Q2 2023 SunOpta Inc Earnings Call
Greetings and welcome to sign up those second quarter 'twenty twenty-three earnings conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the prepared remarks as a reminder, this conference call is being recorded I would now like to turn the conference over to your host Reid Anderson with ICR. Thank.
You may begin.
Good afternoon, and thank you for joining us on <unk> second quarter fiscal 2023 earnings conference call on the call today are Joe <unk>, Chief Executive Officer, and Scott Hawkins Chief Financial Officer.
Now everyone should have access to the earnings press release that was issued earlier. This afternoon and is available on the Investor Relations page.
<unk> website at Www Dot <unk> dot com.
All is being webcast. This 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 questions.
These statements do not guarantee future performance and therefore undue reliance should not be placed on them.
We refer you to all risk factors contained in snap discretion release issued this afternoon. 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.
Correct or update the forward looking statements made during the presentation to reflect future events or circumstances.
As may be required under applicable securities laws.
Finally, we would like to remind listeners that the company may refer to certain non-GAAP financial measures. During this teleconference. A reconciliation of these non-GAAP financial measures was included with the company's press release issued earlier today also please note that unless otherwise stated all figures discussed today are in U S dollars and occasionally rounded to the nearest million. Please note in the prepared.
Remarks that follow the company will generally exclude the impact of the divested central our business.
Now I'd like to turn the call over to Joe.
Good afternoon, and thank you for joining us today.
We signaled last quarter that Q2 was going to be soft.
Proved to be more challenging than we anticipated the.
The nature of the headwinds are short term in nature and do not reflect sent out the long term potential.
Several of the issues, we encountered in Q2 were related to broader factors affecting our industry and similar companies.
Three specific issues are category softness in tracked channels.
Roth and frozen fruit and.
And third timing of new business to be specific we had 10, new business opportunities that informed our guidance.
<unk> of them are contracted and happening but are slower to commercialize slashed ramp up than we planned two are on pace and two of them didn't materialize.
Let me offer some key takeaways before we began unpacking the quarterly results.
Grouped them into one time events.
CERN and bright spots.
There are two significant one time events that impacted the quarter, the first being the frozen fruit recall.
This was a significant distraction for the team in Q2, and while the financial impact wasn't huge with insurance covering a significant majority of the cost it undoubtedly consumed a sizeable portion of leaderships time within the quarter.
The second is the previously communicated $7 million of one time plant based revenue from Q2 of 2022 that we overlapped.
Importantly, adjusting for this overlap our core packaged plant based milk growth was 10% in Q2.
In terms of concerns several of our co manufacturing customers experienced soft volume in the quarter, resulting from tracked channel headwinds.
This not only impacted big existing customers, but also impacted the plans up two of our entrepreneurial growth oriented new customers. We were planning to onboard in the second half of 2023.
In terms of bright spots in the quarter, we continued to see strength from our core growth levers strong growth with several of our largest customers fruit snacks oat milk and Texas.
We remain very confident in our ability to deliver our long term guidance.
At several investor events, I've outlined our five strategic imperatives.
<unk> update against these will help you understand our continued optimism.
Our first imperative is fortifying our competitive advantages with implant base, we continue to win a larger share of customers' business because of our customer value proposition, our ability to execute and our capacity additions all of which gives our customers runway for growth and redundancy of supply.
Capacity adds in oat milk fruit snacks tea and Texas in general have all attracted share expansion and new customers.
I will share some specifics to underline that point.
We are growing share at our largest customer in both tea and oat milk with dream oat milk sales up 89%.
By the end of the year, we will be the exclusive supplier for both of our major T customers for the first time ever.
We also signed a contract extension with our largest national brand customer through 2028, and beginning in 2024, we will be their exclusive U S supplier. These.
These share gains along with other new business wins demonstrates our real competitive advantages.
Our second imperative is expanding the Tam of the business our biggest Tam expansion is our entry into the $5 billion nutrition beverage category and this new business will deliver growth in the second half of 2023 in 2024 and it represents a major long term.
Space for us.
We are still in the ramp up phase producing this product we are meeting our customers' expectations for volume production and we expect to continue to accelerate towards our long term run rate by the end of the year.
