Westrock Coffee Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

Key Takeaways

  • World’s largest roast-to-RTD facility now live in Conway, Arkansas, producing finished products and slated to run at ~75% of capacity in 2025.
  • Q1 adjusted EBITDA up 32% year-over-year to $11.1 million; reaffirmed 2024 guidance of $60 – $80 million and introduced preliminary 2025 guidance of ~$115 million.
  • Roasting ground coffee volumes remain weak due to consumer inflation and the exit of some low-margin contracts, prompting upcoming expense reductions.
  • Robust customer wins and commercialization across single-serve, RTD cans and glass bottles (sold out), driving materially higher volumes for late 2024 and 2025.
  • CapEx and leverage outlook includes $200 million spent on Conway to date, ~$90 million planned through year-end, net leverage at ~5× LTM EBITDA, and FCF positivity expected in H2 2025.
AI Generated. May Contain Errors.
Earnings Conference Call
Westrock Coffee Q1 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

you for standing by. My name is Alex, and I will be your conference operator today. At this time, I would like to welcome everyone to the WestRock Coffee Company First Quarter 2024 Earnings Conference Call.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Robert Munger with WestRock Coffee. Please go ahead.

Speaker 1

Thank you, and welcome to WestRock Coffee Company's Q1 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.

Speaker 1

By now, everyone should have access to the company's Q1 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.

Speaker 1

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 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.

Speaker 2

Thank you, Robert, and good afternoon, everyone. Thank you for joining us for this pivotal financial and operational update. As most of you know, we've been engaged the development of what we believe is the world's largest roast to extract to ready to drink facility. And today, we are thrilled to announce that it is now operational, producing finished sellable product, and we have commenced the full fledged fill it up mode. On top of this, our first quarter performance was simply outstanding across a number of fronts.

Speaker 2

Our first quarter adjusted EBITDA was up 32% over the prior year due to double digit growth in every product segment except for roasting ground coffee, which remained weak. Our Conway, Arkansas extract and ready to drink plant commenced we already expect to run at roughly 75% of installed capacity utilization in 2025, our first full year of production. Our select milk producers JV for 2 aseptic ESL lines and requisite cold storage capabilities in Littlefield, Texas continues on pace for an expected closing and funding in the Q3 of this year and a subsequent product launch in mid-twenty 26. Our current indicated order book for this already reflects one line essentially spoken for. We are in the midst of a meaningful string of sales victories across multiple customer channels and product types, and our volumes for late 2024 and 2025 are anticipated to be materially higher than current run rates.

Speaker 2

With our Conway cold chain multisterve bottle line and commercial operation, we are now in the product commercialization phase with several customers on our high speed can line, and we continue to expect our glass bottle line to commence operations in the Q4 of this year, which remains completely sold out. Given these results, our updated order book outlook and our ongoing expense reduction plans, we are pleased to reaffirm our adjusted EBITDA guidance range of between $60,000,000 $80,000,000 for 2024. Further, we are introducing our first preliminary view for 2025 adjusted EBITDA of roughly $115,000,000 This view reflects the current state of our traditional business, plus the addition of those new customers and products that we are in the final stages of contracting, commercializing and preparing to manufacture. With that overview, I'd like to spend a few minutes drilling down on the key challenges and objectives we are executing against over the remainder of 2024 2025. As I'm sure everyone on this call is aware, fuel and food inflation continued to disproportionately impact a growing segment of American diners and shoppers, which in turn continues to affect our roasting ground coffee volumes.

Speaker 2

And while part of our volume decline is the result of a customer moving some low margin roasting ground volume, the more important declines seem to be directly attributable to ongoing food price inflation. We simply see no quick fix to the reality that many end consumers will continue to struggle to afford food and beverages, especially when purchased away from home and we will be adjusting a number of our operating expenses accordingly in the coming months. But of even greater impact to our business is the quickening transition of the coffee consumer from pots of hot coffee to cold based and single serve RTD style coffee offerings. This transformational shift plays directly into our strengths as we launched the Conway extract and RTD facility and as our single serve cup business continues to see meaningful share shift opportunities materialize. In these instances, our growing team of product development, commercialization, logistics and operations professionals continue to be recognized across our industry as one of the premier teams to partner with globally.

