Whole Earth Brands: announces Q3-2020 results

Chicago / IL. (web) Whole Earth Brands announced its financial results for its third quarter ended September 30, 2020. Additionally, on November 10, 2020 the Company announced the completion of its acquisition of Swerve®, a rapidly growing manufacturer and marketer of a portfolio of zero sugar, keto-friendly, and plant-based sweeteners and baking mixes.

Third quarter 2020 highlights

Our consolidated financials reflect both predecessor and successor periods indicative of the June 25, 2020 business combination date. The third quarter results disclosed below compare the successor’s 2020 third quarter results ended September 30, 2020 to the predecessor’s 2019 third quarter results ended September 30, 2019.

• Consolidated product revenues of USD 67.0 million, an increase of 4.6 percent compared to the prior year third quarter; an increase of 3.6 percent on a constant currency basis.
• Branded CPG segment product revenues of USD 41.0 million, an increase of 1.8 percent; an increase of 0.1 percent on a constant currency basis. Constant currency results reflect the combination of strong growth in Western Europe, and North American foodservice channel softness associated with the Covid-19 pandemic.
• Flavors + Ingredients segment product revenues of USD 26.0 million, an increase of 9.4 percent in the third quarter, driven by strong growth in derivative product lines.
• Consolidated operating income of USD 1.1 million and a consolidated net loss of USD 2.8 million in the third quarter of 2020 reflect non-cash purchase accounting adjustments which are not comparable to prior year’s predecessor period.
• Consolidated Adjusted Ebitda increased 6.7 percent to USD 16.5 million driven by increased sales and expense reduction actions.

Irwin Simon, Executive Chairman, stated, «We are excited to deliver our first full quarter as a public company. I’m proud of our team – they’ve been working diligently to build the necessary infrastructure to support our rapidly growing enterprise and the evidence of this work is the speed by which we were able to close the Swerve acquisition. We are poised for a strong year ahead, supported by our internal organic growth initiatives which are complemented by Swerve, a high-quality asset that is highly synergistic with our ‘free-from…’ strategy.»

Albert Manzone, Chief Executive Officer of Whole Earth Brands, commented, «Our Branded CPG segment performance was highlighted by strong market share gains within our natural products business. All of our top seven markets grew share of natural in the year-to-date period, underscoring the powerful healthy-living macro trends that are supporting our brands. Additionally, our Flavors + Ingredients segment experienced a very strong quarter driven by the resiliency of our diverse end-markets. Looking ahead to the fourth quarter, we are anticipating a strong finish to 2020, marked by a nice sequential lift in revenue within our Branded CPG segment, which is indicative of the distribution gains that we’ve been planning for ahead of the holiday season.»

Manzone concluded, «We were thrilled to close Swerve last week, which is our first strategic acquisition. This is a significant value creation event for Whole Earth Brands as we integrate one of the leading brands within our core sweeteners and ingredients businesses. We believe this transaction enhances our ability to generate long-term sustainable growth, while positioning Whole Earth Brands to create additional value for our shareholders. Our integration is already underway – we are engaging with customers on our expanded portfolio, and we are extremely excited about our broader presence in the better-for-you sweetener market. We are just getting started – there are some great opportunities in the market, and we’re excited to continue exploring additional prospective M+A targets as we pursue our long-term vision of penetrating the adjacent opportunities in the massive ‘free-from…’ marketplace. We have great confidence in our plan to grow Whole Earth Brands and are proud of our organization’s ability to act quickly while still maintaining focus on our customers and growth initiatives.»

Third quarter 2020 review + segment results

Consolidated product revenues increased 4.6 percent to USD 67.0 million for the third quarter of 2020, compared to USD 64.1 million for the same period in the prior year. On a constant currency basis, product revenues increased 3.6 percent. Growth was primarily driven by the Company’s Flavors + Ingredients segment.

Reported gross profit was USD 18.6 million, down from USD 25.9 million in the prior year period, and gross profit margin was 27.8 percent in the third quarter of 2020, down from 40.4 percent in the prior year period. Results were significantly influenced by an USD 8.7 million non-cash purchase accounting adjustment related to inventory revaluations required for accounting purposes. Excluding the impact of this non-cash adjustment, gross profit increased 5.6 percent to USD 27.3 million and gross profit margin increased 40 basis points to 40.8 percent versus prior year, driven by favorable product mix in the Branded CPG segment and productivity.

Operating income was USD 1.1 million, compared to USD 7.9 million in the prior year period. The decrease was driven primarily by the USD 8.7 million non-cash purchase accounting adjustment and public company costs following the business combination.

Net loss was USD 2.8 million compared to net income of USD 5.3 million in the prior year period and was similarly impacted by the non-cash adjustment.

Adjusted Ebitda increased by USD 1.0 million, or 6.7 percent, to USD 16.5 million, compared to USD 15.5 million for the same period in the prior year. Improvement in Adjusted Ebitda was driven by revenue growth, expense contingency actions and improved gross profit margins.

Branded CPG Segment

Branded CPG segment product revenues increased USD 0.7 million, or 1.8 percent, to USD 41.0 million for the third quarter of 2020, compared to USD 40.3 million for the same period in the prior year. On a constant currency basis, product revenues increased 0.1 percent driven by positive momentum within the retail channel globally, offset by foodservice softness and some reduction of retailer and distributor inventories in a few emerging market geographies due to Covid-19 uncertainty.

