Q3 2022 Sunopta Inc Earnings Call
Good afternoon, and welcome to Sun <unk> third quarter 2022 earnings conference call by now everyone should have access to the earnings press release that was issued this afternoon and is available on the Investor Relations page on <unk>.
<unk> web site at Www Dot signed off.
Dot com.
This call is being webcast and its transcription will also be available on the company's website.
As a reminder, please note that the prepared remarks, which will follow contain forward looking statements and management may make additional forward looking statements in response to your question.
These statements do not guarantee future performance and therefore undue.
Reliance should not be placed upon them.
We refer you to all of the risk factors contained in this press release issued this afternoon.
The Companys annual report filed on Form 10-K, and other filings with the securities.
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 security 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 million.
I'd like to now turn the conference over to the Sun up to CEO , Joe and then.
Good afternoon, and thank you for joining us today with me on the call is Scott Huckins, our Chief Financial Officer.
Overall, we were very pleased with our Q3 results.
Revenue was up 16% with plant based revenue up 20%.
Profitability also rose significantly with a 42% increase in adjusted EBITDA.
These results demonstrate the durability of our competitive advantages in plant based and the traction of our turnaround strategies and through.
Let me offer several key takeaways before we began unpacking the result.
Encouragingly, we continue to deliver both revenue and volume growth.
We continue to cover almost all inflationary costs with customer pricing adjustments.
Similar to Q2, we had approximately 95% coverage of cost inflation.
We made progress in Q3 against one of our five strategic imperatives focused on portfolio evolution with the sale of our sunflower business and then idled frozen fruit plant in California.
The sale of the sunflower business will provide investors with a clearer view of the margins in our core plant based milk segment as sunflower was significantly margin diligent.
Despite a choppy supply chain, we continue to service our customers at an exceptionally high level with case fill rates in the high nineties.
Similar to last quarter the growth in plant based was broad based with growth across channels product types customers and go to market strategies.
Growth in plant based largely came from share gains from both new and existing customers, reflecting our competitive advantages and capacity additions we have made in 2021 and 2022.
Oh it continues to fuel growth in our plant based business unit and we are far outpacing the <unk> segment growth rates.
The oat milk segment growth in syndicated data for the quarter with plus 29% in dollars our old business grew 68%.
We saw significant improvement in fruit segment performance, both from portfolio evolution and productivity gains in frozen fruit.
Fruit snacks continues a very impressive growth pace at plus 52% most of which is volume growth.
Similar to almost all food and beverage categories. We are seeing some demand softness in what I would describe as an erratic demand signals from our customers.
Recall less than one third of shelf stable plant based milk show up and tracked retail channel data, where we continue to significantly outpace category performance and the foodservice channel remains strong.
Innovation continues to power of the business.
Oh based products like chocolate oat milk high protein oat milk, and even pumpkin oat milk, new fruit snacks, new value added frozen fruit blend and new plant based bowls are all examples of our commitment to lead through innovation.
Lastly, the construction and qualification of our Greenfield plant in Texas remains on budget and on track for an end of year startup.
Net net as a result of continuing momentum in the business, we are increasing our 2022 guidance to reflect strong year to date results and continued confidence in our outlook.
Scott will further break out the details later in the call.
Third quarter revenues rose nearly 16% on a consolidated basis driven largely by pricing.
We continue to see solid volume gains in our key growth categories of plant based milks, and especially oat milk and also fruit snacks.
We have three levers that drive volume growth category growth share growth and Tam expansion.
While we are seeing some short term moderation in category growth, we are more than compensating for this by pulling harder on share gains via new and existing customers and Tam expansion.
Gross margin of 13, 7% was up 190 basis points versus last year, Despite 140 basis points of pricing dilution headwind.
While margins continue to benefit from broad efforts to optimize input costs and production levels the year over year expansion in our fruit based business was especially strong.
This strength reflects the importance of earlier initiatives around SKU rationalization, and consolidating our manufacturing footprint, coupled with robust growth in our fruit snacks business.
Production output in our plants and service levels continue to be strong and all of our capacity expansion projects are complete or on track inflation remains a significant headwind, but we've been able to mitigate much of the impact with earlier pricing actions.
In the third quarter, we incurred approximately 25 million of increased costs and similar to the past couple of quarters, we were able to recover the overwhelming majority of that with higher prices.
