Q1 2023 Westrock Co Earnings Call
Speaker 1: 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 Crumbliss with ICR.
Speaker 2: Thank you, and welcome to Westrock Coffee Company's first quarter 2023 earnings conference call.
Speaker 2: 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 2: 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 2: 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.
Speaker 2: that could cause actual results to differ materially from those described in these forward-looking statements.
Speaker 2: 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. Thank you.
Speaker 2: 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 2: And with that, it's my pleasure to turn the call over to Scott Ford, our co-founder and chief executive officer. Scott. 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 1st quarter operating results. Update you on the 2 most important areas of focus for our team in 23.
Speaker 2: and share my views on our progress towards achieving the strategic goals we laid out when we went public last summer. As noted in the headline of our release, net sales for the 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-service...
Speaker 2: even pull through in the first quarter.
Speaker 2: Thankfully, these pressures are beginning to wane as we brought additional manufacturing single-serve capacity online late in Q1, and we are turning on our new extract expansion in North Carolina over the next few weeks.
Speaker 2: 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.
Speaker 2: is the available revenues, cost, and margins of our core coffee and tea business.
Speaker 2: 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 2: 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 2: 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 2: And the Conway Extract and RTD facility continues on pace with ever growing interest from an even broader customer base than we envisioned when we set out on this path.
Speaker 2: With that, I'll turn the call over to Chris and then I'll give a quick wrap up and he and I will be glad to answer your questions.
Speaker 2: With that, I'll turn the call over to Chris, and then I'll give a quick wrap up, and he and I will be glad to answer your questions. Chris?
Speaker 3: Thanks Scott and good afternoon everyone. I'll begin my remarks with an overview of our first quarter results and then I'll provide an update on our 2023 outlook.
Speaker 3: As we stated from our very first earnings call, we measure our financial success based on adjusted EBITDA on both an absolute dollar basis and on our growth rate compared to prior periods. And in the first quarter of 2023, our consolidated adjusted EBITDA with $8.5 million, a decrease of approximately $2.9 million compared to the first quarter of 2022.
Speaker 3: 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 3: 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. 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 3: While we do not expect immediate earnings growth from our single-serve operations in the second quarter, we remain optimistic that we should be able to drive improved financial performance from this platform over the back half of the year. In addition to the single-serve equipment installations in our Little Rock Arkansas facility, at the beginning of the first quarter, we transitioned our North Carolina facilities from the legacy
Speaker 3: manufacturing operation was offline for approximately two weeks in early January . That downtime coupled with a gradual ramp back up to full production negatively impacted our service levels for our roast and ground coffee in January and February .
Speaker 3: 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 3: The net impact of the conversion downtime, as well as the challenges scaling our single-third platform, account for approximately 4 million in misgrows profit in the quarter, which flows down dollar for dollar to adjust at EBITDA.
Speaker 3: Finally, our Sustainable Sourcing and Tracability segment, or SS&T, experienced the 36% decline in that sales in the first quarter of 2022. As the disruption in global supply chains brought about by the COVID pandemic normalizes,
Speaker 3: And coffee roasters roast through their stockpiled beffer stocks. We're not surprised to see a reduction in sales volume as SS&D customers normalize their coffee inventory levels.
Speaker 3: We expect to continue to see this trend through at least the next quarter. With that in mind, let's walk through the financial results.
Speaker 3: Total company net sales for the first quarter increased 10% year over year to 205.4 million. Our sales growth was driven by the 44% increase in single-serve cut volumes referenced earlier, and increased pricing for the past through a higher underlying green coffee prices during the quarter.
Speaker 3: 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 3: 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.
Speaker 3: The negative impacts of the production stoppage is part of the ERP conversion and our continued effort steps or the 44% growth in year-over-year single-served cut volume.
Speaker 3: These impacts on a gross profit had a flow through effect on our consolidated Adjusted ebidot, which has mentioned above with 8.5 million for the first quarter.
