Q4 2023 Westrock Coffee Co Earnings Call
Participants
Melissa Calandruccio; Investor Relations; ICR
Scott Ford; Co-Founder & Chief Executive Officer; Westrock Coffee Company LLC
Chris Pledger; Chief Financial Officer; Westrock Coffee Company LLC
Todd Brooks; Analyst; The Benchmark Company LLC
Ben Bienvenu; Analyst; Stephens, Inc.
Matt Smith; Analyst; Stifel Nicolaus & Company Incorporated
Sarang Vora; Analyst; Telsey Advisory Group
Presentation
Operator
Thank you for standing by, and welcome to WestRock Coffee Company's fourth quarter 2023 earnings conference call. (Operator Instructions)
I would now like to hand the call over to Melissa Calandruccio, Investor Relations. Please go ahead.
Melissa Calandruccio
Thank you, and welcome to WestRock Coffee Company's fourth quarter 2023 earnings conference. 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 fourth quarter earnings release issued earlier today. This information is available on the Investor Relations section of the WestRock Coffee Company's website, investors dot westrock coffee.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 could 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 discussing during the call, we'll 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 Ford
Thank you, Melissa, and good afternoon, everyone. Thank you for joining us today for the year '23 was a significant transition year for restaurants. When we entered last year, we knew it was going to be a long year of system upgrades and equipment installations.
And as we explained on our quarterly calls throughout the year. The impact of these upgrades on our business were material and sometimes painful, even if holy necessary. We now enter 2024 on the backside of a number of important system migrations, capital equipment upgrades and with the new extract and ready to drink facility in Conway, Arkansas on schedule for delivery of our first commercially available products next month.
After incurring the expenses brought about by these significant upgrades and improvements, we now enter the year 2024 with the infrastructure in place to scale this business multiple fold and with our current adjusted EBITDA run rate already 30% to 40% above our year end results for 2023.
This is due to the unrelenting and unwavering work by the entire WestRock team, our vendor partners and our customers. My heartfelt gratitude extends to each and every one of them.
As we turn to '24, I'll remind you that we announced our '24 annual adjusted EBITDA forecast in connection with our select mill joint venture and convertible note offering announcements last month. Today, we're pleased to reiterate that our guidance for our expected adjusted EBITDA for the year 2024 should be up somewhere between 30% and 75% for the year.
We have recently enjoyed several new contract wins on each of our platforms from roast and ground coffee and tea to single-serve cups and extracts and ready-to-drink finished goods. And while the impact of most of these new lands is slated to come online in the back half of the year. Some are already starting make modest contributions to our profitability.
Even now I would like to thank everyone who has supported us through the long two year process of modernizing and expanding our incumbent facilities as well as constructing the new extract and RTD. facility in Conway. It's required tremendous effort, persistence and patience on everyone's part.
And it is a delight to be able to walk through these plants today and see the new commercial realities of these investments coming to life. We chose to bear the pain of fully modernizing all parts of our business in 2023. So that when the new Conway facility was launched, those challenges would be seen in our rearview mirror and not in our face.
It was an extremely difficult year because of this. There's no doubt about that. But we are now thrilled that these challenges are behind us, and we are extremely excited for 2024.
And with that, I'll turn the call over to Chris Pledger, our CFO, for a review of our financial results.
Chris Pledger
Thanks, Scott, and good afternoon, everyone. When we took the Company public in August of 2022, we did so to reposition the Company to capture the consumer shift to single-serve coffee and cold coffee products. Our financial performance, both in the fourth quarter and in our full year 2023 results continue to reflect this shift by the consumer and our work to capture it.
In terms of our financial performance company, net sales for the fourth quarter of 2023 were $215 million compared to $227.7 million for the fourth quarter of 2022. Consolidated gross profit for the fourth quarter of 2023 were $34.8 million and included $900,000 of non-cash mark-to-market losses compared to $34.3 million for the fourth quarter of 2022 that included $2.7 million of non-cash mark-to-market loss.
This drove consolidated adjusted EBITDA of $13.7 million for the fourth quarter of 2023 compared to $17.5 million for the fourth quarter of 2022. That delta between these two numbers is almost entirely the result of a one-time compensation accrual reversal in the fourth quarter of 2022. That was not repeated in 2023. Adjusting for the accrual reversal, consolidated adjusted EBITDA would have been essentially flat quarter over quarter.