Third is portfolio transformation.
Over the last several years, we have made material progress transforming the portfolio from commodity oriented to a focus on value added manufacturing.
We have flipped the portfolio from 70 30 commodity value added the 30 70, and we are absolutely focused on continued transformation.
Fourth is sustainability, we are making real progress as evidenced by upgrades from two of the most respected rating agencies, we believe strong sustainability reporting around scope, one and two will be a competitive advantage as it becomes a must have for our customers.
Lastly, our culture is a significant point of difference for US we have built the team that has a real passion to win if focus on customers and execution. These are the things that will propel us forward.
I mentioned the category softness and client base, we are seeing more bifurcation between retail and foodservice.
We do not believe nor have we seen a structural change in consumers attitudes towards plant based milks the.
The category has over 50% household penetration and a 10 year CAGR of 10%.
There are enduring demand drivers such as lactose intolerance taste preferences for plant based milks over milk from Macau and health benefits both for the individual and the planet I believe the retail category headwinds are a short term function of the inflationary environment and its impact on real wages.
We know plant based milks are more expensive for.
For example, in a leading retailer plant based milk is five cents, an ounce compared to dairy milk at <unk>.
As inflation softened, we would expect a return to growth and this view is supported by research, which project a double digit CAGR for the category over the next decade as millennials and Gen Z fully take center stage as the drivers of the U S economy.
While the quarter was disappointing our business development pipeline contains several significant new opportunities. This along with significant share gains in existing customers that I outlined previously along with Tam expansion gives us confidence in our long term growth plans.
Our snacks capacity expansion is on track for the end of Q3, and we are excited that we will be able to continue to drive growth in this business.
In closing as a major shareholder myself I share your frustration with the current stock price performance.
EBITDA is more than 50% higher than what it was the last time the stock traded at these levels. Our major capital projects are complete cash flow is positive we are much stronger company than our share price suggests.
I will end by saying that we have grown the plant based business, 87% in the last 48 months and we have more than doubled our fruit snacks business in that same timeframe. We are in the right categories with the right value propositions, we have demonstrated execution capabilities, we built great manufacturing asset and <unk>.
Our team's passion to win is stronger than ever we are excited about the future of sent off to and look forward to improved results in future quarters.
Now I will turn the call over to Scott to take us through an update on the key commercial activities and the rest of the financials Scott.
Thank you very much Joe and good afternoon, everyone. Let me start by reviewing the key commercial activities in each segment in the second quarter.
Plant based segment revenues were down 8% year over year to $114 million.
Relative to our expectations revenue was off approximately $15 million and was driven by two factors one the timing of new business in two category influenced national brand performance.
The timing of new business was affected by a number of frustratingly unrelated factors, including slow customer setup slow transition from existing suppliers to sonata and significant, albeit temporary supply chain related disruptions at one of our key customers.
Track channel data for plant based milks in Q2 showed softness throughout the quarter with sales up 1% and volume down 8% and performance in shelf stable was slightly worse.
<unk> channel data reports oat milk sales grew 9% on flat volume with almond milk sales down 3% on 10% lower volumes.
So not the total plant based milk results across all channels were up 1% on 9% lower volumes.
<unk> sales grew 59%, including a 58% increase in volume and creamer sales were up 27% on double digit volume growth.
Largely offsetting the growth in AUM was almond milk, which included the onetime revenue overlap we called out in Q2 of last year.
As Joe mentioned, removing this overlap packaged plant based milk sales grew 10%.
Looking at our business by customer as you would expect results were mixed in Q2.
Three of our top five customers delivered growth, including two with double digit gains aided by the strength of our route based offerings.
As mentioned, we have increased share with three of our top five customers most of which will begin later in 2023 and into 2024.
Looking at results on a go to market basis owned brands remain the top performing area with sales up 27% versus last year.
Driven by equally strong growth in both dream and soon.
Private label also had a solid quarter of high single digit growth, reflecting gains in non dairy with major retail customers.
The decline in our co man business more than offset growth in owned brands and private label, reflecting softness in the category and the timing overlap and almond milk.
