Q1 2023 SunOpta Inc Earnings Call
Speaker 1: And we continue to see strong underlying trends in our core businesses, giving us a high degree of confidence in our outlook for 2023 and beyond.
Speaker 1: Let me offer some key takeaways before we begin unpacking the quarterly results.
Speaker 1: Our focused efforts to drive profitability across the company delivered a record level of adjusted EBITDA.
Speaker 1: Q1 adjusted EBITDA increased 50% to $23.6 million.
Speaker 1: Our core strategic growth areas, including plant-based milk products and fruit snacks, continue to drive strong growth in Q1.
Speaker 1: In plant-based, revenue growth remains broad-based with our plant-based milk products growing 25%.
Speaker 1: The ramp up of production in our Texas plant is progressing and will materially contribute to growth in the second half.
Speaker 1: Thank you again to the 30 plus guests who came to Texas on April 11th to see our new 285,000 square foot greenfield plant up and running.
Speaker 1: Our business development pipeline has never been stronger, supporting our long-term growth algorithm of doubling the plant-based business off of the 2020 base.
Speaker 1: We continue to see strong demand and growth in our fruit snacks business, which on an LTM basis is now almost 100M in revenue, up from 50M in 2020.
Speaker 1: Execution in our manufacturing plants continues to be strong and execution in general continues to be a defining factor in our performance and gives us a high degree of confidence in our outlook for 2023.
Speaker 1: Lastly, oat milk and food service continues to more than double quarter on quarter. This success is creating some reprioritization within the business as it relates to usage of our proprietary oat base and line time on our half-gallon fillers.
Speaker 1: For the total company, first quarter revenues were up fractionally from a year ago, as the growth in plant-based was offset by revenue declines in frozen fruit.
Speaker 1: Our profit expansion continues to reflect growth in key strategic categories and value-added offerings, along with pricing actions and steady progress optimizing performance across our business.
Speaker 1: Consolidated adjusted gross profit, which excludes startup costs, grew more than $5 billion in Q1, or nearly 20%.
Speaker 1: of strategic mix shifts and strong operational performance in our manufacturing plant.
Speaker 1: We saw operational efficiency improve, we delivered best in class case fill rates, and we saw improvements in employee retention.
Speaker 1: Now we'll turn to our segment results starting with the plant-based food and beverage segment.
Speaker 1: where we remain focused on three strategic priorities.
Speaker 1: Number one, strengthening and fortifying our competitive advantages.
Speaker 1: Number two, expanding the TAM of the business, including winning an oat milk and entering the protein shakes category.
Speaker 1: And three, building a multi-pronged go-to-market business model, thereby creating multiple ways to win.
Speaker 1: Plant-based segment revenues were up over 9% in the first quarter to $129 million, driven by 2022 pricing action.
Speaker 1: We saw strong growth in our core plant-based milk products and teas, partially upset by declines in broth and ingredients, which were trade-offs to support the rapid growth we're seeing in packaged oat milk sales.
Speaker 1: Starting with customers, we continue to see broad-based growth in the first quarter, with three of our top four customers growing by 40% or more.
Speaker 1: This is a result of both their growth and synopto winning a larger percentage of their business.
Speaker 1: Our performance in core plant-based milk products remains strong, with revenue and volume growth of 25 and 6 percent respectively.
Speaker 1: These products accounted for nearly three quarters of our plant-based segment revenue. In addition, our tea business remains extremely strong, with revenue and volume growing significantly as a result of us gaining supply share.
Speaker 1: Broth revenue was down 29% in the quarter as we exited a portion of our broth business, specifically the portion that competes internally for half-gallon line time that we use for oat milk for our largest customer.
Speaker 1: Taking a deeper look at our core plant-based milk products performance, OAT remains the key driver with total OAT up 33% and packaged oat milk up 89% on a 70% increase in volume.
Speaker 1: OAT was once again the largest product type in our portfolio.
Speaker 1: Coconut milk was also up significantly as our top customer continues to feature this product.
Speaker 1: We also saw soy milk grow low double digits.
Speaker 1: Owned brands continues to deliver the highest growth rate and we're up 59% versus last year, reflecting solid gains in both Dream Oat Barista and Sown Organic Oat Creamers.
Speaker 1: Our Coman business was up mid-teen and private label sales were up slightly, with private label plant-based milks up 31 percent, partially offset by broad decline previously described.
