Whole Earth Brands Inc
NASDAQ:FREE
Earnings Call Analysis
Summary
Q3-2023
The company's third-quarter gross profit rose to $37.5 million from $35 million in the previous year, with margins also increasing mainly due to lower freight costs and a more profitable sales mix. Despite this, a consolidated net loss grew to $5.4 million, compared to $2.5 million, affected by rising interest rates. Branded CPG revenues dipped slightly to $103.3 million, a 2% year-over-year decline, while the Flavors & Ingredients segment saw a 4.2% rise to $31.2 million. Overall, management has refined its revenue forecast to $540-$550 million and adjusted EBITDA guidance to $77-$79 million, signifying confidence in ongoing supply chain enhancements and cash flow growth. Capital expenditures are also expected to fall slightly, contributing to a leaner operation.
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Good morning, and welcome to Whole Earth Brands Third Quarter 2023 Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note, today's event is being recorded.At this time, I'd like to turn the conference call over to Jeff Sonnek, Investor Relations of ICR. Sir, please go ahead.
Thank you, and good morning. Today's presentation will be hosted by Rajnish Ohri and Jeffrey Robinson, the company's co-Chief Executive Officers; and Bernardo Fiaux, Chief Financial Officer. Nigel Willerton, President and CEO of branded CPG North America region and Irwin Simon, the company's Executive Chairman, will be available for Q&A.The comments during today's call and the accompanying presentation contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC. We'll also refer to certain non-GAAP financial measures today. Please refer to the tables included in the earnings release, which can be found on our Investor Relations website, investor.wholeearthbrands.com, for reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures. Additionally, we've provided a supplemental earnings presentation on the Investor Relations website that may be useful in your analysis of the company's performance.With that, I'd now like to turn the call over to Mr. Ohri. Please go ahead.
Good morning, everybody, and thank you for taking time to be on the call. This is the second quarter since Jeff and I took over as co-CEO, and I'm very pleased on the way our business is evolving despite some very challenging macroeconomic and geopolitical situations around the world.For today's call, I will begin by providing an update on the consolidated numbers for the quarter and then shift to an update on the progress of a branded CPG business. We produced consolidated third quarter revenue of $134.4 million and generated $21 million of adjusted EBITDA. Our adjusted gross profit margin of 31.6% is an improvement of 80 basis points versus the prior year period. Since Q4 of 2022, our adjusted gross profit margin has expanded 270 basis points, which makes our third consecutive quarter of improvement. The performance is directly linked to the focus of our entire organization on stabilizing, streamlining and evolving our operations to drive enhanced productivity and sustainable margin improvement. The outcomes from those efforts are also key to driving improved cash flow to support our growth initiatives and reduce leverage, both of which we advanced during the third quarter, and Bernardo, in his presentation, will share more details about it.As mentioned in the previous calls, within our branded CPG business, our core focus continues to be on simplification, our global structure and removing complexity, reinvention and optimizing our North America supply chain and leveraging our brand strength and expand into adjacent categories. Branded CPG segment product revenues were $103.3 million, representing a decrease of 2% versus the prior year or a decrease of 2.9% on a constant currency basis. Excluding the planned decrease in wholesome bulk sugar sales, segment constant currency revenue was essentially flat at 4.7% growth due to pricing was offset by a 4.6% decline in non-bulk sugar sales volumes. As a reminder, the reason to limit bulk sugar sales was to avoid paying incremental tariffs, which would negatively impact our margins and profitability. However, going forward and considering the current sugar prices, we may consider selling some of our bulk sugar to manage inventories and generate additional cash.Operating income for the branded CPG segment for the quarter has shown significant improvement, growing approximately 31% versus prior year. The increase in operating income reflects in part the improved efficiency across the operations and the selection of the channel oblique product mix as well as lower supply chain reinvention costs and lower sugar import tariffs. These improvements are an outcome of our thoughtful plan to streamline our management structure, manufacturing operations and decision matrix. We have now established a globally interconnected network of cross-functional teams with a clear objective of identifying opportunities that enhance productivity and drive efficiency. As we speak, these