Similar to Q1, our ingredients business was down for the reasons that we outlined on our Q1 call.
Importantly, we have completed the restaging of oat base to finished goods at the end of Q2.
We continue to ramp production at our Texas facility, including our new 330 milliliter protein Shake line.
This facility gives us sufficient capacity to reach our goal of doubling the plant based business off of the 2020 base, along with enhanced capabilities and providing a strategically advantaged location for many of our current and new customers.
Moving to our fruit based segment snacks continued to be the key story.
<unk> sales were up nearly 14% driven primarily by volume growth, reflecting strong underlying trends in consumption as well as the strength of our platform to support innovation and provide incremental capacity to our customers.
More than offsetting the growth in fruit snacks with softness in our frozen business, which was down 10% due to supply constraints together with unfavorable consumption trends that negatively impacted retail volumes in foodservice orders along with the recall in June .
Overall, our fruit based segment revenues were down 4% in the second quarter versus last year, mostly driven by frozen volume.
We can continue to have a significant pipeline of potential growth opportunities in our snack business and look forward to the additional capacity coming online here in the third quarter, which will provide headroom to grow this business by another 40% overtime.
Now, let me walk through the more detailed financial results in the quarter.
Second quarter revenues of $208 million were down 6% versus last year adjusted for the divestiture of the sunflower business.
Adjusted gross profit removing startup and recall costs was $25 3 million or 12, 1% of revenue down $7 million versus last year on a like for like basis, reflecting lower volumes.
In plant based segment level gross margin was 12, 6% as reported and adjusted for startup costs in Texas was 17, 5% a nine.
The 90 basis point improvement over the prior year period.
In fruit based segment level gross margin as reported was two 1% and adjusted for the frozen fruit recall with five 5% or 570 basis point decline versus last year the.
The margin decline was driven almost entirely by our frozen fruit business, principally impacted by an unfavorable sales mix and a stronger Mexican peso.
You can see on the face of the P&L of $2 4 million dollar FX gain while the effect of the higher cost inventory for Mexico reduces gross profit.
I also want to provide a few comments on the voluntary frozen fruit recall, we initiated in June .
Specifically, we issued out of an abundance of caution a voluntary recall of specific frozen fruit products linked to pineapple provided by a third party supplier as you would expect we are permanently terminated our relationship with that supplier.
From a financial perspective, we have insurance for this event and our Q2 results reflect a net $2 $5 million expense, which is our deductible under these insurance programs.
There was limited impact on revenue in Q2, and the affected customers have turned replenishment orders back on in Q3.
Adjusted loss from continuing operations was $3 million compared to $3 3 million of income in the prior year period.
Adjusted EBITDA as reported decreased nine 8% to $20 2 million and was up 50 basis points as a percent of consolidated revenue to nine 7%.
As a reminder, last years adjusted EBITDA included a $2 $4 million contribution from the divested sunflower business.
On an apples to apples basis. This quarter's EBITDA is flat to last year's.
TTM EBITDA is $89 4 billion.
Up $25 million or 39% versus the prior 12 month period.
Turning to the balance sheet and cash flow at the end of Q2 total debt was $336 million with leverage of three seven times in line with our target leverage of two to four times we.
We continue to expect to be within that range at year end 2023.
Cash provided by operating activities during the second quarter of 2023 was a strong 16 million compared to cash used in operating activities of $2 million in the prior year.
This improvement reflects the effective management of working capital and inventory in particular.
Cash used in investing activities was $8 million compared to $34 million last year.
The step down in capital expenditures was expected, reflecting the completion of our <unk>, Texas plant.
There are no huge projects on the near term horizon, and Capex will continue to moderate.
Let me close with comments on our outlook recognizing the environment remains very fluid.
From a guidance standpoint, we are revising our 2023 estimates that were first provided on our Q4 call.
We now expect revenue in the range of $8 $80 million to $900 million.
For the second half of 2023, the revisions are attributable to one category softness in tracked channels to increase competition in frozen fruit and broth.
And three the timing of new business in plant based.
This outlook, excluding the divested sunflower business results in the plant based segment growing in the high single digits in the second half of 2023 with.
