Westrock Coffee Co Q2 FY2025 Earnings Call

Hello, and welcome to the Westrock Coffee Company's Second Quarter 2025 Earnings Conference Call. My name is Therese and I'll be coordinating your call today. I'll now hand the call over to Robert Mounger with Westrock Coffee.

Thank you, and welcome to Westrock Coffee Company's Second Quarter 2025 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 is my pleasure to turn the call over to Scott Ford, our Co-Founder and Chief Executive Officer.

Thank you, Robert, and good afternoon, everyone. Thanks for joining us. We delivered record-breaking second-quarter results driven by strong customer demand, improved margin performance, and successful execution across our integrated platform this quarter. These results reflect the strength of our model and the strategic investments we've made in growth. Our progress toward our goal of becoming the premier integrated strategic supplier to the preeminent coffee, tea, and energy beverage brands globally has resulted in record production, record deliveries, and record profits for our business this quarter. We ended the second quarter with the combination of our Beverage Solutions and SS&T adjusted EBITDA of $23 million, up 100% over the first quarter of this year and up approximately 70% over the same quarter last year. These results bring our first half of the year combined segment adjusted EBITDA to $34.5 million, up approximately 40% over the prior year at the high end of our guidance range. As we explained on our first quarter call, the beginning of commercial operations at the new single-serve cup plant, along with production ramp-up at the extract and RTD plant in Conway, Arkansas, combined with cost controls across our entire business and process, data intelligence, and risk mitigation insights brought about through our now two-year-old relationship with Palantir were the key drivers of this quarter's earnings beat. To provide you a bit of context, but without getting into competitive sensitive details, our new extract and RTD facility saw a fivefold increase in sales from our main production line in the quarter and is on track for the third quarter to be up another fourfold. It has not been without its challenges. We got off to a much slower volume start than we originally anticipated, and our startup costs exceeded our plan, but it was as difficult as our most ardent critics intimated. However, our primary liquid product volumes are now approaching planned levels, and we're closing in on our budgeted unit economics. The Conway plant team members continue to persevere with unprecedented grit and determination; our knowledge base grows daily, and we have line of sight to being fully caught up with all of our customers over the next 60 to 90 days. I am so proud of this team. They are now just weeks away from pulling off what many said was impossible. To lesser fanfare, but at the same time, as the Conway RTD facility went into commercial production, we also launched our second single-serve cup manufacturing facility in another part of the Conway complex. The start-up of this plant has continued to go seamlessly as we move from 3% of our total manufactured cups being made in this new plant to 25% in just 3 months. Our combined single-serve plants are now producing 50% more cups monthly than we were just a few short months ago, and we have a number of new customers that we will be onboarding into this new facility over the next year. As a reminder, together these Conway facilities encompass over 1 million square feet that can produce and distribute hundreds of millions of RTD cans, glass bottles, and multi-serve bottles, along with ultimately billions of single-serve cups each year. We remain convinced that consumer-driven shifts taking place in the coffee and related beverage market are going to create immense return opportunities for a few companies while stagnating many others. We also believe that our customer base and our vendor partners position us as one of the very few companies globally who have the technological expertise and breadth of product offerings to deliver on this type of industry-altering strategic plan. By becoming the lead innovation and development partner, dependable and sustainable sourcing resource, and low-cost processing and packaging outsourcer for the world's leading beverage brands, we enable them to capitalize on their brand equity positions through the transition of their product portfolio in step with the movements of their end consumers. These results from the quarter demonstrate examples of growth brought about from our delivery as the leading integrated platform in the category. Progress then enhances the value of our services to our customers, contributes to the growth of the careers of our teammates, manifests our pricing power on the ground daily for the benefit of smallholder farmers in the developing world, and rewards our shareholders. These are important things and they continue to be worthy of all of our greatest efforts. Our combined results, while different in mix versus our original thoughts, blended together in such a way this quarter that we were able to generate record results and are now again able to affirm our previous guidance for the back half and for the full year 2025. With that good news, I'll turn the call over to Chris Pledger, our CFO, and rejoin you in a few moments for questions.

