Q4 2023 Westrock Coffee Co Earnings Call
Okay.
Thank you for standing by and welcome to restaurant coffee company's fourth quarter 'twenty to 'twenty three earnings conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone to remove yourself from the queue. You May press star one again.
I'd now like to hand, the call over to Melissa Collins ratio Investor Relations. Please go ahead.
Thank you and welcome to West dry coffee company's fourth quarter 2023 earnings Conference call. Today's call is being recorded with US are Mr. Scott Ford Co founder and Chief Executive Officer, and Mr and Mr. Chris Pleasure Chief Financial office.
Sure.
By now everyone should have access to the company's fourth quarter earnings release issued earlier today. This information is available on the Investor Relations section of the West Rock coffee company's website at investors day last straw coffee dotcom.
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 could differ materially from those described in these forward looking statements. Please.
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 we'll use some non-GAAP financial measures as we describe business performance.
The SEC filings as well as the earnings press release provides reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures and with that it is my pleasure to turn the call over to Scott Ford, Our co founder and Chief Executive Officer.
Thank you Melissa and good afternoon, everyone. Thank you for joining us today.
The year twenty-three was a significant transition year for restaurant when we entered last year. We knew it was going to be a long year of system upgrades and equipment installations and as we explained on our quarterly calls throughout the year. The impact of these upgrades on our business were material and sometimes painful even if wholly necessary.
Now enter 2024 on the back side of a number of important system migrations capital equipment upgrades and with the new extract and ready to drink facility in Conway, Arkansas on schedule for delivery of our first commercially available products next month.
After enduring the expenses brought about by these significant upgrades and improvements we now enter the year 2024 with the infrastructure in place to scale. This business multiple fold and with our current adjusted EBITDA run rate already 30% to 40% above our year end results for 2023. This is due to the.
Unrelenting and unwavering work by the entire West rock team, our vendor partners and our customers my heartfelt gratitude extends to each and every one of them as.
As we turn to 24, I'll remind you that we announced our 24 annual adjusted EBITDA forecast in connection with our select milk joint venture and convertible note offering announcements last month today, we're pleased to reiterate that our guidance for our expected adjusted EBITDA for the year 2024 should be up.
Somewhere between 30% and 75% for the year.
We have recently enjoyed several new contract wins on each of our platforms from roast and ground coffee and tea to single serve cups to extracts and to ready to drink finished goods and while the impact of most of these new lands is slated to come online in the back half of the year. Some are already starting to make modest contributions to our profitability.
Even now.
I'd like to thank everyone, who has supported us through the long two year process of modernizing and expanding our incumbent facilities as well as constructing the new extract an RTD facility in Conway, it's required tremendous effort persistence and patience on everyone's part and it is a delight to be able to walk through these plants today.
And see the new commercial realities of these investments coming to life.
We chose to bear the pain of fully modernizing all parts of our business in 2023, so that when the new conduit facility was launched those challenges would be seen in our rearview mirror and not in our face it.
It was an extremely difficult year because of this there is no doubt about that but we are now thrilled. These challenges are behind us and we are extremely excited for 2024 and with that I'll turn the call over to Chris pleasure, our CFO for a review of our financial results.
Thanks, Scott and good afternoon, everyone.
When we took the company public in August of 2022, we did so to reposition the company to capture the consumer shift to single serve coffee and cold coffee products, our financial performance both in the fourth quarter and in our full year 2023 results continues to reflect this shift by the consumer and our work to capture it.
In terms of our financial performance company net sales for the fourth quarter of 2023 were $215 million <unk>.
Compared to $227 7 million for the fourth quarter of 2022.
Consolidated gross profit for the fourth quarter of 2023 were $34 8 million.
And included 900000 of noncash mark to market losses, compared to $34 3 million for the fourth quarter of 2022 that included $2 7 million of noncash mark to market losses.
This drove consolidated adjusted EBITDA of $13 7 million for the fourth quarter of 2023 compared to $17 5 million for the fourth quarter of 2020 to that.
The Delta between these two numbers is almost entirely the result of a one time compensation accrual reversal in the fourth quarter of 2022 that was not repeated in 2023 adjusting for the accrual reversal consolidated adjusted EBITDA would have been essentially flat quarter over quarter.
And our beverage solutions segment in the fourth quarter, we continued to see strength in our single serve cup platform as well as our sales of flavors extracts that ingredients, which grew 30%.