dedicated teams continue to look into areas of the business, including new rationalization, co-packer efficiency optimization, the refinement of product formulations, the strategic sourcing of raw material and logistics consolidation. We believe this will further lead to systematically removing excess costs at all levels of our operations, strengthen our margin profile and result in improved free cash flow performance.The North America supply chain reinvention project is well on track and near its completion. The Alabama facility is closed, and the co-packer in Perry, Texas is up and running with all necessary certification and quality audits needed to service our customers. We are very proud of our supply chain team, who has led this very complicated transition without compromising our service, which I'm pleased to say remains at high levels of approximately 99%.With this consistency in service levels, our commercial team in North America CPG branded business is working hard to regain lost distribution across different customer accounts. Our unmeasured channels, which account for approximately 80% of our branded CPG revenue in North America is healthy and growing in all segments, clubs, e-commerce and food service. Our private label business also continues to provide us opportunities to grow, and we are well-positioned to service customer needs across the entire portfolio.Within our international business, CPG, we are experiencing category headwinds, especially in the non-material side of the business. While this trend is limiting our ability to drive our new distribution gains, this is also impacting our competitors across the category. And as a result, we have not seen any significant changes in our market shares, which demonstrates the confidence and loyalty our consumers have in our brands. The evolving trends towards the choice of natural and better-for-you products provides an opportunity for us to meet consumer expectations through our assortment of leading better-for-you brands across Europe, Asia and Africa.Globally, we continue our focus on category adjacencies and have a strategy in place to drive new product launches in identified growth categories that are aligned to our core business and distribution strengths. Within North America, we are energized by the overcoming of our supply chain challenges, which allows us to shift our focus to further building our diversified portfolio. In fact, I'm excited to announce that we have recently brought on a new senior leader to help us advance this work and drive these very important initiatives.In summary, I want to emphasize the renewed excitement within our CPG business. We see tremendous opportunity to build this business and believe that we have created alignment across our entire talented and committed team. I want to make sure I take this opportunity to thank all of them for their focus and individual efforts.I now hand over to Jeff.
Thank you, Rajnish. Flavors & Ingredients is a strong free cash flow generator with key barriers to entry and a global leadership position that supports our broader growth and diversification initiatives at Whole Foods Brands. This diversification and our revenue growth in new markets and new opportunities in our traditional markets have driven the continuous improvement in our operating results.We continue to generate solid revenue growth in Flavors and Ingredients in the third quarter with a 3.6% constant currency increase, which compares against a 16.9% increase in the prior year period. We will continue to face tougher comparisons for the next few quarters, but we remain encouraged by some of the long-term opportunities we see in the end markets we serve that will drive continued growth. Our success will be supported by our deep experience, focus and continued efforts to grow each of our product solutions, all of which are based on our ability to be nimble and identify specific uses and functions for our various licorice products. More specifically, we are seeing continued concern by customers in the European Union over regulatory changes requiring rigorous product purity, which provides us with opportunities to grow our sales and wallet share in licorice extracts in 2024. Our licorice extract sales grew in other sales segments during 2023 through our ability to provide functional and environmentally friendly alternatives to specific per and polyfluorinated substances or PFAS. These environmental concerns reinforce a movement towards naturally derived ingredients, and we look to expand these applications in 2024 and beyond.We continue to invest in development for all of our sales segments, including new investments in consumer-facing categories such as ingredients for personal care products. Beyond our sales and business development, we continue to streamline our operations and improve service from our global manufacturing, quality and logistics and are planning new actions for 2024. Future improvements in efficiency will further improve our competitiveness and our value proposition for our customers.With that, Bernardo, over to you.
