Q3 2021 Sunopta Inc Earnings Call
Yeah.
Good morning, and welcome to sum up the third quarter fiscal 2021 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 each on from this website.
First I'd like your thoughts on after the Dot Com this call is being webcast.
Transcription will also be there'll be either on the Companys website.
As a reminder, please note that the prepared remarks, which will follow contain forward looking statements and management may make.
Additional forward looking statements in response to your questions. These.
These statements do not guarantee future for apartments, and therefore undue reliance should not be placed upon them.
Refer you to all risk factors contained in front of 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 a 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 law.
Finally, we would like to remind listeners that the company may refer to certain non-GAAP financial measures. During this teleconference.
A reconciliation of this non-GAAP financial measures was included with the company's press release issued earlier today and also note that unless otherwise stated all figures discussed today are in U S dollars and art occasionally rounded to the nearest million.
And now I'd like to turn the call over to sum up the CEO John Edmunds. Please go ahead Sir.
Good morning, and thank you for joining us today with me on the call is Scott Huckins, our Chief Financial Officer.
Before I begin unpacking. The Q3 results, let me offer three key takeaways from the quarter.
First given everything going on in the macro environment. It is worth starting out by stating that nothing has fundamentally or structurally changed within our business.
Our strategy priority deployment of capital and expansion plans are all on point.
<unk> was exceptionally strong, especially in areas like oat base oat milk and fruit snacks again underlying the alignment of our priority then investment with the market dynamics.
Second we saw very strong demand in plant based especially in oat as oak revenue tripled versus the prior year revs.
Revenue was plus 16% versus prior year, achieving our highest ever Q3 and plant based and were it not for the raw material and labor challenges, we would've had growth in the low 20%.
Sourcing incremental raw materials and incremental labor above plan proved challenging and disruptive to our operation.
It would've been a much smoother quarter. If we were just trying to deliver plus 5% plant based growth. However, our aspirations are much larger than that.
From a margin standpoint, gross margin and plant based declined 360 basis point of.
Of which a 100 basis points was incremental depreciation.
And the remaining 260 basis points was the result of the current supply chain and labor challenges given some of the challenges reported by our peers only realizing a 260 basis points supply chain hit solidly represents the efforts of our passionate team hustling for every case and every dollar of productivity.
Third while there was some timing impact in the quarter related to cost inflation or co manufacturing cost pass through business model and our other pricing strategy have us in a solid position.
Based on confirmed customer pricing adjustment, 100% of the current raw material price inflation will be passed on.
These pricing adjustments will be fully implemented by the end of this month.
Now I'm sure everybody on this call are keenly aware of the unprecedented challenges impacting the global supply chain.
Like many companies, we were challenged by labor availability raw material availability and inflation along with the corresponding push to pass it on it.
It is important to note that these same issues are hitting our customers and that is creating fluctuating order patterns, which is also disruptive to our operations.
The three pillars that underlie our strategic growth priorities portfolio transformation accelerating customer centric innovation and doubling the plant based business have not changed.
We continue emphasizing topline growth in our plant based business and improving profitability and fruit based.
Our multi pronged approach to solidify our leadership position by expanding capacity in the plant based business, while optimizing our fruit based margins remained firmly on track our Allentown project will be coming online by year end, the Modesto expansion along with the initial phase of the Mega plant in Texas.
In August are all on target to be operational by late 2022.
Collectively these initiatives combined with our investments in 2020 provided doubling of our client base capacity, enabling significant growth as well as derisking the supply chain through geographic diversification.
Redundancy and network optimization.
We continued to see strong consumer and customer demand for plant based products, where we remain focused on strengthening our competitive advantages.
And fruit, we're driving supply chain and cost efficiencies to improve the gross profit, which we are increasingly optimistic about our strategies are starting to pay dividends and we expect to return to growth in 2022 based on the New business Awards, we have received.
As it relates to the shortages in raw materials and labor I want to recognize the herculean efforts of the team and responding and tempering the impact.
From adding backup supplier to the backup suppliers, finding new sources of raw materials hosting job fairs, working double shifts adjusting production schedules on the fly to match the raw materials, our team has risen to the challenge that.
We also have a stepped up focus on retention and our client base facilities.
These are highly automated sophisticated plants with highly skilled workers and training new employees can take months.
