Whole Earth Brands Inc (FREE) 2020 Q3 法說會逐字稿

Good morning, and welcome to the Whole Earth Brands Third Quarter 2020 Conference Call. (Operator Instructions). Please note, today's event is also being recorded. At this time, I'd like to turn the conference over to Jeff Sonnek, Investor Relations at ICR. Sir, please go ahead.

Thank you, and good morning. Today's presentation will be hosted by Albert Manzone, Chief Executive Officer; and Andy Rusie, Chief Financial Officer. Executive Chairman, Irwin Simon is also participating on the call and 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 their most directly comparable GAAP measures.

With that, I'd like to now turn the call over to Albert Manzone, CEO.

Thank you, Jeff, and good morning, everyone. I am excited to present our first full quarter as a public company today. I will start by providing some color around the performance of our 2 business segments, and then discuss the strategic merits of our Swerve acquisition, which closed this past Tuesday, November 10.

In addition to the M&A strategy that you're starting to see unfold, I want to reiterate our commitment to driving organic growth for brand building, innovation and marketplace execution.

We had a demonstrated track record of innovation success within our branded CPG segment. In fact, approximately 16% of our 2019 sales were driven by innovation. To new product launches and product extensions. This is especially apparent in areas such as baking, which accounts for approximately 50% of our sugar consumption globally.

Additionally, our future organic growth will be driven by geographic penetration of North America within our sweetener portfolio, which represents a significant opportunity for our business.

We're also positioned to support category growth in our key international markets and enter into new geographies such as India and China. Increasing awareness within emerging markets will continue to drive expansion across all sweetener stuff.

During the third quarter Whole Earth Brands grew consolidated product revenues by 4.6% versus comparable quarter last year, while growing adjusted EBITDA 6.7% during the quarter. Within our branded CPG segment, we experienced continued momentum within the sweetener category across the retail and e-commerce channels in all of our key markets. Additionally, we realized year over year natural share gains in all our top 7 markets, underscoring our ability to innovate and execute.

This positive momentum within the retail channel was offset by foodservice softness, which includes lower sales from Starbucks, and some reduction of retailer and distributor inventories in certain [Euro-Asian] market geographies due to COVID uncertainty, resulting in stable revenue growth for the quarter for this segment.

Looking forward, we're excited about the continued secular strives in growing our natural business. Our Whole Earth sweetener brand grew 75% during the quarter. Within our Flavors and Ingredients segment, our derivatives in domestic tobacco business drove our strong performance.

This segment grew by 9.4% versus comparable quarter last year. Our organic growth strategy is primarily focused within our derivatives business.

Our new global Head of Sales and R&D has hit the ground running and is establishing a growth-oriented focus to drive the segment's future performance. We continue to make solid progress on the footprint optimization projects that's underway.

Our team is working diligently to execute this project on time and on budget. This has significant operational advantages for our platform, and we look forward to delivering the associated financial benefits in 2021 and 2022.

Now I'll take a few moments to reinforce the strategic and financial merits of the Swerve transaction and provide some direction on where we're headed. Swerve is a rapidly growing manufacturer and marketer of the ultimate sugar replacement with a portfolio specializing in natural zero sugar, zero calorie and gluten-free sugar replacements in baking mixes, which are sold through various retail channels, including conventional, mass, online and natural, among others to include e-commerce. Swerve is the fastest-growing shelf-stable sweetener brand across conventional grocery, generating compound annual revenue growth of 150% since 2016.

The brand is expected to generate net sales of approximately $36 million and adjusted EBITDA of approximately $5 million in 2020. This transaction offers several compelling strategic attributes for all our brands and represents a significant value creation opportunity.

First, Swerve strengthened our position in the natural sweeteners category with its focus on baking, which is a segment of the market that we find especially attractive, with its approximate $6 billion addressable market.

Second, Swerve enhances our scale and growth in the key North American market by 50%. With this key geography representing pro forma branded CPG revenues of approximately $100 million, equating to a 10% market share of all sweeteners.

Third, Swerve products provide portfolio diversification. We enhanced our penetration of the natural sweetener category from 45% to approximately 65% of our estimated 2020 North American Branded CPG segment revenues.

And our portfolio of natural products within our branded CPG segment now represents approximately 46% of segment revenue compared to approximately 35% previously.

And fourth, Swerve leverages our established business model, which affords us the opportunity to extract expected savings in the range of $2.50 to $3 million by the second full fiscal year following the closing of this transaction, driven by supply chain and overhead savings.