Thank you, Jeff, and good morning to everyone. I will start by walking through our third quarter financial performance. As a reminder, please refer to our non-GAAP reconciliations at the end of the press release for additional detail. And I encourage you to view our supplemental earnings presentation on our Investor Relations website.For the third quarter ended September 30, 2023, consolidated product revenues decreased 0.6% to $134.4 million versus the prior year quarter. On a constant currency basis, product revenues decreased 1.5% versus the prior year third quarter. Reported gross profit was $37.5 million compared to $35 million in the prior year third quarter. Adjusted gross profit was $42.5 million compared to $41.7 million in the prior year period. The increase was driven by a decrease in port duties, lower freight costs and improved sales mix resulting from our planned reduction in bulk sugar sales.Reported gross profit margin increased to 27.9% in the third quarter of 2023 compared to 25.9% in the prior year period. Adjusted gross profit margin expanded to 31.6% compared to 30.8% in the prior year. Our adjusted gross profit margin has improved 270 basis points in 2022 year-end, a testament to our team's focus on maximizing productivity and driving sustainable margin improvement. This margin recovery will serve as a foundation for higher profitability next year.Consolidated operating income was $6.7 million compared to operating income of $6.8 million in the prior year third quarter. Consolidated net loss was $5.4 million compared to a net loss of $2.5 million in the prior year period. The higher net loss was driven primarily by an increase in interest expense due to higher interest rates. Finally, consolidated adjusted EBITDA was $21 million compared to $21.5 million in the prior year third quarter.Shifting to our segment results for Q3. Branded CPG product revenues were $103.3 million for the third quarter of 2023, a decrease of $2.1 million or 2% compared to $105.4 million for the same period in the prior year. On a constant currency basis, segment product revenues were down 2.9% compared to prior year as 4.7% growth from pricing actions was more than offset by a 7.6% decline due to lower volumes. As Rajnish noted, excluding the planned decreases in wholesome bulk sugar sales, segment constant currency revenue was flat.Operating income for the branded CPG segment was $7.2 million in the third quarter of 2023 compared to operating income of $5.5 million for the same period in the prior year. The increase in operating income was primarily due to a decline in costs associated with supply chain reinvention, a reduction of $2.4 million compared to third quarter of 2022 and lower sugar import tariffs partially offset by higher bonus expenses and an impairment of a right-to-use asset of $0.4 million related to a leased facility to cater Alabama that is now vacant following our co-packer optimization.Flavors & Ingredients segment product revenues increased 4.2% to $31.2 million for the third quarter of 2023 compared to $29.9 million for the same period in the prior year. On a constant currency basis, segment product revenues increased 3.6%. Operating income for the F&I segment was $8.4 million in the third quarter of 2023 compared to operating income of $7.3 million for the same period in the prior year.Operating expenses for corporate for the third quarter of 2023 were $9 million compared to $6 million in the prior year period. The increase was primarily due to higher bonus expense, costs associated by strategic review and other professional fees.Now I'll briefly cover our September year-to-date results. For the 9-month period ended September 30, 2023, consolidated product revenues were $399.7 million, essentially flat on a reported basis as compared to the 9 months ended September 30, 2022. On a constant currency basis, product revenues increased 0.4% compared to prior year period.Consolidated operating income was $12.7 million compared to $21.6 million in the prior year period. Consolidated adjusted EBITDA decreased 5.4% to $55.8 million.Now moving to cash flow and the balance sheet. Cash provided by operating activities for the 9 months ended September 30, 2023, was $10.6 million compared to cash used in operating activities of $17.3 million in the same period last year, representing an improvement of over $27 million despite incurring $12.2 million of higher interest expense over the same period due to higher interest rates. Capital expenditures for 9 months ended September 30, 2023, were $4.1 million. Free cash flow was approximately $6.5 million, and we expect this to grow further and exceed $10 million in full year 2023.When adjusting for our cash add-backs, which I would hope have decreased this year, year-to-date adjusted free cash flow was $19.9 million. We expect to build upon this further in the fourth quarter as well.The strong improvement in our cash flow is a direct result of the hard work you heard Rajnish and Jeff talk about to stabilize our core. It has shown up in lower net working