Speaker 2

We are excited to be collaborating on a number of development and scale up projects with key customers across industry segments who are global leaders in these quickly growing categories. It takes considerable and time to execute against this type of multilayered consumer driven product shift. But I believe the WestRock team has distinguished themselves as the leading partner for consumer facing clients to work with to capture the benefits these rapid consumer and product shifts enable. You can clearly ascertain from our guidance updates that we are winning much more than our traditional fair share of these customer relationships. We view this as critically important strategically because as customers choose their product development, new product launch and meaningful scale up partners today, they are making decisions that will ripple through our industry for the next decade.

Speaker 2

Being dedicated to our customers' long term success no matter the short term dislocation pain to our operations or to preset self imposed financial metrics has been a critical differentiator for WestRock in the eyes of our customers. I fully acknowledge this sometimes painful reality and appreciate the great patience that everyone has shown as we upsized the Conway plant yet again and again, for instance. But I, our executive team and our Board remain steadfastly resolute in our belief that this is how we must have acted in order to help our growing list of customers make the transition from hot to cold and from multi serve to single serve coffee and energy based drinks. It was imperative that we say yes when asked for help. For enduring the attendant dislocations over the past few years, we are today partners with most of the leaders in the various industry sectors we service across multiple product categories, and we are being entrusted by more and more of them each quarter with a growing set of products as their strategic development, product development, ethical sourcing, logistics and production partner.

Speaker 2

The guidance we're sharing today about our late 2024 and full year 2025 adjusted EBITDA serves, I believe as the first but definitely not last major proof point of the wisdom that our investors and Board have placed in our leadership team execute this non conventional but value enhancing corporate transition. I'll be glad to answer questions in a moment. But with that, let me turn the call over

Speaker 3

to our CFO, Chris Fletcher, who will take you through the key metrics that underpin all of these remarks. Chris? Thanks, Scott, and good afternoon, everyone. As Scott mentioned, our business performed well in the Q1, highlighted by 13% sales growth in our flavors, extracts and ingredients platform and 8% gross profit growth in our Beverage Solutions segment, both of which contributed to 32% growth in our consolidated adjusted EBITDA. On a consolidated basis, net sales for the quarter were $192,500,000 down 6.3% from the Q1 of 2023.

Speaker 3

The drop was largely volume driven with continued softness in our roasting ground coffee business. This was partially offset by a 42% increase in net sales in our Sustainable Sourcing and Traceability segment and 13% sales growth in our Flavors, Extracts and Ingredients platform. Despite the drop in sales, consolidated gross profit was up 8.7% driven by gross profit improvement in single serve coffee and across flavors, extracts and ingredients. This drove consolidated adjusted EBITDA of $11,100,000 in the Q1 of 2024, which is a 32% increase year over year and our adjusted EBITDA margin was up 167 basis points year over year. Moving to our segments, Beverage Solutions contributed $158,100,000 of net sales, which is a decrease of approximately 13% compared to the Q1 of last year.

Speaker 3

While we continue to see strong results in our Flavors that Extracts and Ingredients platform, this growth was offset by continued softness in our traditional roasting ground coffee business. As has been widely reported in the financial news and on other earnings calls this quarter, lower and middle income consumers remain budget conscious. They're making fewer trips to restaurants and convenience stores, and when they do make trips, they're looking for ways to spend less, often by foregoing a beverage occasion. Likewise, U. S.