At this point in time, we see some cost trending up and some trending down which in aggregate suggests there will not be a need for broad brush price increases in 2023.
Now I will turn to our segment results starting with plant based where we remain focused on three strategic priorities.
Number one strengthening and fortifying our competitive advantages.
Number two winning in oat milk to capitalize on the consumer trend and increase our participation in refrigerated beverages.
And third building a balanced multi pronged go to market business that includes co manufacturing private label and owned brands.
In our plant based business unit revenues were up 20% to $138 million in the third quarter, our 16th consecutive quarter of revenue growth and very similar to the plus 22% we delivered in the first half.
On a TTM basis, we have grown this business, 50% in the last 24 months.
These results benefit from our unique agnostic approach to winning in the category.
We have balance across foodservice and retail we have our own brands to bring innovation to market. We co manufacturer for major national brands, we manufacture products for private label and we sell ingredients, we arent and almond milk company or an Alt milk company, we manufacture almost every type of plant based meat.
Okay.
Oh, no woman to soy to cashew milk.
This approach combined with our competitive advantages continues to fuel growth.
When we look at the core plant based milk product group stripping out T broth and sunflower revenues increased 25% and this part of the portfolio represents approximately 70% of our plant based business unit.
Our tea business also remained strong with growth of 50% an acceleration from Q2, reflecting strong customer demand.
We saw a single digit decline in broth as we prioritized profitability and overlap some non repeating business from 2021.
This 25% growth in plant based milks was broad based with four of our five product types experiencing growth.
<unk> was once again, the largest contributor to growth with revenue from all other products up 68%.
<unk> is now the number one product type in our portfolio passing almond milk for the top spot.
Most of this increase was volume driven reflecting consumer growth and our strong partnership with the biggest fastest growing brands in the category.
Our old varistor products in foodservice contributed significantly to the 68% growth the.
The growth of these barista products is a testimony to our R&D capabilities as we have quantitatively demonstrated for customers that are outburst of products are functionally superior to other products in the market.
Coconut milk was up mid 30% versus last year again fueled by foodservice with roughly half of the increase stemming from volume.
<unk> soy grew low to mid single digits as higher price realization more than offset moderation in volume.
Looking at the results by customer channel retail was up 16%, reflecting strong growth in mass and club.
Foodservice was especially strong in Q3 with revenues up 30% driven as I mentioned by O based offerings.
Looking at the business from a go to market standpoint, the fastest growth continued to be in our branded business, where revenues were up 41% versus a year ago, including volume gains of 33%.
This growth was fueled by a doubling of our dream brand, which benefited from distribution gains from our top customers.
The largest part of our business our co man business grew a solid 16% in Q3.
Innovation continues to be a key factor in our growth and new products or new customers accounted for approximately 15% of our revenue increase in the third quarter led by large CPG.
Next I'll provide some context on the plant based milk category and its recent performance based on retail scan data.
We continue to see solid growth in plant based milk category.
In the latest 13 weeks total plant based milk dollar sales grew 12% while units declined 2%.
Private label units are flat and dollars are growing plus 7%, representing a 15% share of the category.
Category growth continues to be driven by oat milk with units growing 12% and dollars growing 29%.
Milk is now 21% of the plant based milks category.
Almond milk remains the dominant market share leader in the category with a 61 chair.
And saw a dollar sales grow 8%.
We remain confident in the long term growth potential of the plant based milk plant based milk is a $3 billion category in the U S. With a 10 year CAGR of approximately 8% and the underlying drivers of the sustained growth are incredibly durable.
First people, who drink plant based milk prefer the taste vs Cal milk and won't switched back to come out if they don't like the taste just to save 10 cents of glass.
More likely that these consumers will switch within the plant based milk category for value.
Second for the one third of Americans, who are lactose intolerance switching from plant based milks to milk from Macau will make them uncomfortable or sick, so that isn't an option for them.
Third plant based milk consumers understand and value the health benefits of these products.
When you think about these three category drivers from a consumer's point of view you can understand the durability of the consumer demand drivers.
While consumers will certainly find ways to save money like changing where they shop, how often they eat out or trading down to less expensive private label products. They are less likely to leave the plant based milk category.
Consistent with most food and beverage categories, we have seen consumers destocking their pantries as a result of the current economic environment, but we believe this is short term and we are seeing unit trends improve and the latest data.
