Westrock Coffee Company — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial statements are unaudited and reflect Westrock Coffee Holdings, LLC before its August 2022 conversion to a Delaware corporation. Unless noted, dollar amounts below are in millions.
Business context and financial performance
Westrock supplies coffee, tea, flavors, extracts and ingredients, and operates two segments: Beverage Solutions and Sustainable Sourcing & Traceability (SS&T).
- Q2 revenue: $223.4, up 30.5% from $171.1 a year earlier. Beverage Solutions revenue was $170.9, up 27.1%; SS&T external revenue was $52.5, up 43.0%.
- Q2 profitability: Gross profit was $38.9 versus $34.4, but gross margin declined to 17.4% from 20.1%. Operating income was $1.4 versus $1.6. Net loss narrowed to $5.8 from $6.1; net loss attributable to common unitholders was $12.9 versus $12.2, including $7.1 of accumulating preferred dividends.
- Q2 Adjusted EBITDA: $13.3 versus $11.2, a non-GAAP measure. Segment margins were 7.3% for Beverage Solutions and 1.6% for SS&T; total segment margin was 5.9%, down from 6.5% a year earlier.
- First-half revenue and earnings: Revenue was $409.8, up 25.5%. Gross profit was $77.3 and gross margin was 18.9%, compared with $67.5 and 20.7%. Net loss improved to $10.5 from $12.2; common-unit loss was $24.5 versus $24.4. Adjusted EBITDA increased to $24.7 from $19.5.
- Cash flow, first half: Operating cash outflow was $47.0, compared with $0.8 outflow a year earlier; investing cash outflow was $13.0 versus $7.5; financing provided $55.3 versus $7.7. The operating outflow was primarily associated with higher working capital, including a $46.1 increase in inventory to support anticipated demand. Capital expenditures were $15.2, up from $8.6.
- Liquidity and debt at June 30: Cash and cash equivalents were $14.3, restricted cash $3.8, and availability under the prior ABL facility $14.5. Reported debt was $377.2 before $4.1 of unamortized debt costs, including $67.9 of short-term debt; an additional $13.3 of subordinated related-party debt was reported separately. Total current liabilities were $231.3 and current assets $294.1.
Changes versus the prior comparable period
- Sales growth reflected higher Beverage Solutions volumes—single-serve cup volumes rose 57% and flavors, extracts and ingredients volumes 20% in Q2—as well as higher green-coffee prices. SS&T Q2 volume was essentially flat, while average selling price per pound rose 44%.
- Commodity cost increases drove higher costs of sales. Q2 costs of sales rose to 82.6% of revenue from 79.9%, contributing to lower gross margin despite increased sales.
- Q2 SG&A increased by $3.2 to $35.0; acquisition, restructuring and integration expense increased to $2.3 from $0.9. Interest expense rose to $8.8 from $8.3, partly reflecting greater use of Falcon’s trade-finance facility and higher ABL borrowings.
- First-half inventory increased to $155.3 from $109.2 at year-end 2021. Debt also increased from $295.2 at year-end, with growth in short-term trade-finance borrowings.
Outlook, financing, risks and unusual items
- De-SPAC and new financing: The merger with Riverview closed August 26, 2022. Westrock reported $230.9 of gross PIPE proceeds and $66.3 from Riverview’s trust account. A new August 29 credit agreement replaced the prior term loan and ABL facilities with a $175.0 term loan and $175.0 revolving facility; no revolver borrowings were outstanding as of August 29. The facilities mature in 2027. Management reported approximately $87.0 of net proceeds after specified payments and transaction expenses, plus $175.0 of revolver availability.
- The new credit agreement includes a maximum net leverage covenant of 4.50-to-1.00, stepping down to 4.00-to-1.00 after 18 months, and a minimum interest coverage ratio of 1.50-to-1.00, first tested for the quarter ending September 30, 2022.
- Investment plans: Management expects the initial Conway, Arkansas, manufacturing-facility build-out to cost approximately $190 over three years. It said transaction proceeds and revolver availability are expected to fund the initial build-out, but it may delay or reduce the project or reprioritize growth plans if liquidity proves insufficient. No specific revenue or earnings guidance is provided.
- Working-capital commitments: Inventory purchase obligations were $371.7 over the following 12 months. Falcon’s $52.0 trade-finance borrowing was repayable on demand and secured by its assets.
- Controls: Management concluded disclosure controls were not effective at June 30 because of outstanding material weaknesses in risk assessment, complex transaction accounting, period-end reporting, segregation of duties and IT general controls. Remediation efforts are underway; investors should not assume the weaknesses have been resolved.
- Other risks and contingencies: Management cited commodity-price volatility and inability to pass costs through, supply-chain disruption, customer concentration or loss, indebtedness and covenant compliance, and timely, cost-effective completion of Conway. It stated ordinary-course legal matters were not expected to have a material adverse effect. No material change in the previously disclosed market risks was reported.
- Q2 results included $2.3 of acquisition, restructuring and integration expense, including public-company preparation and ERP implementation costs. Derivative and inventory mark-to-market changes also affected costs of sales. The quarter’s preferred dividends were $7.1.
Important facts for investors to verify
- Whether post-merger cash proceeds and new debt provide adequate liquidity after transaction costs, working-capital needs and planned capital expenditures.
- Whether the company meets the new leverage and interest-coverage covenants, beginning with the September 2022 quarter.
- Whether commodity costs can be passed through to customers without further margin pressure, and whether reported volume growth is sustained.
- Whether operating cash flow improves as inventory and other working-capital balances normalize.
- Progress, total cost and funding needs for the approximately $190 Conway facility project.
- Remediation and independent validation of the disclosed material weaknesses in financial reporting and IT controls.