WEST - NASDAQ

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. [Operator Instructions] 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 towards 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 2-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, our start-up costs exceeded our plan and 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 an 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 and 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 in turn 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 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 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.

[Operator Instructions] Our first question today comes from Eric Des Lauriers from Craig-Hallum Capital Group.

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 2 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 9 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 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 the middle of October in production early November.

Our next question is from Bill Chappell from Truist Securities.

Just a follow-up or initial question, kind of a thought of you should have pretty high visibility, I imagine, for production over the next 6 to 9 months. Is that -- would you say it's in the high 90s, 100%? And kind of what's the -- maybe what's the room for upside from there? I mean in terms of new orders coming in, can you take it or are you kind of full out as we move into the -- especially the fourth quarter?

Hard to say. I think in fairness, I think we've got pretty good line of sight in terms of what we expect from customers that are in and running now. We have some other customers that are scheduled to come on after the second can line comes in. Exactly whether that falls in November or December or January, things like that, hard for me to guess at this point in time. I think the other major thing that's going on there is when exactly we start up the glass line. So the trials on that have gone exceedingly well. We are concluding all of those where we have to premake it and make it again, make it again and get all of that checked off. We're in the final stages of that. That could start in the fourth quarter. It could start earlier than later. So those things could have a few million dollars, if you would, of EBITDA impact plus or minus from where we are. I think that's all caught in our guidance. I think Pledger has his line of sight on all of the pluses and minuses of that which bring us out kind of just -- I think we're good where we sit in our previous guidance with some of those being positives and negatives normally in the full course of time.

I think the good thing there is, from a volume perspective, customer demand is -- continues to be really strong. And so the volume that we had, the volume that we've sold continues -- the demand there continues to be strong. There's capacity in -- not only in single- serve, roast and ground, but also in the Conway products that open up as we continue to add the second can line on the multi-serve bottle line. So there's opportunities to grow, there's customer demand for those. And then the demand for what we've sold continues to be where we expected it.

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. I think the whole catalyst for it was winning new business. I mean we had outgrown what we -- our original or legacy facility wanted to create redundancy in the supply chain for some of the big customers that we provide single-serve cup volume for and had one new business that was a catalyst for opening the second facility. There's still capacity for us to be able to expand there, which we're excited about. And we've got a good pipeline of customers that we're working with about coming into it.

Our next question is from Sarang Vora with TA.

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. I think as Chris mentioned -- this is Scott. As Chris mentioned, the first plant as it's laid out was essentially full. The second one we built in the front 25% of the new distribution center that was built to serve the Conway beverage plant. So we built it from day 1, set up to run another single-serve facility in that portion of the building. So it is reasonably modular. We could turn it on. If you had billions of cups a year of demand and you wanted to contract for that, we could take the space and fill that out. Right now, I would say that we've filled out maybe 25% -- 20% of that space with machines, and the rest of it is actually available for part of the distribution center. So it's kind of modular. We will add machines and take space from one service into the next as we go. And at this point, we've had very nice wins in the traditional retail CPG space. We continue to have great conversations in the space that we grew up in, which is really around the traditional private label space for retailers. We've got a lot of interesting projects going on on that front and we continue to chip away at it. The industry structure, everybody knows, Keurig is the 800-pound gorilla. The research reports that I see say they have well over 80% market share. There used to be 20 of us that competed in the other 20. I think there's maybe 3 or 4 that are left. It's been a good business for us, but it is a scale business and it's very difficult to run kind of in a one-off with just 1 or 2 machines. You'll recall that we started -- the original Westrock, we started with one machine. We've got dozens now, but it's an issue that it is a scale game when you have a very tough, very sizable player that started the industry and is still an excellent manufacturer, very aggressive competitor, and we live under an industry structure umbrella that reflects that.

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 tariff over there. Are you able to change your sourcing from one market to other market more efficiently or these contracts are 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 is a great question. It's reasonably detailed. It depends. There are some contracts we can say, okay, well, we can get a reasonable profile of a bean from Colombia or Honduras or Rwanda or Uganda that can substitute for a 50% tariff and all of a sudden logistics out of East Africa are back in play. Those coffees can be competitive. We have other situations where it's very difficult to change them for customer profile or contract reasons. And so it will be a total mixed bag. There is no flip of the switch of which -- that just says, okay, we're just going to avoid 50% tariffs when they are the largest producer of coffee in the country -- in the world and most of the coffee that freely trades in the world net comes out of Brazil. So it matters.

Our next question comes from Todd Brooks with The Benchmark Company.

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.

I think -- I mean, that's kind of the way -- revenue is hard just simply because of the price of how the coffee cost impact the business. But I think there is an opportunity to significantly grow revenue and grow EBITDA with the existing footprint that we have. I mean we will continue just with the equipment that we have in place now and the new -- when the glass line comes on, when the second can line comes on, just with those assets, we will have the opportunity to significantly grow and will continue to grow both on a revenue basis and on an EBITDA basis, really through next year off of those assets being deployed. We've got additional capacity in the Conway, the single-serve facility that we have in Conway that we can sell without having to deploy more CapEx. And so there's a great opportunity for us over the next 12 to 18 months to really grow and monetize the assets that we've deployed in Conway over the last 2 or 3 years. And then there's space within each of those facilities that if there are bespoke opportunities to add a line here or there, we'll have the ability to do that and we'll take advantage of it. And I guess that's the way I think about it.

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 like AI. You have to -- it's how you ask the question.

The other question I want to ask is thinking about the different business lines. Just Scott, can you update us on cross-selling momentum and does that continue to accelerate? And are you surprised by how quickly customers are buying across the 3 lines of business in Beverage Solutions or maybe layering in SS&T from a green standpoint? Is it just -- is that an accelerating opportunity relative to your expectation 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. And 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.