Hello and welcome to the Westrock Coffee Company's Third Quarter 2023 Earnings Conference call. My name is Tanya and I'll be coordinating your call today. I would now like to hand it over to Clay Crumbliss with ICR.

Good afternoon and welcome to the Westrock Coffee Company's Third Quarter 2023 Earnings Conference Call. Today's call is being recorded. With us are Mr. Scott Ford, Co-Founder and Chief Executive Officer; and Mr. Chris Pledger, Chief Financial Officer. By now, everyone should have access to the company's third quarter earnings release issued earlier today. This information is available on the Investor Relations section of Westrock Coffee Company's website at investors.westrockcoffee. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press releases and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Also, discussions during the call will use some non-GAAP financial measures as we describe business performance. The SEC filings as well as the earnings press release provide reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. And with that, it is my pleasure to turn the call over to Scott Ford, our Co-Founder and Chief Executive Officer. Scott?

Thank you, Clay and good afternoon, everyone. Thank you for joining us today. I'll be the first to acknowledge that our third quarter this year looks like a bit of a mess as the variance from our targeted performance of roughly $20 million in adjusted EBITDA for the period and our reported results of $11.6 million appears quite large at first glance. That said, I think it's critically important to call out that virtually 100% of the miss comes from two distinct causes that were unique to the period. First, over $6 million of this happened in July and August alone in our traditional roast and ground coffee unit, where these customers ordered fewer pounds in this period than they did in the depths of COVID. As we work with them and their forecast analysts, we were repeatedly informed that the spike in gasoline prices, coupled with the spike in interest rates, combined with a miserably hot summer kept consumers out of restaurants and convenience stores in the first two months of the quarter. Fortunately, September was largely back to normal versus prior years in roast and ground coffee volumes. October and early November are coming in at normal levels as well. So this appears to me to have been the same transient crunch that happened last year when gasoline prices spiked as oil went above $85 a barrel and demand came back for coffee as soon as oil prices retreated a bit. Secondly, as Chris will detail in a few moments, we incurred almost $2 million of expenses during this quarter that were associated offsets to prior periods, further compounding the stated performance gap. And I fully realize that GAAP does not allow us to go back and add these items back, if you will. But in terms of clearly laying out what is going on in our business, this $8 million of combined EBITDA pressure equates to 100% of our adjusted EBITDA miss for the quarter compared to the updated guidance we gave you after our second quarter. We will continue to head down to deliver all that we can in '23, looking for ways to drive revenues up and costs down. Turning now to the Conway extract and RTD plant, I want to commend and thank the team that has tirelessly worked to transition that plant and distribution facility from initial designs to the finest facilities of their kind in the country, in what has to be record time. This has been a collaborative effort involving Westrock employees, professional service providers, equipment vendors, customer product development, quality assurance, procurement leaders, and the two primary general contractors, including a construction company. Each person involved is committed to the successful completion, product commercialization, and operational launch of this new $300 million extract and ready-to-drink facility in Conway, which is on track to begin commercial production of finished products in the second quarter of '24. This Conway facility is coming online just as we have essentially completed selling out 100% of our extract manufacturing capacity in Concord, North Carolina. Overall, while it is a challenging time for the core hot coffee market, where we continue to compete for customer volumes as they fluctuate with the seasons and gasoline price changes, it is a remarkable time to be in the extract and RTD space as our new customer and product extensions keep expanding, and we are about to open our third extracted ingredient factory, with the first two sold out. Currently, we have nearly sold out of capacity on four of the initial six packaging lines and are over 50% sold out on the last two initial lines in the combined Richmond, California, and Conway, Arkansas plants. As Chris will explain shortly, we're working on new ways to keep the investing public informed about our progress within the plants as we release our guidance for '24 early next year. We do not expect most of this capacity in Conway to start generating commercial volumes, which is what produces EBITDA, until late '24 and early '25. However, we are confident that the 4- to 5-year projected EBITDA generation of Westrock, with these assets fully online, remains on track with our previous estimate of around $200 million of annual adjusted EBITDA.