capital, expanded gross margins, declining costs associated with our supply chain reinvention project and more favorable payment terms of our vendors. Taken together, we feel very good about the efforts we have made to accelerate our cash generation. And I would like to emphasize that our supply chain reinvention costs will continue to decelerate through year-end and into 2024, which gives me confidence that the adjusted free cash flow that we generate this year would be a good proxy of our reported free cash flow in 2024. We expect that this improvement in free cash flow will help us reduce leverage at an increasing pace and be a key element in our ability to reignite our growth strategy. Additionally, we're making continuous efforts to further reduce inventory sustainably and generate incremental cash flow.As of September 30, 2023, we had cash and cash equivalents of $24.2 million and $424.5 million of long-term debt, net of unamortized debt issuance costs. Our long-term debt decreased year-end 2022 by $8.8 million as a result of revolver repayments of $6 million and mandatory repayments of term loan of $2.8 million. At September 30, 2023, there was $7 million drawn on our $125 million revolving credit facility. We have a comfortable level of liquidity to navigate through this challenging microenvironment.I also would like to highlight our inventory position of $217.3 million. Yet, a significant portion is composed of raw materials in readily tradable commodities such as sugar and licorice. Reducing leverage continues to be a focal point for us, and we aim to accomplish this through organic means, led by the improvement in our operating cash flow.Now shifting to our outlook, which we are updating today. As a reminder, our outlook is presented on a reported basis, which includes the impact of foreign currency translation. As a result of our year-to-date performance in 2023, we now expect consolidated product revenues to be between $540 million to $550 million.Given the milestones achieved in regards to supply chain efficiency, we now expect consolidated adjusted EBITDA to be in the range of $77 million to $79 million or $1 million above the guidance range we provided previously. Our top priority is cash flow generation and the results of the past 4 quarters is a reflection of that focus with an expectation that we will generate additional gains in 2023 and extend those in 2024. We also expect some modest capital expenditure savings of about $1 million versus prior plan, which puts our revised budget at approximately $8 million for the full year 2023.Finally, with respect to our supply chain reinvention, we expect cost to further decline in the coming quarters as we complete our current projects. Including known and forecasted events, we anticipate another $3 million for the remainder of the year or a decline of around $6.5 million in the fourth quarter of 2023 compared to the same period last year.Before we open the call to your questions, I want to take a moment and address the status of our strategic review. The Board formed a special committee to review and evaluate the nonbinding proposal received from Subaba Holdings as well as other strategic alternatives that may be available to the company. That review is ongoing, and company and the special committee do not intend to comment further until it's complete or until they give further disclosures otherwise appropriate. Not in this communication shall constitute a solicitation to buy or an offer to sell shares to the company's common stock. There can be no assurance that any definite offer would be made, that any agreement will be executed or that this or any other transaction will be approved or consolidated. Those processes remain active with a goal of maximizing value for all shareholders. When appropriate, we will update you on any developments.That concludes our prepared remarks. Operator, please open the call for questions. Thank you.
[Operator Instructions] We will go first to Scott Mushkin with R5 Capital.
Turning to the branded side of the business. Obviously, there's been a lot of press around weight loss drugs, a lot of press around sugar substitutes. How are you thinking about that business in regards to some of these issues? And how do you think about -- as we kind of start to try to pay some debt down growing that side of the business?
Yes. I guess I will take this question. This is Rajnish. I mean we've seen -- while you're seeing some kind of degrowth in the category on the nonnutritive side of the business, I think we see tremendous opportunity on the nutritive side of the business. And most of our brands are -- it's a brand in North America or in the global scenario where we have brands like Pure Via, Whole Eart, et cetera, they're all well positioned to kind of ride on this wave of growth of the nutritive side of the business. And also, we have a plan where is all the allied categories, which are aligned to the nonsugar product categories, there is a plan to kind of grow these businesses and launch in the coming quarters as we go forward.