Speaker 3

Grocery sales are experiencing similar volumes declines as shoppers absorb significantly higher food and beverage prices. These consumer based decisions drive the volume drop we experienced in the Q1. But despite the drop in net sales, gross profit in our Beverage Solutions segment increased 8%, driven by double digit gross profit growth in single serve and across flavors, extracts and ingredients. And adjusted EBITDA in Beverage Solutions for the quarter was $10,800,000 a 28% increase compared to our prior year Q1. And adjusted EBITDA margin in Beverage Solutions was up 217 basis points.

Speaker 3

In our Sustainable Sourcing and Traceability segment, sales net of intersegment revenues were $34,400,000 during the Q1 of 2024, an increase of 42% compared to the Q1 of 2023, primarily due to increased volumes. Adjusted EBITDA in our SS and T segment for the quarter was $300,000 compared to breakeven for the Q1 of 2023. Moving on to capital expenditures, during the Q1 we deployed approximately $7,000,000 of CapEx primarily related to our Conway extract and RTD facility. Through the end of the Q1, we spent over $200,000,000 of the anticipated $315,000,000 on the Conway facility and we expect to spend approximately $90,000,000 over the next 9 months of fiscal 'twenty four and then the balance in the first half of twenty twenty five. As our Conway CapEx intensity abates and our Conway sales intensity ramps in the first half of twenty twenty five, we expect to be free cash flow positive in the second half of twenty twenty five.

Speaker 3

At quarter end, we had approximately $188,000,000 of consolidated unrestricted cash and undrawn revolving credit commitments. Our consolidated net secured leverage ratio as of March 31, 2024 was 5 times based on our LTM adjusted EBITDA. As we said all along, we expect leverage to increase and remain elevated to the build out of our Conway facility and these leverage levels are in line with our expectations. Turning to our outlook for 2024, we are reiterating our expected consolidated adjusted EBITDA guidance of $60,000,000 to $80,000,000 in fiscal 2024. While we expect our 2nd quarter results to look similar to our Q1 from an adjusted EBITDA standpoint, we expect meaningful growth in the second half of twenty twenty four as our high speed can line and glass bottle lines commence operation and the volume throughput in our Conway facility intensifies.

Speaker 3

As Scott mentioned earlier on the call, we're also introducing preliminary 2025 consolidated adjusted EBITDA guidance of $115,000,000 which we expect to achieve as customer onboarding and product commercialization continues as planned. With that, I'll turn the call back over to the operator for questions.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Ben Bienvenu with Stephens. Please go ahead.

Speaker 4

Hey, good afternoon and congratulations.

Speaker 5

Great. Thanks, Devin. I wanted to ask, as

Speaker 4

it relates to the 2025 guidance, which is great, super encouraging, what was it that gave you guys the confidence to give that sort of guidance recognizing hinges heavily on Conway, we're 4 months into the year or so in 2020 4, that signals a lot of confidence, which is great. And I'd love to hear a little bit about kind of the critical path that helped you get here to offer that guidance to us for next year.

Speaker 2

Thank you, Ben. This is Scott. And yes, it is a bit far out for what any normal company would do on a normal guidance timeframe, but we've been going through something exceptional. We've been building the world's largest roast to ready to drink facility. And I thought it was important and our Board thought it was important that we share with you some level of indication about what we've already sold.

Speaker 2

What we've put in front of you is what we've sold as of now that we are finalizing commercialization and actually getting ready to ramp up. We do have roughly 25% of the capacity of the facility yet to fill up, which we intend to do and I think we will do probably in the next few months. But at this point in time, we wanted to give you a sense of what is it that we've accomplished with Conway turning on and being able to make commercial sellable product. Well, it would generate given our current run rate in our core business and the new contracts that we've sold into Conway just coming on, it would generate that EBITDA number and we wanted you to have some sense of what that looked like. I assure you it will change.

Speaker 2

It will move up or down based on whether things happen on time and on the marks that we think they're going to hit, but we had to start someplace so you had a sense of order of magnitude about what it is that has happened as Conway turns on.

