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. Following prepared remarks, we will open your call to questions with instructions to be given at that time. 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.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 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 a 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 the miss 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 our forecast analysts, we were repeatedly informed that the spike in gasoline prices, coupled with the spike in interest rates, combined with a measurably 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, and 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 GAAP. 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 2023, looking for ways to drive revenues up and costs down. Turning now to the Conway extract and RTD plan. I want to commend and thank the team that has tirelessly fought to convert that plant and distribution facility from rendering on the drawing board to the finest facilities of their type in the country in what has to be record time. It has been a joint effort of Westrock employees, professional service providers, equipment vendors, customer product development, QA and procurement leaders, and the two primary general contractors involved, Nabholz Construction, and Clark Construction Co. Each individual involved is dedicated 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 schedule to successfully begin commercial production of finished product in the second quarter of 2024. This Conway facility is coming online just as we have essentially now finished selling out 100% of our extract manufacturing capacity in Concord, North Carolina. So overall, while it is a bit of a difficult time for the core coffee market, where we continue to compete for customer volumes as they ebb and flow through the seasons and gasoline price fluctuations, it is an absolutely glorious time to be in the extract and RTD space as our new customer and product extensions continue to expand and where we are about to open our third extracted ingredient factory, with the first two being sold out of capacity. For example, at this point, we have sold out almost 100% of our capacity on four of the initial six packaging lines, and we are over 50% sold out on the remaining two initial lines in the combined Richmond, California and Conway, Arkansas plants. And as Chris will describe in a few moments, we're working on some new ways to keep the investing public current on our progress inside the plants when we roll out our guidance for 2024 early next year. Now we do not expect most of this capacity in Conway to come online in commercial volumes, which is what produces EBITDA, until the very end of 2024 and early 2025. But we are confident that the four to five year forecasted EBITDA generation of Westrock, with these assets fully online remains right on track with our previous estimate at around $200 million of annual adjusted EBITDA. With that, I'll turn the call over to Chris for a review of our current operations and financial results.

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 for our sustainable sourcing and 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 adjustment 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, which 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 United States. 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 improvement 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 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 4.6 times 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 2023 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 level 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 will 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. With that, I'll hand the call back over to the operator for questions.

Our first question will come from Ben Bienvenu of Stephens Incorporated. Your line is open.

Hello, this is Jack Hardin on for Ben Bienvenu. With what you can see in the flavors and extracts market today, is the demand there subject to the same volatility that you've witnessed 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 situation, 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 directly to a shelf 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, etcetera, etcetera. And when gas prices go up, they tend to pull back on that pretty quickly. You can see across the industry that ready-to-drink, 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, thank you. 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 feel we've got plenty of room, and frankly, if you look at where we're running and what we expect to run, taking July and August hot coffee out, and this is a little complicated. But in a quarter where we made $17 million last year, we were close to $20 million this year without the two items I took you through. So as you roll through where we're running apart from those two months, from a credit perspective, we think we've got plenty of room. But I know for certain that if we ran into any issue whatsoever finishing out Conway, we have multiple sources lined up wanting to be part of this capital structure, to be part of this adventure, if you will, because the Conway numbers are frankly stunning in terms of what they're going to add to this business and bridging it or financing it in any way, shape, form, or fashion that is needed to finish that off. We're highly confident we can get that done. And as we said on our last call, this is the last common equity you're going to see us raise, which we raised last summer to finish. And we didn't know exactly how July and August were going to come in, but even that performance doesn't change that answer.

Makes sense. Thank you so much. I will hop back in the queue.

And one moment for our next question. And our next question will come from Todd Brooks of the Benchmark Company. Your line is open, Todd.

Hey, thanks for taking my questions. Scott, I'd love to lead off with one for you, if I could. We're getting on four or five 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?

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 cost 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 same period last year. So single-serve is doing exactly what we told you it would do. Flavors extraction ingredients is doing exactly what we told you 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 saying, well done, you're up 15% year-over-year. Tell me more about Conway. It's just like 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 the product.

That's great, Scott. And thanks for your honesty. Chris, could you explain the changes to the new EBITDA guidance? You mentioned the $8 million shortfall in the quarter compared to the plan. However, at the midpoint of the range, it appears we are looking at an additional $8 million decrease in EBITDA expectations for Q4. Can we discuss what is causing this decline from the previous outlook?

Yes, I think we're beginning to see more normalization in both roast and ground coffee, along with an increase in single-serve and extract products. However, we are starting from a lower baseline. We anticipate continued growth in these categories throughout the fourth quarter, although this growth may not meet our initial expectations from when we updated our guidance 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 extraction that we extract 10% of the EBITDA opportunity that Conway eventually represents in fiscal 2024, are we still tracking towards being able to generate $20 million of EBITDA?

