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spk08: Hello, and welcome to West Rock Coffee Company's second quarter 2024 earnings conference call. My name is Kathy Darnell, and I'll be coordinating your call today. Following prepared remarks, we will open the call to your questions with instructions to be given at that time. I'll now hand the call over to Robert Munger with West Rock Coffee.
spk03: Thank you, and welcome to Westrock Coffee Company's second quarter 2024 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 second quarter earnings release issued earlier today. This information is available in the investor relations section of Westrock Coffee Company's website, 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 is my pleasure to turn the call over to Scott Ford, our co-founder and chief executive officer.
spk04: Thank you, Robert. Good afternoon, everyone. We have a number of significant updates that we're pleased to share with you today in conjunction with the second quarter's earnings details, which our CFO, Chris Pledger, will take you through in just a moment. The second quarter of 24 marks a celebratory milestone for all of us that have labored so hard for so long to bring to realization the commencement of commercial operations of our Conway, Arkansas, extract and ready to drink facility we are in full production and sales mold on our multi-serve bottle line we have completed the startup of our rtd canning line and expect to begin commercial sales off that line in the second half of this year and we are on target for the completion of our glass bottle line later this year importantly as we continue our sales effort to fill these lines we have several new commitments in hand that we expect will completely fill our RTD can line over the next 18 months. Our glass bottle line remains fully committed to an anchor tenant that we expect will commence purchasing product in mid-25, and our multi-serve bottle line has already been forced to add a second production ship. This essentially completes our commitment to having the lines in place on time and largely sold through before they begin full production. My hat is off to and my gratitude is profound for each of the team members that financed, designed, built, created products for, sold, and commercialized each of the production and packaging lines in this magnificent facility. I know of no other team in the world who could have accomplished these goals in this timeframe and within this budget. Unprecedented and yet so typical of these fantastic individuals, who sought each other out and came together from every corner of this industry to do something extraordinary for our customers, shareholders, communities, and the farmers who reside at the origin source of these vast and complex global supply chains. As an old and important mentor of mine, Eamon Mahoney, once told me, if you're not happy when you can be, you never will be. So today, we are happy to share this exceptionally good news with all of you. Now, having stopped momentarily to celebrate, and before I turn the call over to Chris, let me say a word or two about our current operations and outlook. The investments we made over the past two years in people, processes, and systems are paying off handsomely, and our core operating and sales metrics are the best they have been in years, hence the 200 basis point improvement in margins. In fact, we were extremely pleased with every key performance metric we measure, except for unit sales in our single serve cup segment this quarter. We could have easily been up over 50% in adjusted EBITDA year over year and not just 20 had the retail customer acted just nearly normal in the quarter. We believe the volume miss is primarily due to the trade down in packaging size that the retail private label customer is executing across multiple products as interest rates and fuel prices continue to absorb a disproportionately higher portion of their disposable income. I doubt that the current single-serve cut volume softness is permanent, and we have a number of new volume opportunities in this category that we are currently working on, which would not only fill this hole but be very additive to our business overall. So I remain very optimistic about the market position and commensurate earnings power we are assembling over the next few years. I'd like to conclude my prepared remarks by offering this important insight. Our 24 and first half of 25 forecasts are still subject to material movement as volume onboarding discussions are likely to continue through the end of this year. That said, we are now much better equipped to gauge the volumes we expect to move through our plans in the back half of 25 once the onboarding transitions are completed. Therefore, we can now estimate an annualized adjusted EBITDA run rate of somewhere between $125 and $150 million as we exit 2025 and enter 2026. Obviously, we have a number of potential opportunities beyond this base level, including the expected continuing development of the Select Milk Producers Joint Venture, which we now expect to wind up later this year as our sales pipeline fills for these products. This is the most accurate and helpful information we can share at the moment. And so with that, I'll now turn the call over to Chris for a review of our financial results.
