Q1 2021 Sunopta Inc Earnings Call
And your press release that was issued this morning and is available on the Investor Relations page on and off those web site at Www Dot sent up 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 remark.
Which will follow and contain forward looking statements and management may make additional forward looking statements and response to your questions.
These statements do not guarantee future performance and therefore and.
Reliance should not be placed upon them.
We refer you to all risk factors contained and sum up the 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.
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 U S dollars and are occasionally rounded to the nearest and <unk> million.
And now I'd like to turn the conference call over to Tronox is CEO, Joe and then please go ahead Sir.
Good morning, and thank you for joining us today with me on the call and Scott Huckins, Our Chief Financial Officer.
And we began on tax and the results let me offer several key takeaways from the first quarter.
First our strategy of focusing on top line growth and plant based and margin growth and continued just fuel strong EBITDA growth and Q1 and then.
And all of last year.
Second the topline momentum and our plant based business remained strong, reflecting our leadership position and beverages.
Ongoing capacity expansion and steady consumer demand as plant based continues to be the number one global food trends.
Third our focus on productivity and our free base business continues to drive solid margin expansion.
Lastly, we all know team and culture are critical to driving great performance and the efforts we have made and the last 18 months around and creating accountable business units building a high performance team with a winning culture and investing in talent have been instrumental and fueling our business.
Execution ties everything together and our team continues to excel at operational excellence, which is delivering consistently strong results.
The first quarter played out largely as expected with plant based revenue continuing to grow rapidly margins, improving and three days and very strong double digit growth and adjusted EBITDA.
Total revenue of $207 6 million was comprised of 12% topline growth and plant based largely offset by planned revenue rationalization and free.
<unk> and aggregate sales that were flat to year ago levels, and plus 21, 8% compared to pre COVID-19 Q1 2019.
Compared to Q1 of 2020 gross margin improved by 130 basis points to 14, 4% and adjusted EBITDA grew 33, 5% to $18 3 million or eight 8% of our revenue.
Q1, and saw continued transformation of our operations across the board, we continue to dial and production on the three capacity additions and plant based and that came online in Q4 of last year.
We made good progress on our latest expansion project and Allentown, Pennsylvania, which is on schedule to be fully commissioned and Q4 of this year and we closed our fruit processing plant and Santa Maria under budget and ahead of schedule.
We expanded fruit operations in Mexico, and we are having a productive strawberry season. There. We are also executing the closure of our fruit ingredients plant and Los Angeles, which we will cover in more detail and a few minutes.
Net debt pace and impact of our operational transformation continues to put the company and a stronger and stronger position, our new extraction capability is operating well and revenue was up significantly as we continue to ramp up new and existing customers.
Raul and I am pleased with our business development progress and at our current pace. We continue to believe that we will exit 2022 with the additional capacity effectively utilized.
We think our added capacity gives us a unique competitive advantage as we strive to provide our customers with an unparalleled combination of product quality.
Cost service capacity to grow and unrivaled technical and innovation and support.
These five ring fences are critical to our long term success.
Now let me comment on the announcement from a couple of weeks ago on the acquisition of the dream and west relay brands from Hain celestial for $33 million.
Our rationale for this acquisition was simple.
First there is an opportunistic element to this acquisition as we currently manufacture all of the website products and approximately half of the dream product line.
We believe these brands have significant brand equity based on what we're seeing and believe we were able to acquire them attractively given our supply chain advantages.
Second we have the opportunity to in source the half of the Dream product line. We don't currently produce therefore, we benefit from gaining that margin and absorption benefit and our plants.
It is important to understand these brands don't materially compete with existing customers dream at 90% Rice milk and west soy is 100% soy milk and we don't produce either of these formats for any other co man customer.
And it's also important to understand that shoppers are fairly loyal to one type of plant based milk. So that also reduces the potential for conflict free.
Finally from a financial perspective, our forecast is that these brands next year, and 2022 will add $15 million to $20 million of incremental revenue and $6 million to $8 million of incremental EBITDA. When we complete the in sourcing of all volume.
Our current priorities with dream and West soy are to realize the and sourcing synergies transition the business and build the capabilities needed to manage these brands.
Turning to our segment results, let me start with our plant based business.
