Q3 2020 Sunopta Inc Earnings Call
[music].
Good morning, and welcome to send off his 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 spinoff is that comp.
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 is press release issued this morning. The Companys 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. 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 and 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 unpacking. The Q3 result, there are three key takeaways that I would like to offer.
Sure.
Execution of our core strategy continues 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 that.
Future of 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 expenses to driving profitability and growth across each of our business segments.
I'm 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 indicated 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 milk 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.
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 and 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.
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 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 sales has COVID-19 continues to impact the channel has all would anticipate.
Sales increased 6.6% on an adjusted basis, despite our largest customer not contributing to the growth given their food service 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 initiatives.
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 as close to capacity as possible and as a result, we expect a strong Q4 and 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.
These projects when fully utilized has the potential to add approximately $100 million to our annual sales.
I continue 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 ingredients 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 fruit 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 fruit 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 were 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, groaning, 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 drove 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 consist.
In FY 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.
We have successfully executed and completed our turnaround efforts reduced 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 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, and increase of $15.6 million or 59% compared to $26.3 million during the third quarter of 2019.
The fruit based segment was responsible for $9.1 million of the gross profit improvement.
For perspective that 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.
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 plan 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 that 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 revenues 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 food segment.
210 basis points in the plant based segment.
And 160 basis points in the global ingredients segment.
Operating income was $9.4 million or three percentage 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 towards the back of the press release issued earlier this morning.
Turning to the balance sheet and cash flow.
Q3, total debt was $443.8 million down approximately $47 million from Q4 2019.
Total debt reflects $219.5 million net of issuance costs 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 that 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 asset in the refinancing process and we're 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 pre.
Creating robust double digit gross profit growth cascade into what could approach and 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 Simon I was like to remind everyone in order to ask a question for stars on the number one on your telephone keypad.
Our first question comes from Brian Holland of D.A. Davidson.
Your line is open.
And then maybe.
Maybe first question here, just kind of 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 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 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 Clippers, you've been asked several times since your expansion announcement about whether there has been demand to fill that capacity.
Mindful, specifically of the suit significant growth within the Oak based segment as well as the potential Tam given their value proposition vis-a-vis almost though im curious, whether you think you rather than 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.
With that.
You know on some levels I hope, we didnt have enough capacity.
But that would be a good problem to have.
You know we we are certainly encouraged by is.
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 in kind at some point in 2021 that we feel like we've got a 12 month view out of the business, where we think we are going to sell that out we're certainly willing and.
Unable to make further investments in that in that space.
Got it fair enough.
Switching over to foodservice.
Bit of a headwind or and also to the growth this quarter, but not surprising but just curious if you could maybe kind of give us a little bit of incremental color on.
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.
Hello.
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 may be 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 use 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 annual 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.
Ready to respond to that.
Got it and last one for me I really appreciate the color and clarity of it and provider 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 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.
That's a 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 costs for it.
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 to plant based beverage, including food service that you could.
Could potentially see going forward that maybe slow the growth a little bit.
Yeah, I mean, I'd say I, certainly think a second.
You know wave of co bid could have an impact I mean, all I will remind.
That we now have.
Several quarters of what a corporate 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 youre through sort of a transition phase what's your kind of outlook for gross margins on the plant based business.
The strong this quarter, just kind of how you're thinking about that going forward is that kind of going to be what it's been well 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.
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 Harbor Barb.
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 that's it for 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.
Nice to have some follow up question is on the call.
I wanted to ask you about the outpace extraction.
Owed extraction process.
Can you talk about the.
Quality of your process.
In producing the base.
And is there.
Equivalent.
Player in the market that does this my understanding is there are some differences in the way.
Okay milks.
Our formulated and can have a difference on kind of the quality and the functionality.
Okay. So 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 as you start with raw or you sell them and you add enzyme that basically break that down into soluble in insoluble components, obviously the soluble component.
Turning to open out you get a much cleaner tasting product.
None of that greedy texture that consumers complained 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 we want to be.
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.
Two.
Technical and do it in terms that lame and like I can understand so I appreciate that.
Okay.
Youre plant base.
Beverage business.
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 base capabilities, because that may 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 client based growth and in your exposure and.
Ability to serve both of those end markets. Thanks.
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 uptick.
Manufacturing assets and that is a core business for us, but the Oh extraction pro.
Project and capability, certainly affords us the opportunity to start to work with customers in the refrigerated space.
Who arent current customers today on the shelf double shelf stable.
Septic side.
Okay. Thanks on that.
[music].
True.
In terms of fruit.
What led you to upgrade the willing to kind of upgrade your outlook.
For 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 too.
2021 is going to be better than previously forecasted.
And given that your through the season the harvest this year 2020 Argus.
Does that.
Advised you.
Cost visibility through the bulk of.
2021 at this point.
You typically it wouldn't provide us insight certainly into kind of Q1 and you too.
And then as it relates 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.
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 is 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 it was RPM 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 on us for new about two years from now in October 2022.
So we're working on them sequentially, so I would expect that.