July 12, 2022 – On today’s podcast we welcome special guest, Westrock Coffee CEO and Co-Founder, Scott Ford. Westrock Coffee is a leading integrated coffee, tea, flavors, extracts, and ingredients solutions provider.
On the show, Scott discusses:
- How he went from asset management to the coffee industry
- Where the idea for Westrock Coffee came from and what problem he was looking to solve
- Key skills and knowledge from his experience in finance utilized as a company founder
- Trends in the coffee industry
- And more
Welcome investors to The Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies, your hosts, Julian Klymochko, and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate because performance matters. Find out more at accelerateshares.com.
Julian Klymochko: Welcoming Scott from Westrock to the show. Scott, how are you today?
Scott Ford: I’m terrific. Thank you. How are you, Julian?
Julian Klymochko: Doing fantastic. Thank you and got my coffee right here. Ready to go with this podcast and I was going through your career and it’s very interesting because you started out in investment banking, went onto asset management, did CEO roles at large corporations, which was very successful. You grew them significantly, you know, multi-billion dollars in revenue. Can you give us a bit of a primer on your background and your different experiences?
Scott Ford: Well, sure. So, I’m from here in Little Rock. Grew up here, went to Central High, went to the University of Arkansas, was fortunate enough to get hired into the investment banking world at Merrill Lynch in New York, right out of school where I worked in the M&A department and, you know, basically learned to build models. I then went to work for Jack Stevens, and I worked for him as his assistant for the better part of 10 years. And really it was Mr. Stevens and Warren Stevens, I worked for both of them at different points in time. Who really kind of took me under their wing and taught me how to think about a business, how to think about building a business from an investor’s perspective, as well as from an operator’s perspective? And as they sent me out to go take over from my dad at Alltel, I told Mr. Stevens, I said, I grew up in his house, but I don’t know anything about the telecommunications business.
Julian Klymochko: [Laugh].
Scott Ford: And, you know, he was a Marlboro red cigarette smoker, and I never will forget. He was smoking on that cigarette, and he paused for a minute, and he said, well, the nouns are different, but the verbs are all the same. You’ll do well. And the concept that, it doesn’t apply to surgery or engineering, but most businesses are common enough in their general verbs that once you learn the nouns of the industry, you can go from one to another. And frankly, as whimsical as that was, it gave me the confidence, okay. In a year or so, when I’ve learned the nouns, I’ll be okay, we’ll be able to figure this out. And from that, have gone on from industry to industry, to industry. And since I stay out of technical fields, that advice is proven true.
Michael Kesslering: And could you go a little bit more into that role within Stevens because it, you know, it’s within an investment bank, but it’s a very non-traditional investment banking role. What were you doing on a day-to-day basis in that role before moving over on the operating company side?
Scott Ford: So, the first two years I did the same kind of thing in the investment bank that I had done at Merrill Lynch. And then I picked up a series of projects for Jack Stevens that he was interested in. And he was always interested in company valuations, and he would buy them whether they were public or private, he would buy a part of them, all of them. And I started doing work for him on that kind of project-by-project basis. Basically, everywhere he traveled I went so for the last eight years I was with him. I sat with him most of the day and I work on whatever he was interested in. So, if he was working on an investment banking project, like Tyson Foods was buying Holly Farms, then he put me in the middle of working on that.
Now Warren was running the day-to-day business of the investment bank, but I would be on the project team. When he bought Don Ray Media, the newspaper business. First of all, to go and buy it and then for two years, I traveled with Fred Smith. Monday through Thursday and learned how do you work through the operating metrics of running the business on a profitable basis. And so, whatever he was interested in, that’s kind of what he sent me on. And that was a great education. That was better than any formal education I would’ve ever got.
Julian Klymochko: Now, fast forward to today, you have Westrock Capital Partners, Westrock Coffee. So, I imagine there’s a bit of synergies between coffee and caffeine and the financial services industry, as we all know, but that is certainly untraditional. So how did you go from that business specifically to Westrock coffee? Where did that idea come from?