The 12, 4% increase and plant based revenue was on top of a 30% increase and the first quarter of 2020.
To put Q1 into perspective. This was the highest plant based revenue quarter in company history, and compared with the first quarter of 2019, our Q1 2021 plant based revenues were up 47%.
Both based offerings were a key factor and our growth delivering roughly half of our growth on a year over year basis.
We remain extremely well positioned to capture additional share and this product category, where consumer demand is surging.
We also benefited from increased retail sales volume of other plant based beverages during the first quarter.
While not a significant contributor to revenue growth this quarter I would like to offer we are pleased with the sales velocity of our organic milk Kramer launched under the brand name Stone late last year and addition to strong initial sales velocity. We also continued to build focused distribution for this brand.
Gross margin and plant based was 19, 4% down only 40 basis points from a year ago as we added the depreciation expense associated with our plant expansion and absorbed increased transportation costs.
These negatives were mostly offset by continued improvement and productivity.
And the fruit segment revenues were down 13% due to overlapping the initial COVID-19 surge and the first quarter of 2020.
And the planned rationalization of marginally profitable business affected customers and skus compared.
Compared to 2019 fruit revenue was basically flat.
We experienced two headwinds COVID-19 overlap and frozen and customer and FQ rationalization and fruit ingredients.
With a tailwind and fruit snacks as we put more emphasis on this margin advantaged business.
And we have discussed in the past we are executing three strategies to de risk the frozen fruit business.
First is geographic diversification of supply, where we have made significant progress.
And Q1, we sourced three times as much fruit from South America, 2020, and year to date, Mexico Strawberry production is plus 25% to 2020.
Second is pricing mechanism and price encouraged with our customers.
We are now and our position with this business, where we can confidently pass on a majority of cost inflation.
Third better grower relations to source more of the available fruit and.
And 2020, we sourced 25% more of the available fruit out of California than in 2019, and we are looking to build on that momentum and 2021.
All of this may proved fortuitous as the California freezer season is off to a slow start as beautifully cool weather and strong demand for fresh has kept the growers growing for the fresh market versus switching over to frozen.
Net net no matter how the season comes in we are better prepared to manage the impact.
Consistent with our strategic priorities improving margins was the big story and our fruit based business during the first quarter.
Gross margin and fruit increased to 170 basis points versus last year to seven 7%.
Some of the planned factors that reduced fruit based sales and the first quarter also had the intended positive impact on margin, including free snack growth planned rationalization and productivity improvements.
And mid April we began the process of exiting our South gate, California fruit ingredient plant with closure expected. This June.
Our plan is to migrate some of that volume to other plants within the network.
It was a small older facility and its closure represents another margin opportunity for us.
As we have consistently stated we want to position fruit as a more cost advantaged business in 2021, and expecting to turn to revenue growth and 2022.
In summary, our strategic priorities are firmly on target and we are executing at a high level across the organization.
Over the near term, we continue to prioritize plant based revenue growth fruit based margins and increasing adjusted EBITDA.
And after a strong position and some of the fastest growing CPG categories and sharp focus on operational excellence underscore my continued optimism about our future.
Our balance sheet remains strong capable of supporting multiple growth drivers for the foreseeable future.
<unk> expansion continues and earn it and our pipeline of new business opportunities is robust and providing a long runway with existing and new customers.
Finally, we are just starting to add M&A to our playbook with the recent completion of two brand acquisitions that are strategic and opportunistic as well as additive to sales and profitability.
We remain committed to the previous 2021 outlook and we believe our strategy and our team will continue to deliver as we seek to fuel the future of food.
Now I will turn the call over to Scott to take us through the rest of the financials.
Hi.
Thank you very much Joe and good morning, everyone. We're excited to report another solid quarter.
As Joe discussed first quarter revenues of $207 6 million were flat year over year as the strong 12, 4% growth and plant based was offset by planned rationalization of marginally profitable business and fruit based.
Demonstrating the power of our strategy adjusted.
Adjusted EBITDA increased 33, 5% on flat revenue aided by further improvement and gross margins as we add margin to fruit and consolidated margins benefit from more plant based revenue and the sales mix.
Gross profit was $30 million for the first quarter of 2021 at.
