Q3 2023 Westrock Coffee Co Earnings Call
Hello, and welcome to the restaurant coffee company's third quarter 2023 earnings Conference call. My name is Tanya and I'll be your coordinating your call today. Following prepared remarks, we will open your call to questions with instructions to be given at that time I would now like to hand, the call over to Craig.
Crump list, let's see E R. I C R.
Okay.
Good afternoon, and welcome to the restaurant coffee companies start quarter in 2023 earnings Conference call today's call is being recorded.
With us are Mr. Scott Ford Co founder and Chief Executive Officer, and Mr. Chris Pleasure Chief Financial Officer.
Now everyone should have access to the company's third quarter earnings release issued earlier today.
Information is available on the Investor Relations section of West dropped coffee company's web site at investors Dot restaurant coffee Dot com.
Certain comments made on this call include forward looking statements, which are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of $19 95.
These forward looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements.
Please refer to today's press releases 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 we'll use some non-GAAP financial measures as we describe business performance.
These filings as well as the earnings press release provides reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures.
With that it's my pleasure to turn the call over to Scott Ford, Our co founder and Chief Executive Officer Scott.
Thank you clay and good afternoon, everyone. Thank you for joining us today.
I'll be the first to acknowledge that our third quarter of this year looks like a bit of a mess is the variance from our targeted performance of roughly $20 million and adjusted EBITDA for the period and our reported results of $11 6 million appears quite large at first glance.
I think it's critically important to call out that virtually 100% of the mix comes from two distinct causes that relate to the period.
First over $6 million and this happened in July and August alone in our traditional roast and ground coffee unit, where these customers ordered fewer pounds in this period than they did in the depths of Covid.
As we work with them and their forecast to enlist we were repeatedly informed.
That caused the spike in gasoline prices, coupled with the spike in interest rates combined with a miserably hot summer kept consumers out of restaurants in C stores in the first two months of the quarter.
Fortunately September was largely back to normal versus prior years in roast and ground coffee volumes.
Tober in early November are coming in at normal levels as well.
So this appears tomato had been the same transient crunch that happened last year when gasoline prices spike as oil went above $85 a barrel and demand came back for coffee as soon as oil prices retreated a bit.
Secondly, as Chris will detail in a few moments, we incurred almost $2 billion of expenses. During this quarter that were associated offsets to prior period further compounding the stated perform together.
And I fully realize that GAAP does not allow us to go back and add these items back if you will but in terms of clearly laying out what is going on in our business. This $8 million of combined EBITDA pressure equates to 100% of our adjusted EBITDA for the quarter compared to the updated guidance. We gave you.
After our second quarter.
We will continue to head down to deliver all that we can in 'twenty three looking for ways to drive revenues up and costs down.
Turning now to the Conway extracting RTD plan.
I want to commend and thank the team that is tirelessly fought to convert that plant and distribution facility from renderings on the drawing board to the finest facilities of their type in the country and what has to be record time.
It has been a joint effort of West rock employees professional service providers equipment vendors customer product development, QA and procurement leaders and the two primary general contractors involved novels construction and Clark construction.
Each individual involved is dedicated to the successful completion product commercialization and operational launch of this new $300 million extracting ready to drink facility in Thailand, which is on schedule to successfully began commercial production of finished product in the second quarter of 2004.
This kind of wait facilities coming online just as we have essentially now finished filling out 100% of our extract manufacturing capacity and Concord North Carolina.
So overall, while it is a bit of a difficult time for our core hot coffee market, where we continue to compete for customer volumes as they ebb and flow through the seasons and gasoline price generation. It is an absolutely glorious time to be in the extract an RTD space as our new customer and product extensions continue to expand and.
Where we are about to open our third extracted ingredient factory with the first two being sold out of capacity.
For example at this point.
We have sold out almost 100% of our capacity on four of the initial six packaging lines and where over 50% sold out on the remaining two initial line in the combined Richmond, California in Conway, Arkansas plants and.
And as Chris will describe in a few moments we're working on some new ways to keep the investing public current on our progress inside the plant.
We rollout our guidance for 'twenty for early next year.
No we do not expect most of this capacity in Conway to come online in commercial volumes, which is what produces EBITDA until the very end of 24 in early 'twenty five but.
We are confident that the four to five year forecasted EBITDA generation of West drive with these assets fully online remains right on track with our previous estimate at around $200 million of annual adjusted EBITDA.
With that I'll turn the call over to Chris for a review of our current operations and financial results.
