Q3 2019 Earnings Call
Good morning, and welcome to set up this third quarter fiscal 2019 earnings conference call.
By now everyone should have access to the earnings press release that was issued this morning and is available on the Investor Relations page on synopsis website at Www Dot set off the dot com.
This call is being webcast and its transcription will also be available on the company's website.
As a reminder, please note that the prepared remarks, which will follow contain forward looking statements and management may make additional forward looking statements in response to your questions.
These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.
We were afraid walrus factors contained it's an off this press release issued this morning. The company's annual report filed on Form 10-K , and other filings with the Securities and Exchange Commission for more detailed discussion of the factors that could cause actual results to differ materially from those projections and any forward looking statements.
The company undertakes no obligation to publicly correct or update the forward looking statements made during the presentation to reflect future events or circumstances, except as may be required under applicable securities laws.
Finally, we would like to remind listeners that the company may refer to certain non-GAAP financial measures. During this teleconference.
Reconciliation of these non-GAAP financial measures was included with the company's press release issued earlier today.
Also please note that unless otherwise stated all figures discussed today are in U.S. dollars an hour occasionally rounded to the nearest million.
And now I'd like to turn the conference call over just enough to CEO , Joe and.
Good morning, and thank you for joining us today.
I'm pleased to start by saying, we had a productive third quarter was strong revenue growth and adjusted EBITDA of $9.9 million.
I will take you through our third quarter performance and brief you on some organizational uptick.
For the third quarter of 29 team, we generated $296 million of revenue, which on an adjusted basis represented a 6.6% year over year growth rate.
The growth was driven by our global ingredients and consumer products segments and was led by particularly strong performance in healthy beverages.
During the third quarter, we generated exceptionally strong revenue growth and margin expansion in our healthy beverage platform, specifically the healthy beverage platform generated an impressive adjusted revenue growth of 31% during the quarter driven by growth across every beverage category addition.
Only our margin performance exceeded our internal expectation and is within the range up our previously communicated long term target.
This is encouraging in a quarter, where we just brought on a significant increase in capacity.
Our plant based beverage and ingredients business is seeing strong demand across all channels and product category.
Following our recent capital investment we are in an improved position in both capacity and capabilities. The added capacity, including two new fillers in Allentown has allowed us to get an early start to the bras season. This year driving both increased revenue and margin.
Further the growing demand for plant based beverages, particularly in the promising Oh category continues to drive return on our investment.
Finally in contrast to last year, when executional issues and capacity limitations weighed on our fourth quarter result, we're looking forward to a well plan and well executed 2019 Q4.
To sum up we expect the momentum in this business to continue.
The healthy snacks platform posted revenue decline of 23% on a year over year basis. This was anticipated as our second quarter grew 21% benefiting from a customer moving orders into the second quarter from the third quarter.
On a year to date basis revenue from the healthy snack business is in line with the prior year sale with higher gross margin.
As we discussed on our last call, we continue to see opportunities for more everyday healthy snack items in private label, which should ultimately reduce quarter to quarter volatility. Additionally, there are some exciting innovation projects in development that will help us better utilize our plans.
Moving onto a healthy fruit I'm excited to announce that we've enhanced our senior leadership team with the promotion a barn trying to general manager of our healthy free platform. In addition to bar and we have also upgraded talent in key free support function.
These changes are an important step towards continuing improvement of the performance of that business.
Bar and was most recently a vice president within Trodden Organics organization, where he was responsible for our U.S. fruits sourcing and trading operation.
So he brings a wealth of knowledge to the roll around fruit agricultural practices fruit sourcing and the global fruit market.
His experience will be especially valuable as we activate one of the eighth business driver outlined in Q2, which is to seek to further diversify our for outsourcing.
Barack has a proven track record of driving growth and fostering a true culture of entrepreneurial ism and innovation and we're pleased to have him lead to healthy fruit business.
Revenue in the healthy fruit platform declined 2.4% on an adjusted basis, reflecting a decline in volume volume, partially offset by improvement in revenue per pound.
