Whole Earth Brands Inc (FREE) 2020 Q2 法說會逐字稿

Greetings, and welcome to the Whole Earth Brands Second Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Jeff Sonnek, Investor Relations at ICR. Thank you. You may begin.

Thank you, and good morning. Today's presentation will begin with a brief introduction by Irwin Simon, Executive Chairman of the Board; followed by a commentary from Albert Manzone, Chief Executive Officer; and Andy Rusie, Chief Financial Officer.

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 the 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. Please refer to the tables included in the earnings release, which can be found on the Investor Relations website, investor.wholeearthbrands.com, for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures.

With that, I'd now like to turn the call over to Irwin Simon, Executive Chairman.

Thank you, Jeff, and good morning, everyone. I'm excited to kick off Whole Earth Brands inaugural earnings address as a public company today, following our business combination transaction on June 25, 2020. This has been an exciting journey with the support of our sponsor group, Act II.

In the past 1.5 months since closing the transaction, we've been meeting with the leadership team and refining our strategies. We are thrilled by the opportunities that our team is driving to support with our growth initiatives. With these 2 assets, I believe we have the foundation to build a major force in what we like to call the free-from marketplace. This is a rapidly-growing, not to mention, massive segment of the marketplace that is on-trend and has extremely powerful secular forces supporting it, which Albert will speak to in a moment.

As we shifted toward the future, our engagement with prospective M&A targets has accelerated, and I'm more energized by the day on the opportunities which we are seeing in the marketplace. We have great conviction in our plan to grow Whole Earth Brands, and I'm proud of our organization's ability to manage through the pandemic, while simultaneously maintaining focus on our customers, our growth and our growth initiatives.

With that, Albert can provide you with our vision for Whole Earth Brands.

Thank you, Irwin. I will begin with an overview of the company to help provide some context on who we are today and where we're headed in the future as our growth strategy unfolds. Our CFO, Andy Rusie, will then review our financial results for the second quarter and year-to-date period as well as discuss some of the drivers of our 2020 outlook.

Whole Earth Brands is building a platform of branded products and ingredients focused on the consumer transition towards natural alternatives and clean label products. Our products enable consumers to enjoy a range of delicious foods and beverages without compromising their health and wellness goals. We believe this is just the beginning of our journey.

For our business combination, we operate 2 business segments. The first is Branded CPG, which is a global leader in natural and free-from-sugar sweeteners and over-sweet categories, with a portfolio of brands that rank #1 or #2 across key global markets. This segment will serve as the foundation of our growth. The second is Flavors & Ingredients, which is the global leader of natural licorice extracts and derivatives, utilized in consumer packaged goods in health and personal care among other industries for flavor enhancement, masking and other benefits. This business generates consistent and considerable cash flow. Together, we have an extremely strong and stable financial foundation to execute our growth strategy.

We are fortunate to have a growth engine with our Branded CPG segment and a stable cash flow generator with our Flavors & Ingredients segment. We believe our financial profile of our businesses are attractive. We have a significant revenue base and our strong competitive position allows us to generate sustainable adjusted EBITDA margins in excess of 20% annually.

Furthermore, due to our asset-light infrastructure, to support the growth of the existing businesses, our annual long-term capital requirements are only 1.5% of revenue. The cash flow generation this combination creates, coupled with our low leverage and high liquidity levels, would immediately help us drive organic growth and pursue strategic acquisitions to achieve our mission.

Whole Earth Brands is on trend and aligned with powerful secular forces around health and wellness, that is increasingly becoming a necessity due to the burdens created by the global trend toward Western diets. In 2018, 34% of the global population or 2.1 billion people were considered obese or overweight. 545 million people have diabetes. The rate of growth of those preconditions in children is alarming. Here at Whole Earth Brands, we are seeking innovative solutions to help consumers find better alternatives that meet their health and wellness goals while still enjoying the sweetness in life.

Our vision is to grow in the enormous free-from category. Today, we address sugar-free, which represents a $13 billion addressable market that's expected to grow at a 6% CAGR in the coming years. However, our sights are also set on the adjacent free-from markets, which combined represent nearly $30 billion in revenue. Those include categories such as clean label, plant-based, dairy-free, low-carb and gluten-free, all of which are attractive to us as we look to build out our global platform around a free-from vision.

Whole Earth Brands is advantaged and poised to scale its platform with our global manufacturing, distribution and supply chain infrastructure that we already have in place. We service a diversified global customer base in over 100 countries and have multiple levers to generate growth and drive shareholder value through organic and strategic initiatives.

From an organic growth perspective, we view innovation as a core strength and we have a demonstrated track record of success. In fact, approximately 16% of our 2019 sales were driven by innovation. We're driving product innovation and product extensions in areas such as baking, which accounts for approximately 50% of sugar consumption. Our brands are outpacing our respected categories growth rates.

We see other disruption opportunities in the center store with delicious and guilt-free enjoyment of the foods consumer love like jams, chocolate, granola mixes and bars. These products have already successfully launched in Western Europe, Asia, Latin America, the Middle East and Africa and have been doubling in size every 2 years.

