Westrock Coffee Company — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Westrock provides coffee, tea, flavors, extracts and ingredients through Beverage Solutions and Sustainable Sourcing & Traceability (SS&T). Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $192.5 | $205.4 | Down 6.3% |
| Gross profit / margin | $37.3 / 19.4% | $34.3 / 16.7% | Margin up 2.7 percentage points |
| Operating loss | $(10.1) | $(7.4) | Loss widened |
| Net loss | $(23.7) | $(4.3) | Loss widened |
| Net loss per common share | $(0.27) | $(0.06) | |
| Adjusted EBITDA | $11.1 | $8.5 | Up $2.7 |
| Cash from operating activities | $8.0 | $(25.1) | Improved |
| Capital expenditures | $68.9 | $19.6 | Up substantially |
Gross margin improved despite lower sales. Beverage Solutions revenue fell 12.8%, primarily as roast-and-ground coffee volumes declined 23.8%; flavors, extracts and ingredients volumes rose 41.5%. SS&T net sales, excluding intersegment revenue, increased 42.1%, driven by a 100.9% increase in volume, partly offset by a 27.9% lower average selling price per pound. Segment Adjusted EBITDA was $10.8 million for Beverage Solutions and $0.3 million for SS&T.
SG&A increased to $44.4 million from $34.1 million, including higher Conway facility start-up costs. Adjusted EBITDA includes $9.8 million of Conway start-up costs and is a non-GAAP measure. Interest expense rose to $7.6 million from $6.0 million; the prior-year period also benefited from a $5.5 million warrant fair-value gain, versus a gain of less than $0.1 million in Q1 2024. Income tax expense was $5.8 million, compared with a $4.4 million benefit, reflecting in part a higher valuation allowance against domestic deferred tax assets.
Liquidity, debt and investment
- Cash and cash equivalents were $12.6 million at March 31, 2024, down from $37.2 million at year-end; cash plus restricted cash was $13.8 million. Current assets were $273.2 million and current liabilities were $220.3 million.
- Gross debt was $324.3 million, versus $279.0 million at December 31, 2023. This includes $72.0 million of 5.00% convertible notes due 2029, issued in February; $50.0 million was purchased by related parties. The term loan rate was 9.2% and delayed-draw loan rate 8.7% at quarter-end. No revolving loans were outstanding.
- Supply chain finance obligations were $78.7 million, on 180-day terms. The program is uncommitted and may be cancelled by its provider.
- Operating cash flow was positive, with working-capital movements contributing; investing cash outflow was $68.9 million, primarily capital spending. Financing cash inflow was $37.0 million. Quarter-end cash and restricted cash totaled $13.8 million.
- Growth capital expenditures were $67.3 million, principally for Conway. The company reported $17.5 million of property and equipment acquired but not yet paid.
Developments, outlook and risks
- Management expects material capital expenditures for the Conway, Arkansas extract and ready-to-drink facility to be completed by Q1 2025. The filing does not provide a clear commercial production start date for the facility. Management’s liquidity projections rely partly on the timing and volume of Conway products.
- Westrock says projected operating cash flow and available credit are expected to fund operations for at least the next 12 months. It reported compliance with financial covenants as of the filing date. However, it incurred a $23.7 million quarterly net loss and says delays or weaker-than-projected Conway commercialization could constrain liquidity and covenant compliance. Management identifies raising capital, delaying growth spending and reducing expenses as possible actions if needed.
- The amended credit agreement requires minimum liquidity of $15 million and imposes leverage and interest-coverage tests; the company also faces restrictions during a covenant-relief period that may continue until April 1, 2026. The filing does not clearly state the components of covenant-defined liquidity, so the $13.8 million cash figure alone does not establish covenant compliance or noncompliance.
- In March, Westrock established an at-the-market program for up to 5 million common shares. No shares were sold under it in Q1. Issuance could dilute existing shareholders.
- A non-binding letter of intent with Select Milk contemplates a joint venture for an aseptic beverage facility in Texas; the parties expect first product shipments in Q1 2026. The plan depends on the Conway facility supplying coffee extract.
- Holders may require redemption of Series A preferred shares after February 26, 2028. Assuming the stated liquidation preference and all shares remain outstanding, the company estimates a minimum aggregate payment of approximately $270.4 million.
- Other cited risks include volatile commodity and packaging costs, the ability to pass costs to customers, supply-chain disruption, customer concentration, access to capital, and execution of the Conway build-out. Future inventory purchase commitments were $160.1 million for the next 12 months.
- Disclosure controls were deemed ineffective at March 31, 2024 because material weaknesses in financial reporting controls remain. The company says the IT general-controls weakness was remediated, but weaknesses related to risk assessment, period-end reporting, and segregation of duties remain under remediation.
- Management said ordinary-course legal matters are not expected to have a material adverse effect. No material changes to the risk factors in the 2023 Form 10-K were reported.
Investor facts to verify
- Progress, spending and production timelines at Conway, and whether customer demand supports management’s commercialization and cash-flow assumptions.
- Covenant-defined liquidity and headroom, including the impact of the $78.7 million supply chain finance balance and the uncommitted trade finance facility.
- Sources and uses of cash as growth capital spending continues, and whether further equity or debt financing is needed.
- Drivers of the sales decline and gross-margin improvement, including coffee volumes, commodity pricing, and segment mix.
- Remediation and testing of the remaining material weaknesses in financial reporting controls.
- Potential dilution from the ATM program, convertible notes and warrants, and the longer-term preferred-share redemption obligation.