Speaker 1: While ingredient sales were off significantly, it's important to understand that packaged oat milk sales were up 101% 46% and 89% in the last three quarters.
Speaker 1: This continued growth in packaged oat milk has created a supply constraint on our oat base available for ingredient customers.
Speaker 1: As such, our largest ingredient customer added a second oat-based supplier to compensate for our contracting available supply.
Speaker 1: We continue to support this ingredient customer, but at a lower level.
Speaker 1: This oat base, which was used for ingredient sales, will now be used in finished goods, which in total is twice as profitable as selling it as an ingredient.
Speaker 1: Most importantly, this now creates a runway in both oat-based and half-gallon packaging to continue to support the strong growth of oat milk in food service.
Speaker 1: We expect Oak Base capacity utilization to be back to full by the end of Q2, with almost all of it being used in double-touch finished goods.
Speaker 1: As it relates to extraction in general, there is a customer lifecycle dynamic between ingredients and finished goods, and we would expect the same dynamic to occur with our new Modesto extraction facility.
Speaker 1: Last month, many of you attended the plant tour we hosted at our new facility in Midlothian, Texas.
Speaker 1: As a reminder, there are four distinct phases to a project like this.
Speaker 1: Number 1, construction and installation number 2, validation and qualification of both equipment and products.
Speaker 1: Number three, start-up ramp up, and number four, steady state production.
Speaker 1: The past five months have been a whirlwind of activity and we have finally completed the gauntlet of one time, important, necessary, but time consuming elements of validation and qualification. And we are now excited to be shifting gears towards full scale production. On the 1st, 2 lines.
Speaker 1: This Texas facility is the final piece of our broader expansion initiative to double capacity and will serve as the cornerstone of our growth agenda.
Speaker 1: Volumes will be ramping up over the next several months, including the initial production run from our 330 ml protein shake line, which started on Monday.
Speaker 1: As exciting as this is, we don't anticipate a recognizable contribution until the second half of 2023 as the initial two production lines hit their stride.
Speaker 1: We remain very pleased with our business development efforts and with the additional capacity, we're able to support the planned growth for existing customers as well as bringing on several new customers in 2023.
Speaker 1: Moving on to our fruit based segment, recall our three strategic priorities are 1. Be risking the business through geographic diversification, customer pricing programs, and better grower relations.
Speaker 1: 2. Becoming the low-cost operator in frozen fruit through automation, footprint re-engineering, and aggressive cost take-outs. 3. Evolving the portfolio via mixed shift in innovation towards more value-added offerings.
Speaker 1: The fruit-based business segment revenue was down 10% in the first quarter with lower volumes in frozen being partially offset by strong volumes in fruit snacks and smoothie bowls.
Speaker 1: Trends remain very strong in our fruit snacks business with revenues of more than 20%.
Speaker 1: driven by both volume and pricing. In addition, we delivered another solid quarter of margin improvement in fruit based, led by mixed shift pricing along with driving efficiencies and frozen fruit.
Speaker 1: First quarter fruit based gross profit was flat to last year on 10 million less revenue. We continue to see new growth opportunities and are very excited for our snack capacity expansion to come online in Q3, which will enable a 40% expansion of the business over time. Lastly, I'd like to make a couple comments about our
Speaker 1: The Texas location will help save 15 million freight miles annually from our supply chain, eliminating 59 million pounds of carbon emissions.
Speaker 1: I'm also excited to share that we published our comprehensive ESG report on May 4th, highlighting progress across the business.
Speaker 1: This report is available on our website.
Speaker 1: In summary, the 1st quarter once again proves the power and resiliency of our model to consistently deliver strong profitability. Our go to market flexibility, expanding capacity. And leverageable platform provide a demonstrable competitive advantage that has proven highly durable. Our outlook for 2023 is unchanged.
Speaker 1: and we remain committed to our long-term growth algorithm of annual double-digit plant-based revenue and profit increases and increasing returns on invested capital.
Speaker 1: Now I'll turn the call over to Scott to take us through the rest of the financials. Scott?
Speaker 1: Thank you very much, Joe, and good afternoon, everyone.
Speaker 1: First quarter revenues of 224 million were up slightly versus last year.
Speaker 1: Plant-based revenue increased 9%, with pricing up 10% and volume 1% lower.
Speaker 1: Fruit-based revenues were down 10% as growth in fruit snacks was more than offset by lower volumes in frozen.
