Thank you for standing by and welcome to Westrock Coffee Company's Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the call over to Melissa Calandruccio, Investor Relations. Please go ahead.

Thank you, and welcome to Westrock Coffee Company's fourth 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 fourth quarter earnings release issued earlier today. This information is available on the Investor Relations section of Westrock Coffee Company's website. 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.

Thank you, Melissa, and good afternoon, everyone. Thank you for joining us today. The year 2023 was a significant transition year for Westrock. When we entered last year, we knew it was going to be a long year of system upgrades and equipment installations. As we explained on our quarterly calls throughout the year, the impact of these upgrades on our business was material and sometimes painful, even if wholly 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 enduring the expenses brought about by these significant upgrades and improvements, we now enter 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 2024, I'll remind you that we announced our 2024 annual adjusted EBITDA forecast in connection with our Select Milk 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 somewhere between 30% and 75% for the year. We have recently enjoyed several new contract wins on each of our platforms, from roasting ground coffee and tea to single-serve cups to extracts and to ready-to-drink finished goods. While the impact of most of these new wins is slated to come online in the back half of the year, some are already starting to make modest contributions to our profitability even now. I'd 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 required tremendous effort, persistence, and patience on everyone's part, and it is a delight to be able to walk through these plans 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, 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.

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, continues 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 was $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, which included $2.7 million of non-cash mark-to-market losses. 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. The 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 cup 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's 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 the fourth quarter of 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 SS&T segment for the quarter was $2.1 million, which is $200,000 less than the prior year's 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 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 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 of capital expenditures on 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 commitments. Our consolidated net leverage ratio at December 31, 2023, was 4.4x based on fourth quarter annualized adjusted EBITDA. As previously disclosed, we recently issued $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 Select Milk joint venture. We believe that these are key investments that position Westrock to capitalize on the expanding customer demand for RTD 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 broad to account for the range of results we may experience as we begin 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, flavors, extracts, and ingredients, and a new approach to pricing in our traditional roasting ground business, which we expect to drive results in 2024. We are also turning the page on an ERP conversion and single-serve scale-up that pressured our 2023 results in the first half of the year. The 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-up and commercialization of our Conway 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.

Our first question comes from the line of Todd Brooks of The Benchmark Company.

A couple of questions about Conway. In the release and Scott, you talked to this, you detailed both plural customers and plural product 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, so kudos on that. But are there any details you can tell us about these initial commercialization and any early looks into how, no pun intended, fluidly the customer acceptance program is going with the new facility?

Sure. The good news is we are ahead of schedule on every one of the line installation projects. We also have good news in that we have a number of customers that are in the commercialization process now. There are windows across, so when we talk about the various products, packaging format, glass bottle, can, or multi-serve bottle, cold fill the cold room. We have commercialization projects going on all three of them. There's a sequential start-up. The multi-serve bottle is coming on first, the can is coming on second, the glass 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 products in through the pipeline in the year 2024, but it allows us the opportunity to maybe be able to do that. 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 could be at the high end of our range. If everybody goes about 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.

And any detail, I know you said multi-serve first. Any detail on the type of customers that we should be watching for and when that April delivery turns into product on the shelf?

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 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 them.

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&I, though, and talk about both single serve, which there was a tough first half with the equipment delays last year, and then roasting ground, where we've really 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, there'll be variability around FE&I commercialization, but what are the thoughts and variability around contributions that you're expecting from single serve and roasting ground?

Do you want to take that?

Yes. I know what I would say, but yours would be smarter. I think this is Chris. In terms of 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. We then look at what customer wins we have that are coming online in 2024. That's what helped really inform the bottom part of our range. We feel good about the run rate, as Scott talked about in his comments as we exit 2023; we feel good about kind of based on the base business being able to get to the bottom end of our range. Then what we do after that is really Conway dependent.

Our next question comes from the line of Ben Bienvenu of Stephens Inc.

I want 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 rush of volume and 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 recognizing is a significant ramp up?

It's a super question, and it's obviously one that reflects you've been through this before. What we are doing to try to mitigate the rush for the door is we are actually committing to production based on when people come in for commercialization. We have kind of forced, right, if you really want it in X timeframe, you've got to come to commercialization now. For 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. If they come, they get production in their window. If they need to wait and delay, then their production window slides out too. 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 wants to do 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. If you're going to have production, you've got to be in your commercialization window. 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.

Chris, as we think about margins through the year, recognizing that 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 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?

In terms of Conway, we have the expense turning on in sequence with the ramp. I don't expect the ramp of Conway to create margin compression as we take on the fixed cost. I feel good about how that's going to sequence itself out. In terms of product mix and margin improvement, I think you're going to continue to see growth in our single serve, which is a higher-margin part of our business. You're going to continue to see FE&I growth in our base business with extracts. I think they were 30% up in the fourth quarter. When you start layering on the products for Conway that come on in April and the volumes really start to ramp in the back half of the year, you're going to continue to see growth from that.

Our next question comes from the line of Matt Smith of Stifel.