Geographic penetration of North America with our sweeteners represent a significant opportunity for our business. We're also positioned to support category growth in developing countries and entry into new geographies, such as India and China. Additionally, increasing awareness within emerging markets will continue to drive expansion across all sweetener types.

Similarly, in our Flavors & Ingredients segment, we see opportunities to grow globally, particularly within derivatives and Magnasweet. We recently hired our Global Head of Sales and R&D for this segment to increase the depth and breadth of our customer relationships. As a 25-plus year veteran in the ingredients industry and with his leadership experience in companies including IFF and Frutarom, we believe that his experience will revitalize organizational focus to drive the segment's future sales growth.

M&A is complementary to our growth strategy. We are seeking strategic consolidation opportunities where we can leverage our infrastructure, our team's experience and our distribution network. We are pursuing opportunities within our core sweetener and licorice markets, opportunities in growing adjacent categories and opportunities within our free-from target market of on-trend branded health and wellness categories. We expected this potential acquisition to bring synergies, continue the improvements to our market positioning and financial profile while driving scale, which is a key strategic objective of our business. We remain confident in our ability to identify attractive targets and put our balance sheet to work prudently for our shareholders.

In summary, I believe that we have the right assets in the right categories and geographies to form the foundation by which we will grow from to create a significantly larger enterprise. And I am confident that our experienced leadership team can drive a corresponding growth in shareholder value. I would like to recognize the perseverance of our global organization today who are meeting the COVID-19-related challenges head on while delivering excellent customer service during these exceptional times.

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

Thank you, Albert, and good morning to everyone. I would like to begin by explaining that for comparative purposes, we will review unaudited financial statements for the period ended June 30, 2020, and June 30, 2019, which presents our results, including the combined predecessor and successor periods for comparative purposes. We believe this discussion provides helpful information on the performance of the business during this period, and all financial measures discussed today will be on a combined predecessor and successor basis. Second, we also evaluate our performance on an adjusted EBITDA basis. We have included a detailed reconciliation from GAAP net income to adjusted EBITDA in today's press release. Management believes this measure is a key indicator of the true underlying performance of the business.

Now turning to the financials. For the second quarter ended June 30, 2020, combined product revenues were $66.8 million, representing a 3.1% decrease from $69 million for the comparable quarter last year. This includes a 4.3% increase in Branded CPG product revenues to $43.1 million compared to $41.3 million in the prior year. On a constant currency basis, the increase was 6.6%, driven by strong gains in Whole Earth Sweetener in North America, improving overall category performance of sugar-free substitutes following COVID-19, share gains in Western Europe and double-digit growth in the Asia Pacific region.

Flavors & Ingredients product revenues decreased 14.2% to $23.8 million for the second quarter of 2020 compared to a $27.8 million for the same period in the prior year. The quarterly decrease was primarily driven by the decline in the international tobacco market. Furthermore, the business is working closely with its diversified customer base to navigate COVID-19-related manufacturing challenges and production constraints. As a result, the company has been negatively impacted given its position as a supplier.

With gross profit margin down 30 basis points to 39.8%, the gross profit margin decrease was entirely driven by the transaction bonuses. Combined operating loss was $5.2 million in the second quarter of 2020, decreasing $11.1 million versus the prior year, primarily driven by transaction bonuses.

Combined net income decreased $9.5 million to a loss of $6 million in the second quarter 2020 driven by transaction bonuses. Combined adjusted EBITDA decreased 8.8% to $11.3 million compared to $12.4 million in the prior year period. This decrease was primarily driven by the decline in international tobacco, which we've previously disclosed.

Shifting to our commentary regarding the 6 months ended June 30, 2020. Combined product revenues were $132.8 million, representing a 4.7% decrease from the $139.3 million for the same period in 2019. Branded CPG product revenues increased 0.6% and 2.6% on a constant currency basis to $83.3 million, driven by Whole Earth Sweetener growth in North America and share gains in Western Europe.

Flavors & Ingredients product revenues decreased 12.4% to $49.5 million compared to $56.5 million for the same period in the prior year. $7.4 million of the decrease was driven by the decline in international tobacco as previously disclosed.

Combined gross profit decreased 7% to $52.5 million. The key drivers of the decrease included the international tobacco revenue declines within the Flavors & Ingredients segment, along with the corresponding lower manufacturing volume absorption as well as transaction bonuses reflected within cost of goods sold.

Combined operating loss was $38.5 million compared to operating income of $16.3 million in the prior year. The $54.8 million decline was materially impacted by noncash asset impairments of $40.6 million in transaction bonuses of $11 million occurring in 2020. Combined net loss of $34.6 million was driven by noncash asset impairments, transaction bonuses and international tobacco declines within the Flavors & Ingredients segment. Combined adjusted EBITDA decreased 15.2% to $23.9 million, primarily driven by the decline in international tobacco.

Now moving to cash flow, the balance sheet and liquidity. We generated consolidated cash flow from operations of $15.9 million in the first half of 2020. As of June 30, 2020, we had cash and cash equivalents of $61.6 million and $127.8 million in long-term debt. Total liquidity, being measured as cash and cash equivalents plus the undrawn revolver facility, was $110.9 million.