Thanks, Scott and good afternoon, everyone. I'll begin my remarks by providing an overview of our third quarter results and end with an update on our 2023 outlook and our outlook once our Conway extract and RTD facility is launched and operating at scale. Total company net sales for the third quarter were $219.6 million compared to $230.3 million for the third quarter of 2022. This 5% decrease was driven by a 25% decrease in net sales of our Sustainable Sourcing & Traceability segment, partially offset by 2% growth in our Beverage Solutions segment. Consolidated gross profit, excluding the impact of $1.2 million of mark-to-market adjustments and the $1.8 million of out-of-period charges Scott mentioned, was approximately $38 million for the quarter. The out-of-period charges impacted our Beverage Solutions segment and related to the recognition of green coffee costs, which were associated with coffee that was consumed and sold in a prior period. Consolidated gross profit for the third quarter of 2022 was $41.1 million, included $0.5 million of noncash mark-to-market loss. Consolidated adjusted EBITDA was $11.6 million compared to $17.9 million for the third quarter of 2022. On a segment basis, our Beverage Solutions segment contributed $176.8 million of net sales for the third quarter of 2023, which represented year-over-year growth of 2%. Adjusted EBITDA for the third quarter was $9.9 million compared to $15.9 million for the prior year third quarter. Removing the impact of the $1.8 million of out-of-period charges, adjusted EBITDA for the third quarter would have been approximately $12 million. While we're disappointed with our third quarter results, the underperformance versus the previous year was largely driven by consumer demand for roast and ground coffee in July and the first half of August. Like others in our space, demand for hot black coffee in the third quarter was significantly down compared to the prior year, driven by higher gas and food prices and extremely hot temperatures across most of the U.S. On the positive side, we grew sales in our flavors, extracts and ingredients platform by approximately 70% year-over-year and our single-serve platform continues to see improvement driven by the pricing and operational improvements we highlighted on our last earnings call. Although we might not be excited about our third quarter results, we're very excited about the performance of our business and what that means for the future as roast and ground volumes normalize and our single-serve and extract platforms continue to grow. Turning to our SS&T segment, sales net of intersegment revenues were $42.8 million during the third quarter of 2023, a decrease of 25% compared to the third quarter of 2022. Adjusted EBITDA for the quarter was $1.7 million, which is $300,000 less than the prior year third quarter. You'll recall that net sales in our SS&T segment will fluctuate up and down based on the movement of the global price of arabica coffee and that our profit in this segment is largely based on the fixed dollar margin we make above that price. This is why you can have such a large downward swing in net sales versus the same quarter last year, while adjusted EBITDA is largely in line with what we generated versus the same quarter last year. With respect to our capital expenditures, during the third quarter, we deployed approximately $56 million of CapEx, primarily related to our Conway extract and RTD facility. And at quarter end, we had approximately $174 million of consolidated unrestricted cash and undrawn revolving credit commitments. Our consolidated net leverage ratio at September 30 was 4.6x based on LTM adjusted EBITDA. Turning to our outlook for 2023, our performance in the third quarter undoubtedly impacts our expectations for full fiscal year 2023 adjusted EBITDA. While we expect roast and ground volumes to continue to improve through the end of the year and we expect continued solid performance from both our single-serve and extracts platform, we do anticipate that fiscal '23 adjusted EBITDA will fall below the previously provided guidance range. Our current expectation for full year 2023 adjusted EBITDA is $45 million to $50 million. We do, however, expect adjusted EBITDA to return to more normalized levels in 2024. Now with respect to our extract and RTD facility, while it's impossible for us to accurately predict the timing of the EBITDA ramp we'll experience, as the facility begins production in the first half of 2024, we remain confident in our ability to deliver around $200 million of consolidated adjusted EBITDA in fiscal 2027 as we continue on pace with the sales, contracting and product commercialization efforts required to deliver that number. We'll update you on all of this and more in our 2024 guidance call early in the new year.

Hello. This is Jack Hardiman for Ben Bienvenu. Given the current state of the flavors and extracts market, is the demand experiencing the same volatility as what you've seen during the quarter in your roast and ground business?