I want to ask, when we consider cash flow in 2025, you talked about Conway 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? And 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 as commercially salable product production begins in April?

Well, I think in terms—just to make sure we're talking about the same numbers. From the Conway CapEx spend, we expect that to be $315 million, and through the end of the year, we spent $155 million. From a free cash flow perspective, I mean, we've got the highest spend months for the project in the first quarter and second quarter of this year. We'll start to see that step down in the back part of next year. We expect to start generating free cash flow in probably the third quarter of next year as you turn that spend up.

And the preproduction costs should those continue to persist through the first half of this year, or now that you're producing salable product beginning in April, do those start to tail off?

They should start to tail off.

Right now, the preproduction in Conway itself is going to the balance sheet. That was released on a pro-rata basis over the next two years as the volume fills, which was the comment Chris was making about the margins.

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?

It's actually not the structure of the contract, which I would say is what you're referring to today. 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 is in the middle of a massive systems rebuild. This systems rebuild has allowed us to get to a level of cost transparency by machine, by operator, by shift that was not available previously. This kind of data system installation has been unbelievably burdensome to operations. Our current financial operations of 2023 suffered because we had to slow down, drag out, rebuild, turn lines off, and get this automation in. As we've had it running now for about the last five or six months, our ability to clearly see exactly where our costs are, not on an average basis across products, not on an average basis across lines, not on an average basis across customers, but specifically to the detail of the very SKU running on that line, with that operator and that shift. When we are able to do that, we can better price. Sometimes we're able to offer lower prices to our customers, lower conversion through the contract formula that you talked about. 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 in that specific SKU and that specific slot. This ability to get really found in on our cost has allowed us to go customer-by-customer, SKU by SKU and rationalize the price to the right point, higher or lower. This methodology has already resulted in several large wins for us in 2024 that are coming our way. Those large wins help fill a high fixed cost throughput-based set of facilities, and that all hangs from the decisions we made to have a challenging year in 2023, but to do all of the work required so that when we turn on Conway in 2024 and 2025, we can showcase the powerful earnings capabilities of this business. That's our strategy over the next two years.

Our next question comes from the line of Sarang Vora of Telsey Group.

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. When you look at the facility and your plans for how you plan to open different production lines, can you help us understand a little differently, saying how much of the plant will be operating in 2024? Will you be like about 70% running on Conway by like 2025 and then the other 30% opens in like fully operational by end of 2026? I'm just trying to see how the production ramps up over a three-year period from Conway.

One that we spend a lot of time on ourselves, let me attempt to answer it this way. I hope this is helpful. What is the best way to understand Conway is that it is a two-year onboarding. Whatever you can get onboard in 2024 essentially becomes full run rate in 2025. We are better to commercialize, this goes back to the question that Ben asked a minute ago. We are better to commercialize more customers in 2024 and slow production to meet our contractual commitments in 2024 so that we get everybody lined up to run in full in 2025. If you go through the way that Chris laid out how we built our forecast, if Conway comes in at the low end of Conway in 2024 because we commercialize more and get everybody ready to run in late 2024 and 2025. Instead of picking up $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. This power, built up over the last two years when we suffered and spent the money to take lines offline to get them automated and to get the Management Information Systems built-in, is much more powerful than anything I'm reading about. We'll just have to deliver that.

I'll ask you about one more big initiative that you announced this quarter about the JV with Select Milk Producer. Can you help us walk through how this JV will work? I know you do the concentrate, they do the milk, but how do the revenues flow through your P&L? Also, can you explain the rationale of this JV and some of the operational aspects?

Yes, sure. It's a 50-50 JV. We're each going to put money up to capitalize it. The JV itself will borrow money to finish out the equipment, and that equipment will be put into a facility that Select is building. We will become a lease tenant of the Select facility. The way that we will primarily book revenues through is through the sale of extracts because that's the largest use product that we deliver out of this. There will be a conversion profit that will come out of the 50-50 JV. You'll see the extract sales come out of our flavors extraction ingredients division, and you will also see, in that same division, the pickup of our 50% interest in whatever the residual profitability is of the conversion work. You'll see that come in at and above the EBITDA line. It's a very powerful earnings adder that we're saving up for in 2026.

I would now like to turn the call back to Scott Ford for closing remarks. Sir?

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. There's not really any news in the release we put out because we told everybody this essentially exactly where we were two or three weeks ago. The news is we are off to a great start in 2024. The plans we have for 2024 through the commercialization and then monetizing some of that should give us a really good year and it's setting up '25 to be absolutely fantastic. We've got to walk the walk, but 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. We're super excited about getting that plant operational. Meanwhile, back in the core business, we have spent an enormous amount of time, energy, and money through lost EBITDA from taking things offline and suffering through the windows of turning MIS systems up in the old business. All of that's going to come back on and is coming back on now, and we're seeing it in our results now. We're excited about it. If people want to get on board with us, great. If they want to bet against us and say, let's see you do it—let's do that too. I love it. Thanks for tuning in. See you all later.

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