Q1 2023 Westrock Coffee Co Earnings Call
Speaker 2: Following prepared remarks, we will open the call to your questions with instructions to be given at the time. I'll now hand the call over to Clay Crembliss with ICR.
Speaker 3: Thank you and welcome to Westrock Coffee Company's first quarter 2023 earnings conference call.
Speaker 3: 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 3: By now, everyone should have access to the company's first 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.
Speaker 3: 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 3: financial measures as we describe business performance.
Speaker 3: 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.
Speaker 3: And with that, it's my pleasure to turn the call over to Scott Ford, our co-founder and chief executive officer. Scott. Good morning.
Speaker 3: Good afternoon, everyone, and thank you, Clay. It's good to be here with you all today. I'm pleased to be able to share a quick word on our first quarter operating results, update you on the two most important areas of focus for our team in 23, and share my views on our progress towards achieving the strategic goals we laid out when we went public last summer.
Speaker 3: As noted in the headline of our release, net sales for the first quarter increased 10% year over year on a consolidated basis and 22% in our beverage solution segment. The most significant contributors being the 44% increase in our single serve cup volumes and the flow-through of last year's coffee price rise.
Speaker 3: Clearly, we continue to work through scaling up the single-serve and extract units as capacity constraints, new physical expansions, and the resulting operating efficiency challenges impacted our EBIT knob pull-through in the first quarter.
Speaker 3: Thankfully, these pressures are beginning to wane as we brought additional manufacturing single-served capacity online late in Q1 and we are turning on our new Extract expansion in North Carolina over the next few weeks.
Speaker 3: Turning to our two key business priorities for 23, first our team remains focused on successfully launching our new extract and ready to drink facility in Conway, Arkansas. And please we remain on track with this project with anticipated product launches beginning in the first quarter of 24 rolling through a ramp up over the remainder of the year.
Speaker 4: In addition to the timely launch of the Conway facility, the second topic the team is constantly aware of is the available revenues, cost and margins of our core coffee and tea business.
Speaker 4: So amidst the excitement of growth, new customer relationships, new product launches, we remain ever vigilant on our price points, costs, operating metrics, efficiencies, and returns, as this is a competitive commodity processing business.
Speaker 4: Our single-serve scale-up effort has been tremendously challenging due largely to equipment shortages. But we are now meeting those challenges as new machines are online and our in-stock levels are now back at industry-leading standards.
Speaker 4: The flavors extraction ingredient business continues to show itself as both a tremendous source of growth and as a powerful generator of leads for all of our product lines.
Speaker 4: ever growing interest from an even broader customer base than we envisioned when we set out on this path.
Speaker 4: With that, I'll turn the call over to Chris and then I'll give a quick wrap up and he and I will be glad to answer your questions.
Speaker 5: Chris?
Speaker 6: Thanks Scott and good afternoon everyone. I'll begin my remarks with an overview of our first quarter results and then I'll provide an update on our 2023 outlook. As we stated from our very first earnings call, we measure our financial success based on adjusted EBITDA on both an absolute dollar basis and on our growth rate compared to prior periods.
Speaker 6: $22.9 million compared to the first quarter of 2022.
Speaker 6: There are three main factors driving these results. First, as mentioned on our last quarterly call, it has taken its longer and cost more in terms of equipment, labor, and materials to absorb the 44% year-over-year growth in our single-served cut volumes.
Speaker 6: That said, our single-serve production received a major boost in the first quarter when we installed and commercialized new single-serve cut machines in February and March.
Speaker 6: With the addition of these machines, we have been able to improve our customer service level and turn our focus to delivering the efficiency improvements that come from being able to optimize our single-serve platform.
Speaker 6: While we do not expect immediate earnings growth from our single-serve operations in the second quarter, we remain optimistic that we should be able to drive improved financial performance from this platform over the back half of the year.
Speaker 6: In addition to the single-served equipment installations in our Little Rock Arkansas facility, at the beginning of the first quarter, we transitioned our North Carolina facilities from the legacy and might I say antiquated ERP system onto the modern cloud-based platform we utilized for all of our other West Rock coffee operations.
Speaker 6: This brings our entire company onto a common ERP platform that we will leverage as we expand.
Speaker 6: As a result of the conversion, our Ritzen ground manufacturing operation was offline for approximately two weeks in early January .
Speaker 6: That downtime, coupled with a gradual ramp back up to full production, negatively impacted our service levels for our roast and ground coffee in January and February .
Speaker 6: The good news is that our ERP system, along with the manufacturing operations tied to it in North Carolina, are running now as they should.