Thank you, Scott, and good afternoon, everyone. As Scott mentioned, we delivered a strong second quarter highlighted by year-over-year growth in our core roast and ground, single-serve and flavors, extracts, and ingredients platforms, as well as disciplined supply chain and operating expense management. Our Sustainable Sourcing & Traceability segment also posted another impressive quarter. On a consolidated basis, net sales increased by 34.8% compared to the second quarter of 2024. Although we reported a net loss of $21.6 million, this reflects our planned investment in the Conway extract and RTD facility. Our consolidated adjusted EBITDA was $15.3 million, which includes $7.6 million of scale-up operating costs related to the Conway facility. For comparison, in the second quarter of 2024, consolidated adjusted EBITDA was $12.4 million and included $1.2 million of Conway-related scale-up costs. We expect our scale-up costs to moderate later this year as the Conway production volumes continue to ramp. In our Beverage Solutions segment, net sales increased 27.9% year-over-year, and segment adjusted EBITDA grew 48.5% to $19.7 million in the second quarter. This growth was driven by a 13.7% volume increase in our core roast and ground coffee, a 21.1% volume increase in single-serve cups, and a 14% increase in sales of flavors, extracts, and ingredients supported by our continued ramp-up of production in the Conway facility. Commodity coffee price increases, which we pass on to our customers, also contributed to top line growth. Our SS&T segment continues to perform exceptionally well. Net sales grew 60% over the second quarter of 2024, driven by volume growth, margin capture, and higher coffee prices. Segment adjusted EBITDA was $3.3 million, up from $400,000 in the prior year quarter. Not only do these results reflect the scalability and resilience of our SS&T segment, but they also reinforce our leadership in sourcing transparency, which drives long-term commercial value for our partners and for our investors. Capital expenditures in the quarter totaled approximately $20 million, primarily related to the Conway extract and RTD facility. We remain on track to complete the remaining CapEx for Conway by the end of fiscal 2025. As of quarter end, we had approximately $72 million in unrestricted cash and available liquidity under our $200 million revolving credit facility. Our leverage metrics remain within expectations and are in full compliance with the covenants under our credit agreement. Turning to coffee commodity prices and tariffs, we've begun to see some relief from the historically high green coffee prices I spoke about on our last earnings call, which should provide a working capital benefit in early 2026. However, tariffs remain a significant focus across the industry and will likely reflect a new normal for our operating environment going forward. Earlier this month, the U.S. implemented a 50% tariff on imports from Brazil, the world's largest arabica coffee producer and the single largest source of coffee imports into the United States. As with previously announced tariffs, these added costs are ultimately passed through to our customers. However, because we carry green coffee inventory during the manufacturing process, the tariffs impact the value of our inventory and as a result place additional pressure on our working capital and liquidity in the short term. While this dynamic adds some incremental strain, we have several levers available to manage liquidity should the need arise and continue to monitor the situation closely. Turning to our outlook, as Scott mentioned, we had a very strong first half of the year and are pleased to report that our $23.6 million of consolidated adjusted EBITDA for the first half of 2025 put us at the top end of our guidance range. Beverage Solutions segment adjusted EBITDA, which came in at $29.3 million, was also at the top end of our guidance range. And our SS&T segment adjusted EBITDA of $5.2 million significantly exceeded the high end of our first half 2025 guidance. In addition, our Beverage Solutions secured net leverage ratio at June 30, 2025, was 4.75x, nearly a full turn better than the guidance we provided of 5.7x. While we expect this momentum to carry into the second half of the year, we do recognize that the broader macroeconomic and consumer environment could present some headwinds. While we're not currently seeing material impacts with our customers, elevated tariffs, persistent inflation, and any softening in consumer confidence could affect traffic and purchasing patterns in the restaurants, convenience, retail, and consumer packaged goods channels we serve. If our customers see reduced consumer demand, it may in turn impact their ordering patterns with us. But despite these uncertainties, demand for our products remains strong across all customer segments, and we continue to benefit from the strength and diversification of our customer base. At this point, we see no reason to make any changes to our forward guidance. With that, I'd be happy to open the line for questions.

Congrats on the strong results here. Nice to see EBITDA coming in at the top end of the range. First one, just kind of double-clicking on a comment from Scott earlier, our results were a bit different in mix compared to your initial results. Not sure if I missed something there, but could you just expand on that comment?

Yes, sure. The mix was a little bit better in some of the categories that we track our profitability both on a revenue side, volume side, and on a cost side. And the cost side I specifically called out. We were slower getting Conway started on the volume throughput in the quarter than we had anticipated, but we made up for that in a number of other areas in our core base business. I tried to call those things out specifically in the paragraph, but that is what I was talking about. On the balance, we about caught up with where we thought our volumes would be in Conway now, and the back part of the year is actually looking to be pretty close to original plan. But what I did call out in the paragraph, the work we started doing with Palantir two years ago continues to outrun even our optimistic view of what they're able to help us do. And I'm not normally in the advertising business, but I called it out because it was a significant contributor to our profitability, really going to be a significant contributor for the whole back nine months of the year.

