Whole Earth Brands, Inc.
Q2 2022 Earnings Call Transcript

Published: 10 May 2022

[Company Representatives:]

Albert Manzone - Chief Executive Officer Duane Portwood - Chief Financial Officer Irwin Simon - Executive Chairman Jeff Sonnek - Investor Relations, ICR

[Operator:]

Good morning and welcome to the Whole Earth Brands, First Quarter 2022 Results Conference Call. All participants will be on a listen-only mode. After today's presentation there will be an opportunity to ask questions. Please also note, today's event is being recorded. At this time, I'd like to turn the conference over to Jeff Sonnek, Investor Relations at ICR. Thank you, sir. Please go ahead.

[Jeff Sonnek:]

Thank you and good morning. Today's presentation will be hosted by Albert Manzone, Chief Executive Officer; and Duane Portwood, 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, www.investor.wholeearthbrands.com for reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures. Additionally, we've provided a supplemental earnings presentation on the IR website that may be useful in your analysis of the company's performance. With that, I'd now like to turn the call over to Albert Manzone, CEO.

[Albert Manzone:]

Thank you, Jeff, and thanks to everyone for joining the call today. We are pleased to report our first quarter earnings results. We delivered consolidated product revenues of $130.6 million, which represents a proforma organic constant currency growth of 4.9%, and we generated EBITDA of $18.2 million at constant currency amid a fluid geopolitical, economic and supply chain backdrop. Since we last spoke in March, the environment has been further complicated by geopolitical events that prompted an acceleration in input prices. But as we have shared previously, our focus on our global supply chain prior to the pandemic has provided us with an ability to remain in the proactive stance, with a sound plan of action to ensure that we have the tools to defend our business and our margin profile. We believe we have strong foundation with an advantage supply chain, strong global diversification across our business segments, brands, channels and geographies and strong innovation and distribution engines to drive growth. During the first quarter our primary focus was the ongoing execution of our North American supply chain reinvention project. We significantly ramped up production at our new Alabama facility that services our Branded CPG business. March production was at its highest level in over a year and was nearly three times our January production rates. As a reminder, we accelerated our North America supply chain reinvention project in fourth quarter 2021 to help us solve for supply constraints. The primary for us of this strategy was focused on taking control of select production from a co-packing partner. The transition of this operations and the improvement in production run rates in the first quarter was critical to increasing our field rates with customers and restore customer service levels. This is most visible in the sequential step up in growth from our fourth quarter, where growth was constrained by supply shortages to the 3.3% organic constant currency growth in Branded CPG we achieved in the first quarter. While the transition to a higher throughput pressured margin in the first quarter, this dynamic was anticipated and importantly we entered the second quarter with confidence in our full year guidance that we are rate rating today. Beyond the supply chain we are also combating inflationary forces for a combination of tools, including price, gross net optimization, productivity and prudent expense management. We're committed to defending our margins and would be using these tools to ensure that we continue to deliver on our commitments to the market and delever our balance sheet this year through organic means, both of which are key priorities for us in 2022. First, an update on our pricing actions. Our retail partners implemented our price increase, which was reflected in store in March. This amounted to an average increase, mid-single digit across our Branded CPG portfolio, at an approximate 3% positive influence on revenue growth in the first quarter. Elasticity is something we are watching carefully, alongside the rest of the CPG industry. Given the ongoing intensity on inflation, a new valuable such as accelerating diesel prices will reserve the right to implement additional price actions as necessary. Second, productivity. As we discussed last quarter, another element of our supply chain reinvention project is SKU rationalization. Essentially we are trying to better align our production to demand and where appropriate we are abiliating underperforming SKUs and reallocating those resources to work innovation. This is an excellent complement to our price strategy and something that we can control in response to external forces. Third, expense management. We are already [inaudible] lien global organization and we're being vigilant about adding expenses in the environment. First, we have posed some head count additions in our selectively reducing spending on discrete projects, where they are not revenue generative in nature. Again, this is all geared toward a goal of ensuring that our business is in a nimble position to react to market dynamics and still deliver on our financial goals. Next, we are making progress since we last spoke with you on our fourth quarter earnings call. We have production back, we have pricing in place and we have ongoing productivity measures that are helping us drive our recovery in Branded CPG margins that would carry through the year. On our Flavors & Ingredients business, the team is doing an exceptional job. For the first quarter 2022 we drove a 12% increase in segment revenue. This is the second quarter in a row of strong double digit growth and is the result of strong volume growth across our diverse product categories. We are succeeding at driving adoption of natural, non-GMO, flavor enhancing licorice related ingredients in our end markets across Food and Beverage, Cosmetics, Healthcare and Industrial. Our new leadership and critical investments in R&D and sales in 2021 have been instrumental in shifting our commercial approach to the diverse end markets that we serve. This is visible in our innovation and product development strategy, which now clearly maps to the various applications across our suite of Magna-branded products to drive use and sales growth. Our sales team is also focused on enhancing our relationships through direct relationships and having some great successes. Further, our Flavors Ingredient team is also benefiting from our footprint optimization project. As you may recall, we transitioned our North American operation from New Jersey to a state of the art facility in Virginia last year. With that has come a significantly improved cost structure, which results in the ability to drive more competitive pricing. Taken together, the team has the tools necessary to drive growth and we are excited about the results they are generating for the business. We continue to view Flavors & Ingredients as a strong free cash flow generator with high barriers to entry and global leadership position that would support our broader growth initiatives as we further diversify and grow Whole Earth Brands. Further, Flavors & Ingredients brings diversification in both revenue and cash flow that is valued in a fluid environment such as this, allowing us to deliver greater consistency in our operating results. In summary, our proactive efforts across Whole Earth Brands are creating a stronger foundation that we would build upon. We are pleased with our progress to meet our goals for 2022. Whole Earth Brands is the global leader in the better-for-use sweeteners and reduced sugar categories. Our team continues to pursue four priorities. First, disrupt the massive $100 billion total addressable refined sugar market, which is being displaced by fast growing sweeteners. Second, drive category leadership for best-in-class innovation and brand building, expand our global distribution and leverage our strong supply chain capabilities. Third, continue to build out of ESG credentials and evolve our brands and product portfolio towards becoming a large, organic, natural, plant based, food company; and fourth, deliver on our balance sheet. We believe we would reduce leverage in 2022 for organic meats, as we deliver profitable growth and significant cash flow generation. With that, I will pass the call to Duane for this financial review.

