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Operator
I'll now hand the call over to Clay Crumbliss with ICR.
Clay Crumbliss
Thank you, and welcome to Westrock Coffee Company's first 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. Chris Pledger, chief financial officer. By now, everyone should have access to the company's first quarter earnings release issued earlier today. This information is available on the investor relations section of Westrock Coffee Company's website at investors.westrockcoffee.com. 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 to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Also, discussions during the call will use some non-GAAP financial measures as we describe business performance. The SEC filings, as well as the earnings press release, provide reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. And with that, it's my pleasure to turn the call over to Scott Ford, our co-founder and chief executive officer. Scott?
Scott Ford
Good afternoon, everyone, and thank you, Clay. It's good to be here with you all today. I'm pleased to be able to share a quick word on our first quarter operating results, update you on the two most important areas of focus for our team in 23, and share my views on our progress towards achieving the strategic goals we laid out when we went public last summer. As noted in the headline of our release, net sales for the first quarter increased 10% year over year on a consolidated basis and 22% in our beverage solution segment. The most significant contributors being the 44% increase in our single serve cup volumes and the flow through of last year's coffee price rise. Clearly, we continue to work through scaling up the single serve and extract units as capacity constraints, new physical expansions, and the resulting operating efficiency challenges impacted our EBITDA pull-through in the first quarter. Thankfully, these pressures are beginning to wane as we brought additional manufacturing single-serve capacity online late in Q1, and we are turning on our new extract expansion in North Carolina over the next few weeks. Turning to our two key business priorities for 23, First, our team remains focused on successfully launching our new extract and ready to drink facility in Conway, Arkansas. I'm pleased we remain on track with this project with anticipated product launches beginning in the first quarter of 24, rolling through a ramp up over the remainder of the year. In addition to the timely launch of the Conway facility, the second topic the team is constantly aware of is the available revenues, cost, and margins of our core coffee and tea business. So amidst the excitement of growth, new customer relationships, new product launches, we remain ever vigilant on our price points, costs, operating metrics, efficiencies, and returns as this is a competitive commodity processing business. Our single-serve scale-up effort has been tremendously challenging, due largely to equipment shortages. But we are now meeting those challenges as new machines are online and our in-stock levels are now back at industry-leading standards. The flavors, extracts, and ingredients business continues to show itself as both a tremendous source of growth and as a powerful generator of leads for all of our product lines. And the Conway Extract and RTD facility continues on pace with ever-growing interest from an even broader customer base than we envisioned when we set out on this path. With that, I'll turn the call over to Chris, and then I'll give a quick wrap up, and he and I will be glad to answer your questions. Chris?
Clay
Thanks, Scott, and good afternoon, everyone. I'll begin my remarks with an overview of our first quarter results, and then I'll provide an update on our 2023 outlook. As we stated from our very first earnings call, we measure our financial success based on adjusted EBITDA on both an absolute dollar basis and on our growth rate compared to prior periods. And in the first quarter of 2023, consolidated adjusted EBITDA was $8.5 million, a decrease of approximately $2.9 million compared to the first quarter of 2022. There are three main factors driving these results. First, as mentioned on our last quarterly call, it has taken us longer and cost more in terms of equipment, labor, and materials to absorb the 44% year-over-year growth in our single-serve cut volumes. That said, our single-serve production received a major boost in the first quarter when we installed and commercialized new single serve cut machines in February and March. With the addition of these machines, we have been able to improve our customer service levels and turn our focus to delivering the efficiency improvements that come from being able to optimize our single serve platform. While we do not expect immediate earnings growth from our single serve operations in the second quarter, we remain optimistic that we should be able to drive improved financial performance from this platform over the back half of the year. In addition to the single-serve equipment installations in our Little Rock, Arkansas facility, at the beginning of the first quarter, we transitioned our North Carolina facilities from the legacy and, might I say, antiquated ERP system onto the modern cloud-based platform we utilize for all of our other Westrock