That's a good question. I appreciate where you're coming from on it. It's actually a very different economic being, if you will. It's a different set of contracts. It's a very different type of product flow. It's a very different product forecast flow because it's a consumer product good that goes to a shelf directly versus people driving through and people trying to guess what they're going to do, whether they buy coffee or just as part of the value meal or just buy a biscuit, et cetera, et cetera. And when gas prices go up, they tend to soften up on that pretty quickly. You can see across the industry that RTD, like every other beverage, had a soft third quarter across the industry, but nothing like hot coffee itself experiences in terms of seasonal fluctuation or fluctuations around gas prices. It is a much more stable business and it is a much more contractually driven business than the core roast and ground coffee business.

Okay. Great. And then one quick follow-up. How do you feel about the balance sheet at present? And how has that view changed throughout the quarter?

Well, it hasn't changed. We believe we have plenty of room. If you examine our performance and our expectations, excluding the hot coffee sales from July and August, it's a bit complex. Last year, we made $17 million in this quarter, and this year we were close to $20 million without those two items I mentioned. Looking at our current standing, aside from those months, we feel we have enough flexibility financially. However, I can assure you that if we face any challenges in completing the Conway project, we have multiple resources ready to participate in our capital structure and join us in this endeavor. The projections from Conway are impressive regarding their potential contribution to our business, and we have various options to finance or support its completion if necessary. We are very confident we can achieve this. As we mentioned in our last call, this will be the last common equity we will raise. We raised some last summer to finalize things, and even though we were uncertain about the performance in July and August, that situation has not altered our approach.

Scott, I'd love to lead off with one for you, if I could. We're getting on 4, 5 quarters as a public company here. Just as you're looking in the rearview, knowing that we've got Conway in front of us, just can you comment on kind of the lack of predictability that we've seen in the business over this time frame and what it takes to return to a more predictable nature in your kind of core roast and ground business and the non-FE&I portion of beverage solutions?

Sure. It's a totally fair question. First of all, you look at the performance of the business overall over the last year and you've got essentially two things going on. You have in the single-serve business and in the systems integration, the first part of the year where we were putting in a new accounting and information system in Concord, which is the roast and ground and extract business. You had $5 million to $10 million of costs this year related to those two things, which are, for the most part, now out of the run rate. So you look at single serve, where we were basically overrun with orders beyond the equipment, we had to get equipment in. It was late bringing it in. We paid penalties. We suffered the charges of that. We ran 24/7 overtime. All of that was in the first part of the year. In the last five months of the year, that business is right on plan, clicking along just like we told you. So if you look at the extract business, flavors, extracts and ingredients, and I'll heed your question and keep going, that business is up 70% over the quarter. Same period last year. So single serve is doing exactly what we told you it would do. Flavors, extracts and ingredients is doing exactly what we told you it would do. The hot black coffee business is a very complicated business, where we had a very, very, very good year last year and we've had a bit of a tough year this year. But you take out the demand forecast, now these are the biggest companies in the world, biggest restaurant and convenience store chains. We follow their demand forecast. The gas price spike, the interest rate spike in the summer and the demand destruction that created at their restaurants and on their shelves surprised them as much as it surprised us. So I guess some points in time in hot black coffee, you're going to have periods of time like that. But if we hadn't had that happen to us, you'd be sitting here and saying, well done, you're up 15% year-over-year, tell me more about Conway. It's just life, you just go through it. I've had quarters where we've been pleased, and I'm no genius, and we've got quarters when we're disappointed and we're not idiots. It's just part of a commodity processing business where you don't have contractual rights to make people buy a product.

That's great, Scott. Chris, I was wondering if you could walk us through the bridge to the new EBITDA guidance. You laid out the $8 million shortfall in the quarter to plan. But at the midpoint of the range, we're talking more of an incremental $8 million guide down to EBITDA expectations in 4Q. Can you walk through what's behind that dip from the prior outlook?

