Q3 2020 Sunopta Inc Earnings Call
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Good morning, and welcome to spinoff is third quarter fiscal 2020 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 spinoff is website at www synopsis 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 preferred remarks, which will follow contain.
Forward looking statements and management may make additional forward looking statements in response to your questions. Please.
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 spinoff. 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.
The company undertakes no obligation to publicly correct or update the forward looking statements made during his 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. A 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 us dollars under are occasionally rounded to the nearest million.
And now I'd like to turn the call over to spin off the CEO Joe Anand.
Good morning, and thank you for joining us today with me on the call. It got Hakan, our Chief Financial Officer.
Before we begin on packing. The Q3 result, there are three key takeaways that I would like to offer.
Our strong execution of our core strategy continued to deliver consistent strong performance across all three business segments.
Second our prioritized investments in plant based foods and beverages it paying dividends.
We are playing off and we are winning and we expect to continue to win as our expansion projects come online in the fourth quarter further strengthening an already strong position.
And third we are optimistic about our future ability to deliver consistent sustainable above average EBITDA growth.
As anticipated the third quarter results were strong delivering our fourth consecutive quarter of more than doubling year over year, adjusted EBITDA and the third consecutive quarter in which each of our segment generated both revenue and margin growth.
Trailing 12 month adjusted EBITDA at the end of Q3 2019 with 40 million today, our trailing 12 month adjusted EBITDA is 84 million.
With four consecutive quarters of more than doubling adjusted EBITDA combined with the momentum and plans. We have it is safe to say that the amount that is no longer a turnaround story, we are quite simply a well positioned sustainability minded growth company with a clear vision to fuel the fuel.
Europe food.
Our performance reflects strong execution of our core strategies, along with investment and focus on our core strength.
We have now fully transitioned from our turnaround excessive to driving profitability and growth across each of our business segments.
Im pleased with our positioning and the performance across our entire organization.
For the third quarter, we delivered 5.4% revenue growth adjusted for changes in commodity related pricing and FX rate.
This growth was fueled by very strong consumer demand in all three of our core segment led by robust growth in our global ingredient and plant based business segment.
I'd like to share some syndicated data to help dimensionalize the consumer feel the momentum in our core businesses.
Consumption in the last 13 weeks shows both refrigerated and shelf stable plant based smelt growing 18% and 16% respectively.
We are excited to see the continued tremendous growth and open up with triple digit growth rate.
Oh no is now the second largest client base metals behind only on inbound.
This momentum and Oh, well certainly provide tailwinds for our plant based business unit as our own extraction facility is in the final stages of commissioning and as previously discussed gives us a fourfold increase in extraction volume.
Frozen fruit also continued to see very strong consumer demand and while our supply constraints have somewhat limited our upside we are encouraged by the consumers enthusiasm for this category.
Lastly, we continue to see strong growth in organic food sales in many of our core markets around the world fueling growth in our global ingredients segment.
It is encouraging that we are so well positioned in such strong growth category and we fully intend to capitalize on consumer demand or are on trend sustainable products.
Since I joined Sonata I've talked about improving execution as a top priority.
Nowhere is the improvement in execution more evident than in our gross margin performance.
Total company gross profit margin in Q3 was 13.3% the best gross margin since Q1 of 2012.
Total gross profit margin improved 440 basis point with our fruit business contributing the most to this improvement.
Our productivity initiative with a focus on automation, reducing line downtime and more disciplined operations management are paying off around the world Manny.
Manufacturing plants from our cocoa facility in Holland to our plant based aseptic beverage facility in Pennsylvania to our frozen fruit bagging operation in Canada are setting production records and doing it with fewer people.
While these records are impressive in their own right. It's important to recognize that these results are coming at a time. When we are also managing all of the challenges related to COVID-19 prevention in our plan.
To date, we continue to have zero confirmed cases of community transmitted cobot 19th. This accomplishment is something we are all very proud of as employee safety is our top priority.
While the challenges of managing around COVID-19 are significant the overall impact on our financial performance for the quarter were not significant on a year over year basis when.
When we net the headwinds and Tailwinds the impact on revenue and EBITDA offset each other.
Turning to EBITDA as mentioned, we more than doubled adjusted EBITDA on a year over year basis for the third quarter with an increase of 129% to $22.8 million on 5.4% adjusted revenue growth.
Adjusted EBITDA as a percentage of revenue was 7.2% and showed solid progress against our long term stated goal of 10% EBITDA margin rate.
Turning to our segment results, let me begin with our plant based segment.