With core packaged plant based milks growing low double digits, partially offset by headwinds in broth and ingredients.
From a profit perspective, we expect adjusted EBITDA of $87 million to $91 million.
From a pacing standpoint for the total company, we would expect Q4 to be stronger than Q3.
Finally, we would expect approximately $2 million to $4 million in startup costs in the second half with the majority occurring in Q3.
For Conservatives <unk>, we have assumed that the three headwinds remain in the second half of 2023. However, we have the opportunity to deliver better results from category improvement along with the possibility for a steeper ramp up in production in Texas and in fruit snacks.
Further productivity efforts.
From a balance sheet and cash flow standpoint, we continue to expect capital expenditures on the cash flow statement of approximately $45 million.
Consistent with this we expect Unlevered free cash flow in the $25 million to $35 million range.
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.
And with that operator, please open up the call for questions.
Certainly at this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
Withdraw your question again press Star one.
Yeah.
Your first question comes from Jim <unk> with Stephens. Your line is open.
Hey, good afternoon, guys. Thanks for taking my question.
If you could maybe provide a little more color on the business opportunities that you guys had.
Planned on the sixth floor, a little bit slower than the 2% fell through just any detail on kind of what the moving pieces were there.
Theres a chance maybe to accelerate the six that are slow and if the two that fell off permanently fallen off there is a chance to maybe pick those up down the road.
Yeah. Thanks, Thanks, Tim as we outlined turn key projects two of them that didn't happen.
We're not the biggest opportunities but.
We're really a function of they had lofty expectations based on category growth a year ago that didn't materialize and their plans to get on shelf, we're somewhat rewarded by retailers lack of enthusiasm for adding new.
New brands into the category as it relates to the six as I mentioned all of them are contracted all of them are now ramping up they're just slower than we thought I would give you if I could summarize kind of one core reason it was many of those six or.
<unk>, where we were taking business from one of our competitors.
And with the category slowing down those competitors had excess packaging excess finished goods that the customer allowed them to work through thereby delaying their move from competitor X Y Z two sonata.
We're kind of fully over the hump with most of those and.
I would say the average delay was circa three four months something like that certainly frustrating because we build guidance and our expectations based on the timelines that were committed by them, but at the end of the day.
We're happy to have those new customers onboard and producing and will certainly contribute to kind of back half business as well as growth in 2024.
Okay, Great and then on the BT volumes, where the customer just kind of lack of an ability to get raw material.
Is that something that we should keep our antennas up for US maybe there is some increased supply chain dislocations coming or is this kind of unique to one customer and any color you could give us on that would be helpful as well.
Very unique to one customer.
It is a customer where they provide us the ingredient, meaning they provide us the tea.
And they are having some.
The transition of more transition timing, so it sounds like theres, a crop failure or anything like that.
It's really linked to changes in their business structure standing up a new it system and their system basically functioning and providing us tea leaves that we then turned into.
Finished goods.
We would expect and hope we just had a call with them. This morning, we would expect and hoped probably be some continued lumpiness in Q3, but they fully expect to have it behind them by Q4.
Got it that's helpful and then maybe if I could sneak in one more.
As you guys step up your mood.
Move to being the exclusive supplier for a couple of your larger customers.
Because all of that incremental business with them.
Just flow into the addition that you have made in Logan or B, you have to pull some other stop off of existing lines and slot in those customers to meet that step up in demand.
No we won't have to pull anything off existing lines. It just slots into capacity additions we've made.
And a number of instances, Texas provided redundancy.
In capabilities like tea, where we used to only have one T extraction system, we now have two giving the customer confidence.
To give 100% of their business to <unk>, because we have some redundancy in manufacturing that we never used to have but no. We won't have to do any kind of restaging or business.
Resignations, where we're fully capable of supporting the incremental volume that is coming our way.
Okay, great. Thanks for the color guys I'll hop back in the queue.
Thanks.
Your next question comes from Ryan Meyers with Lake Street Capital Markets. Your line is now open.
Hey, guys. Thanks for taking my questions.
First one for me I'm, just curious as we think about the full year guidance.