Scott Ford: Well, when we sold Alltel. We sold it to private equity in 2007, I stayed on and ran it for them and then they sold it to Verizon in 2009. And in 2009, I decided to take a one-year sabbatical, had a chance to go do other CEO jobs. And I decided I was going to take a year off. And in that year, I was going back to Rwanda where my wife and I had been doing volunteer work for a number of years. And while I was there on this specific occasion, I realized that the coffee industry only had two mills in Rwanda. And that those two mills were paying coffee farmers, which were really just trying to keep their children fed and flourishing. They were paying them about half what their product was worth. And so, I kind of got irritated.
I said, you know, the free market will allow these people to get a fair price, but only if someone opens a third, you know, mill and offers a fair price, then the other two guys will match it. And that’s how we started the coffee business. I started the money management business because I heard a conversation between Jack Stevens, Warren Stevens, and Don Tyson at one point that left a real mark on my development. And it was around the fact that when Don Tyson was borrowing money to buy Holly Farms. He needed a equity put for a hundred million at three dollars below the market. And he priced that with Jack and Jack and Warren underwrote that put, and then they asked him a question. They said, well, is it true that your banks should be concerned about the amount of leverage?
Now, this is in the late nineties. I’m sorry, the late eighties. And Don said, no, Jack, you don’t need to worry about that because most people try to actually take advantage of the movements in commodity prices, we don’t. We are a commodity processor. We work for a processor’s margin. We don’t get rich in times of plenty, but we don’t go broke in lean times either. And that always left a mark on me. So, when the day I started a coffee business, I opened a hedge desk that I personally ran, and I ran a hedge book and worked for a processor’s margin from the very first day we set up the business and that’s where the money management business grew out of that. They grew up kind of simultaneously off the same desk.
Julian Klymochko: So, you are actively hedging the coffee exposures or what sort of hedges were you implementing?
Scott Ford: Yeah, exactly. So, in the beginning, we were just hedging the coffee exposure. When we would go long coffee on the table, on the drying table, then we would short the future position. And then we wouldn’t remove the future position until we transferred the long to a buy order from a customer that was going to take the physical. So, we ran a hedge book, and if markets went up, I had to write margin checks.
Julian Klymochko: Mm-Hmm.
Scott Ford: Margin went down. I gained margin in the account, but I always ran a net zero balance book. And that’s why even in times of like Covid when a lot of companies in our industry just got upended, because we were running a balanced book, we were able to transition through even dark times like that.
Julian Klymochko: That makes a lot of sense. And there is in fact, a lot of synergies there because the asset management is supporting the operations as you indicated, driving the stability of the revenues and the margins. Another interesting aspect is, is how you started this company. You noticed the opportunity just through your volunteering. I noticed that Westrock mission is to do well by doing good.
Scott Ford: Mm-Hmm.
Julian Klymochko: How was that a big driver of what you’re trying to accomplish?
Scott Ford: Yeah, well, you know, that’s really the core of why I started it, right. I mean, at the end of the day, as I’ve told people. My father grew up initially in Wooster, Arkansas, which is, you go to Conway and go up the road to green Bryan and turn left and go out to the cavern river bottoms. And that’s where he grew up. And he was born in 1937, the third child to his parents. And the first two didn’t survive the depression, right. Poverty is unbelievably hard on young children. And I frankly had not really thought a lot about, you know, bone breaking poverty growing up in America until I was back in Rwanda, and I realized, wow, these women are barely keeping their children alive. And there are two guys that are setting the price half what her crop is worth.
I don’t apologize for it. I was furious. And so, I started the coffee business out of anger, frankly, but as I was telling somebody that one time. he goes, eh, I think that’s [Inaudible 00:10:03]. And I said, I don’t even know what you’re talking about.
Julian Klymochko: [Laugh].
Scott Ford: He goes, [Inaudible 00:10:06] is when you’re angry and you should be versus just angry, because your feelings are hurt or whatever, you should have been angry. And that was something that you had a skill set and the capacity to do something about and good for you. That’s where the business started. So why did I start a coffee business in Rwanda? Because my families from Wooster and I understand what it means to be able to access all the benefits that free market capitalism allows, which is, it allows the poorest of the poor to change their stars. It’s the only system that does that, but you’ve got to nurture it. And when you see it impinged as a capitalist, you got to be willing to go in and break the impingement. And it just turned into a business. I just thought it’d be a project. It just turned into what I did with the back half of my life.