Speaker 6: The net impact of the conversion downtime, as well as the challenges scaling our single-faire platform, account for approximately 4 million in misgrows profit in the quarter, which flows down dollar per dollar to adjust to the EBITDA.
Speaker 6: Finally, our Sustainable Sourcing and Tracability segment, or SS&T, experienced the 36% decline in that sales in the first quarter of 2022.
Speaker 6: As the disruption in global supply chains brought about by the COVID pandemic normalizes, and coffee roasters roched through their stockpiled beffer stocks, we are not surprised to see a reduction in sales volume as SS&D customers normalize their coffee inventory levels. We expect to continue to see this trend through at least the next quarter.
Speaker 6: With that in mind, let's walk through the financial results. Total company net sales for the first quarter increased 10% year-over-year to 205.4 million.
Speaker 6: Our sales growth was driven by the 44% increase in single-serve cut volumes referenced earlier, and increase pricing for the pass-through of higher underlying green coffee prices during the quarter.
Speaker 6: This growth was partially offset by a 3% decrease in roast and ground coffee volumes and the 36% decrease in net sales in our SST segment.
Speaker 6: Gross profit, excluding the impact of market-to-market adjustments, decreased 4.2 million to 33.1 million, due in part to higher material and production labor costs compared to the prior year quarter, the negative impact of the production stoppage is part of the ERP conversion, and our continued effort subsort the 44% growth in year-over-year single-served cut volume.
Speaker 6: These impacts on a growth profit had a flow through effect on our consolidated adjusted EBITDA, which has mentioned above was 8.5 million for the first quarter. On a segment basis, our beverage solution segment contribute 181.2 million of net sales for the first quarter of 2023.
Speaker 6: which represents the year of year growth of 22%. Adjusted either the doctor the first quarter was 8.4 million compared to 10.4 million for the prior year first quarter.
Speaker 6: Turning to our S, S and T segment, sales net of intersegment revenues were 24.2 million during the first quarter of 2023, a decrease of 36% compared to the first quarter of 2022.
Speaker 6: Adjust the diva doll for the quarter was breaking then compared to approximately 1 million for the prior year first quarter.
Speaker 6: These expenditures primarily consisted of infrastructure spending and equipment payments for our glass and can line. In addition, we deployed $3 million of growth capex tied to the continued single serve capacity expansion in our Little Rock, Arkansas facility. In the first quarter of 2023, we added new single serve machines, and we expect to add additional machines in the coming quarters, which should allow us to be able to capitalize on increased customer demand while also improving the overall efficiency of our single serve cup operations. At the quarter end, we had approximately $144 million of consolidated unrestricted cash and undrawn revolving credit commitment.
Speaker 6: Our consolidated net leverage ratio as of March 31st with 4.3 times based on LTM adjusted EBITDA. We believe we have ample access to liquidity to achieve our near-term growth targets in capital expenditure needs.
Speaker 6: Despite the headwinds we experienced in the first quarter, we continue to expect adjusted EBITDA to grow between 10 and 25% per year, which translates to a range of 66 to 75 million in adjusted EBITDA. This guidance represents our current expectations regarding the performance of the business.
Speaker 6: However, actual results may differ materially from these estimates. With that in mind, I'll hand the call back over to Scott for some closing comments.
Speaker 4: And thanks, Chris. In closing today, I'd like to offer a word on our strategic progress. As when we went public last year, our vision simply stated is to achieve the attractive economics available to a scaled player, serving the largest and most complex.
Speaker 2: I remain very excited about not only what we are building and the ultimate value that we create for all of us collectively, but also about our meaningful progress along that journey at this point in time. With that, I'll hand the call back over to the operator for questions. Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone. And wait for your name to be announced. To withdraw your question, please press star 1-1 again.
Speaker 2: I remain very excited about not only what we are building and the ultimate value that we create for all of us collectively, but also about our meaningful progress along that journey at this point in time. With that, I'll hand the call back over to the operator for questions. Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need a press star 1-1 on your telephone. And wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster.
Speaker 2: Our first question comes from the line of Vendee N.V. from Stevens. Your line is now open.
Speaker 7: Hey, good afternoon. Good afternoon. How are y'all? Good, Ben. How are you doing?
Speaker 7: So I want to start on a comment that you made Scott just as it relates to bigger picture demand and the breadth of that demand being larger than you originally conceived. As you continue to make progress on scaling up Conway, can you talk about how the man continues to shape up in conversations with either existing or prospective customers? Yeah, sure. You know, we've given some general framework around percentages of the facility and we will do a full update. We're thinking at the end of the third quarter as we wrap up.