[Duane Portwood:]

Thank you, Albert, and good morning to everyone. As a reminder, we acquired Wholesome on February 5, 2021. I will speak to reported results, which include Wholesome for the full first quarter of 2022. Additionally, we will provide some selected pro forma results as if we had owned Wholesome in 2021, to assist in your analysis of the organic growth of the combined portfolio. Also, please refer to our non-GAAP reconciliations at the end of the press release for additional detail and I encourage you to view the supplemental earnings presentation on our investor relations website. In the first quarter ended March 31, 2022 consolidated product revenues grew 23.4% to $130.6 million versus the prior year quarter. On a pro forma basis, including Wholesome for the full quarter in both the current and prior year periods, organic constant currency product revenue increased 4.9% versus the prior year first quarter. Reported gross profit was $39.6 million compared to $35.7 million in the prior year first quarter. The increase was largely driven by contributions from the Wholesome acquisition, pricing actions and a $3.2 million favorable change in non-cash purchase accounting adjustments, related to inventory revaluations, partially offset by cost inflation. Reported gross profit margin was 30.3% in the first quarter of 2022, compared to 33.7% in the prior year period. Adjusted gross profit margin was 32.8%, down from 36.9% in the prior year, due primarily to the inclusion of Wholesome in 2021, which had lower margins and previously mentioned cost inflation. Consolidated operating income was $7.1 million compared to an operating loss of $3.1 million in the prior year first quarter, and consolidated net income was $2.7 million compared to a net loss of $12.0 million in the prior year period. Consolidated adjusted EBITDA of $17.8 million increased 1.8%, driven by the contribution from the Wholesome acquisition and revenue growth, partially offset by a $0.4 million of unfavorable foreign currency. Now shifting to the segment results for Q1. Branded CPG segment product revenues increased $22 million or 26.9% to $103.8 million for the first quarter of 2022, compared to $81.8 million for the same period in the prior year, driven primarily by the addition of Wholesome. On a pro forma basis, organic constant currency product revenue increased 3.3% compared to the prior year first quarter, primarily due to pricing actions taken throughout the quarter. Overall, volume was flat; however, excluding the discontinuation of certain legacy private label skews Branded CPG volume increased 2.1%. Operating income for the Branded CPG segment was $6.5 million in the first quarter of 2022, compared to operating income of $10.2 million for the same period in the prior year. The decrease was driven by costs associated with our supply chain reinvention project, the impact of cost inflation and an unfavorable impact from the stronger U.S. dollar, partially offset by a full quarter of Wholesome results and revenue growth in that business. Flavors & Ingredients Segment product revenues increased 11.7% to $26.8 million for the first quarter of 2022, compared to $24.0 million for the same period in the prior year, primarily due to strong volume growth and licorice extracts and derivatives driven by commercial expansion and innovation. Operating income for the Flavors Ingredients Segment was $7.8 million in the first quarter of 2022, compared to operating income of $1.0 million in the prior year period, primarily due to revenue growth, and a $2.3 million favorable change in purchase accounting adjustments related to inventory and valuations and a $1.7 million favorable change in restructuring and other expenses. Operating expenses for corporate for the first quarter of 2022 was $7.2 million, compared to $14.2 million of operating expenses in the prior year period. The decrease was primarily due to lower M&A transaction fees. Now moving to cash flow and the balance sheet. Cash flow provided by operating activities for the quarter ended March 31, 2022 was $4.4 million, that is net of $4.2 million of non-recurring or unusual items primarily related to our supply chain reinvention project, along with M&A transaction related costs. Capital expenditures for the quarter ended March 31, 2022 were $3.3 million. Free cash flow excluding the non-recurring or unusual items was $5.4 