That's where we are through the first six weeks of Q4 I can share that we are in a better spot as far as staffing and the plans.
There is still open positions, but fewer than this summer and there is still work to be done around training to improve our overall efficiency.
Similarly, the raw material situation is sequentially better than this summer.
As I mentioned for the most part we have been successful in sourcing our planned level of raw materials. It is sourcing materials for the growth over and above our planned growth that has been challenging and disruptive.
So with all of this as a backdrop our total company revenues in Q3 increased three 6% to $198 5 million, which as I mentioned was somewhat suppressed due to our inability to keep up with demand.
This had a disproportionately negative impact on gross margin due to underutilization and plant disruption, resulting in a 220 basis point decline to 11, 8%.
Despite these factors we delivered eight 4% growth in adjusted EBITDA to $15 6 million by mitigating headwinds through proactively managing SG&A.
Now, let me turn to our segment results.
Starting with our plant based segment.
As a reminder, we have three strategic priorities in our plant based business unit first is strengthening and fortifying our competitive advantages already present, and our son after value proposition.
Second compete in refrigerated plant based beverages by building a strong ingredient business focused on oath.
Third build a multi pronged go to market business that includes co manufacturing private label and owned brands.
So reasonably ourselves bullish about the growth in this business is that we have multiple layers of competitive advantage that comprise our son after value proposition.
This model has five dimensions.
First the capacity having available capacity for our customers to grow.
Second quality consistent product quality that comes from new state of the art plants third cost delivering advantaged supply chain costs that are derived from our national manufacturing footprint fourth service with professional support and strong order fill rate.
And last but not least is innovation that is enabled by world class R&D to accelerate customer innovation.
We've made a significant investment in R&D and talent and a brand new R&D innovation Center in Minneapolis, which includes a full scale pilot plant.
We start moving into this new facility in the next six weeks.
We reported plant based revenue of $114 9 million in the third quarter up $15 8 million or 16% over prior year, which is the highest plant based Q3 in our history.
This 16% growth at 23, 9% on a two year stack basis.
Had we not faced challenges around labor and raw material availability, our client base growth would have been notably higher likely five points or so as I mentioned earlier.
Retail scan data for the plant based milk category shows 6% growth over the last 13 weeks and compared with 2019, the 13 week growth was 24%.
Looking at the trends by ingredient type for the last 13 weeks Almond has a 63% market share and revenue was down slightly.
<unk> has an 18% share and revenue was up 65% and so he has an 8% share and is flat.
New customers life, new business accounted for an impressive 34% of our plant based growth with a significant portion attributable to our own brands.
<unk> west soy and zone.
Beyond our brands, we also signed a new two year contract with a major foodservice customer to supply it.
And we extended our manufacturing agreement for another two years with an existing oat milk customer, which is one of the leading brands in retail oat milk.
Revenue from our top five client based customers increased 14% during the third quarter more than <unk> the pace of category growth.
The majority of this gain was driven by oat based offerings, which more than tripled.
As I mentioned on our last call. The success of our brand partners as a strong marketplace testimony to the quality of the product that is produced by our proprietary extraction process as evidenced by consumers purchasing behavior and validated and quantitative consumer testing.
Innovation led is one of our three strategic priorities and this is a great example of the power of proprietary innovation combined with Great brand partners.
We have secured long term commitments from our three largest existing old customers.
When you combine this with strong interest from other major new customers. It is highly likely that we will soon begin construction on another extraction facility in the very near future.
From a go to market standpoint, our owned brands were a key growth driver in the third quarter Dream and West side, which we acquired in Q2 contributed to growth and performed slightly ahead of our expectations as did zone.
Organic oat milk cleaner.
<unk> was named a 2021, new products by Progressive Grocer magazine, and we are seeing strong velocities and expanding retail distribution.
We expect to be in over 3500 stores by the end of the year.
Brands accounted for only 6% of Q3 plant based revenues, but we are excited by the long term prospects of our branded portfolio as an aggregate. It has a more than 1000 basis point gross margin advantage compared to our core business.
As we have communicated for the past two years, our plan is to double the size of our plant based business as.
As such business development is a critical component to realizing this goal.
We have several promising opportunities we are working on with leading CPG customers, who are significantly expanding their plant based portfolio.
Additionally, now that we have begun construction in Texas, we have initiated the first phase of business development for a brand new capability for us.