That's very helpful color. Maybe just worth expanding on that, could you just kind of give us a bit more of a background on this relationship with Palantir? How are you using their products? How is it helping improve your profitability? That would be helpful.

Sure. We sit at the nexus of a number of interesting data feeds as we serve the world's largest, or certainly the U.S. largest consumers of coffee, where our balance sheet is the one that's at risk to carry the positions for them. So we get forecasts from them. We have futures that we have to carry. We carry a series of spread trades around those futures to maintain good risk management. And frankly, the team that works with Palantir and the data that we've been able to glean from all of that data coming together in one place has simply been more powerful than we would have guessed. We are now deploying them through our manufacturing facilities and are actually more optimistic about what they'll bring there over time than we were in the trading and physical logistics business.

That's very encouraging. Appreciate the color there. And then just the last one from me here. On the previous call, you mentioned the second Conway RTD can line, which should come online in Q3. I'm not sure if this is sort of mixed up in some of the maybe pushouts of the expected ramp, but can you just kind of comment on where that second RTD can line is in terms of timing compared to your initial expectations?

Yes. No real update there. It should be installed in the middle of October and in production early November.

Just following up or asking an initial question, I assume you have good visibility for production over the next 6 to 9 months. Would you say it's in the high 90s or 100%? Additionally, is there potential for upside from there? In terms of new orders coming in, can you handle them, or are you at full capacity as we approach the fourth quarter?

It's difficult to determine exact figures. However, I believe we have a clear understanding of what to expect from our current customers. We also have additional customers scheduled to onboard after the second can line goes live. At this moment, it's uncertain whether that will happen in November, December, or January. Another significant factor is the timing of the glass line startup. Our trials have gone exceptionally well, and we are in the final stages of preparations, which could allow us to begin operations in the fourth quarter, possibly even sooner. These developments could impact our EBITDA by a few million dollars, either positively or negatively. I believe all of this is reflected in our guidance. Pledger is aware of the various factors that might affect our performance, and I think we are positioned well within our previous guidance, considering both the potential positives and negatives that typically arise over time.

Customer demand remains very strong, and the sales volume continues to reflect that. We have capacity not just in single-serve, roast and ground varieties, but also in the Conway products as we expand our multi-serve bottle line with the addition of a second can line. This presents opportunities for growth, and there is demand from customers for these products. Overall, the demand for our offerings aligns with our expectations.

Got it. And then on the single-serve, just the new facility, how about the visibility there? Have you started to win new business or recently won meaningful new business where you expect to fill that pretty quickly or just help me understand kind of the flow of that business, too?

Yes. The main reason for this was winning new business. We had outgrown our original facility and wanted to create redundancy in the supply chain for some of our major customers for whom we supply single-serve cup volume. We had one significant new business opportunity that prompted the opening of the second facility. There is still capacity for us to expand there, which we are excited about. Additionally, we have a strong pipeline of customers we are engaging with regarding this expansion.

Great quarter. Good to see new facilities up and running. My question is on single-serve. You already have one facility in Arkansas, you opened another one. Can you help us frame how your market share is today? And with the full production at the new facility, I know it just started, where do you think it ends up in general? Trying to understand how big your scale is getting in the single-serve.

Sure. As Chris pointed out, the first plant is essentially at full capacity. The second facility is located in the front 25% of the new distribution center designed to serve the Conway beverage plant. We built it from the start to function as another single-serve facility in that area. It is fairly modular, meaning we could activate it as needed. If there was a demand for billions of cups a year and a contract for that, we could expand into that space. Currently, we've utilized about 20-25% of that area with machines, leaving the remainder available for distribution purposes. This setup is quite flexible; we can add machines and adjust space usage as needed. So far, we've achieved significant success in the traditional retail consumer packaged goods sector. We're having fruitful discussions in the traditional private label space where we have a lot of intriguing projects underway, and we're steadily making progress. As everyone knows, Keurig dominates the market with over 80% share according to research reports. The competitive landscape has narrowed from about 20 players to just 3 or 4 remaining. It's been a profitable area for us, but it's fundamentally a scale business, and operating with only 1 or 2 machines is quite challenging. You may remember that we started the original Westrock with just one machine. Now we have dozens, but given the presence of a significant player that established this industry and continues to be a strong manufacturer and competitor, we navigate within an industry structure that highlights these challenges.

Great. And I have a quick question on the tariffs. I know you source from multiple countries around the world, but Brazil is one of the big markets, high tariffs over there. Are you able to change your sourcing from one market to another more efficiently or are these contracts long term and you kind of have a fixed liability to buy products or something? Just curious to know if there is an easy swap when tariffs change between countries.