New capacity projects continue to be on track with expectations relative to timing and budget as we've outlined many times there are six capital projects that produce the doubling of our capacity from 2020.
Five of the six are complete and contributing to growth.
Most recent of the Phi being an expansion in Modesto, which came online a month ago as expected.
As it relates to Texas, we hosted our board of directors three weeks ago at our new plant and everything is looking great I will share a comment from one of our directors and I quote ive been in hundreds of food plants in my 30 plus years in the business and this is the most impressive plant I have ever seen.
All of the equipment for the first line is installed and we are in the process of running the equipment for qualification and validation at this point. The second line is on or maybe even a bit ahead of schedule.
As it relates to business development, we continue to feel good about 2023 utilization with more than 50% of the capacity plan.
Obviously this will benefit the back half of 2023 more than the front half.
As a reminder, we will expand our Tam with the addition of the 330 milliliter production line that gets us into the protein shake category.
This Tam expansion is one of our five strategic imperatives, and we are now under contract for five years with one of the leading brands in the category.
The plant management team is in place training of new employees is underway and we anticipate the first production run in the next seven weeks.
Given a very challenging environment going from a dirt field to fully operational and roughly 15 months is an incredible achievement something which we are all very proud of.
Moving onto our fruit based segment recall, our three strategic priorities are one derisking the business through geographic diversification customer pricing programs and better grower relations.
To becoming the low cost operator in frozen fruit through automation.
Foot print reengineering and aggressive cost takeout and three evolving the portfolio via mix shift and innovation towards more value added offerings.
In the third quarter fruit based revenues increased 10% to 92 million led by the continued strength of our margin advantaged fruit snacks business as frozen was essentially flat with higher price realizations offsetting anticipated volume declines.
We were very pleased with the Q3 gross margin of 12, 3% as the strategies. We have been focused on for the last several years are manifesting in the numbers.
The year over year revenue growth rate of our fruit snacks business was an impressive 52% and the overwhelming majority of the revenue increase was driven by higher volumes.
And roughly three years, we've grown our fruit snacks business, which includes our Smoothie Bowl.
By 125% to around $100 million of annual revenue.
We remain very positive on the outlook for 2023 and beyond and we continue to leverage our innovation capabilities and expand capacity growth in snacks is very reflective of our balanced customer portfolio and we continue to see solid gains across large CPG as well as.
Large retail customers.
In our frozen business revenue was up fractionally versus a year ago as higher price realization served to offset the volume declines we had expected.
A significant portion of the overall fruit segment gross profit margin improvement came from frozen.
This is a strong indication of the power of our profit recovery strategies are.
Our efforts to build a low cost business model.
On top customers.
De risking the business.
And building pricing credibility with our customers are paying dividends 12.
12, 3% gross margin in fruit is the highest margin we've seen in five years and we are confident these strategies have created a more stable profitable business unit.
In summary, our passionate team continues to execute extremely well against our core strategic priorities and deliver solid results. Despite a challenging macro environment.
Underlying demand remained solid and we are well positioned to continue driving revenue growth improving profitability and capturing additional share by leveraging the power of our platform to rapidly scale. We remain committed to our long term growth algorithm of annual double digit plant based revenue.
Profit increases and increasing returns on invested capital 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 afternoon, everyone.
As Joe mentioned third quarter revenues of $230 million were up 15, 7% year over year, reflecting continued growth in both segments.
In the plant based segment revenue increased 19, 9%.
With pricing up 16, 2% driven by earlier actions to offset inflation and volume growth was three 7%.
Importantly, within this segment the product category of plant based milks delivered 7% volume growth in the quarter.
Fruit based revenues increased 10% as a 10, 6% increase in pricing was partially offset by fractionally lower volumes.
Gross profit was $31 4 million for the third quarter of 2022, an increase of $8 million or <unk> 34 per cent compared to the third quarter of 2021.
Consolidated gross margin was up 190 basis points to 13, 7%. Despite approximately 140 basis points of headwind from the dilutive effect of passing through higher input costs to customers and 30 basis points of increased depreciation.
Expense.
And plant based segment level gross profit increased one 4 million to $20 1 million, while gross margin was down 170 basis points to 14, 6%.
The year over year decline in gross margin reflects a 225 basis point impact from the dilutive effect of pass through pricing to recover cost inflation.
Along with 60 basis points of incremental depreciation expense and 40 basis points of startup costs in Texas <unk>.
