in locations including Alabama, Chicago, Czech Republic, Dubai, Houston, London, Mexico, and Paris.
Speaker 6: 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.
Speaker 6: I want to make sure that as we evolve our strategy to drive top-line growth, improve operational effectiveness, and increase margins in cash flow, I understand the specific challenges and opportunities faced by our operating management teams.
Speaker 6: I believe that this investment in meeting people face to face was an important first step in developing our plans for the future.
Speaker 6: 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.
Speaker 6: The board and I have high expectations for the future of this business.
Speaker 6: Building the strategy together is essential to making sure the company meets or exceeds expectations in the future.
Speaker 6: 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.
Speaker 6: Accordingly, we anticipate 2023 will be similar to 2022 in terms of financial results.
Speaker 6: This year, we will be focusing on improving our operations and creating a foundation from which we can deliver sustained, profitable growth.
Speaker 6: Today, our business has unnecessary complexities that we are starting to simplify.
Speaker 6: 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.
Speaker 6: As I said at the beginning of my remark, I believe Whole Earth has significant opportunities for success.
Speaker 6: To demonstrate my belief 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.
Speaker 6: 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.
Speaker 6: 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.
Speaker 6: Our diversification extends to channel presence, product assortment, and geographical reach.
Speaker 6: 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.
Speaker 6: as we further diversify and grow Whole Earths brands.
Speaker 6: This diversification in both revenue and cash flow is particularly valuable in a public company environment.
Speaker 6: Strategically, improving our operational execution is an area of the business that we can continue to push forward.
Speaker 6: As has been discussed over the past several quarters, our manufacturing inconsistency at the Alabama facility cost us dearly in 2022.
Speaker 6: We still have important work to complete in 2023 with respect to optimizing our network and returning the business to an asset-like state.
Speaker 6: This will assist us in controlling costs, delivering margin, managing working capital, and ensuring that we are delivering on our commitments with customers.
Speaker 6: Further reflecting on 2022, as I alluded to earlier, it was a year of challenges.
Speaker 6: Some of these were brought about by the pandemic and macroeconomic forces.
Speaker 6: 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 faults that are far along in being resolved. Taken together, our margins were under pressure despite our pricing, our
Speaker 6: de-rationalization, and productivity strategies.
Speaker 6: We see 2023 as a year of stability and evolution.
Speaker 6: 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.
Speaker 6: 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 years, but is a core tenet of effective brand building and growing household penetration.
Speaker 6: 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 the corporate function is there to serve the business, rather than the other way around.
Speaker 6: 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.
Speaker 6: 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 outline at our investor day.
Speaker 6: We will achieve this through free cash flow generation for get reduction and EBIT.growth.
Speaker 6: In summary, I am confident that our outlook is positive, but I also believe that it is necessary to make some select reinvestments in our organization, including our greatest asset, our people.
Speaker 6: 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.
Speaker 6: In turn, this will allow us to de-lever the business and position the company to take advantage of the multitude of consolidation opportunities that we see in the marketplace today.
Speaker 6: Before passing the call over to Dwayne, I wanted to address the recent press that many of you may have seen regarding erythritol.
Speaker 6: 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.
Speaker 6: Similarly, erythritol has been approved for use in more than 60 countries, including the European Union, Canada, Argentina, Australia, Japan, among others.
Speaker 6: The recently released report is contrary to decades of proven scientific research.
Speaker 6: 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.
Speaker 6: With that, I'll pass the call over to Dwayne to go over two, four results and 2023 guidance. Dwayne. Got him?
Speaker 6: With that, I'll pass the call over to Duane to go over two, four results and 2023 guidance. Duane? Thank you and good morning to everyone.
Speaker 3: 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.
Speaker 7: For the fourth quarter and December 31, 2022, consolidated product revenue grew 4.7% to $138.9 million versus the prior year quarter.
On a constant currency basis, project 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 headroom from favorable non-cash amortization of purchase accounting adjustments related to inventory revaluations in a 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. In a quarter, we recorded a non-cash 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 non-cash 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 EVA DA 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 US dollar.
Excluding the foreign currency impact, Consolidated Adjusted EVA DA 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 non-cash Google 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 US dollar, partially offset by pricing actions.
Our flavors and 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 licorice extracts and peer derivatives, resulting from the company's commercial expansion and innovation efforts. The company was also a significant contributor, increasing 5.4% vs.
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 a 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 Holcim on February 5, 2021. I will speak to reported results, which include Holcim for the full year of 2022.