Sales momentum continued overcoming the impact of softer foodservice sale has COVID-19 continues to impact the channel has all would anticipate safe.
Sales increased 6.6% on an adjusted basis, despite our largest customer not contributing to the growth given their foodservice focus.
Sunflower, which is reported within this segment saw revenue decline in Q3, which dampened overall segment performance.
If we remove the sunflower headwind the remainder of the segment grew revenue 10.8%.
Gross margins improved to 19.9%, reflecting improved utilization and execution of our productivity initiative.
With the significant growth in consumer demand that I mentioned earlier, you will not be surprised to hear that in Q4, we will be operating at close to capacity as possible and as a result, we expect a strong Q4 in our plant based business unit.
Our three expansion projects, which we have discussed several times our on time and on budget combined they will further expand our leadership position in a sceptic plant based beverage production through new capabilities implants extraction and added a septic production.
These projects when fully utilized have the potential to add approximately $100 million to our annual sales.
Continued to be pleased with our sales development effort and we are in advanced discussions with several large customers, who will consume a sizable portion of the incremental volume.
I would like to remind listeners that adding this amount of new business does not happen overnight in.
In many cases these are large new customers with complex needs and it is not as simple as flipping a switch, but we continue to believe that we can have this incremental capacity fully utilized by the end of 2022.
Our new capacity additions in the fourth quarter position us for a strong 2021 and 2022.
Our leadership and plant based beverages, our broad capabilities, along with our strong positioning are the key driver of the significant new business opportunity and is the foundation of our plan to double our plant based business unit over the coming years.
In global ingredient sales growth accelerated to an impressive 8.3% on an adjusted basis, reflecting very strong performance in cocoa oil and juice to highlight just a few categories.
We generated another quarter of improved gross margin as a result of topline growth along with executing our productivity plan.
In particular, our crown of Holland, cocoa processing facility generated record production levels with higher efficiency.
Further our efforts in driving return on investment yielded a roughly 10% reduction in year over year inventories, while our revenue growth accelerated.
Gross margin in this segment was 12.2% again, reflecting strong execution of our plan.
While this business has had some historical volatility it is encouraging to see a heightened level of discipline and execution at that time.
Within our free platform.
Our focus on driving improved margin yielded significant year over year gain with gross margin improving to 7.7% up 990 basis points from the prior year on approximately 1% adjusted revenue growth.
Our investments in automation are driving significant improvements in productivity, partially offsetting a challenging fruit procurement environment.
We have wrapped up the California, strawberry season, and despite the lower than expected free their crop our renewed focus on grower relations helped us perkier a significantly larger share of the available through compared to 2019.
We maintained our plant throughput for the whole season, utilizing roughly 40% less seasonal labor compared to 2018 as a result of our automation initiative.
We remain confident in our ability to meet our expectation for further sequential margin improvement in the fourth quarter.
While there are many questions last quarter on the impact of the California Strawberry season, I will share that this business is different now than in the past.
For context conventional strawberries grown in California represent less than 5% of our total company gross profit.
I wish the season had been better of course gives.
Do some headwinds on 5% of the business defined sonata no.
Our fruit business has had a history of negative Q3, Q4 surprises, but this is not historical sonata and our view of 2021 has actually improved compared to last quarter and we are now incrementally more optimistic about next year.
We have more clarity into customer commitments and we are seeing success in passing through pricing to offset more costly fruit. Therefore, while there are still some unknowns. We can now communicate a more optimistic view that we expect profit growth in fruit in 2021.
In conclusion, we delivered yet another doubling year over year adjusted EBITDA.
The third consecutive quarter of growth and gross margin improvement in all three of our segments and produce the best consolidated gross margin percentage performance in eight years. Further we are seeing significant increased consistency across each of our segments, which is reflected in our quarterly results.
Our positioning and key healthy natural and organic category, along with our leadership and plant based food position us exceptionally well with consumers.
We have successfully executed and completed our turnaround efforts reduce leverage invested in promising opportunities and are now focused on driving growth across our core platform.
Now I will turn the call over to Scott to take us through the rest of the financials Scott.
Scott.
Thank you very much Joe and good morning, everyone let.
Let me walk through gross profit and the rest of the income statement given Joe's discussion of the commercial activities and revenue during the quarter I will also cover our balance sheet and cash flow results.
We're very pleased to report another strong quarter as Joe discussed, we saw 6.4% revenue growth and more than doubled adjusted EBITDA for the fourth consecutive quarter.
Gross profit was $41.9 million for the third quarter of 2020, an increase of $15.6 million or 59% compared to $26.3 million during the third quarter of 2018.