This capability is one of the building blocks of our plan to double the business.
We will be installing equipment to produce 330, milliliter Tetra Pak beverages.
For those not familiar $3 30 ml is the size, commonly associated with protein drinks, which you would see in club stores gems and virtually every other food retail outlet in America.
The retail sales for the nutrition beverage segment is approximately $3 5 billion and we estimate the majority of this is co manufacturers clearly this is a big opportunity for some after and we are actively engaging with multiple potential customers. We expect to be in production with this new capability in Q1 of 2023.
Moving onto our fruit based segment were three strategic priorities are number one derisking the business, which we're doing through geographic diversification customer pricing programs and better girl relations.
To becoming the low cost operator in frozen fruit through automation footprint, reengineering and aggressive actions and right sizing SG&A and three evolving the portfolio via innovation towards more value added offerings.
We reported fruit based revenue of $83 6 million in the third quarter down $9 million or nine 7% over the prior year period.
Similar to what you've heard all year. This reduction is reflective of SKU and customer rationalization, along with global shortages in certain fruit types, such as blackberries and raspberries.
Declines in frozen were partially offset by fruit snacks, which increased 21% fueled by growth in both CPG come in customers as well as retail private label customers.
We are seeing very strong demand in fruit snacks across the board and consider this a growth engine for the future.
In addition, we have successfully launched Smoothie bowl products, which will be marketed across co manufacturing private label and our own branded platform.
Based on Nielsen data the frozen fruit category is basically flat over the last 13 weeks.
With private label outpacing branded offerings rising 3%.
The fruit snack category is up an impressive 16% over the same time period.
Our business grew faster than the category propelled by strong growth from our top retail customers as well as our top CPG co manufacturing customers.
Our focus over the last several months and fruit has been around pricing to provide some perspective, we have executed significant pricing increases across the portfolio, including with our largest customer.
These actions are expected to pass through the entirety of the fruit cost inflation.
These pricing actions are material, representing low double digits as a percentage of revenue.
In summary, despite all the global supply chain issues are plant based segment produced another solid quarter of growth delivering a record setting third quarter more than offsetting declines in our fruit based business.
We continue to work to mitigate the impact of supply chain issues, creating transitory headwinds and our long term outlook for double digit plant based revenue growth and continued improvement in return on invested capital remains unchanged, we've been winning business with new customers, capturing additional business from existing customers add.
The capacity and expanding our portfolio of products.
Coupled with our strong balance sheet <unk> remains well positioned for substantial long term growth and some of the fastest growing CPG categories.
All of which supports my continued optimism as we continue to focus on fueling the future fruit.
Now I'll turn the call over to Scott to take us through the rest of the financials Scott.
Thank you very much Joe and good morning, everyone. We're excited to report another quarter of plant based revenue and adjusted EBITDA growth.
As Joe mentioned third quarter revenues of $198 5 million were up three 6% year over year.
Reflecting strong demand in plant based where revenues increased 16%, partially offset by a nine 7% decline in fruit based revenues due to both the rationalization of marginally profitable skus and ongoing shortages of certain fruit varieties.
Adjusted EBITDA increased eight 4% to $15 6 million.
Gross profit was $23 4 million for the third quarter of 2021, a decrease of $3 5 million compared to the third quarter of 2020 in consolidated gross margin declined 220 basis points to 11, 8%.
And plant based segment level gross margin decreased $1 million or 360 basis points to 16, 3%.
Lower plant utilization was the primary factor due to supply chain disruptions and labor shortages.
This adversely affected plant efficiencies during the third quarter worth 260 basis points.
Addition, depreciation expense increased 100 basis points over last year similar to the second quarter.
And fruit based segment level gross profit declined $2 5 million or 210 basis points to five 6%.
The decline in fruit based gross margin reflected higher commodity prices for most theories higher production costs and higher cost of fruit inventory due to a stronger Mexican peso versus the prior year.
Pass through pricing rationalization of marginally profitable business and productivity gains were mitigating factors and fruit based during the quarter.
As we have previously stated we are confident we will pass on materially all of the fruit cost increases, but there is a timeline.
Operating income was $3 9 million in the third quarter compared to $3 1 million in the year earlier period.
SG&A decreased $5 6 million or 25, 3% to $16 5 million, primarily due to reductions in variable compensation and a head count reduction in our fruit business.