As we continue to evaluate and prioritize various alternatives aimed at delivering the highest returns to our shareholders' capital, we are considering various alternatives, including, but not limited to, a share repurchase program. Our overall evaluation is driven by our belief that our stock is undervalued, and we are trading at a deep discount to our peers.

With respect to our outlook, the company is maintaining its full year 2020 financial outlook despite COVID-19 headwinds within our Flavors & Ingredients segment as well as the realization of higher public company operating costs.

The summary of the guidance is consolidated product revenues in the range of $270 million to $290 million; consolidated pro forma adjusted EBITDA of $63 million to $67 million, which equates to consolidated adjusted EBITDA in the range of $54 million to $58 million. The difference in these 2 figures or the pro forma adjustments is related to $9 million of future secured benefits related to the Flavors & Ingredients segment manufacturing footprint optimization project, synergies related 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.

Total capital expenditures are in the range of $12 million to $14 million. The increase versus prior guidance is due to the acceleration of the manufacturing footprint optimization project. This will accelerate economic and cash flow benefits to the company. We continue to expect that our annual capital expenditure budget in future years 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 Pablo Zuanic with Cantor Fitzgerald.

Congratulations on your first conference call. Can you talk about specifically about the natural sweetener business in North America? I mean I see the 6.6% ex FX growth in CPG. That's a very good number for a company with your valuation. But just more color in terms of the in and out there, right? What happened with artificial sweeteners, were they flat, were they down? How much did the natural sweetener business grow? What's assumption for the second half? Are you able -- is the second half mostly velocity-driven? Are you getting into a lot of new doors? And then some context also for the same business in Europe.

Sure. Thank you. This is Albert Manzone, and I'm going to keep up this question with you. So there is a few sub-questions, so let me try to take them one by one. And if I miss anything, please remind me at the end. But I think your first question is on the natural performance in North America. And I would tell you that we are excited about the performance that we got with our natural, which is Whole Earth, the brand Sweetener in the U.S. The growth was in the 70% in the first half.

This is a growth that has been driven by, number one, the trend towards a healthier alternative, which has only increased during COVID, and we do expect some of that to continue post-COVID with consumers looking increasingly for healthier alternatives. What drove that was that trend, together with a number of innovation that we have been putting into the marketplace, which are, for example, around baking. So if you take our baking innovation with Whole Earth in the Natural, we have had Erythritol, which contributed about $1 million in the first half. This is a product we launched in 2019, and we have been very happy with the results.

As a reminder, 50% of the sugar consumption goes into baking, and you are aware that the baking solution provided in the natural side are increasingly meeting consumer expectations in terms of baking-light sugar, which we're very happy with and also with 1:1 portion equivalent.

So if you look at the second half, we do, on the back of this 70-plus growth in the first half, feel very comfortable with our guidance in North America. That would be driven, as you asked for, by a number of factors. Number one, as you say, increased distribution. You are in the U.S., a number of retailers do put in place their innovation at the end of Q2. We have been able to secure increased distribution for Whole Earth Brands on the second half with new products.

So just to pick up on the theme of baking, we are introducing -- we just introduced Allulose Baking Blends and allulose brown baking blends, which have been picked up by a number of retailers. We have a second innovation which is Whole Earth Infusion, which is essentially with fortifications and functional benefit. So think about turmeric and collagen, which have been picked up by a number of natural retailer channels together with -- over retailers' channel. So we are excited about this and plan to see that growth continuing in the second half.

The last driver is e-commerce, which has also done very well. We invested in e-commerce about 2 years ago in North America and Western Europe and in Asia, and our e-commerce grew 249% in Q2. As I said earlier together with baking, we do expect the trend on e-commerce to continue, and that is a good thing for us since we are very close to Amazon, but also to our -- the retailers' e-commerce arm. So that's with regard to North America.

And I would say last thing, the velocity is also good, thanks to receiving of this brand at the Starbucks for the last 3 years. We get a very good loyalty and very good repurchase rate on the Whole Earth.

So moving then to our, what we call, our regional Equal, Canderel for Europe. We have seen those brands actually in the first half of Q2 being almost flat, and that is despite the fact that foodservice, which represents 14% of our mix on the sweetener side was, as you know, down significantly, and those brands have over-indexed compared to the natural in foodservice. So despite that, we have also seen performance that we're satisfied with on the artificial brands.

And again, this is driven by innovation. So if you take the U.S., we have innovated with Equal, both in terms of bringing flavors. So for the summer, this summer, we have peach and lemon, and also with fortification, for example, Equal PLUS with vitamin C and D.

So coming to Europe, I would say that you see some of the same trends playing out during COVID, which are beneficial to us. The difference is in Western Europe, if you take that, we obviously dominate both the artificial side with 70 share or so and we also dominated the natural side, being the only player. So that has been a benefit and a good driver of our performance in Q2.

I stop here in case I missed any of your sub questions.

No, that's fine. Maybe just a follow-up for Andy. So in terms of share buybacks, I mean, obviously, if I do the math based on your target net-debt-to-EBITDA ratio, you could buy back almost 25% your market cap. Maybe my math is wrong. But just some more color there, how big of a buyback are we talking about and what time frame?