The fruit based segment was responsible for $9.1 million of the gross profit improvement.
For perspective.
Brings year to date gross profit in fruit to $19.8 million or nearly five times the prior year's results.
The improvement in freight came from improved revenue price.
Pricing, a favorable mix of higher margin retail versus foodservice revenue.
And the benefits from increased automation and productivity initiatives implemented in our plants.
The plant based segment accounted for $3.4 million of the increase in gross profit made.
Mainly reflecting revenue growth of 10.8% in the plant based beverage and extraction businesses.
Offset in part by a reduction in revenue in the sunflower business.
In addition to revenue growth.
Increased production volumes as well as strong execution of our productivity plans and higher capacity utilization drove improved margins.
This was partially offset by lower revenue production volumes and plant utilization in the sunflower operations.
Global ingredients contributed $3.1 million of improvement primarily due to solid execution of our portfolio optimization efforts that resulted in increased pricing spreads and higher margin product mix organic ingredients and premium juice products.
This was supplemented by manufacturing efficiencies and productivity improvements.
These results were partially offset by an unfavorable cocoa commodity hedging results of $1 million versus the prior year.
And manufacturing inefficiencies related to organic avocado oil production.
As Joe noted we were quite pleased with the performance of our cocoa processing operations, which set record production volumes in the third quarter with improved efficiencies.
As a percentage of revenue third quarter gross margin was the highest since 2012 at 13.3%.
Compared to 8.9% last year, a 440 basis point increase.
All segments contributed significantly to the gross margin expansion with gross margin expanding 990 basis points in the freight segment.
210 basis points in the plant based segment.
And 160 basis points in a global ingredients segment.
Operating income was $9.4 million or 3% of revenues in the third quarter compared to a loss of $3.5 million last year.
SGN, a increased 1.6 million to $29.3 million in the third quarter with the savings initiatives being offset primarily by variable compensation expense.
Loss attributable to common shareholders for the third quarter was $2.8 million or three cents per diluted share compared to a loss of $13.8 million or 16 cents per diluted share during the third quarter of 2019.
On an adjusted basis net loss was 1.3 million or one cents per diluted share compared to a loss of $9.9 million or 11 cents per common share in the prior year.
As Joe mentioned earlier for the third quarter of 2020, adjusted EBITDA was $22.8 million compared to $9.9 million in the prior year, bringing the trailing 12 months adjusted EBITDA to 84 million.
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 the balance sheet and cash flow Q.
Q3, total debt was $443.8 million down approximately $47 million from Q4 2019.
Total debt reflects 219.5 million net of issuance cost of our second lien notes due in October of 2022.
199.7 million drawn on our global asset based credit facility.
With the balance representing smaller credit facilities leases and other financing arrangements.
Leverage has improved to 5.3 times from 10.3 times as we entered 2020 and we are now nearing completion of the refinancing of our ABL, which matures in March of 2022.
Following this we will begin the process of refinancing our second lien notes, which are due in late 2022.
Our significant improvements in adjusted EBITDA over the trailing 12 months is a significant out that in the refinancing process and we are very confident with our refinancing prospects.
From a cash flow perspective during the quarter cash generated from operating activities was $20.2 million compared to cash generated of $4.3 million during the third quarter of 2019.
The $15.9 million improvement reflects improved operating performance and continued working capital management.
It is worth pointing out that our global ingredients segment produced nearly 10% of its inventory position versus Q3 of last year.
Cash used in investing activities was $11.8 million compared with $7.6 million in the third quarter of 2019.
The increase in capital investments, primarily relates to investments to expand capacity at our plant based operations.
As we look forward, we continue to expect that our Executional excellence will generate strong PML flow through.
In the fourth quarter, we will likely see high single digit revenue growth, creating robust double digit gross profit growth cascade into what could approach nearly 50% increase in EBITDA versus Q4, 2019, which was in turn a doubling of EBITDA.
Versus Q4 of 2018.
With that I'd ask the operator to please open up the call to questions.
Thank you. So at this time I would like to remind everyone in order to ask a question for Star then the number one on your telephone keypad.
Our first question comes from Brian Holland of CA Davis.
Your line is open.
Lynne maybe.
Maybe first question here, just kind of the near term focus.
The ramp of the new plant based capacity I know, we've talked about a 100 million over two years. We just think about maybe the next couple of quarters, though.
As you ramp that up but the impact both the sales and also gross margin. If there is anything we should be mindful of this were forecasting now.
