Westrock Coffee Co Q3 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Westrock Coffee Company Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Robert Mounger, Vice President of Investor Relations. Please go ahead.

Thank you, and welcome to Westrock Coffee Company's Third 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, you 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. 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 SEC filings for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements made today. All 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.

Thank you, Robert. Good afternoon, everyone. Thanks for joining us. We're pleased to announce today that for the second quarter in a row, we produced record-breaking quarterly results, driven by continued new customer volume additions and cost management execution. We believe these results reflect the strength of our customer-centered model and the value to our customers of the strategic investments we have made in both the physical expansion of our facility and the systems that allow us to manage them more effectively. We remain on track toward our goal of becoming the premier integrated, strategic supplier to the pre-eminent coffee, tea and energy beverage brands globally. And now due to great customer interest, we're excited to be adding a new body of work focused on ultra-filtered milk-based, high-protein products as well. We ended the third quarter with the combination of our Beverage Solutions and SS&T Adjusted EBITDA of $26.2 million, up 14% over the second quarter and up 84% over the same quarter last year. These results bring the combined Segment Adjusted EBITDA of our first 3 quarters of '25 to $60.7 million, up 55% over the same period in the prior year, leaving us on target within our original full year guidance range for the year 2025. The growing volumes at both our new single-serve cup and extract to RTD plants in Conway, Arkansas, combined with cost controls across our core business units derived from process, data intelligence and risk mitigation insights via our ongoing relationship with Palantir continued once again this quarter to be the key drivers of this quarter's earnings beat. Importantly, on key packaging lines in Conway, we have already reached production levels nearing 80% of our original planned capacity, and we have added significant water and tank farm capacity to the plant to enable future lines to be quickly added. We also completed the installation of our second can line, which should start commercial production in Q1 of next year. You may recall that last quarter, we gave you some initial data on our second single-serve cup manufacturing facility located in the Conway complex, the start-up of which went seamlessly. The cup volume produced through these new lines was a key contributor to our profitability this quarter. Chris will have an important word on this topic in just a few moments. We remain convinced that 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 position in step with the movements of their consumers. Our record quarterly results demonstrate growth brought about from our delivery as this leading integrated platform in the category, delivery that enhances the value of our services to our customers, contributes to the growth of the careers of our teammates, manifests as pricing fairness for smallholder farmers in the developing world and rewards our shareholders. These continue to be important things worthy of our greatest efforts. I believe that our customers and our competitors are keenly aware of the market share shifts that we are beginning to cause as these new plants scale operationally. We have been successful at winning our customers' trust because we have spent 3 years over $350 million in capital and the time of 1,400 highly skilled development and manufacturing professionals to provide them a set of products and services that they can count on for quality, convenience, innovation and price. That said, I also believe that historically high coffee prices and major tariffs on coffee imports, coupled with the 2 extra quarters it took us to reach scale production levels in our Conway plant has given some investors pause. Therefore, I am thrilled to share with you today the news of a new $30 million infusion of capital into our business from our traditional core shareholder group, which coupled with the realignment of our debt covenants with our growth in Conway clears the way for us to completely focus all of our resources on operational delivery and driving results for our customers and stockholders. My thanks to the entire Westrock team who steadfastly go the extra mile to ensure our customers are positioned to win in their markets daily. Our Board and core shareholders who are simply relentless in their support of our mission and to our bank syndicate members led by Wells Fargo, Bank of America, Rabobank, Truist and others who have been the consummate engaged and encouraging professionals throughout the entire build-out and startup phases of what is now the largest and I believe, best facility of its type anywhere in the world. I'm now going to turn the call over to Chris Pledger, our CFO, who will explain all of these developments and more in greater detail. Chris?