spk01: Chris? Thanks, Scott, and good afternoon, everyone. We're pleased with another strong quarter driven by 13% gross profit growth in our beverage solution segment, contributing to 21% growth in our consolidated adjusted EBITDA. On a consolidated basis, net sales for the second quarter were $208.4 million, down 7.3% from the second quarter of 2023. Despite the drop in sales, consolidated gross profit was up 16%, driven by operational and procurement improvements in our core coffee business, continued strength within our flavors, extracts, and ingredients platform, and almost 50% gross profit growth in our SS&T segment. This drove consolidated adjusted EBITDA of $13.7 million in the second quarter Moving to our segments, beverage solutions contributed $163.3 million of net sales, which is a decrease of approximately 14% compared to the second quarter of last year. While we continue to see strong results from our flavors, extracts, and ingredients platform with 7% sales growth, volumes remained under pressure in our core coffee business and for the first time in our single serve cup business, driving lower sales in both of those platforms. On our first quarter call, we talked about budget-conscious, lower- and middle-income consumers making fewer trips to restaurants and convenience stores. While that continued to be the case in the second quarter, we are now seeing that same consumer group forgo purchasing single-serve cups in bulk, preferring to purchase smaller pack sizes as a way to stretch their paycheck. This trading down negatively impacted our single-serve sales volume in the second quarter. But despite the drop in net sales, Gross profit in our beverage solution segment increased 13% due to improved gross profit margins in both our coffee and tea and flavors, extracts, and ingredients platforms. Adjusted EBITDA from beverage solutions for the quarter was $13.2 million, a 13.6% increase compared to our prior year second quarter, and our adjusted EBITDA margin in beverage solution was up 197 basis points. In our sustainable sourcing and traceability segment, sales net of intersegment revenues were $45.1 million during the second quarter of 2024, an increase of 29% compared to the second quarter of 2023, primarily due to increased sales volumes. Adjusted EBITDA from our SS&T segment for the quarter was approximately $400,000 compared to an adjusted EBITDA loss of approximately $400,000 in the second quarter of 2023. With the launch of our Conway Extract and RTD facility, We took several actions intended to optimize our manufacturing footprint and reduce costs. During the quarter, we consolidated our Concord, North Carolina core coffee operations into a single facility, and we announced that during the third quarter, we'll be consolidating our extract can and bottling operation in Richmond, California, into our new Conway extract and RTD facility. In addition to the solidations, we carried out a reduction in force impacting SG&A functions across all departments. We estimate annualized savings from these initiatives to be approximately $10 million, and we expect to begin fully realizing these savings on a run rate basis in the first quarter of 2025. Moving on to capital expenditures, during the second quarter, we deployed approximately $36 million of CapEx, primarily related to our Conway Extract and RTD facility. Through the end of the second quarter, we spent approximately $245 million of the anticipated $315 million on the Conway facility. We expect to spend approximately $55 million in the back half of fiscal 2024 and the balance in the first half of 2025. As I mentioned last quarter, as our Conway CapEx intensity abates and our Conway sales intensity ramps in the first half of 2025, we expect to be free cash flow positive in the second half of 2025. At quarter end, we had approximately $140 million of consolidated unrestricted cash and undrawn revolving credit commitments. Our consolidated net secured leverage ratio as of June 30, 2024, was 6.1 times based on an LTM adjusted EBITDA. As we've said all along, we expect leverage to increase and remain elevated during the build-out of the Conway facility, and these leverage levels are in line with our expectations. Turning to our outlook for 2024 and 2025, We are narrowing our 2024 consolidated adjusted EBITDA guidance to a range of between $60 and $65 million from the previously announced range of $60 to $80 million to account for the softness we're experiencing in our single-serve cut platform and our current expectations regarding the sales ramp of customers at our Conway Extract and RTD facility. While we expect our 2024 consolidated adjusted EBITDA to come in at the lower end of our original range, We are reaffirming our consolidated adjusted EBITDA for fiscal 2025 of $115 million. With that, we'll turn the call back over to the operator for questions.
spk08: Thank you. As mentioned, at this time, we'll conduct the question and answer session. To ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1 1 again. Please stand by while we compile our Q&A roster. Your first question comes in the line of Todd Brooks with the Benchmark Company. Your line is now open.
spk00: Hey, thanks for taking my questions. Good to talk to you guys. Scott, I wanted to lead off with questions on two paces within the Conway facility. So it sounds like the commercialization pace as far as lines coming on is tracking to what your expectation was. Is the customer acceptance pace Tracking as expected and then on top of that if we could talk about the contracting case there was a lot of positive news that you you kind of flew through at the start, but it sounds like Single serve can Good news their multi serve bottle with the addition of the second line and then Hadn't known the fact that single serve bottle was kind of a single tenant type of structure So any color you could give us would be helpful.
