Q3 2023 Whole Earth Brands Inc Earnings Call
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Okay.
Good morning.
And welcome to whole or sprint third quarter 2023 results conference call all participants will be in a listen only mode.
After todays presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Jeff Sonic Investor Relations with ICR.
Please go ahead.
Thank you and good morning, today's presentation will be hosted by Rajneesh Ob and Geoffrey Robinson.
<unk> co chief Executive officers, and Bernardo feel Chief Financial Officer.
Nigel Bulletin, President and CEO of branded CPG, North America region, and Irwin Simon the company's executive chairman will be available for Q&A.
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 Securities Litigation Reform Act of 1995 pulse.
All statements other than statements of historical facts are considered forward looking statements.
These statements are based on management's current expectations and beliefs as well as a number of assumptions concerning future events.
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.
Risks and uncertainties are identified and discussed in the company's filings with the SEC. We will also refer to certain non-GAAP financial measures today. Please refer to the tables included in the earnings release, which can be found on our Investor Relations website investor got whole Earth brand's dotcom.
Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures. Additionally, we provided a supplemental earnings presentation on the Investor Relations website that may be useful in your analysis of the company's performance.
I'd now like to turn the call over to Mr. O'brien. Please go ahead.
Good morning, everybody and thank you for taking time to be on the call.
This is the second quarter is Jeff Knight took over at school to yield and I'm very pleased to on the wheat flour.
Despite the very challenging macroeconomic and geopolitical situations around the world.
But today's call I will begin by providing an update on the consolidated numbers for the quarter and then shift to an update on the progress of our branded CPG business.
We produced consolidated third quarter revenue of $134 $4 million.
And getting ready to go and he wanted to get a dog is adjusted.
Adjusted EBITDA.
Adjusted gross profit margin of 31, 6% an improvement of 80 basis points what is the prior year.
Since Q4 of 2022 adjusted gross profit margin.
170 basis point.
Our third consecutive quarter of improvement.
Performance is directly linked to the purpose of that organization on stabilizing streamlining our.
Our operations to drive enhanced productivity and sustainable margin improvement.
I'll come from both airports are also key to driving improved cash flow to support our growth initiatives.
Leverage both of which you had one during the third quarter and Bernardo Hees presentation, we'll share more details about it.
As mentioned in the previous call, we did not branded CPG business I would focus continues to be on.
Simplification.
Global structure and removing complexity.
Invention, and optimizing our north American supply chain.
And leave it again, our brand strength and expand into adjacent categories.
Branded CPG segment revenue was $103 $3 million.
I don't think a decrease of 2% what is the five years.
A lot of degrees of coupon of 9% on a constant currency basis.
Excluding the planned degrees and hold some bites you Betsy.
Segment constant currency revenue was essentially flat.
I spoke with 7% growth due to pricing was offset by a four 6% decline in non bulk sugarcane buggy.
As a reminder, the reason to limit bulk sugar was awake big incremental statics.
Which would negatively impact our margin and profitability.
By the way forward and considering the current sugar prices.
You may consider selling some of that voucher, but the amount of inventory and generate additional cash.
Operating income for the bank.
For the quarter has shown significant improvement going to approximately 31% what this friday at that.
Increase in operating income reflects in part the improved efficiency across the operation and the selection of the agenda will be product mix as well as the supply chain reinvention cost and Louis you're waiting for pets.
These improvements are an outcome of our Hartford plant.
Streamlined management structure manufacturing operation and decision matrix.
We have now established a globally interconnected network of cross functional team.
Their objective.
The client opportunities that enhance productivity and drive efficiency.
As we speak.
These dedicated teams continue to look into areas of the business, including U S. Nitrogen fought back against your optimization the refinement of product formulations.
Pretty big sourcing of raw materials and logistics consolidation.
We believe this will further lead to systematically removing excess cost at all levels all of our operations.
And then on the margin profile.
Is that an improved free cash flow performance.
The ultimate effect supply chain reinvention projects is that on track and nearing its completion.
Alabama facility is closed.
And to go packaging body picks it up.