When fully integrated, we expect Swerve to generate similar adjusted EBITDA margins to what we're producing today within our branded CPG segments.

The purchase price of $80 million represents an attractive multiple of 2.25x 2020 estimated net sales and 9.5x run rate synergized estimated adjusted EBITDA. It is important to note that given Swerve's asset-light business model, we believe that this acquisition represents minimal integration or synergies achievement risk.

Our business is aligned with powerful secular forces around health and wellness, which is increasingly declining the necessity due to the burdens created by the global trend toward Western diets, such as obesity and diabetes.

As we look to the future, we intend to continue our penetration of the sweetener category. Over time, we intend to expand into adjacent categories within the broader free-from marketplace.

The enormous free-from category represents an addressable market with nearly $30 billion in revenue and includes categories such as clean label, organic, GMO free, plant-based, dairy free, low carbon, gluten-free among others.

We continue to engage with additional prospective M&A targets and are seeing great opportunities in the market. In summary, we are energized by the strong market performance of our brands within our CPG segment, the continued growth of our derivatives business within our Flavors and Ingredients segment and the execution of our M&A strategy with the Swerve transaction.

I believe that we have the right assets in the right categories, in the right geographies to form the foundation from which we would grow to create a significantly larger enterprise.

I am confident that our experienced leadership team can drive a corresponding growth in shareholder value.

Before I turn the call over to Andy, I'd like to thank my colleagues. In the 4.5 months since we went public, our team has worked hard to operate and grow the business, higher leaders in key functions and geographies to drive future growth, put the necessary public company infrastructure in place and complete a highly strategic acquisition.

With this execution oriented team, I am excited for the fourth quarter and for 2021 and beyond.

With that, Andy will take you through the financial details and our outlook for 2020.

Thank you, Albert, and good morning to everyone. As a reminder, for those new to our company, our consolidated financials reflect both predecessor and successor periods, indicative of the June 25, 2020, business combination date.

The third quarter results that I'll discuss compare the successors 2020 third quarter results ended September 30, 2020, to the predecessor's 2019 third quarter results.

As a result, our reported GAAP financials may not be comparable to the predecessor period. I'll highlight for you in my remarks, some of the items that impact comparability.

This will enhance your understanding of our financial progress, and I also point you to our non-GAAP reconciliations at the end of the press release for additional detail.

For the third quarter ended September 30, 2020, consolidated product revenues were $67 million, representing a 4.6% increase from $64.1 million for the comparable quarter last year. Growth was primarily driven by our Flavors and Ingredients segment.

Segment revenues increased 9.4% to $26 million for the third quarter of 2020 compared to $23.8 million for the same period in the prior year.

The increase was primarily driven by strong performance of our derivatives business, which is used in food and beverage over-the-counter pharma and skin and beauty care end markets.

Branded CPG revenues grew 1.8% to $41 million compared to $40.3 million in the prior year. On a constant currency basis, revenues were essentially flat, increasing 0.1%.

Segment results were driven by strong performance in Western Europe, which was partially offset by the continued softness of the North American foodservice channel and reductions of retailer and distributor inventories in a few emerging markets due to COVID uncertainty.

Reported gross profit was $18.6 million, down from $25.9 million in the prior year, and gross profit margin was 27.8% in the third quarter of 2020, down from 40.4% in the prior year period.

These results were significantly influenced by an $8.7 million noncash purchase accounting adjustment related to inventory revaluations required for accounting purposes. Excluding the impact of this noncash adjustment, gross profit increased 5.6% to $27.3 million, and gross profit margin increased 40 basis points to 40.8% versus prior year, driven by favorable product mix and the branded CPG segment and supply chain productivity.

Operating income was $1.1 million in the third quarter of 2020, decreasing $6.8 million versus prior year, again, driven primarily by the $8.7 million noncash purchase accounting adjustment and public company costs following the business combination, partially offset by consolidated revenue growth.

Net loss was $2.8 million compared to net income of $5.3 million in the prior year period and was similarly impacted by the noncash adjustment on a year-over-year basis.

Excluding the noncash purchase accounting adjustment, nonrecurring public company readiness expenses and other miscellaneous nonrecurring expenses, adjusted EBITDA increased 6.7% to $16.5 million compared to $15.5 million in the prior year period. This increase was primarily driven by revenue growth, expense contingency actions and improved gross profit margins.

Shifting to a brief review of our year-to-date performance for the 9 months ended September 30, 2020. Consolidated product revenues decreased 1.7% to $199.8 million versus the prior year period, driven by a 5.9% decrease in Flavors and Ingredients product revenues that was nearly offset by a 1.8% constant currency increase in branded CPG product revenues.