Combining these three factors our comparable gross margin would have been 17, 8% up 150 basis points compared to last year, reflecting improved plant efficiencies.
In fruit based segment level gross profit rose $6 6 million to $11 3 million and gross margin increased 670 basis points to 12, 3%. Despite an approximately 50 basis point headwind stemming from the impact of pass through.
Reising to recover commodity inflation the.
The year over year improvement in our fruit based gross margin was driven primarily in frozen by rationalizing our SKU portfolio and consolidated in our processing facilities to lower manufacturing costs.
The significant volume growth and plant efficiencies in our fruit snack operations also contributed to higher gross margins in fruit based during the third quarter.
Segment operating income was $7 6 million in the third quarter compared to $3 9 million last year.
The year over year growth was attributable to higher gross profit, partially offset by a $4 2 million increase in SG&A due to higher employee compensation costs. The majority of which was stock based compensation, reflecting our strong performance in 2022.
Loss from operations attributable to common shareholders for the third quarter was $13 4 million or <unk> 12 per diluted share compared to a loss of $3 8 million or <unk> <unk> per diluted share in the prior year period.
The loss was inclusive of the $16 9 million loss on our sunflower business and a $2 7 million gain on the sale of one of our two oxnard facilities.
On an adjusted basis, we had earnings of 2 million or <unk> <unk> per diluted share in the third quarter of 2022 versus adjusted earnings of $1 1 million or <unk> <unk> per diluted share in the prior year period.
In the third quarter, adjusted EBITDA was $22 1 million or 42% higher than $15 6 million in the prior year.
I'd like to remind listeners that adjusted EBITDA and adjusted earnings are non-GAAP measures and a reconciliation of these measures to GAAP can be found toward the back of the press release issued earlier this afternoon.
Turning to the balance sheet and cash flow.
As of October one 2022, total debt was $306 million and reflects $191 million drawn on our asset based credit facility.
$112 million of capital leases with the balance representing smaller credit facilities.
Leverage stood at four three times at the end of the third quarter, just above our targeted range, reflecting the timing and scale of our planned investments and capacity expansion.
Given the volatility in the capital markets, it's worth reminding that our debt doesn't mature until the end of 2025.
As the new capacity ramps and generates revenue and cash flow, we expect our leverage to return within our target range in 2023.
From a cash flow perspective cash provided by operating activities. During the third quarter of 2022 was $20 million compared to cash provided of $5 million during the third quarter of 2021.
Cash used in investing activities of continuing operations was $22 million compared with $17 million in last years third quarter, primarily reflecting investments in capacity expansion projects, partially offset by proceeds from the recent sales of noncore assets.
As a reminder, we expect material improvement in free cash flow in 2023, as we monetize the capacity expansion projects, we invested in during 2021 and 2022.
I'd also like to recap the two divestitures completed in the third quarter.
First we sold an idled frozen fruit plant in Oxford at California for $16 million.
We did not run this plant in 2022 and monetize this noncore asset.
As a reminder, we continue to run a second plant in Oxnard, California.
Second we sold our sunflower business for $16 million.
As we discussed at Investor Day on June 2nd Sunflower was a noncore business.
For perspective in the last 12 months, the sunflower business delivered $70 million of revenue with only a 4% gross margin.
Let me share the impact on gross margin from removing sunflower from our business.
Third quarter consolidated gross margin would improve by 110 basis points to 14, 8%.
And plant based margins would improve by 210 basis points to 16, 7%.
On a full year basis, the divestiture adds 150 to 200 basis points to plant based gross margins.
In summary, we are following our strategic plan to shape the portfolio to more value added manufacturing.
Let me close with comments on our outlook for the balance of 2022, recognizing the environment is very fluid as it relates to inflation supply chain labor raw materials and the state of the consumer.
We are increasing our 2022 guidance to reflect strong year to date Q3 results and continued confidence in our outlook.
Given the sunflower divestiture I'll do this in three steps to ensure clarity.
First a recap of the outlook as shared on our second quarter call.
Second our improved outlook without considering the sunflower sale.
And third the outlook as adjusted for the Sunflower sale.
On the Q2 call we shared estimated revenue in a range of $930 million to $960 million.
With adjusted EBITDA estimated in a range of $72 million to $78 million.
On an apples to apples basis, we are increasing our full year outlook to revenue in a range of $940 million to $960 million.