Thank you, Scott, and good afternoon, everyone. Before I go into the details of the capital markets activity we announced today, I'll first cover the results of our third quarter. As Scott mentioned, we delivered an exceptional quarter, highlighted by year-over-year volume growth in our roast and ground, single-serve and flavors, extracts and ingredients platforms and continued supply chain optimization and disciplined expense management. Our Sustainable Sourcing & Traceability segment also posted another strong quarter. On a consolidated basis, net sales increased 61% compared to the third quarter of 2024. Our reported net loss of $19.1 million reflects our continued investment in the Conway extract and RTD facility through its scale-up phase. Our Consolidated Adjusted EBITDA was $23.2 million, representing 125% growth over the third quarter of 2024. In our Beverage Solutions segment, net sales increased 60% year-over-year and Segment Adjusted EBITDA grew 74% to $20.4 million in the third quarter. This growth was driven by a 4% increase in core roast and ground coffee volumes, an 85% volume increase in single-serve cup and continued supply chain optimization and disciplined expense management. Year-over-year increases in commodity coffee prices and tariffs, which we passed through to our customers, also contributed to top line growth. Our SS&T segment continues to outperform our expectations with net sales growth of 62% over the third quarter of 2024, driven by volume growth, margin capture and higher coffee prices. Segment Adjusted EBITDA was $5.8 million, up from $2.5 million in the prior year quarter. As I mentioned last quarter, our SS&T results reflect the scalability and resilience of this business segment. Capital expenditures totaled approximately $18 million in the quarter, primarily related to the Conway extract and RTD facility. We have $15 million of CapEx remaining on our original build-out of the Conway extract and RTD facility, and we expect to spend that over the next 2 quarters. As of quarter end, we had approximately $52 million in unrestricted cash and available liquidity under our $200 million revolving credit facility. This is before taking into account the $30 million capital raise we announced today. Our leverage metrics remain within expectations and in full compliance with the covenants under our credit agreement. We have talked a lot on our last few calls about the working capital impact of historically high coffee prices and tariffs on coffee imports and their potential impact on consumer demand. Both topics continue to be front and center for Westrock Coffee and other U.S.-based coffee roasters. To help mitigate the working capital impact of higher coffee prices and tariffs, we raised approximately $12 million in the third quarter via sales of common stock under our ATM program. In addition, today, we announced the issuance of $30 million of convertible notes and a credit agreement amendment. The capital raise strengthens our balance sheet and provides additional liquidity to support the working capital needs resulting from elevated coffee prices and tariffs, while the credit agreement amendment realigns our financial covenants with the ongoing scale-up of our Conway facility. While it's impossible to predict how macroeconomic influences might impact our business, we believe we now have the working capital and credit capacity needed to navigate the continued elevated coffee prices and tariffs, and we do not anticipate any additional capital markets activity in response to these headwinds. Turning to our outlook. For 2025, we're updating our guidance to reflect our current expectation for the fiscal year. We now estimate that Consolidated Adjusted EBITDA will be between $60 million and $65 million, which is consistent with the guidance we provided at the beginning of the year. Beverage Solutions Segment Adjusted EBITDA for fiscal 2025 is expected to be between $63 million and $68 million and SS&T Segment Adjusted EBITDA is expected to be between $14 million and $16 million. Finally, our Beverage Solutions credit agreement secured net leverage ratio is expected to be 4.5x, a 40 basis point beat to our prior guidance. Turning to 2026 guidance. Earlier this year, we shared our expectations for 2026 Consolidated Adjusted EBITDA, our expected annualized run rate for Consolidated Adjusted EBITDA as we exit 2026 and our expected year-end Beverage Solutions credit agreement secured net leverage ratio. While we believe it would be premature to update our 2026 guidance, we also believe it's important to call out that one of our key customers is involved in a large M&A transaction within the coffee category. This is creating uncertainty for us related to their single-serve cup volume commitment for 2026. In addition, continued elevated coffee prices and tariff costs are creating uncertainty regarding how consumers will respond to higher coffee prices across restaurants, convenience stores and on retail shelves. We expect to have greater clarity, particularly regarding the M&A transaction ahead of our fourth quarter call, and we'll update our 2026 outlook, if necessary, when we report fiscal 2025 results. It's important to note that for purposes of resetting our credit covenants as part of our amendment, we have conservatively assumed that all single-serve cup volume related to the impacted customer will be off our platform by the end of this year, thereby assuring we don't need to seek additional relief if this scenario plays out. And even if it does, we're confident that over time, we'll be able to replace any lost volume on our single-serve cup platform with expanded volume from existing customers and new customer wins. With that, we'd be happy to open the line for questions.