Up and running.
All necessary, he said vacation and quality audits needed to service our customers.
I'm very proud of our supply chain team.
It gets very complicated transition without compromising our survey, which I'm pleased to say it because I mean I love it.
Approximately 99%.
This consistency and says there was a commercial team in North America, you piggy back their business.
Working hard to regain lost distribution across different customer accounts.
I know your channels, which account for approximately 80% of our branded CPG revenue in North America.
Healthy and growing in all segments.
E Commerce and food service.
Private label business also continues to provide us opportunities to grow and we are well positioned to service customer needs across the entire portfolio.
Really not international business CPG.
Yeah, excuse me got to be had great.
Actually in the non utility side of the business.
This trend is limiting our ability to tell you about new distribution gains.
Also impacting outbound, particularly across the category and added the exited that we have not seen any significant changes in that market yet.
This demonstrates the confidence and loyalty I couldn't be happier.
Well the trend where the choice of natural and better for you products provided an opportunity for us.
Consumer expectations.
What its argument up leading better for you brands across Europe, Asia and Africa.
Globally, we continue to have a cool, but some category adjacencies.
We have a strategy in place to drive new product launches.
I didn't quite good categories that are aligned to our core business and distribution strengths.
They didn't knock the medica, you got a guy by the overcoming of our supply chain challenges.
Allows us to ship I feel but.
Well I've been building a diversified portfolio in.
In fact, I'm excited to announce that we have recently brought on a new senior leader to help US advance this work and drive that's very important to initiate it.
Comedy I want to emphasize that renewed excitement they did not keep your business.
See tremendous opportunity to build this business and believe that we have created alignment across our entire talented and committed team.
I want to make sure I take this opportunity to thank all of them for their corporate and individual athletes Act.
I now hand over to Jeff.
Thank you Raj niche flavors and ingredients is a strong free cash flow generator with key barriers to entry and a global leadership position that supports our broader growth and diversification initiatives at all these brands.
Diversification and our revenue growth in new markets and new opportunities in our traditional markets have driven the continuous improvement in our operating results.
We continue to generate solid revenue growth in flavors and ingredients in the third quarter with a three 6% constant currency increase which compares against the 16, 9% increase in the prior year period we.
We will continue to face tougher comparisons for the next few quarters, but we remain encouraged by some of the long term opportunities. We see in the end markets. We serve that will drive continued growth our success will be supported by our deep experience.
And continued efforts to grow each of our product solutions all of which are based on our ability to be nimble.
And identifies specific usage and functions for our various liquorice products.
More specifically, we are seeing continued concerned by customers in the European Union, although regulatory changes requiring rigorous product purity, which provides us with opportunities to grow our sales and wallet share and licorice extracts in 2024.
Liquorice extract sales grew in other sales segments during 2023.
Our ability to provide functional and environmentally friendly alternatives to specific power and poly fluorinated substances or P fast.
These environmental concerns reinforce a movement towards naturally derived ingredients and we look to expand these applications in 'twenty 'twenty four and beyond.
We continue to invest in development for all of our sales segments.
New investments in consumer facing categories, such as ingredients for personal care products.
Beyond our sales and business development, we continue to streamline our operations and improve service from our global manufacturing quality and logistics and are planning new actions for 2020 for future improvements inefficiency will further improve our competitiveness and our value proposition for our customers.
With that been auto over to you. Thank.
Thank you, Jeff and good morning to everyone.
I will start by walking through our third quarter financial performance 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 viewership peninsula in this presentation on our Investor Relations website.
For the third quarter ended September 30, or 23, three consolidated project revenues decreased 6% to $134 $4 million versus the prior year quarter.
On a constant currency basis, private crabbing decreased one 5% versus the prior year third quarter.
Reported gross profit was $37 $5 million compared to $35 million in the prior year third quarter.
Adjusted gross profit was $42 $5 million compared to $41 $7 million with prior year period.
Increase was driven by a decrease in import duties lower freight costs and improved sales mix, resulting from planned reductions bulks sugar sales.
