This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Hello, and welcome to the Rest Rock Coffee Company's third quarter 2023 earnings conference call. My name is Tanya, and I'll be 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 it over to Clay Crumplis with ICR.
spk05: Good afternoon, and welcome to the West Rock Coffee Company's third 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 third 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 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 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 is my pleasure to turn the call over to Scott Ford, our co-founder and chief executive officer. Scott?
spk01: Thank you, Clay. Good afternoon, everyone. Thank you for joining us today. I'll be the first to acknowledge that our third quarter this year looks like a bit of a mess as the variance from our targeted performance of roughly $20 million in adjusted EBITDA for the period and our reported results of $11.6 million appears quite large at first glance. That said, I think it's critically important to call out that virtually 100% of the MIS comes from two distinct causes that were unique to the period. First, over $6 million of the MIS happened in July and August alone in our traditional roasting ground coffee unit, where these customers ordered fewer pounds in this period than they did in the depths of COVID. As we worked with them and their forecast analyst, we were repeatedly informed that, quote, the spike in gasoline prices coupled with the spike in interest rates combined with a miserably hot summer kept consumers out of restaurants and 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. And October and early November are coming in at normal levels as well. So this appears to me to have been the same transient crunch that happened last year when gasoline prices spiked 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 million of expenses during this quarter that were associated offsets to prior periods, further compounding the stated performance gap. 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 missed for the quarter compared to the updated guidance we gave you after our second quarter. We will continue head down to deliver all that we can in 23, looking for ways to drive revenues up and costs down. Turning now to the Conway Extract and RTD plans. I want to commend and thank the team that has 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 in what has to be record time. It has been a joint effort of Westrock employees, professional service providers, equipment vendors, customer product development, QA, and procurement leaders, and the two primary general contractors involved, Navholz Construction and Clark Construction Company. Each individual involved is dedicated to the successful completion, product commercialization, and operational launch of this new $300 million extract and ready to drink facility in Conway, which is on schedule to successfully begin commercial production of finished product in the second quarter of 24. This Conway facility is coming online just as we have essentially now finished selling out 100% of our extract manufacturing capacity in Concord, North Carolina. So overall, while it is a bit of a difficult time for the core hot coffee market where we continue to compete for customer volumes as they ebb and flow through the seasons and gasoline price gyrations, it is an absolutely glorious time to be in the extract and 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 we are over 50% sold out on the remaining two initial lines in the combined Richmond, California, and Conway, Arkansas plants. 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 plants when we roll out our guidance for 24 early next year. Now, 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 and early 25. But we are confident that the four- to five-year forecasted EBITDA generation of West Rock 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.
spk03: 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 extract and RTD facility is 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 solution segment. Consolidated gross profit, excluding the impact of $1.2 million of mark-to-market adjustment and the $1.8 million of out-of-period charges Scott mentioned, was approximately $38 million for the quarter. The out-of-period charges impacted our beverage solution 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 was 41.1 million, included half a million of non-cash mark-to-market loss. Consolidated adjusted EBITDA was 11.6 million, compared to 17.9 million for the third quarter of 2022. On a segment basis, our beverage solution 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 was 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 have been approximately $12 million. While we're disappointed with our third quarter results, the underperformance versus the previous year was largely driven by consumer demand for roasted ground coffee in July and the first half of August. Like others in our space, demand for hot black coffee in the third quarter was significantly down compared to the prior year driven by higher gas and food prices and extremely hot temperatures across most of the U.S. On the positive side, we grew sales in our flavors, extracts, and ingredients 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, we're very excited about the performance of our business and what that means for the future as roasting ground volumes normalize and our single-serve and extract platforms continue to grow. Turning to our SS&T segment, sales netted 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 $300,000 less than the prior year of third quarter. You recall that net sales in our SS&P segment will fluctuate up and down based on the movement of the global price of Arabica coffee, and that our profit in this segment is largely based on the fixed dollar margin we make above that price. This is why you can have such a large downward swing in net sales versus the same quarter last year, while adjusted EBITDA is largely in line with what we generated versus the 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 Extract and RTD facility. And at quarter end, we had approximately 174 million of consolidated unrestricted cash and undrawn revolving credit commitments. Our consolidated net leverage ratio at September 30th was 4.6 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 roasting 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 2023 adjusted EBITDA will fall below the previously provided guidance range. Our current expectation for full year 2023 adjusted EBITDA is $45 to $50 million. We do, however, expect adjusted EBITDA to return to more normalized levels in 2024. Now, with respect to our extract and RTD facility, while it's 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 of the consolidated adjusted EBITDA in fiscal 2027 as we continue on pace with the sales, contracting, and product commercialization efforts required to deliver that number. We'll 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.