million. As of March 31, 2022 we had cash and cash equivalents of $29.4 million and $412.9 million of long term debt, net of unamortized debt issuance costs. Note that our long term debt increased from year end 2021 due to the cash portion of the Wholesome run out, where we paid $30 million in cash and approximately $25 million in equity to those principles on February 23, 2022. Our net debt to adjusted EBITDA ratio at March 31, 2022 was 4.53x. Reducing balance sheet leverage continues to be a corporate priority and we anticipate that we can reduce leverage by approximately 0.2 turns through organic means by year end 2022 as implied by the mid-point of our guided adjusted EBITDA range. Now shifting to our full year outlook, we are reaffirming our 2022 guidance, which includes the full year impact of the Wholesome acquisition. As a reminder, our outlook represents our expectations for growth on a proforma organic basis. We define proforma organic growth to be as if the company owned Wholesome for the full year 2021. For 2022 we continue to expect consolidated product revenues to be in the range of $530 million to $545 million, representing reported growth of 7% to 10%, and pro forma organic growth of 3% to 6%. We continue to expect consolidated adjusted EBITDA in the range of $84 million to $87 million and we continue to expect total capital expenditures will be approximately $10 million. That concludes our prepared remarks. Operator, now back to you. Please open up the call for Q&A.

[Operator:]

Thank you. [Operator Instructions]. The first question is coming from Brian Holland of Cowen. Please go ahead.

[Brian Holland:]

Thanks. Good morning everyone. If I could just start with I guess two on the top line, just curious about the source of the U.S. share erosion that you called out in our deck this morning. Is that all tied back to the supply issues and when might we anticipate inflection there, that would be the first thing. And then the second thing is how long as we look at our model should we anticipate that ongoing skew rate [ph] to remain a drag on volume.

[Albert Manzone:]

Good morning, Brian. This is Albert and let me take the first question and then I would start the second one and let Duane finish on it if that’s okay. So with regard to share, and thank you for referring to the supplemental deck which we tried to give as much transparency as possible. But as you did mentioned, there is an impact on share which has stated in Q4, continued in Q1, essentially for a big part driven by the supply chain disruption. As we have talked, what – that has obviously driven some product shortages on the shelves across all retailers and that has impacted share across all of – most of the brands. So that's really I would say the key driver. The good news is, as we have reported our supply chain reinvention, we are very happy with the progress. We were still short on Jan, Feb and then March was our highest production months, and we are getting back to old servicing customers the way we want to, the way they expect and the way we have always done it. With that, what you are going to see is a restore of the share towards the second half of the year, later in the year. It takes time of course. That has had also a compounding effect as you can imagine on how many promos you can run, and those type of activities when you compare year-over-year with what you were able to do on the prior year, which by the way in Q1 was a heavy, still COVID period. So I would say this is really what it is. What we – I can also tell you is that we are very excited about our innovation. Very excited and the customers are very excited about what we see in terms of innovation wins, getting into the second half and the Brand Building initiatives. So again, if you look at our supplemental deck, you will see that we are gaining share across all our markets we are in, except the U.S. That’s also the one place where we do have supply chain constraints and have had them until the month of Feb, so that bodes well for the second part of the year. With regard to your question on the private label, this is as we explained last year, an opportunity, also considering the environment we are in to remove poor performing SKUs from a gross margin standpoint and make place for innovation. So you are going to see that effect throughout the year on a balanced way. Duane, anything you want to add on that?