And also related to that, I understand there's a difference on the EBITDA guidance of about $10 million -- $9 million, $10 million between consolidated and pro forma. How quickly can you realize those synergies? Is that something you can do all in 2021 or will it take longer?

Yes. Good question, Pablo. So first of all, on the share buyback, one, we are -- we -- as we said on the call, we think that there's a lot of value there and the share price is undervalued, and we do think it's something that we were looking at. So we are evaluating that right now. So I can't really comment on the size of it as we're looking at it actively right now but I think there'll be more to come on that, but we clearly think that the stock is undervalued. And obviously, we'll do what we think is best for the shareholders and the return on that. So more to come on the buyback plan.

On your second question related to our pro forma benefits, and this is consistent with what we've talked about, it's [pre-destacking]. We've got pro forma benefits across 3 projects, basically, our existing macro footprint -- our Flavors & Ingredients footprint optimization project; number two, synergies, combining the 2 companies together into Whole Earth Brands; and third, a supply chain transformation within Branded CPG. The vast majority of those will be realized in 2021 with a small amount lingering into 2022.

Our next question comes from the line of Alex Arnold with Odeon Capital.

Congrats on making it through the SPAC obstacle course during the pandemic and being here.

Thank you.

I guess one, Andy, I just want to harp a little more and get some color around the -- basically the philosophy of applying that $9 million in synergies to think about this year. Why not just say we're doing $54 million to $57 million in EBITDA this year? And can you also help me rationalize some of the onetimers that ran through? Maybe we can do this off-line if it's too deep of an explanation. The onetimers in terms of bonuses and everything, is there any way that you can button that up into one clean number to tell me how things look on a year-over-year basis, when you back out sort of bonuses and everything?

Yes. That's a great question. So first one, Alex, on the question of the adjusted EBITDA versus pro forma. One, we just wanted to create a transparency. We have gone out pre destacking, right, with the metric of pro forma adjusted EBITDA. And so to make it easy for everyone to understand our performance as far as the pro forma as well as the adjusted EBITDA that would obviously be realized within 2020. And so that's why we had that reconciliation table within our earnings release.

Second -- and then second question you had on kind of the understanding of the underlying performance of the business given the fact that there's -- if you look at the reconciliation table, there's large items, especially the asset impairment charge and then the transaction-related expenses. I mean overall, if you look at the -- our reported adjusted EBITDA was down overall by 9%. But that includes a couple of different items. I think, number one, FX, there's negative FX impact. Number two, this year, we are on track with our budget, and so therefore, our bonus expense is higher than what it was in the previous year. If you exclude those 2 items, our adjusted EBITDA performance is actually growing in the mid-single digits. And then third, if you look at the business, excluding international tobacco, as we've talked about that previously, with yourself and other investors and analysts in that headwind that we've had there, if you exclude international tobacco, actually, our adjusted EBITDA performance is in the mid -- is up in the mid-teens -- or in mid-teens, I should say.

So the underlying performance of the business, excluding international tobacco, is actually pretty robust. Our sales performance is up in the mid-single digits and our adjusted EBITDA is in the mid-teens.

Okay. And the other one is for Albert and Irwin. And I know you can't tell details here, but obviously, the pandemic shook up the world and things are different. So from an acquisition standpoint, how should we look at the funnel, the time line and the backdrop? And are you seeing changes with regards to people looking more to get acquired? Or are you seeing changes to pricing in the market? How's the discussions been out there?

Albert, you take that, (inaudible)? We're seeing and having good relationships out there, lots of opportunities on acquisitions and -- either strategic opportunities or opportunities with smaller companies that's looking for their next step that want to be part of the bigger companies, that wants the expertise and the management that we have within Albert, Andy and Luke. So we're seeing lots of interesting strategic opportunities that fit within what Albert talked about, it's the free-from or the ingredient business. And stay tuned to that. Albert, do you want to add anything to that?

No, I agree. And I would say that essentially, our funnel and the opportunities have increased, and we are looking at a number of opportunities as we speak. We are excited about that. But we had a very solid -- as Andy just stated, a very solid foundation business, a very strong base. We have a great global network supply chain, global team, strong competitive position and well-diversified. And so we see those opportunities in M&A as really fulfilling our vision to reach the $1 billion mark and in the free-from. And so I would say that we see increasing opportunities, and we're excited about that.

Our next question comes from the line of Brian Holland with D.A. Davidson.

Congratulations. Irwin, you mentioned at the top that the team has been refining its strategies. Obviously, we're in a new world today versus 6 or 7 months ago. What's changed for Whole Earth Brands? Anything just stepping back on given the current environment? Any opportunities reveal themselves? Can you just kind of talk through what you meant specifically by refining strategies?

When I say refining strategies, it's around a couple of things. Number one, it's the strategy and where we're going to grow in regards to retail, e-commerce today has become a much bigger part of our business and then foodservice. Foodservice has been interrupted during this COVID, and the team has done a tremendous job picking up revenue that they lost to COVID. Starbucks, one of our big customers out there, which was closed for 3 months. So we've done a really good job of redirecting the business, number one; number two, some great innovation coming out of this team and sticking to the free-from, which Albert talked about in regards to low sugar, no sugar; and #3 is the geography we focus on. North America is a big part of our business and how we get this business growing in North America, where we were not growing before. So the focus is on growing in North America, but the other focus is how we're going to grow around the world.