Speaker 1: It's important to remember that we called out in the first quarter of 2022 a significant one-time order from a major frozen fruit customer that was not repeated so the comparison is somewhat skewed.
Speaker 1: Gross profit, as reported, was $28 million. Removing the $6 million of startup expenses, gross profit was $34 million, up 18%.
Speaker 1: Consolidated gross margin was up 80 basis points to 12.6% as reported, despite the impact of 260 basis points of startup costs.
Speaker 1: On an adjusted basis, removing the impact of startup costs, gross margin improved 320 basis points to 15.2%.
Speaker 1: In plant-based, segment-level gross margin was up 60 basis points to 15.6 percent and would have been 470 basis points higher or 20 percent excluding startup costs for Texas.
Speaker 1: The increase in gross margin reflected approximately 170 basis points of benefit from the the divestiture of our low margin sunflower commodity business.
Speaker 1: combined with operational efficiencies and the positive gross profit and margin impact of a favorable mix shift.
Speaker 1: In fruit-based, segment level gross margin increased 80 basis points to 8.5%, mainly driven by strong revenue growth in fruit snacks, partially offset by a higher mix of lower margin bulk frozen fruit sales.
Speaker 1: Earnings from continuing operations were $1.4 million compared to $1 million in the prior year period.
Speaker 1: adjusted EBITDA increased over 50% to 23.6 million and was up 400 basis points as a percent of consolidated revenues to 10.5%.
Speaker 1: Turning to the balance sheet and cash flow.
Speaker 1: As of Q1, total debt was $326 million with leverage of 3.6 times, down slightly from Q4, and in line with our target leverage of 2 to 4 times.
Speaker 1: We continue to expect to be within that range at year end, with the first half of the year toward the high end of the range, followed by improvement as we continue ramping the production capacity that came online over the last couple of quarters. Cash provided by operating activities during the first quarter of 2023 was $4 million. We continue to expect to be within that range at year end.
Speaker 1: compared to $16 million in the prior year, primarily reflecting an increase in working capital resulting from payables timing.
Speaker 1: Cash used in investing activities was $25 million and flat to last year.
Speaker 1: we would expect a significant step down in capital expenditures for the balance of the year.
Speaker 1: Let me close with comments on our outlook, recognizing the environment remains very fluid. From a guidance standpoint, we are reaffirming our prior outlook, introduced in our Q4 call, expecting revenue in a range of $1 billion to $1.05 billion.
Speaker 1: representing 14 to 20 percent growth.
Speaker 1: We are expecting adjusted EBITDA in a range of 97 to 103 million, which represents 16 to 23 percent growth.
Speaker 1: to be a roughly 45-55 split in the first and second half of the year, with the back half benefiting from the ongoing ramp up of our growth initiatives. Reflecting on the business dynamics that Joe outlined, we thought we would provide some color. SCH found this at the CEO spreadsheet, by Matt gracious, who were made on the bridge for poured oil and dial QC to deliver EU
Speaker 1: that we would expect Q2 revenue to look a lot like Q1 revenue. Finally, we would expect to incur $5 to $7 million of additional startup costs related to our capital expansion projects, with the flow being approximately $4 million in Q2.
Speaker 1: and 1 million each in Q3 and Q4. From a balance sheet and cash flow standpoint, we would expect capital expenditures on the cash flow statement of roughly 35 to 45 million assuming no material new growth investments.
Speaker 1: in a range of 25 to 35 million with a year at an leverage in the low to mid-3s.
Speaker 1: Each of these estimates are consistent with our outlook provided on the Q4 call and with what we laid out at our investor day in June of 2022.
Speaker 1: as we assess further investment opportunities in Texas, for example.
Speaker 1: Before opening the call for questions, just a reminder that for competitive reasons, we do not provide detailed commentary regarding customer or SKU level activity.
Speaker 1: And with that operator, please open the call for questions.
Speaker 2: 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 is from the line of Andrew Strelzick with BMO. Your line is open.
Speaker 2: 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 is from the line of Andrew Strelzik with BMO. Your line is open. Good afternoon. Thanks for taking the questions.
Speaker 3: I guess I'd like to start on the exit of the boss for off business and also the transition with the agreedy customer. I guess what I'm trying to figure out is
Speaker 3: how much that impacted your 1Q and maybe how you're thinking about 2Q, whether from a sales or an EBITDA perspective. Like was there a mismatch on broth? It sounds like there was maybe an ingredient. How long some of that last for?