In our Beverage Solutions segment in the fourth quarter we continued to see strength in our single-serve coffee platform as well as our sales of flavors, extracts and ingredients, which grew 30%. This was partially offset by continued softness in our traditional roast and ground coffee business.
In the fourth quarter of 2023, our Beverage Solutions segment contributed $175.1 million of net sales, which is a decrease of approximately 9% compared to the fourth quarter of 2022. Beverage Solutions gross profit was $31 million for the quarter, down 4% compared to the fourth quarter of 2022.
Adjusted EBITDA from our Beverage Solutions segment for the quarter was $11.7 million compared to $15.2 million for the prior year fourth quarter. This decline, as previously stated, was almost entirely the result of a one-time compensation accrual reversal in the fourth quarter of 2022. That was not repeated in Q4 2023.
In our sustainable sourcing and traceability segment, we started to see a return to more normal operating results as sales net of intersegment revenues were $39.8 million during the fourth quarter of 2023, an increase of 13% compared to the fourth quarter of 2022. Adjusted EBITDA from our S&T segment for the quarter was $2.1 million, which is $200,000 less than the prior year fourth quarter.
Turning to our annual results for the full year 2023, total Company net sales were $864.7 million, which is essentially flat compared to the full year 2022. Consolidated gross profit for full year 2023 was $139.9 million included and included $100,000 of non-cash mark-to-market gains.
By comparison, consolidated gross profit for the full year 2022 was $152.8 million includes and included $3.5 million of non-cash mark-to-market losses. Consolidated adjusted EBITDA in 2023 was $45.1 million compared to $60.1 million for the prior year.
For 2023, our Beverage Solutions segment contributed $722.9 million of net sales, which is an increase of approximately 5% compared to the prior year. Adjusted EBITDA for our Beverage Solutions segment was $41.6 million compared to $54 million for the full year 2022.
In 2023, our SS&T. segment contributed sales net of intersegment revenues of $141.8 million, representing a 22% decrease compared to 2022. Adjusted EBITDA from our SS&T segment for the year was $3.5 million compared to $6.1 million for the prior year.
Moving on to our capital expenditures, during the fourth quarter, we deployed approximately $43 million of CapEx, primarily related to our Conway extract and RTD. facility. With respect to Conway, we now expect our total CapEx spend to settle around $315 million. And as we ended 2023, we had already spent approximately $155 million of that amount.
Our largest outlays, capital expenditures and the facility will take place over the next six months, and then we'll start to see that spending step down in the back half of this year. At quarter end, we had approximately $147 million of consolidated unrestricted cash and undrawn revolving credit committed.
Our consolidated net leverage ratio at December 31, 2023, was 4.4 times based on Q4 annualized adjusted EBITDA. As previously disclosed, we recently issued a [$72 million] of convertible notes which mature in February of 2029.
The notes, combined with covenant flexibility included as part of our recent credit agreement amendment will allow us to fund the Conway facility expansion and our investment in the SelectBuild joint venture. We believe that these are key investments that position WestRock to capitalize on the expanding customer demand for our TD. products.
Turning to our outlook for 2024. As noted in our business update in February, we expect consolidated adjusted EBITDA to be between $60 million and $80 million for fiscal 2024. This guidance range is necessarily brought to account for the range of results we may experience as we began operations in our new extract and RTD. facility and the commercialization of customers in that facility.
As we exit 2023, we do so with strength in the areas we expect to drive growth in future years, single-serve cups and flavors, extracts and ingredients, and a new approach to pricing in our traditional roast and ground business, which we expect to drive results in 2024.
We are also turning the page on an ERP conversion and new and single-serve scale-up that pressured our 2023 results in the first half of the year business is off to a solid start in 2024, and we're pleased with our performance thus far in the first quarter with our adjusted EBITDA results coming in line with our expectations.
Given the wide range of adjusted EBITDA guidance for the year, which is largely determined by the ramp and commercialization of our conduit facility. We'll continue to update you on the progress and how it may impact our outlook for the year.
With that, I'll turn the call back over to the operator for questions.
Question and Answer Session
Operator
Thank you. (Operator Instructions)
Todd Brooks, The Benchmark Company.
Todd Brooks
Hey, thanks for taking my question and good to talk to you all. Couple of questions about Conway in the release and Scott, you talk to this and you detailed both plural customers and plural products on commercialization that will hit in April, if I'm remembering correctly, that's actually a month or two ahead of schedule for what we had been talking about.
Sokudos on that, but are there any details you can tell us about from these initial commercializations and any early looks into how and no pun intended fluidly the customer acceptance program is going with the with the new facility?