Yes, I think you’re beginning to observe a return to normal in both roast and ground segments, as well as an increase in single serve and extract growth. However, since you’re starting from a lower baseline, we anticipate ongoing growth in these areas throughout the fourth quarter. It’s important to note that this growth will fall short of our expectations, as reflected in the updated guidance we provided at the end of the second quarter call.

Okay. Great. And the final one for maybe, Scott. On Conway, can you walk us through, if there's been any change in the commercialization timing or the EBITDA extraction? I think on the last call, we talked about maybe an expectation that we extract 10% of the EBITDA opportunity that Conway eventually represents in fiscal '24. Are we still tracking towards being able to generate $20 million in EBITDA out of Conway?

Here's where we stand, and I'll be completely frank. We need to check if the equipment is in place, if the systems are operational, if the plumbing is set up, and if the products are ready. Additionally, we have to determine if the team is ready. All these aspects are on track or ahead of schedule. We are now entering a phase where the customer decides how much they wish to commercialize, the number of SKUs they want to introduce, and the timeline for doing so, which they can manage over the course of a year. There are no penalties during the start-up year, and they have the flexibility to choose when to proceed. If they all move forward in the second quarter, we will exceed our expectations significantly. However, if they delay until later in the year or early 2025, which is within their contractual rights, that growth won't materialize in 2024. To answer your question about what my customers will decide regarding commercialization and start-up timing, I can't predict that as it's entirely under their control. They have a year to ramp up, which allows me to clearly outline what we have contracted for 2025, but it makes it challenging to determine how that will roll out in 2024.

If I could start with a question around hot coffee and I appreciate your commentary so far, but I'm surprised by the volatility in the business, especially the impact on EBITDA. Can you talk about the ordering patterns from your customers? Do you have a sense of if they were carrying excess inventory into the quarter and that factored into why there was such a severe reduction here in the third quarter? Perhaps there was a bit of inventory normalization to go along with the softness in the consumption that you saw?

Sure. Let's break it down into two parts. First, regarding the revenue variance and its effect on EBITDA, this is a segment of our business where we are a scaled, core processing commodity manufacturer. The way revenue flows through here is significant and direct, as you would expect. Our customers were holding inventory, and their forecasts required us to build our own inventory. Consequently, we were fully stocked as we approached the summer, and during that time, we experienced a noteworthy decline in hot coffee sales from July and August. It was quite remarkable. As we prepared for this quarter, a reasonable question arose: why did we wait until the end of the quarter to address this? We are not like Walmart; we don't report revenues monthly. This quarter faced challenges starting in July. Initially, we thought it was just a timing issue. However, by the end of August and into September, we realized it was impossible to cut costs and adapt quickly in a commodity processing business when orders simply stop coming in.

I appreciate that. And then one of the hallmarks of the business was your long-tenured relationships with your customers. I think you had a number of your largest customers you've been doing business with for many, many years. Have you seen any customer turnover there? Or is this really just related to consumption and inventory trends in the quarter?

This is 100% driven by the same set of customers doing less business year-over-year.

Okay. And then if I could transition over to talking about Conway. It's clearly opportunity there, it's compelling as we look out to 2027. You talked about $200 million for the full business. It sounded like that was your view of Westrock in 2027. Previously, you talked about $150 million to $175 million incremental EBITDA from the facility.

We projected $125 million to $150 million for Conway, which has increased from $100 million since going public. We've raised our target from $100 million to $125 million to $150 million. It's difficult to pinpoint the exact figures, but we are aiming for around $200 million by 2027. Those are the numbers; please continue with your question. I wanted to ensure we were aligned on that.

No, that's perfect. I appreciate that. And then one last one here. The contracts you have in place today, you've talked about selling out 100% and then 50% of the remaining lines that are being built out, understanding that there is some timeline shift based on when customers can decide to order. But can you talk about the structure of those contracts? Many co-manufacturers have a take-or-pay structure. Are you trying to set that up with your customers? Or do they get to determine the volume as well as the timing?

Yes, some of them do and some of them don't. But for the most part, the large ones, where if someone comes in as an anchor tenant, they do. They do have a form of take-or-pay.