Speaker 4: We're turning on a large glass line. It is sold out and we have a waiting list. We're turning on a large retort canning line and it is well over 50% sold out. We're turning on a multi-serve bottle line and we're actually, we have been running a line like it in Kohana and we are having to up the size of that line seven fold to be able to make room for the demand that we've got coming in. We have demand for other product lines that are not in the phase one and two that we're turning on in Conway.
Speaker 7: Great. That's great. Maybe, you know, with respect to kind of a continued situation where demand continues to exceed your ability to supply it, and thinking about, you know, in addition to the organic growth plans that you have, some of the M&A that you've done, I'd be curious to hear about your continued appetite for M&A to help meet the demand that's coming or bring additional capabilities to the organization.
Speaker 7: When you think about interest rate environments and a tighter banking system that we've seen develop over the course of the year, year to date, how has that impacted how fertile the landscape is for M&A and potentially asking prices that you see out in the market?
Speaker 4: Well, Ben, that is one complicated question. So let me unpack it this way.
Ben, that is one complicated question. So let me unpack it this way. We're in it.
We are in the multi-serve bottle, single-serve ready to drink can and glass bottle. That is a very interesting industry structure right now. There are a number of really good players that are in that space.
It wouldn't surprise me over time if there was some form of consolidation in it, but at this point in time, we are head down on, and this is to the second part of your question, we are head down focused on making sure we deliver what we signed up to deliver. We are constantly aware as anybody would be.
of the current market, the banking climate, where we are in terms of cushion that we've got available to us in terms of our own capitalization, how much our customers are asking us to buy it off versus how much we can comfortably buy it off with the capital structure that we've got. And we're going back and forth through that with our board.
with our key shareholder partners that are on the board and also with our customers, because what's really clear is there is a service and a set of products that we are maybe not uniquely, but we are certainly distinctly qualified to provide that the major CPG retail brands
in the country are looking to buy a lot more of than they can get their hands on today and we want to be the first and last call that they make to meet those needs how that place through the industry over time is you know beyond my pay grade on today's first quarter call but you're asking the right questions and if
Okay, very good. And one more if I could quickly on the shorter term. Just for this year's guidance, good to see that reiterated. I know it's a milestone on the way to continued rampant in EBITDA as we move forward. I want to ask about the $4 million impact in that profit in the quarter. Was that contemplated in the prior guidance range? And if not, is there something about the remainder of the year that makes you more optimistic, such that you maintain your guidance for 2023?
Yeah, and Chris will actually take you through the guidance, but let me let me own something here broadly.
So Chris talked about the fact that our roasting ground operations in North Carolina were down for two weeks We did not plan on that that was not in our guidance That was a a few million dollars of the miss in the overall grand scheme of things
and the only person responsible for that is me. We had a series of conversions that were perfect all through the fall. We had every anticipation we would be able to do that exchange the conversion in three to four days. We had two customers who had an emergency.
that needed supplies that they couldn't get from another vendor. And I made the decision to front run the conversion. And I made a mistake in doing that. And I cost us the downtime. I cost us the EBITDA from the missed sales and the cleanup. And it's not the IT department's fault. It wasn't the accounting department's fault. It wasn't the operations team's fault. And it was the IT department's fault.
to the year, there's a lot to play for as we as we as we continue on and we're excited about the position we have. We think there's a lot of good opportunity to execute on and we'll be in a good spot at the end of the year.
higher supply chain costs will continue into the second quarter even though you've got some new equipment up and running. So can you talk about what's still weighing on the profitability in that business and what gets better in the second half to allow that incredible sales volume growth to flow through to the profit line? Right.
Great question. Let me just back up one quick second. We had a very large single-served manufacturing machine that was due in last October when we agreed to take on the lift in volume. That machine did not come in until February .
What we did was we put together other machines to stand in the gap, but no matter what else we could throw at it, when we were left without the delivery, we were behind.
and when you get behind two things happen.
Your volume drops, obviously, relative to the orders that are coming in. You get penalized and paid fees for missing delivery at volume levels.
You then have to throw over time, you run machines up against, you know, breakdown, you don't get to do maintenance, your efficiencies drop, your waste increases, and now your output on a dollar of input, whether that be labor material, machine time, whatever, all of that suffers. That did not relieve until the very end of the first quarter when the new machines
rebuild it, do proper maintenance on it, and we're seeing lifts of 50 and 100% in the efficiency of the individual machine when now that we're able to finally take it offline, rebuild it, and properly tool it. So this is one of those things where, you know, you only get this kind of uptick in volume a few times in your career.