And then the big thing also, as Albert talked about, is the emphasis on our ingredient business. Every product out there has ingredients, and licorice is a great ingredient in regards from a medicinal standpoint, from a masking a taste, and our licorice business has tremendous margins, so the focus on our ingredient business. And then as we talked about acquisitions, we're plant-based, we're free from dairy, free from meat, free from sugar, free from flowers, so that is very much what the focus is on from a strategic standpoint from the overall company from the current product and from acquisitions going forward.

I appreciate the color, Irwin. I generally like the asset-light model, minimizes CapEx, drives free cash, so on. How does that [jive] though with your M&A aspirations? So I guess what I'm asking is, can you maintain that structure as you bring other brands or businesses in the fold, especially if they require either some renovation or some incremental investment, if they're early stage types of businesses? And then with that, can you just reconcile the share repurchase plans or intentions with the appetite for M&A and what parameters have you set for the acquisition strategy?

So the parameters, listen, from the acquisition strategy, and here's what I've always said, listen. We paid 6.8, 7x for all these assets together, so we paid a pretty good price. We have an infrastructure in place today with a management team that can run $1.5 billion. So again, every acquisition, we're going to look at if that will be accretive, but we can take a lot of SG&A out of there and put it through our infrastructure in regards to our operations, in regards to our purchasing power, et cetera. So we think there's tremendous amount of synergies.

The other thing is from an acquisition standpoint, we're looking at businesses that are growing to grow, high single-digits, low double-digits, so there's going to be organic growth there. So again, it's not so much what we're paying, but can we get it down in an EBITDA multiple after the dust settles in the same area which we paid for these 2 businesses, and that's kind of what we're looking at here.

In regards to the share repurchase, I think what Andy has said before, listen, we're trading pretty cheap today. And I always said this here, and I said that to team, it's better to buy my own stock sometimes because I know what I have in the company than going out doing acquisitions. And we'll weigh the options there, what makes sense in regards to that and using our balance sheet. And we do have a very, very, very strong balance sheet today. So we do have options in regards to which method we're going to go here.

And then high-level magnitude of CPG segment growth amidst COVID-19. How much of that can you attribute to maybe your leadership positions? In other words, have you grown share over the past 6-or-so months? Or are these factors more company-specific? And then just kind of near term, how should we think about the sustainability of these trends?

Yes. Albert, do you want to take that?

I'm happy to. Yes. Yes, I'm happy to lead this. I love the question because this is really talking to -- and I can take one in the other segment, so let me start with sweetener. And I would say that the things we have done on the brand building on innovation and our innovation has been for the last 3 years, north of 15% of our net sales every year on a 3-year rolling basis. Our marketplace execution, think about our investments in e-commerce, so dating back 2 years ago, have really enabled us essentially to gain market share in most of our key markets. So this is really a share gain. And I think whenever you work hard, you use a crisis to essentially make a leap forward. And I think what you have seen during this crisis is a leap forward from -- on the sweetener side.

I'm very -- I said it in my opening remarks, I want to salute the supply chain team. We have been at 99% service level in North America and Western Europe, all throughout the crisis. This is very significant when you work with retailers to know that they can count on you. So we have been gaining share.

And to your question about the sustainability, I would say that on the e-commerce, we do think there is a significant amount of sustainability because we have had changing purchasing behavior from all segments of population. When you think about our ingredients used, both in terms of coffee and tea, which you know have been growing double-digit, but you also look at baking, which is 50% of sugar consumption, you have seen significant changes in consumer behavior. We do expect also some of that -- a big chunk of that to continue going forward. And the reason is, as you know, there's going to be, and there seems to be, from a consumer behavior standpoint, the decision now to consume more from home, that is more made from scratch, which is going to be important.

And then the third one, which I think was the first question of Pablo, is consumers are looking for value, but they don't want to give up on health and wellness. So I would say that we are very well-positioned on the sweetener side. And when you look on the Flavors & Ingredients, and Irwin alluded to it, I would say that the impact that you have had in Q2 and first half, which is really something we had previously disclosed, which was the loss of tobacco international customer. And in Q2, some difficulty of the customers we do supply because we are supplier to those -- to a number of manufacturers, which had contrary to us, some difficulty to continue production during Q2. Those are onetime events.

What I am excited when I look at Flavors & Ingredients are 2 things: one is exactly what Irwin said, which is there is a trend that we expect to continue toward health and wellness. Our licorice ingredient is registered on the back of the pack as natural ingredients. It makes a lot of foods taste better, and so we see significant opportunity to grow. And the second thing is we just appointed our first ever global head of sales and R&D in that organization, 25-year veteran from IFF and Frutarom. And in his first 100 days, we see significant opportunities that we're going to take forward, which is really to increase the depth and the breadth of the customers we engage with and we provide a solution on the derivative side of that segment.

So I would say that we are optimistic with regard to the second half and more importantly, taking this business forward.