Scott Ford
Sure, hey Todd. So the good news is we are we are ahead of schedule on every one of the line installation projects, and we also have good news in that we have a number of customers that are in commercialization in the commercialization process.
Now there are windows across. So when we talk about the various product packaging format, glass bottle can or multi-serve bottles, coal to the coal route. We have commercialization projects going on all three of them. There's a sequential startup, the multi-serve bottles coming on.
First, I can't comment on second, the last line is coming on third and we are about two months ahead of schedule on every one of those physical installs, which allows us. I don't know that it's going to get any more product in through the pipeline in the year '24, but it allows us the opportunity to maybe to maybe be able to do that.
And if it were if we stay on this schedule and everybody commercializes in their window and stays on time and wants us to ramp it up faster, we can be at the high end of our range. If everybody kind of goes back to normal pace, we ought to be at the middle part of our range. That's how we built the EBITDA forecast for this next year.
Todd Brooks
Okay. That's helpful detail. I know you said MultiServ First, any detail on the type of customers that we should be watching for and win that April delivery turns into product on the shelf.
Scott Ford
So that should turn into product on the shelf in the early summer as they hit large retailer resets. I don't want to go into who it is. But obviously these are large. These are large leading brands in the coffee space that are rolling ready to drink out in various form factors. And this is some of them that we're doing for.
Todd Brooks
Okay, great. And then my final question, I'll jump back in queue. You talked about the pace of commercialization defining where you fall in the $60 million to $80 million guidance range. I want to strip out FE and I have talk about both single serve, which there was a tough first half with the equipment delays last year and then roast and ground where we're really site kind of seen a little bit of a collapse in customer demand here in the second half of this year.
Within that $60 million to $80 million guidance on there will be variability around FP. and I. commercialization. But what are the thoughts and variability around contributions that you're expecting from single-serve and restaurant brands. Thanks.
Scott Ford
Do you want to take that? (multiple speakers)
Chris Pledger
I think this is Chris. In terms of in terms of how we how we built our outlook for 2024, we looked at what was the run rate of the business as we got to the back half of the year. And then we look at what are the customer wins that we have that that are that are coming online in 2024.
And so that's what helped really inform the bottom part of our range. And so we feel we feel good about the run rate, as Scott talked about in his comments as we as we exit 2023, we feel good about kind of that based on the base business, being able to get to the bottom end of our range. And then what we do after that is really Conway dependent.
Todd Brooks
Okay, great. Thanks, Chris.
Scott Ford
Much smarter answer. Yeah.
Operator
Thank you. Ben Bienvenu, Stephens, Inc.
Ben Bienvenu
Good afternoon. I wanted to ask as it relates to the ramping of the Conway facility and recognizing the inherent variability in how your customers choose to commercialize. To what degree can you shepherd that onboarding such that you don't end up with a Russian volume in more concentrated windows, kind of increasing the risk of ramping smoothly versus helping to gate the process to scale up as ratably as you're able? And while I recognize there's a significant ramp.
Scott Ford
Yes, it's a super question. It's obviously one that reflects you've been through this before of what we are doing to trying to mitigate the rush for the door is we are actually committing to production based on when people come in for commercialization.
And so we have kind of force rank if you really wanted an X timeframe, you've got to come to commercialization now and of for our outlet McCollam, our anchor tenants, they have their own process.
That's all part of the contract of their anchor tenant relationship with us. But when we start talking about the dozen others that are trying to come through the door right now on the commercialization. We actually are lining that up with production.
And if they come, they get production in their window, if they need to wait and delay them their production window slides out to. And that's been a great clarifier of the importance of hitting your window when it's available for the commercialization side, for the brands, all of them. They're like us.
Nobody wants to spend any money until you have to, and nobody was doing anything until you have to. But if you do want to hit a reset window with your retail customers, then you've got to have production. And if you're going to have production, you've got to be in your commercialization window.
And that was the only way we could kind of bring some ramp up, walk through that people could actually do to what would otherwise be a very chaotic rush for the door as you clearly understand. So that's what we're doing. Whether that works exactly right or not.
We don't know which is why we've offered the guidance that says we know what the base business is capable of doing. We don't quite know how that will all flow through. We're going to give you some guesses and the range around it and as Chris laid out very smartly and I think that captures the same story.
Ben Bienvenu
Yes. Okay. Thanks, Scott. Chris, as we think about margins through the year, recognizing mix and utilization will be a really important factor. Should we think of the range of outcomes for margins being such that if the ramp happens faster, could there be margin pressure actually, is there a fixed cost deleveraging for us to consider?