Yes, that's a great question. It can be quite detailed. It really depends. For some contracts, we can identify a reasonable alternative coffee profile from Colombia, Honduras, Rwanda, or Uganda that could offset a 50% tariff, making logistics from East Africa viable again. Those coffees could remain competitive. However, there are other cases where changing these would be challenging due to customer profiles or contract obligations. Therefore, the situation is quite varied. There isn’t a simple solution where we can just avoid 50% tariffs, especially since Brazil is the largest coffee producer in the world and most of the coffee that is traded globally comes from there. So, it is significant.

And I'll add my congratulations as well for just that next step up in the momentum of the business here. Great to see. Scott, I want to ask a question or to both of you. We think about your production footprint that you're building in Conway between single-serve facilities, between the FE&I facility. And I know a lot of this, the shelves are built, the plumbing's there, it's incremental lines that you're putting in. Is there a way to frame up kind of Beverage Solutions revenue that could be supported out of the existing footprint as we get 3 to 5 years out?

Revenue. That's a revenue question. I only work in EBITDA. Pledger, he wants to know about revenue.

Revenue is challenging due to the impact of coffee prices on the business. However, there is significant potential for revenue and EBITDA growth with our current infrastructure. We will leverage our existing equipment and the upcoming glass and second can lines to drive substantial growth in both revenue and EBITDA throughout next year. We also have extra capacity at our single-serve facility in Conway that can be utilized without additional capital expenditure, presenting an excellent opportunity to expand and monetize the assets we've built over the past few years. Additionally, there is room within each facility to add custom lines as opportunities arise, and we plan to take advantage of that. That's my perspective on the situation.

Yes. And I asked the question poorly. I should have asked from the EBITDA line, I apologize.

It's the same question Pledger just answered, but I will convert it for you. And you can look at the guidance that we laid out for the year and then you look at what we expect that to ramp up next year. And we are working internally; we are working backwards over the next 3 years of driving EBITDA to $200 million. So we plan to go from last year where we did 60 to 200 in about 3 or 4 years, and we think we have eyes on everything we have to do, and we have every relationship, I would say 85% of all the relationships we have to have from a customer and product perspective to deliver that. So that's what we're working backwards from. And frankly, that is the progress on that. We report to our Board every quarter at the beginning of every meeting because that's all they want to talk about, too.

So you get a good answer when you ask the right question. Thank you for reminding me to focus on EBITDA here.

It's similar to AI. The key is in how you frame the question.

The other question I want to ask is about the different business lines. Scott, can you provide an update on the cross-selling momentum and whether it continues to accelerate? Are you surprised by how quickly customers are purchasing across the three lines of business in Beverage Solutions, or perhaps incorporating SS&T from a green perspective? Is this an opportunity that is accelerating beyond your expectations for Westrock?

Yes, that is a thoughtful question. Not to wax poetically, but I think there really are 3 categories and there are the mega brands that serve products across the whole category or only serve part of the category like roast and ground, and they want to be in RTD as an example. Those very large brands that have very large product development, commercialization staffs, research, data analytics, they have been much more aggressive than I would have guessed. I think that's the phrasing of your question reflects some of the surprise we've expressed in the past about how well our cross-selling went. There's another category, I think, of customers largely in the C-store and restaurant space that are realizing they are going to have to get back on trend with some of their beverage offerings, and they are more in the exploratory and one-off kind of pace. And then we've got a large number of customers in our traditional business that are single product buyers and probably will be for a very, very long time. So it's a mix, but those top 20 accounts are driving all of the cross product enhancements that our business is really benefiting from, and they're coming from that top 20 or 30 customers.

This concludes the question-and-answer session. I would now like to turn it back to Scott Ford for closing remarks.

Well, thank you. Thanks all of you for hopping on. Thank you for those of you that follow us. We've not been the easiest story to follow, and you all have been great. You've been professional, you've been thoughtful and we do appreciate the work that you're doing. We're super excited about where we are. We have a lot to do. Not every quarter lines up where it all comes in to your liking and you have to battle through some. And I'm sure we have quarters ahead of us where we'll continue to have to battle through. But as my old director at Alltel told me, Emon Mahony, after a quarter like this and I started making a list of all of the things we hadn't done yet, Emon looked at me and he said, if you're not happy when you can be, you never will be. So we're going to pause this evening and be happy, and then we're going to go back to work tomorrow and lay down a good set of numbers for the third and fourth quarter. Thank you for your time and your interest.

This does conclude the program. You may now disconnect.