spk00: Certainly. At this time, if you do have a question, please 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. In one moment for our first questions. Our first question will come from Ben Bonifu of Stevens Incorporated. Your line is open.
spk02: Hello, this is Jack Harden on for Ben Bienvenu. Hi, Jack. Hey, with what you can see in the flavors and extracts, the extracts market today. Is the demand there subject to the same volatility that you've witnessed during the quarter in your roasting ground business?
spk01: That'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. It's 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 trying to guess what they're going to do, whether they buy coffee 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 that RTD, like every other beverage, had a soft third quarter. across the industry, but nothing like hot coffee itself experiences in terms of seasonal fluctuation or fluctuations around gas prices. It is a much more stable business and it is a much more contractually driven business than the core roasting ground coffee business.
spk02: 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?
spk01: Well, it hasn't changed. We feel we've got plenty of room. And frankly, if you look at where we're running and what we expect to run, taking July and August hot coffee out, 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 lined up wanting to be part of this capital structure, to be part of this adventure, if you will, because the Conway numbers 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 you're going to see us raise, which we raised this last summer, to finish. And we didn't know exactly how July and August were going to come in, but even that performance doesn't change that answer.
spk02: That makes sense. Thank you so much. I'll hop back in the queue.
spk00: And one moment for our next question. And our next question will come from Todd Brooks of The Benchmark Company. Your line's open, Todd.
spk04: Hey, thanks for taking my questions. Scott, I'd love to lead off with one for you, if I could. Sure. We're getting on four or five quarters as a public company here. Just as you're looking in the rear view, knowing that we've got Conway in front of us, just can you comment on kind of 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, rest, and ground business and the non-FE&I portion of beverage solutions?
spk01: It'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, two things going on. You have in the single-serve business and in the systems integration, the first part of the year where we were putting in a new accounting and information system in Concord, which is the roasting ground and extract business. You had $5 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 in. It was late bringing it in. We paid penalties. We suffered the charges of that. We ran 24-7 overtime. 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 along just like we told you. 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 it would do. The hot black coffee business is a very complicated business where we had 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. Now, these are the biggest companies in the world, biggest restaurant and C-store chains. We follow 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 surprised them as much as it surprised us. So I guess some points in time in hot black coffee, you're 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 life. You just go through it. I've had quarters where we've been pleased and I'm 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 buy a product.
spk04: 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. You laid out the $8 million shortfall in the quarter to plan, but at the midpoint of the range, we're talking more of an incremental $8 million guide down to EBITDA expectations. Can we walk through what's behind that dip from the prior outlook?
spk03: Yeah, I think at the end of the day, I think you're 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, you're starting at a lower base. And so we expect continued growth in those platforms throughout the fourth quarter, but that growth will flow underneath our expectation whenever we updated our guidance at the end of the second quarter call.
spk04: Okay, great. And the final one for maybe Scott. On Conway, can you walk us through if there's been any change in the commercialization timing or the EBITDA extraction? I think on the last call, we talked about maybe an expectation that we extract 10% of the EBITDA opportunity. that Conway eventually represents in fiscal 24? Are we still tracking towards being able to generate 20 million in EBITDA out of Conway?
spk01: Yeah. Here's where we are, and let's be super candid. In terms of the things that we have to do, is the equipment in? Are the systems in? Is the plumbing in? Are the products ready to go? Are 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. So there are no penalties in the year of startup, and they select when they come in. So if they all come in in the second quarter, well, we'll blow that away. We will run through the roof against that kind of guidance. But if they all delay until late in the year or first part of 25, which they contractually can, then that won't happen in 24. Now you're asking me, what are my customers going to do in the commercialization startup selection that they alone control? I don't know. 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 24.
spk04: Okay, fair enough. I'll jump back in queue. Thanks.
spk00: One moment for our next question. And our next question will come from Matt Smith of Stiefel. Your line is open, Matt.
spk07: 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 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 into the quarter and that factored into why there was such a severe reduction here in the third quarter?