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 was a negative $14.7 million due to increased working capital investment.
approximately 22 million dollars in cash ad 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 networking 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 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 that suffered 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 scales so that we can lower our per unit cost to levels that are more appropriate. As a result, you can expect some one-time expenses associated with these actions in 2023. Now shifting to our full year 2023 outlook.
to $565 million representing growth of 2 to 5%.
We expect consolidated adjusted EBITDA to be in the range of $76 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 EVA-DAH and adjusted EVA-DAH 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.
Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad and the confirmation tone will indicate your line is in the question queue.
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One moment please while we poll for questions. Thank you and our first question comes from the line of Brian Holland with TD Cowan. Please receive your questions.
Yeah, thanks. Good morning. If I could start with the erythritol where Michael, you made comments toward the end of your prepared remarks. Maybe just a couple 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 or, you know, that's been done around erythritol. But obviously that, you know, is going to, I don't know how much of an impact that's going to have with respect to, you know, whatever.
Yep, thanks Brian . I'm happy to take that. So with regards to Ritz-Ritz-Dahl,
Similar to what is shared in our prepared remarks, we'll continue to monitor the situation closely. And for us, it's like any ingredient, any product that we sell, we don't disclose what amount of that product accounts 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 consumers continuing to purchase.
you know, these products and, you know, for us making sure that we're reacting on the forefront and adjusting accordingly, you know, we'll continue to monitor that over the coming month and the existing reactions.
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 declining consumption with respect to that.
Yeah, I mean, we've obviously, you know, when we're putting together, you know, our 2023 plan, you know, we included that in terms of what we could see, you know, from a consumer perspective. But the truth is, you know, we continue to see demand for our products, you know, continue to be strong. We're working through it. We're working through it now. And
That is reflective for our 2023. Yeah, I think, good morning, Brian . Mikey, just let me say something on erythritol. I think, guys, again, I think every week there's a study that comes out in regards to an ingredient in a 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 gonna 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, you know, we're gonna keep an eye on it. And if there's an ingredient to substitute, we will do that. But it's not the whole thing that makes up our business. That's our, we're not just.
different associations come out with a finding. And this is something that's been going on for seven years and I'm not sure all the science behind it too.
Thank you. Mikey? Okay, thanks. Last one for me, Michael, you talked about providing a long-term outlook..
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 that this guidance was given, the environment has been...
is generally still attainable, or is something structurally altered such that, you know, any of that wouldn't be attainable down the road.
Yeah, look, we're excited to provide a more full-slown presentation of our long-term goals and how we plan on getting there in the third quarter this year at what 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. We're having a relentless focus on cash flow this year, but in the third quarter, we'll share on that long growth and come of our financial targets.
I'll leave it there. Thanks. Best of luck. Thanks, Brian . Our next question is from the line of Rob Dickerson with Jefferies. Please proceed with your questions.
Great, thanks so much. You know, look at me, I guess I'll just ask kind of upfront, you know, just given this is the first time, as Brian was saying, you know, we have access to Mikey and also maybe Irwin, you know, a lot of the commentary is about kind of all the opportunities ahead.
right, still see a lot of opportunity, could still grow nicely on the go forward. You know, just I guess given since you kind of got there in August , Mikey, and you said you know, you traveled, you know, decent amount, I'm sure you've been speaking with the board frequently, maybe just kind of spend a minute kind of talking about
You know, maybe you know where you saw certain opportunities not captured that were already available to you You know, maybe kind of like what some of the low-hanging fruit is You know mostly on the top line, I guess You know and then just you know kind of as you set course now like we'll hear more in q3 But like what are you doing now? You?
that you know on the CP and the branded CPG segment you know we're in the early innings for you know where we can take this business and you know I'd say above all else 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 spent 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. You know, I think, you know, the first opportunities we identified was our manufacturing footprint. How do we simplify and return our business to an asset like State? You know, that's something that is of, you know, increased focus for us, right? How do we get the products 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 stemmed from, look, the operating macro environment wasn't easy.
about taking together hopefully, you know, we're continuing to be excited about what's in store for 2023 MBS.
All right, got it. So, I mean, it basically sounds like, you know, a little bit more operational kind of, you know, headwind that you felt, hoped to kind of dig out of that through your own efficiency plan.
When you think about the investment side, right, what he said, there are areas to kind of reinvest, which I guess would imply kind of S, G, and 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 under-invested then? Because I feel 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 up front, right? It was like Equalton crush it in emerging markets, but really didn't hear much about Equalton in emerging markets. So maybe just kind of spend a second on kind of where you think some of the investment could go. Yeah.
I'd be happy to answer that. But look, our international region is somewhere that 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 21 to 22...
are nearly tripled. No different is what we're seeing in material growth in China with that business going over 50% year over year. I think it's for us, it's identifying high growth regions and making sure that we're supplying products 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.
said, I mean, you said international was to be a big part of this. And I think, you know, listen, we'll go back and can blame a lot on COVID. But, you know, there's certain things whether it's currency and other things that we happen that hurt us, but international has tremendous opportunity and we have some strong brands over there. I mean, you mentioned Cantrell.
the brand awareness. And basically we're only in a few countries today in Europe with tremendous expansion. Like you 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. All right, great. Thanks guys. And then just quickly, just some gross margin.
out the plan for 23, trade spend, price-cost relationship, etc. You're thinking kind of more of like a flattish gross margin-ish 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. That's all. Thanks so much.
Hey Rob, this is Dwayne. I appreciate the question. Good morning. Yeah, from a full year perspective, do expect adjusted gross margins to be pretty consistent overall with 2022. The...
the order of events is going to be a little different in the sense that, like I mentioned, the first quarter, both from a gross margin perspective and an even down 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 expect to finish fairly consistent. On the SG&A side, there's investments going on there. 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.
Perfect. Thank you. Our next question is from the line of Bobby Burleson with Canaccord. Please proceed with your questions.
Good morning. So just curious on the top line guidance parsing out the...
full year benefit of price increases versus kind of volume expectations? What's implied in terms of volume directionally versus 22?
price increases versus kind of volume expectations? What's implied in terms of volume directionally versus 22? From a growth perspective.
Hey Bobby, good morning. We expect growth to be, I guess I'll call it more balanced than we saw in 22. From a branded CPG perspective, most of the growth was...
was price. I would say 23. 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 skew rationalization particularly as it relates to.
our ingredient business on Wholesome so that that business may may
decline just a little bit that's by choice given where sugar prices are and what our sugar quota is.
So, you know, 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 actioning on now. But expect volume growth to be maybe two-ish times what we saw in 2022.
And flavors and ingredients, a little different dynamic there. Great volume growth, obviously, in 2022. We do expect both positive price and positive volume in our flavors and ingredients, but that'll be slightly more weighted towards price in 2023.
Okay, great. And then just on the risk-reseal, I understand there's some...
Excuse that you guys have out there to kind of highlight the real first haul, not just as an ingredient in the back but really emblazoned on the front of the package.
I'm curious kind of what the costs might be or you know timing around Repopaging if that's necessary like whether or not customers or partners are interested in
you know, maybe a different way of presenting those products, you know, that don't highlight the erythritol on the front. I'm 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.
any products that you receive about any products 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 reformulate our products, we're working obviously to make sure that we can do that. We need to have the backups in place and repackaging if that's what we ultimately need.
you know, what do they need. But the truth is today where we are, you know, we continue to have strong conviction in our products and, you know, there's nothing that's happening or changing overnight. But, you know, like any business when you're managing risk, you're making sure that 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. We go through this with all of our SKUs, not just ones that have erythritolamine.
Okay, fantastic. Thank you. Thanks, Brian . Our next question is coming from the line of Scott Mushkin with R5 Capital. Please proceed with your questions. Hey, guys. Thanks for taking my questions. So it seems, and I know Michael, you're still thought of as the interim CEO , but the way you kind of addressed the question is,
to join the board in August and ultimately join in a full-time role, obviously, at the beginning of January . I think for me, 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 wanted 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 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.
For me, I'm here for the long term and I'm excited about the future prospects of this business. Great. And then this question is actually I think probably more for Dwayne. When we look at your – and you laid out the first quarter being lowest keep it down. As we look at the other side of the ledger, the cash needs of the business, how should we think about that?
you know, same way and, you know, how significant do you think they'll be in the first quarter, and then maybe lay out the year? Scott, I really appreciate the question. Good morning.
same way and you know how significant do you think they'll be in the first quarter and then maybe lay out the year? Scott, I really appreciate the question and good morning. No, I think...
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 networking capital perspective. I don't expect working capital to be a
a source of funds for the full year. I think where we're at as we exited 22, we're actually in a pretty healthy position both in terms of inventory, we make good strides in Q4 in bringing some of that down and kind of what remains.