And increase of $2 8 million per 10, 4% compared to $27 2 million during the first quarter of 2020.
The plant based segment accounted for $2 $1 million of the increase and gross profit due to higher revenue production volumes and productivity improvements within our plant based beverage and ingredient operations.
The fruit based segment was responsible for $7 million of the gross profit improvement, reflecting strong fruit snack volumes.
<unk> rationalization of marginally profitable skus and customers and productivity gains and frozen fruit.
As a percentage of revenues first quarter gross margin was 14, 4% and <unk>.
Paired to 13, 1% a year ago, a 130 basis point increase.
The plant based segment gross margin was 19, 4%.
And only 40 basis points from last year, primarily due to the depreciation expense associated with our three new projects on boarded and Q4, along with increases in freight costs, partially offset by improved productivity.
Recall that we added a four fold increase and our own extraction capacity and our Alexandria, Minnesota plant and additional processing and packaging and capacities and our Modesto, California, and Allentown, Pennsylvania plants.
Gross margin and the fruit based segment was seven 7% compared to 6% last year and increase of 170 basis points.
Gross profit dollars grew <unk> 7 million on lower revenue, indicating a strong impact of our productivity efforts.
As you know, we've prioritized profitability improvement and the fruit during 2021.
And a solid improvement in Q1 stem from several factors, including higher snack volumes pricing rationalizing marginal skus and customers and productivity gains and frozen and.
Importantly, we were able to significantly expand through base gross margin during the quarter. Despite the impact of lower sales volumes, demonstrating the merits of our strategy.
Operating income was $6 1 million or two 9% of revenue in the first quarter compared to $2 8 million or one three percentage of revenues in the year earlier period.
SG&A increased $2 9 million or four 7% to $20 9 million.
Collecting higher variable compensation costs and increased headcount to support growth initiatives.
Loss attributable to common shareholders for the first quarter was point $3 million or zero cents per diluted share compared to a loss of $6 million or <unk> <unk> per diluted share during the first quarter of 2020.
On an adjusted basis.
First quarter, 2021 earnings or $1 3 million or <unk> <unk> per diluted share versus an adjusted loss of $5 4 million or 6%.
Per diluted share in the prior year period.
As Joe mentioned, adjusted EBITDA was $18 3 million compared to $13 7 million and the prior year, a 33, 5% increase.
Note that this was after absorbing inflationary costs and transportation and insurance.
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.
As of April three 2021 total debt was 137 5 million down approximately $332 million from the first quarter of 2020 and.
Up from $69 7 million at the end of <unk> 2020, as expected from the additional lease obligations related to our capital projects as well as the seasonal inventory build we discussed last quarter.
Total debt reflects $88 $9 million drawn on our asset based credit facility with the balance representing smaller credit facilities lease and other financing arrangements.
Leverage stood at two two times at the end of the first quarter versus $7 seven times a year earlier.
From a cash flow perspective cash used in operating activities of continuing operations. During the first quarter of 2021 with $7 million compared to cash generated of $23 7 million during the first quarter of 2020.
As we discussed and the fourth quarter call, we expected to see a seasonal build of inventory and the quarter.
Cash used in investing activities of continuing operations was $7 9 million compared with $9 million and last year's first quarter.
In addition, we paid over $13 million in the quarter to settle a crude transactions costs associated with the global ingredients divestiture.
Prior to discussing our current outlook, let me add some color on the dream and what sort of acquisitions from a financial perspective.
These brands generated approximately $40 million of external revenue in 2020.
Since we produce all over the west <unk> and half of the Dream volume.
This represents 15% to $20 million of incremental revenue to sum up debt.
As Joe pointed out with synergies, we expect approximately $6 million to $8 million of incremental 2022 EBITDA from the acquisition.
Let me close by offering some perspective on what we're seeing in terms of Q2 and full year 2021 results.
From a topline perspective with the acquisition and our continued momentum and plant based.
Could see growth and the 20% area for the balance of the year.
And fruit as a reminder, we closed the facility and shared that we would be rationalizing a second plant customers and Skus and are therefore forecasting revenue declines as a result.
Given some uncertainty and the fruit business it would be conservative to assume single digit revenue declines for the rest of 2021.
