Thursday, May 11, 2023 3:46:49 PM
While Schwazze's calculation for Free Cash Flows is accurate (really unlevered free cash flows is specifically what they are calculating) and was stated at $2.7MM for the quarter, there are better versions of that calculation which provide a clearer picture of the cash flow generating power of the company:
Let's examine two of the fixes:
1. Working Capital
Their method does not backout the changes in working capital and, in this case, over penalizes the free cash flow figures by treating the buildup of inventories, prepaids, and accounts payable as recurring cash flow items. Q1'23 is the period of the year where Schwazze builds up inventory for Q2 and Q3. For understanding the standalone business, one would argue that these should be backed out and treat inventory as stabilized so as to not create noise around the cash flows.
2. CapEx
Schwazze deducts for all of CapEx (i.e., Purchases of Fixed Assets) vs. just the Maintenance Capex. Since a majority of the "Purchase of Fixed Assets" is associated with Acquisitions and Buildouts and new developments this grossly overestimates the Maintenance CapEx needed on a recurring basis.
When you adjust for both of these items you will see that Schwazze generated well over $10MM in true Unlevered Free Cash Flow this quarter (in what is generally considered the weakest quarter of the year).
As we enter into Q3, the working capital situation will reverse as inventory and prepaid asset levels will come down and this will free up cash to be used in more acquisitions in Q4.
Overall, I expect true unlevered free cash flow levels (adjusting for and stripping out changes in working capital and only deducting maintenance CapEx) for the year to exceed $45MM, with Levered Free Cash Flows (after deducting for the cash portion of interest expense) to come in around $20MM.
This leads to a double-digit free cash flow yield (regardless of whether you calculate it on a levered or unlevered basis with the convertible debt).
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