Julian Klymochko: [Laugh].
Michael Kesslering: And so, you partner with the small holder farmers, can you talk a little bit about what small holder farming is and then as well, how this practice of partnering with these smaller farmers differs from the rest of the coffee industry?
Scott Ford: Sure. Small holder farming is literally one or two acres. So, people have a home, they have a garden, they primarily take care of themselves through a barter system, much like my grandparents. So, you grow extra beans, extra melons, you swap, somebody has chickens, you swap eggs. Somebody tends bees, you swap honey. So, it’s a barter system, but then the cash income is from the hundred or two hundred trees that grow on the back acre or back half acre of the family plot. That’s what a small holder farmer is. Now you go to Brazil, and they have farms over there that are bigger than the farms in east Arkansas. I mean, they have huge farms, so you get all kinds of coffee farmers in the world. But the small holder farmers tend to be in the lesser developed economies in the Hillier, more rugged terrain.
And it happens to be, they can produce a highly premium quality crop, but it’s tough to, you know, get it in and out of a market and get access to the market. So that’s what small holder farmers are, what we did in terms of the agronomy training program here in the United States. There’s a county extension agent that’s connected to a land grant college that any farmer can call and say, I want to grow cotton or soybeans or corn. When should I plant it? What seed should I use? What fertilizer, what pesticides should I use or not use? None of that exists in the developing world. So, the private sector has to take that knowledge base with them into the small holder farmer community, and then work with them one on one. This is when you mulch, this is when to prune, this is the type of fertilizer and when you apply it.
These are the color cherries to pick, literally. Laminated cards, bring us these, don’t pick these, you know? And so, that kind of agronomy is the first stage. So first of all, how do you become a better farmer? Then how do you manage your money now that you’re a better farmer? And then how do you reinvest in your community so that your children have the benefit of the work you’ve done to help them transition out of borderline poverty, into a more sustainable income as they grow up with better access to resources? That’s the free market system. That’s how it works. But you’ve got to do it in the private sector because unfortunately, very few charities ever get that kind of work, right. They tend to get focused on other metrics and other messages, and they just don’t get down to the core of don’t you want to be a better farmer and make more money, don’t you? Because they’ll always say yes to that, even though they may say, what are you talking about though? A lot of the other ideas that get thrown at
Julian Klymochko: Seems like it’s a fairly easy answer. And the major thing I like about the Westrock story is that. This seemed to be a passion project that turned into a business and not just any business, but one with nearly 1 billion of annual revenue, not just that, but in a highly competitive, relatively mature market. I’m sure the coffee business is not an easy one to break into. So how did you guys accomplish that against what I would assume would be massive incumbents?
Scott Ford: Yeah. So, I think it’s really three things. I’ve never been asked that question, so I’m not sure I’ll get this answer perfect. But bear with me. I think it’s really three things. Number one, we put together a fantastic team. We have people that are unbelievably talented that have deep experience in multiple industries and anybody that runs a business or works for a business as you guys know, it’s all about the team. If you don’t get that part right, none of the rest of it worked. And I got a group of people who, although what we were trying to do was a little bit wonky and a lot of people said, we think you’re nuts. Why would you do that? Why don’t you go run blah, blah, blah on the west coast? You know, I got a group of people that were like-minded and deeply talented and wanted to see this be successful. So that was number one.
The second thing was. We got onto the coffee scene when new technology was actually reshaping market share for the first time in a long, long time. And that’s true around the digitally traceable platform we built so that you can scan a QR code and see whose coffees in your bag. What price we paid her, what date we bought her coffee, what quality she brought in, what quantity, in consumer can’t see it, but our retail and restaurant customers can. So, we used that technology and we offered to sell coffee with a different technological insight that had been offered before. Second thing is, we just got into business when Keri’s patents ran out just by pure happenstance luck, their single serve k-cup patents had just expired. And all the retailers were looking around for who can do this for us for less money than what they’re charging us.