In inventory at the end of 22 is more the cost impact that we saw throughout the year. So You know based on what we know about costs right now I think most of that is kind of woven its way into the 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 a good spot. So, you know, I would say we're starting 23 probably not as hungry as we were in 22 from a networking capital perspective. So,
as we, you know, it will be lumpy as we go through the year. I actually don't see Q1. There's 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...
some sugar type purchases and the like. And then as we finished the year, again, I would expect this kind of single digit millions use of cash overall in that working capital given our growth. But I don't expect it to happen.
kind of fluctuations that we saw in 2022 overall as the year progresses. Perfect. And then my final question would be, as you look at your EBITDA guidance, you'll kind of walk us through the idea of, you know, what could take you above that and what could maybe take you below it and kind of as you guys look at the year.
Yeah, I think so. Right now currency is year on year. It 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 a hurt at this stage.
You know, volume, we think we have a good plan, 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...
some decrease in our ingredients business. If we were to get, you know, better quota and the like, then we could more aggressively go after that business and do a little bit better from an EBITDA perspective.
decrease in our ingredients business. If we were to get, you know, better quota and the like, then we could we could more aggressively go after that business and and and do a little bit better from an EBITDA perspective. You know, I think it'd be great to use
We have good execution plans in place and 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 it you know, we don't execute it like like we want but again, I think it's it's a pretty balanced portfolio, so really, you know the big probably the big driver will be Volume growth and there is there is certainly opportunity to beat the Beat the numbers that we we have out there and beat the budget
if that can come to fruition. Perfect, thanks for taking my questions. Appreciate all the color. Our next question is from the line of Ryan Myers, Lake Street Capital Markets. Please just use your questions.
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. Yeah, from, you know, as we finished Q4.
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 23, we continue to work through and make sure that we're serving our customers in the best way possible. So, we continue to work through and make sure that we're serving our customers in the best way possible.
You know the the areas of focus remained the same And you know right now I think feel pretty good about the demand and the marketing and trade investments that we're putting behind the demand in North America From an international perspective and we gain share in almost every market throughout last year and those were in markets where we already have
you know, pretty high share to begin with. And the teams continue to, you know, again, operate well, stock shelves well, the like. So, you know, the demand is there even in Europe where, you know, kind of different macroeconomic environment going on, share is very healthy and.
actually growing. So again as we demand is not really the issue as far as that goes. And then from a flavors and 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 licorice extract. And that continues to grow, continue to de-emphasize tobacco and the like. So product demand is pretty healthy across the board. And in North America, we've just got to help that out with good execution.
That's good to know. And then the price increases that you guys have implemented. What kind of feedback have you gotten from your larger customers and maybe how receptive have they been to these price increases?
I think I guess Mike, you can correct me where I'm wrong, but.
You know so more than 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.
for 2023 is the full year impact of price increases that have already been implemented, executed throughout 2022.
the new price increases, it's a customer by customer, skew by skew battle. I would say, I guess I'd characterize it as those conversations aren't getting easier, they're getting more difficult.
new price increases. It's a customer by customer skew by skew battle. I would say I would I guess I characterize it as those those conversations aren't getting easier. They're getting they're getting more difficult.
And you know some of the conversations are successful as far as getting what we asked for. Some of them are less successful getting maybe a little bit less than we asked for. But you know it's not – I wouldn't say we're still living in interesting times. Maybe three or four years ago talking about price increases, you know they 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.
about costs in your guidance related to the Alabama shutdown or is that something that we'll find out as it comes.
We do have, as I mentioned before, the 22, you know, the
Challenges and 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 copackers set 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 pinpoint to it.
is that we had around 22 and change million of cash outbacks related to Decatur in 22. In 23, I expect that to drop in half.
with about 50% of those costs being born in the first quarter of this year. So I expect dramatic improvement actually in the cash costs 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 Qs 2, 3, and 4, kind of even spend there, given the timing of what we want to do with the caterers.
That's how I see that you're progressing that. Okay, great. And then in terms of cost of goods, are you seeing any abatement in your supply chain?
We are seeing you know it's I would say last year it was cost inflation was pervasive you know 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 22, or living in 23 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 from materials like dextrose.
This year, we are seeing inflation in our wholesome business, whether it is sugar prices, whether it is honey prices, whether it is 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. 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's other pockets where we continue to work through cost increases. Great. All right. Thanks a lot, guys.
kind of going up and what's coming down. 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's other pockets where we continue to work through cost increases. Great. All right. Thanks a lot, guys.
Thank you. At this time, we've reached the end of our question and answer session. I'll now turn the floor back to management for closing comments. Operator, we appreciate it. Thank you for all. Thank you to everyone for joining the call.
This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.