Speaker 4

That's great and much appreciated. As we think about kind of the ramp and Chris, your comments are helpful on kind of how we should think about this next June quarter, should we think of the back half of this year as a step function change higher to get to the EBITDA range you've reiterated today for 2024 and then a steady ramp into 2025? Or Scott, I just heard your comments. I know this won't be a straight line. So anything as you expect it anything you could provide as you expect it today, recognizing it's subject to change would be helpful in terms of us kind of calibrating our models into 2025?

Speaker 4

Thanks so much.

Speaker 2

Sure. We do have a little bit of Conway coming on in the back part of 2024 in our current thinking, But most of 2024 is work that we've done away from Conway that is just now coming through. We've been working on about an 18 month sales cycle where we had a lot of things come in the last part of this year, the first part of this year that don't actually start production until late 2024. That's a big driver. There is some EBITDA help in the back half of 2024 as well, but it's I'm not sure what we've said about it.

Speaker 2

It's not a huge number. You should see over the back, I'd say it's really about a 3 quarter launch between the 4th quarter and the first two quarters of 2025 is where you should see the curve really accelerate on a run rate basis as things turn on in full. And this is our best kind of guesstimate. The $115,000,000 is our best attempt at guessing what that should look like if everybody stays on the calendar hitting their marks, which frankly is as much up to our customers as it is us, but everybody has been hitting their marks to date. And part of the strategy is

Speaker 3

to make sure that in 2024 that we can commercialize as much as we possibly can for Conway, so that you're able to run as much of Conway in 2025 as possible. So there will certainly be a ramp, but the more we spend time commercializing what we've currently sold and sell throughout the rest of the year, the better the number that we get in 2025.

Speaker 4

Yes. Okay, understood. Thanks so much. Much appreciated.

Speaker 5

Thanks, Ben.

Operator

Your next question comes from the line of Todd Burke with The Benchmark Company. Please go ahead.

Speaker 6

Hey, good afternoon, everyone, and congrats on sticking the landing as far as getting the plant up and running in April. Well done.

Speaker 3

Thanks, Todd.

Speaker 6

Two questions for you. 1, if we look at early stage commercialization process and you'd explained to us in the past that a lot of the timing relates to how much the customer needs to prove on the new lines, how long that acceptance period runs. Which early take on the actual acceptance window versus how long it possibly could have been when we were discussing it in the future or in the past?

Speaker 2

Holistically speaking and not to get into which product and which SKU and which customer and all of that stuff, but holistically speaking, because a number of those things have to do with customers and also with approval processes that the customers, regulators, approving authorizing agencies all have to work through, we are ahead of schedule. Whether that will continue to hold is the $64,000,000 question, but as of right now, we are ahead of schedule.

Speaker 6

Okay. And then second of three questions. The incremental 25% capacity that's not reflected in the fiscal 'twenty five guidance, why wouldn't that be sold out going into 'twenty five given just the demand for flavors and extracts?

Speaker 2

Exactly. Yes, that's exactly the question I asked the sales force and they have said, don't worry, boss, we have got it covered, But we don't have it signed, so it's not in our number. There's a group

Speaker 3

of customers that can sign on ahead of time because they may have moving capacity from other vendors or they have other sources. But if you've got customers where they've only got 1 or 2 other vendors, they need to be able to see product produced on the equipment. And so a little bit of it is once we're able to show we can produce the product and the timeframe in which we said to the quality that we said, our ability to be able to sell out the rest of the line is we feel pretty strong about that.

Speaker 6

Okay, great. And then my final question in the comments in the release. Scott, you talked about just sales pipeline development efforts and several new contract wins in the quarter. I'm wondering how broad the contract wins are. Now that you brought customers, many of them new to WestRock in through Conway, what type of contract wins are you getting?

Speaker 6

And how far does it branch out as far as cross selling into single serve or rest and ground or other potential opportunities? Thanks.