Thanks, Scott and good afternoon, everyone I'll begin my remarks by providing an overview of our third quarter results and end with an update on our 2023 outlook and our outlook once our Conway extracted RTD facility has launched and operating at scale.
Total company net sales for the third quarter were $219 6 million compared to $230 3 million for the third quarter of 2022.
This 5% decrease was driven by a 25% decrease in net sales for our sustainable sourcing and traceability segment, partially offset by 2% growth in our beverage solutions segment.
Consolidated gross profit, excluding the impact of $1 2 million of Mark to market adjustment and the $1 8 million of out of out of period charges as Scott mentioned with approximately $38 million for the quarter.
The out of period charges impacted our beverage solutions segment and related to the recognition of green coffee costs, which were associated with coffee that was consumed and sold in a prior period.
Consolidated gross profit for the third quarter of 2022 with $41 1 million included half a million of noncash mark to market levels.
<unk> adjusted EBITDA was $11 6 million compared to $17 9 million for the third quarter of 2022.
On a segment basis, our beverage solutions segment contributed $176 8 million of net sales for the third quarter of 2023, which represented year over year growth of 2%.
Adjusted EBITDA for the third quarter with $9 9 million compared to $15 9 million for the prior year third quarter.
Removing the impact of the $1 $8 million of out of period charges adjusted EBITDA for the third quarter would've been approximately $12 million.
While we are disappointed with our third quarter results the underperformance versus the previous year was largely driven by consumer demand for roast and ground coffee in July in the first half of August like others in our space demand for hot Black coffee in the third quarter were significantly down compared to the prior year, driven by higher gas and food prices and extreme.
Hot temperatures across med D that on.
On the positive side, we grew sales in our flavors extracts and ingredient platform by approximately 70% year over year and our single serve platform continues to see improvement driven by the pricing and operational improvement we highlighted on our last earnings call.
Although we might not be excited about our third quarter results were very excited about the performance of our business and what that means for the future is roast and ground volumes normalized and our single serve and extract platforms continue to grow.
Turning to our <unk> segment sales net of Intersegment revenues were $42 8 million during the third quarter of 2023, a decrease of 25% compared to the third quarter of 2022 adjusted EBITDA for the quarter was $1 7 million, which is 300000 less than the prior year third quarter.
You'll recall that net sales in our <unk> segment will fluctuate up and down based on the movement of the global price of a rabbit coffee and that our profit in this segment is largely based on a fixed dollar market, we make above that price.
This is why you can have such a large downward swing in net sales versus versus the same quarter of last year, while adjusted EBITDA is largely in line with what we generated versus same quarter last year.
With respect to our capital expenditures during the third quarter, we deployed approximately $66 million of Capex, primarily related to our Conway extracted RTD facility.
And at quarter end, we had approximately $174 million of consolidated unrestricted cash and undrawn revolving credit commitments are.
Our consolidated net leverage ratio at September 30 was four six times based on LTM adjusted EBITDA.
Turning to our outlook for 2023, our performance in the third quarter undoubtedly impacts our expectations for full fiscal year 2023 adjusted EBITDA.
While we expect roast and ground volumes to continue to improve through the end of the year and we expect continued solid performance from both our single serve and extracts platform. We do anticipate that fiscal 'twenty two 'twenty three adjusted EBITDA will fall below the previously provided guidance range.
Our current expectation for full year 2023, adjusted EBITDA is $45 million to $50 million. We do however, expect adjusted EBITDA returned to more normalized levels in 2024.
Now with respect to our extract an RTD facility, while it is impossible for us to accurately predict the timing of the EBITDA ramp will experience as the facility begins production in the first half of 2024, we remain confident in our ability to deliver around $200 million consolidated adjusted EBITDA in fiscal 2027 as we.
Continued on pace with the sales contracting and product commercialization efforts required to deliver that number we will update you on all of this and more in our 2024 guidance call early in the new year with that I'll hand, the call back over to the operator for questions.
Certainly.
At this time if you do have a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby will be compile the Q&A roster.
And one moment for our first question.
Our first question will come from Ben Bonneville.
Stephens incorporated your line is open.
Yes.
Hello, This is Jack hard non prevent the MLR.
Hi, Jack.
Hey.
What you can see in the flavors and extracts extracts market today is the demand there subject to the same volatility that you've witnessed during the quarter and youre roast and ground business.
It's a good question I appreciate where you're coming from on it it's actually a very different economic being if you will it's a different set of contracts.
A very different type of product flow, it's a very different product forecast flow because it's a consumer product good that goes to a shelf directly versus people driving through and people try to guess what they're going to.