Or are you adding equipment as the commercialization happens and you have what is a shell today help us think in our mind's eye, what that process looks like and what the implications for margins are?
Chris Pledger
As we in terms of in terms of Conway, we I mean, we have the expense turning on in sequence with the with the ramp. And so I don't expect the ramp of Conway really to create margin compression that you take on the fixed cost that they've been about how that's going how that's going to kind of sequence itself out.
In terms of kind of product mix and margin improvement. I think you're going to continue to see growth in our single serve which is the higher-margin part of our business. We're going to continue to see F&I growth in kind of our base business with extracts.
I think there were 30% up in the fourth quarter. And then we start layering on the products for Con-Way that come on in. We start selling them in April and the volumes really start to ramp in the back half of the year and you're going to continue to see growth from that.
Ben Bienvenu
Okay, great. Thanks so much.
Chris Pledger
Yep.
Operator
Thank you. Matt Smith, Stifel.
Matt Smith
Hi, good afternoon. I wanted to ask when we consider cash flow in 2025, you talked about Con-way being about a $355 million capital investment, that implies $200 million or so to go. Should we think of that being spent in the first half and then a moderating level of spend in the second half.
Preproduction costs were about $5 million in the fourth quarter. Should that continue at a similar level in the first half, or does that step down is commercially saleable product production begins in April.
Chris Pledger
But I think in terms just to make sure we're talking about the same numbers from the Conway CapEx, and we expect that to $315 million. And through the end of the year, we spent $155 million. Is that are we on the same page there?
Matt Smith
I had the numbers wrong there. I appreciate the clarification.
Chris Pledger
From a free cash flow perspective. I mean, we've got the as we talked about on the call, I think that the highest spend months for the for the cross or spend quarters for the project for the first quarter and second quarter of this year, and we'll start to see that step down in the back part of next year. And then we expect to from we expect to start generating free cash flow in the second, probably third quarter of next year, as is the term that I turn that that's been bobbed.
Matt Smith
Thank you. And the preproduction cost should those continue to persist through the first half of this year or now that you're producing salable product beginning in April, did those start to tail off.
Chris Pledger
The they start to pay base stations start to tail off.
Scott Ford
But right now is the preproduction and timely itself is go into the balance sheet hassle. And it was not released on a pro rata basis over the next two years as the volume builds, which was the comment Chris was making about the margins of into either, I think to Ben's question a minute ago.
Chris Pledger
Correct.
Matt Smith
Okay. Thanks for that clarification. And just one more you talked about a new approach in pricing in the roast and ground business. Can you talk about that a little more? I know previously pricing was more of a pass through as you locked in green coffee costs for your customers. It sounds like that may be changing.
Scott Ford
It's actually not the structure of the contract, which I would say is what you're referring to there. We're not changing the structure of the contract, what we've been doing as part of the modernization of the roast and ground coffee business. And these are the plants that are in North Carolina that we acquired a few years ago. We are in the middle of a massive well.
We have just finished a massive systems rebuild and as systems rebuild has allowed us to get to a level of cost and transparency by machine by operator by shift that was not available previously. So that kind of a data system installation, which has been unbelievably burdensome to the operations to current financial operations of '23 suffered because we had to slow down drag out, rebuild, turn lines off, get this automation in well as we've had it running now for about the last, I'd say, five or six months.
Our ability to clearly see exactly where our costs are not on an average basis, not on an average basis across products, not on an average basis across line on an average basis across customers, but specifically to the detail of the various skew running on that line with that operator and that shift. And when we are able to do that, we are able to better price.
Sometimes we are able to give lower prices to our customers, lower conversion through the contract formula that you talked about. And sometimes we require higher because we realize that's actually a pinch point in the market where we need to charge more just given the demand and that specific skew in that specific slide slot. And so that ability to get really honed in on our cost has allowed us to go customer by customer.
You've asked you and rationalized the price to the right point, higher or lower. And that's the methodology that Chris is talking about. And it's all brought about its work. It is worth several large wins to us already in '24 that are coming our way.
And those large wins helped fill a high fixed costs throughput based set of facilities and that that all hinged from the decisions we made to if we're going to have a bad year and '23 have a bad year in '23 and do all the work so that when you turn on Con-Way in '24 and '25, you catch everybody asleep at how powerful the earnings can be off of this business. That's our whole strategy over the next two years.