Speaker 2

Todd, it has been a mix. It has been we have brought customer we been introduced to new customers through Conway, even just looking at Conway, which then has turned out to be we landed roasting ground coffee contracts. We received we started talking about roasting ground and we ended up getting single serve cup contracts. We have one customer that came in that started in roasting ground is now looking at cups and now is wanting to move their beverage platform in. And what's nice about this is that we have a number of customers of various sizes from some of the largest retailers who have never launched private label in some of these categories, private label providers that want to switch vendors, that's always kind of part of it.

Speaker 2

But we've also got a very nice assortment of what we would call emerging brands in the RTD single serve coffee space, as well as some really large brands. They're looking at adding products to their portfolio over time. And Conway turning on has been a great place for us to meet, sit down and go through all of the things we can do. And I think we signed new contracts in every one of our product categories, and I think we signed new contracts in every one of our customer channels in the last 6 months from that activity. And I believe over the next 6 months, we will dwarf.

Speaker 2

Just a personal guess, not in our guidance. I think we have the possibility of dwarfing those wins over the next 6 months.

Speaker 6

That's fantastic. Look forward to seeing it happen, Scott. We'll talk to you later.

Speaker 2

Me and you both. Thank you.

Operator

Your next question comes from the line of Matt Smith with Stifel. Please go ahead.

Speaker 5

Hi, good afternoon. Just a couple

Speaker 7

of questions here. Last quarter you talked about the wide range of EBITDA in 2024 reflecting maintaining some flexibility to prioritize customer onboarding versus kind of flat out running production through Conway. Can you talk about the phasing of that customer onboarding in using up some of the line capacity meaning as you get into the second half of twenty twenty four and you have cans and glass bottles running, are you still toggling back and forth between production and trying to fill the remaining 25% of contracts?

Speaker 2

I think we've got all of the above going on, Matt. And we're also it's been less than 90 days since we spoke to you last. It's not like we have any huge amount of additional visibility into exactly when the 3rd and 4th quarter commercialization production runs will start. But so far everything is on track. And so that's why we're able to say, well, let's at least pencil out for them if we land that in 2024, whenever that might be, what will 2025 look like?

Speaker 2

And as Pledger has said multiple times, and it's said in jest, but it's actually true, we have a lot more visibility into what we're going to do in 2025 than we do in 2024 because of all the song and dance processes we have to line up with all of the various customers.

Speaker 7

I appreciate that. And one last one for me. You mentioned in the prepared remarks about a customer moving on from low margin roast and ground. Can you just provide a little more color on to what's behind the customer moving on and what they're pivoting to?

Speaker 2

What they're pivoting to, I'm not really privy to, it's not really my business. It was a large kind of wholesale type Post and Ground piece of business that had been done the old S and D plant. And at the end of the day, as we exchanged out our accounting systems and started taking a hard look at all of our costs and all the redundancies and all of the support that that pulled on. There were better customers for us than that one. And also we are managing the transition from customers where we do commodity work versus customers where we do important brand work for them.

Speaker 2

And in that transition, we had one move on and it's about half of the volume decrease we experienced in the quarter over the prior year in Roasting Ground.

Speaker 7

It's very helpful. Thank you.

Operator

Your next question comes from the line of Sanang Vara with Tag. Please go ahead.

Speaker 5

Great. Thank you. And my congratulations as well on opening of Conway, a big venture started so great. Just digging deeper on the 2025 EBITDA guidance, dollars 150,000,000 that is driven a lot. The growth is coming mainly from the Conway.

Speaker 5

So can you help us understand the margin profile of this new business compared to your old business? I know FE and I is significantly higher margin on the growth side. So just trying to understand like as we look out at 25, like how does your gross margin profile inflect as well and cost? So if you can share a little more color on the profile of Conway that would be great.

