Title

Presentation

Operator: Hello, and welcome to Westrock Coffee Company’s Second Quarter 2024 Earnings Conference Call. My name is Cathy 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 Mounger with Westrock Coffee.

Robert Mounger: 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 on the Investor Relations section of Westrock Coffee Company’s website at investors.westrockcoffee.com. Certain comments made on this call include forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.

Please refer to today’s press release and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Also, discussions during the call will use some non-GAAP financial measures as we describe business performance. The SEC filings as well as the earnings press release provide reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. And with that, it’s my pleasure to turn the call over to Scott Ford, our Co-Founder and Chief Executive Officer.

Scott Ford: Thank you, Robert, and 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 mode 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 canning 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 shift. 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 too 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 time frame 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, Eamonn 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 2 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 cup 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 plants 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 million 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. I believe 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. Chris?

Chris Pledger: Thanks, Scott, and good afternoon, everyone. We are pleased with another strong quarter driven by 13% gross profit growth in our Beverage Solutions 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 of 2024, which is a 21% increase year-over-year.

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 a 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 Solutions 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 Solutions was up 197 basis points. In our Sustainable Sourcing & 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 to reduce cost. 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 these facility consolidations, 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 6.1x based on an LTM-adjusted EBITDA.

As we 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 million and $65 million from the previously announced range of $60 million to $80 million to account for the softness we’re experiencing in our single-serve cup 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.

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Todd Brooks with the Benchmark Company. Your line is now open.

Todd Brooks: Hi, thanks for taking my questions. Good to talk to you guys. Scott 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 pace, there was a lot of positive news that you kind of flew through at the start. But it sounds like single-serve can, good news there, 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. Thanks.

Scott Ford: 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 the 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 in – 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 and first part of next year is because as the RTD space has experienced softness, they are actually going through for the most part in 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 how we think, as of what we can see today, we think that’s a $125 million 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.

Todd Brooks: That’s great. Thanks and then a second follow-up and I’ll jump back in queue. We know about the 3 lines that are commercializing this year. Can you walk through what additional lines are slated to come on over the course of ‘25 in 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.

Scott Ford: Right. 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 box. So those are the 3 things that we expect to turn on in 2025 and answer the first part of your question. Where we are with Select right now, frankly, everybody is so busy that we didn’t want to push. We had – we need to get a certain threshold of the line sold out before we turn to the banks that are going to finance the equipment side of the JV. And although we were close, we weren’t quite at a number that easily made that possible and so we’ve delayed it a quarter while we try to, #1, line that up and #2, 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 Conway.

Todd Brooks: That’s great. Thanks, Scott.

Scott Ford: Thank you.

Operator: Your next question comes from the line of Matt Smith with Stifel. Your line is now open.

Matt Smith: Hi, good morning. 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 box, and bulk fill, how you’ve contemplated the capacity for those lines implied in the EBITDA run rate?

Scott Ford: Yes. At this point, we don’t have any of those in our EBITDA run rate for the moment.

Matt Smith: 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? And – 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?

Scott Ford: Yes. 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 a 10, 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.

Matt Smith: Thank you, Scott. And maybe if I could follow-up with one more question. The narrowing of the guidance range, the second half comes down, call it, $15 million, $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.

Scott Ford: Sure. It’s about 80-20, cups and commercialization start-up.

Operator: Thank you. The next question comes from the line of Sarang Vora with TAG. Your line is now open.

Sarang Vora: Great. Thank you. So first, it was great to tour the facility earlier in the summer, gave a lot of confidence about all these production plants and lines that you are starting. 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 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.

Scott Ford: 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 a 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’ve gotten 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 the fall, a back half of the year impact, and it’s why we didn’t put anything in our guidance for it right now.

Sarang Vora: That’s helpful. Thank you so much. And 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, Is, like, 19.5%, 20% range a decent range as you look at the back half? Or with all these changes happening, we need to be more careful in expansion ahead?

Chris Pledger: This is Chris. I think that those margins should hold. I think what you’re seeing is a great job with operational efficiencies. 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.

Sarang Vora: Thank you.

Operator: Thank you. Your next question comes from the line of Eric Des Lauriers with Craig-Hallum Capital Group. Your line is now open.

Eric Des Lauriers: Great. Thank you for taking my questions. First one for me, on the timing of facility consolidations. I understood the annualized savings won’t be fully recognized until first part of 2025. But in terms of the actual sort of transition or consolidation, how should we think about timing there?

Chris Pledger: We started one of the consolidation of 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.

Eric Des Lauriers: Okay. Great. And then those savings, should we expect to see those more on the OpEx side or cost of goods?

Chris Pledger: You’ll see more on the OpEx side. You’ll see some benefit on the cost of goods side, but mostly on the OpEx.

Eric Des Lauriers: Makes sense. And then demand for Conway, obviously, 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 given the sort of consolidation of these other facilities, I’m kind of just wondering what sort of capacity may be left in Conway for 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?

Chris Pledger: Well, we have – there’s excess capacity in the existing lines that we put in – that we’re starting up now 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?

Eric Des Lauriers: Yes. Exactly. And thank you very much for taking my questions.

Operator: Thank you. I’m showing no further questions at this time and would now like to turn it back to Scott Ford for closing remarks.

Scott Ford: Thank you very much. Well, we appreciate everybody’s interest. It’s been a wild week in the market. I know everybody is busy. But we were thrilled with the quarter. Operationally, we’ve been working really hard in 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 even now in the third quarter. And we are excited about where we are. I think 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 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’m looking forward to seeing everybody in the third quarter where we will be in a much better place at that juncture, both contractually to keep – to post people on where we are and to give any – 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 5-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 have a good evening.

Thanks, guys.

Operator: Thank you. This does conclude the program, and you may now disconnect.