With adjusted EBITDA in a range of $76 million to $80 million.
Now adjusting this outlook for the effect of the sunflower divestiture.
We are removing the $17 million of revenue in the fourth quarter and making no adjustment for adjusted EBITDA.
This results in a full year outlook of revenue in a range of $923 million to $943 million and adjusted EBITDA in a range of $76 million to $80 million.
This new range results in annual revenue growth of 14% to 16%.
And adjusted EBITDA growth of 25% to 32%.
To assist with year over year analysis.
Q4, 2021, sunflower revenue was $15 million.
Let me note that for clarity the sunflower business is too small on its own to be removed from the financial statements. So we will see the historical results show up in the comps for 2022 and 2023.
I'd also like to remind listeners about how we see the new plant based facility in Midlothian, Texas.
In Q4, 2022 gross profit and gross margin.
As we have previously stated we expect production to start at the very end of the year.
We expect to incur approximately $5 million of startup costs in the fourth quarter of 2022.
While these startup costs are added back to adjusted EBITDA, They will affect gross profit and gross margin rate as reported.
Before opening the call for questions. Just a reminder that for competitive reasons, we do not provide detailed commentary regarding customer or SKU level activities.
And with that operator, please open up the call for questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad.
Your first question comes from the line of Brian Holland with Cowen and company. Your line is open.
Yeah. Thanks, good afternoon.
If I could just start with maybe parsing the guidance a little bit.
The original expectation was that you'd have about $10 million of start up costs. In 2022, I think you've only had about you only had about 600000 this quarter.
So.
Are those startup costs is something changing there are getting pushed out in the timeline.
I'm just trying to understand if maybe the higher revised guide just reflects timing of startup cost hitting.
Hey, Brian It's Scott Thanks for the question.
Two pieces in retrospect, our estimate of startup costs in Q3 was too conservative mainly centered around the timing of a bunch of the occupancy costs. Then part two would be because those costs are added back to EBITDA those startup costs are no way.
Fact, the updated range.
Okay got it that's helpful.
Joe you described in your prepared remarks.
Erratic customer behavior.
Just curious how that impacts your near and long term visibility.
Yeah from a long term standpoint, you know as I outlined we're incredibly confident in the durability of the consumer demand in the short term.
What that looks like Brian and I'll just give you. An example, I mean in Q2 customers were saying give us as much as you can well take everything you can make.
Then it's whoa whoa are warehouses full hit the brakes hit the brakes and then two weeks later, it's like well we may have over of course corrected and let's get back on our normal pattern.
I think everybody is working through the consumer is destocking their pantry, we see that across many many food categories I'm sure you've heard that as other CPG companies have reported but don't forget not only does the consumer have inventory, but the retailer has inventory on the shelf they have inventory in their warehouses and then our customers.
Also have inventory and we have inventory. So I think this is just the process of getting back to normal working through how the consumer is responding and as we mentioned I mean category was up 12 on a comparable basis. Our business was up 25 band on a volume basis category was down two we were.
Seven so 902, <unk> hundred basis points better performance versus the scan data.
We are proud of the brands that we're partnered with they continue to win in the marketplace and foodservice was also particularly strong.
Got it.
And then.
You also talked about I think you were pretty clear that your expectation that.
We're not expecting I guess rotation out of the plant based beverage category, we could see some switching within the category trade down et cetera.
Just thinking about your channel customer mix this trade down within plant based beverages, having for brands and private label that have an adverse impact on your business.
Yeah.
It does not Brian .
As you know, we're a manufacturer of private label products and so.
Assuming the consumer trading down.
In a retailer where we're the manufacturer of that private label product. We we would stand to be kind of a net neutral recipient until that volume. It's also worth noting we don't have material differences in our margin structure between co manufacturing and private label, So theres not really.
Gross profit trade down to worry about if that were to happen.
Okay I'll leave it there and hop back in the queue. Thanks best of luck.
Thanks. Your next question is from the line of Andrew <unk> with BMO. Your line is open.
Hey, good afternoon.
My first question is on the cost backdrop.
Youre not expecting any broad price increases in 2023, there are some good guys and bad guys could you just elaborate a little bit on the puts and takes there.
Where you see maybe the most risk or concern just.
Washington unfold.
Yeah.
Packaging continued to trend up.
Some of the energy inputs like natural gas.