And Scott, let me just add to that. I think these are complementary to all these weight loss drugs. As again, as consumers use these weight loss drugs, they're looking for products that are much lower in sugar, much lower in calories and nutritionals. And I think if anything, some of the research in that where we see is they're drinking more of the diet cokes, drinking more products that are sugar-free. So I think there is absolutely more opportunities for us because we're either no calories or very low calories in the sugar-free products that we have.And just on paying down debt, Scott, I think the big thing is, and Nigel referred to it. A big part of our debt over $200 million is inventories. And we turn our inventories in some much longer. We're buying out there. But Rajnish, have a big movement on how do we reduce our inventories. Unfortunately, we buy sugar and we buy it at one time, but that was a big thing. We have really saleable inventories, but how do we focus on working with our suppliers in that on reducing inventories, which ultimately reduces our debt and use more cash coming from that to invest back in the marketing of the brands in this business.
That actually is a great segue. And so it's my next question around kind of the debt levels of the company and how we should kind of frame your thoughts as we move into '24 around being able to pay more down and kind of how should we think about that as we move over the next 12 months and then I'll yield.
Scott, this is Bernardo. Thank you for the question. I think that free cash flow is one of the highlights of this quarter and as we expect to continue going forward. You probably heard in my prepared remarks that I'm highlighting the adjusted cash flow for this year as a good proxy for next year. The reason for that is that we are expecting our add backs to reduce massively towards next year while increasing EBITDA and while growing with our growth algorithm, but that's going to be a big driver that would allow us to accelerate our debt pay down while maintaining a more sustainable business as well.
[Operator Instructions] We will go next to Ryan Meyers with Lake Street Capital Markets.
When we think about the lower revenue guide, just kind of wondering if you can provide a bit more detail on what you are seeing there? Is it primarily volume related? Or is there something else that's going on? And then as it relates to kind of the overall branded CPG segment as a whole, what kind of are you seeing from an industry demand perspective?
Ryan, this is Bernardo. I'll take this one again and I welcome the rest to complement. But our year-to-date performance has really been about cost margins and cash flow improvements, and we have delivered that. As the category has faced headwinds this year, so too have our sales. And I think you have seen that fairly clear like in our today revenue performance. So all in all, this is an effort to be transparent on where we are and what we expect to finish the year. I think that it's important also to call out that we are doing a good job executing our margin enhancement strategy, which is being driven in part by these bulk sugar sales, but also through all the optimizations and cost efficiency. So -- and at this point, you're also seeing that we are showing a consistent adjusted EBITDA increasing and we are bumping this guidance as well by $1 million to account for this and some other items like bonus, so we align with our goals. But most importantly, I think that this is all being translated to our very strong free cash flow generation. This has been positive this year and expect to extend this through Q4 and 2024 and with all these combination of factors, including the improved margins, lower supply chain reinvention costs, improving net working capital by reducing inventory and also to a lesser extent, some modest CapEx savings as we move to an even more asset-light model.
Just let me add to that. On the sales growth part of the business, I think Jeff has shown what has happened on the licorice side. I think the big thing for us on the consumer package size was as we move to away from our [ de-pack ], getting back in stock and getting our service levels back up to 99% where they were running in the 70s and 80s. But I got to tell you, this team has developed a big pipeline of a lot of innovation in different categories in the whole sugar-free area, have looked at distribution going into other parts of the world. Listen, our big markets today are France, U.K., somewhat in Germany. So there's a big country out there called Europe. There's a big country out there called South America and the Middle East. So there's lots of growth opportunities for us. And the big thing is the expansion of the products here in sugar-free, whether it's chocolate jams, jellies, other desserts, et cetera. And I think there's a big opportunity still for us within Swerve. So as Bernardo said, first this year was focusing on balance sheet, focusing on making sure the supply chain got fixed. And now there's a big effort on organic growth going into '24. And I think the team has a good strategic plan in place for that.