Speaker 1: Sure, so to summarize simply, it'll be a first half headwind, second half tailwind.
Speaker 1: The impetus for the change and the thing that we are executing is we have the opportunity to increase our market share to deliver long-term growth with our largest customer in oat milk. And in order to do that, we needed to free up both oat-based and...
Speaker 1: half-gallon packaging to be able to serve our largest customer and so we need to make those pivots.
Speaker 1: So we didn't exit broth completely, we just exited one of the two sizes of broth that we do in that category. So we do a 32 ounce and a 48 ounce, we exited the 48 ounce because it shares the packaging line time with the half gallon.
Speaker 1: Maybe more details than you wanted, but the details are important there.
Speaker 3: No, that was perfect. That was exactly what I needed. Thank you. And then I guess the other question, you continue to have really strong growth among your top customers. I think you said three out of four growing 40% plus.
Speaker 3: what I needed. Thank you. And then I guess the other question, you continue to have really strong growth among your top customers. I think you said three out of four growing 40% plus this quarter.
Speaker 3: I think at the event down in Texas you said you had 100 customers and I think I might have asked this but I'll ask again. I mean how is that impacting your how you're managing your customer base? Are you having to reprioritize you know even more is there more of this on the horizon? Obviously you have a lot more capacity coming online but again I'm just curious how you're thinking about managing the customer base. Thanks.
Speaker 1: Yeah, so the 100 was a reference to all customers, which includes frozen fruit, fruit snacks, plant-based, the whole business, and there are quite a few customers. It's a fairly long tail on the oat-based, the ingredient sales side of things. So in core plant-based milks, it's a more concentrated list, and we would not expect that.
Speaker 1: to have to make a pivot like this, especially with Texas capacity coming online. We don't anticipate the needs to make any kind of big shifts other than the one just described. And again, that is our largest customer and we're simply prioritizing the most strategic, stickiest business that we have.
Speaker 2: Thanks, sir. Makes sense. Thank you very much. Your next question is from the line of lobby Burleton with Canacord. Your line is open.
Speaker 3: Great, thanks for taking my questions.
Speaker 3: So, I'm just curious with mid low fee and is that ramps and you talked about a more meaningful contribution in the 2nd, half.
Speaker 3: Can you maybe just give us a sense for what the. Dollar growth contribution might be of that facility to your overall. Plant based revenue in the 2nd, half.
Speaker 1: Hey, Bobbi, it's Scott. We were framed from sharing too much in the way of plant level or line level economics. Probably the easiest way to think about it would be if you think about 2022 stripping out sunflower and plant based business was around a $500 million business.
Speaker 1: And we've reconcistently said we would expect on average, you know, circa 15% growth per year. Obviously, Texas, then, to your core question, would be, you know, a meaningful part of that journey, but it's not all of the journey because recall we had a handful of other projects who've executed.
Speaker 1: Frequently said, we would expect on average, you know, circa 15% growth per year. Obviously, Texas, then, to your core question, would be, you know, a meaningful part of that journey. But it's not all of the journey because recall we had a handful of other projects who've executed. Okay, thanks for that.
Speaker 3: And then, you know, clearly your customers are outgrowing growth in the plant-based milk category that we're seeing out there.
Speaker 3: and you as a result are also outgrowing that growth.
Speaker 3: maybe characterize where that share gain is coming from.
Speaker 3: Is it simply the performance with an oat or is there something more?
Speaker 3: something more nuanced happening maybe across other formats.
Speaker 1: I think there's a couple things to appreciate, Bobby. Number one is we're seeing significantly higher growth rates in non-tracked channels than track channels. And as it relates to our business model, we would estimate, you know, roughly...
Speaker 1: two-thirds of the business flows through non-track channels.
Speaker 1: Second, you know, we've been very public about communicating that we want to win without. You know, we've taken that business from circa a million dollars of sales in 2019 to 120 million last year. So we are certainly winning in the winning segments. We're winning in non-track channels. The third piece, which is.
Speaker 1: product quality, cost containment, et cetera, that is affording us the opportunity to win a larger percentage of their business.
Speaker 4: Great, thank you.
Speaker 2: Your next question is from the line of Ryan Myers with Lake Street Capital Market. Your line is open.