How much does that bake in improved industry.
Demand trends and then also you know if you could kind of just speak a little bit more to what youre seeing in that category softness I think it'd be helpful.
Yeah. So we did not bake in improvements in category performance.
As I articulated we certainly believe the category long term has a lot of positives going for it just.
Just candidly, we don't have any information that would tell us.
September 1st it's going to turnaround our October 1st So we're just operating off of the information we have today, which is why Scott called it out.
As a potential upside.
The thing I will point out and we've made this point several times tracked channels is roughly a third of our business. So we have growth in many of the other channels.
Got I think referenced category was down 8% in volume so that we're.
We're not immune to softness in the in a third of the category when it's down 8%, but foodservice was up for US again, it's been a strength of ours for many years.
And we're also seeing solid growth in E Commerce and club so.
We feel good about the diversified channel mix that we built and.
We're certainly performing better than the overall.
Category and attract channel basis, but.
Does that does definitely represent a headwind.
Got it and then as we think about the more longer term guide.
<unk> targets that you guys have given in the past for FY 'twenty four I think it was $1 1 billion in revenue and $120 million EBITDA.
Does the sort of three areas of softness that youre seeing right here does that change anything for next year.
It does not our view it doesn't change our view for 2024.
The vast majority of the.
Growth levers that we built into that guidance are happening.
And we're confident in the long term strength of the category. So no we're not.
We're not revising 2020 for 2025, we still believe in those targets.
Good to know thanks for taking my questions.
Your next question comes from Andrew <unk> with BMO. Your line is open.
Hey, good afternoon, thanks for taking the questions.
Okay.
I'd like to hear you talk maybe a little bit more about what you're seeing outside of the retail market at the other two thirds of your business you've talked about strength obviously.
Are you seeing any softness there any slowdown there.
Have you incorporated any.
Christian in your guidance on that side are you seeing that really holds consistent.
So we're definitely continuing to see strength there.
Where we have really good visibility into the numbers, we saw overall double digit growth in the foodservice channel.
There is also a component and this is where our business gets a little bit tricky to understand sometimes.
We make an estimate of the national brands that we produce for what portion of that volume flows into foodservice.
And so there was a little bit of headwind. There are estimates are accurate, but the kind of where we sell direct into foodservice, we continue to see strength.
Okay. Okay.
Maybe if you could just talk a little bit about what you saw through the quarter and are you seeing that.
The retail side of the business starts to stabilize at that lower level or.
We kind of continually.
Since you've accelerated declines.
Okay.
And I think it's fairly stable at those at those levels Andrew.
It is not further decelerating if we look at say the four week data versus the 12 week.
Got it and then I guess, just as we think about bridging this into my last one I apologize if we think about bridging from.
The sales guidance and the reduction there to.
The profit impact I mean are there any cost opportunities or anything you guys are doing differently as you kind of tightened.
Sure.
Reasonably more steady EBITDA relative to the reduction on the on the topline just anything that you've contemplated there it'd be great to hear thanks.
Yeah, Andrew it's Scott its a good question I'd say, there's probably two core activities. Some you can even see.
In the Q2 financial statements I think I mentioned in my prepared remarks.
Been a very good job.
Managing the inventory quantum in the environment that we're in I mentioned it was a.
Significant outperformance versus last year, but then I think as you would expect making sure that production volumes are bang on what demand is then youre not.
Over or under delivering your customer and you're not building or decline in inventory. So I think we are managing the business I think actively on that basis on both fronts.
Okay.
Okay, great. Thank you very much.
Your next question comes from Bobby Burleson with Canaccord. Your line is now open.
Alright, Thanks for taking my question.
So I was just curious on the <unk>.
Customer programs that were slower to get going but expected.
It sounds like the two that dropped off.
Were in part due to that category softness and I'm wondering how much you think the slower than expected ramp to those six customers are the six programs. It is also due to the category weakness.
I think it was absolutely a contributor Bobby has the way. This works is if they're moving from a competitor to us. They are trying to calculate okay. When will they be out of inventory and out of packaging materials and out of ingredients with.