As we have discussed in detail on several calls the Mexico in California, Strawberry freezer harvests have significantly impacted the business in the short term.
The impacted both volume and margin were consistent with our expectations, resulting in a negative gross margin of approximately 5% in the third quarter.
As previously discussed we had been working with our retail customers to remedy are overly aggressive pricing actions from 2018.
These efforts have largely been successful and we have made meaningful progress.
As a result of this and other actions taken under our fruit margin optimization plan. We believe the third quarter will represent the low point for frozen fruit margins and we anticipate sequential improvement in the fourth quarter and into 2020.
Moving to global ingredients.
Sales on an adjusted basis increased 0.3%, excluding commodity and currency changes the sale of soy and corn business and the acquisition of Sandler.
The growth was driven by strong performance inorganic cocoa sugars and grains. However, these increases were partially offset by lower volumes of organic fruits and vegetables, as well as cocoa excuse me as well as coffee enough.
The recent acquisition of Sanmark continues to perform well and meet expectations.
Encouragingly, we began initial commercial production of organic avocado oil in Ethiopia on schedule during the third quarter.
Domestically revenue in the sunflower and roasted ingredients business declined 5.3 on adjusted basis, primarily reflecting lower demand for in shell and colonel sunflower products, partially offset by higher roasted snack volumes.
As I discussed last quarter, we have developed our strategic priorities and are focused on eight key strategies, let me recap those for you.
Number one double our plant based beverage business to roughly 500 million in revenue within five years be a rapid expansion of our manufacturing packaging and go to market capabilities.
Never to deliver the fruit optimization margin optimization plan by the ended 2020 through automation diversification and rational pricing.
Three create and bring to market margin accretive innovation in both our fruit and plant based beverage businesses.
Before I tried inorganic continue to identify and develop new sources of organic ingredients.
To maintain our position as a leader in sourcing on trend ingredients and to drive sustained high single digit topline growth over the next five years.
Five further invest in manufacturing as a mechanism to add value to try and organics overall value proposition and support attainment of an overall, 14% gross margin profile in that business.
Six quickly identify and leverage both sales and margins synergies by viewing our fruit business as one synergistic operation as opposed to operating global fruit sourcing fruit snacks fruit juice frozen fruit and fruit prep as five independent businesses.
Seven further diversify our fruit sourcing by expanding our operations in Mexico, while simultaneously strengthening our California grower relation and expanding our global reach to de risk the impact whether can have on fruit supply.
And finally, streamline the organization for faster decision, making clear accountability and more empowerment.
I'm pleased with the progress you've made against all of these strategic initiatives today, Let me provide a few highlights of what we've accomplished during the quarter during the third quarter as I mentioned, we generated 31% revenue growth across all categories and our beverage business as we successfully commercialized our capacity expansion in Allentown.
Ahead of schedule early in the quarter.
We also began the expansion of our extraction capacity, which will expand our beverage ingredient capabilities to capitalize on the strong demand, particularly in based beverages.
We continue to have a robust pipeline of opportunities and broth and plant based products.
As it relates to innovation, we are driving strong growth from based beverages, reflecting our strong technical R&D competency and our efforts to co create innovation with our customers.
We are benefiting from our early leadership in the category as queues Q3 saw the commercialization of nearly a dozen new products co developed with our customers.
We are also ramping up our innovation efforts in healthy fruit with new fruit land smoothie kits and new customers.
As it relates to the diversity application of fruit sourcing.
We have enhanced the leadership team and our leveraging our global sourcing capability to source incremental fruit.
This quarter, we secured additional fruit from counter seasonal sources in South America to help partially offset the supply limitations in Mexico in California.
I have also personally had multiple top to top meeting with large growers, who represent over half of our volume.
In addition, as you saw within I'll send a bar and we are beginning to leverage our global through competencies.
The last strategic priority to touch on relate to our efforts to streamline enhance organizational effectiveness.