Our first question comes from Eric Des Lauriers of Craig-Hallum Capital Group.

First question is just kind of checking in on the progress of some of the production lines after the delays reported last quarter. So on the Q2 call, you expected the main production line to be up fourfold in Q3 and that you expect to be fully caught up to the delays by the end of the year. It sounds like you're about 80% there as of Q3. So just looking for an update on both of those and seeing how those trended in Q3?

Eric, this is Scott. At this juncture, we've run 80% to 125% of the standard volumes we would have expected off the line on the main can line. We've got all of our customers caught up at this juncture and the glass line is currently making commercial product for sale starting in the month of December.

Congrats on that progress. I suppose I'd like to focus my next question on this newly announced product line or just a product type, but including this ultra-filtered high-protein milk. Can you just expand on any timing and I suppose, size or scale commentary on this product? I mean, it certainly seems like this is an area where a lot of consumers are focused, looking to get more protein. So it seems like this could be quite a successful product for you and your partners. So just looking to get a little bit more info on there, whatever you're able to share.

Sure. It's early days, but there is a tremendous amount of interest from a number of different businesses. The core issue is as ultra-filtered milk products, high protein, move into cans and not just aseptic plastic bottles, there's a demand for aluminum cans over those bottles. The only plants that can run those are big major retort plants. We own and operate the largest retort lines in the country, and we have just installed a second line that is coming on for commercial production in January. So the whole product development cycle is probably a 12-month process. But as you're probably aware, the demand for these ultra-filtered milk products moving into cans is competing with the traditional coffee ready-to-drink can lines that we've been serving. And so a lot of the same customers are saying we want to do product extensions out into that platform and we love doing product development work. We have small-scale lines that they can set up and run on. And I don't know that it will turn into anything, but the demand and the forecasted numbers that people are talking about suggest that it could become as big as our ready-to-drink coffee business over the next 2 to 4 years.

Our next question comes from Sarang Vora of TAG.

I'll just follow up on the ultra-processed protein line. Do you need to make additional investments to develop this line? It seems like a promising opportunity for the future, but will you be able to use the existing production line to serve this segment?

Yes. We could, if someone delivered the product to us, run it through our production facilities today. We have probably $5 million or $6 million of capital that we or our distribution milk partner would have to put up to fully enable that, but that's the kind of thing that as we move into production contract levels, we could easily put in place. That's really all we have to do—the can lines themselves, the product development, the labs through which we do all the testing, that's all completely interchangeable with the products that we make for people today.

My second question is about the coffee sourcing and stuff. Coffee prices are high. There are tariffs on top of the coffee prices. How are you managing that? Like are you changing the sourcing between markets? I know you were able to pass, but there is a pressure on gross margin right now. So how are you managing the whole dynamics on the coffee price increase? And what is your outlook for next year regarding coffee?

Sarang, this is Chris. The short answer is that with 60% of our coffee coming from Brazil and Brazil having the highest tariff, it's hard to produce product in the coffee space without using Brazilian coffee. But we look at ways to optimize the coffee that we use and the blend that we make. We'll continue to do that. My guess is the longer the coffee prices stay high, the more innovation people will have around it, including us. The capital raise that we completed and announced today was really to ensure that coffee prices can stay as high as they are, tariffs can stay exactly where they are, and we've got the balance sheet in order to make it through. From our perspective, we feel like we're good as we move forward in whatever the market environment entails.

Our next question comes from Todd Brooks of Benchmark, StoneX.

First question, Scott, just thinking through the single-serve customer who we may be losing some M&A transaction friction. Were they existing customers on the platform? Or were these prospective customers that were contemplated when you gave the original 2026 EBITDA guidance?

