Westrock Coffee Company — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Westrock supplies coffee, tea, flavors, extracts and ingredients through Beverage Solutions and Sustainable Sourcing & Traceability (SS&T). Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $219.6 | $230.3 | $649.7 | $640.1 |
| Gross profit / margin | $35.1 / 16.0% | $41.1 / 17.9% | $105.0 / 16.2% | $118.5 / 18.5% |
| Operating income (loss) | $(5.4) | $5.5 | $(14.1) | $7.6 |
| Net income (loss) | $16.6 | $(13.0) | $(14.5) | $(23.5) |
| Adjusted EBITDA | $11.6 | $17.9 | $31.4 | $42.6 |
| Basic and diluted EPS | $0.15 | $(0.41) | $(0.19) | $(1.12) |
- Q3 net income included a $25.1 million non-cash gain from revaluing warrant liabilities; the nine-month gain was $18.8 million. This materially affected reported net income and should be distinguished from operating performance.
- Q3 interest expense was $7.8 million, down from $13.4 million, partly because prior-year debt termination and financing write-off costs did not recur. Nine-month interest expense was $21.2 million versus $30.3 million.
- Q3 Beverage Solutions revenue rose 1.9% to $176.8 million, but segment Adjusted EBITDA fell to $9.9 million from $15.9 million. SS&T revenue, net of intersegment sales, declined 24.7% to $42.8 million; segment Adjusted EBITDA was $1.7 million versus $2.0 million. For the first nine months, total Adjusted EBITDA fell to $31.4 million from $42.6 million.
- Nine-month cash used in operations was $75.1 million; investing activities used $125.3 million, including $121.5 million of property and equipment additions; financing provided $223.1 million. Cash and restricted cash totaled $48.8 million at September 30, 2023, compared with $95.5 million a year earlier.
- At quarter-end, cash and cash equivalents were $44.4 million, current assets $339.6 million and current liabilities $222.2 million. Gross debt was $270.7 million, excluding the separately presented $67.5 million supply-chain-finance obligation; gross debt was $219.7 million at December 31, 2022. The company reported $45.0 million drawn on its revolving facility and a 9.0% weighted-average rate on those borrowings; the term loan rate was 9.2%.
Changes, outlook and key risks
- Q3 sales declined 4.6% year over year. Lower coffee and tea sales and reduced SS&T green-coffee volumes outweighed growth in flavors, extracts and ingredients. Management attributed the lower SS&T volumes to weaker customer demand. Nine-month sales increased 1.5%, supported by Beverage Solutions growth, acquisitions and pricing, while SS&T sales fell 30.8%.
- Management said lower-than-projected roast-and-ground coffee sales, reflecting market and industry conditions, led it to reduce full-year projections. The filing does not provide a clear numerical full-year revenue or earnings forecast.
- The Conway, Arkansas extract and ready-to-drink facility remains a major investment. Nine-month growth capital expenditures were $113.6 million; the facility generated $6.6 million of start-up costs in that period. Management expects available equity proceeds, operating cash and borrowing capacity to fund the build-out, but says it may delay or change the scope if liquidity is inadequate.
- In August, Westrock issued shares for approximately $118.8 million of gross proceeds: $100.0 million from the HF and PIPE investments and approximately $18.8 million from BBH preemptive rights. Management believes equity proceeds, projected operating cash flow and available credit will fund operations for at least twelve months. It also warned that failure to meet targets could constrain liquidity and covenant compliance and may prompt additional capital raising, delayed growth spending or cost reductions.
- The company was compliant with its financial covenants at September 30, 2023, following a June amendment that relaxed the leverage covenant through a relief period expected to end no later than April 1, 2025. The company also disclosed $234.0 million of inventory purchase commitments over the next 12 months. Its $70 million Falcon trade-finance facility is uncommitted and repayable on demand; $42.5 million was outstanding.
- Series A preferred shares totaled 23.5 million at quarter-end and have a $11.50 liquidation preference. Holders may seek cash redemption after February 26, 2028, subject to financing-agreement terms; Westrock estimates at least approximately $270 million if all shares remain outstanding and the assumed preference is unchanged.
- Disclosure controls were ineffective at quarter-end because material weaknesses in financial reporting controls remained outstanding. Management described remediation efforts, but stated that the weaknesses are not considered remediated until controls are fully implemented and operate effectively.
- Principal disclosed risks include coffee and other input-cost volatility, supply-chain disruption, softer demand and customer volumes, ability to pass through costs, access to capital and covenant compliance, Conway construction costs and timing, and the company’s history of losses. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether roast-and-ground coffee volumes and demand recover, and the updated full-year projections underlying management’s reduced outlook.
- Cash-flow trends, liquidity availability, the status and terms of supply-chain financing, and compliance with leverage and interest-coverage covenants.
- Conway facility completion schedule, remaining capital needs, start-up costs and expected contribution to sales and margins.
- Progress in remediating material weaknesses and the reliability of future financial reporting.
- The scale and timing of any preferred-share redemptions, and the potential dilution from warrants and equity awards.