Due whether they buy coffee or just as part of the value meal or just buy a biscuit et cetera, et cetera, and when gas prices go up they tend to soften up on that pretty quickly you can see.
Across the industry the RTD like every other beverage had a soft.
Third quarter.
Across the industry, but nothing like hot coffee itself.
<unk> in terms of seasonal fluctuation or fluctuations around gas prices. It. It is a much more stable business and it is a much more contractually driven business than the core roast and ground coffee business.
Okay, great. Thank you and then one quick follow up.
How do you feel about the balance sheet at present, and how has that view changed with.
Throughout the quarter.
Well it hasn't changed we feel.
We've got plenty of room, and frankly, if you look at where were running and what we expect to run taking July and August Hot coffee out.
And this is a little complicated but.
In a quarter, where we made $17 million last year, we were close to 20. This year without the two items I took you through so as you roll through where we're running apart from those two months from a credit perspective, we think we've got plenty of room, but I know for certain that if we ran into any issue whatsoever, finishing out Conway we have multiple sources.
Wind up wanting to be part of this capital structure to be part of this.
Adventure, if you will because.
The Conway numbers are are frankly stunning in terms of what they're going to add to this business and bridging it or financing it in any way shape form or fashion that is needed to finish that off.
We're highly confident we can get that done and as we said on our last call. This is the last common equity youre going to see us raise which we raised this last summer to finish and we didn't know exactly how July and August we're going to come in but even that performance doesn't change that answer.
Okay.
Okay that makes sense. Thank you so much I'll hop back into queue.
And one moment for our next question. Please.
<unk>.
And our next question will come from Todd Brooks of the Benchmark Company. Your line is open Todd.
Hey, Thanks for taking my questions Scott I'd love to lead off with one for you if I could sure.
<unk>.
Sure.
Getting getting on four or five quarters as a public company here just as Youre looking in the rearview knowing that we've got Conway in front of US just can you comment on.
The lack of predictability that we've seen in the business over this timeframe and what it takes to return to.
A more predictable nature in your kind of core roast and ground business.
Non F&I portion of beverage solutions, that's a totally fair question.
First of all you look at the performance of the business overall over the last year and you've got.
Essentially.
Really two things going on you have in the single serve business and in the systems integration. The first part of the year, we were putting in a new accounting and information system in Concord, which is the roast and ground and extract business.
You had $5 million to $10 million of cost this year.
Related to those two things, which are for the most part now out of the run rate.
So you look at single serve where we were basically overrun with orders beyond the equipment, we had to get equipment and it was late bringing it in we paid penalties. We suffered the charges are that we ran 27 over time all of that was in the first part of the year in the last five months of the year that business is right on plan clicking.
Just like we told you so.
So if you look at the extract business flavors extracts and ingredients and I'll heed your question and keep going but that business is up 70% over the quarter same period last year. So single serve is doing exactly what we told you. It would do flavors extracts and ingredients is doing exactly what we told you would do the hot Black coffee business is there.
Very complicated business, where we had a.
A very very very good year last year, and we've had a bit of a tough year. This year, but you take out the demand forecast. So these are the biggest companies in the world biggest restaurant in C store chains.
We followed their demand forecast the gas price spike the interest rate spike in the summer and the demand destruction that that created at their restaurants and in their shelves surprise them as much as a surprise to us. So I guess some points in time and hot Black coffee youre going to have periods of time like that.
But if we hadn't had that that happened to us you'd be sitting here, saying well done you're up 15% year over year tell me more about Conway. It's just like you just go through it I've had quarters, where we've been please.
Pleased and I am no genius, and we've got quarters, when we're disappointed and we're not idiots. It's just part of commodity processing business, where you don't have contractual rights to make people byproduct.
That's great Scott and thanks for the candor.
Chris I was wondering if you could walk us through.
The bridge to the new EBITDA guidance kind of you laid out the $8 million shortfall in the quarter to plan for it.
The midpoint of the range, we're talking more of it looks like an incremental $8 million guide down to EBITDA expectations in four key can we walk through what's behind that.
<unk> from the prior outlook.
Yes, I think at the end of the day I think you are starting to see more normalization, both in roast and ground and you're starting to see more normalization in single serve and growth and extract but if you go from kind of where you started youre starting at a lower base and so we expect continued growth in those in those platforms over the throughout the fourth.
Quarter, but.
Youre under your that growth will slow underneath our expectation whenever we updated our guidance over the at the end of the second quarter call.
Okay, Great and a final one curve for maybe Scott.
On Conway can you walk us through.