This was partially offset by continued softness in our traditional roast and ground coffee business.
In the fourth quarter of 2023, our beverage solutions segment contributed $175 1 million of net sales, which is a decrease of approximately 9% compared to the fourth quarter of 2022 Bev.
Beverage solutions gross gross profit was $31 million for the quarter down 4% compared to the fourth quarter of 2022.
Adjusted EBITDA from our beverage solutions segment for the quarter was $11 7 million compared to $15 2 million for the prior year fourth quarter. This decline as previously stated was almost entirely the result of a one time compensation accrual reversal in the fourth quarter of 2022 that was not repeated in Q4 2023.
And our sustainable sourcing and traceability segment, we started to see a return to more normal operating results. Our sales net of intersegment revenues were $39 8 million during the fourth quarter of 2023, an increase of 13%.
Compared to the fourth quarter of 2022, adjusted EBITDA from our <unk> segment for the quarter was $2 1 million, which is $200000 less than the prior year fourth quarter.
Turning to our annual results.
For the full year 2023 total company net sales were $864 7 million, which is essentially flat compared to the full year 2022.
Consolidated gross profit for full year 2023 was $139 9 million included and included $100000 of noncash Mark to market gains by comparison consolidated gross profit for the full year 2022 was $152 8 million and include and included $3 5 million of non.
Noncash mark to market losses.
Consolidated adjusted EBITDA in 2023 was $45 1 million compared to $60 1 million for the prior year.
For 2023, our beverage solutions segment contributed $722 9 million of net sales, which is an increase of approximately 5% compared to the prior year adjusted EBITDA for our beverage leasing segment was $41 6 million compared to $54 million for the full year 2022 and.
In 2023, our <unk> segment contributed sales net of intersegment revenues of $141 8 million, representing a 22% decrease compared to 2022 adjusted EBITDA from our <unk> segment for the year was $3 5 million compared to $6 1 million for the prior year.
Moving onto our capital expenditures during the fourth quarter, we deployed approximately $43 million of Capex, primarily related to our Conway extract an RTD facility.
With respect to Conway, we now expect our total capex spend to settle around $315 million and as we ended 2023, we had already spent approximately $155 million of that amount.
Our largest outlets capital expenditures on the facility will take place over the next six months and then we'll start to see that spending step down in the back half of this year.
At quarter end, we had approximately $147 million of consolidated unrestricted cash and undrawn revolving credit commitments. Our consolidated net leverage ratio at December 31, 2023 was four four times based on fourth quarter annualized adjusted EBITDA.
As previously disclosed we recently issued a $72 million of convertible notes, which mature in February of <unk>.
2029, the notes combined with covenant flexibility included as part of our recent credit agreement Amendment will allow us to fund the Conway facility expansion and our investment in the select milk joint venture.
We believe that these are key investments that position west dropped to capitalize on the expanding customer demand for RTD products.
Turning to our outlook for 2024 as noted in our business update in February we expect consolidated adjusted EBITDA to be between 60 million and $80 million for fiscal 2024. This guidance range is necessarily broad to account for the range of results. We may experience as we begin operations in our new extracting RTD facility.
And the commercialization of customers in that facility.
As we exit 2023, we do so with strength in the areas, we expect to drive growth in future years single serve cups, and flavors extracts and ingredients and a new approach to pricing in our traditional roast and ground business, which we expect to drive results in 2024.
We are also turning the page on an ERP conversion and new and single serve scale up that pressured our 2023 results in the first half of the year.
The business is off to a solid start in 2024, and we're pleased with our performance thus far in the first quarter with our adjusted EBITDA results coming in line with our expectations given the wide range of adjusted EBITDA guidance for the year, which is largely determined by the ramp and commercialization of our Conway facility. We will continue to update you on the progress and how it may impact.
Our outlook for the year with that I'll turn the call back over to the operator for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to remove yourself from the question queue. You May Press Star one again, please standby, while we compile the Q&A roster.
Yeah.
Our first question comes from the line of Todd Brooks of the Benchmark Company. Your question. Please Todd.
Hey, Thanks for taking my question and good to talk to you all.
Couple of questions about con way in the reliefs and Scott you talk to us.
Detailed.
Yes.
Total customers plural product.
Commercialization that will hit in April.
Im remembering correctly, that's actually a month or two ahead of schedule for what.
We had been talking about so kudos on that but are there any details you can tell us about.