During the quarter, we executed a rightsizing of the organization, which will reduce complexity and create a more nimble operating structure that put key decision makers closer to the customer by being faster to respond to customer needs and consumer trends, we will strengthen our competitive positioning in healthy food and beverage category.
Yeah.
This initiative resulted in a head count reduction of the top and middle management levels within our consumer products segment and corporate function.
Besides optimizing our organizational effectiveness. This restructuring provides the additional benefit of reducing overall SDMA by $8 million to $10 million on an annualized basis once fully implemented by the end of Q by the end of Q4 in summary, we are executing on the key initiatives we laid out.
On or ahead of schedule.
Our focus on plant based beverages is delivering significant margin accretive growth our products and capabilities remain aligned with on trend category and we have the organization to deliver on our opportunities and drive improved profitability.
As we enter the fourth quarter, we anticipate a sequential and year over year improvement in adjusted EBITDA.
We remain well positioned to drive growth across our business, while improving the profit profile of our healthy fruit platform.
We still have work to do on fruit and we need to work through the higher cost and limited supply of last year's harvest, but we're positioned to execute our fruit margin optimization initiatives.
Before we go through the financials in more detail, let me introduce you to stop Scott Hakan, who joined US early in September as our new Chief Financial Officer, Scott as a result or oriented financial executive with 30 years of financial management and capital markets experience.
He has a proven track record of leading significant business improvement by attacking cost streamlining processes and improving underlying business structures.
So has extensive experience in strategic planning workers, working capital management and risk management together with a deep understanding of baking relationships and treasury.
Scott Most recently served as executive Vice President and CFO Claire stores, a $1.3 billion global retail.
I look forward to working with Scott as we continue to unlock the potential of our on trend category, while relentlessly driving margin enhancement and consistent operational excellence.
Got it is off to a fast are now let me turn the call over to Scott to discuss the financials in more detail Scott.
Thank you very much and good morning, everyone I.
Im excited to join this talented team and look forward to meeting and speaking with all of you in the future.
Let me begin with some initial impressions for my first two months here, it's an option.
First I joined the company because I saw opportunity both on the attractive positioning in on trend product categories in the transformation the company is undertaking.
Having now been able to evaluate the business from the inside out. It is very apparent to me that there are incremental opportunities to drive profitability improvement.
Hanson and streamline processes across the organization.
This should not only enhance margin, but also accelerate growth.
I look forward to working with the entire team to create stronger and more efficient organization.
Let me walk through more detailing gross profit in the rest of the income statement given Joe's discussion on the commercial activities and revenue during the quarter.
I'll also cover our balance sheet in cash flow results.
Gross profit was 26.3 million for the third quarter of 2019, a decrease of 7.8 million compared to 34.1 million during the third quarter of 2018.
Consumer products accounted for 3.4, Atlanta, the decrease mainly reflecting the impact of the weather related strawberry shortfall in healthy fruit.
Our financial results in healthy fruit Red line with our previous communication, which was a total impact to margins of 20 to 30 million for fiscal 2019 and 2020.
Based on Threeq you performance, we would expect to be in the center of that range and we have absorbs slightly more than half of the impact to date with sequential decrease is expected in each of the next three quarters.
The decline in healthy fruit was partially offset by increased gross profit in the healthy beverage platform due to the strong sales growth and associated increases in production volumes as well is productivity driven savings.
As Joe noted, we're achieving our long term gross margin targets in the healthy beverage platform. Despite the startup of significant capacity this quarter.
Global ingredients accounted for 4.4 million at the decrease in gross profit.
Excluding the impact of the sale of the soy and corn business gross profit and global ingredients decreased by 3.1 million.
This was primarily due to a 2.3 million reduction in commodity hedging gains as well as the increased cost of production.
Following the expansion of our organic cocoa facility late last year.
As a percentage of revenues third quarter gross margin was 8.9% compared to 11.1% last year.