Yes, good morning, Brian Jo here.
So first of all just in terms of.
Our expectations on ramping that production utilization, we put a marker out there that we expected to be fully utilized by the end of Q4 2022.
At this juncture, we don't have perfect insight into how that's going to flow we are making good progress.
In terms of working with significant new customers in the end, the adding business to that capacity.
As it relates to gross margin impact there are kind of three components certainly.
Certainly in the added capacity would be a bit of a headwind to gross margin. However, as we look forward to 2021, we think.
Both customer mix as well as our productivity efforts will both be tailwind and net net those two tailwinds should net.
Or mitigate any kind of negative impact from the added capacity. So we would expect 2021.
Gross profit margin to look broadly like 2020.
I appreciate the color there.
So the question will clip as you've been asked several times since your expansion announcement about whether there has been demand to fill that capacity.
Mindful, specifically of the see significant growth within the Oak based segment as well as the potential Tam given the value proposition vis-a-vis almost though I'm curious, whether you think you've added enough capacity and what not and given the lead time required to stand up that incremental capacity are there plans in place for further investment how you're thinking about.
That.
You know on some levels I hope you didnt have enough capacity.
But that would be a good problem to have.
You know, we we are certainly encouraged by the consumer excuse me the customer.
Outreach that we had on that and customers interest in opaque.
At this juncture our focus is on.
Getting that new facility fully up and running and utilized and if we find that.
But at some point in 2021 that we feel like we've got a 12 month view out of the business, where we think we're going to sell that out we're certainly.
Willing and able to make further investments in that in that space.
Got it fair enough.
To be fair switching over to foodservice.
You know a bit of a headwind or and also to the growth. This quarter is not surprising, but just curious if you could maybe kind of give us a little bit of incremental color.
That's sort of the pace of recovery in that channel I think high level. What we're seeing is obviously a trough first half of the year.
Yeah.
Immediately following locked down and then we saw some steady progression moderating declines that seem to have sort of key.
Depending on what channels you are talking about maybe in the high single low double digit range. So I'm curious is specific to your business. So thats kind of mirrors, what we are seeing high level and then secondly, with the concerns about second wave and new cases, and maybe maybe new measures being implemented how you're kind of thinking about the plan going forward here.
And the pace of recovery in that channel as it pertains to your business.
Yes, so you know.
Yes, we're seeing a consistent pattern to what you articulated.
In aggregate foodservice was neither a headwind or a tailwind.
For the quarter it looked broadly similar to 2019.
As it relates to the impact of a second wave of Covance, where all certainly concerned about that at multiple levels first and foremost for.
Our associates and the operations of our facilities.
But you know we're going to continue to monitor monitor it and work with our customers and and respond to their forecast and to date, we have not seen any significant adjustments in their forecasts as they think about a potential second wave, but we'll certainly be.
Ready to respond to that.
Got it last one for me I really appreciate the color and clarity that you provided with respect to the fruit segment. This quarter, but just to confirm you are lapping pricing that you took I believe this time last year. So.
So just curious have you taken or will you need to take more pricing this quarter and if so how those discussions progress.
So yes, we.
We are in a position, where we have been able to pass through the majority of the impact of higher cost fruit from this season and many of those.
Prices will go into effect here in the fourth quarter.
Thats. The result of a lot of great work by our sales team over the last 12 months to get.
Better relations with our customers as well as different pricing mechanism in place and and certainly has aided our efforts in mitigating the impact of the higher cost for it.
I appreciate all the color best of luck once again.
Thanks Brent.
Your next question comes from Brian Meyers of Lake Street capital.
Your line is open.
Thanks for taking my question offer just a clarification you gave some commentary on the fourth quarter for revenue gross profit and adjusted EBITDA I just want to make sure. This is year over year growth correct.
Correct.
Okay.
And then can you discuss potential headwind that you guys might seem a plant based beverage, including food service that you can.
Could potentially see going forward that maybe slow the growth a little bit.
Okay.
Yeah, I mean, I say I, certainly think a second.
You know wave of Covance could have an impact I mean, all I will remind.
That we now have.
Several quarters of what a covert environment looks like and so I don't really have any material forward looking inside that would suggest it would look different than our Q2 and Q3 results from next year.
I think there is obviously, an offset with retail growth and we see very very strong growth in the retail segment.
I would I guess expect the 2021 to look like 2020, if we were to kind of go back into a very deep.
Kind of call that shutdown.
Okay. That's helpful.
And then now that you're through sort of a transition phase what's your kind of outlook for gross margins on a plant based business.