[Duane Portwood:]

No, that's exactly right. And good morning, Brian. But as we had discussed previously, it's about a $10 million impact year-on-year and that is spread pretty evenly across the four quarters, including Q1.

[Brian Holland:]

Got it! I appreciate the color Albert and Duane. I’m curious to hear, excuse me, on demand elasticity. Just kind of any early reads. Obviously there’s a lot of moving parts in your numbers, but if we just kind which you havedone on the consumption, you have a portfolio that plays across pricing tiers. So just kind of curious what the interplay looks like as you start to roll pricing through.

[Albert Manzone:]

Right, great question. So we have taken price globally across all of our markets. The percentages will vary depending on the type of inflation you have in any given market. If you look at the U.S., our price increase on average is mid-single digits. That price has really, as you know customer have a 60 to 90 day window. So those prices of which were communicated early January went into effect more into March, which is going then to impact further from a margin standpoint Q2, and it impacted really one month's out of our Q1. From a pricing elasticity, I would say that we have assumed some of that in our calculation, so we have assumed a pricing elasticity. How much will happen, I think the inflationary environment we are in Brian is unheard of for the last few decades. So I think we are being very prudent and making sure as you said, and I think that's one of the great benefits of Whole Earth Brands, making sure that we have a portfolio that can play across all price points. So I will remind you that with the U.S. we are positioning the premium natural brands, we are positioning the main stream natural brands, we are positioning artificial, which tend to be more on the value side to from a pricing standpoint. We have a strong presence with Wholesome into private label, which again is a great place to be in those times, so we have reflected. We know our pricing; we have taken into account some elasticity from all the historical modelings. I don't know how good the historical models are going to be for the future, but we have a very resilient portfolio and right now we are happy with how that addresses our costs. We will continue to monitor the environment very carefully, both in terms of pricing elasticity and activities with consumer, as well as our pricing inflation going forward.

[Brian Holland:]

I appreciate the color again Albert. I'll leave it there. Best of luck!

[Albert Manzone:]

Thank you. Thanks Brian.

[Duane Portwood:]

Thanks Brian.

[Operator:]

Thank you. The next question is coming from Scott Mushkin of R5 Capital. Please go ahead.

[Scott Mushkin:]

Hey! Good morning everybody! So my first question is on Flavors & Ingredients. I mean obviously you're seeing some pretty heavy growth in, but I always modeled that as a pretty slow, good cash flow business. So I was wondering, are you thinking a little differently about this business long term, that it could grow perhaps just a little bit faster, so you know kind of get your thoughts there.

[Albert Manzone:]

Yes, good morning Scott. First of all, I want to congratulate the whole team at Flavors & Ingredients, which I’m sure are listening on this call and fantastic job from them in Q4 as you have seen in Q1. The business from our standpoint is essentially on track. We're very happy we the payback investing into the business as we have talked to previously, both from an R&D standpoint and you can see new applications coming across Food and Beverage, Cosmetics, Pharmaceuticals, industrial and also from sales force that allow us to go direct to some of the key customers versus at times going through distributors in the past. And we continue to see momentum and we expect momentum going in Q2 and forward. At the same time, very similar to what we're doing with supply chain reinvention in our Branded CPG right now in the U.S. and we just talked about you know the short term impact of it. But let's remember that Flavors & Ingredients went through a very similar exercise in 2021 and we’re also overlapping that manufacturing footprint optimization, which was the closing of our Camden, New Jersey plant and opening a smaller, state of the art facility in Virginia, and I think we are reaping now the benefits. We have good overlaps and the business is on track and very happy about what the team has done there.

[Scott Mushkin:]

Okay, and then my second question goes to the inflation. I know you gave some color already on you know what you put through and when it's going to be in the marketplace or is in the marketplace. What are you seeing right now on input costs? You know most of the companies I'm talking to said it’s going to have to be another round of price, and how are you thinking about that? What's going on with your input costs? Is that something that you guys are contemplating as you go forward?

