Westrock Coffee Company — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statement amounts below are in U.S. dollars; figures are converted from thousands to millions where applicable. Interim results are unaudited. Westrock supplies coffee, tea, flavors, extracts and ingredients through Beverage Solutions and Sustainable Sourcing & Traceability (SS&T).
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $224.7m | $223.4m | $430.1m | $409.8m |
| Gross profit / margin | $35.7m / 15.9% | $38.9m / 17.4% | $70.0m / 16.3% | $77.3m / 18.9% |
| Operating income (loss) | $(1.4)m | $1.4m | $(8.8)m | $2.1m |
| Net loss | $(26.8)m | $(5.8)m | $(31.1)m | $(10.5)m |
| Adjusted EBITDA | $11.3m | $13.3m | $19.8m | $24.7m |
| Operating cash flow | Not presented quarterly | $(35.7)m | $(47.0)m |
Q2 sales were nearly flat year over year; first-half sales increased about 5%. Higher materials, production and green coffee costs pressured gross margin. First-half Beverage Solutions growth reflected higher single-serve cup volumes, Kohana extract sales and pricing; external SS&T green coffee sales fell 33% in Q2 and 35% for the first half, primarily as demand and volumes declined. Adjusted EBITDA, a non-GAAP measure, decreased in both periods.
Q2 net loss included an $11.8m loss from remeasuring warrant liabilities and $6.2m income tax expense, versus a tax benefit in Q2 2022. First-half warrant remeasurement loss was $6.3m. Interest expense declined year over year, which management attributed mainly to lower debt and a lower rate on the new term loan than on the prior facility.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $25.2m, plus $3.5m restricted cash. First-half operating cash use was $35.7m; investing cash use was $58.2m, including $55.7m of capital expenditures, versus $15.2m of capex in the first half of 2022.
- Total debt was $296.0m before unamortized debt costs, up from $219.7m at year-end 2022. This included $168.4m of term loans, $80.0m drawn on the revolving facility and $46.2m of short-term debt. The company also had $29.0m outstanding under an uncommitted supplier-finance program. Series A convertible preferred shares were carried at $275.0m; shareholders’ equity was a deficit of $14.3m.
- The June credit amendment provided covenant relief through no later than April 1, 2025, with stepped leverage limits; the minimum interest coverage covenant remains 2.00x. The company reported compliance at June 30. A $50m delayed-draw term facility was available for Conway capital expenditures or general purposes; no draw had been made as of the filing.
- After quarter-end, the company issued shares for approximately $118.8m gross proceeds: $100m from the HF and PIPE investments and approximately $18.8m from BBH preemptive rights. Management said the proceeds, operating cash flow and available borrowings were expected to fund operations for at least 12 months and support the Conway build-out.
Outlook, risks and unusual matters
- The Conway, Arkansas extract and ready-to-drink facility is a major growth investment. Approximately $78m had been spent by June 30, with $50.5m of first-half growth capex. The filing gives no clear commercial-production start date or specific numerical earnings guidance. Management said it may delay or reduce the project or other growth spending if liquidity is insufficient.
- Management noted that selling-price increases can lag inflation and commodity-cost increases. Principal risks include coffee and other input-price volatility, supply disruption, weaker customer demand, customer concentration, covenant compliance, access to capital, and completing the Conway facility on time and within budget.
- Liquidity depends on operating cash generation and borrowing access. The Falcon trade-finance facility is uncommitted and repayable on demand. The company had $193.3m of inventory purchase commitments for the next 12 months and a further $9.4m inventory repurchase obligation.
- Holders may require cash redemption of Series A preferred shares after February 2028, subject to law and debt-agreement terms. The company estimated at least approximately $271m of aggregate redemption value if all shares remained outstanding at an $11.50 liquidation preference.
- Disclosure controls and procedures were deemed ineffective at June 30 because material weaknesses in financial reporting controls remained. The filing describes weaknesses in risk assessment, period-end reporting, segregation of duties and IT controls; remediation efforts are underway. Management nevertheless stated the interim statements were prepared in accordance with U.S. GAAP.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. The filing also corrected a $10.1m prior-period property, plant and equipment classification error; it stated the correction did not affect previously reported net income.
Important facts for investors to verify
- Whether the post-quarter equity proceeds and available facilities adequately fund Conway completion and operating needs, and when the facility is expected to begin commercial production.
- Future operating cash flow, gross-margin recovery and SS&T customer demand, given declining green coffee volumes and rising costs.
- Debt balances, borrowing availability, interest costs and covenant compliance during and after the relief period; confirm terms and availability of uncommitted financing.
- Progress in remediating the disclosed material weaknesses and whether controls are independently validated as effective.
- Potential dilution from common-share issuances, warrants and preferred-share conversions, and the long-term cash exposure from preferred-share redemption rights.