If there's been any change in the commercialization timing or the EBITDAX traction I think on the last call.
We talked about maybe an expectation that we extract 10, 10% of the Utica opportunity.
Eventually represents in.
Fiscal 'twenty four or are we still tracking towards being able to generate $20 million in EBITDA.
Yeah.
Where we are and let's let's be super candid in terms of the things that we have to do is the equipment in our the systems and as the plumbing or the products ready to go dark people ready to go all of that is on or ahead of schedule.
Now we come into the period of time, when the customer chooses how much they want to commercialize how many skus they want to commercialize and when they want to do it and they have to do that and they get to do that over a year.
There are no penalties and the europes startup and they select when they come in so if they all come in in the second quarter, well will blow that away, we will run through the roof on our against that kind of guidance, but if they all delay until late in the year or first part of 'twenty five which they contractually can then.
That won't happen in 'twenty four now you're asking me what are my customer is going to do in the commercialization startup selection that they alone control.
No, but they have a year to turn it up so it's very easy for me to tell you. What we've got signed up for 25, it's very difficult for me to tell you how that will phase in in 'twenty four.
Okay fair enough I'll jump back in queue. Thanks.
Our next question.
And our next question will come from Matt Smith of Stifel. Your line is open Matt.
Hi, Good afternoon, Scott and Chris Thanks for taking my questions.
If I could if I could start with a question around hot coffee and I appreciate your commentary so far but I'm.
I'm surprised by the volatility in the business, especially the impact on EBITDA.
Can you talk about.
The ordering patterns from your customers do you have a sense of if they were carrying excess inventory ended the quarter and that factored into why there was such a severe reduction here in the third quarter.
Perhaps there was a bit of inventory normalization to go along with the softness in the consumption that you saw.
Sure I think let's let's take it into two parts. The first one is the variance in revenue and the impact on EBITDA that is in that in that part of our business, where you really are a scaled core processing of commodity manufacturer.
Revenue ripple through there is pronounced and direct as you as you would expect.
When it comes to what we're going on with our customers.
They were carrying inventory and a forecast they had for us caused us to build inventory.
So at the end of the day the whole system was full as we went into the summer in the summer was literally we sold.
You might have to make an amended filing for this but the whole Miss was in hot coffee dollar for dollar from July and August It was stunning and people said.
As we've as we've talked.
And getting ready for this quarter I think a fair question is well why did you wait until the end of the quarter, while we're not Walmart. We don't report revenues on a monthly basis, but this quarter was in trouble in July we didnt really realize how deeply we thought well that's some timing, but by the time August had closed and were in the September we realized.
There is nothing you can do to save cost.
And get out of a commodity processing business quick enough win when they just literally don't order anything.
I appreciate that and then.
One of the hallmarks of the business was your long tenured relationships with your customers. I think you had a number of your largest customers <unk> been doing business with for many many years have you seen any customer turnover there or is this really just related to consumption and inventory turns in the quarter. This is 100%.
Driven by the same set of customers doing less business year over year.
Okay, and then if I could transition over to talking about con way, it's clear the opportunity. There is compelling as we look out to 2027, you're talking about $200 million for the full business. It sounded like that was your view.
West Rock in 2027 previously you had talked about $150 million to $175 million incremental EBITDA from the facility. So we've said 25 to $1 50 on Conway. If you go back last quarter and in previous that was up from a 100. When we went public so we upped it from 100 to 125 to $1 50.
Hard to know exactly how to fold in but the number we're actually targeting this 200 plus or minus in 2007.
And so those are the numbers just to go ahead and finish your question I'm going to make sure. We're on the same page there though.
No that's perfect I appreciate that and then one last one here.
Contracts you have in place today, you've talked about you're still about a 100% 50% of the remaining lines.
That are being built out understanding that there is some timeline shifts there.
Based on when customers can decide to order, but can you talk about the structure of those contracts. Many co manufacturers have a take or pay structure are you trying to set that up with your customers or do they get to determine the volume as well as the timing, yes. Some of them do and some of them don't look for the most part the large ones where someone comes in as an anchor tenant they do.
They do have a form of take or pay.
That's really helpful. I'll leave it there and pass it on I appreciate the help.
And one moment our next question.
Our next question will be coming from Joseph Feldman of Telsey Advisory Group. Your line is open.
Yeah, Hey, guys. Thanks for taking my question I'm on for <unk> today.
<unk> had a couple of follow ups. There. So we're sitting here today on November nine.
And as you think about the fourth quarter like I guess, what are you guys thinking about right now.
What are you worried about.