[A - Albert Manzone:]

So Scott, with regard to inflation, first of all we are seeing a high single digit inflation and essentially which is consistent with what you will hear right, on the earnings from most of the CPG. What I would tell you is a few things here. Number one is we have taken pricing, which I talked about, which is now reflected. We had done some last year, so the combination of both and what we're doing in the U.S., we feel comfortable at this time. I would add to it that the work, and I want to salute again, the work that our supply chain global team and U.S. team are doing has started way before, and the supply chain reinvention which we put in motion right at the time of the Swerve in Wholesome acquisition and which we accelerated the first out of last year, essentially is addressing some of those inflationary concerns, coupled with smart rebuys that have been done a year ago. So those are essentially the actions. With that, we are obviously not resting and we're adding further productivity. We’re adding as I have said just earlier in my scripted remarks, productivity in terms of our SG&A, so we're being very attentive across the line. So far we feel good about what we are, but obviously we're in a very fluid environment and would reserve the right to take further actions if needed based on how the environment holds, to make sure that we heard what is expected of us and as I said earlier, we feel comfortable at this point in time to reiterate our guidance for the year.

[Scott Mushkin:]

So to interpret that out, you think you won't need any more with where things stand now, but you know obviously reserve the right, is that a good interpretation of what you said?

[Albert Manzone:]

Correct.

[Scott Mushkin:]

Okay. Alright, I'll yield. I have some more, but I'll take that offline. Thanks guys. I really appreciate it.

[Albert Manzone:]

Thank you.

[Duane Portwood:]

Thanks Scott.

[Operator:]

Thank you. The next question is coming from Bobby Burleson of Canaccord. Please go ahead.

[Bobby Burleson:]

Yeah, good morning. So I guess the first one is just looking at Flavors & Ingredients, curious how broad based the strength is there and maybe if you could kind of revisit that for us in terms of the revenue mix across some of those end markets?

[A - Albert Manzone:]

Sure. Hi Bobby! It is broad based. As you know, what I would tell you is we start with competitively advantage supply chain. We start with market leading share and position globally in one ingredients, which is the licorice, so that's a good place to be. Number two, we did significantly lower our cost of production through the manufacturing footprint, which has essentially put us at a cost advantage across multiple usages; and number three, we do have a very diversified end users base, which are going to be in food and beverage, cosmetic, health care and industrial, and we see right now because of the combination of good cost, the ability to work directly with R&D of multiple of those end users in terms of providing the benefits and working on their product with the benefits of licorice. We do see and the abilities and to reach more customers directly through our revamp of the sales force on the global level. I will say that the momentum is broad based in terms of the end users in terms of the type of industry, and also globally, you know as an example, we did step up our sales force in all of Asia and we're seeing significant growth there. Not because the growth was not there before, but because we were not able to access it or we were accessing it too indirectly and passively. So those – all those efforts have really been put in place with the vision of growing as soon as we went public, and I think this is a yielding good results as we speak, as we expect.

[Bobby Burleson:]

Great! And then on the non-revenue finishing projects where you’re selectively reducing spending, any examples of the low hanging fruit there in terms of types of projects you could reduce spending on this year?

[Albert Manzone:]

Sure. Duane, do you want to take this on?

[Duane Portwood:]

Yes, sure. Good morning, Bobby. I think the biggest example is really just more on the technology side in terms of – we're pretty integrated right now, we're working pretty well. There are areas where we want to explore, where we might be better at items like that that we’re just saying okay, well 2022 is maybe not the best year to do that, so let's attack that after 2022 and for now focus on execution and the like.

[Bobby Burleson:]

Okay, great. And then just last one, in terms of supply chain disruptions, I know you guys did some proactive inventory build last year, which turned out to be very timely. I'm wondering just with you know the war in Ukraine, etc. are there areas in your ingredient set that you're maybe a little bit more concerned about where you could initiate another pre-buying activity this year?

[Albert Manzone:]

Right. So Bobby, on this I would say first and foremost, we don't have any ingredients really coming from those to – from Russia and Ukraine. So we're not impacted the directly and obviously a lot of people sufferings there and our thoughts and prayers go to those nations. With regard to the indirect impact, which is obviously what I'm thinking about more. Also when I was talking earlier with Scott, that we’re very vigilant. One of our models and you started with Flavors & Ingredients is in-built into our model we have one year of supply. On the ingredients we feel comfortable there. Similarly on Wholesome we have supply on hand, and with regard to the rest of the ingredients, we have done a few things as you mentioned. Not only did we pre-buy, but we also brought all those key ingredients close to the point of productions and so as your localizing the right geographies and that is also a de-risking that we did take. From a procurement standpoint, I will say that our teams are very aggressive and always looking forward. So as we speak now, they are working on 2023 and we would do what is right in terms of as you said, ensuring continuity of supply, but we don't see any disruption of risks at this point in time.

