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spk00: Good morning, and welcome to the Whole Earth Brand's third quarter 2020 conference call. All participants are in a listen-only mode. After today's presentation, there will be the opportunity to ask questions. Please note, today's event is also being recorded. At this time, I'd like to turn the conference over to Jeff Sonick, Investor Relations at ICR. Sir, please go ahead.
spk01: Thank you, and good morning. Today's presentation will be hosted by Albert Manzoni, Chief Executive Officer of and Andy Ruzzi, Chief Financial Officer. Executive Chairman Erwin Simon is also participating on the call and 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. 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. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll 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.wholeearthbrands.com for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. With that, I'd like to now turn the call over to Albert Manzoni, CEO.
spk05: Thank you, Jeff, and good morning, everyone. I am excited to present our first full quarter as a public company today. I will start by providing some color around the performance of our two business segments, and then discuss the strategic merits of our Swerve acquisition, which closed this past Tuesday, November 10. In addition to the M&A strategy that you are starting to see unfold, I want to reiterate our commitment to driving organic growth through brand building, innovation, and marketplace execution. We have a demonstrated track record of innovation success within our branded CPG segments. In fact, approximately 16% of our 2019 sales were driven by innovation for new product launches and product extensions. This is especially apparent in areas such as baking, which accounts for approximately 50% of our sugar consumption globally. Additionally, our future organic growth would be driven by geographic penetration of North America within our sweetener portfolio. which represents a significant opportunity for our business. We're also positioned to support category growth in our key international markets and entering to new geographies such as India and China. Increasing awareness within emerging markets will continue to drive expansion across all our sweetener stops. During the third quarter, all our brands grew consolidated product revenues by 4.6%, versus comparable quarter last year, while growing adjusted EBITDA 6.7% during the quarter. Within our branded CPG segment, we experienced continued momentum within the sweetener category across the retail and e-commerce channels in all of our key markets. Additionally, we realized year-over-year natural share gains in all our top seven markets, underscoring our ability to innovate and execute. This positive momentum within the retail channel was offset by food service softness, which includes lower sales at Starbucks and some reduction of retailer and distributor inventories in certain emerging market geographies due to COVID uncertainty, resulting in stable revenue growth for the quarter for this segment. Looking forward, We're excited about the continued secular strides in growing our natural business. Our whole-earth sweetener brand grew 75% during the quarter. Within our flavors and ingredients segment, our derivatives and domestic tobacco business drove our strong performance. This segment grew by 9.4% versus comparable quarter last year. Our organic growth strategy is primarily focused within our derivatives business. Our new global head of sales and R&D has hit the ground running and is establishing a growth-oriented focus to drive the segment's future performance. We continue to make solid progress on the footprint optimization projects that's underway. Our team is working diligently to execute this project on time and on budget. This has significant operational advantages for our platform, and we look forward to delivering the associated financial benefits in 2021 and 2022. Now, I'll take a few moments to reinforce the strategic and financial merits of the Swerve transaction and provide some direction on where we're headed. is a rapidly growing manufacturer and marketeer of the ultimate sugar replacement with a portfolio specializing in natural zero sugar, zero calorie, and gluten-free sugar replacements and baking mixes, which are sold through various retail channels, including conventional, mass, online, and natural, among others to include e-commerce. Swerve is the fastest-growing shelf-stable sweetener brand across conventional grocery, generating compound annual revenue growth of 150% since 2016. The brand is expected to generate net sales of approximately $36 million and adjusted EBITDA of approximately $5 million in 2020. This transaction offers several compelling strategic attributes for a whole lot of brands and represents a significant value creation opportunity. First, Swerve strengthens our position in the natural sweeteners category with its focus on baking, which is a segment of the market that we find especially attractive with its approximate $6 billion addressable market. Second, Swerve enhances our scale and growth in the key North American market by 50%. with this key geography representing pro forma branded CPG revenues of approximately $100 million, equating to a 10% market share of old sweeteners. Third, Swerve products provide portfolio diversification. We enhance our penetration of the natural sweetener category from 45% to approximately 65% of our estimated 2020 North American branded CPG segment revenues. And our portfolio of natural products within our branded CPG segment now represents approximately 46% of segment revenue compared to approximately 35% previously. And fourth, Swerve leverages our established business model, which affords us the opportunity to extract expected savings in the range of 2.5 million to 3 million by the second full fiscal year following the closing of the transaction, driven by supply chain and overhead savings. When fully integrated, we expect Swerve to generate similar adjusted EBITDA margins to what we're producing today within our branded CPG segments. The purchase price of 80 million represents an attractive