It seems like you kind of had a sense back on when you reported last quarter.
That this hot coffee was a pressure in July but it really didn't come up and I'm just wondering.
What's not coming up right now or what should we be aware of that could be of concern.
For the fourth quarter and into next year.
Sure well that's why we went on and gave you an update in our prepared remarks, which we don't normally do when we give you insight into the order book in October and November. So September part of the third quarter was back to 90 plus percent of the prior year October was right back at the prior year.
In November right now is running a little bit ahead. So we gave you that guidance. So that you could see that as soon as gas prices came back down a little bit people went back to their traditional buying patterns and we lay over last year's results retracted everyday for the last several years and we're laying right on top of previous years now that could stop again if gasoline.
Does to $85 and Christmas spending comes on.
There could be something like that that we don't see right now that's not coming through at the moment, what we're doing in terms of the coffee business is this.
We changed out the accounting if you will management information systems, it's taken us many months to do that we've actually just now started being able to get to some of the reports where the machines themselves are wired up so that we have all of them the waste and throughput data off each machine. These are the things that we did in the single serve plant last summer.
This is why we know basically very early on in the month, what we're likely to make because we've got the algorithms down now by machine by operator, we're putting all of that in the old SMB roaster.
<unk> and ground business over the next few months I expect that we will see material improvement in the operating metrics of that facility. Once that system is finished so that's the answer to your question. What are you worried about what I'm worried about things I don't know about as always and then what are you working on we're re hanging the information.
System and roast and ground the same way we did single serve in the same way we are setting Conway up from the very beginning so that we have that level of detail to manage the business going forward.
Got it that's really helpful. Thank you and then just one more follow up I guess from a <unk>.
Total sales perspective, you've talked about the EBITDA pressures in the fourth quarter, but.
Any any other puts and takes we should think about.
With regard to the sales for this coming quarter and really even at the start of next year. We're hearing from a lot of other companies that they're concerned about slower demand and not quite sure that applies to coffee, but just wanted to get your thoughts on it.
Well, we're not in terms of what we've seen so far in the fourth quarter I think it's kind of a continuation of what we saw in September. So we're not seeing anything like that yet I think.
<unk> to add from an <unk> perspective, you are selling lower priced or youre selling coffee that comes in at a lower.
Global commodity prices and so for <unk>. For example, you saw a significant decrease in the net sales of the business, but the EBITDA year over year flat and so youll likely see significant decrease in net sales and <unk> coming into the fourth quarter, but you won't see.
But youll continue to see EBITDA flat you are not going to see EBITDA drop off because of that.
Our beverage solutions segment, I think youre going to continue to see that.
Same kind of sales slowdown that you saw.
That we saw in in September.
Got it that's helpful. Thanks, So much guys I appreciate it good luck with the quarter. Thank you.
Okay.
I'd now like to turn the conference back to Scott <unk> for closing remarks.
Well. Thank you I appreciate it bye harping on this afternoon.
I'd simply highlight what Chris and I have mentioned earlier, the third quarter was about a disappointing roast and ground coffee volume early in the quarter.
Pleased to see it come back it continues to come back into the fourth quarter, that's as much visibility as we've got so we're sharing it with you. So that you can make your own assessment.
We then look at the Conway facility coming online early next year that is on time I think it's important to remember this we have filled out too.
Extracting.
Flavor extract an ingredient plant one enrichment, California that we bought a couple a year or so ago and the one in North Carolina. They are full we have more demand than we can make product for right now Conway will not only package, but it will also manufacture extract to relieve that pressure and the <unk>.
We've experienced there which is up 70% year over year for the period were going to roll that same growth in the Conway and the Conway facility alone, which is probably 70% contracted out right now is capable of making twice the EBITDA of the entire enterprise on its own.
One and I expect it to do that and we will be bringing you some metrics to follow along with US along along the lines of <unk>.
Percentage of completion number of Skus that are in commercialization.
What kind of volumes that we've got we'll try to give you some feel for that as we start the plant up so you can follow along.
Do your own math given.
Our really our lack of ability to forecast it because of the wide range of startup window time that our customers have and I'll just conclude by saying this if they go to the end of their window. Then we will make some more money next year than we made this year and we will tough it out in rough it alone and if they come to the front of the window.
It's very hard to get your mind around how fast the EBITDA this business could explode to the upside, but nobody cares until we do it we are on to that we will get it done. Thank you for tuning in and I look forward to talking to you next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.
Okay.
[music].
Okay.
[music].
Okay.
Yes.
[music].
<unk>.
[music].