Speaker 5: Hey guys, thanks for taking my questions. First one for me, I'm curious what kind of feedback you guys have gotten from your existing customers so far as you guys have begun to ramp up 330 ML production line. I'm going to do the team like they're pretty excited to see that getting kicked off and kind of how they're taking about the demand for that product.
Speaker 1: Yeah, so great question. We hosted the entire management team of the principal customer that we'll be partnering with on 3.30, I think three weeks ago. Super pleased with the progress. It's been very collaborative and very supportive.
Speaker 1: As I mentioned, we started the very first saleable production on Monday. So this is definitely going to ramp over time. But we're excited to get going so far so good. We have a lot to learn in this space. So we're approaching it with a fair amount of humility and understanding that we're going to learn. But the partnership has been really incredible. They've been incredibly successful.
Speaker 1: touch on your first question. So you know we continue to see very very strong growth rates in tract channels for protein shakes and protein beverages and you know it is a supply constrained category so not surprising.
Speaker 1: working with us. So you know at the moment that 330 ML production line all of the volume is spoken for but if if and when we were to put in a second system we feel like there is certainly robust demand in the marketplace to fill that.
Speaker 2: Great, thanks for taking my questions.
Speaker 2: Your next question is from John Anderson with William Blair. Your line is open.
Speaker 6: Hey, good afternoon everybody.
Speaker 6: I wanted to ask on the Texas, I think it's line two.
Speaker 6: or the second line to come up, which is part of the TAM expansion into 330 milliliter.
Speaker 6: From an industry perspective, it's a supply and strain industry right now. Is this Texas location unique or geographically advantaged from an industry perspective? I guess does it put production in a place where economicTR
Speaker 6: There hasn't been production historically. Yeah, I'm just trying to get a sense for that, whether there's kind of a bigger value proposition here to this particular customer that you're partnering with and maybe others down the road.
Speaker 1: Yes, John . Texas is and was a very strategic choice in that regard. As it relates to 330 milliliter production, there are other co-manufacturers around the US. I believe the nearest one to Texas is in the kind of southern Midwest.
Speaker 1: production and manufacturing in Texas certainly represents supply chain savings for our customers and also additional capacity. So it's a double win in that regard. Its capacity to fulfill the unmet demand that they have as well as it should afford them supply chain cost savings.
Speaker 1: not having to ship the product from several states away.
Speaker 1: the product from several states away.
Speaker 1: you know, several states away. Thanks.
Speaker 6: I think there was, I think Scott may have mentioned during the prepared remarks on guidance that we should expect the Q2 sales comparable to Q1. I'm assuming that was in dollar terms and
Speaker 6: that would kind of imply a upper single digit revenue decline year over year in Q2. Is that, am I reading that right?
Speaker 6: You know what what are some of the puts and takes there that would cause that? Hey John , it's Scott. Thanks for the question. So you heard the statement correct? So what we're trying to point out is we would expect on a dollar revenue basis Q2 total company to look a lot like Q1 so to make the statement. A couple of puts and takes.
Speaker 6: The headwinds, as I think Joe laid out, was we'd have that continuing diminution from the broth and ingredients business as we make that pivot. We also will have, like we do every year, a sequential Q1 to Q2 decline just in the absolute consumption of broth. Not very popular in the summer, as you know.
Speaker 6: When you were talking about percentages though, don't forget we've got a back out sunflower from the last year numbers. So as you're calculating growth rates, we think about the comp being last year's number X of sunflower compared to this year's number X of sunflower. This is a reminder. As it were we hope to have less ice not on the next few days, some areas pay off, Anne is confident andethyst.
Speaker 6: you're capacity constrained right now. You're making some decisions around how to allocate that capacity to the highest value, you know, biggest opportunity customers. And then that those capacity constraints get relieved in the second half of the year has been both in scales. And we kind of you know, there's a step change in the revenue run rate in the back half of the year. Is that fair?
Speaker 1: Yeah, very fair. And as Midlothian Rance, but also John , don't forget, we also have Ode Extraction or Extraction coming online in Modesto at the end of Q3, which will also bring a relief valve to some of the Oate Base constraints.
Speaker 2: Super helpful. Okay. Thanks very much.
Speaker 2: There are no further questions at this time. I would now turn the call back over to Mr. Joe and then.
Speaker 1: to hearing and connecting with all of you again soon. And again, thank you and have a good evening.
Speaker 2: Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.