And then on the downside on some of the agricultural inputs Oh. It's for example, we're definitely seeing the market come back to where it was in 2020.
So that's why we Andrew that's why we kind of said Hey, you know, we don't see broad brush pricing changes, but obviously the.
Where those are impacting a particular product for a particular customer.
We may need to take pricing, but we don't see the aggregation of all of those input costs.
Something that we're going to need to make wholesale pricing changes on.
Okay great.
Last quarter, you gave a fair amount of detail on productivity and capacity increases just given kind of the evolution of the labor environment.
Can you give us a little bit of an update there as well please.
Yes, so capacity we're in great shape.
Texas will come online at the very end of this year, which we're excited about huge accomplishment for the entire organization.
Other capital expansion projects that we've been executing in 2021 and earlier this year those are all complete online and contributing to growth.
So overall, we're feeling very good about that and we look forward to bringing on new customers and new business.
Okay.
And the last one for me.
I know when we talked about the fruit based segment margins.
You'd noted some of the mixed benefits and kind of maybe kind of a wait and see approach now that we've got a couple of quarters in a row.
Of these stronger margins I guess I'm, just curious how you're thinking about the trajectory here moving forward or the margin potential of that business is it.
Change the way Youre thinking about it at all or.
This is kind of more in line with you would have what you would have anticipated.
Yeah. Thanks, Andrew Scott. So one I think we're pretty pleased with the performance of both of the fruit businesses, both the frozen fruit business.
On an absolute basis, expanding margin and two really really nice growth in fruit snacks I think I think Q2 Q3, if you'll recall get us in the sphere of what are now I don't know intermediate term margin target are so I think I think the takeaway would be that's what we're capable of delivering.
Don't know that I'd say you pencil in that number for every single quarter because at the heart of it as you point out there's certainly.
A considerable mix benefit from fruit snacks, but it doesn't really change the way we're thinking about it I think it gives us confidence that we're on the right track.
Okay, great. Thank you very much.
Your next question comes from the line of Bobby Burleson with Canaccord. Your line is open.
Hi, Thanks for taking my questions.
So I guess just trying to understand maybe some of your expansion.
Categories and plant based.
Refrigerated milk ice cream in yogurt.
Are there synergies there like do you guys.
Anticipated margin benefit or some additional structural benefit.
Fan out into additional categories and May use some of the same bases that you produce.
Yeah, absolutely. So there are two steps to manufacturing plant based anything plant based milk plant based yogurt plant based ice cream. The first step is converting that ingredient into a liquid or a powder that step is called extraction and so it is a very transferable.
And product.
In terms of that end product the oat base.
If you will that comes out of the extraction process.
It's very usable in our yogurt environment, and an ice cream and environment.
And for plant based milks or Creamers et cetera. So it definitely opens the aperture for us too.
Be an ingredient supplier of value added premium bespoke ingredient supplier.
Into those categories opens up the Tam for us and Leverages, our fixed asset investments around extraction, and specifically <unk> extraction.
Great.
And you've managed to do a pretty fantastic job in terms of picking your partners and how you've kind of.
Aligned herself with certain customers that are taking share and I'm wondering are there best practices there that youre looking at as you figure out who you're partnering with these expansion categories, where you're taking some learnings there to help you kind of place. Your bets are there any is there any overlap in your customer base.
Those product categories.
There are tons of there is some overlap at kind of the highest corporate level, but not necessarily at a brand level if that makes sense.
When you are talking about customers, who are 20 $30 billion.
Sometimes there are opportunities to serve.
Multiple brands in that environment. So.
So definitely something we're looking to leverage and continue to build on.
Okay, Great and then maybe the last one it seems like everybody is kind of capitulating to plant based milk and kind of.
It's getting much greater adoption and what we're seeing in plant based meat.
I'm wondering does that extend maybe into a younger demographics like <unk>.
People that are younger than 18, as it's becoming potentially a substitute.
At the breakfast table for.
The serial of kids.
How far can we expand the category just demographically in your minds.
Yes, great question I mean, we we definitely see that there is a significant bias to younger consumers and younger households for plant based milks and I think it's one of the most powerful cohort effects in plant based milks.
And recall this category has been around 30 40 years. So you have consumers, who that's what they grew up drinking their whole life, whether it was in breakfast cereal, whether that's what get get got used in baking applications et cetera, et cetera, and so for them. It's just a very natural continuation of what they grew up.