Coffee operations. This brings our entire company onto a common ERP platform that we will leverage as we expand. As a result of the conversion, our roast and ground manufacturing operation was offline for approximately two weeks in early January. That downtime, coupled with a gradual ramp back up to full production, negatively impacted our service levels for our roast and ground coffee in January and February. The good news is that our ERP system, along with the manufacturing operations tied to it in North Carolina, are running now as they should. The net impact of the conversion downtime, as well as the challenges scaling our single serve platform, account for approximately $4 million in misgrossed profit in the quarter, which flows down dollar for dollar to adjusted EBITDA. Finally, our Sustainable Sourcing and Traceability segment, or SS&T, experienced a 36% decline in net sales in the first quarter of 2022. As the disruption in global supply chains brought about by the COVID pandemic normalizes, and coffee roasters roast through their stockpiled buffer stocks, We are not surprised to see a reduction in sales volume as S&P customers normalize their coffee inventory levels. We expect to continue to see this trend through at least the next quarter. With that in mind, let's walk through the financial results. Total company net sales for the first quarter increased 10% year-over-year to 205.4 million. Our sales growth was driven by the 44% increase in single-serve cup volumes referenced earlier, and increased pricing for the pass-through of higher underlying green coffee prices during the quarter. This growth was partially offset by a 3% decrease in roasting ground coffee volumes and a 36% decrease in net sales in our SS&T segment. Gross profit, excluding the impact of mark-to-market adjustments, decreased $4.2 million to $33.1 million, due in part to higher material and production labor costs compared to the prior year quarter, the negative impacts of the production stoppage as part of the ERP conversion, and our continued efforts to absorb the 44% growth in year-over-year single-serve cup volume. These impacts on our gross profit had a flow-through effect on our consolidated adjusted EBITDA, which, as mentioned above, was $8.5 million for the first quarter. On a segment basis, our beverage solution segment contributed $181.2 million of net sales for the first quarter of 2023. which represents year-over-year growth of 22%. Adjusted EBITDA for the first quarter was 8.4 million compared to 10.4 million for the prior year first quarter. Turning to our SS&T segment, sales net of intersegment revenues were 24.2 million during the first quarter of 2023, a decrease of 36% compared to the first quarter of 2022. Adjusted EBITDA for the quarter was breakeven compared to approximately $1 million for the prior year first quarter. With respect to our capital expenditures, during the first quarter we deployed approximately $20 million of CapEx, the majority of which was growth capital related to our Conway Extract and RTD facility. These expenditures primarily consisted of infrastructure spending and equipment payments for our glass and can lines. In addition, we deployed $3 million of growth CapEx tied to the continued single-serve capacity expansion and our Little Rock, Arkansas facility. In the first quarter of 2023, we added new single-serve machines, and we expect to add additional machines in the coming quarters, which should allow us to be able to capitalize on increased customer demand while also improving the overall efficiency of our single-serve cup operations. At the quarter end, we had approximately $144 million of consolidated unrestricted cash and undrawn revolving credit commitments. Our consolidated net leverage ratio as of March 31st was 4.3 times based on LTM adjusted EBITDA. We believe we have ample access to liquidity to achieve our near-term growth targets and capital expenditure needs. Despite the headwinds we experienced in the first quarter, we continue to expect adjusted EBITDA to grow between 10 and 25% for the year, which translates to a range of 66 to 75 million in adjusted EBITDA. This guidance represents our current expectations regarding the performance of the business. However, actual results may differ materially from these estimates. With that in mind, I'll hand the call back over to Scott for some closing comments.
Scott Ford
Thanks, Chris. In closing today, I'd like to offer a word on our strategic progress. As when we went public last year, our vision, simply stated, is to achieve the attractive economics available to a scaled player serving the largest and most complex retail restaurant and CPG customers in the world of coffee, and to do that in a way that fosters fair market pricing all the way through the supply chain to our farmer partners in 35 origin countries. I remain very excited about not only what we are building and the ultimate value that we create for all of us collectively, but also about our meaningful progress along that journey at this point in time. With that, I'll hand the call back over to the operator for questions.
Operator
Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ben Bienvieux from Stevens. Your line is now open.
Ben Bienvieux
Hey, good afternoon. How are you all?
Clay
Good, Ben. How are you doing?