Partially offset by transition and integration expenses related to the dream and what sort of acquisition.
Loss from continuing operations attributable to common shareholders for the third quarter was $3 8 million or <unk> <unk> per diluted share.
Compared to a loss of $6 7 million or <unk> <unk> per diluted share during the third quarter of 2020.
Note that this quarter's loss is after giving effect to $2 8 million of expenses related to the transition and integration of the dream and what sort of acquisitions.
Development costs, including our new plant based beverage facility under construction in Midlothian, Texas and costs related to the exit of our South gate fruit processing facility.
Loss from continuing operations also absorbed $2 9 million of income tax expense due to the lack of deductibility of certain expenses.
On an adjusted basis third quarter 2021 earnings were $1 1 million or <unk> <unk> per diluted share versus an adjusted loss of $5 8 million or <unk> <unk> per diluted share in the prior year period.
Adjusted EBITDA was $15 6 million compared to $14 4 million in the prior year and eight 4% increase.
In addition to the <unk> 8 million improvement in segment operating income depreciation and amortization was $1 3 million higher versus a year ago, reflecting our capacity expansion initiatives and plant based.
Partially offsetting these increases was a $2 2 million decrease in stock based compensation expense.
Finally, adjusted EBITDA included $1 6 million and add backs for business development costs associated with the acquisition of Dream and West as well as project costs for our new plant based beverage facility being constructed in Texas.
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 October <unk>, 2021, total debt was $220 million, approximately 50% lower than a year ago and up $14 million from the end of the second quarter.
Total debt reflects $170 million drawn on our asset based credit facility with the balance representing smaller credit facilities lease and other financing arrangements.
Leverage stood at three one times at the end of the third quarter versus five three times a year earlier.
From a cash flow perspective cash provided by operating activities. During the third quarter of 2021 was $5 1 million compared to $8 7 million of cash provided by operating activities during the third quarter of 2020.
The change in operating cash flow versus last year was primarily due to the year over year change in net working capital.
Cash used in investing activities was $17 4 million compared with $11 3 million in last year's third quarter, primarily reflecting investments and capacity expansion projects.
I'd like to remind listeners that we expect to see our customary reduction in working capital and resulting cash flow benefit in Q4.
Before we turn to the outlook and given our investment in capital projects I'd like to comment on our capital allocation priorities and perspectives on capital expenditure Rois.
As we have discussed previously we prioritize our plant based business from a capital allocation standpoint.
All investments in fruit have been more modest and centered around cost reduction projects.
In plant based to remind you we have three projects in flight now which are the expansion projects in Modesto, California, and Allentown, Pennsylvania, along with our Greenfield plant 10, Midlothian, Texas.
When we think about return profiles is important to understand that there are three broad categories of growth investments.
One building a specific capability such as oat extraction.
Two general capacity expansion to an existing plant.
And three building a new plant.
Looking across these investment types taken in the aggregate they provide somewhere between a three and four year payback period, which is attractive.
Let me close by providing some commentary around the outlook for the fourth quarter. Recognizing we are all operating in uncertain times with supply chain labor and ingredient challenges.
Further it is important to recall that Q4 2020 had an extra week. So we will be talking about adjusted growth in light of last year's 50 <unk> week.
On the topline we are assuming that we will continue to experience some disruptions and as such we expect the total company to grow in the mid to high single digits versus Q4 2020 adjusted for the 50 <unk> week.
From a margin standpoint, we expect Q4 to show some sequential improvement.
Finally from an EBITDA standpoint, given the macro environment headwinds Q4 will likely be similar to last year. Recognizing Q4, 2020 was a record quarter from continuing operations of $26 million.
Before opening up the call for questions. Just a reminder that for competitive reasons, we do not provide detailed commentary regarding customer or SKU level activity.
With that I'd ask the operator to please open up the call to questions.
Thank you and as a reminder to ask a question you will need to press star one on your telephone again that would be star one on your telephone.
Please stand by while we compile the Q&A roster.
Your first question comes from the line of Brian Holland from Cowen and company. Your line is open.
Yes. Thanks, good morning, if I could start with.
The Q4 outlook.
Kind of drilling down on the segments here, you talked about sequentially the margins looking a little bit better.
Is that balance is that biased towards one segment or the other.