Albert, appreciate all the color. If I could just sneak one more, kind of big picture question in here. You talked a lot about free-from buzzword in the food industry. Can you provide some context around where that is most applicable to your business? And what opportunities can you reasonably attack with your manufacturing and distribution footprint, what it is today?

Happy to. The free-from is exciting because it's very big, as you said. And it's growing on average 10% annually. And so let me break it down a little bit for you. If you start with where we are at and you look at our sweetener business, we are in the sugar-free. This is $13 billion, it's growing about 6%. So this is very exciting and there is a lot of things we can do there. When you think about our Flavors & Ingredients side, we are really thinking about clean label. And essentially, as you know, licorice does many great things in products, enhancing the taste, masking some over taste, and that is a category that is $20 billion and growing 7%. And then there is the opportunity, which is what Irwin was saying earlier, as we refine our strategy to have the right to succeed and bring differentiated solution, including in other free-from. Think about low-carb, think about gluten-free, think about plant-based.

So altogether, this is -- you are talking about a very large piece, which is $30 billion-plus. You are talking about significant growth. Some of it we can do ourselves, some of it, as Irwin said, we are going to do it from an M&A standpoint. But that goes back really to the fundamentals and the strong base that we do have, our global network, our global supply chain, and I would say, our first-class of team that is very easily scalable based on the background of everybody that I have on my leadership team, running the regions and running the functions, makes us very excited about this journey.

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

First, I do have a comment, and then I have a couple of questions. It's very -- pleased to hear about your plans on buyback and from a long-term shareholder perspective, with the free cash flow generation that you have, we don't think there is anything better than to fund your own company and essentially getting 30% or so discount on cash on the SPAC transaction that was already attracted a few months ago. So thank you for being nimble.

Thank you.

In terms of -- yes. So in terms of the question that I have, if you look at the first half revenues and EBITDA, adjusted EBITDA, and you look at your -- midrange of your full year guidance, there seems to be a significant double-digit acceleration on revenues and even more significant, probably over 50% acceleration on your adjusted EBITDA for the midrange of your numbers.

So just wanted to dig into that a little bit. Is that getting into new doors? Because our observation is maybe this brand, with the previous ownership, it really was producing very significant amounts of free cash flow, but paying up to the parent and maybe there's more internal growth opportunities coming now that you have that access to free cash flow for the growth of the business as well. So is it new doors? Is it seasonality? Is it anniversarying the loss of the tobacco business on the back half? Could you shed some lights on your level of confidence on achieving these very strong numbers on the full year?

Sure. Sure. Thank you for a great question. I'm going to take the first half, which is with regard to the top line revenue as you were asking, and then I will let Andy answer the EBITDA piece, if that's okay.

So if you look at the second half growth guidance, and I started with Branded CPG. What I would say, our -- certainly the health is driven by, as you said, the improving category and market share gains in the U.S., and we did gain good share in the first half, largely reflected, as you mentioned, in increased distribution, or ACV. And this is for Whole Earth Sweetener product. As I did mention, we got a number of distribution increases, new products that are underway. Usually retailers will reset their mode at the end of Q2, so you are going to have all that impact in Q3 and Q4. We also expect, as I said earlier, e-commerce growth to continue in the second half, and we saw 249% growth in North America in Q2.

Additionally, we have exciting innovation hitting the shelf related to baking, functional benefits, as I mentioned, and finally, we also see continued growth in the developing markets in the second half and in Western Europe.

Now if I look at Flavors & Ingredients, the growth is led by our derivatives products, such as Magnasweet, which is where I was telling in the previous question about the positive trend there and the obviously, positive opportunity in the investment that we have made in a global head of sales and R&D as well as domestic tobacco and confection. So keep in mind also that as we had previously released, we were impacted in the first half by the international tobacco customer loss, which essentially we are overlapping in the second half. So we see that going away. You have strong domestic tobacco growth, which you may have read over places about what's happening there and then the confection business also being strong in the second half.

Andy, do you want to address the EBITDA side?

Yes. [Burke], good to hear from you again, and thanks for the question. A couple of things on the EBITDA side. The first, obviously, kind of building block when you think about going from, say, the first half forecast to the second half forecast is the sales growth that Albert just alluded to. The second items really are things that are already in place that are just carrying forward into the second half of the year. The first one of those are on the Branded CPG side, our cost of goods kind of productivity. We talked about the fact that we have some pro forma items carrying forward into next year. Well, we actually have just gone through a big renovation of how we're procuring Stevia and so forth, and a lot of those benefits are only starting in the second half of the year, hence the carryforward we are having into 2021. That's an incremental benefit over the first half of the year.

The second item is really in our SG&A. So with -- we'd already driven some productivity that started in the first half, and second, we put in contingency plans with COVID that we've already enacted, starting in March or in the first quarter. Those have incremental benefits in the second half of the year relative to the first half of the year. So those items are actually all secured. And even with all that, those costs even more than offset, say, any public company-related kind of expenses that we have. So when we look at the bridge between first half to second half, roughly about half of the benefit or half of the delta is already secured. It just needs to come through into the P&L and the other half roughly relates to the sales growth that Albert alluded to.