Reported gross profit margin increased to 27, 9% in the third quarter of 2023 compared to 25, 9% in the prior year period.
Adjusted gross profit margin expanded to 31, 6% compared to 38% in the prior year.
Our adjusted gross profit margin has improved 270 basis points.
Switching to year end.
Testament to our team's focus on maximizing productivity and driving sustainable margin improvement.
It's my Dream Colby, we serve as the foundation for higher profitability next year.
Consolidated operating income was $6 $7 million compared to operating income of $6 $8 million in the prior year third quarter.
Consolidated net loss was $5 $4 million compared to a net loss of $2 $5 million in the prior year period.
The higher net loss was driven primarily by an increase in interest expense due to higher interest rates.
Finally, consolidated adjusted EBITDA was $21 million compared to 21 $5 million in the prior year quarter.
Shifting to our segment results for Q3.
Then to keep your product revenues were $103 $2 million for the third quarter of 2023.
<unk> was $2 $1 million or 2% compared to $105 $4 million for the same period in the prior year.
On a constant currency basis segment product revenues were down two 9% compared to prior year.
7% growth from pricing actions were more than offset by seven 6% decline due to lower volumes as.
As Rajiv noted excluding the planned increases in wholesome book Sugar sales segment constant currency revenue with the fishing explained.
Operating income for the branded CPG segment was $7 $2 million in the third quarter up 22, three compared to operating income of $5 $5 million for the same period in the prior year.
The increase in operating income was primarily due to a decline in cost associated with supply chain reinvention, a reduction of $2 $4 million compared to the third quarter 'twenty, two but where should we import gas partially offset by higher bonus expense and impairment of our right to use asset of zero point $4 million related to a leased facility indicator.
Dammit that is now vacant falling our co pack optimization.
Flavor ingredient segment product revenues increased four 2% to $31 $2 million for the third quarter of 2023 compared to $29 9 million dogs for the thank you it into probably eat.
On a constant currency basis segment private graduate increased three 6%.
Operating income for the F&I segment was $8 $4 million in the third part of 2023.
Third to operating income of $7 $3 million for the same period.
Operating expenses for corporate for the third quarter, 2023 were $9 million compared to $6 million in the prior year period.
Increase was primarily due to higher bonus expense.
Associated with our strategic review and other professional fees.
Now I'll briefly cover our September year to date results.
For the nine months period ended September 32, anti Tim three consolidated project revenues were $399 $7 million essentially flat on a reported basis as compared to the nine months ended September 32022.
And of course with Crazy basis revenues increased 4% compared to prior year period.
Consolidated operating income was $12 $7 million compared to $21.6 million in the prior year period.
Consolidated adjusted EBITDA decreased five 5% to $55 $8 million.
Now moving to cash flow and the balance sheet.
Cash provided by operating activities for the nine months ended September 32023 was $10 $6 million compared to cash used in operating activities of $17 $3 million and it seems to be let's see.
Representing an improvement of over $27 million, despite incurring $12.2 million of high interest expense over the same period due to higher interest rates.
Capital expenditures for the nine months ended September 30, 22 were $4 $1 million.
Free cash flow was approximately $6 $5 million and we expect this to go further and exceed $10 million in full year 2023.
When adjusting for a cash add backs, which I would note have decreased this year year to date adjusted free cash flow was $19 $9 million.
Expect to build upon this further in the fourth quarter as well.
Strong improving our cash flow is the direct result of the hard work you heard Jeff.
Talk about to stabilize our core.
And it has shown up in lower networking capital expanded gross margins declining costs associated with our supply chain reinvention projects and more favorable payment terms with our vendors.
Taken together, we feel very good about the efforts we have made to celebrate their cash generation.
And I would like to emphasize that our supply chain reinvention costs will continue to the salary through year end and into 'twenty 'twenty four which.
Gives me confidence that can't just the free cash flow that we generate this year would be a good proxy of our recording free cash flow in 2024.
We expect that this improvement in free cash flow will help us reduce leverage at an increasing pace you'd be a key element in our ability to reignite our growth strategy.