Speaker 2

Sure. And we will do a lot more of that for you as this year goes on. But at a high level, the Conway plant has a higher margin than most of our traditional businesses and parts of the Conway plant have a much higher margin, gross profit margin, EBITDA margin than our traditional businesses and that's in the extract world. And so the balance of where we are making extract and shipping it out to some people versus then running it through a lower margins further process or packaging process, if you will, That will create what the blended margin of Conway will look like. There will be places where we just do extract sales in bulk and then places where we do extract sales into a finished product.

Speaker 2

The finished product line is it's not the greatest whizbang business in the world from a margin and capital return business, but it's a really good business compared to when coupled with the extract sales business. And I think you're going to see the industry continue to line up in that regard. Our core theory is simply this, Sarong. And I know that you want a specific margin number, which we will take you through later in the fall. The core principle is this.

Speaker 2

Our collective industries have faced off against our customers in the ways that the companies wanted to do business. They want to sell just extract, they want to just do a canning process, they want to just run a cold chain, they want to just do product development and have you pay them a fee. That's the way the industry has been structured. And what basically we bet on was that people would want to see all of those things under one roof where they could then embed their own product development engineers and food scientists and then they could say, I want to turn this into a can, this into a bottle, this I want extract where I can fill my own bottle, this I want to blend with milk, this I want to do with oat milk, I want to do with an alternative plant based milk. Providing that vehicle for people to bring their own food scientists in and say, you tell us how you want to pick and match various functions and services we can provide and we'll let you do that.

Speaker 2

That has garnered an immense response from our customers. Now you're asking me exactly how that set of Tetris blocks will land and how the numbers will play out and I can't answer that yet any more than I can give you the specific guidance by quarter for 2024. But I think you get the idea that it is a meaningful lift to the core EBITDA that the business in

Speaker 5

the aggregate reports. No, I mean, some of your margins are 2x your current margin profile. So I can understand, but I was just trying to see if you can have you have a curve or how high the margins can go. So that's helpful. Thank you so much.

Speaker 5

And I have one quick question on the expense reduction plan. I know you mentioned in the press release, you talked about it that you're trying to cut back on certain costs. So help us understand areas that were a bit out of control from a cost standpoint. And then how are you planning to address the reduction of cost or something? Thank you.

Speaker 3

I think turning on the Conway facility and the distribution center that comes along with the Conway facility, it really creates opportunities to be able to maximize the manufacturing footprint. So we can look to consolidate operations to where they're most profitable to be able to produce. And so now that the facility is up and running, now that we've got the distribution center that's associated with it, we're going back and looking at our the rest of the operations to see how do you look at our business and how can what can we do within our business in order to maximize the value of the platform we've created? Are there opportunities to rationalize assets in order to be able to streamline how we operate? And if we can save expenses in the process, then that's just a smart thing to be able to do.

Speaker 5

That's great. Thank you.

Operator

That concludes our Q and A session. I will now turn the conference back over to Scott Ford, Chief Executive Officer, for closing remarks.

Speaker 2

Well, I think we've answered I think you guys have asked all of the right first level questions and I think you've gotten what we know about them at each level. I'll say this, we were extremely pleased with our Q1 operations. We were we are making good progress on the margins and expenses in our core business at the same time that we've been able to turn on Conway exactly on time. I don't think there's many people that thought it would happen on time, And it was a thrill to see the first product come off and to see it ship out and sell. We're extremely excited about what the next 9 to 12 months hold on that.

Speaker 2

It is still a period of great flexibility and flux, if you will, about exactly how it will land. But we thought it was imperative that we give you some sense if the ship just carries on at today's course and speed about what you should expect for 2025 and we hope that that helps you frame up your valuation thinking because this is the kind of question set that we go through with our Board, which as everybody knows, is largely made up of institutions and family offices that have carried the lion's share of the financing of all of these operations. And so since they are asking that question and are worthy of the answer, we wanted to share it publicly as well. And we appreciate your support. We appreciate your interest, and we hope you have a good afternoon.

Speaker 2

Thank you.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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