Excluding equipment startups, and new product commercialization costs of 1.9 million in the third quarter of 2018.
Gross profit percentage would've been approximately 12.4% last year.
On a consolidated basis operating loss was 3.5 million worth 1.2% of revenues in the third quarter compared to operating income of 4.5 million or 1.5% of revenues last year.
The decrease in operating income year over year reflects a $7.8 million reduction in gross profit and 8.5 million increase in consolidated SGN expenses.
The increase in us gionee reflected higher overall employee compensation costs.
Offset by yesterday reductions related to the sale of the soy and corn business in rationalized overhead.
Excluding the results of disposed businesses.
Structural SGN a costs and the other items affecting gross profit that I just mentioned.
Operating loss would have been 1.9 million in the third quarter of 2019, compared with operating income of 6.2 million in the third quarter of 2018.
Loss attributable to common shareholders for the third quarter was 13.8 million or 16 cents per share.
Compared to a loss of 6.6 million were eight cents per share during the third quarter of 2018.
On an adjusted basis net loss was 9.9 million or 11 cents per share compared to 3.8 million or four cents per share in the third quarter of 2018.
For the third quarter of 2019, adjusted EBITDA, excluding disposed operations was 9.9 million compared to 16.3 million in the prior year.
Looking ahead, we continue to expect some top line and margin pressure and healthy fruit as we sell through the 2019 crop that carries the burden of the weather related costs.
However, we expect the full effect of our pricing efforts to take hold over the course of the fourth quarter.
This will enable the fruit platform to generate low single digit margins before the full impact of our fruit margin optimization plan is in place by the end of 2020.
I'd like to remind listeners that adjusted EBITDA and adjusted earnings our non-GAAP measures and a reconciliation of these measures to GAAP can be found towards the back to the press release issued earlier this morning.
Now, let me turn to cash flow and balance sheet activities.
Total debt as of Q3 was 514.9 million compared to 509.2 million at year end 2018, as a result of the seasonal increase related to working capital in the future fruit operation.
Partially offset by the sale of the soy and corn business.
Total debt as of Q3 reflects 218 million net of issuance costs of the 9.5% senior secured second lien notes due in 2020 too.
$268.2 million drawn on our first lien global asset based credit facility with a balance representing smaller credit facilities lease and other financing arrangements.
The global asset base credit facility is a syndicated credit agreement maturing in February of 2021, with an aggregate commitment of up to 360 million.
We recently engaged the agent bank of our global asset based credit facility to seek an extension a refinancing of the agreements.
I'm pleased with the support in Receptiveness of our partners in our productive discussions to date.
From a cash flow perspective during the third quarter cash generated from operating activities was 4.3 million compared to cash generated of 10.5 million during the third quarter of 2018.
The $6.2 million decrease in cash generated from operating activities, primarily reflects lower profitability in the company's healthy fruit platform.
Cash used in investing activities was 7.6 million in the third quarter of 2019.
Compared with 6 million in the prior year, yet increase in cash used at 1.6 million due primarily to proceeds of 1.7 million received in the third quarter of 2018 related to the sales of businesses and assets.
I'd like to remind listeners that in the fourth quarter, we typically see meaningful cash released from the seasonal sell through of inventory.
With that I'd ask the operator, please open up the call to your questions.
Ladies and gentlemen to ask a question. Please press Star then one on your telephone keypad.
To withdraw your question press the pound key.
Please standby only compiled acuity roster.
Our first question comes from a bit Sharma with BMO capital. Your line is now open.
Hi, good morning, everyone.
Good morning, good morning.
Just a quick one on the on the on the.
Global asset buying asset base up somebody as you are talking to the bankers.
Any early sense for how much incremental it may cost the company to a new at this facility.
No not a lot there and I think at the moment, we're really focused on drawing closure to whether it's a an extension or refinance and those efforts are underway, but at the moment I am not seen any material headwind on that.
So as we model for next year at any it after we shouldn't really look for interest expense to be a big hurdle.
Any perspective.
I wouldn't expect that to be immaterial address got it. Thank you.
And then Joe.
Really encouraging performance on the beverage side.
But I just want to make sure that be understand.
The the ramp up as we go into the fourth quarter add 2020 can you talk about like last year fourth quarter 18.
How big of a impact did we see on both margins and topline from a poor execution around abroad.
Some of that men for you look at Fourq you. This theater most of that will be gone.
I'm just I understand your your question so you're asking.
How significant is the overlap between Q4 upcoming Q4 in Q4 last year, yes exactly.
Yeah I mean.
We're obviously in a much much better position you saw the results in Q3 of.
The beverage business Q4 is is obviously, a very seasonally strong broad segment.
It's worth noting that more than half the growth in the beverage business in the third quarter came from plant based beverages not from brought the while it might be easy to oriented around Q3, Q4 performance being driven exclusively by brought.
The majority of the growth that we saw in the third quarter was from plant based beverages, which obviously have less seasonality.
Then brought so we're going into the fourth quarter. I mean, we would expect expect a significant improved overlap versus Q4 of last year on the on the beverage business.
And just to confirm the additional bras business that you are running.
And additional planned base as well the margin profile I love These new business wins as at least as good as it be had historically in the beverage business if not better.
Correct.
There's not a.
Theres not a material difference between the margin profile of our brought business than the margin profile of our plant based beverages.
And obviously you benefit from better utilization of your asset because as you continue to grow up volumes here absolutely.
All right and on food Joe.
Gave you an encouraging to hear you.
From that Threeq, you, it's probably the trough.
In terms of margins.
Can you just help us understand a little bit better like what gives you.
The confidence and the visibility that this is as bad as it gets from margin perspective for this business.
A couple things number one is the third quarter, we had some pretty significant costs related to re working.
Inventory previous inventory.
Those costs will not materially impact us in the fourth quarter as well as the pricing that we've talked about extensively sense.
Really the my first call.
Where we're seeking to remedy some over a fairly aggressive pricing positions from 2018, and the majority of that pricing gain will be fully realized by the fourth quarter.
The last one from me.
This eight to 10 million dollar unrated saving from much DNA.
Scott how should we think about bad like a fuel if at least I live in my model I have totaled $115 million Sylvester DNA in my model for 2019, and should I take $8 million to $10 million not a bad bucket as we think about the flow through of the savings for next year. Okay. So.
The the way to think about is the cost savings are on an on an as realized real time basis. So obviously, there there could be inflationary costs that exists in the business. As an example, many if not most companies will provide some level of merit increases and the like and.
Those of you who spent time out in the West you look at labor costs, and California markets and the like it would be would be some offsets to that.
Okay, but but do you would expect due to some sort of pricing to offset day, net and inflation and your cost bucket right over time, I mean, I think I think the point Im trying to drive that is that there'll be some absorption of inflationary pressures against that eight to 10, but thats the action we've taken today.
Got it thanks, so much.
Thanks.
Our next question comes from Jon Andersen with William Blair. Your line is now open.
Hi, good morning to Clay Williams on for John Anderson.
And I guess first question would be I guess, I guess, the priorities going into a 2020.
As a.
Yeah, I mean key priorities execute our fruit optimization plan continue to drive growth in the in the beverage business.
You know with very aggressive posture around driving innovation, winning new business and expanding our capabilities and capacity.
Through.
Capital investments, which we previously discussed and then on the trod inorganic side continue to leverage our global network to source.
Additional organic supplies in key emerging commodity as well as leverage our manufacturing footprint that we've established around the world to add value to the ingredients that we're sourcing.
All right and I guess, secondly, I was I guess, we've talked a little bit about the a global credit facility doing a 2021 I guess is there any initial plans the regarding the I guess the bonds due 2022.
The way I think about it is job one is to extend the maturity of the NPL I think John to from purely a financing standpoint is it can you continue to drive and improve the performance specifically the EBITDA performance of the company, which obviously facilitates down the road a refinancing of the two walnuts.
Thank you and lastly from me is that I guess as we think about EBITDA in the fourth quarter, I guess, we mentioned to improve sequentially and year over year improvements.
I guess kind of breaking that down I guess the reasons.
We are thinking, though full I guess, the quarterly run rate for the corporate cost savings as well as though.
I guess, the reduced frozen fruit drag I.
I guess as we think about.
I know that the incremental beverage business you have installed capacity I think about 70 to 70 million in September , but we have the full run rate of bed in the fourth quarter.
Well I guess, maybe try to take it in steps. So I think your premise is generally right we have lift from the fruit business.
We'd have some level of those SJ savings again, I think as we've described earlier those are implemented across the fourth quarter.
There'd be improvement.
In the beverage business as Joe was talking about but there's also seasonal activities.
Some some of the businesses aren't sequentially as topline rich in the fourth quarter as they are in the third quarter. So like always it's a series of puts and takes.
Alright, Thank you I'll pass it off.
As a reminder, ladies and gentlemen that is star then one if you'd like to ask a question at this time.
Our next question comes from Chris Krueger with Lake Street Capital Markets. Your line is now open.
Hi, good morning.
Morning.
First question is on a healthy beverages, you indicated a strong margin improvement as you.
Fill up new orders and got the capacity of up to speed did that margin improvement get better and better as a quarter moved on.
Yes.
Yes, it did.
Okay and can you repeat again I think about us on other calls but.
What are your margin goals for each of the two segments longer term goals.
Between.
You're talking.
Well, what radiance and then consumer products.
So on global ingredients, we've indicated up 14% as our long term goal and on CPG. Our goal is.
Kind of 19% to 20%.
Okay.
And then just last question.
I know you guys is sold some businesses and and done a lot of worked last few years, but are there more assets. So you could potentially monetize.
You know as Weve.
We're not and we're not about to announce a a sale on this call, but as we've indicated previously we have an active a strategic review committee on the board and our active that in looking at.
What is the optimal portfolio and you know do we feel like the long term the asset that we have are going to provide long term shareholder value and returns.
All right that's only have thank you.
We have a follow up question from the lineup I met Sharma with BMO capital. Your line is now open.
Hi, Thank you so my for taking the follow up.
Just a question for you.
You know given your deal.
Deep experience on working capital and balance sheet.
It should we be thinking about free cash flow little bit more for first an opt out so long it's being focused on the EBITDA line.
As you look at the working capital lines, especially you see any opportunities for you too, but it had been more productive there and.
Just a word on capex should be expected to say into 25 to 30 million range.
Thanks for the question. So I think there's always a scrutiny on working capital and balance sheet efficiency, it's something that.
Focused on.
So at the same time, obviously trying to grow the business as well so.
You got to remember if we have.
We're reaching that growth initiatives that Joe just described to you put in to take you have an opportunity maybe squeeze some working capital out of the business, but at the same time, we have to be prepared to invest in working capital to grow the topline.
Centered on the beverage business climate growing 31% last quarter, there's obviously, some working capital consumption on that.
Your next question was around Capex, I think something in that $25 million to $30 million range.
On a longer term outlook basis makes sense to me recognizing that we obviously have the opportunity to finance some of that capex as well.
Got it and Joe one for you.
Obviously, a very large strategic holder for you in the older list.
What what's the interaction between between the border between you and them is that still a healthy relationship the fully onboard but on the changes or do you putting in place.
Oh, absolutely, it's a very productive relationship they're incredibly supportive of of all of our activities.
Both at a strategy level as well as an execution level and AR.
An absolute asset to the business and a great great partner.
Got it thank you so much.
Im showing no further questions in queue at this time I'd like to turn the call back to Mr. and then for closing remarks.
Okay. Thank you operator, and thank you all for participating in our third quarter conference call I look forward to speaking to you in the future and appreciate your interest and support and Sunopta have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.