multiple of 2.25 times 2020 estimated net sales and 9.5 times run rate synergized estimated adjusted EBITDA. It is important to note that given Swerve's asset-light business model, we believe that this acquisition represents minimal integration or synergies achievement risk. Our business, is aligned with powerful secular forces around health and wellness, which is increasingly becoming a necessity due to the burdens created by the global trend toward Western diets, such as obesity and diabetes. As we look to the future, we intend to continue our penetration of the sweetener category. Over time, we intend to expand into adjacent categories within the broader free-from marketplace. as we pursue our long-term growth objectives to reach one billion of revenue. The Anonymous Free From category represents an addressable market with nearly 30 billion in revenue and includes categories such as clean label, organic, GMO-free, plant-based, dairy-free, low-carbon, gluten-free among others. We continue to engage with additional prospective M&A targets and are seeing great opportunities in the market. In summary, we are energized by the strong market performance of our brands within our CPG segment, the continued growth of our derivatives business within our flavors and ingredients segment, and the execution of our M&A strategy with the Swerve transaction. I believe that we have the right assets in the right categories in the right geographies to form the foundation from which we would grow to create a significantly larger enterprise. I am confident that our experienced leadership team can drive a corresponding growth in shareholder value. Before I turn the call over to Andy, I'd like to thank my colleagues. In the four and a half months since we went public, our team has worked hard to operate and grow the business. hire leaders in key functions and geographies to drive future growth, put the necessary public company infrastructure in place, and complete a highly strategic acquisition. With this execution-oriented team, I am excited for the fourth quarter and for 2021 and beyond. With that, Andy will take you through the financial details and our outlook for 2020.
spk03: Thank you, Albert, and good morning to everyone. As a reminder for those new to our company, our consolidated financials reflect both predecessor and successor periods indicative of the June 25, 2020 business combination date. The third quarter results that I'll discuss compare the successor's 2020 third quarter results ended September 30, 2020 to the predecessor's 2019 third quarter results. As a result, our reported gap financials may not be comparable to the predecessor period. I'll highlight for you in my remarks some of the items that impact comparability. This will enhance your understanding of our financial progress, and I also point you to our non-gap reconciliations at the end of the press release for additional detail. For the third quarter ended September 30, 2020, consolidated product revenues were $67 million, representing a 4.6% increase from $64.1 million for the comparable quarter last year. Growth was primarily driven by our flavors and ingredients segment. Segment revenues increased 9.4% to $26 million for the third quarter of 2020. compared to $23.8 million for the same period in the prior year. The increase was primarily driven by strong performance of our derivatives business, which is used in food and beverage, over-the-counter pharma, and skin and beauty care in markets. Branded CPG revenues grew 1.8% to $41 million compared to $40.3 million in the prior year. On a constant currency basis, revenues were essentially flat, increasing 0.1%. Segment results were driven by strong performance in Western Europe, which was partially offset by the continued softness of the North American food service channel and reductions of retailer and distributor inventories in a few emerging markets due to COVID uncertainty. Reported gross profit was $18.6 million, down from $25.9 million in the prior year, and gross profit margin was 27.8% in the third quarter of 2020, down from 40.4% in the prior year period. These results were significantly influenced by an $8.7 million non-cash purchase accounting adjustment related to inventory revaluations required for accounting purposes. Excluding the impact of this non-cash adjustment, gross profit increased 5.6% to $27.3 million, and gross profit margin increased 40 basis points to 40.8% versus prior year. driven by favorable product mix in the branded CPG segment and supply chain productivity. Operating income was $1.1 million in the third quarter of 2020, decreasing $6.8 million versus prior year, again, driven primarily by the $8.7 million non-cash purchase accounting adjustment and public company costs following the business combination, partially offset by consolidated revenue growth. Net loss was $2.8 million compared to net income of $5.3 million in the prior year period and was similarly impacted by the non-cash adjustment on a year-over-year basis. Excluding the non-cash purchase accounting adjustment, non-recurring public company readiness expenses, and other miscellaneous non-recurring expenses, adjusted EBITDA increased 6.7% to $16.5 million compared to $15.5 million in the prior year period. This increase was primarily driven by revenue growth, expense contingency actions, and improved gross profit margins. Shifting to a brief review of our year-to-date performance for the nine-month ended September 30, 2020. Consolidated product revenues decreased 1.7% to $199.8 million versus the prior year period, driven by a 5.9% decrease in flavors and ingredients product revenues that was nearly offset by a 1.8% constant currency increase in branded CPG product revenues. Consolidated adjusted EBITDA of $40.4 million decreased 7.5% versus prior year, driven by international tobacco business declines and public company costs, partially offset by revenue growth in the branded CPG segment and productivity improvements. Now, moving to cash flow and the balance sheet. We generated consolidated cash flow from operations of $7.2 million in the first nine months of 2020. That is net of $10.1 million of transaction-related expenses that were funded by McKenders