Ben Bienvieux
Doing fine. So I want to start on a comment that you made, Scott, just as it relates to bigger picture demand and the breadth of that demand being larger than you originally conceived. As you continue to make progress on scaling up Conway, can you talk about – how demand continues to shape up in conversations with either existing or prospective customers?
Scott Ford
Yeah, sure. You know, we've given some general framework around percentages of the facility, and we will do a full update. We're thinking at the end of the third quarter as we wrap kind of the main contracts that are going to go into Conway that will be up and running in early 24. But essentially, We're turning on a large glass line. It is sold out, and we have a waiting list. We're turning on a large retort canning line, and it is well over 50% sold out. We're turning on a multi-serve bottle line, and we're actually – we have been running a line like it in Kohana, and we are having to up the size of that line sevenfold. to be able to make room for the demand that we've got coming in. We have demand for other product lines that are not in the phase one and two that we're turning on in Conway. And that is actually where we're spending a lot of our time with customers right now. Now that the first three lines are, for the most part, spoken for, what are the fourth and fifth lines we'll turn on? And we're literally negotiating contracts with people for those at this current point in time.
Ben Bienvieux
Okay, that's great. Maybe, you know, with respect to kind of a continued situation where demand continues to exceed your ability to supply it and thinking about, you know, in addition to the organic growth plans that you have, some of the M&A that you've done, I'd be curious to hear about your continued appetite for M&A to help meet the demand that's coming or bring additional capabilities to the organization and then you know, when you think about kind of interest rate environments and, you know, perhaps a tighter banking system that we've seen develop over the course of the year, year to date, how has that impacted how fertile the landscape is for M&A and potentially asking prices that you see out in the market?
Scott Ford
Well, Ben, that is one complicated question. So let me unpack it this way. We're in a we are in in the multi-serve bottle single serve ready to drink can and glass bottle that is a very interesting industry structure right now there are a number of really good players that are in that space it wouldn't surprise me over time if there was some form of consolidation in it but at this point in time we are head down on and this is to the second part of your question We are head down focused on making sure we deliver what we signed up to deliver. Uh, we're, we are constantly aware as anybody would be of the current market, uh, the banking climate, um, where we are in terms of a cushion that we've got available to us in terms of our own capitalization, how much our customers are asking us to bite off versus how much we can comfortably bite off with the capital structure that we've got. And we're going back and forth through that with our board. with our key shareholder partners that are on the board and also with our customers, because what's really clear is there is a service and a set of products that we are, maybe not uniquely, but we are certainly distinctly qualified to provide that the major CPG retail brands in the country are looking to buy a lot more of than they can get their hands on today. And we want to be the first and last call that they make to meet those needs. How that plays through the industry over time is beyond my pay grade on today's first quarter call. But you're asking the right questions. And if I look at the history of this team, we will probably be a player in that space at the right time. But right now, the time is to make sure we execute and deliver against what our customers are lined up for.
Ben Bienvieux
Okay, very good. And one more, if I could, quickly on the shorter term, just for this year's guidance, good to see that reiterated. I know it's a milestone on the way to continued ramp in EBITDA as we move forward. I want to ask about the $4 million impact in net profit in the quarter. Was that contemplated in the prior guidance range? And if not, Is there something about the remainder of the year that makes you more optimistic such that you maintain your guidance for 2023?
Scott Ford
Yeah, and Chris will actually take you through the guidance, but let me own something here broadly. So Chris talked about the fact that our roasting ground operations in North Carolina were down for two weeks. We did not plan on that. That was not in our guidance. That was a few million dollars of the miss in the overall grand scheme of things. and the only person responsible for that is me we had a a series of mock conversions that were perfect all through the fall we had every anticipation we would be able to do that exchange the conversion in three to four days we had two customers who had an emergency that needed supplies that they couldn't get from another vendor and i made the decision to front run the conversion And I made a mistake in doing that. And I cost us the downtime. I cost us the EBITDA from the missed sales and the cleanup. And it's not the IT department's fault. It wasn't the accounting department's fault. It wasn't the operations team's fault. It was mine. And so that's the majority of the miss. The good news, as Chris said, that is behind us. The team did a miraculous job of digging out of that. That system is up and running and puts us in a place to go forward rapidly with all of the issues that are attendant to the first question you asked over the next couple of years. And we really ran out of time to be able to do it other than in that window. And I botched it, and I'm old enough and had been through 20 of these and should have known better, and I missed it. Now, Chris, if you want to take it from there about what that means for 23, feel free.