Speaker 3: On a segment basis, our beverage solution segment contribute 181.2 million of net sales for the first quarter of 2023, which represents the year of year growth of 22%. Adjusted either down for the first quarter with 8.4 million compared to 10.4 million for the prior year first quarter. Turn into our SST segment.
Speaker 3: Sales, net of inter-sagment revenues, were $24.2 million during the first quarter of 2023, as decreased at 36% compared to the first quarter of 2022.
Speaker 3: Adjust the diva doll for the quarter was breaking then compared to approximately 1 million for the prior year first quarter.
Speaker 3: In addition, we deployed 3 million of growth cathedicts tied to the continued single-starved capacity expansion in our Little Rock Arkansas facility. In the first quarter of 2023, we added a mid-single-star machine, 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-starved cup operations. At the quarter end, we had approximately 144 million of consolidated unrestricted cash and undraw-and-revolving credit commitments. Our consolidated net leverage ratio, as of March 31st, was 4.3 times.
Speaker 3: based on LTM Adjusted EBITDA. We believe we have ample access to liquidity to achieve our near-term growth targets and capital expenditure needs.
Speaker 3: Despite the headwinds we experienced in the first quarter, we continue to expect adjusted epitomic growth between 10 and 25 percent per year, which translates to a range of 66 to 75 million in adjusted epitomic growth.
Speaker 2: 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 retail restaurant and TPG customers in the world of coffee. And to do that in a way that bosters fair market pricing all the way through the supply chain to our former partners in 35 origin countries.
Speaker 4: You know why is that open? Hey, good afternoon. How are you all? Good, how are you doing? Good, fun. So I want to start on a comment that you made, Scott, 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 demand continues to shape up in conversations with either existing or prospective customers?
Speaker 2: 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 2: kind of the main contracts that are going to go into Conway that will be up and running in early 24 but essentially.
Speaker 2: 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...
Speaker 2: We have been running a line like it in Kohana, and we are having to up the size of that line sevenfold to be able to make room for the demand that we've got coming in. We have demand for other product lines that are not in the phase one and two that we're turning on in Conway.
Speaker 4: 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, I'm 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. And then, you know, when you think about kind of interest rate.
Speaker 4: environment and perhaps a tighter banking system that we've seen developed 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? Yep.
Speaker 2: Well, Ben, that is one complicated question. Let me unpack it this way.
Speaker 2: Well, Ben, that is one complicated question. So let me unpack it this way. We're in it.
Speaker 2: We are in 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
Speaker 2: 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 the economy.
Speaker 2: cushion that we've got available to us in terms of our own capitalization, how much our customers are asking us to bite off versus how much we can comfortably bite off with the capital structure that we've got. And we're going back and forth through that with our board, with our key shareholder partners that are on the board and also with our customers because what's really clear...
Speaker 2: 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 wanna be the first.
Speaker 2: last call that they make to meet those needs. How that plays through the industry over time is beyond my pay grade on today's first quarter call, but you're asking the right questions. And if I look at the history of this team, we will probably be a player. As a result of that, our Katie Danvers listen on her own. We want to open up the table with theheavy single-teamq and end us in
Speaker 4: in that space at the right time, but right now the time is to make sure we execute and deliver against what our customers are lined up for. 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.
Speaker 4: on the way to continue to ransom in EBITDA as we move forward. I want to ask about the $4 million impact in that profit in the quarter.
Speaker 4: 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 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.
Speaker 2: 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 few million dollars of the miss in the overall grand scheme of things.
Speaker 2: and the only person responsible for that is me. We had a series of mock conversions that were perfect all through the fall. We had every anticipation we would be able to do that exchange, the conversion, in three to four days. We had two customers who had an emergency.
Speaker 2: 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.