and Forbes. As of September 30, 2020, we had cash and cash equivalents of $49.1 million and $133.3 million in debt net of issuance costs. Proforma for the Swerve acquisition, assuming full 12-month adjusted EBITDA contribution, and the change to the capital structure give an effect for the $80 million purchase price. which was financed with $32 million of available cash on hand and approximately $48 million under the company's revolving loan facility, our net leverage ratio was approximately 2.4 times based on the combined company's pro forma adjusted EBITDA on a trailing 12-month basis as of September 30, 2020. As we've previously disclosed, our board authorized a $20 million share repurchase authorization on September 8, 2020. While the buyback was not utilized during the third quarter, we continue to evaluate and prioritize various alternatives aimed at delivering the highest returns to our shareholders' capital. With respect to our outlook, We are tightening our full-year outlook due to COVID-19 headwinds within our flavors and ingredients segment, as well as higher public company operating costs. Included in the updated outlook are fourth quarter 2020 contributions associated with our store of acquisition in the amount of approximately $4 million to $5 million of revenue and nominal adjusted EBITDA. We are updating our 2020 full-year outlook as follows. Consolidated product revenues in the range of $270 million to $280 million. Consolidated adjusted EBITDA in the range of $54 million to $57 million. Please note that this excludes the pro forma adjustments of $9 million of future benefits related to the flavors and ingredients segment manufacturing footprint optimization project, synergies relating to combining the two companies and supply chain transformation within the branded CPG segment. We do not anticipate realizing these benefits in 2020, but will reflect these benefits in future periods as we look ahead to fiscal 2021 and beyond. Total capital expenditures will be in the range of $8 million to $9 million, which is a reduction of approximately $4.5 million. The reduction is associated with our footprint optimization project. The execution of the project remains on track. However, the spending of a portion of the capital has been delayed to 2021. We continue to expect that our annual capital expenditure budget in future years beyond 2021 will approximate 1.5% of sales to maintain our asset base and support our growth strategies. That concludes our prepared remarks. Operator, now over to you. Please open the call to Q&A.
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Scott Mushkin with R5 Capital. Please proceed with your question.
spk02: Hey, guys. Good morning, and thanks for taking my question. So my biggest question is around, you know, what's changed when you kind of think of the business over the last three or four months? I mean, obviously, we've kind of tapped down a little bit, the revenue expectations and the kind of, I guess, the EBITDA just a little bit, too, the range there. So I was wondering what's changed. Thanks.
spk05: I'm happy to. Hi, Scott. I'm happy to start on this question. And as we said at the opening of the call this morning, we also have Erwin. And Erwin, feel free to jump on as needed. I would say that, you know, little has changed. What you do have obviously from a COVID uncertainty is the fact that we now assume for the balance of the year that food service is going to remain depressed, which, as you know, impact the United States mostly. So that's what we have. At the same time, so we're being cautious, I would say, with regard to COVID. At the same time, lockdowns are starting and we see some The lockdowns in Europe are starting to drive a second wave of much higher consumption. We don't know what is going to happen in the U.S., of course, but some states are also proceeding with more severe conditions, which could have a very positive impact. I would reiterate that our share is very strong. So what you saw in Q3 was some one-off from a phasing standpoint in some international markets, but the category is performing extremely strongly within most of our top seven markets, a double-digit growth for the category, and we're gaining share. So that bodes very well for Q4, I would say, and we have a buffer from e-commerce where we have seen 200% growth in Q3, as well as a number of initiatives that we have put in place for whole earth and the gain of distributions that are confirmed as well as our seasonal products on equal and special displays that are hitting the shelves as we speak.
spk04: Scott, I'll just add to that. You know, good morning. I think, you know, what has changed? I mean, nothing has changed. This is our first full quarter as a public company. There's a lot coming together in the meantime, you know, our sales were up overall sales up 6%. We continue to gain share, you know, in the equal and the whole earth category and the ingredients business. We had, you know, good positive EBITDA. We've done a great acquisition out there in regards to swerve and, you know, lots of other interesting stuff out there. I think as we look at public company costs coming together and, And this company coming together as a public company also as we consolidate. And as you go back and look at what this being a private company now being a public company and comparisons, you really can't compare. So, you know, it's more of a tightening, you know, of the guidance. And, you know, still, you know, growing mid to high single digits today is something that, you know, I'm proud of this team. The other thing is the transformation. I mean, food service was a good part of the sweetener business, but as more and more consumers stay at home, the opportunity for us to pick up more and more business at home. Coke Zero is growing over 5%, and Diet Coke is growing nicely, and these are products that are in both Coke Zero and Diet Coke. So I'm pretty excited, and also, as Albert said and pointed out, the four or five great points on Swerve. And I got to tell you, if you have not tried that product, go buy some and bake with it because you will not realize how great a product is with the nutritionals that is attached to it.
