Hello and welcome to the Westrock Coffee Company's Third Quarter 2023 Earnings Conference call. My name is Tanya and I'll be your -- coordinating your call today. [Operator Instructions]. I would now like to hand all 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. 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 the 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 2 distinct causes that were unique to the period. First, over $6 million of this 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 their forecast analysts, we were repeatedly informed that, "the spike in gasoline prices, coupled with the spike in interest rates, combined with a miserably hot summer kept consumers out of restaurants and C-stores in the first 2 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 gap. 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…

Thanks, Scott and good afternoon, everyone. I'll begin my remarks by providing a 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 of our Sustainable Sourcing & 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, 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 in the first half of August. Like others in our space, demand for hot black coffee in…

[Operator Instructions]. Our first question will come from Ben Bienvenu of Stephens Inc.

Hello. This is [ Jack Hardiman for Ben Bienvenu]. With what you can see in the flavors and the 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 being, 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 to a shelf directly 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, et cetera, et cetera. And when gas prices go up, they tend to soften up on that pretty quickly. You can see across the industry that RTD, 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. And then one quick follow-up. How do you feel about the balance sheet at present? And how has that view changed with 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 2 items I took you through. So as you roll through where we're running apart from those 2 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 those -- 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 this 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.

And our next question will come from Todd Brooks of The Benchmark Company.

Scott, I'd love to lead off with one for you, if I could. We're getting on 4, 5 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?

Sure. 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 2 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 2 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 over time. All of that was in the first part of the year. In the last 5 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 quarter. Same period last year. So single serve is doing exactly what we told you it would do. Flavors, extracts and ingredients is doing exactly what we told you it 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 C-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 in 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 and saying, well done, you're up 15% year-over-year, tell me more about Conway. It's just life, 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 a product.

That's great, Scott. Chris, I was wondering if you could walk us through the bridge to the new EBITDA guidance, kind of you laid out the $8 million shortfall in the quarter to plan. But at the midpoint of the range, we're talking more of an -- it looks like an incremental $8 million guide down to EBITDA expectations in 4Q. Can you walk through what's behind that dip from the prior outlook?

Yes. I think at the end of the day, I think you're starting to see more normalization, both in roast and ground and you're starting to see more normalization in single serve and growth in extract. But if you go from kind of where you started, you're starting at a lower base. And so we expect continued growth in those platforms throughout the fourth quarter. But your -- that growth will flow underneath our expectation whenever we updated our guidance over the -- 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 expectation that we extract 10% of the EBITDA opportunity that Conway eventually represents in fiscal '24. Are we still tracking towards being able to generate $20 million in EBITDA out of Conway?

Here's where we are and let's be super candid. In terms of the things that we have to do, is the equipment in, are the systems in, is the plumbing in, are the products ready to go? Are people ready to go? All of that is on or ahead of schedule. Now we come into the period of time when the customer chooses how much they want to commercialize, how many SKUs they want to commercialize and when they want to do it and they have to do that and they get to do that over 1 year. So there are no penalties in the year of start-up and they select when they come in. So if they all come in, in the second quarter, we will blow that away. We will run through the roof on our -- against that kind of guidance. But if they all delay until late in the year or first part of '25, which they contractually can, then that won't happen in '24. Now you're asking me, what are my customers going to do in the commercialization, start-up selection that they alone control. I don't know. But they have a year to turn it up, which -- so it's very easy for me to tell you what we've got signed up for '25. It's very difficult for me to tell you how that will phase in, in '24.

And our next question will come from Matt Smith of Stifel.

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. I think let's take it into 2 parts. The first one is the variance in revenue and the impact on EBITDA. Well, that is in fact, in that part of our business where you really are a scaled, core processing commodity manufacturer. Revenue ripple-through there is pronounced and direct as you would expect. When it comes to what was going on with our customers, they were carrying inventory and the forecast they had for us caused us to build inventory. So at the end of the day, the whole system was full as we went into the summer and the summer was literally, we sold -- you may have to make an amended filing for this but the whole miss was in hot coffee dollar for dollar from July and August. I mean it was stunning. And people said, as we've talked and getting ready for this quarter, I think a fair question is, well, why did you wait till the end of the quarter? Well, we're not Walmart. We don't report revenues on a monthly basis. But this quarter was in trouble in July. We didn't really realize how deeply, we thought, well, that's some timing. But by the time August had closed and when we were into September, we realized there is nothing you can do to save cost and get out of a commodity processing business quick enough when they just literally don't order anything.

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 clearly opportunity there, it's 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. So...

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 million 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 million plus or minus in '27. And so those are the numbers, just go ahead and finish your question. I wanted to make sure we were 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 time line 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.

Our next question will be coming from Joseph Feldman of Telsey Advisory Group.

I'm on for Sarang Vora today. I had a couple of follow-ups there. So we're sitting here today on November 9. 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 percent of the prior year. October was right 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 everyday 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. And then just one more follow-up. I guess from a total sales perspective for the -- you've talked about the EBITDA pressures in the fourth quarter. But any other puts and takes we should think about with regard to the 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, we're not -- in terms of what we've seen so far in the fourth quarter, I think it's kind of a continuation of what we saw in September. So we're not seeing anything like that yet. I think you continue to have, from an SS&T perspective, you're selling lower priced or you're selling coffee that comes in at a lower global commodity price. And so for SS&T, for example, you saw a significant decrease in the net sales of the business but the EBITDA year-over-year is flat. And so you'll likely see significant decrease in net sales in SS&T coming into the fourth quarter but you won't see -- but you'll continue to see EBITDA flat. You're not going to see EBITDA drop off because of that. But in our Beverage Solutions segment, I think you're going to continue to see the same kind of sales flow that you saw -- that we saw in September.

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

Well, thank you. I appreciate everybody hopping on this afternoon. I'd simply highlight what Chris and I had mentioned earlier, the third quarter was about a disappointing roast and ground coffee volume. Early in the quarter, we were pleased to see it come back. It continues to come back into the fourth quarter. That's as much visibility as we've got. So we're sharing it with you so that you can make your own assessment. We then look at the Conway facility coming online early next year. That is on time. I think it's important to remember this. We have filled out 2 extract and -- flavor, extracts and ingredient plants, one in Richmond, California that we bought a couple of -- 1 year or so ago and the one in North Carolina, they are full. We have more demand than we can make product for right now. Conway will not only package but it will also manufacture extract to relieve that pressure. And the growth we've experienced there, which is up 70% year-over-year for the period, we're going to roll that same growth into Conway and the Conway facility alone, which is probably 70% contracted out right now is capable of making twice the EBITDA of the entire enterprise on its own and I expect it to do that. And we will be bringing you some metrics to follow along with us along the lines of percentage of completion, number of SKUs that are in commercialization, what kind of volumes that we've got. We'll try to give you some feel for that as we start the plant up so you can follow along and help do your own math, given our, a really, our lack of ability to forecast it because of the wide range of start-up window time that our customers have. And I'll just conclude by saying this. If they go to the end of their window then we will make some more money next year than we made this year and we will tough it out and rough it along. And if they come to the front of the window, it's very hard to get your mind around how fast the EBITDA of this business could explode to the upside. But nobody cares until we do it. We're on to that. We will get it done. Thank you for tuning in and I look forward to talking to you next quarter.

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