One of our competitors in order to then move business to us well, if the category slows down the inventory builds up the ingredients buildup packaging builds up and there is a fairly common respected practice in the industry have you don't screw somebody when you're moving and you.
You allow them to work through whatever finished goods and dedicated specific packaging. They have so we've just seen a slower pace I mean, some of it is just a frustrating bureaucracy with some of the bigger packaged goods companies.
But overall again as I mentioned they are all contracted they're all coming.
They were just several months slower than we had planned and built into our guidance.
Okay, Great and then just on the.
Yes, the overall kind of inflationary environments impact on consumer purchasing and yet you guys pointed out the premium nature of the category.
But it sounds like oat milk creamer did well so do you think.
Folks, we're driving we're buying multiple types of plant based milk and then they just.
Cut out the almond milk or.
What kind of reconcile the strength in certain areas of the category and the overall kind of thesis that.
No.
Consumer wallets being pressured and its impact on category volumes.
Yeah, I mean oat milk has has done well as a product introduction you know call. It five years ago in earnest and so.
We continue to see growth there, especially in foodservice it is a product that payers and.
Incredibly well with coffee and so it's not surprising to us that we continue to see it do well in coffee applications be it creamers barista blends.
Or in foodservice, So I don't think that dynamic is as much pricing.
One of the things that you referenced in your question, we have seen which is there.
Average household that buys plant based milks.
Bis to three different varieties, and we have seen a bit of skinny up meaning instead of a household buying both almond milk and milk, which might be all in eight nine and $10.
They are buying just one product instead of two which doesn't necessarily change the amount that gets consumed in the household but it changes the amount that goes through the basket on a short term basis.
Okay, great. Thank you.
Your next question comes from Alex Fuhrman, Craig Hallum Capital Group. Your line is open.
Hey, guys. Thanks for taking my question it sounds like Joe from your from some of your comments earlier, it sounds like youre, not really seeing much or any weakness in the foodservice channel I'm curious you know.
Or is it just that the foodservice channel was so strong for you that it continues to be up despite maybe seeing a little bit of a sequential slowdown or has it really just been a tale of two completely different trajectories in foodservice and in tracked channels.
Yeah, you know as I mentioned, I mean, we're definitely seeing more bifurcation in performance between foodservice and retail.
I think it's possible to the consumer is just less price sensitive when they're in a coffee shop ordering their favorite drink versus in a grocery store, where they have a basket of items they need to purchase to feed themselves and their family and so maybe there's just more price sensitivity in a in a retail environment and then there is.
At the drive through for your ear morning, Oat milk latte.
But that is that is definitely something we're seeing and.
We haven't seen any signs of a slowdown as I mentioned, where we do have good visibility into the data and in foodservice, we're seeing low double digit growth.
Okay. That's really helpful. Thanks, Joe and then I think you called out a couple of times in the release and on the conference call that <unk> continues to be a really strong performer or are there any particular nuts receipts or grains that have been slowing down and then as you think about it.
Continuing to optimize your production in Midlothian or are there maybe any way that you might differently allocate production given what you've been seeing since the last update.
Yes, we're seeing a bit of an acceleration.
Or deceleration if you will in almond milk.
At a category takeaway basis, which is a little bit surprising but.
Almond milk is the lion's share of the category still at 60%. So if something's going to be a share donor. It's typically usually the biggest thing in the category.
But that's the answer to your question in terms of.
Impact on Midlothian, our assets are pretty fungible in terms of ability to run almond milk versus oat milk et cetera, So while we love running products, where we're doing both the extraction and the processing side of it.
We don't serve.
Certainly our assets are capable of making a quick pivot and as I've mentioned in the past things like oat milk, where we're doing both extraction as well as the packaging side of it affords us.
Better margins, because we're making a margin on the extraction as well as the packaging.
Okay. That's really helpful. Thanks, Joe.
There are no further questions at this time with that I will now turn the call back over to Joe and then for closing remarks.
I just wanted to say thank you I appreciate your interest and time this evening and look forward to talking to all of you in the future. Thank you.
This will conclude today's conference call. Thank you for joining US you may now disconnect.
Okay.
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