Consolidated adjusted EBITDA of $40.4 million decreased 7.5% versus prior year, driven by international tobacco business declines and public company costs, partially offset by revenue growth in the branded CPG segment and productivity improvements.

Now moving to cash flow and the balance sheet. We generated consolidated cash flow from operations of $7.2 million in the first 9 months of 2020, that is net of $10.1 million of transaction-related expenses that were funded by MacAndrews and Forbes. As of September 30, 2020, we had cash and cash equivalents of $49.1 million and $133.3 million in debt, net of issuance costs.

Pro forma for the Swerve acquisition, assuming full 12-month adjusted EBITDA contribution and the change to the capital structure given effect for the $80 million purchase price, which was financed with $32 million of available cash on hand and approximately $48 million under the company's revolving loan facility, our net leverage ratio was approximately 2.4x based on the company -- the combined company's pro forma adjusted EBITDA on a trailing 12-month basis as of September 30, 2020.

As we've previously disclosed, our Board authorized a $20 million share repurchase authorization on September 8, 2020. While the buyback was not utilized during the third quarter, we continue to evaluate and prioritize various alternatives aimed at delivering the highest returns to our shareholders' capital.

With respect to our outlook, we are tightening our full year outlook due to COVID-19 headwinds within our Flavors and Ingredients segment as well as higher public company operating costs.

Included in the updated outlook, our fourth quarter 2020 contributions associated with our Swerve acquisition in the amount of approximately $4 million to $5 million of revenue and nominal adjusted EBITDA.

We are updating our 2020 full year outlook as follows: consolidated product revenues in the range of $270 million to $280 million.

Consolidated adjusted EBITDA in the range of $54 million to $57 million. Please note that this excludes the pro forma adjustments of $9 million of future benefits related to the Flavors and Ingredients segment manufacturing footprint optimization project, synergies relating to combining the 2 companies and supply chain transformation within the branded CPG segment.

We do not anticipate realizing these benefits in 2020, but will reflect these benefits in future periods as we look ahead to fiscal 2021 and beyond.

Total capital expenditures will be in the range of $8 million to $9 million, which is a reduction of approximately $4.5 million. The reduction is associated with our footprint optimization project.

The execution of the project remains on track. However, the spending of a portion of the capital has been delayed to 2021. We continue to expect that our annual capital expenditure budget in future years beyond 2021 will approximate 1.5% of sales to maintain our asset base and support our growth strategies.

That concludes our prepared remarks. Operator, now over to you, please open the call to Q&A.

(Operator Instructions) Our first question comes from the line of Scott Mushkin with R5 Capital.

My biggest question is around what's changed when you kind of think of the business over the last 3 to 4 months. I mean, obviously we've kind of tapped down a little bit the revenue expectations and the kind of, I guess, EBITDA just a little bit too, the range there. So I was wondering what's changed?

I'm happy to -- Scott, I'm happy to start on this question. And as we said at the opening of the call this morning, we also have Irwin and Irwin, feel free to jump on as needed. I would say that the little has changed.

What you do have, obviously, from a COVID-19 uncertainty is the fact that we now assume for the balance of the year, that foodservices is going to remain depressed, which, as you know, impact the United States, mostly. So that's what we have.

At the same time -- so we're being cautious, I would say, with regard to COVID. At the same time, lockdowns are starting, and we see some positive are starting -- lockdowns in Europe are starting to drive a second of much higher consumption.

We don't know what is going to happen in the U.S., of course, but some states are also proceeding with more severe conditions, which could have a very positive impact.

I would reiterate that our share is very strong. So what you saw in Q3 was some one-off from a phasing standpoint in some international markets. But the category is performing extremely strongly, with in most of our top 7 markets, a double-digit growth for the category, and we're gaining share. So that bodes very well for Q4, I would say.

And we have a buffer from an e-commerce, where we have seen 200% growth in Q3 as well as a number of initiatives that we have put in place for our Whole Earth. And the gain of distributions that are confirmed as well as our seasonal products on Equal and special displays that are hitting the shelves as we speak.

And Scott, I'll just add to that. I think what has changed? I mean, nothing has changed. This our first full quarter as a public company, there's a lot coming together in the meantime.

Our sales were up overall sales, up 6%. We continue to gain share in the Equal and Whole Earth category and the ingredients business. We had good positive EBITDA. We've done a great acquisition out there in regards to Swerve and lots of other interesting stuff out there.