And we said coffee, technology, we can figure that out. Surely, we can figure that out. We’ll do it for you. And so, there were kind of two technology ripples. The third thing is, we did it the old-fashioned way. We bought somebody a lot bigger than us [laugh] and when we got into the wireless business at Alltel, the first transaction we did of size was 360 Communications. And everybody forgets that at the time 360 was three times the size of Alltel Wireless when we bought it. So, I’ve never been afraid to buy a business a lot bigger than the one, because if you’ve got the right team and you’ve got technology as a tailwind helping you then size doesn’t need to back you off of your goals, it’s just something to be worked through. So, I don’t know, you might need to edit that. That was a long answer, but that’s best I can do.
Julian Klymochko: No. That that makes a lot of sense in one area that I wanted to expand on for explanation was M&A. So, you obviously have a significant amount of experience in mergers and acquisitions. How did that play out in the Westrock story thus far?
Scott Ford: Well, let’s see, we run eight mills around the world, and we’ve built three of them. Three or four, I guess we’ve built four of them and we bought four of them. And so, if you’re growing your business half organically and half through acquisition, that’s generally a balanced portfolio that you can continue to run at an industry beating EBITDA return on invested capital calculus, which is how I keep score. That’s maybe for the [Inaudible 00:18:38] nerds listen to your podcast. We can drop down into that another time. But that’s a pretty reasonable balance and you can do that for a long period of time normally, if you’re in a disaggregated business and the coffee industry globally is a very disaggregated business.
Julian Klymochko: Certainly, we are all nerds with respect to return on invested capital, no doubt. Now, speaking of recent M&A, you just announced a growing public transaction through a merger with SPAC Riverview Acquisition. Now, notably this comes with a 250 million pipe investment, 300 million credit facility. So, no doubt you’ll be cashed up, significant balance sheet assets. On the capital side after this deal closes. Now, what are some of the uses of proceeds on this deal and what are you looking to accomplish in terms of becoming a public company?
Scott Ford: Yes. Well, the reason that we wanted to become a public company and we can drill down on why we went the SPAC route if you’d like, but the reason we wanted to become a publicly traded company is, we wanted a currency to help fuel the acquisition machine if you will. And we wanted a clean balance sheet. So, we wanted to be a clean credit and have a liquid currency that would allow us, number one, that would allow investors that want to invest with us to ride along. And number two, that would give us a currency for making acquisition. The reason that we decided to go public and therefore need access to a clean balance sheet. And a liquid currency is because we have customers that are asking us to do two things that are frankly, beyond the capital structure capacity of the business we have today.
The first one is to go internationally with our large restaurant customers who are asking us to take the same coffee, tea, and extract based drinks globally that we provide to them here in the United States. And the second reason is to get into the canned and bottled, ready to drink business where cold brew coffees are growing. They’re the fastest part of the coffee, you know, industry globally, one of the fastest growing grocery products in the store and our customers are just out of room and need us to go, not only to make them an extract, but to actually go the next step, put it in a can or bottle, make that available to them. That’s the facility that we’re doing in Conway. So those are the two primary reasons that we went public and what we’re going to do with the proceed that we raise.
Michael Kesslering: So, you mentioned the cold brew area is growing the fastest in the coffee beverage industry. What are some of the other trends that you’re seeing in the coffee beverage industry that investors should be looking at?
Scott Ford: Well, I think the move to digital traceability is the quiet killer that is really driving. It’s not what people are talking about. Buyers aren’t talking about it publicly; their CEOs and their CFOs are not out talking about the fact that they have a digitally traceable commodity supply chain. It’s not so important if you buy corn and make corn flakes, because everybody can see where corn comes from and what the price is. But when you get into cocoa and coffee and cashew nuts and casava flour, and you get into these products that are grown by small holder farmers in the lesser developed economies of the world, being able to see who gets, what part of that value chain, how much the farmer gets. That’s becoming really, really important to executives who sell those products on to their customers because it’s becoming important to their customers.