Additionally, we're making continuous efforts to further reduce inventories sustainably and generate incremental cash flow.
As of September 30, 2023 we had cash and cash equivalents up $24 $2 million and $424 $5 million of long term debt net of unamortized debt issuance costs.
Our long term debt decrease here in 2022 by $8 $8 million as a result, we vote for payments of $6 million in mandatory payments up to a low of $2 18 and drops.
At September 32023, there was $70 million drawn on our $125 million revolving credit facility.
We have a comfortable level of liquidity to navigate through this challenging microenvironment.
I also would like to highlight that or even take position of $273 million.
But a significant portion is composed of raw materials and readily tradable commodities such as sugar in the bridge.
Reducing leverage continues to be a focal point for us.
And we aim to accomplish this through organic means.
The improvement in operating cash flow.
Now shifting to our outlook, which we updated today.
As a reminder, our outlook is presented on a reported basis, which includes the impact of foreign currency translation.
As a result of our year to date performance in 2023 we now expect consolidated project revenues to be between $540 million to $550 million.
Given the milestones achieved in regards to supply chain efficiencies. We now expect consolidated adjusted EBITDA to be in the range of $77 million to $79 million.
Or $1 million above the guidance range, we provided previously.
Top priority is cash flow generation and the results of the past four quarters is a reflection of that focus.
Expectations that could generate additional gains between three three and extend dosing 'twenty 'twenty four.
We also expect some modest capital expenditure savings of about $1 million versus prior plan, which puts our revised budget at approximately $8 million for the full year 'twenty.
Finally, with respect to our supply chain, we expect costs to further decline in the coming quarters as we complete our current approach.
Including known and forecasted events, we anticipate that $92 million for the reminder of the or that'd be kind of around $6 $5 million in the fourth quarter of 'twenty, two and three compared to the same period last year.
Before we open the call check questions I want to take a moment and address the status of our strategic review.
The board formed a special committee to review and evaluate a nonbinding proposal from some other holdings as well.
These strategic alternatives that may be available to the company.
That would use them going and company and the special Committee do not intend to comment further until it's complete on Tuesday can further disclosures otherwise appropriate.
Not only this communication shall constitute a solicitation to buy or an offer to sell shares of the company's common stock.
There can be no assurance that any definite offer would be made.
Any agreement will be executed.
Our debt.
Or any other transaction will be a proof of economy.
Those processes remain active with a goal of maximizing value for all shareholders.
When appropriate we will update you on any developments that concludes my prepared remarks, operator. Please open the call for questions. Thank you.
Absolutely.
At this time, we will open the floor for questions. If he would like to ask a question. Please press star followed by the one key on your telephone keypad now.
Questions will be taken in the order in which they are received.
Is it any time, you would like to remove yourself from the questioning queue. Please press star two.
Again to ask a question please press star one.
We will go first to Scott, Michigan with ours.
Okay.
Turning to the branded side of the business are obviously, there's been a lot of press around weight loss drugs a lot of press around.
Sugar substitutes, how are you thinking about that business in regards to some of these are these issues and how do you think about you know.
As we kind of start to try to pay some debt down you know growing that side of the business.
Yeah.
Yeah, I guess I would take this question because the tragedies.
I mean, we've seen what are you seeing some kind of a deep draw between the cat degree on the non nutritive side of the business I think we see tremendous opportunity on the nuclear side of the business.
And.
Most of our brands be that it's a brand new automated caller in the global scenario you have brands like.
There will be a whole lot except that they are all well positioned to kind of right on this vehicle.
We've of course, they'll be neutral to state of the business and also.
Have a plan that is all the allied got degrees, which are aligned to be non issue, but our product.
Product categories. There is a plan to kind of grow these businesses and launch in the coming quarters as we go forward.
And Scott just like Scott, Let me just add to that I think these are complementary.
All these weight loss drugs as you know again as consumers you know use these weight loss drugs, they're looking for products that are much lower in sugar much lower in calories and Nutritionals and I think if anything you know.
Some of the research in that World. We see is they're drinking more of a diet cokes drinking you know more products that are sugar free. So I think there is absolutely.