From a margin perspective, we would expect plant based to remain in the high teens area and fruit based to make year over year improvement each quarter from a more efficient portfolio of manufacturing plants and customers.
Finally from an adjusted EBITDA perspective, given some of the tailwind we are experiencing we could see growth of up to 50% in Q2.
And our outlook for the balance of the year is solid double digit EBITDA growth.
With that I'd like to turn the call over to the operator for Q&A.
Great. Thank you at this time.
And if he would like to ask a question.
Got it from the back and number one and you touched on.
Draw your question press, the pound or cash side.
And Bob and compile the Q&A okay.
And your first question Jacob per line of business.
Okay.
Go ahead. Your line is now open.
Good morning, gentlemen, and thanks for taking my questions and congrats on a solid Q1. Thank.
Thank you Bill good morning.
Joe I was hoping we could start here and just kind of get maybe your.
Kind of a broad state of the union on domestic oat milk.
And obviously, you guys, bringing unintended capacity.
And you saw that or at least filing and then talking about bringing on a lot of capacity additions this year I guess.
And as you stand today, and maybe what is the supply versus demand picture look like and.
Maybe if you could compare that to what it looked like a year ago and maybe what you expect it to look like a year from now anything there would be super helpful.
So we're seeing incredible consumer demand and triple digit.
Increases in demand across the board you are seeing a very robust competitive landscape with.
And really kind of four or five brands.
And procuring the vast majority of the market share we partner with several of those leading brands.
As they are going to market with oat milk offerings. So we feel like from a demand standpoint, we are in a really good position in terms of who our brand partners are as it relates to capacity.
We're incredibly fortuitous with the investment that we made in 2019 around oat milk.
We are seeing really strong business development and utilization from both existing and new customers around our oat milk production.
At this juncture, we still have available capacity.
We still have the ability to take on new customers and as you might imagine given a market that's growing and triple digits.
We have a real eye to the future in terms of understanding how high is up with oat milk and it will need to add additional capacity or capabilities and <unk>, but right now we're in a really good position.
With that facility that we stood up at the end of last year.
We're really starting to crank out volume and and helping our brand partners drive growth and help milk.
Great Thats Super.
Very helpful. And then I guess just wanted to touch on the acquisition of the dream and less soy brands here.
Okay.
I guess help me understand a little bit what the plan is for those going forward.
It's just an opportunity to kind of.
Consolidated some of the brands and your you were already manufacturing floor and get a little benefit and the P&L with debt or is there more that we should be thinking about here from a and.
Innovation and are building the brands going forward.
It would largely opportunistic.
We saw a real in sourcing opportunity.
To take on the <unk>.
Volume that we don't manufacture.
And we've also talked about interest in expanding beyond plant based milk and dream, especially has strong consumer brand equity and gives us optionality. If we were to look two categories outside of plant based milk.
And that gives us some optionality as far as the brand platform to access some of those opportunities, but our priorities at the moment.
Relative to these brands are very simple, which is in sourcing the volume and standing up the internal capabilities to manage these brands.
Okay, and then I guess, if you look across your.
And your partners your manufacturing floor today and are there are there similar opportunities with the relationships you guys have or.
Or is this kind of a one off.
When you say similar opportunity areas.
And more options to brands with brands and manufacturing for today, and you could potentially bring bring in house and that might make sense.
And do a similar transaction.
I wouldn't see us executing.
And anything beyond that just because it get.
Little bit entangled with existing customers part of.
Part of what made this.
And easy access opportunity was the fact that 90% of the volume of Dream is right milk and a 100% of west so a soy and and.
But beyond that I think we would we would get into a pretty entangled position. If we were to do something bigger and the space.
As far as acquiring a brand.
Great Great very helpful.
And does that and Keith for now thanks, guys.
Your next question comes from the line of Alex.
Capital. Please go ahead. Your line is now open.
Great. Thank you for taking my question and congratulations on a strong start to the year.
Wanted to ask about the foodservice recovery, that's going to be coming here Youre already operating at record revenue levels on the plant based side of your business and I would imagine a lot of your foodservice customers are right on the verge of showing pretty strong double digit comps for the rest of the year.
And that demand starts to come back you have enough capacity for all of that and existing to your existing customers and.
And just as you start to think about incremental capacity coming online over the next year, where do you see that incremental product going out the door growth.