[Bobby Burleson:]

Great! Thank you.

[Albert Manzone:]

Thanks Bobby!

[Operator:]

Thank you. The next question is coming from George Kelly of Roth Capital. Please go ahead.

[George Kelly:]

Hi everybody! Thanks for taking my questions. So I have a couple for you. First, on your guidance for the year, for EBITDA, just curious – so I guess with revenue and EBITDA, revenue – I mean the number you just posted in the first quarter. If I go to your full year, it looks like there's some modest sequential sort of improvement versus what you just reported. But EBITDA is more substantial, the improvement is. So it sounds like pricing should have a good flow through, but what else can you point to that gives you confidence that you can hit on that sequential uptick in EBITDA?

[A - Albert Manzone:]

Do you want to take this on Duane? Good morning, George!

[Duane Portwood:]

Yeah, good morning George! Yeah, I think the two big things to think about George as it relates to that progression would be first of all we did have a price increase versus cost inflation mismatch during the first quarter, you know and inflation was present starting at the very start of the year and as Albert mentioned in his commentary, prepared and in the questions, pricing was in effect throughout the quarter and really didn't come into full effect until the last half of the quarter. So pricing is going to help from an EBITDA perspective. We did have a little bit of supply disruption in January and February, so that'll help from an EBITDA perspective as well. So those are the two main drivers in the uptick in EBITDA.

[George Kelly:]

Okay, okay. And then second question for me is on free cash flow. And so wondering if you could help us just in round numbers bridge from EBITDA to free cash flow, and I know you’ve provided CapEx, but should there continue to be kind of one time things that'll impact free cash flow or where do you expect – I mean if you could just provide a number or a range, that would be helpful. I’m not sure you want to do that, but anything unique to call attention to?

[A - Albert Manzone:]

Duane?

[Duane Portwood:]

I went on mute, sorry about that. Yeah George, so on free cash flow, you know if you think about adjusted EBITDA in the mid-80 range as you know we guided 84 to 87, the things to consider of course are, we have cash taxes which will be in the high single digit millions we expect; interest expense, low to mid-20’s. CapEx in the $10 million range, and so then – and then from a cash related add back perspective, we did add about $4 million in Q1. I expect that to significantly decrease in Q2 going forward. Maybe a little bit in Q2, but significantly less than what we saw in Q1 and I expect that to continue throughout the year. So I'd expect cash related add backs in the single digit millions. And then the bids [ph], you know things that can swing things as networking capital. Last year net working capital was of use of about $20 million. I expect that to be significantly less as well. This year there is some seasonality to that and it’s different by quarter of course. But you know at the end of the day, right now I'm expecting free cash flows for the year to be somewhere in the mid to high $30 million.

[George Kelly:]

Okay, that's really helpful. Thanks. So that and then last one for me is your leverage – so I think you said in your prepared remarks you expect something like 0.2 turns of improvement by year end and so I guess a two part question, I want to make sure I heard that correctly. So I have you right now at about 4.7x. I just want to make sure that I have that right that you're going down to 4.5. And then the other part of the question is, where does – you know I understand that deleveraging is a real priority right now, at least that's what it sounds like. Where do you need to get as far as that ratio, to again become more comfortable considering M&A and am I hearing it right that it’s really not a priority – M&A is really not a priority right now until that gets into better position.

[Duane Portwood:]

Yes, so I’ll take the first. Well, I’ll take all of that and then Albert can add in where I miss some things. Okay, so glad you asked on the leverage ratio. So the 4.53 is really based on our current debt balance and then using the mid-point of our guidance range. So that's the 4.53. The 4.7 is like on our last 12 months basis, 4.69 actually. But the 0.2 turns going back to that, it's really based off of that 4.53. So in other words what we're saying is, 0.2 turns – actually, I'm sorry is based off of where we ended 2021. We ended 2021 at 4.37 and based on the cash flow that I just took you through, I would expect that to come down by about 0.2 turns. So we’ll be in the low four’s is my expectation by the end of the year.

[George Kelly:]

Okay, great. And then the M&A part of that?

[Duane Portwood:]

Yes, I think you know as we talked about at the end of - in our Q4 call, you know priority number one is execution. Across the enterprise there is obviously the particular attention to North America and then the supply chain stability there. We do continue to look at the landscape on the M&A side, but it’s – the priority really is execution. And then as it relates to kind of what leverage ratios would make us more comfortable and I guess being, we are always going to be thoughtful. So I hesitate to say more aggressive or anything like that. But we're only going to do deals that make sense of the price that makes sense. But you know, I think clearly we had more flexibility when we have the leverage ratio under three’s versus the fours.