More opportunities for us because we're either no calories or very low calories.
Figure three products that we have.
Okay. Okay.
So paying down just on paying down debt Scott I think the big thing is <unk>.
Nigel referred to it a big part of our debt $200 million of inventories.
Now, we turn our inventories and some much longer we're buying out there, but you know Raj. This is Jeff has a big movement on how do we reduce our inventory. Unfortunately, we buy sugar and we buy it at one time, but that is a big thing.
You have really stable inventories, but how do we focus on working with our suppliers and that then reducing inventories, which ultimately reduces our debt.
And use more cash comment from that to invest back in the marketing of the brands in this business.
Is that actually it's a great segue into my next question around kind of the debt levels of the company and how we're how we should kind of frame your.
Our thoughts as we move into 'twenty four.
You know being able to pay more down in you know kind of how how should we.
About that is as we move over the next 12 months and then I'll yield. Thanks.
Hey, Scott Good morning. This is Bernardo and thank you for the question I think that free cash flow is one of the highlights of this quarter and as we expect to continue going forward.
You heard in my prepared remarks that.
And I'm highlighting the adjusted cash flow for this year is a good proxy for next year.
The reason for that is that we are expecting our add backs to reduce massively towards next year.
Why are we increasing EBITDA and while growing with our growth algorithm, but that's going to be a big driver that would allow us to to accelerate our our debt pay down.
While maintaining a more sustainable business as well so.
Okay.
Right.
Alright, guys. Thank you very much appreciate it.
Good luck.
Okay.
Once again, if you would like to ask a question. Please press star one.
We will go next.
To Ryan Meyers with Lake Street Capital markets. Your line is open.
Hey, guys. Thanks for taking my questions.
You know when we think about the lower revenue guide just kind of wondering if you can provide a bit more detail on what you are seeing there you know was it primarily volume related or is there something else that's going on.
And then you know as it relates to kind of the overall branded CPG segment as a whole you know what kind of are you seeing from that industry demand perspective.
Hey, Ryan Good morning. This is Bernardo I'll take this one again and I welcome the rest of the complement right.
Our year to date performance has really been about cost margin and cash flow improvements and we have delivered that.
As the category has faced headwinds this year, so to have our sales and they seem to have seen that fairly clear like an hour today revenue performance. So all in all this is an effort to be transparent on where we are and what we expect to finish the year.
I think it's important also to call out that you're doing a good job executing our margin has been strategy.
Being driven in part by these bulk sugar sales, but also through all of the optimization and cost efficiency. So and at this point do you also see that we are showing a consistent adjusted EBITDA.
Increasing and weird bumpy this guidance as well by a by $1 million to account for this.
Some other items like born and so we are aligned with our overall goal is but most important I think that is all being translated to our very strong free cash flow generation has been positive this year and next.
Expect to extend this through two point change when you're fine with all of these combination of factors, including the improved margins lower supply chain renovation costs, improving our working capital by reducing inventory and also to a lesser extent some modest capex savings as we move to even more assets like demand.
But I just want to add to that on the sales growth part of the business I think you know.
Jeff has shown what has happened on the liquid side I think the big thing for us on the consumer package size was.
As we as we move to <unk>.
Waste.
Deepak getting back in stock and getting our service levels back up to 99% where they were running in.
The Seventy's and Eighty's, but I got to tell you this team.
Develop a big pipeline of a lot of innovation in different categories and the whole sugar free area have looked at distribution going into other parts of the world listen there are big markets today.
France U K somewhat in Germany, So theres, a big country out there called Europe.
There is a big country out there called South America, and the Middle East So there's lots of growth opportunities for us.
And the Big thing is the expansion.
The products here in sugar free whether it's chocolate jams jellies.
Other desserts et cetera.
And I think there's a big opportunity still for us with its work so.
As Bernardo said first this year was focusing on balance sheet, focusing on making sure the supply chain got fixed and now there's a big effort on organic growth going into 'twenty, four and I think the team has a good strategic plan in place for that.
Okay got it that's helpful. And then if we think about the strong gross margin during the quarter.