This is very helpful. And then my final question is on free cash flow generation power of this business. Obviously, you talked in your press release, the very low capital expenditure requirement on normalized times of the business. And just looking at the proxy statements and how the business has performed in the last 2, 3 years, it seems to me that this business generates about $1 a share or over $35 million or so of free cash flow or 15% free cash flow yield. Am I thinking about it right on normalized years on how this business performs? Because there's a lot of adjustments to EBITDA, et cetera, but at the end of the day, cash doesn't lie. So just trying to have my hands around how much cash you can generate out of this business.

Yes. No, I'll take that one. So [Burke], that's a great question. So I mean if you look at our cash flow on a year-to-date basis, if you look at the cash flow from operations of $15.9 million and think about that for half year, right, you get to roughly the numbers that you're talking about. So I think you're thinking about it in the right way is the short answer.

Correct. Yes, particularly with the acceleration that we talked about on the back half, which only should benefit cash. Just wanted to make sure we weren't missing anything, but appreciate it.

Yes.

Our final question comes from the line of [Brian Luther] with Emerson Equity Partners.

Welcome to the marketplace. I had a quick question. I realize tobacco is kind of a cash cow business, but I'm interested in some of the competitive dynamics that are going on. There's a -- you have an international competitor that I won't name that just does similar to twice your sales, and they had a market cap increase from $1 billion to $4 billion in the last 2 months in their stock price. So added $3 billion in U.S. market capitalization. I'm curious as to -- and there's no underlying change in their share or results that would show that they're accelerating growth in that segment, in tobacco flavorings. Do you see an opportunity, not only in tobacco, but in ingredients to displace any Chinese competitors, given some of the security and safety concerns just coming out of China these days?

Brian, this is -- I'm going to start this one. This is a -- first of all, a great question. I'm not sure who you are referencing to, but then maybe...

I'll tell you off-line, but yes.

Sure, sure, sure. But let me -- and we can take it off-line for the pieces that I'm missing. But let me start by saying that in terms of suppliers of licorice, we're the largest one in the world. So there is nobody that would be larger than us in supplying licorice, number one. Our largest competitor, and we have said that on the roadshow repeatedly, is less than 20 million, which brings essentially the second point that you are making, which is an important point.

The -- in that segment, which is a very stable, profitable segment for us and we have, as we have said on the roadshow with the largest tobacco manufacturer, we have a 10-year contract, I would say that what they are looking, first and foremost -- and this is a competitive advantage of ours that we're carrying into derivatives and Magnasweet, as I was saying earlier, is scalability of supply. So we are the only player in licorice that can really ensure scalability of supply. And so what I would tell you with regard to tobacco just to say there is that, essentially, we have a very significant, for the lack of being able to say anything else, very significant share of wallets, obviously of licorice need all around the world when it's coming down to that.

And then to your point that you are making about safety and scalability of supply. As I said earlier, on both segments, we have been able -- during COVID, all our clients have operated, we haven't had outbreaks of COVID, we were at 99% customer service level. So to your point, we see that as an advantage taking forward. We have developed closer partnerships during this crisis with a number of players on the CPG branded side, same thing on the Flavors & Ingredients. And this gives us a lot of optimism as we now expand beyond tobacco, we expand our business in the derivatives and Magnasweet. Happy to take a follow-up question from you on this one if you want.

Yes, sure, sure. I'd love to speak with you off-line. I mean and just generally, I mean, I look at this as a cash cow business, the tobacco side, where -- I mean the designs -- or sort of the ingredient wins, whether it's in licorice or tobacco or any other food, they don't change the -- consumer, when they get a taste for something, they stick with the taste. So you don't want to really mess with your product mix as a consumer goods company. So how often -- like I say, generic in terms of licorice, this is going to be in tobacco for the next 100 years, there's not going to be a replacement. How much does -- does the share jump around much or is the pricing, given it somewhat of a commodity, fluctuate much?

And I apologize if I might have missed that you might have lost a one-off customer that caused some of the decline. I'm just using the dynamics because these are really long tail reoccurring revenue streams to a large respect. I just want to kind of make sure you're not losing out to somebody given you do have scale...

No. No, that's a -- yes.

Yes, and again, just the opportunity. Are you selling into China, for example? I know this is kind of a steady state -- tobacco is kind of steady state. But is there -- the plan there, is it mainly just to kind of continue to share and cash cow the business? Is that...

Albert, can I take that? It's Irwin here. I think -- listen, and that's one of the unique things when we put those deals together was the licorice business, and I think it was a driver in the [candy stores] for a long time. And what excited me was the vision on licorice, it comes from a plant, we buy it in 14 different countries. As Albert said, it is -- we're one of the largest, if not the largest. Albert talked about who we just hired to help us in regards to expanding sales and R&D. And licorice is an ingredient that is used in medicinal medicine in Japan. It's multiple uses of where this can go. So I think back to what you said, that company that tripled the market cap just on licorice and us being one of the biggest. And today, we're not getting really any value for our licorice business out there, and I think that's important. And if you look at the multiples on ingredient business, it's tremendous.