Yes so.
And we're in a good position relative to available capacity to support foodservice recovery, absolutely I mean again three capital projects that came online in Q4 and additional capacity addition that will come online and the acute and Q4 of this year puts us in a very.
Comfortable position to support our customers' growth and as I mentioned that as one of the core components of our service offering to our customers is making sure that we have capacity available for them to drive growth as hard and as fast as they want to so it is a pretty.
Violent shift in demand that we saw during.
During COVID-19 and now kind of coming back again, but I am pleased to report that that the operations team and the whole business has done an outstanding job in filling customer filling customer orders, especially on the foodservice side of things as they I think candidly have been a bit surprised by the wrap.
And nature of the recovery of their business and and we are doing an excellent job and keeping them and stock filling orders. Our case fill rate is very very high and and again speaks to one of the core themes that I covered which was execution and.
Right now we're nailing it.
That's great to hear Inc.
Very much and I guess, just curious given that it is such a kind of a.
Dramatic shift and now ship back in demand or what are the biggest concerns you are hearing from your foodservice partners as a tool or the next couple of years and their menu debt.
Just having consistent access to supply a variety of products or particular formulations and just kind of curious what what restaurants, and we're really thinking about from you and I would say.
Look the kind of reopening and the next the next leg of their businesses.
I would say there is two things.
We're hearing pretty consistently one is are you guys ready.
For a pre dramatic snapback in demand and our answer is absolutely we are ready and the second thing is on the upstream availability of ingredients.
And I think theres been innumerable new stories of.
Kind of upstream raw material shortages from.
Computer chips to copper et cetera, et cetera, I mean, we've all seen the story and so that would probably be the second theme or here and Alex is just and do you have any upstream.
Pinch points or supply constraints and.
Again to date.
And we feel very confident in our procurement and sourcing efforts to make sure that we have.
Good flow of raw materials, we obviously source raw materials from around the world.
And we feel good at this point that we have.
The right flow of raw material ingredients into our manufacturing plants to support the snapback and growth.
That's great thanks very much.
Your next question here comes from the line of Lake.
Lake Street Capital. Please go ahead. Your line is now open.
Hey, guys first question from me just wanted to check on kind of the cadence of in sourcing on the dream products. It sounds like you expect this to be complete by the end of next year.
And the additional details you can give us would be great on the timing, yes, we expect to complete it by the end of this year.
Perfect.
And the EBITDA and the incremental EBITDA would be fully affected and in place for 2022.
Excellent and.
And you just talked a little bit about logistics and supply chain and it sounds like you're in good shape. There, but are you seeing anything on kind of inflationary pressure and pricing.
Yes.
Scott I would say, we had modest headwinds, which we talked about.
In Q1.
And as Joe talked about a moment ago, we're looking at actively and.
Probably the easiest way to think about it is and it's.
Really three categories of costs and certain raw materials.
Operations and supply chain and they behave a bit differently between the two channel.
Co man.
Think plant based.
A significant amount of installation from raw material volatility as those are generally pass throughs of course, our operating costs are for our account and then unless it's a supply chain and there is some inflation because a fair amount of calm and businesses pick up.
And then we think about the second channel or private label and as we've talked about with it being pass onto majorities of raw material costs.
GAAP operating costs are for our account and it's probably a little more exposure on supply chain since that tends to be delivered business. So net net net and a pretty good place for Q1, but.
Zero.
Okay and then the last question from me interest any update on kind of the Sone and also as we look back at our.
Bar.
Learning and results on branded products.
Yes, so far we're pleased with the.
Sales velocities on zone, we're in.
And the right accounts, which I think is important this is an organic.
Offering but.
I would just tell you that the early velocity that we're seeing out of the lead accounts are exceeding our expectations and we are being systematic and surgical as we look to add distribution to make sure that we're putting it into the right accounts that have a.
Shopper profile, that's going to fit a premium product like this.
Excellent. Thank you.
And I'm not showing any further questions at this time.
I'll turn the call back over to Joe and then for closing comments.
Great well. Thank you everyone for your time and interest we appreciate it and look forward to speaking to you again and thank you.
And this concludes today's conference call. Thank you for your participation you may now disconnect.
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