spk04: Thanks Sure, we've got a range of Issues with people that we're working through across the board so commercialization to some extent is dependent not only upon our teams But the customers so you've got a lot of companies doing a lot of different things right now They are reformulating drinks. They are creating new drinks and they're trying to get They've been they have same group has to come in and live in Conway for a few weeks So I would say on the whole we are right where we need to be on that front. I would on the contracting side We're not trying to get into the habit of announcing every time we do or don't get a contract, but we had some major surprising positive news that came into the house. Whether we get it all squared away to the final contract, I would imagine that we do. But at this juncture, we're trying not to make any assumptions around that front. But I think that what we're experiencing at a dollar level estimated level and the reason that we're not quite positive where we're going to come out in the latter part of the year, first part of next year is because as the RTD space has experienced softness, they are actually going through for the most part and working through contracts they have with other vendors and the slotting of when we start up and what we start up and what volume that we start up with. That's all very flexible and because we have the flexibility to work with people, As we are the plant that's just coming up, we are offering to help people and are working through that with our customers so that they have a smooth transition. That is why we gave you the number in the back half of the year of 25. Whenever all of those gives and takes are settled through, we can see where our run rate is expected to be. We do know the annual volumes that people plan to run with us across all of our lines at this point in time. And that's, we think, as of what we can see today, we think that's a $125 to $150 million EBITDA business when they are all in. We are not pressuring them to come in. We are being good partners and letting them walk in at their pace. And I think it's been highly appreciated across the industry by people that are signing up to help us.
spk00: That's great. Thanks. And then a second follow-up, and I'll jump back in queue. We know about the three lines that are commercializing this year. Can you walk through what additional lines are slated to come on over the course of 25 and Conway as you see it now and then just kind of remind us of the timing for the earliest that the Select milk lines down in Texas could come on as well. Thanks Right.
spk04: We expect over the course of 25. We'll have a small can line We will have bulk fill lines coming on and we will also have bag in a box those are the three things that we expect to turn on and Uh, in 2025 in answer to the first part of your question, where we are with select right now, frankly, everybody is so busy, um, that we didn't want to push. We had, we need to get a certain threshold of the line sold out before we, uh, turn to the banks that are going to finance the equipment side of the JV. And although we were close, uh, we weren't quite at a number that easily made that possible. And so we've delayed it a quarter. while we try to, number one, line that up, and number two, get the flexibility in the banking group for the joint venture to be able to move forward with that without having to make trade-offs of what we're doing back home in Congress.
spk00: That's great. Thanks, Scott.
spk08: Thank you.
spk00: Thank you.
spk08: Your next question comes from the line of Matt Smith with Staple. Your line is now open.
spk06: Hi, good morning. I'm sorry, good afternoon. I wanted to come back to the question around the implied run rate in 2025. You gave some nice color there. And I want to understand how the additional lines that are coming online in 2025, you mentioned the small can, bag in a box, and bulk fill, how you've contemplated the capacity for those lines implied in the EBITDA run rate?
spk04: At this point, we don't have any of those in our EBITDA run rate for the moment.
spk06: Okay, thank you for that. And if we could talk about the single serve pressure you're seeing. You talked about retailers trading down to smaller pack sizes. We've seen that across other categories as well. Are you filling that business or is that contract volume shifting to other vendors that are already set up for the small pack size? Or is this really just a matter of customers purchasing less volume over time, but you're still providing the retailer with the smaller pack sizes.
spk04: Yeah, it's the latter. Typically, and I can't tell you how the whole industry works. I just know how we work with our retailers. We tend to do a very broad spectrum of packaging sizes for them. So we actually, if the consumer is moving from a 100 count to a 50 count to a 25 count, to attend, we will do whatever the customer volume pulls. So we do see, as we serve the distribution centers, precisely and exactly what the volume shift is from the consumer through the store, through the DC, to our ability to make any product that they're pulling through at the shelf. So we know that we know that we're right on that.
spk06: Thank you, Siad. And maybe if I could follow up with one more question. Narrowing of the guidance range, the second half comes down, call it $15, $20 million relative to your previous expectations. You talked about the pressure in single serve as well as some commercialization activity in Conway. Any direction you can provide on the magnitude of each one of those, and I'll leave it there. Thank you.
spk04: It's about 80-20, CUPS and commercialization startups.
spk07: Okay, thank you.
spk08: Your next question comes to the line of Sarang Vora with TAG. Your line is now open.
spk02: Thank you, guys. So, first, it was great to tour the facility earlier in the summer. Gave a lot of confidence about all these, you know, production plants and lines that you're starting. You know, my question is more about next year's production So the small can, the bag in the box, those production lines, can you share the timing of those openings? Like, you know, how are you in terms of like ordering the equipment? Is it more like a second half 25 story or more like a first half? Just to make sure, because I know you said it's not in the guidance. So just trying to understand it better. Thank you.