Eating and drinking so demographics are definitely a huge propellant here and I would also underscore and we saw some data recently I mean plant based milks has a 53% household penetration. So again this isn't Justin a niche set of consumers.
Who could wake up tomorrow and decide they're enthusiastic about something else I mean, you have.
Virtually 50% of American households, having plant based milk in them at some point during during the year. So again speaks to the durability of the breadth of adoption and I think the power of that cohort in pulling their consumer behaviors, along with them as they age and start their own households.
Yes.
Great. Thanks Congrats.
Thank you.
Your next question is from Mark Smith with Lake Street Capital markets. Your line is open.
Hi, guys.
First.
Certainly like the consumer behavior data that you gave us early on.
Can you just speak to.
<unk> service it certainly doesn't look like from the growth that you put off but have you historically seen any pullback there in tough economic times.
Good question, Mark and I'll sort of pull a little bit on 30 plus years of my ancient time in the category.
What you tend to see is you might see consumers in broadly in foodservice trading out of kind of fine dining.
But if my memory serves me correctly from the last economic downturn.
Experiences like stopping for my morning, Latte and that fixed dollar expense is something that consumers are loathe to give up so you may be in a position financially where you're deferring buying a new car going on a vacation or taking on a remodeling project because those are significant expenses.
Consumers are.
Very disinclined to giving up those small treats that.
Things like a delicious oat milk or soy milk cappuccino represents for them.
Okay, and then within fruit snack certainly like the growth that we're seeing there.
I'm curious as we.
Look at the margins within fruit snack and a lot of this is kind of newer products are there opportunities to expand the gross profit margin on that kind of family of products as we move 12 plus months down the road.
I think with the expansion project that we have coming.
In the third quarter of next year.
It definitely gives us an opportunity to better leverage the fixed cost structure of our plants and so all things being equal more volume through the same four walls definitely should contribute a bit too.
A bit of margin leverage.
And then the last one just kind of a modeling question as we look at the I think he said $5 million and kind of plant expansion expense here in Q4 with Midlothian.
Is that all going to go in cost of goods sold or will we see some of that over in the SG&A.
It will really be driven market in Cogs. So so the modeling would be all other factors being equal an extra if you will $5 million in Cogs. So.
That effects gross profit and gross margin as reported however from an EBITDA standpoint, we add those costs back to have the effect on the P&L be net neutral, but again the watch out is just that those flow through Cogs.
Perfect. Thank you.
Yes.
Your next question is from Alex Fuhrman with Craig Hallum. Your line is open.
Great. Thanks, very much for taking my question and congratulations on a really strong quarter here wanted to ask about oat milk up 86% year over year and now your biggest plant based milk.
Even though almond remains the biggest.
Plant based milk in the category here, just curious how you've been able to grow your oat milk business. So much faster than the overall market and do you expect your oat milk business to continue to be your biggest plant based milk going forward considering almond is still the biggest in the category for now.
Yes, Alex.
We saw the 68% growth that we outlined was really driven both by foodservice and retail and I think speaks to several things one is the.
Product quality that we're delivering.
It speaks to our ability to continue to serve that category and <unk>.
Produce and fill orders and fill cases at exceptionally high rates I mean, I'm talking 90, 899% case fill rate for almost every one of our customers.
That then allows the retail customer the confidence to put that brand on the shelf, knowing they're going to be able to supply and theyre going to be able to keep the product on the shelf. So I think we've we've identified and are working with some great partners and I would not underestimate the other component that I talked about on the call which is.
<unk>.
We have a functionally outstanding product it makes an amazing latte the structure of the foam the way again, we formulate specific for foodservice coffee applications and our oat milk is outstanding.
The latte or cappuccino at forms it phones amazingly it holds.
We measure that over time, if youll recall when you had a chance to visit US. We showed you some of the technology and equipment, we use to do that analysis and its certainly paying dividends for us.
Great. That's really helpful. Thanks, Joe and then if I could ask just one question on the Midlothian project you mentioned the second line. It sounds like that is now tracking perhaps a little bit.
Head of schedule do you have an update on when you expect the second line of production to be operational.
Yeah.
What we had outlined at Investor day was by the end of Q2, I believe and we're certainly pressing.
Hard as we can to pull that forward.
At this juncture, we're feeling good about it and again I think it speaks to the team's ability to execute in a complex environment and if we can pull that forward, even 30 days that that's fantastic for us because.