These initial commercialization and any early looks into how.
No pun intended fluidly the customer acceptance.
Program is going would be with the new facility.
Sure Hey, Todd.
So the good news is we are.
We are ahead of schedule on every one of the line installation project.
We also have good news and that we have a number of customers that are in commercialization in the commercialization process now there are windows.
Across so when we talk about the various product packaging format glass bottle.
Can or multi serve bottle cold.
Cold room.
We have a commercialization projects going on all three of them. There is a sequential startup the multi serve bottles coming on first the Qantas terminal second the last one is coming on third.
And we are about two months ahead of schedule on every one of those of physical installs, which allows us.
I don't know that its going to get any more product in through the pipeline in the year 24, but it allows us the opportunity to maybe to <unk>.
Maybe be able to do that and if it were if we stay on this schedule and everybody commercial losses in their window and stays on time that wants us to to ramp it up faster we could be at the high end of our range. If everybody kind of goes about normal pace, we ought to be at the middle part of our range. That's how we built the EBITDA forecast for this next year.
Okay. That's helpful and any detail I know you said multi serve first St detail on the types of customers. So we should be watching for in and win that April delivery turns into product on the shelf.
So that should turn into product on the shelf in the early summer as they hit large retailer resets I don't want to go into who it is but.
Obviously these are large.
These are large leading brands in the coffee space that are.
Our rolling ready to drink out in various form factors and this is some of them that we're doing for them.
Okay, Great and then my final question I'll jump back in queue, you talked about the pace of commercialization defining where you fall in the $60 million to $80 million guide.
Guidance range I don't want to strip out after you and I have Alan talk about.
Our single serve which there was a tough tough first half with the equipment delays last year, and then roast and ground, where it was really kind of scene.
A little bit of a collapsing customer demand here in the second half of this year within that $60 million to $80 million guidance.
There'll be variability around at P&I commercialization, but what are the thoughts.
Variability around contributions that you're expecting from single serve and restaurant grabbed thanks.
Do you want do you want to take that.
I think I know, what I would say, but yes, we'll be smarter no no no no I think this is Chris in terms of in terms of how we how we built our outlook for 2024, we looked at what was the run rate of the business as we got to the back half of the year.
And then we looked at what are the customer wins that we have that that are that are coming online in 2024, and so thats what helped really informed the bottom part of our range and so we feel we feel good about the run rate as Scott talked about in his comments as we as we exit 2023, we feel good about based on the base business.
Being able to get to the bottom end of our range and then what we do after that is really Conway dependent.
Okay, great. Thanks, Chris much smarter answer yes.
Sure.
Thank you.
Our next question comes from the line of Ben Bienvenu Stephens, Inc. Your question. Please Ben.
Hey, good afternoon.
I want to ask as it relates to the.
The ramping of the Conway facility in recognizing the inherent variability in how your customers choose to commercialize.
To what degree can you Shepherd that onboarding, such that you don't end up with.
Russia volume and more concentrated windows kind of increasing the risk of.
Ramping smoothly versus helping to gate the processed.
Scale up as Ratably, as Youre able and while I recognize the significant ramp up.
Yes, it's a super question and its ability obviously, one that reflects you've been through this before of what we are doing to try to mitigate the rush for the door as we are.
Actually committing to production based on when people come in for commercialization and so we have kind of force rank. If you really wanted an X timeframe, you've got to come to commercialization now and four hour, let me call them, our anchor tenants they have their own process. That's all part of the call.
Track of their anchor tenant relationship lenders, but when we start talking about the dozen others that are trying to come through the door right now on the commercialization of.
We actually are lining that up with production and if they come in they get production and their window, if they need to wait and delay them their production windows slides out too and that's been a great.
Clarifier of the importance of hitting your window.
When it's available for the commercialization side or for the brands all of them.
US nobody wants to spend any money until you have to.
And nobody wants to do anything until you have to but if you do want to hit a reset window with your retail customers then you've got to have production and if youre going to have production you've got to be in your on your commercialization window and that was the only way we could kind of break some ramp up walk through that people could actually do to to what would otherwise.
I would be a very chaotic.
Rush for the door as you clearly understand.
So that's what we're doing whether that works exactly right or not we don't know which is why we've offered the guidance that says we know what the base business is capable of doing we don't quite know how that will all flow through and we're going to give you some guesses in a range around it.
Chris laid out very smartly.
That captures the same story.
Yes, okay. Thanks, Scott.
Chris as we think about margins through the year, recognizing mix and utilization will be a really important factor.
Should we think of.
The range of outcomes for margins being such that.
If the ramp happens faster could there be margin pressure actually is there fixed cost deleveraging for us to consider or are you, adding equipment as the commercialization happens and you have what is the shell today help us think in our minds, what that process looks like and what the implications for margins are.
In terms of FERC in terms of Conway I mean, we had the expense turning on in sequence with the with the ramp and so I don't expect the ramp of Con way really to create margin compression as you take on the fixed cost I feel good about how that's kind of how that's going to kind of.
Sequence itself out in terms of kind of product mix and margin improvement.
Youre going to continue to see growth in our single serve which is the higher margin part of our business Youre going to continue to see F&I growth and kind of our base business with extracts I think they were 30% up in the fourth quarter and then we start layering onto products or for Conway that come on in.
<unk>.
We start selling them in April and the volumes really start to ramp in the back half of the year Youre going to continue to see growth from that.
Okay, great. Thanks, so much Jeff.
Sure.
Thank you.
Our next question.
From the line of Matt Smith of Stifel. Your question. Please Matt.
Hi, Good afternoon, I wanted to ask when we consider cash flow in 2025, you talked about <unk> being about a $355 billion capital investment that implies.
$200 million or so to go should we think of that being spent in the first half and then a moderating level of spend in the second half.
Preproduction costs were about $5 million in the fourth quarter should should that continue at a similar level in the first half or does that step down is commercially saleable product production begins in April.
Well I think in terms just to make sure. We're talking about the same numbers from the Conway Capex and we expect that to be $3 15.
And through the end of the year, we spent $1 $50 million to $155 million of debt.
We on the same page there.
I had the numbers around there I appreciate the clarification.
From a cash flow free cash flow perspective, I mean, we've got the the as we talked about on the call I think the highest spend months.
Our spend quarters for the project or the first quarter and second quarter of this year and we'll start to see that step down in the back part of next year and then we expect to we expect to start generating free cash flow in the second probably third quarter of next year as you turn as you turn that that spend Bob.
Thank you and the preproduction costs should those continue to persist through the first half of this year or now that you are producing salable product beginning in April do those start to tail off.
They start to pay.
You'll start to tail off.
Right now, it's a preproduction and Conway itself as go into the balance sheet.
It was not released on a pro rata basis over the next two years as the volume builds which was the comment Chris was making about the margins.
I think it was to Ben's question a minute ago.
Correct.
Okay. Thank you for the clarification, just one more you talked about a new approach and pricing in the roast and ground business can you talk about that a little more I know previously <unk>.
Missing was more of a pass through as you locked in green coffee cost for your customers. It sounds like that may be changing.
It's actually not the structure of the contract, which I would say is what youre, referring to there were not changing the structure of the contract what we've been doing as part of the modernization of the roast and ground coffee business and these are the plants that are in North Carolina that we acquired a few years ago. We are in the middle of a massive.
We have just finished a massive systems rebuild and this systems rebuild has allowed us to get to a level of cost.
Transparency by machine by operator by a shift that was not available previously so that kind of data system installation, which has been unbelievably burdensome to the operations to current financial operations of 23 suffered because we had to slowdown drag out.
Rebuild turn lines all get this automation as well as we've had it running now for about the last.
Five or six months.
Our ability to clearly see exactly where our costs are not on an average basis not on an average basis across products not on an average basis across line on an average basis across customers, but specifically to the detail of the very SKU running on that line with that operator and that shift and when we are able.
To do that we are able to better price, sometimes were able to give lower prices to our customers lower conversion through the contract formula that you talked about and sometimes we require higher because we realize that's actually a pinch point in the market, where we need to charge more just given the demand in that specific skew in that spot.
<unk>.
Slot and so that ability to get really honed in on our cost has allowed us to go customer by customer SKU by SKU and rationalize the price to the right point higher or lower and Thats. The methodology that Chris is talking about and it's all brought about its worth it is worth several law.
Large wins to us already in 2014, 24 that are coming our way and those large wins helped build a high fixed cost throughput base set of facilities and that that all hinged from the decisions. We made to if we're going to have a bad year in 'twenty three have a.
Bad year in 'twenty, three and do all of the work so that when you turn on Conway and 24% and 25, you catch everybody asleep, how powerful the earnings can be off of this business.
Our whole strategy over the next two years.
Thank you Scott I'll leave it there and pass it all.
Thank you.
Our next question comes from the line of Surang Bora of Telsey Group. Please go ahead Sir.
Thank you.
I'll just ask a question on con way as well.
When you look at the picture.
Let's see the facility opening in April.
It is a three year.
Providence for you on the product side. So when you look at the facility.
Your plans for how you plan to open.
Different products and lines.
Can you help us understand a little differently, how much of the plant will be operating in 24.
Will you be like about 70% running on Conway.
By like 25, and then the other 30% opens in the.
Fully operational by the end of 2000, and I'm, just trying to see like how the the products and ramps up over three ERP here from from Conway.
Yes terrific question, one that we spend a lot of time on ourselves let me attempt to answer it. This way this might be this is my I hope. This is helpful and pleasure you can clean this up if I get it wrong and Blake you can go file an 8-K, if I'm a step too far.
What is the best way to understand Conway.
That it is a two year onboarding, but whatever you can get onboard and in 'twenty four essentially become full run rate in 'twenty. Five. So we are better to commercialize. This goes back to the question that's been asked a minute ago.
We are better to commercialize more customers in 'twenty, four and slow production to just meeting our our contractual commitments in 2004, so that we get everybody lined up to run in full in 'twenty five and so if you go through the way that Chris laid out the way we built our forecast.
If <unk> comes in at the low end of the Conway.
In 24, because we have commercialized more and we get everybody ready to run in late late late 'twenty, four and 'twenty five well instead of picking up.
10, or $20 million of EBITDA, you can pick up $50 million to $70 million of EBITDA from the customers that are already in the door and all we have to do is sit there and run the machine and when you put that on top of the core business that Chris talked about at 60, you can see why people when they look at and while this business could.
If we can just commercialized in 'twenty for this business can generate $125 million of EBITDA and 25, if we don't make a single additional sale.
That has been built up the last two years, while we suffered and spent the money to take lines offline to get them automated and to get the MIF system built in is really much more powerful than anything I've read about.
But we'll just have to deliver that and that's just life.
So that's very helpful.
I'll ask you about one more big initiative that you announced this quarter about the JV with select Brody you. Sir can you help us walk through like you know how.
How did the JV will work and I know Youll do the concentrate day to the mill, but then how the revenues kind of flow through your P&L.
Just help us a little bit more about the rationale of this JV.
Some of the operating things in this JV. Thank you.
Yes, sure. It's a 50 50 JV.
Each going to put money up to capitalize at the JV itself will then go borrow money to finish out the equipment and then that equipment will be put into a facility that select is building and we will become a lease tenant.
The select facility if you will the way that we will for the most part book revenues through is through the sale of extracts because thats the largest use product that we deliver out of this and then there will be a conversion profit.
We'll come out through the through the 50 50 JV. If you will so you will see the extra sales come out of our.
Flavors extraction ingredients Division and then you will also see in that same division the pickup of our 50% interest in whatever the residual profitability as of the conversion work.
And youll see that come in at and above the EBITDA line, it's a very powerful earnings adder that were.
We're saving up for everybody in 2006.
That's great. Thank you good luck.
Thank you.
Thank you I would now like to turn the call back to Scott <unk> for closing remarks, Sir.
Well. Thank you very much we appreciate it operator and gentlemen, thank you for getting on with your questions. Thank you for your interest.
We're super excited and I would just say that we were talking before the call started there's not really any any news in the release, we put out because we told everybody. This essentially exactly where we were two or three weeks ago, the news as well.
We are off to a great start in 'twenty four and the plans that we have for 24 through the commercialization and then monetizing some of that should give us a really good year and setting 25 up to be absolutely fantastic and we've got to walk the walk, but we are we are months ahead of.
Well on the physical side, our customers are starting to match with us on the commercialization and product development work and we are super excited about getting that plant on Meanwhile back in the core business. We have been we spent an enormous amount of time and energy and money.
Through loss.
EBITDA for taking things down and actually suffering through the windows of turning MIF systems up in the old business. All of that is going to come back on is coming back on now and we're seeing it in our results now and we're excited about it and.
Yes.
We want to get onboard with his great and if they want to bet against this and say, let's see you do it let's do that too.
So thanks for thanks for tuning in so you all later.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
Okay.
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