spk04: Sure. I think it's really twofold. Number one is as we free up the product development workforce that is currently trying to launch 150 individual SKUs in Conway right now, as we work through this period of busyness, then we will turn to customers that are asking us for bulk fill, for hot fill bottle lines, for bag in the box. We literally are just stacked up. It's the same people. in commercialization and product development that have to do the work. And so we don't feel any pressure to further pressure our balance sheet to turn lines on until we got the product development group freed up to actually make the products and get them started up. We are going to work through that over the course of the year. It's probably by default a back half of the year impact, and it's why we didn't put anything in our guidance for it right now.
spk02: That's helpful. Thank you so much. And, you know, margins, especially gross margins, were much stronger back-to-back for second quarter. So curious if you can share some color on how it looks in the back half. It's like, you know, 19.5%, 20% range or decent range as you look at the back half or with all these changes happening. We need to be more careful in expansion ahead.
spk01: This is Chris. I think that those margins should hold. I think what you're seeing is a great job of operational efficiency. I think that our ability to drive down our COGS as we optimize our supply chain is driving real benefits through our P&L, and those things are sustainable. So we'd expect to see those margins hold as we get through the back half of the year. Thank you.
spk07: Thank you.
spk08: Your next question comes from the line of Eric Deloray with Craig Hallam Capital Group. Your line is now open.
spk05: Great. Thank you for taking my questions. First one for me on the timing of facility consolidations. Understood the annualized savings won't be fully recognized until the first part of 2025, but in terms of the actual sort of transition or consolidation, how should we think about timing there?
spk01: We started one of the consolidation of the The core coffee facility in Concord, North Carolina, that took place actually towards kind of the end of the second quarter. The consolidation of the Richmond, California can and bottling, that's going to take place kind of in the third quarter and should be complete by the end of the third quarter.
spk05: Okay, great. And then those savings, should we expect to see those more on the OPEC side or cost of goods?
spk01: you'll see more on the OPEX side. You'll see some benefit on the cost of goods side, but mostly on the OPEX.
spk05: That makes sense. And then demand for Conway, obviously, you know, quite robust here, kind of getting ahead of ourselves. Obviously, you guys have done a great job kind of filling those lines, commercializing that facility. But, you know, given the sort of consolidations of these other facilities, I'm kind of just wondering what sort of capacity may be left in Conway for, you know, potential additional lines or overall expansion? I'm just kind of wondering, as this is all coming together, sort of how much capacity do you have left in that facility itself?
spk01: Well, we have – there's excess capacity in the existing lines that we've put in – that we're starting up now. So if you think about the can line, the glass line, and then the multi-serve bottle line. So there's capacity there to continue to grow in those. And then that also feeds itself into kind of the addition of a smaller can line. We can add probably, I think the total is around six different kind of lines in the footprint that is Conway from a space constraint perspective. So we have the ability to continue to grow in that facility as demand continues to grow. Does that answer your question?
spk05: Yes. Yeah, exactly. Thank you very much for taking my questions.
spk08: Thank you. I'm showing no further questions at this time and would now like to turn it back to Scott Ford for closer remarks.
spk04: Thank you very much. Well, we appreciate everybody's interest. It's been a wild week in the market. I know everybody's busy, but we were thrilled with the quarter. Operationally, we've been working really hard at improving our metrics. We did. We beat our, I think, the median estimate for us by about 14%. We've got a lot of momentum moving into the back half of the year. We have a ton of new customers that are starting to do new lines of business with us, uh, even now in the third quarter. And we, um, we're excited about where we are. I think we are, um, we are landing the brands that we wanted to land in the Conway facility. And I think you are going to see over the next 12 months, an amazing, um, development in that facility. And I just want to end this call with this is really a call to celebrate the people that have built that. And I appreciate what they've done. I'm amazed at what they've done. We've got to execute now. And everybody on the team knows it. And they are doing it. And I am looking forward to seeing everybody in the third quarter where we will be in a much better place at that juncture, both contractually to post people on where we are, and to give really any kind of variance guidance we've got into the end of the year and the first part of next year. So thank you very much for your support. We continue to be head down delivering on a five-year project that we're about midway through, and I think we are on time and on schedule, and I am super pleased. I hope that if you've got any questions, please feel free to follow back up with us, and you have a good evening. Thanks, guys.
spk08: Thank you. This does conclude the program and you may now disconnect.
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