spk02: Thanks for that. And so my follow-up question, because it's a great lead-in, Erwin, to my follow-up question around Swerve. Can you talk to us about how much shelf space they have, the opportunities there? Because it seems like there's probably significant opportunities as you consolidate this in. to really drive even further adoption at retail of the product. And then I have one more.
spk04: If you look at the business thing in MULO, it's small in Alberta. I'll give you the percentages. The product was, you know, mostly sold within, you know, Whole Foods and natural food stores. So, you know, I know how to roll products out to natural food into MULO. And that's the big thing for us to roll it out into Mule and roll it out into e-commerce. The other big thing is, as I said on the call last week, none of this is sold internationally, whether it's Canada, Mexico, where there's high levels of diabetes and high levels of sugar issues. We now have a good infrastructure in the Middle East where the same thing. So there is a major business for us outside of the U.S. that we look to, you know, for distribution. And it's amazing the calls I got on this product just from international looking, when can we ship this product to them? Albert, do you want to just talk about ACVs? I'm not sure.
spk05: No, I think you said it all. We are excited. You know, scale is going to be very good for us. We're now at 10% market share of all sweeteners, 100 million in the U.S., The two products, Whole Earth and Equal and Swerve, are very complementary. Whole Earth is anchored into sachet and tibia and monk fruit. When you look at Swerve, it's really anchored into pouches and baking. Very complementary products. We got already a lot of praise from the top customers, number one and number two in the world and the country. And we see opportunities to, number one, learn a lot about the natural channel from Swerve, which is a place where we can do better with our historical brands and all those. And at the same time, really do more in traditional grocery in club and in mass. And this is very exciting. Very exciting also because those brands are squarely sitting, as I said earlier, in the natural. We're now in the U.S., it's, you know, our natural portfolio is 70%, and so that bodes very well for where the consumers are going, where the dinos are going, where healthier consumers are going, and the retailers are excited to hear from us, and we're starting those discussions as we speak.
spk02: So that's a great call. My final question, if I could sneak one last one in, I mean, if you look at the swerve acquisition, if you look at what you guys said regarding the restructuring plant consolidation for the flavors and ingredients. And I know we're not given guidance for next year, but it does look like next year is setting up pretty well, given those two factors. Am I off base on that? And then I'll yield. Thank you.
spk05: Erwin, I left you the pleasure to answer that question.
spk04: me on the hot seat listen Scott I think number one as you know I'm about people and I think we have a great organization in place you know under Albert's leadership and the team number two is our strategy is on free from and our ingredient business you know we got brands and brand equity in regards to what consumers want today so with the swerve acquisition with expansion and of both, you know, Equal and Whole Earth and Cantrell and putting the infrastructure around the world. I think the big thing is, is this year, you know, we took a business that was, you know, part of McAndrew Forbes, not really run for growth. We're going to run this business for growth. and uh with that is just taking the business now and going after distribution white space and getting white space out there and you heard albert say you know what are our acvs are and the opportunity um from a scale standpoint it gives us a good scale in the north american market 100 million dollar business today you know in the sugar career the low sugar category and There is also with this business, you know, with our free cash flow, I mean, this business throws up just a tremendous amount of cash. It's not a CapEx intensive business. So, you know, we also have the ability to do additional acquisitions out there, which, you know, we're looking at.
spk05: Yeah, I agree completely, Scott. And I would say that, you know, that's why I'm so excited when I see strong share gains, and I see Category doing very well because share gains really talk about the ability to execute. With that, we committed to the streets during our despacking that we would be acquisitive. And, you know, what I'm happy is that we announced and closed our first significant deal in only 138 days since our despacking. And what you can expect is that we will continue to remain acquisitive in the short midterm while growing our base business.
spk02: That's great, guys. Thanks so much. Thank you, Scott.
spk00: Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from the line of Berkay Barkay with Barkay Capital. Please proceed with your question.