Operating income was USD 1.5 million in the third quarter of 2020 compared to operating income of USD 3.2 million for the same period in the prior year. The decrease was driven primarily by a USD 3.5 million non-cash purchase accounting adjustment related to inventory revaluations and increased SG+A expenses related to both recurring and non-recurring public company costs that are included in the Company’s Branded CPG segment. Excluding the non-cash purchase accounting adjustment, segment operating income was USD 5.0 million.

Flavors + Ingredients Segment

Flavors + Ingredients segment product revenues increased 9.4 percent to USD 26.0 million for the third quarter of 2020, compared to USD 23.8 million for the same period in the prior year. The increase was primarily driven by strong performance of its derivatives business and domestic tobacco market, partially offset by headwinds within international tobacco.

Operating loss was USD 0.4 million in the third quarter of 2020 compared to operating income of USD 4.7 million in the prior year. The decrease was driven by a USD 5.2 million non-cash purchase accounting adjustment related to inventory revaluations, higher amortization of intangible assets resulting from the business combination, offset by improved gross profit from higher revenues and lower SG+A expenses. Excluding the non-cash purchase accounting adjustment, segment operating income was USD 4.8 million.

Year-to-date highlights

Our consolidated financial statements reflect both predecessor and successor periods indicative of the June 25, 2020 business combination date. The year-to-date results disclosed below combine the successor period from June 26, 2020 through September 30, 2020 with the predecessor period from January 1, 2020 through June 25, 2020. The combined year-to-date results are compared to the predecessor’s 2019 year-to-date results.

• Consolidated product revenues decreased 1.7 percent, or USD 3.5 million, to USD 199.8 million.
• Branded CPG segment product revenues increased 1.0 percent, or 1.8 percent on a constant currency basis, to USD 124.3 million. Operating loss was USD 13.1 million compared to operating income of USD 7.7 million in the prior year period.
• Flavors + Ingredients segment product revenues decreased 5.9 percent, to USD 75.5 million. Operating loss was USD 24.4 million compared to operating income of USD 16.5 million in the prior year period.
• Consolidated gross profit margin was 35.6 percent compared to 40.5 percent in the prior year period, reflecting the USD 8.7 million non-cash purchase accounting adjustment related to inventory revaluations and non-recurring transaction bonuses associated with the business combination. Excluding the non-cash adjustment, year-to-date gross profit margin was 39.9 percent.
• Consolidated operating loss of USD 37.4 million, primarily impacted by non-cash intangible asset impairment charges, non-cash purchase accounting adjustments and transaction related costs.
• Consolidated Adjusted Ebitda of USD 40.5 million, a decrease of 7.2 percent versus prior year driven by international tobacco business declines and incremental public company costs, partially offset by revenue growth in the Branded CPG segment and productivity improvements.

Cash flow + balance sheet

The Company generated consolidated cash from operating activities of USD 7.2 million in the first nine months of 2020.

As of September 30, 2020, the Company had cash and cash equivalents of USD 49.1 million and USD 133.3 million of debt, net of unamortized debt issuance costs.

Swerve acquisition

As previously announced on November 10, 2020, and subsequent to the end of the Company’s third quarter, Whole Earth Brands closed on its acquisition of Swerve. Swerve is a marketer of the «Ultimate Sugar Replacement» and provides a key growth platform for Whole Earth Brands to expand its existing offerings in the alternative better-for-you sweetener space, which fits perfectly within its existing sweetener portfolio. Swerve is expected to increase Whole Earth Brands North American Branded CPG segment net sales to USD 100 million, representing a 10 percent market share of all sweeteners and making natural sweeteners 65 percent of Whole Earth Brands North American Branded CPG sales mix. Swerve is one of the fastest growing sweetener brands in retail, with a 150 percent revenue CAGR since 2016. The Company believes that with the combination of its Whole Earth Brands portfolio and Swerve, it can continue to drive growth across multiples products and channels.

Swerve is expected to generate net sales of approximately USD 36 million, income from operations of approximately USD 5 million and Adjusted Ebitda of approximately USD 5 million in 2020. The Company has identified cost synergy opportunities in the range of USD 2.5 million to USD 3 million. The USD 80 million purchase price represents 14.8x Swerve’s 2020 expected Adjusted Ebitda and 9.5x 2020 expected run-rate synergized Adjusted Ebitda.

2020 full-year outlook

The Company is tightening its full-year outlook due to Covid-19 headwinds within its Flavors + Ingredients segment, as well as the realization of higher public company operating costs. Included in the updated outlook are fourth quarter 2020 contributions associated with its Swerve acquisition in the amount of approximately USD 4 million to USD 5 million of revenue and nominal Adjusted Ebitda.

The Company’s updated 2020 full-year outlook follows:

• Consolidated product revenues in the range of USD 270 million to USD 280 million.
• Consolidated Adjusted Ebitda in the range of USD 54 million to USD 57 million.
• Consolidated proforma Adjusted Ebitda in the range of USD 63 million to USD 66 million. The difference between these two figures, or the proforma adjustments, is related to the expectation of USD 9 million of future benefits related to Flavors + Ingredients segment manufacturing footprint optimization project, synergies related to combining the two companies and supply chain transformation within Branded CPG. The Company does not anticipate realizing these benefits in 2020, but will reflect these benefits in future periods as realized.
• Total expected capital expenditures in the range of USD 8 million to USD 9 million.