Very strong this quarter, just kind of how you're thinking about that going forward is that kind of going to be what's been reported this quarter is there further room for improvement.
Yes, as I mentioned to Brian we think that the 2021 gross margin will look broadly like 2020.
There is a bit of a headwind with just some added capacity, which will be a kind of short term headwind to our gross margin rate that there are two strong tailwind.
Our productivity initial.
Initiatives, certainly being one of them so and we also think.
Mix, both product mix as well as customer mix.
We'll be a tailwind in 2021, so net net 2021, we'll look broadly similar to 2020.
Okay, and then last one for me any update on new product performance, such as the Arbor bar.
Yes, I mean, we continue to monitor and look for additional customers to roll it out we're happy with the product.
And are actively engaged in putting.
Promotional efforts against that to drive trial and.
We're encouraged by the repeat that we're seeing on the product but.
We're looking for additional ways to drive trial.
All right Thats it from me thank you.
Thanks.
Your next question comes from Jon Andersen of William Blair. Your line is open.
Good morning, everybody. Thank you marni.
Good morning, John.
I just have some follow up question is on the call.
I wanted to ask you about the Opaques extraction.
Owed extraction process.
Can you talk about the.
Quality of your process.
In producing the OTE base.
And is there.
Okay equivalent.
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Player in the market that does this my understanding is there are some differences in the way.
Okay milks.
Our formulated and it can have a difference on kind of the quality and the functionality of the products themselves.
Yes without.
Without getting too technical here, where I might get them diagrams and schematic theres two ways of making all alkaline is you start with old flower.
And add water. The result of that process as you get a very gritty better tasting product.
The other way to do it is you start with raw or would you sell them and you add enzyme that basically break that down into soluble in insoluble components, obviously the soluble component.
Our turned into open out you get a much cleaner tasting product.
None of that greedy texture that consumers complain about and we think.
It's a superior process to the way many of the people are manufacturing it.
I certainly don't have detailed information into how everyone does it but.
We are aware that one of the.
Leading oat milk manufacturer that we don't make a product for also does it in a similar process to the way that we do it.
That's great.
Up to.
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Technical and do it in terms that lame and like I can understand so I appreciate that.
Youre plant base.
Beverage business.
Yeah. It was interesting I thought it was great that you provided some of the consumption data syndicated consumption data.
That showed both a sceptic and in refrigerated.
Growing at very healthy rates.
Yes.
Which which segment is more important to you and.
And I assume that that might be changing a little bit with.
Your own base capabilities, because definitely allow you to serve the refrigerated.
Market, perhaps on making that assumption in the way you have into the path, but if you could just talk a little bit about.
Your outlook for a septic versus refrigerated plant based growth Dan in your exposure and ability to serve both of those end markets banks.
It's so you're you're exactly right.
Our added extraction capability opens us up to being a.
Supplier on the refrigerated side were both of them are important to last obviously, we have significant aseptic.
Manufacturing assets and that is a core business for us, but the Oh extraction pro.
Project and capability certainly afford us the opportunity to start to work with customers in the refrigerated space.
Who arent current customers today on the shelf double shelf stable.
Haptics side.
Okay. Thanks on that.
True.
In terms of fruit.
What led you to upgrade the willing to kind of upgrade your outlook.
Gross profit.
In 2021, some of the specifics maybe prioritize.
Form.
Yeah.
Our success in.
Working with customers to pass through.
The increased cost of fruit.
Our clarity around the customer commitments that we have for 2021.
Would be probably but to the two biggest one that that gave us confidence to suggest that.
2021 is going to be better than previously forecasted.
And given that your through the season the harvest this year the 2020 Argus.
Does that.
Provide you talk.
Cost visibility through the bulk of two.
2021 at this point.
Yeah, typically it wouldn't provide us insight certainly into kind of Q1 and you too.
And then as it relate to our overall cost structure for the balance of 2021, while the.
Rude input cost is still a variable we certainly understand.
The overall cost structure of our supply chain network.
Labor et cetera et cetera.
Okay.
That's helpful last one just on the debt Scott's comments on the debt refinancing. So my understanding the ABL is in process.
And the second lien.
Is it soon to come and I think you expressed confidence around the second lien.
Is your expectation that the second lien.
There would be an ability to get.
Better pricing.
Yes, good morning, John So the comments that was offered them is really focused around during the homestretch on getting the deal done recognizing that that has the March 22 maturity date and just keep in mind that the two owners for new about two years from now and in October 2022.
So we're working on them sequentially, so I would expect that.