They were coming on in the '25 year, and we're going to be at full ramp by early '26. So they were incorporated in our original '26 guidance.

And then the one I wanted to explore more in depth, you talked about really having the financing in place so that from a go-forward standpoint, you could start to play a little bit more offense again. You talked about, obviously, the high protein ultra-filtered. But are there other areas where maybe you haven't been able to play offense that the balance sheet might allow you to go after in '26?

Yes. It's a good question, Todd. When I look at the last few months as we worked through with our bank syndicate and with our core shareholders on the best path forward, I take away two or three things. First, our performance and the capital raise will allow us to be at 4.5x debt to EBITDA by the end of this year. I don't think anybody thought Westrock Coffee was ever going to get back to 4.5x debt-to-EBITDA. But the team has delivered great EBITDA numbers, and the core shareholder groups have come in. We managed our cash closely as the Conway plant neared completion and out of fast mode. The second thing, which is probably more important, is that as Conway turns on the new lines that are being commissioned and coming up right now, we will be EBITDA profitable with no add-backs, just straightforward EBITDA profit and free cash flow positive. I've talked to people who have us going free cash flow positive in 5 years. We're going to go free cash flow positive after debt service in the next 4 or 5 months. This allows us to conservatively chip away at each incremental opportunity. Interestingly, we've received inquiries needing CapEx to meet demand trying to line up for the plant over the next 12 to 18 months. We wouldn't have had any capacity to deal with that while building Conway. If that's what happens, we could fund that ourselves. It's a level of freedom we haven't had since we decided to build the world's largest RTD factory, and I'm glad to have it back.

Our next question comes from Bill Chappell of Truist Securities.

It's Davis on for Bill. Can you hear me okay? So just on the expanded single-serve capacity that you all brought on recently and the consolidating customer leaving the platform. You mentioned being pretty confident that you're going to be able to fill the capacity. So I guess I was just wondering if there is currently a backlog of customer demand that's ready to go ahead and step in? Or is that just kind of based on the way things have worked for the facility up until now that gives you the confidence?

Yes. Davis, this is Scott. We don't really know. The words that probably please you are to talk about the fact that it is an uncertain period of time for us. We haven't changed our guidance for '25 or '26 from what we said at the beginning of '25. The only difference is one of our large single-serve customers is going through an M&A acquisition transaction, and we don't know how that will play out. The last thing we're going to do is start to guess at how that plays out. We'll know more by the end of the year, and we'll update you with whatever we know at that point. We're trying to be very careful about what we know and what we don't. Nothing has happened in the business other than that transaction to make us change our guidance for '25 or '26. The specific transaction that is causing us to alert you to a large customer in the single-serve space potentially exiting has attracted interest from multiple other customers with significant volume to come to our facility and switch platforms. How that will all play out is completely unknown to me. But if it unfolds the way we hope, we're trading at 4x EBITDA on what we think we can turn this business into over the next couple of years. So I would take a low stock price with a strong business forecast any day. We'll just play the cards as they come.

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

Well, thank you all for hopping on. I appreciate it. We were, as you can probably imagine, looking at being up 85% from last year. We were thrilled with the quarter. We're very optimistic about what lies ahead, as you can tell. We're not trying to get ahead of ourselves in terms of how it all lands. We've recapitalized the business from mostly the same shareholders that have been backing us for years now. We have more information about where we stand in Conway. Those lines are all now up, running, producing, and making sellable product. We have new lines just starting their production volume increase and profits. I really like where we've positioned our balance sheet. We've managed the cash crunch caused by 50% tariffs on Brazil. It was a painful solve, but we've been able to address it in good order. We are optimistic about our current business, new business, and cost innovations we are working on. The only caveat is the uncertainty surrounding one customer involved in a potential acquisition by a competitor. That is the full disclosure, and we will see you in another 90 days for updates. Thank you very much for your support, and we will see you soon.

Thank you…