spk01: um perhaps there was a bit of inventory normalization to go along with the softness in the 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 well 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 would expect. When it comes to what we're going on with our customers, they were carrying inventory and the 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 and the summer was literally we sold You may have to make an amended filing for this, but, but the whole myth was in hot coffee dollar for dollar from July and August. I mean, it was stunning and people said, um, as we've, as we've talked, you know, um, and getting ready for this quarter, I think a fair question is, well, why did you wait until the end of the quarter? Well, we're not Walmart. We don't report revenues on a monthly basis, but this quarter was in trouble in July. We didn't really realize how deeply we thought, well, that's some timing. But by the time August had closed and we were into September, we realized, you know, there is, there is nothing you can do to save costs and get out of a commodity processing business quick enough when, when they just literally don't order anything.
spk07: I appreciate that. And then one of the hallmarks of business was your long tenure relationships with your customers. I think you had a number of your largest customers you've been doing business with for, for many, many years. Have you seen any customer turnover there? or is this really just related to consumption and inventory trends in the quarter?
spk01: This is 100% driven by the same set of customers doing less business year over year.
spk07: Okay, and then if I could transition over to talking about Conway, it's clear the opportunity there is compelling as we look out to 2027. You talked about $200 million for the full business. It sounded like that was your view of Westrock in 2027. Previously, you talked about $150 to $175 million incremental EBITDA from the facility.
spk01: So we've said 125 to 150 on Conway. That's if you go back to last quarter. And the previous, that was up from 100 when we went public. So we upped it from 100 to 125 to 150. Hard to know exactly how it will fold in. But the number we're actually targeting is 200 plus or minus in 27. And so those are the numbers. Just go ahead and finish your question. I want to make sure we were on the same page there, though.
spk07: No, that's perfect. I appreciate that. And then one last one here. The contracts you have in place today, you've talked about you've sold out 100%, then 50% of the remaining lines that are being built out. Understanding that there is some timeline shift 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?
spk01: Yeah, some of them do and some of them don't. But 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.
spk07: That's really helpful. I'll leave it there and pass it on. Appreciate the help.
spk00: And one moment for our next question. Our next question will be coming from Joseph Feldman of Telsey Advisory Group. Your line's open.
spk06: Hey, guys. Thanks for taking the question. I'm on for Sarang Vora today. Had a couple of follow-ups there. So we're sitting here today on November 9th, and as you think about the fourth quarter, like, I guess what are you guys thinking about right now? And what are you worried about? You know, 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, you know, for this fourth quarter and into next year?
spk01: Sure. Well, that's why we went on and gave you an update in our prepared remarks. which we don't normally do where 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 and 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'd lay over last year's results. We track it every day. for the last several years, and we're laying right on top of previous years now. That could stop again if gasoline goes 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 and, 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 the waste and throughput data off each machine. These are the things that we did in the single serve plant last summer, which 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 S&D roasting ground business over the next few months. I expect that we'll 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? Well, I'm worried about things I don't know about, as always. And then what are you working on? We're rehanging the information system in Roasting Ground the same way we did single serve and 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.
spk06: That's really helpful. Thank you. And then Just one more follow-up. I guess from a total sales perspective, you talked about the EBITDA pressures in the fourth quarter, but any other puts and takes we should think about with regard to 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 I'm not quite sure that applies to coffee, but just wanted to get your thoughts on it.
spk03: Well, 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 you continue to have, from an SS&T perspective, you're selling lower priced or you're selling coffee that comes in at a lower global commodity price. And so for SS&T, for example, you saw a significant decrease in the net sales of the business, but the EBITDA year over year is flat. And so you'll likely see significant decrease in net sales in SS&T coming into the fourth quarter, but you'll continue to see EBITDA flat. You're not going to see EBITDA drop off because of that. But in our beverage solution segment, I think you're going to continue to see the same kind of sales flow that we saw in September.
spk06: Got it. That's helpful. Thanks so much, guys. Appreciate it. Good luck with the quarter.
spk00: Thank you. I would now like to turn the conference back to Scott Ford for closing remarks.
spk01: Well, thank you. I appreciate everybody hopping on this afternoon. I'd simply highlight what Chris and I had mentioned earlier. The third quarter was about a disappointing roasting ground coffee volume early in the quarter. We were 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 two flavor extract and ingredient plants, one in Richmond, California that we bought 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 growth we've experienced there, which is up 70% year over year for the period, we're going to roll that same growth into 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. And I expect it to do that. And we will be bringing you some metrics to follow along with us along the lines of 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 to plan up so you can follow along and help do your own math, given 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 and rough it along. And if they come to the front of the window, it's very hard to get your mind around how fast the EBITDA of 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.
spk00: This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer