Q4 2019 Earnings Call
Ladies and gentlemen, your conference is scheduled to begin shortly please continue standby. Thank you for your patience.
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Good morning, and welcome to fend off this fourth 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 Phenoptics website at Www Dot spinoff 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 question.
These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.
We refer you to all risk factors contained in set 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 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, what's included but the company's press release issued earlier today.
Also please note that unless otherwise stated all figures discussed today or in U.S. dollars enter occasionally rounded to the nearest million.
And now I'd like to turn the conference call over to send out the CEO Joanna.
Good morning, and thanks for joining us today with me on the call. It's got Hawkins, our Chief Financial Officer.
We're pleased with how we closed out 29 team as our fourth quarter results demonstrated strong progress in our efforts to turn around the business.
Adjusted for disposed operation in Q4, we doubled our adjusted EBITDA on a year over year basis, delivering 16.4 million against last year's 8.2 million and generated strong sequential growth from 9.9 million it in the third quarter.
Adjusted revenue was up slightly and gross profit increased by over 50% versus the prior year.
Gross profit improvement along with savings from the previously announced corporate reorganization powered our improvement in either.
These results drove a 24.1 million dollar sequential reduction and told me that aided our successful effort to extend the maturity of our $360 million Amy.
The March up 2022.
Our EBITDA growth was driven by outstanding performance in our plant based food and beverage business unit, along with delivering what we said we would deliver in the frozen free platform.
Well the results in global ingredients were pressured by several non systemic external and internal factors. We feel these pressures are largely behind us and we expect solid improvement in 2020.
Total company gross profit was up over 50% year over year, driven by plant based foods and beverages and fruit.
As I noted we delivered on our fruit expectations this quarter returning to slightly positive gross margin.
Well, we are pleased with our progress, we're certainly not yet satisfied and see considerable opportunity to further improve.
Corporate reorganization announced in Q3 is on track to reduce SGN, a bike eight to 10 million on an annualized basis.
Besides providing cost savings the reorg has provided real value by improving the organization speed and effectiveness driving a culture of entrepreneur realism and enhancing accountability.
Scott will provide more detail later, but as we stated on the Q3 call there'll be some offsets to these savings such as incentive compensation cost inflation in certain categories.
We have realigned our financial reporting structure can be consistent with how we view the business and as such we will discuss the business performance in our three core business unit plant based foods and beverages.
Based foods and beverages and global ingredients as we step through each segment, we will outline the composition of each one.
Please also note that we have posted Recasted quarterly historical financial result.
Under our new segments as an appendix to our investor deck available on our website now.
Now let me walk you during each segment.
Our plant based food and beverage segment is composed of all of our plant based beverages, such as Soi and Oh, plus our brought business extraction, where we convert plan into the concentrated base for making food and beverages and our Sunpower business is also included in this segment.
During the fourth quarter, our crown jewel the plant based food and beverage business unit delivered 25% revenue growth more than doubled gross profit year over year and improved gross profit margins by 770 basis points.
It ended 2019 as the most profitable segment of the business and as you can see in our new segment reporting grew gross profit in the fourth quarter by 10.5 million versus 2018.
We're pleased to share that our renewed innovation focus has resulted in 65% of Q4 growth coming from new items or new customers.
Additionally, unlike last year, our holiday execution supporting the brought business was outstanding with a case fill rate over 98.5%.
Our ability to maintain exceptional customer service, while executing capital expansion projects and delivering mid teens revenue growth for the full year is a testament to our differentiated capabilities in this space.
Stepping back and looking at the market today plant based beverages are approximately 15% of total melt beverages.
And the continued migration towards plant based beverages is creating structural changes in the melt beverage landscape that we expect to continue for decades.
We also believe the same consumer dynamics that are transforming the dairy milk category will occur in other dairy categories.
Already we have seen players like the leading Greek yogurt brand announced the launch a plant based yogurt.
Plant based beverages, and we're also seeing new entrance into plant based ice creams.
While plant based burgers have captured the imagination of Wall Street, and the media I will point out that plant based beverages, where the pioneer in the plant based movement and have a modest 25 year head start.
The total plant based beverage category is growing at approximately 11% per year with white hot segments like oak beverages that are seeing explosive growth in the hundreds of percent.
The plant based beverage category growth is being fueled by five underlying consumer drivers that represents a generational shift in preferences and purchase drivers. The five drivers a plant based beverages, our number one the consumers belief in the health benefits of plant based beverages second dairy allergy.
He is insensitivities, which affect 30% of U.S. consumers, but which tend to convert an entire household to plant based beverages.
In fact, 65% of the World population is lactose intolerant.
Third genuine concerned about animal welfare, holistically and specifically the treatment of livestock supporting the dairy industry.
For consumer taste preferences for plant based which once and grain are not likely to change and we'll pass through the generation.
And fifth and certainly not last.
Is that from a sustainability standpoint plant based beverages are dramatically better for our planet.
As the world looks for seismic solutions individuals are looking for everyday ways to contribute to the health of our planet and this isn't easy switch.
So not to build to win in this important category. There is the supply demand imbalance in the category and the barriers to entry relative to other food categories are quite high.
Beyond the Capex requirements, the real obstacle to profitable growth lies and having the knowledge and expertise to know how to run the sophisticated plans.
We feel we have the asset expertise and the team to continue to be a low cost high quality reliable partner to some of America's leading national brands answer retailers.
Land based beverages has and will continue to be a key focus of the company, which is evident in the significant capital investment announced in the second quarter that is underway to expand our extraction capabilities.
In addition to this project we're pleased to announce that our board has approved two additional expansion projects to increase capacity and capabilities across our national footprint.
We expect all three of these projects to come online in late Q4, 2020, and we feel our current customer pipeline will allow for solid utilization out of the gates as we look to drive growth in 2021 and 2022.
Turning to fruit, our fruit based food and beverage segment is comprised of frozen fruit fruit ingredients and fruit snacks.
The fruit based business unit posted an 11.7% decline in fourth quarter revenues on a year over year basis, primarily as a result of lower revenue from one large foodservice customer as well as the reduction in noncore portions of the business.
Excluding these activities revenue was essentially flat on a year over year basis.
During the fourth quarter. The volume decline was partially offset by increases in price as well as strong performance upfront snacks.
Our plan to improve margins in frozen fruit is progressing and results are tracking in line with the expectations, we outlined over the last couple of quarters.
We delivered our anticipated slightly positive gross profit margin in the fourth quarter and continue to execute on our efforts to improve pricing and reduce costs.
As we progressed into 2020, although early at this point, we are seeing decent weather and increased acreage in California, which we expect to translate into a more normal crop season.
Currently in Mexico, we're seeing an improved fruit harvest versus 2019, although fruit pricing remained higher than we would like.
In summary, our new team our extensive pre work and our enhanced automation have a stage to deliver a decent year.
Lastly, let me cover our global ingredients segment, which is comprised of trodden organic ingredients business, along with our premium juice offering.
Global ingredients saw some headwinds in the fourth quarter, which caused a 5.7% decline in revenue on an adjusted basis, which removes the impact of the disposed corn and soy business FX and commodity price movements.
The decline in revenue was driven mainly by two factors first is technical production challenges with commissioning the new processing line at our cocoa manufacturing facility in Holland, and second is competitive pressures in fruits and vegetables in the North American market.
As we look at the first half of Q1, we can share that we've made good progress in improving output in our cocoa plant and fruits and vegetables, we have had a good start the year, while awaiting the new crop season.
The growth margin profile improved versus last year, delivering a 10.2% gross margin rate compared with 9.5% year ago.
In 2020, we will focus on improving the margin and the return on capital profile of the global ingredients segment by reducing exposure to lower margin businesses and reinvesting into higher margin businesses.
While this will likely leave the topline relatively flat we expect these actions to result in improved profitability.
In conclusion, I am pleased with our progress during the fourth quarter and delivering 16.4 million of adjusted EBITDA, a doubling from the prior year are focused on plant based beverages and delivering significant margin accretive growth and we are executing on the key initiative, we laid out to our investors and our partners.
We remain well positioned in on trend categories and have the organization to deliver on our opportunities and drive improved profitability and now I'll turn the call over to Scott to take us through the rest of the financials Scott.
Thank you very much show and good morning, everyone. It's a pleasure to speak with you today.
Let me walk through gross profit in the rest of the income statement given chose discussion of the commercial activities had revenue during the quarter I will also cover our balance sheet and cash flow results.
Gross profit was 33.4 million for the fourth quarter of 2019, it increase of 12.1 million or 57% compared to 21.3 million during the fourth quarter of 2018.
The plant they segment accounted for 10.5 million of the increase in gross profit, mainly reflecting revenue growth.
Plan to productivity efforts in higher capacity utilization.
Gross profit also benefited from improved results in the fruit based segment.
The negative impact to gross profit from the weather related shortfall in the fruit based business was in line with our previous communication for the fourth quarter.
We recognized a 4.4 million impact during the fourth quarter, and now anticipate $20 million to $23 million of total impact slightly below the midpoint of the 20 to 30 million range previously communicated.
To date, we've incurred 17.7 million of costs and anticipate approximately four to 5 million in the first half of 2020.
The majority of this impact will fall in Q1 is we sell through fruit that was more costly to produce in 2019.
The gross profit growth in the plant in fruit based segments. During the fourth quarter of 2019 was partially offset by decreased gross profit within the global ingredients segment of 2.5 million of which 1.6 million was related to the corn and soy business sold in early 2019.
The remaining point 9 million was primarily driven by the revenue headwinds Joe touched on in his comments.
As a percentage of revenues fourth quarter gross margin was 11.3% compared to 6.6% last year, a 470 basis point increase.
The largest contributor to this margin expansion was the plant based segment, which saw a 770 basis points of margin growth to 18.7%.
Operating income was 3 million or 1% of revenues in the fourth quarter compared to operating loss of $6.9 million or negative 2.2% of revenues last year.
The increase in operating income year over year reflects the 12.1 million growth in gross profit, partially offset by increases in consolidated SGN a expenses in foreign exchange losses.
The increase in SGN, a reflected higher overall employee compensation related costs, which included $2.3 million of increased incentive compensation in point 8 million of non structural costs.
These costs mast $2 million to $3 million divesting a savings realized during the quarter.
Excluding the non structural costs and other items affecting gross profit that I. Just mentioned operating income would have been 4.1 million in the fourth quarter of 2018 compared with operating loss of point 9 billion in the fourth quarter of 2018.
Loss attributable to common shareholders for the fourth quarter was $7.6 million or nine cents per common share compared to a net loss of 99 million or $1.13 cents per common share during the fourth quarter of 2018.
On an adjusted basis net loss, excluding disposed operations was 5.6 million or six cents per common share compared to 9.8 million or 11 cents per common share in the fourth quarter of 2018.
As Joe mentioned earlier for the fourth quarter of 2019, adjusted EBITDA, Excluding disposed operations was 16.4 million compared to 8.2 million in the prior year.
I'd like to remind listeners that adjusted EBITDA and adjusted earnings are non-GAAP measures and a reconciliation of these measures to GAAP can be found toward the back of the press release issued earlier this morning.
Turning to cash flow in the balance sheet.
At the end of the fourth quarter total debt was 490.7 million in 2019 compared to 509.2 million in 2018.
Total debt reflects 218.4 million net of issuance costs of our senior secured second lien notes due in 2022.
241.7 million drawn on our first lien global asset based credit facility with the balance representing smaller credit facilities lease and other financing arrangements.
We reduced bank indebtedness sequentially by 25 million in the fourth quarter reflected improved operating results and working capital management.
From a cash flow perspective during the fourth quarter cash generated from operating activities was 36.2 million compared to cash generated 5.1 million during the fourth quarter of 2018.
The 31.1 million increase and cash provided by operating activities, primarily reflects improved operating performance of 11.5 million along with more efficient working capital management of $19.6 million.
Cash used that investing activities was $9.2 million in the fourth quarter of 2019, compared with 6.7 million in the fourth quarter of 2018 net increase in cash used of 2.5 million primarily related to the expansion of our extraction capabilities that are currently underway as well as investment.
It's in new automation for our frozen fruit facilities.
Before we begin Q in a I am sure there are questions around our exposure to the impacts from the Corona virus. We all know this is an evolving situation. So what I can offer you is merely a point in time assessment.
Based on what we know today with the majority of the impact being China centric, we have very little exposure to this region. It would not expect any significant impact to our twentytwenty results. It goes without saying that if this has a dramatic impact in regions outside China, We will revisit this assessment.
With that I'd ask the operator, please open up the call two questions.
Ladies and gentlemen to ask a question you will need to press Star then one on your Touchtone telephone to withdraw your question press the pound key.
Please standby will be compiled acuity roster.
Okay.
Your first question comes from the line of Jon Andersen with William Blair. Your line is now open.
Hi, Good morning, Joe and Scott how are you good morning, Hungary.
Good Thank you excuse me.
I guess I wanted to start with.
The.
The new food food and.
Food plant based food and beverage segment.
And specifically within that.
The growth that you saw in the quarter.
25, mid Twentys growth I think on an adjusted basis was actually a little stronger than that.
And.
Im hoping you can give us a little bit more color on.
The drivers of that that growth.
Distribution.
You know kind of velocity improvements you're seeing its shells.
And maybe a little bit more color brown.
How much beverages is contributing to that how much brought this can should be that just so we get a little bit better sense of.
How you arrived at that because it's so it's a terrific number obviously.
Great John So the 25% revenue growth was the majority of the growth was on the plant based beverage side.
Versus broad so that was the last part of your question was the balance between plant based beverage and broad.
The majority of the growth within plant based beverages relative to where the growth is coming from.
You know, it's great to say, it's coming across the board, it's coming from existing customers, it's coming from new customers, it's coming from new items and that's coming from growth in existing items. So we're seeing literally growth in every single dimension in every single cut of the business.
Great and.
You know that volume growth obviously drove.
Significant step up in your margins.
In that segment during the quarter.
Could you talk a little bit about where you are with respect to.
Beverage capacity.
Assuming you're expecting strong growth in that part of the business to continue in 2020 again, where are you from a capacity standpoint today on beverages and is there additional capex or investment required in square footage of lines as we look forward.
Yes, so from a capacity standpoint, we have the capacity in 2020 to deliver a similar growth rate to what we delivered in 2019 full year.
And the additional capacity expansion that we just announced those three projects in aggregate.
We'll certainly give us line of sight to continued growth into 2021 and 2022.
Okay.
Could you talk a little bit more about.
The three three projects I think one is is focused more on extraction. The other two you mentioned today you didnt.
I don't think mentioned the focus of those.
Specifically, but I'd like to understand a little bit more if you could just revisit it.
Extraction capacity.
The spend and what you anticipate that extraction capacity, what's that going to allow you to do you how big is that market opportunity for you. Once that's in place and then a little bit more color around what these these two other projects are will be helpful.
Sure so on the extraction side and just.
To give a little bit of of color from a process standpoint, what exactly that is so that is the kind of first stage of making a plant based beverage where you start with literally start with the grains, whether its owed.
Or soy and you create an enzymatic reaction that separates the soluble and insoluble components of the grain to which then you can add water in kind of create a.
Scott study that is a pleasant beverage.
That extraction capability for us.
Is the significant revenue driver in margin driver.
We see that as potentially a 40 $50 million business.
The other two projects that we announced our more in the processing in filling up the core business.
The core fixed.
Filling and processing side of the business.
Okay. That's super helpful. Just so I I understand then on the extraction side.
When when will that capacity be in place. So you will you begin to commercialize that product and where is that Don is that done in one of the three facilities.
Aseptic facility that you'd be you own right now or is there is this a separate location, yes, so that projects in Alexandria, Minnesota.
And it comes online in mid Q4 start production as mid Q4 so.
We would not expect us significant.
Revenue bump in the fourth quarter from that but startup is in the fourth quarter and were on track for that project.
Terrific and then the other two projects would be in place by the end of the year, presumably helping you support growth in 2021 fair exactly.
Okay.
I'm, hoping that overdoing it M&A us quite a few questions here.
I'm not sure how many people like having the in the queue, but if you need to stop me stop me.
So.
On broad just sticking with plant based permanent so so so abroad. It sounds like your execution and broad was was good through the holiday season.
Where is that business sit today youre mines on a on a run rate basis and.
How much as you lap year, the introduction of raw through your entry into the category.
Where does that business go from here does that continue to grow at a double digit rate as a moderate from here with better margins just talk about that hurt.
The the business.
Yeah, I mean, we're happy with the margins on the brought business.
They're not quite as strong as the plant based beverage side of things, but we're certainly happy with them.
Yes, we would.
We.
We'll continue to be aggressive in the in the bras space. It provides a nice kind of seasonality add to the plan.
That allows us to get great capacity utilization.
Across the year and is a nice.
Tuck in if you well from a from an overall capacity standpoint, and our focus is really on driving plant based beverages as the quarter the business but.
The Brock business provides a nice.
Capacity addition, then and tuck in which allows us to be incredibly price competitive across the.
The whole landscape of of products that we produce.
Okay.
Okay shifting over to to a fruit.
Base foods for a minute.
Encouraged by the commentary you had that.
The margin effort is kind of on track at this point.
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Can you remind us.
Gross margins were up.
You know slightly which was as planned this quarter.
How how should we think about that progression.
Sitting here today, what do you know today the progression of gross margin in that fruit segment.
Okay.
As you move through 2020, because I know, there's the possibility of step changes as you work through the higher cost fruit from last year, and hopefully start to the dip into some of the benefits of the automation et cetera associated with the new harvest. So take you give us your thoughts on the cadence of gross margin improvement from here in that business yes.
So where we sit today, we mentioned that we had a slight positive gross margin in frozen fruit and it is our goal to exit the year.
In the double digits.
Range and so you can just think about.
Sort of bridging from.
Low single digits towards that 10.
We feel like certainly within the components of the fruit business that we control specifically.
The conversion components, then and building outgrow relations et cetera that that we feel like we're in good shape. Obviously, we're we're sitting here today in February.
In the heart of the California season is May June.
July and so.
With what we know today, we're we're feeling cautiously optimistic but we were were not in the season. So.
But our prep work the automation we've installed.
Our real significant will be very.
Very significant contributors.
To our ability to drive margin and all of that automation has been installed its been tested.
And we are very encouraged by.
The test results that we saw.
From the kind of pilot testing if you will.
Okay.
And you recently put a new GM in place over I think over the fruit business can you talk about.
Why and.
Why that individual just.
That's why that change and what this individual brings to the table.
Sure. Yes. So he was someone who we moved over from the trodden side of the business and I had spent basically a decade and a half on the on the fruit business from a global commodity trading standpoint. So he brings just an incredible wealth of knowledge into.
The agriculture side of the business the grower side of the business global pricing price competition on and really has been.
A great helped to us in understanding the global marketplace global pricing and the agriculture side of the business.
Okay.
And the one large foodservice customers that you referenced.
That really drove the decline in the top line in route is is that.
Is that at a customer customer loss that is ongoing or was it more of a timing issue how should we think about that impacting the fruit business going forward.
It's behind Us.
So there's no there's no significant overlap in.
In 2020 on that business.
So it was at the very lumpy order pattern and it's basically behind us.
Okay. Thanks.
Last one for me.
Just next.
I know you you had to.
Good announcement around kind of the balance sheets, and extending and redoing the the facility.
What is your roadmap.
You think about at a high level, what should we be expecting from a debt refinancing perspective at this point have you done what you wanted to do for the time being and then when maybe would you look at addressing the secondly, thanks.
Yes, John It's Scott Good morning, I think we've done that we wanted to do to answer that part of the question.
I guess the flu I think about this is the second lien nodes are 11 quarters out and so pragmatically that really leaves us with seven quarters to address that instruments. So I think the focus across 2020 is to continue to improve the business and drive EBITDA.
Great. Thank you so much for the questions appreciate it and good luck going forward. Thank you.
Your next question comes from Chris Krueger with Lake Street Capital Markets. Your line is now open.
Hi, Good morning, Hi, Chris Good morning.
Right.
Lot of my questions are answered but.
Now the added these three.
Segments can you give us an idea of what you're.
Longer term gross margin.
EBITDA margin goals are for each of those three segments.
Sure.
I think as you as you think about each of these segments.
I think the outlook is pretty consistent with what we've previously shared.
The global ingredients business.
I think the margin targets there are low teens.
Just commented on what we're trying to do with the other fruit business. We're obviously trying to recover the profitability that business exiting 2020 in the in a low low double digit category and obviously you very very pleased with what we've seen in the plant based segment and I would say that debt.
The margin print there is pretty indicative of what would expect going to go forward basis.
All right.
Just two more questions in the the BRAF category can you talk a little bit about the market I believe there's some signs that it's always been kind of old category that wasn't growing them much but you're going to hopefully gain some share but has that category actually been growing more.
Believe it or not that category has been growing double digits for the last several years.
We think we're one of the main drivers of that has been the insta pot believe it or not where I think it was the number one gifted item this Christmas and basically every recipe.
For it as deposit requires a copper to of chicken brought be proffer vegetable broth and so we have seen.
Pretty significant growth than what you would kind of.
Otherwise think of as a fairly sleepy category.
Second.
Consumer driver of that category is.
Interest in bone graft.
There's been a lot of.
Movement and consumer interest in bone broth, and then nutrition benefits of that and so we've also the category has also seed seen renewed consumer interest.
Driven by the nutrition profiles in the in bone dry.
All right.
Last question I know you talked a lot about EMEA plant based area a lot about.
Well no being a big category. The last couple of years are there any other maybe early stage emerging.
Categories for subject that we should keep our eyes open for that maybe could.
Start to become meaningful and couple of years.
You know they just a little bit of category landscape soy and almond milk are by far the big.
The big drivers of of category volume Oh is really.
From an overall market share within plant based beverages is really the explosive growth. So theres been a lot written about it and we've certainly talked about it but.
From a mark from oat as a market share percentage in the category.
There is volumes and volumes of share left to left to go for okay. So we would really see out as the answer to your question.
There is there is tremendous runway left in that and.
If theres anything we see sort of glimmering on the horizon it might be hemp milk.
That that would be a probably a half a decade away.
All right I got it.
That's all I got thank you okay. Thank you.
This concludes today's question and answer session I'd like to turn the call back to Mr. Anderson for closing remarks.
Great well. Thank you all for freight for participating in our fourth quarter call look forward to speaking to you in the future and appreciate your interest and support and sonata and have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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