Here's where we stand, and I want to be completely transparent. In terms of our necessary tasks, we have the equipment installed, the systems in place, the plumbing set up, and the products ready. Everything is on or ahead of schedule. Now we enter a phase where customers decide how much they wish to commercialize, how many SKUs they want to bring to market, and when they will do so, with a full year to make these choices. There are no penalties during the startup year, and the timing is at their discretion. If they all choose to proceed in the second quarter, we will exceed our expectations. However, if they decide to postpone until late in the year or early 2025, which they are allowed to do, then we will not see that progress in 2024. You’re asking what my customers will choose regarding commercialization and startup, which is entirely in their hands. I can't predict that, but they have a year to ramp up. Thus, while I can clearly outline what we have planned for 2025, forecasting how that will roll out in 2024 is much more challenging.

Okay, fair enough. I will jump back in queue. Thanks.

And one moment for our next question. And our next question will come from Matt Smith of Stifel. Your line is open, Matt.

Hi, good afternoon, Scott and Chris. Thanks for taking my questions. 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, the difference in revenue and its effect on EBITDA. This is particularly evident in the core processing of our commodity manufacturing business, where revenue changes are noticeable and straightforward. Regarding our customers, they had been holding inventory and their forecasts led us to increase our inventory levels. Ultimately, our entire system was at capacity as we entered summer, and during that period, we experienced a significant drop in hot coffee sales from July and August. It was quite remarkable. As we prepared for this quarter, a legitimate question arose about why we waited until the end of the quarter to address this. Unlike Walmart, we do not report revenues monthly. In July, we sensed the quarter might face challenges, but we underestimated the severity, thinking it was merely a matter of timing. However, by the end of August and into September, it became clear that there was no way to quickly cut costs in a commodity processing business when orders had simply dried up.

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 clear the opportunity there is 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 said $125 million to $150 million on Conway. That's if you go back to last quarter and the previous, that was up from 100 when we went public. So we upped it from $100 million to $125 million to $150 million. Hard to know exactly how to fold in, but the number we're actually targeting is 200 plus or minus in 2027. And so those are the numbers, just go ahead and finish your question. I want to make sure we're on the same page there, though.

No, that's perfect. I appreciate that. And then one last one here. The contracts you have in place today, you've talked about you've sold out 100% and then 50% of the remaining lines that are being built out, understanding that there is some timeline shift there 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.

That's really helpful. I will leave it there and pass it on. Appreciate the help. And one moment for our next question. Our next question will be coming from Joseph Feldman of Telsey Advisory Group. Your line is open.

Hey guys. Thanks for taking my question. I'm on for Sarang Vora today. A couple of follow-ups there. So we're sitting here today on November 9th, 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 of the prior year. October was a write 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 S&D 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, thank you. And then just one more follow-up, I guess from a total sales perspective, you've talked about the EBITDA pressures in the fourth quarter. But any other puts and takes we should think about with regard to sales for this coming quarter, and really even at the start of next year? We're hearing from a lot of other companies that they're concerned about slower demand, and I'm not quite sure that applies to coffee, but just wanted to get your thoughts on it?

Well, in terms of what we've observed in the fourth quarter, it's largely a continuation of September's trends. We're not seeing any major changes yet. From the SS&T perspective, we're selling lower-priced coffee tied to a lower global commodity price. For example, there was a notable decline in net sales in this segment, but the EBITDA year-over-year remains flat. We expect to see a significant decrease in net sales for SS&T in the fourth quarter, but EBITDA should remain stable. In our Beverage Solutions segment, we anticipate the sales flow will continue as it did in September.

Got it, that’s helpful. Thanks so much, guys. Appreciate it. Good luck with the quarter.

Thank you.

I would now like to turn the conference back to Scott Ford for closing remarks.

Thank you for joining us this afternoon. I want to emphasize what Chris and I discussed earlier: the third quarter saw disappointing volume in roast and ground coffee. However, we were encouraged to see a bounce-back early in the quarter, which is continuing into the fourth quarter. That’s the extent of our visibility on this matter, and we share it for your assessment. Looking ahead, the Conway facility is set to commence operations early next year, and it is on schedule. It's also worth noting that our two flavor extract and ingredient plants, one in Richmond, California, and another in North Carolina, are fully operational. We currently have more demand than we can meet, and Conway will help relieve that pressure by not only packaging but also manufacturing extracts. We have seen a remarkable 70% year-over-year growth in that sector, with similar growth expected at Conway, which is already around 70% contracted. The Conway facility alone has the potential to generate twice the EBITDA of our entire company, and I expect it to achieve this. We will provide metrics for you to track our progress, including completion percentages and commercialization of SKUs, so you can keep up with the developments as we start operations. The timeline for our customers is variable, making it challenging to forecast exactly. If they extend to the end of their timeline, we expect to see increased profits next year compared to this year, and we will manage the situation as it develops. However, if they expedite their timelines, the potential for a rapid increase in EBITDA is significant. We recognize the importance of delivering results, and we are committed to making it happen. Thank you for tuning in, and I look forward to updating you next quarter.

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