Hey, Brian Good morning.
Roughly a couple of things.
We talk about pricing actions that we would expect to benefit the fruit business. We would also expect.
Continued mix benefit.
We see the growth profiles of the two segments are different.
Yeah.
And your next question comes from the line of Andrew Charles <unk> from BMO. Your line is open.
Hey, good morning, Thanks for taking the question.
I guess I guess to start on the top line side I mean can you talk a little bit about kind of unpacking between the retail and foodservice you highlighted some of the movie.
Scanner data numbers, but just curious what you're seeing also on the foodservice guide how that recovery ratio.
And last quarter, you made some comments about.
<unk> relationships.
Our relationship with one of your largest your largest customer on that on that side. So just any kind of confidence around that or how youre viewing any changes around that would be fantastic. Thanks.
Yes, we actually saw stronger growth on the retail side of the business.
This quarter.
<unk> bye.
A strong driver on both sides of the equation both on retail and foodservice, obviously, we were particularly pleased with our triple.
Open health revenue and continue to see exceptionally strong demand there.
As it relates to.
Our milk business with our largest customer I would certainly I don't want to speak for them I would direct you to their earnings release on October 28th where they specifically reference, adding additional suppliers and of milk and other categories.
And I would say given our confidence in the long term business that we have in milk.
Why we indicated we're initiating construction of a second.
Second oat milk extraction facility.
Okay, and then obviously the focus on the numbers you cited around kind of underlying growth in the category of oat milk are tremendous.
Even though you could maybe elaborate a little on what Youre seeing.
Almond milk side, even at the category level I guess.
It's the biggest chunk and it was declining I mean is that just a function of what we saw a year ago and looking at either on a two year basis is more appropriate or just kind of does that concern you at all I'm just curious for your thoughts around that.
Revenue was pretty close to flat.
Im talking retail scanner data.
Milk is still the lion's share of the category and revenue was flattish so.
The way to look at it is I mean, the plant based milk category.
<unk> is to source now source volume from Calgary not intra.
Greedy components right and that's what's so exciting about plant based milk category.
Not just sure smashing.
One ingredient type trying to take share from the other but continuing to bring consumers to the category. So we did see oat milk cat retail scanner level.
Flatten out but.
We obviously have a significant business into oat milk.
We're one of the pioneers in putting in extraction in the U S and we're well positioned to capitalize on that consumer momentum I mean, obviously, if our business tripled and the category was up 65% we were pacing again.
I'm mixing metrics here, because one's retail scanner data versus the P&L number, but I think you can see that we continue to do exceptionally well in <unk>.
Very well positioned to continue to ride that wave.
Okay that makes sense and then my last one on the margin side.
A number of the factors that you cited are industry wide and outside of your control I am curious if there are things or efficiencies that you are pursuing that we should be considering moving forward as it relates to things that are within your control.
The corporate services line at least to where do we look at it was much lower than we were anticipating.
You talked about some headcount reductions and fruit and we know that there is ongoing actually there. So maybe there's things around that you can talk about but I'm. Just curious anything that we should keep in mind that maybe youre doing internally or that might be sticky beyond even when this when the supply chain and other dynamics kind of subside. Thank you yes.
Yes.
You, obviously made some reductions in head count and.
Endeavored to be judicious in our management of operating expenses.
Ali we've talked on our on the fruit side of the business.
For several quarters about our initiatives to deploy more automation we.
We are deploying more automation in our plant based plants.
As well in order to help mitigate some of the pressures around labor availability.
Got it thank you very much.
We have very next question coming from the line of Bobby Burleson from Canaccord. Your line is open.
Hey, good morning curious with the.
Dialing back from some of the SG&A to kind of offset the gross margin pressure.
Whether or not that was exclusively.
Things that you were already pursuing on the fruit.
This business or if there was any impact on.
Plant based in particular.
Any initiatives related to the settlement.
<unk> brands.
Good morning.
So in terms of the.
Costs.
The headcount reduction this was squarely focused on fruit not plant based excuse me.
The balance of it is if you look at that.
This release Youll see pullback for example, the stock based comp so that was really the.
Fair enough.
Total so that is really the core thrust of the end of the cost reduction.
Great.
And then just on the topic of Sone.
I guess 3500 doors there at this point.
Any sense for.
What the doors could grow to over the next year.