I'm on for Sarang Vora today. I had a couple of follow-ups there. So we're sitting here today on November 9. And as you think about the fourth quarter, like, I guess, what are you guys thinking about right now? And what are you worried about? It seems like you kind of had a sense back on when you reported last quarter that this hot coffee was a pressure in July but it really didn't come up. And I'm just wondering what's not coming up right now? Or what should we be aware of that could be of concern for this fourth quarter and into next year?

Sure. Well, that's why we went on and gave you an update in our prepared remarks which we don't normally do, where we give you insight into the order book in October and November. So September, part of the third quarter, was back to 90-plus percent of the prior year. October was right back at the prior year and November right now is running a little bit ahead. So we gave you that guidance so that you could see that as soon as gas prices came back down a little bit, people went back to their traditional buying patterns and we lay over last year's results. We track it every day for the last several years and we're laying right on top of previous years now. That could stop again if gasoline goes to $85 and Christmas spending comes on, there could be something like that, that we don't see right now, that's not coming through at the moment. What we're doing in terms of the coffee business is this. We changed out the accounting and, if you will, management information systems. It's taken us many months to do that. We've actually just now started being able to get to some of the reports where the machines themselves are wired up so that we have all of the waste and throughput data off each machine. These are the things that we did in the single-serve plant last summer, which is why we know basically very early on in the month what we're likely to make because we've got the algorithms down now by machine, by operator. We're putting all of that in the old roast and ground business over the next few months. I expect that we'll see material improvement in the operating metrics of that facility once that system is finished. So that's the answer to your question. What are you worried about? Well, I'm worried about things I don't know about as always. And then what are you working on? We're rehanging the information system in roast and ground, the same way we did single serve, in the same way we are setting Conway up from the very beginning, so that we have that level of detail to manage the business going forward.

Got it. That's really helpful. And just one more follow-up. From a total sales perspective, you've mentioned the EBITDA pressures in the fourth quarter. Are there any other factors we should consider regarding sales for the upcoming quarter and even at the start of next year? We're hearing from many companies that they are worried about slower demand. I'm not certain if that applies to coffee, but I would like to get your thoughts on it.

We haven't seen any significant changes in the fourth quarter so far; it appears to be a continuation of the trends we observed in September. From an SS&T viewpoint, we are noticing sales of lower-priced products or coffee linked to lower global commodity prices. For instance, SS&T has experienced a notable decline in net sales, but the EBITDA remains flat compared to last year. We anticipate a further drop in net sales for SS&T as we move into the fourth quarter, but the EBITDA will stay consistent and won't decline because of that. In our Beverage Solutions segment, we expect the sales patterns to mirror what we saw in September.

Our first question will come from Ben Bienvenu of Stephens Inc.

Thank you for joining us this afternoon. I want to emphasize what Chris and I highlighted earlier: the third quarter was disappointing in terms of roast and ground coffee volume. Early in the quarter, we noted a recovery that has continued into the fourth quarter. That's the extent of our visibility at this moment, and we share this so you can form your own conclusions. We are also looking forward to the Conway facility coming online early next year, which is on schedule. It's important to note that we have fully utilized our two extract and flavor plants, one in Richmond, California, and one in North Carolina, both of which are operating at capacity due to higher demand than our current production can meet. The Conway facility will help alleviate this pressure by not only packaging but also manufacturing extracts. The growth we have seen there, which is up 70% year-over-year, will continue with the Conway facility, which is around 70% contracted already and has the potential to generate twice the EBITDA of our entire enterprise. We anticipate that it will achieve this. We'll provide metrics to track our progress, including completion percentages, the number of SKUs in commercialization, and volume updates as we ramp up the plant. This will help you gauge our performance, despite the uncertainty surrounding our customers' startup timelines. In conclusion, if our customers reach the end of their window, we expect to earn more next year than this year, and we'll manage through any challenges. Conversely, if they advance earlier in their timeline, the potential for our EBITDA to increase rapidly is substantial, though we understand that results are what matter most. We are committed to delivering on this.

This concludes today's conference call. Thank you for participating. You may now disconnect.