I think as we look at public company costs coming together, in this company coming together as a public company also as we consolidate. And as you go back and look at what this being a private company now being a public company and comparisons, you really can't compare.

So it's more of a tightening of the guidance and still growing mid- to high single digits today is something that I'm proud of this team.

The other thing is, is the transformation. I mean, foodservice was a good part of the sweetener business.

But as more and more consumers stay at home, the opportunity for us to pick up more and more business at home.

Coke Zero is growing over 5% and Diet Coke is growing nicely, and these are products that are in both Coke Zero and Diet coke.

So I'm pretty excited. And also, as Albert said and pointed out the 4 or 5 great points on Swerve. And I got to tell you, you have not tried that product, go buy some and bake with it because if you will not realize how great a product is with the nutritional's that is attached to it.

And so my follow-up question because it's a great lead in on to my follow-up question around Swerve.

Can you talk to us about how much shelf space they have, the opportunities there? Because it seems like there's probably significant opportunities as you consolidate this end to really drive even further adoption at retail of the product.

And then I have one more...

So if you look at the business day in MULO, it's small, and Albert will give you the percentage as the product was mostly sold within whole foods and natural food stores.

So you know I know how -- we don't have to roll products out for natural food into MULO, and that's the big thing for us to roll it out into MULO and roll it out into e-commerce.

The other big thing is, as I said on the call last week, none of this was sold internationally, whether it's Canada, Mexico, where there's high levels of diabetes and high levels of sugar issues.

We now have a good infrastructure in the Middle East with the same thing. So there is a major business for us outside of the U.S. that we look to for distribution.

And it's amazing the calls I got on this product just from international looking, when can we ship this product to them? Albert, do you want to just talk about ACV, I'm not sure.

No, I think you said it all. We are excited. Scale is going to be very good for us. We're now at 10% market share of old sweeteners, $100 million in the U.S. The 2 products Whole Earth, and the Equal and the Swerve are very complementary.

Whole Earth is anchored into sachet, stevia and monk fruit. And when you look at Swerve, it's really anchored into pouches and baking, very complementary products.

We got already a lot of price from the top customers, #1 (inaudible) in the world and the country. And we see opportunities to: number one, learn a lot about the natural channel from Swerve, which is a place where we can do better with our historical brands in Whole Earth.

And at the same time, really do more in traditional grocery in club and in mass, and this is very exciting, very exciting also because those brands are squarely sitting, as I said earlier in the natural.

We're now in the U.S., it's -- our natural portfolio is 70% and so that bodes very well for where the consumers are going, where (inaudible) are going, where healthier consumers are going, and the retailers are excited to hear from us, and we're starting those discussions as we speak.

So that's great color. My final question, if I could sneak one last one in. I mean if you look at the Swerve acquisition, if you look at what you guys said regarding the restructuring plant consolidation for the Flavors and Ingredients.

And I know we're not giving guidance for next year, but it does look like next year is setting up pretty well given those 2 factors. Am I off base on that?

Irwin, I let you the pleasure to answer that question.

Put me on the hot seat. Listen, Scott, I think #1, as you know, I'm about people, and I think we have a great organization in place under Albert's leadership and the team.

#2 is our strategy is on free-from and our ingredient business. We got brands and brand equity in regards to what consumers want today.

So with the Swerve acquisition with expansion of both Equal and Whole Earth and Canderel and putting the infrastructure around the world.

I think the big thing is, this year, we took a business was part of MacAndrew Forbes, not really run for growth. We're going to run this business for growth. And with that is just taking the business now and going after distribution whitespace and getting white space out there.

And you heard Albert say, what our ACVs are and the opportunity. From a scale standpoint, it gives us a good scale in the North American market, $100 million business today in sugar for you, the low sugar category.

And there is also with this business with our free cash flow. I mean, the business there was up just a tremendous amount of cash. It's not a CapEx-intensive business. So we also have the ability to do additional acquisitions out there, which we're looking at.

Yes. I agree completely, Scott. And I would say that, even that's why I'm so excited when I see strong share gains and I see category doing very well because share gains really talk about the ability to execute.

With that, we committed to the street during our (inaudible) that we would be acquisitive.

And what I'm happy is that we announced and closed our first significant deal in only 138 days since our (inaudible).

And what you can expect is that we will continue to remain acquisitive in the short, midterm, while growing our base business.

(Operator Instructions)Our next question comes from the line of Burke Burke with Burke Capital.

A couple of questions, guys. First of all, I was looking at, as you may recall on the last quarter, I was a little bit concerned about the bridge on how to get to the adjusted EBITDA.