Is this something where you see the door count essentially doubling it is part of what's driving that.
New distribution relationships or.
New relationships.
Retailer.
Yes, it's new.
It is new relationships opening opening up for us at retail I mean, we have really strong velocities.
The brand is doing very well on Amazon as well, so we're able to leverage the success there and the ratings that we're.
Showing on Amazon to pull through.
And sell against for retail distribution.
Im not prepared to comment on the 2022 and state distribution number I would say we have a passionate sales team who are out there.
Telling the story around zone, and I would expect.
Significant continued distribution gains into 2022, especially when you take into context retail resets of categories were somewhat impacted by Covid and the availability of labor to do that and so assuming 2020 to look.
More normal.
I think youre going to see increased.
Susie out of them by the retailers to do major category resets and that should open more doors for us.
To bring this one product into retail distribution.
Okay, Great and just one last quick one is there.
You may have talked about this before just curious.
Is there a plan to.
Add additional skus under the facility.
And.
How many skus, we think so.
You could add there ultimately.
I think we're up to four I don't know if we have officially launched it or not but I guess, we will end this call a salted caramel version, so that brings us to a floor.
We're going to keep it very focused on organic oat milk creamers for the moment and really our focus is on driving retail distribution as opposed to skew proliferation, but we think four represents a nice shelf set for the retailer and for the consumer and offers some good choices within with.
The brand lineup.
Great. Thank you.
Thank you and we have your next question from the line of Jon Andersen from William Blair. Your line is open.
Good morning, and thanks for the question.
I wanted to ask about the plant based business.
Yes.
Organic growth in the quarter was 10%.
Which was a bit of a deceleration from 16 in the second quarter. It sounds like most of that was related to the labor and raw material supply issues.
Scribe.
Yes.
When do you anticipate.
That correcting I E.
Labor and supply getting to a point where you can.
I guess shipped to the full potential of that.
The demand in that business.
Yes.
First question John.
John I think I wish I could give you a precise answer.
But.
I think what we're seeing in the fourth quarter as sequential improvement versus Q3.
And I think no.
Most of the <unk>.
External.
Thoughts that I've read on that topic is Q1, and Q2 are going to continue to be a little bit bumpy I hope that's not true.
But.
Within the context of what <unk> can control and what we're focused on.
I think we're doing an incredible job managing through a tough situation and again.
We're delivering growth we're producing at a very high level. It's just we're kind of hitting a few speed bumps.
Here and there.
One when you are used to operating at a very high level that's disruptive.
Sure.
Can you.
Just to refresh us I know you touched on a couple of these in your prepared comments, but.
I just want to make sure I understand that.
The recent agreements.
Contractual agreements that you've put in place are extended with key customers and plant based.
New customers or new business that you see on the horizon that I think you referenced.
And then what kind of visibility that gives you into 2022 growth.
From the plant based business.
Yes, that'd be helpful.
Yes.
This is a business that is.
Defined.
By longer term agreements given some of the supply and demand imbalance in the category. We are obviously very interested in long term agreements as is our customers. So we have pretty good line of sight to 2022, I would offer we're not prepared to kind of fully unpack.
Some outlook for 2022, what I would tell you is we've been pretty consistent in communicating the aspiration to double the business, which roughly translates to 15% growth.
Every year for the next five years and I think that the.
Good starting point and as we get deeper into next.
Next year, we can we can certainly offer some.
Direction as to what Thats looking like but we feel good about our growth plans for 2022 and aggregate for sure.
Okay.
<unk>.
On the extraction part of the business.
Maybe incorrectly assumed that perhaps the greenfield facility in Texas.
Would take care of.
Some portion of that would be dedicated to OTA extraction.
But it sounds like there's a new facility in the works for that can you give us a little bit more.
A sense of what what kind of capability and capacity is going in in Texas in.
The need for a separate.
Facility I don't know if its another greenfield plant.
400 extraction, yes.
It would not be a greenfield plant.
We are still doing an assessment as to whether that goes into midlothian or whether we put it in modesto, it's likely to go into Modesto, just based on where our customer demand is it makes more sense, but.
We're doing we're doing that assessment so between talking about the old extraction as well as the $3 30 ml business, we were trying to give a little bit more line of sight to future business development.
Yes.
That point on the $3 30, milliliter Tetra Pak.