spk06: Hello. Good morning. Good afternoon. A couple of questions, guys. First of all, I was looking at, as you may recall, on the last quarter, I was a little bit concerned about the bridge on how to get to the adjusted EBITDA, but very happy to see that you guys run from 11.3 to 16.5, which is a 48% growth between the two quarters. Having said that, my question is, having seen the same at the free cash flow generation, looking at the predecessor company generating 26.5 million in nine months and from ops and you guys are 7.2 million. Are there anything, is there anything in there that has some timing component with receivables or payables, et cetera, that you may be able to catch up and get closer to or adjusted a bit down on cashflow from operations, at least on the fourth quarter and beyond?
spk03: Yeah, this is Andy. Hey, great. Good question. And so I think a couple of things on the cash flow, you know, number one, you know, I mentioned this in my prepared remarks, but, you know, our overall cash flow from a reported perspective is impacted by the transaction related bonuses that we paid that technically were paid by McKenders and Forbes. So you kind of have to add back about 10.1 million dollars worth of cash to our reported numbers on a year to date basis. So, in reality, while we report $7.2 million, you know, there's actually – you need to add $10.1 million to that from a real operational perspective. Number two, what I would say is that from a working capital perspective, though, is, yeah, there will be – there's some timing on working capital within the third quarter, simply on the fact of when we've received – you know, when we ship sales and so forth. you should see some positive working capital in the fourth quarter relative to where we came in at the end of the third quarter.
spk06: Okay, thank you. This is very helpful. Then, on a lighter note, Irvin, I actually baked some brownies with my daughter with this world product yesterday, and it was phenomenal. I just really enjoyed it, and it was a great product.
spk04: I did the same. I did the same, and I served it, and people couldn't believe it. Like, First question was, where do I buy it?
spk06: Yep, I bought everything I could on Amazon, including pancakes and everything else, but I'll share some pictures. They were great. So going back on the acquisition, I was particularly excited to hear that there is almost no international or no international sales. Could you educate me, like, what is the cadence of having a very strong niche product that is you know, trending really well. And baking is not a U.S. unique phenomenon, I imagine. So it's going all around the world, the growth. And you guys operate in 100-plus countries. So how do you take something that is domestically so, you know, successful and start generating some revenues internationally? And also, along with other doors in the United States, which is what I understand from your comments, that they're somewhat limited.
spk05: Yeah. I'm happy to start on this one. And Berke, thank you for the question. So a few important things you said in your question. The first one is that baking is a global phenomenon. Fifty percent of the sugar consumption goes into baking. And what you are seeing, similar to the U.S., is you are really seeing baking taking off in Western Europe, taking off in the Middle East, taking off in Australia and New Zealand in a very big way. So, essentially, those would be the markets where we're going to go. We actually, as a matter of fact, have a customer presentation in Asia coming up the week after next, and we're going to present Swerve. the over avenue which we're doing very successfully and you you you are a prime example from what you just mentioned is essentially commerce we do have a very strong relationship as you know with amazon in western europe with our e-tailers in the uk and in australia and using with alibaba in asia and this would be a second uh platform where we're working to be able to insert the product very rapidly. So I would say that, you know, we're going to, baking is a phenomena. It's really taking off everywhere. We see big opportunities in Western Europe, Australia, New Zealand, Asia, and the Middle East. And we're getting started now.
spk06: Thank you. Great to hear that. I have a Final question, then I have one comment after the question. But in terms of analyst coverage or potential analyst coverage, could you guys talk about that on the investor relations side of things? Obviously, I believe there's a lack of awareness of the company right now. So I'm curious about any progress there.
spk03: Yeah, hey, this is Andy. I'll take that one. So great question. It's an area where I'm keenly focused on with support of ICR and everyone and Albert and the whole team. So a couple things. Number one, you'll see on our website, number two, we've got a few analysts who have issued reports on us. Scott, who asked a question earlier, being one of them. We do have a few more lined up for reporting. You should see one more coming out very shortly with reports with maybe one or two more by the end of the year. So at least that's what we anticipate. Great.
spk06: Great to hear that. And my final comment is, and I said the same thing on the last earnings call, fully supportive of your acquisition strategy and integrating on your platform. You have incredible synergies given your global operations and the quality of your management team. But as a shareholder from basically day one of your public company after the merger, I really encourage you to also not forget about the share repurchases because I do believe your stock offers a great return and nothing better than for us shareholders to own a bigger piece of it by eliminating some shares that are out there with the strong and flexible balance sheet that you have. So thank you.
spk03: Thank you, Birka. Appreciate it.
spk00: Ladies and gentlemen, at this time, I'm showing no further questions. I'd like to end the question and answer session and turn the conference back to management for any closing remarks.
spk05: Well, I just would like to thank you again. Thank everybody for the support that you continue to provide. We will be available for any follow-up questions and discussion. Thank you, Andy, and thank you, Erwin, very, very much.
spk00: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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