Matt Smith
Thank you, Scott. I'll leave it there and pass it on.
Operator
Thank you. Sarang Vora, Telsey Group. Please go ahead, surveying.
Sarang Vora
The Thank you. I'll just ask a question on Conway as well. When you look at the picture, it's great to see the facility opening in April, it is a three year progress for you on the production side. So when you look at the facility and you know your plans for how you plan to open on different production lines.
Can you help us understand a little differently saying how much of the plant we'll be operating in '24 of, you know, will you be like about 70% running on Conway by like, you know, '25. And then, you know, the other 30% opens in, like, you know, fully operational by end of '26. I'm just trying to see like how the production ramps up over a three year period from Conway?
Scott Ford
Yes, terrific. Question. One that we spend a lot of time on ourselves. Let me attempt to answer it this way. This might be my I hope this is helpful. And Pledger, you can clean this up if I get it wrong and like you can go file an 8-K upon step too far over. What is the best way to understand calmly is that it is a two year onboarding, but whatever you can get onboarded in '24 essentially becomes full run rate in '25. So we are better to commercialize.
This goes back to the to the question that Ben asked a minute ago, we are better to commercialize more customers in '24 and slow production to just meet meeting our contractual commitments in '24 so that we get everybody lined up to run in full in '25.
And so if you go through the way that Chris laid out, the way we built are our forecast, it probably comes in at the low end of Conway and '24 because we we've commercialized more and we get everybody ready to run in late '24 and '25 instead of picking up a $10 million or $20 million of EBITDA, you can pick up $50 million to $70 million of EBITDA from the customers that are already in the door.
And all we have to do is sit there and run the machines. And when you put that on top of the core business that Chris talked about at $60 million, you can see why people when they look at you while this business could generate if we can just commercialize in '24, this business can generate $125 million of EBITDA in '25 if we don't make a single additional sale.
The power that has been built up in the last two years while we suffered in and spent the money to take plants off-line to get them automated and get the MIS system built in is really much more powerful than anything I've read about, but we'll just have to deliver that. And that's just one.
Sarang Vora
But that's so that's very helpful. I'll ask you about one more big initiative that you announced this quarter about the JV with select generic producer. Can you help us walk through like, you know, you know how this JV will work and I know you do the concentrate there to the mill, but then you know how the revenues kind of flow through your P&L. And now just help us a little bit more about the rationale of this JV and, you know, some of the operating things in this JV. Thank you.
Scott Ford
Yes, yes, sure. It's a 50%, 50% JV, we are each going to put money up to capitalize it. The JV itself will then go borrow money to finish out the equipment and then that equipment will be put into a facility that Select is building and we will become a lease tenant of the select facility, if you will, the way that we will for the most part book revenues through is through the sale of extracts because that's the largest use product that we deliver out of this.
And then there will be a conversion profit that will come out through the through the 50%, 50% JV, if you will. So you will see the extract sale come out of our on flavors, extracts and Ingredients division. And then you will also see in that same division, the pickup of our 50% interest in whatever the residual profitability is of the conversion work. And you'll see that come in at and above the EBITDA line. It's a very powerful earnings adder that we're on that were saving up for everybody in '26.
Sarang Vora
That's great. Thank you. Good luck.
Scott Ford
Thank you.
Operator
Thank you. I would now like to turn the call back to Scott Ford for closing remarks.
Scott Ford
Well, thank you very much. We appreciate it, operator and gentlemen, thank you for getting on with your questions. Thank you for your interest.
We are super excited and I'd just say that we were talking before the call started. There's not really any news in the release we put out because we told everybody this essentially exactly where we were two, three weeks ago.
The news is we are off to a great start in '24 and the plans that we have for '24 through the commercialization and then monetizing some of that should give us a really good year and it's setting '25 up to be absolutely fantastic.
And we've got to walk the walk, but we are we are months ahead of schedule on the physical side. Our customers are starting to match with us on the commercialization and product development work and we are super excited about getting that plant on.
Meanwhile, back in the core business, we have been we've spent an enormous amount of time and energy and money and through lost EBITDA from taking things down and actually suffering through this, the windows of turning MIS systems up in the old business.
All of that's going to come back on is coming back on now, and we're seeing it in our results now, and we're excited about it. And if people want to get on board with us, great. And if they want to bet against us and say, let's see you do it. Let's do that, too. I just a follow-up. So thanks for. Thanks for tuning in. See you all later.
Operator
And this concludes today's conference call. Thank you for participating, and you may now disconnect.