B.
Within one of the existing facilities as well that will go into the mid Lothian.
So I will go ahead.
Sorry.
Yes.
Yes.
The ingredients the named Midlothian into your brain, yet that as our Texas facility, just south of Dallas Fort worth.
No I picked up on that earlier.
On fruit.
I think someone made the comment Scott might a bit or maybe maybe drove into that you expect to return to growth next year.
Can you talk about that like what kind of growth are you looking to achieve from that business. What gives you confidence.
You can grow.
The topline and fruit in 2022 and then.
Just the follow on to that as you're implementing pricing and fruit it sounds like thats going in later this month.
Does that.
Kind of cover.
The full gap, if you will and what I mean is youre experiencing cost inflation berries, but theyre also transportation elements.
Or.
Inflationary.
Do we think about that price increase that's going into that kind of cover the whole nut and is that in place by.
At the end of November.
Yes, we expect to have all of the inflationary factors fully covered by the end of this month.
And part of the confidence in growth for 2022, I would suggest it's two things number one we have certainly endeavored over the last 24 months to significantly reengineer. This business to where we were one of if not the low cost producer in the CAG.
And so you have a very handy scorecard on that which is whether you are winning new business or not and so we feel increasingly confident based on the new business awards that we're seeing for 2022.
Indeed, making significant improvements in our overall cost structure on fruit so between the combination of new business as well as.
Revenue increases from the pricing that is what gives us confidence.
To suggest that we'll see revenue growth in 2022.
Okay. Thank you.
Okay.
We have your next question coming from the line of Mark Smith from Lake Street Capital. Your line is open.
Hi, guys just wanted to dig in a little bit more on this labor and raw material shortages or anything else that you can quantify as far as the impact in the quarter and we're kind of stand today with those headwinds.
Yes, so working backwards, we've seen sequential improvement.
Through the first part here of Q4.
Not all the way back to bright on raw materials and labor, but it is a better situation than we were in in the third quarter.
In terms of what those look like.
It will take me either a very long time here to summarize them or a very short time and I would just say there were dozens of little speed bumps along the way that kind of took us off.
Of course, you know whether it was <unk>.
Not having truing available for a specific shift or a downstream customer moves in order because they can't get a truck or raw materials were a day late because they couldn't get a truck or they.
They didn't have a gluten free test kit to test the product to make sure. It arrived at our facility is certified gluten free I mean, all of these kind of little things.
Really added up and so that's why we feel.
Number one proud of the efforts of the team, but number two that when you when we look at the things that.
Impacted us they are really not structural they are really transitory.
Little speed bumps.
Okay and the second.
Second question of integration of the recent acquisitions can you just talk about kind of how that process has gone and we did see some incremental costs from that that you've called out kind of your outlook.
Four on costs from continued integration.
Integration is materially complete we're off the TSA.
And our fully managing these brands from.
This tip to tail.
And right now the organization is focused on pivoting and really trying to drive accelerated accelerated growth, but the integration has gone very very smoothly.
Excellent and then last one from me is just transportation costs and maybe even more so availability any headwinds that you see here in Q4.
Yes, good morning.
We can give you a couple of metrics perspective on a year over year basis.
We're probably up in the order of about 20%.
<unk> done a very good job managing this.
From an internal standpoint, we actually contracted with asset owner carriers, which obviously gives us an advantage versus the spot rate.
Continues to be I think it's fair to say a fairly tight market and those costs continue to decline, but I think we'd remain on top of that you'll you'll notice we didn't call out a ton.
In the prepared remarks, Chris diaries.
Perfect. Thank you.
We have another question coming from the line of Brian Holland from Cowen <unk> Company. Your line is open.
Yes, Thanks, I got kicked off the operator.
My customer specific questions.
You can learn from you Brian so glad to have you back.
Yes.
Everyone cleaned up.
Most of the outstanding question, but.
I had but maybe if you could just kind of discuss I'm trying to sort of reconcile.
The labor raw material issues impacting Europe.
<unk> your ability to kick out volume with D. A.
With the incremental customers business that youre, bringing on.
So how are you can you just help me unpack, how youre doing that how youre able to bring on more customers. In this dynamic is it does it have to do with your comfort level and your customers comfort level would be.
Timeline for you getting back on and maybe if I could talk about the second question.