Speaker 2: 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. It was mine. And so that's the majority of the myths. The good news, as Chris said, that is behind us. The team did a miraculous job of digging out of that. That system is up and running and puts us in a place to go forward rapidly with all of the
Speaker 2: issues that are attendant to the first question you asked over the next couple of years. And we really ran out of time to be able to do it other than in that window. And I botched it and I'm old enough and had been through 20 of these and should have known better and I missed it.
Speaker 3: Now, Chris, if you want to take it from there about what that means for 23, feel free. Yeah, so I mean, so obviously that's not something we contemplated whenever we provided our original guidance. But the reality is that, you know, the guidance is more art than science. You could talk a little bit about science.
Speaker 1: 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. Okay, understood. Thanks for taking my questions and got your contrition is admirable. Well, it's also true. So it has that. Thanks. Thanks. Thanks, guys. Thank you. Please stand by for our next question. Our next question comes from the line of Matt Smith, a steeple. Your line is that open.
Speaker 5: Hi, good afternoon. Good afternoon. I had a question about the supply chain inefficiencies and specifically around the bringing the K-Cup volume up. I think it was up 44% in the quarter. But it sounds like those higher supply chain costs will continue into the second quarter even though you've got some new equipment up and running.
Speaker 5: 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 serve manufacturing machine that was due in last October when we agreed to take on the lift in volume.
Speaker 5: That machine did not come in until February .
Speaker 2: 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 happened.
Speaker 2: 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 were finally installed and started to catch up. We have already caught up on the volume. We are already back in 98, 99% in stocks with all of our customers. The expensive fees for volume misses have stopped, and our efficiencies are starting to turn as we get to go through and take each machine apart.
Speaker 2: 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.
Speaker 2: 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.
Speaker 5: Okay, thank you for that. And because you maintained fairly high service levels and on shelf, have you been able to hold on to all of the contract volume that was initially one for that business?
Speaker 2: We have not been able to hang on to all of it, but I think all of it is back in play. And I would expect it over the next year. We will have all of that and more back given the current set of circumstance.
Speaker 5: Okay, and just one more for me. It sounded like the 4 million dollars 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 could you talk about the benefits to gross margin relative to the 4th quarter again? If we
Speaker 3: 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 continue to see the mix shift from hot black coffee.
Speaker 3: in a bag or in a frack pack to single serve cups into the cold flavors extracts and ingredients products that we have in the highest part of our margin. And so that margin lift that you're seeing is just that that playing itself out.
Speaker 6: Okay, thanks for that. I'll pass it on.
Speaker 7: Thank you.
Speaker 1: As a reminder, if you would like to ask a question, please press star 1 1 on your telephone. Please stand by for our next question. Our next question comes from the line of Joseph Feldman of the Telsey Advisory Group. Your line is now open. Great. Hey, guys. Thanks for taking the question. I wanted to ask about the new Conway facility and the demand seems like it's through the roof. I guess the question I have is, is the
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, you know, the customer volume? And when do you start to think about the next facility? It sounds like you could, you could already have another one of these things if you could. Um, hey Joe, thanks, thanks for the question.
Well, you can't assume anything, right? If you look at the discussion we just had on machines in the single serve plant, you can imagine how paranoid we are about machines and delivery of being on time in Conway. And the financial proposition that the largest shareholders that came into the business when we went public.
Basically, under-route 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-
sending people to every vendor to physically walk the lines with our suppliers to make sure that we are seeing the wiring cables, the harnesses, the steel is cut, etc., etc. So I can't guarantee it, but we are doing everything corporately possible to ensure that it gets installed on time and on budget.
And frankly, there are always a handful of issues, but I am 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. Thank you.
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 that's really something that's up to our board and something that they review just like this.
but maybe on in terms of overall sales or any of the puts and takes we should think about for the rest of the year.
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 in the business.
Got it. That's great. Thanks guys. I'll turn it over to the next person. Thank you. Thank you. 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, CEO , for closing remarks.
Well, I appreciate the depth of...
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 gonna lay up tonight except us. Some are a little bit moreArm enough
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, one. 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.