Every dollar of revenue is 100% incremental to the business because we're not in that category. That's our $3 30 ml line now.
It's the protein shake capability and so the faster we can get that stood up and contributing.
That is just completely incremental to the business. So as you might expect we as a team are very focused on getting that production line up and contributing as fast as possible.
Okay. That's very helpful. Thank you.
Your final question comes from the line of Jon Andersen with William Blair. Your line is open.
Guten Tag gentlemen.
[laughter] Hi, John .
Hi.
What is the.
Annualized impact.
Of the sunflower divestiture on sales and EBITDA.
Yes, John two things.
If you looked at the last 12 months.
<unk> revenue was about 77 zero million call EBITDA on a standalone basis, roughly $3 million.
What happens is for clarity is we won't we won't just continue the reporting of the business. So.
We see for example here in Q4 'twenty two we'll be Comping, a Q4 'twenty one it was call it $15 million of revenue for modeling purposes, and then part two as we go into 2023, we will have the three quarters of 2022 comp to compare against so hopefully that's clear.
Yeah that's helpful. Thanks.
So.
With with.
The strength in the oat milk business, and obviously strength in foodservice.
I think as.
Somewhat driven by large customer you have in foodservice.
I was kind of fascinated by your comments that you've done quantitative testing on the performance of your product proven it.
At parity or better to competing offerings in the market.
Guess, what I am trying to figure out is this all of this.
Suggest.
That.
The oat milk business that you secured in foodservice with a large customer's business that you expect to retain on a long term basis.
We would.
We certainly expect to retain that I mean, I think the product is performing exceptionally well.
Is a superior product in their applications, we're servicing that business at an exceptionally high rate.
And.
Our partnerships with our top customers are.
In a great place as you might expect with those kind of service levels. So it's something we work at every day, we don't take it for granted we are incredibly focused on.
Serving our customers and.
All indications we have received from them is theyre very happy with us as a supplier.
Okay.
And then.
Okay.
Protein shakes.
That's a large category right at retail every bit as big.
Plant based milks so.
With your entry.
And I think you've sold out your first line already.
Is that Tam expansion should we think about perhaps protein shakes being as big as plant based milks a few years down the road for you is there any reason kind of structurally or competitively why you couldnt.
Kind of replicate to some extent your.
Your position in protein shakes.
So from a Tam standpoint, John the protein Shake category is actually twice as big as the plant based milks.
The protein shake category roughly $6 billion.
At retail and plant based milk is roughly $3 billion. So certainly a dramatic increase.
In our Tam.
We're excited about the opportunity and we certainly would anticipate and hope that we can demonstrate were.
<unk> competitor and a great supplier in that space and continue to add capacity to serve.
To serve our customers. So I think it would take quite a bit of work for it to be as big as our plant based milks business.
In the short term, but certainly we see it as a significant growth driver for the kind of planning horizon of five to 10 years. I mean, we absolutely are very bullish about this and think it's a great logical extension of our capabilities and competencies as a company and so.
We're excited to get into it and and we absolutely think it's a future growth lever.
How as you continue to grow plant based.
At a double digit clip going forward, how important is Texas.
Allowing you to achieve that growth specifically like in 2023.
The reason I'm asking I'm trying to understand.
How hard you are running your plants now to deliver the kind of growth youre delivering in plant based and and how kind of Texas phases in and contributes to that sales growth during the course of 2023 and into 2024.
Yes so.
At our Investor day, we outlined a target for 2023 of $100 million of EBITDA.
We need Texas to contribute I would say modest delay to that number but the core business, meaning the core asset base that we have right now.
Can pretty much deliver that with revenue growth and customer expansion et cetera. So said a different way 2023 is not.
Completely dependent on Texas, Texas will contribute mightily to 2024, and 2025, and we will certainly be a part of the growth algorithm for the back half of 2023, but you know.
We're just starting the plant up and so all of these production lines have a start up ramp up curve.
And.
So Q1 for example will be largely dependent upon the asset base that we have today.
Great really helpful. Thanks, Thanks and congrats.
Thanks, Sean.
There are no further questions at this time I would like to turn the call back over to the CEO , Mr. Joe and then.
Great. Thank you everyone for your interest and your time. This evening, we appreciate it and look forward to speaking to all of you again soon.
Okay.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
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