Maybe going back over a year now you sort of laid out some of those capital projects that you've brought on over the past 18 months and how much revenue they could bring on.
Are you able is there upside to those revenue numbers based on either running more shifts, which obviously seems like almost an irrelevant question given the labor component that you are dealing with now, but whether its through increased efficiencies or if and when you can bring on more labor and run those 24 seven is there incremental revenue that gives you a little.
More cushion on your way to ramping Dallas Fort worth.
Yes, so kind of working backwards from from your questions as it relates to the Dallas Fort Worth project, we've already.
Hired a plant manager for for that and he is beginning the efforts to start to build the team. So we're well ahead of the game.
On getting started on the on that given that facility you won't be opened for 12 months. So.
We are certainly being proactive in trying to build the right team. So that we're ready to hit the ground running when that project is commissioned and ready to produce salable product.
As it relates to bringing on new business in the context of some of the challenges.
Recognize we grew 16%.
Client base. So really this is a story of.
Trying to punch above our weight class if you will in terms of.
We had demand that exceeded what we were able to produce and we were hustling to try to produce as much of that volume as we possibly could.
So it's not like there was some.
Massive structural issue that hit us it was just.
Our whole series, which everybody is struggling with I mean, absolutely everybody is struggling I don't think Theres unlimited supply of anything right now, including people are raw materials and so as we went into this and we saw stepped up demand.
We're attempting to drive incremental growth above our planned growth and.
And Thats, where we experienced some challenges so think about okay. We tripled out we were chasing more.
And it became increasingly challenging to get raw material et cetera, but we obviously procured enough to triple the business. So it wasn't like there wasn't any raw material available, but as we chase the growth that we didn't have in our plan.
That's where that's where things Scott.
Interesting.
Okay.
Fair enough.
Yes.
Yes.
Perfect.
And then if I could just kind of.
I'll start with this one on the balance sheet.
Can you just remind us Scott just kind of talk through the flexibility that you have on the balance sheet, because I think one of the concerns that I've heard from folks is well, they're going to add Dallas Fort worth they've talked about maybe needing incremental capacity beyond that how are they going to fund. Most can you just remind us how.
You are able to fund.
What levers you have to pull there as far as funding some of the sports coming Capex.
You bet.
It's really Q2 tools in the toolkit.
As you are aware last year, we haven't seen new that we're going to have the what we now call the mid low taxes.
Texas plant coming.
So when we redesigned the credit facilities, we added $875 million delayed draw term loan that is principally earmarked for equipment in that facility.
Just staying on Texas.
We've got a pretty good job and the capital lease market finding a cost effective financing for build out costs and so I think that will continue.
If you look through our filings with if you've seen we've done a decent job raising that capital lease financings for projects because again.
<unk> constrained market I think broadly lenders appreciate the value of those assets.
And then.
You reference tools in your toolbox.
And at the risk of <unk>.
Injected sort of thesis.
Commentary.
Your stock one year ago today, you sold your ingredients business.
Trading at more than 10% below.
Where you were this time last year, when you announced that sale, so and last year, you've announced that sale you.
<unk>.
We reaffirmed the doubling of the plant based.
The beverage business by bringing on Dallas Fort worth.
And absent today Mark.
Smith here.
<unk> delivered EBITDA ahead of every quarter, but you've been the CEO.
Yes.
We talked about taking two said I mean, when you look at the balance sheet leverage.
Our share repurchases.
At these levels do they enter the equation at all or to your capital are your capital needs such that you bet.
To remain nimble there. So just help us think through that here. This morning would be helpful.
Sure.
We've had a couple of holders bring up the topic and candidly, we mentioned that to our board.
For context, and awareness I think that in the <unk>.
Mediate near term.
The thing, we're mindful of not wanting to increase leverage.
Simplistic way to effectuate it.
Alright.
Definitely I never never say never sort of situations.
Yes, I appreciate all the color best of luck.
Thanks.
Sure.
And there are no further questions I would now like to turn the call back to some of the CEO Mr. Joe Ennen for final remarks. Please go ahead.
Great well. Thank you everyone for your interest and I hope everybody have a great day. Thank you.
Okay.
And this concludes today's conference call. Thank you all for participating you may now disconnect.
Okay.
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Thanks.
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Thank you.
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Thanks.
Yes.
Okay.