[Irwin Simon:]

Duane, let me just follow up on that. Hi George! It’s Irwin Simon. Listen, we built this company to grow it, to grow it both you know globally and to do M&A and with that I think there is a good plan in place to take cost out. We have an incredible infrastructure in place. We have a company today that has the ability to put another $0.5 billion of sales on top of the year. But M&A is important, but you know having that leverage is too, and I think you know getting the operational right. You know we’ve been public for two years. But we are seeing some interesting stuff out there and if the right thing came along, where there is some good EBITDA and there is some costs that could be taken out, M&A would be something we would look at here. So I don't want to rule out total M&A, but I think there's a great plan in place. How do we grow this business? How do we reduce cost? Your question with regards to how do you get to that EBITDA in the back and is an important question. But I think M&A is something that is part of our DNA and that’s something that I look to build this company on, is M&A at the right time and the right company.

[George Kelly:]

Okay, thank you.

[Albert Manzone:]

Thanks George.

[Operator:]

Thank you. The next question is coming from Mark Smith of Lake Street Capital. Please go ahead.

[Mark Smith:]

Hi guys! Most of my questions have been hit, but just want to hit two kind of big picture things. First, as we look at distribution, you know anything to call out as far as retail partners or shelf expansion?

[Albert Manzone:]

Sure. Good morning Mark. As I said, so let me back up right by saying that the first quarter was per our expectation. This is an incredible category, right. Its $100 billon of addressable marketing and it's not discretionary, whether the economy is up or down or inflation is up or down, so there is a lot of opportunities. Three, we are very well diversified, right, across the aisle. So I will tell you and I don't want to disclose too much; one, not to upset some of the retailer you know; two, for competitive reasons, but we are excited about what we are doing in terms of the power of one and the ability to win on the shelves. We are seeing growth and opportunities that you have some of them and some of them we didn't disclose in the supplemental deck. So we have those scores that will materialize in the second half with the shelf reset. We're also excited about some of the adjacency work we are doing, right. So we have the baking mixes, we have the chocolate chip cookies, we have the Swerve, we have the baking mixes with Wholesome and there you have also seen good distribution wins, and one of the things I like about those adjacency is which we take a page from our international markets is that they give you more point of introductions into the store. They also do source new users, new consumers that then discovery eventually your sweeteners. So this is very dear to our circle and so we are happy of course. We have had to mend some in Q1 as I talked earlier, because the first – as Irwin said earlier, the first thing that you want is to be at the 99% customer service level before you push. But we are getting there with the progress of our supply chain reinvention and we see ourselves in a good place for those distribution wins that are taking place as we speak for the second half.

[Mark Smith:]

Perfect! And Al you talked about – a little bit about my next question, which was just inflationary pressures, you know high gas prices. Any impact on the consumer trends and if you are seeing any trade down out of your product as we see through the tough inflation and environment for consumers.

[Albert Manzone:]

Right. Let me take the opportunity here. We haven't talked about it on the call yet, but also to talk about a very well diversified channel mix, and so we do see continued growth in ecommerce. And as you know, this is a good place to touch a number of consumers. We do, and that's now 10% of our mix in the U.S., and we still have pockets opportunities of Swerve into Wholesome. We do see good growth on good service, right, which has been coming back. And as you know inflationary pressures there has been a little bit lesser than retail and there we are very happy with – you know we grew high single digits in the first quarter in that channel. We see obviously good growth in club, where you can play value, both in terms of downsizing packaging, there is also upsizing and providing more value. So we are doing also both, in terms of value optimization. So pricing is obviously one aspect that as you know it gets much more sophisticated than this as you play that game and there is opportunities that we are taking in terms of packaging optimization, both in larger pack or smaller packs. And so the important thing is to have this whole array. We have great brands. With our four brands we have great innovation and as per your first question scoring wins in distribution, and then we have a very well balanced, not only portfolio, but also channels which essentially bodes well. That being said, we remain extremely vigilant. This is a very fluid environment. Nobody knows if we are going to be in a recession or not a recession. I think in the Q4 of this year and therefore we remain extremely vigilant and we work all the angles constantly.

[Mark Smith:]

Perfect! Thank you.

[Operator:]

Thank you. The final question today is coming from Alex Arnold of Odeon Capital Group. Please go ahead.