But very happy to see that you guys run from $11.3 million to $16.5 million, which is a 48% growth between the 2 quarters.

Having said that, my question is, haven't seen the same -- at the free cash flow generation, looking at the predecessor company, generating $26.5 million in 9 months and from ops, and you guys are $7.2 million.

Is there anything in there that has some timing component with receivables or payables, et cetera, that you may be able to catch up and get closer to your adjusted EBITDA on cash flow from operations, at least on the fourth quarter and beyond?

Yes. Berke, this is Andy. Good question. And so I think a couple of things on the cash flow. Number one, I mentioned this in my prepared remarks. But our overall cash flow from a reported perspective is impacted by the transaction-related bonuses that we paid that technically were paid by MacAndrews & Forbes.

So you kind of have to add back about $10.1 million worth of cash to our reported numbers on a year-to-date basis.

So in reality, while we report $7.2 million, there's actually -- you need to add $10.1 million of that from a real operational perspective.

Number two, what I would say is that from a working capital perspective, though, is, yes, there will be -- there is some timing on working capital within the third quarter, simply on the fact of when we've received -- when we ship sales and so forth, you'll see some positive -- you should see some positive working capital in the fourth quarter relative to where we came in at the end of the quarter.

Okay. This is very helpful. And Then on a lighter note, Irwin, I actually make some brownies with my daughter with this Swerve product yesterday it was phenomenal. I just really enjoyed it, and it was a great product. So I...

I did the same, and I served it and people couldn't believe it like first question was where do I buy it?

yes. I bought everything I could on Amazon, including pancakes and everything else, but I'll share some pictures, but that were great.

So going back on the acquisition, I was particularly excited to hear that there is almost no international or no international sales. Could you educate me like what is the cadence of having a very strong niche product that is trending really well and baking is not a U.S. unique phenomenon, I imagine.

So it's gone all around the world to grow. And you guys operate in 100-plus countries. So how do you take something that is domestically so successful and start generating some revenues internationally? And also, along with other doors in the United States, which -- what I understand from your comments that they're somewhat limited?

I'm happy to start on this one and Berke, thank you for the question. So a few important things you said in your question. The first one is that baking is a global phenomenon. 50% of the sugar consumption goes into baking.

And what you are seeing, similar to the U.S., is you are really seeing baking taking off in Western Europe, taking off in the Middle East, taking off in Australia, New Zealand in a very big way.

So essentially, those would be the markets where one should go. We actually, as a matter of fact, have a customer presentation in Asia in coming up the week after next, and we're going to present Swerve.

The other avenue, which we're doing very successfully, and you are a prime example from what you just mentioned is essentially e-commerce.

We do have a very strong relationship, as you know, with Amazon in Western Europe, with our e-tailers in the U.K. and in Australia and the same with Alibaba in Asia.

And this will be a second platform where we're going to be able to insert the product very rapidly. So I would say that we're going to -- baking is a phenomena. It's really taking off everywhere.

We see big opportunities in Western Europe, Australia, New Zealand, Asia and the Middle East, and we're getting started now.

Great to hear that. I have a final question, then I have one comment after the question. But in terms of analyst coverage or potential analyst coverage, could you guys talk about that on the Investor Relations side of things? Obviously, there is -- I believe there's a lack of awareness of the company right now.

So I'm curious about any progress there?

Yes. Berke, this is Andy. I'll take that one. So a great question. It's an area where I'm keenly focused on with support of ICR and everyone and Albert and the whole team. So a couple of things. Number one, you'll see in our -- on our website, number 2, we've got a few analysts who have issued reports on us, Scott, who asked a question earlier, being one of them.

We do have a few more lined up for reporting. You should've see one more coming out very shortly with reports with maybe 1 or 2 more by the end of the year. So at least that's what we anticipate.

Great. Great to hear that. And my final comment is when I said the same thing on the last earnings call, fully supportive of your acquisition strategy and integrating on your platform, you have incredible synergies given your global operations and the quality of your management team. But as a shareholder from basically day 1 of your public company after the merger, I really encourage you to also not forget about the share repurchases because I do believe your stock offers a great return and nothing better for our shareholders to own a bigger piece of it by eliminating some shares that are out there with this strong and flexible balance sheet that you have.

Ladies and gentlemen, at this time, I'm showing no further questions. I'd like to end the question-and-answer session and turn the conference back to management for any closing remarks.

Well, I just would like to thank you again. Thank you, everybody, for the support that you continue to provide. We will be available for any follow-up questions and discussion. Thank you, Andy, and thank you, Erwin, very, very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.