So again, I think the application for licorice was tremendous, and I think the expansion in consumer products and that. So there's going to be a big, big focus on it. And Luke Bailey, who runs this, has been doing this for 8 years. So it's a big emphasis for Whole Earth Brands to focus on this -- the ingredient business.

Yes. I mean they're literally valued at 3x sales and 5% free cash flow yield, and they lack a growth component in that core segment. They do -- they're beyond licorice. They have other flavorings, but they're only twice the level of sales as you guys overall as a company.

So -- and $4 billion valuation, it intrigues me versus your -- I mean the other quick question in terms of -- just the overall opportunity for sugar substitute. Even your business like Equal and Canderel, I mean these are long-term consumer preferences, like the transitioning from sweet and low to Equal. I mean these sort of kind of -- seems to be almost decade-long decisions for individuals and how they like to drink their coffee or whatnot. And you have seen considerable market share in, what I would call, the legacy diet sweeteners. At what point do we see that you make significant inroads in terms of replacing sugar outright versus the alternative sweeteners that have already kind of taken share from sugar? I mean because I guess that would be like winning the war, just additional penetration in sugar in that category.

Albert?

I'm happy to start on this one. I'm happy to start on this one to tell you that -- this is a fantastic question, and the reason why I came into this business in the first place 4 years ago. I think you are on the tipping point of exactly all the things you have just said. What you start to see is that in the Western world -- and we just talked about the category growth during COVID, we just talked about the baking, which is 50% of the world sugar consumption taking on. You have seen natural players expanding. So what you are seeing is category growth, significant category growth, with a move from sugar to sweeteners naturally in the Western world, which is very significant. And we are gaining share in that. So we are gaining share of the category, which means we are growing even faster than the category, which is accelerating significantly.

And then what you start to see is in the developing markets, where there is still, today, purchasing the barrier to being able to go all the way to natural, what you start to see is the increased awareness of those sweetener options. There is increased awareness, there is increased requirements from consumer. I -- in my opening statement, I told you the level of obesity, diabetes and overweight in the world, those touch mostly developing markets. We have a plan to get into China and India as we speak that we're putting in play. We're very excited about this.

And so we think exactly to what you are saying. We think we are at the tipping of sweeteners gaining significant share from sugar, essentially as a result of those consumer trends. And you see that being played out in the Natural, and we have talked about our growth of Whole Earth, Pure Via for Western Europe, to Whole Earth in Australia and New Zealand. And then in the developing world, we are essentially taking this with our megabrand approach. So whether it's Canderel in the Middle East and Africa or Equal in Latin America and Asia, then you have a rainbow of options that go all the way from an artificial to a natural under the megabrand Equal and Canderel. Which, again -- and we talked about China, security of supply just before, those brands mean a lot for those consumers. They're international brands, they indicate quality, they trust the ingredients that can be put in it. And so I think we're at the tipping point of this because COVID has just shown to the world that obesity and diabetes are 2 preconditions that are not good to have in the case of additional pandemic happening.

So I am very bullish on the future, and this is the whole reason why the team is excited about being in this segment.

Our final question is a follow-up from [Burke Zhicay] with [Zhicay Capital Management].

I think I just heard you guys talk about 50% of the sugar consumption being baking-related, which I was not aware of, which has been a big number. And all we're reading right now is how baking is triple-digit growth, at least in the United States, to my knowledge. And I believe you have a new product in that category that wasn't available before. Could you talk about how big of an opportunity that could be? I believe you quantified what it was, what could be in the back half for next years and the performance of the product and the feedback that you're getting from the customer base?

Yes. I'm not going to give you a number for the second half, but I'm happy to tell you essentially what is going on in baking. And keep in mind, I'm going to talk mostly about the U.S., but keep in mind that the same is going on in the Western Europe. I said earlier that we have influenced a 70 share of the natural segment. And the same is going on in Australia and New Zealand.

We just launched -- a fantastic question, and those are hitting the shelves. This is what I've been saying. A lot of retailers will reset their mode at the end of Q2 with products like Baker's Secret, which tells you a lot about exactly what you are saying about all the baking. But the performance is very strong, and it's very strong because first of all, and most important, it's always the same. Products that have been brought to consumer by us and others are now starting to perform like sugar.

And so we have launched in 2019 an erythritol blend, which tastes very well. And I'm happy to say that the performance of that product, just 1 SKU in the first half of 2020, was $1 million. Importantly, the FDA-approved allulose in the U.S. in Q4 of 2019, and we have brought those products to market. So with Allulose Baking Blend, those products are hitting the shelf as we speak and that's been accepted in a number of major retailers.

So I would say that baking, and the question was asked before, is here to stay. People are going to look to bake more from home, make more from scratch, which goes towards value. But at the same time, they want healthier ingredients, which is essentially what we bring to them. And so we see that in the U.S., that is going to be a big contributor to the second half. Same thing in Western Europe, same thing in Australia and New Zealand.

We have reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Manzone for any closing remarks.

I just would like to thank everybody for taking the time to be with us today. I appreciate this very much, and I look forward to stay in touch. Have follow-up calls as needed. And thank you again, everybody, for your support.

Goodnight.

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