[Alex Arnold:]

Hey guys! Good morning! Albert, I think you just answered my question. But I guess other than channel mix and shift that you're seeing, I guess the extension of that is as the wallet gets squeezed, are you seeing – because you are so well set across price points, are you seeing real signs of trade down and substitution effect yet?

[Albert Manzone:]

Hi Alex! I would tell you that right now we don't see any dramatic shift, but we are prepared for any that might happen, so we haven't seen yet. I they think consumers – I mean nobody knows right exactly. Consumers don't exactly know where things are going to go and so right now I think it’s still balanced. But we are prepared for as I said, both, in terms of channels, in terms of our products, in terms of our price point, in terms of upsizing and downsizing, we are prepared and we continue and that's as Irwin said, earlier one of our strengths of our global manufacturing footprint. We continue to take learning’s across the word and play with that, which is extremely helpful as we speak. So we saw good growth in international, some regions more impacted, but overall we haven't seen anything dramatic at this point yet in terms of rebalancing. But I think if there is something playing out, it will play out more and that because we are well balanced, that’s why we feel comfortable with the year.

[Alex Arnold:]

Great! And then you touched on this one as well. But are there – in terms of products adjacencies or new innovations that are now on the shelf, are there any specific anecdotes or updates that you can give us as to how uptakes been relative to expectations and sort of timing of when you start seeing new additional ones roll?

[Albert Manzone:]

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So as where we say from an adjacency, this is already a $20 million plus business in international for us. We are present in several categories. We are able to source new consumers to our brands. We are able to have multiple points of interruptions in the store, and I think with our team in North America, which is doing a great job across all the brands coming together, working together, we do see opportunities in North America too.

[-:]

So as where we say from an adjacency, this is already a $20 million plus business in international for us. We are present in several categories. We are able to source new consumers to our brands. We are able to have multiple points of interruptions in the store, and I think with our team in North America, which is doing a great job across all the brands coming together, working together, we do see opportunities in North America too.

[Alex Arnold:]

Great! Thanks a lot Albert.

[Albert Manzone:]

Thanks Alex!

[Operator:]

Thank you. At this time I'd like to turn the floor back over to management for any additional or closing comments.

[Albert Manzone:]

If you allow me – first of all, thank you all. I would let the closing words to Irwin. But I just want to thank you all for being on this call. I think our first quarter was as expected and we are happy of course with that. We are looking at a category that is extremely resilient and it's not discretionary. We have a huge addressable market and I think as we have talked multiple times, we are very well diversified, we have great brands, innovation and distribution opportunities, both in the U.S. as well as a globally. So Duane and I are comfortable with what we see looking forward to the follow-up calls with you and comfortable reiterating our guidance. And with that, I will pass it on to Irwin.

[Irwin Simon:]

Thank you, Albert. Good morning, everybody! Listen its difficult times out there and times that we've not seen and between inflation, labor, supply, but they are all things that we have to deal with out there. I think the exciting thing is Whole Earth Brands owns today some great brands and great product lines. Lots of good things coming out of Masgo [ph] which is a unique business with tremendous growth opportunities and great margins. The uniqueness about Whole Earth is we got distribution in ultimately 80 different countries out there, and got a good foothold in the product. And products are what the consumer wants in regards to stevia, organic sugars and sweeteners and licorish ingredients. In regards to building this company out, there is lots of opportunities out there, and one of the big things we don't rely on copackers as we’ve gone out there and built our Birmingham facility. You know we have a great facility with the Czech Republic. We have a great facility as Albert talked about in regards to Virginia, which we’ve done with Masgo [ph]. So it’s all coming together in a good way. We reconfirmed guidance for the year. Hopefully we do not have to take pricing. If we have to, we will. We’ll watch what our competition is doing out there. We have in place an excellent management team. The strategy is there. I've seen a lot of the innovation. I know you asked a lot of the new products. Some things have done right, some things have gone great and some things have just not worked out in regards to some of the new products, but the team continues to work on it. So you know again, as a company, that's a smaller company, but lots of opportunities within the food space, and you know I've mentioned before, there is lots of acquisitions out there. There is a lot of plant based companies today that are looking for partners and opportunities, and with that it’s important for us to have a fixed base, a good cash flow. How do we reduce our debt, and I think with that Whole Earth will continue to grow its distribution, growth its product and ultimate look at acquisitions. So with that, thank you very much and congratulations to the team, and look forward to speaking to you all soon.

[Operator:]

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.