Okay. And then if we think about the strong gross margin during the quarter, how much of that came from sales mix versus how much of that came from just taking costs out of the business? And you highlighted supply chain reinvention. Any commentary there would be helpful.
Yes. Ryan, in terms of breakdown, it's fairly widespread. When we compare across this -- there were some high ticket items, including the lower tariffs in sugar, including the lower ocean freight. So -- those are both efficiencies. But on top of that, we are seeing manufacturing efficiencies as our services improve. We're also seeing improvements in other prices on the contracted side for procurement. It's like I said, fairly widespread, the improvement coming through -- coming from the levels that we were at the end of the year, at the start of this year.
And we will go next to Alex Arnold with Odeon Capital.
I respect your comments about not opening the kimono on the committee process, but I was wondering from a time line perspective, if you could just give an indication of what would be sort of a disappointing date if this was not wrapped up by?
I don't think there's -- and listen, I think the big thing is this here. I'd hate to put a date on it. I think the only thing is the committee, the Board and everybody else wants to get it right. So this is not like a sporting events where there's 3 periods or 4 quarters. I think it would be disciplined. I want to make sure -- I think there's lots of factors in here. We want to make sure there's full shareholder value. You can see the improvements happening in this business. You see the margin improvement now and you take that across the full year next year, some of the costs coming out of this business. You heard Bernardo talk about add backs, how they've come weigh down or pay down of debt, a reduction of inventory. So there's a lot of factors in here as we move forward to put out there in regards to what's the right value for shareholders. And that's what the strategic committee wants to make sure that's what the Board wants to make sure and they want to make sure, working with management, we have all those factors to make sure to sort of say, "Hey, this is the value that shareholders should ultimately get in the share price? Or if there is a strategic opportunity to sell this company, this is what shareholders should be paid." But we got to make sure we have all the right facts in there, not only for fiscal '23, '24, '25, and there's a lot of good things coming out of this company as we've moved out of COVID, as we moved out of de-pack, as we expand the distribution company as we go into new products. And the big thing is, yes, the leverage is high. Interest rates have gone up. We've paid close to $17 million more in interest this year. But we do believe interest rates will come down. We've fixed half of our debt. But one of the biggest things is inventories in dealing with that. So I think the big thing is everybody wants to get it right and what's the right value and what's the right thing for shareholders. And the most important thing is we feel good about the management team in place running this on a day-to-day basis.
I will now turn the call back to our presenters for closing comments.
I guess I'll take that. I want to thank everybody for joining the call today. And as you can see, there's a lot of good headway made that the team is doing at Whole Earth, in regards to the margin improvement, in regards to paying down debt, in regards to free cash. In regards to taking costs out of this business, if you see what the cost that we just took out the last 2 quarters and annualize that out and going into next year, there's a lot of good cost savings that's going to come across this business. The categories, the licorice ingredient business, I think Jeff and team have done some great job in really expanding that ingredient and licorice into multiple categories and done a great job there, great free cash business. Rajnish and Nigel have done a great job in regards to moving to our co-packers, getting de-pack, closing that down. At the same time, we're purchasing sugar out there and not taking it at a bond and paying the higher excise tax just to get sales. At the same time, we've had to deal with higher interest rates, which we have. So the good news is we're absolutely able to pay all our debt. We're good on our covenants. We're good on growth here, and there's a real good plan and team in place. But I think the most important thing is I want to reassure you that we are looking out there for shareholders, how we make sure that we're making sure we're creating and if shareholder value is taken care of here. So I want to really congratulate and thank the management team. I'd like to -- our shareholders that are out there supporting us and look forward to our next call and showing even better results. Thank you.
Thank you, ladies and gentlemen. This concludes today's program. You may now disconnect.