And so, I think that’s kind of a major trend. We are far and away, the world’s leader on digitally traceable coffee. We hope to pull that advantage into other commodities and other types of beverages hopefully in the next couple of years. So, there’s that trend, the hot to cold Michael, the key thing there is, three years ago, 75, 80% of the people that would go to a store, a café, pick your brand. They would buy a hot based coffee and then, you know, maybe a snack or something else to go with it. Today 75 to 80% of the people that are going in to buy a cold based beverage. Well, if it happens in the cafe, it’s soon going to happen in the restaurant. And if it happens in the café and the restaurant, it’s soon going to hit the retail shelf and it’s going to hit the retail shelf with brands, and then it’s going to hit the retail shelf with private label brands, right.
That whole cascade that went through coffee and k-cup is about to roll through, ready to drink beverages. Between those two fundamental industry drivers is where we’ve positioned our business. And I think we can be the number one player, I’m going to say it, people go, I don’t know if you should say that. Well, I’m going to say it. I think we can be the number one player in the world in this category in the next five years if we get really aggressive and go really fast. And what I’ve spent the last year doing is getting a balance sheet together with the team that wants to go that aggressively and that fast.
Julian Klymochko: So, one theme that we’re dealing with right now, we just went past Father’s Day. Now a unique aspect of the Westrock stories. You co-founded the company with your dad. In addition, you took over for him at Alltel. I was wondering what’s that like, co-founding a company with your dad. You don’t see that all that often?
Scott Ford: No, I would say getting to work with Jack and Warren Stevens was a great set of life lessons, not only in business, but also in how to do life. And so, when I went and worked with my father, I had seen that done really well. And he and I worked seamlessly together from the first day I walked in at Alltel. Well, we worked together six or seven years before he retired. And then when we sold Alltel, he and I, and Rick Massey got together and started, you know, kind of a family office, if you will. And out of that, Rick decided to go run Cannae Holdings which is the largest SPAC sponsor, I think in the world. And Joe and I started the coffee and money management business. And two of my three sons worked with us as well. So, my oldest and youngest son worked with us in the same business as my father and frankly, professionally, it’s been the greatest joy of my professional life hands down. It’s not that it’s that easy for everybody all the time. It’s just that you can’t be dishonest about the fact that sometimes it’s hard and you just have to work through it because the fruit is very much worth the sweat equity you put into to getting it.
Julian Klymochko: That’s really great insight. Now, Scott, prior to letting you go. Fun question, what’s your favorite coffee? And do you have any recommendations for our audience?
Scott Ford: I have no recommendations.
Julian Klymochko: [Laugh].
Scott Ford: My personal favorite. I drink every morning. I drink the Rwandan select reserve and I drink it out of the k-cup. And I’ll go through about three to five of them before work.
Julian Klymochko: Oh, wow.
Julian Klymochko: And I go through about another five of them here at work. And I like the fact that it’s not a super dark roast, but it’s kind of a heavy, earthy blend. And most of the time when you see a really heavy earthy blend coffee, people roast it so dark that you have to put milk and sugar in it to be able to drink it.
Julian Klymochko: Hmm.
Scott Ford: And I like the Rwandan because we roast it kind of medium, but you still get this really super coffee velvety, you know, experience with it. That’s just great drinking, you know, black with no milk and sugar, which is how I drink it. So that’s my coffee commercial, but you know, I know enough. I see enough sales reports to know lots of people drink lots of different coffees in different ways and I’m for it all.
Julian Klymochko: Yeah, no doubt. Eight to ten cups a day. You’re certainly getting your fill of coffee. Now with respect to the going public transaction, Riverview Acquisition trades under the ticker symbol, RVAC. Once the deal completes. The ticker will be WEST, west. So, Scott, we wish you the best of luck. Thank you for coming on the show. And you know, I’ll have to step up my coffee drinking that’s for sure [laugh].
Scott Ford: [Laugh]. Well, we’ve all got a goal. Thanks very much for having me.
Julian Klymochko: Alright.
Scott Ford: Good luck to you guys.
Julian Klymochko: Take care.
Scott Ford: Thanks.
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