Clay
So obviously that's not something we contemplated when we provided our original guidance. But the reality is that the guidance is more art than science. And so we've got a lot of really good things that are in the pipeline and a lot of really good things that we're working on. Um, so I, as we sit here today, like I said, you know, we, we weren't expecting that beginning of the year, but in terms of what does that mean over the rest of the year, there's a lot to play for as, as we, uh, as we, as we continue on, um, and we're excited about the position we have. We think there's a lot of good opportunity to execute on and we'll be in a good spot at the end of the year.
Ben Bienvieux
Yep. Okay. Understood. Thanks for taking my questions and Scott, your contrition is admirable.
Scott Ford
Well, it's also true, so it has that. Thanks, man.
Ben Bienvieux
Thanks. Thanks, guys.
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of Matt Smith of Stiefel. Your line is now open.
Matt Smith
Hi, good afternoon. Good afternoon. I had a question about the... the supply chain inefficiencies and specifically around the bringing the K cup volume up. I think it was up 44% in the quarter, but it sounds like those higher supply chain costs will continue into the second quarter, even though you've got some new equipment up and running. So can you talk about what's still weighing on the profitability in that business and, and what gets better in the second half to allow that incredible sales volume growth to flow through to the profit line?
Scott Ford
Right. Great question. Let me just back up one quick second. We had a very large single-serve manufacturing machine that was due in last October when we agreed to take on the lift in volume. That machine did not come in until February. What we did was we put together other machines to stand in the gap, but no matter what else we could throw at it, when we were left without the delivery, we were behind. And when you get behind, two things happen. Your volume drops, obviously, relative to the orders that are coming in. You get penalized and paid fees for missing delivery at volume levels. You then have to throw overtime. You run machines up against, you know, breakdown. You don't get to do maintenance. Your efficiencies drop. Your waste increases. And now your output on a dollar of input, whether that be labor, material, machine time, whatever, All of that suffers. That did not relieve until the very end of the first quarter when the new machines were finally installed and started to catch up. We have already caught up on the volume. We are already back in 98, 99% in stocks with all of our customers. The expensive fees for volume misses have stopped and our efficiencies are starting to turn as we get to go through and take each machine apart rebuild, rebuild it, do proper maintenance on it. And we're seeing we're seeing lifts of 50 and a hundred percent in the efficiency of the individual machine. When, now that we're able to finally take it offline, rebuild it and properly tool it. So this is one of those things where, you know, you only get this kind of uptick in volume a few times in your career. And then when you get shorted the equipment that you built the model on, There is nothing to do except throw bodies at it and effort at it, and it was a mess. But as Chris said, with that machine coming in, and frankly, two others that we were able to get alongside it, with those machines in, we've been able to catch up on our numbers. And with our numbers now, we can take machines offline, and with machines offline, we're starting to run our efficiencies back down. And we've run these machines at a P&L level on a per-cup basis. much better than we're running them now in the past, and I have every expectation we'll get back to that now that we can take them offline and service them.
Matt Smith
Okay, thank you for that. And because you maintained fairly high service levels and on shelf, have you been able to hold on to all of the contract volume that was initially one for that business?
Scott Ford
We have not been able to hang on to all of it, but I think all of it is back in play. And I would expect that over the next year, we will have all of that and more back given the current set of circumstances.
Matt Smith
Okay. And just one more for me. It sounded like the $4 million in disruption costs was a flow through to gross profit as well. So if we look at gross margin and we adjust for those costs, there was some nice expansion sequentially. Could you talk about the benefits to gross margin relative to the fourth quarter, again, if we add back in that disruption cost?