And then when you get shorted the equipment that you built the model on, there is nothing to do except throw body and bodies at it and effort at it and it was a mess. But as Chris said, with that machine coming in and frankly two others that we were able to get alongside it, with those machines in we've been able to catch up on our numbers.
And with our numbers now, we can take machines offline. And with machines offline, we're starting to run our efficiencies back down. And we've run these machines at a P&L level on a per cup basis, much better than we're running them now in the past. And I have every expectation we'll get back to that, now that we can take them offline and service them.
Okay, thank you for that. And because you maintained fairly high service levels on shelf, have you been able to hold on to all of the contract volume that was initially one for that business?
We have not been able to hang on to all of it, but I think all of it is back in play. And I would expect it over the next year. We will have all of that and more back given the current set of circumstances.
Okay, and just one more for me. It sounded like the $4 million in disruption costs was a flow through to gross profit as well. So, if we look at gross margin and we adjust for those costs, there was some nice expansion sequentially. Could you talk about the benefits to gross margin relative to the fourth quarter again if we...
if we add back in that disruption cost. Yeah, I think what you're saying is, is you're seeing growth in our higher margin.
products. You're seeing continued, if you look at the mix shift of the company and you mix shift of the sales that we have, you're seeing continued growth in single-serve and you're seeing continued growth in our flavors, extracts, and ingredients, which is the higher margin business that we do. And so the whole thesis of going public was that we're going to see over a period of time, you'll...
Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. Please stand by for our next question. Our next question comes from the line of Joseph Feldman at the TLC Advisory Group. Your line is now open. Great. Hey guys. Thanks. Take in the question. Um, wanted to ask. Um,
about the new Conway facility and the demand seems like it's through the roof. I guess the question I have is, you know, what gives you confidence A, you know, you'll get it open on time and up and running quickly and B, how do you even prioritize?
And the customer volume, and when do you start to think about the next facility? It sounds like you could already have another one of these things if you could. Hey Joe, thanks for the question. Well, you can't assume anything, right? If you look at the discussion we just had on machines in.
in the single-serve plant, you can imagine how paranoid we are about machines and delivery of being on time in Conway. And, you know, the financial proposition that the largest shareholders that came into the business when we went public basically underwrote is
the functioning properly in a proper timeframe of the Conway facility. So we have a completely dedicated crew. We have probably added 20 people that have done these jobs before, from plant managers to engineering staff.
to senior engineers that have built and run plants like this to product development people, to quality control people who came out of plants that make these very products. And they are separated out and held in a separate team in operations. There's a project management team that is run by a former military guy where no meeting goes past one minute over time and everything gets...
to ensure that it gets installed on time and on budget. And frankly, there are always a handful of issues, but I'm very pleased with how that team is delivering. I just frankly, we have a weekly executive update, and it just coincidentally was right before this call.
And I am amazed at how well that entire functioning group is delivering that project. As it turns to what we would do after that,
We don't have the balance sheet to do what would come after that as we sit here today. And so we either have to answer the question, do we want to say yes and do something about that? Or we better to let that slide two or three years and answer that question then. And now that's really something that's up to our board and something that they review just like they would any other kind of.
I appreciate the EBITDA commentary you gave, but maybe in terms of overall sales or any of the puts and takes we should think about for the rest of the year? Well, I think we didn't give sales guidance this year because we focus on EBITDA. We talked about that at the end of our, when we issued our original guidance.
But, I mean, sales have come in, quite frankly, as we've expected. If you look at sort of customer demand across the different products that we have, we expect to continue to see growth year over year in terms of sales and more growth coming through single-serve and flavors, extracts, and ingredients as you continue to see those products.
continue to take a higher percentage of the overall sales that we have within the business.
Well, thanks, guys. I'll turn it over to the next person. Thank you. Thank you. Thank you. At this time, I'm seeing no more questions, so I'd like to hand it off to Scott Board's CEO for closing remarks.
Well, I appreciate the depth of work that the guys that get on the phone and ask us questions and go through this. I appreciate what you guys do in your models, one thing, but also in terms of what you're doing, trying to understand the business. We are a business that is changing rapidly. We're also fairly small.
Nobody is going to lay up tonight except us and worry about all the ins and outs of our small little details here. But we appreciate the fact that you take the time to do the work to provide coverage. When we were at this stage in Alltale, I had one analyst that would give us the time of day. And we've gotten three here that have asked us great questions and show that they're paying attention and doing the work. And so we just want to say thank you.
You know where we are. We're around all the time. All we do is this. If we can ever be of help, please reach out. Thank you guys very much. Have a great afternoon. Thank you for your participation in today's conference. This concludes the program. You may now disconnect.