How much of that came from sales mix versus how much of that came from just taking costs out of the business highlights and supply chain reinvention, you know any any commentary there would be helpful.
Yeah.
Well in terms of a breakdown it's fairly widespread I can when we when we compare across this there were some high ticket items, including the lower tariffs and sugar.
Clothing to lower Ocean freight.
So.
Those are both efficiency has been on top of that you're seeing manufacturing efficiencies as our services improve are we also seeing improvements in other prices on the contracted side for procurement, it's like I said.
Early widespread the improvements coming thrown are coming from the levels that we were at the end of the year and just started to see.
Got it thanks for taking my questions.
Thank you I have a good one.
And we will go next to.
Alex I don't know what the D N capital.
Your line is open.
<unk>.
I guess I respect your comments.
Comments about not opening the kimono on the on the committee process, but I was wondering from a timeline perspective, if you could just give an indication of what would be.
Sort of a disappointing date, if this was not wrapped up by.
Alchemy and listen I think the Big thing is this here I'd hate to put a date on it I think the only thing is the committee of the board and everybody else wants to get it right. So you know.
This is not like a sporting events, where there's three periods for four quarters.
It would be it would be disappointing I want to make sure I think there's lots of factors in here, we want to make sure their sole shareholder value you can see the improvements happening in this business you know you'll see the margin improvement now and you take that across the full year next year and some of the cost coming out of this business you heard Bernard will talk about.
Yeah.
No add backs holidays come way down or pay down of debt a reduction of inventory. So there's a lot of factors in here as we move forward to put out there in regards to what's the right value for shareholders and that's what the strategic committee.
It's to make sure that's what the board wants to make sure and I want to make sure working with management. We have all of those factors to make sure. It is fair to say Hey, this is the value that shareholders should.
Ultimately get in the share price or if there is a strategic opportunity to you know to.
To solve this company. This is what shareholders should be paid but we got to make sure. We have all the right facts and theyre not only for its fiscal 'twenty three 'twenty four 'twenty five and there's a lot of good things coming out of this company as we've moved out of Covid as we moved out of Deepak as we expand the distributions company as we can.
Go into new products.
And you know the Big thing is yes. The leverage is high interest rates have gone up we pay close to $17 million more in interest this year, but we do believe.
Interest rates will come down.
Fixed half of our debt, but one of the biggest things is inventories in dealing with that so I think the big thing is everybody wants to get it right, what's the right value and what's the right thing for shareholders.
Great. Thanks, Andrew most important taken the most important thing is we feel good about you know the management team in.
In place running this on a day to day basis.
Great. Good luck, thanks, guys. Thank.
Thank you.
Okay.
I will now turn the call back to our presenters for closing comments.
Yeah.
I'll take that I want to thank everybody for joining the call today and as you can see there's a lot of good headway made.
With that the team is doing at whole Earth.
In regards to the margin improvement in regards to paying down debt in regards to free cash.
In regards to taking costs out of this business. If you see what the costs that we just took out the last two quarters.
And annualize that that wasn't going into next year.
You know, there's a lot of good cost savings that's going to come across this business.
The categories relinquish ingredient business.
Jeff and team have done some great job of really expanding that ingredients and may push into multiple categories and done a great job there great free cash business.
You know Raj condition Nigel.
Done a great job in regards to.
Moving to our co Packers getting as Deepak closing that down.
At the same time, we're purchasing sugar out there and not taking it at a bomb and pay at the higher excise tax just to get sales.
At the same time.
Had to deal with higher interest rates, which we have so the good news is we're absolutely able to pay all our debt.
We're good on our covenants.
We're good on growth here and there's a real good plan and team in place, but I think the most important thing is I want to reassure you that we are looking out there for shareholders. How we make sure that we're making sure we're creating and shareholder values taken care of here. So I want to really congratulate and thank the man.
As for team I liked it.
Shareholders that are out there supporting us and look forward to our next call and showing even better results.
Thank you.
Thank you ladies and gentlemen. This concludes today's program you may now disconnect.
Okay.
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