Clay
Yeah, I think what you're seeing is you're seeing growth in our higher margin products. You're seeing continued – if you look at the mix shift of the company and the mix shift of the sales that we have, you're seeing continued growth in single serve, and you're seeing continued growth in our flavors, extracts, and ingredients, which is the higher margin business that we do. And so the whole thesis of going public was that we're going to see over a period of time, you'll continue to see the mix shift from hot black coffee in a bag or in a frack pack to single-serve cups into the cold flavors, extracts, and ingredients products that we have in the highest part of our margin. And so that margin lift that you're seeing is just that playing itself out.
Matt Smith
Okay, thanks for that. I'll pass it on.
Operator
Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. Please stand by for our next question. Our next question comes from the line of Joseph Feldman of the Telsey Advisory Group. Your line is now open.
Joseph Feldman
Great. Hey, guys. Thanks for taking the question. I wanted to ask about the new Conway facility. And the demand seems like it's through the roof. I guess the question I have is, you know, what gives you confidence? A, you know, you'll get it open on time and up and running quickly. And B, how do you even prioritize, you know, the customer volume? And when do you start to think about the next facility? It sounds like you could already have another one of these things if you could.
Scott Ford
Hey, Joe, thanks for the question. Well, you can't assume anything, right? If you look at the discussion we just had on machines in the single serve plant, you can imagine how paranoid we are about machines and delivery of being on time in Conway. And the financial proposition that the largest shareholders that came into the business when we went public basically underwrote is the functioning properly in a proper timeframe of the Conway facility. So we have a completely dedicated crew. We have probably added 20 people that have done these jobs before from plant managers to engineering staff, to senior engineers that have built and run plants like this, to product development people, to quality control people who came out of plants that make these very products. And they are separated out and held in a separate team in operations. There's a project management team that is run by a former military guy where no meeting goes past one minute overtime and everything gets done. And we are actually sending people to every vendor to physically walk the lines with our suppliers to make sure that we are seeing the wiring cables, the harnesses, the steel is cut, et cetera, et cetera. So I can't guarantee it, but we are doing everything corporately possible to ensure that it gets installed on time and on budget. And frankly, there are always a handful of issues, but I am very pleased with how that team is delivering. Frankly, we have our weekly executive update and it just coincidentally was right before this call. And I am amazed at how well that entire functioning group delivering that project as it turns to what we would do after that we don't have the balance sheet to do what would come after that as we sit here today and so we either have to answer the question do we want to say yes and do something about that or we better to let that slide two or three years and answer that question then and And that's really something that's up to our board and something that they review just like they would any other kind of strategic move along the way.
Joseph Feldman
Got it. No, that's very helpful. Thank you. And then I guess one other question, maybe more for Chris. I apologize if I missed it when you talked about the year a little bit, but can you give a little more flavor for the top line? I appreciate the EBITDA. commentary you gave, but maybe in terms of overall sales or any of the puts and takes we should think about for the rest of the year?
Clay
Well, I think we didn't give sales guidance this year because we focused on EBITDA. We talked about that at the end when we issued our original guidance. But, I mean, sales have come in, quite frankly, as we've expected. If you look at sort of customer demand across the different products that we have, We expect to continue to see growth year over year in terms of sales and more growth coming through single-serving flavors, extracts, and ingredients as you continue to see those products continue to take a higher percentage of the overall sales that we have within the business.
Joseph Feldman
Got it. Got it. That's great. Well, thanks, guys. I'll turn it over to the next person. Thank you. Thank you.
Operator
Thank you. At this time, I'm seeing no more questions, so I'd like to hand it off to Scott Ford, CEO, for closing remarks.
Scott Ford
Well, I appreciate the depth of work that the guys that get on the phone and ask us questions and go through this. I appreciate what you guys do in your models, one thing, but also in terms of what you're doing, trying to understand the business. We are a business that is changing rapidly. We're also fairly small. Nobody is going to lay up tonight except us and worry about all the ins and outs of our small little details here. But we appreciate the fact that you take the time to do the work, to provide coverage. When we were at this stage in Altel, I had one analyst that would give us the time of day, one. And we've gotten three here that have asked us great questions and show that they're paying attention and doing the work. And so we just want to say thank you. You know where we are. We're around all the time. All we do is this. If we can ever be of help, please reach out. Thank you guys very much. Have a great afternoon.
Operator
Thank you for your participation in today's conference. This concludes the program. You may now disconnect.
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