Q3 2024 SunOpta Inc Earnings Call
Greetings and welcome to synaptos 3rd Quarter 2024 earnings conference call. At this time, all participants are in a listen only mode.
A question and answer session will follow the prepared remarks.
Speaker Change: As a reminder, this conference is being recorded. Now let's turn the conference over to your host, Reed Anderson with ICR. Thank you, you may begin.
Reed Anderson: Good afternoon and thank you for joining us and soon up to third quarter fiscal 2024 earnings conference call.
Reed Anderson: On the call today, our Brian Kocher, Chief Executive Officer and Greg Gaba, Chief Financial Officer.
By now everyone should have access to the earnings press release. It was issued earlier this afternoon is available on the investor relations page on synoptis website at www. synoptis.com
Reed Anderson: who's causing 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 full-looking statements and management may make additional full-looking statements in response to your questions.
These statements do not guarantee a future performance, and therefore, under-reliance should not be placed upon them.
We refer you to all risk factors contained in Synoptic's press 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.
Reed Anderson: The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances, except as may be required under applicable securities laws.
Finally, we would like to remind the listeners that the company may refer to certain non-GAAP financial measures during this teleconference.
Reed Anderson: Reconciliation of these non-GAAP financial measures was included with the company's press release issued earlier today.
Reed Anderson: Also, please note
Reed Anderson: in the prepared remarks that follow, unless otherwise stated, the company will be referring to the continuing operations portion of the business.
Speaker Change: and all figures are in U.S. dollars, occasionally rounded to the nearest million. Now I'll turn the call over to Brian to begin. Brian? Good afternoon and thank you for joining us today. For today's call, I'll start with the highlights of our latest quarter's performance, along with an update on business trends and key priorities.
Speaker Change: Greg will follow with a review of the financials and our outlook. Then, we'll take your questions.
Reed Anderson: The third quarter played out as expected. We once again demonstrated our ability to drive significant growth, improve productivity and profitability, and build processes for sustainable shareholder value creation.
Reed Anderson: Last quarter we told you that we continue to see revenue growth from innovation, share expansion at existing customers, and share growth with new customers.
Reed Anderson: We also highlighted the temporary operating expense investments in our supply chain to accelerate future sustainable efficiencies, capacity growth, and margin expansion.
Reed Anderson: We guided to what we could see and worked diligently on key metrics, including revenue growth, volume growth, margin expansion, and increasing adjusted EBITDA. The short story? We delivered.
Reed Anderson: For the quarter, revenue growth of 16% was driven by volume growth of 21%, reflecting broad-based strength across customers, channels, and major product categories. We are winning with winning customers as a solution provider and an innovation partner.
Reed Anderson: Our success in operational initiatives was evidenced by the 60 basis point year-over-year improvement in adjusted gross margin, as well as our 13% increase in adjusted EBITDA.
Reed Anderson: Let me provide a few data points to give you some perspective on the breadth and depth of our growth.
Reed Anderson: We again drove double-digit revenue growth from each of our top three customers.
Our top five customers posted 30% average year-over-year revenue growth.
Our fruit snacks business grew by 42% reflecting 40% sales volume growth.
Reed Anderson: In total, our beverages and broths product lines grew revenue by 14%.
Reed Anderson: Our food service channel again increased revenue by double digits as our major customers continued to lean into consumers growing preference for plant-based beverages across their menu options.
Reed Anderson: I love our categories and every category in which we participate is growing. As examples, across all channels on a consolidated basis, shelf-stable plant-based milks continue to grow at a mid-single-digit rate.
Reed Anderson: Protein shakes increased 17% over the last 52-week period.
Reed Anderson: The Better For You Fruit Snacks category grew by 21% over the last 52 weeks with our customers commanding well over 75% of the segment share.
Even a stable consumer category like broth is up 8% over the last 52 weeks.
Reed Anderson: Our co-manufacturing and private label solution provider model has consistently demonstrated revenue growth potential.
Reed Anderson: We are growing revenue through share gains as evidenced by our most recent announcement to expand Dream Oat Milk across North America in partnership with one of our largest customers.
Reed Anderson: Our R&D teams are developing new, innovative product solutions on behalf of our customers.
We are deeply wired into our customers' supply chain processes, and we work closely with them on longer-term inventory, product, and promotional plans.
Reed Anderson: All of this gives us insight into and confidence about our future revenue growth opportunities. Moving on to our operational performance, as you know, the supply chain has been a major area of focus for me.
Reed Anderson: We are committed to improving its effectiveness and using those efficiencies to expand margin and fulfill our unit volume growth opportunities.
Reed Anderson: While we've already realized many meaningful improvements in a relatively short period of time, I'm even more excited about the longer-term potential to drive greater productivity and efficiency.
Reed Anderson: Based on our work over the past several quarters, we believe there is significant runway for us to unlock trap capacity in our existing network through 2026 and beyond.
During Q3, as planned and similar to Q2, we chose to take advantage of our exceptional revenue growth and make additional short-term operating expense investments in our supply chain to either shore up certain processes or accelerate sustainable efficiencies.
Reed Anderson: These incremental investments were focused on process advancements, scheduling, training, and uptime improvements in our aseptic network. Individually and collectively, these projects are making meaningful progress.
Reed Anderson: Our 20-plus percent volume growth over the past six months provides strong evidence of the success of these investments and also gives us a high degree of confidence in our ability to sustain the efficiencies longer term.
Reed Anderson: In summary, we have a much clearer vision in our opportunity to sustainably expand margins and meaningfully increase our return on invested capital. Let me share some recent examples of the progress.
Reed Anderson: Third quarter output versus the prior year was up 18% in our aseptic facilities and up 49% in our fruit snack facilities.
Reed Anderson: Similar to Q2, the higher output was driven by greater efficiency from our established lines and facilities, as well as new capacity deployed over the last 18 months.
Thank you. Bye.
Reed Anderson: During September, we had our second consecutive record-breaking production month at our Fruit Snack facility in Omek, Washington.
Reed Anderson: Our Allentown facility achieved its highest operating uptime metrics of the year in September.
Reed Anderson: Oat extraction in Modesto, which came online during Q2, continues to ramp from a volume perspective.
Reed Anderson: Given our recently announced Dream Oat Milk distribution expansion, our investment in capacity proved to be very timely. Output in Midlothian is increasing, with the third line contributing as expected.
Reed Anderson: To provide just a few data points on Midlothian's performance this quarter, the facility produced more than double the volume of 3Q2023, and more telling about the opportunities ahead produced 20% more units than in the second quarter of 2024.
Reed Anderson: We continue to see opportunities to drive further improvement in Midlothian run rates and output.
Reed Anderson: Most importantly, our margin, output, and manufacturing costs per unit was the strongest in the final month of the quarter, which aligns with our guidance for expanding margins in Q4.
Reed Anderson: Supply chain excellence is the best return on investment we can make today.
Reed Anderson: Based on our high degree of confidence in our supply chain improvement opportunities, we are prioritizing efficiency initiatives to create additional production capacity over incremental capital investments.
Reed Anderson: I am most excited about the clear, practical, and tangible path we have to unlock trap capacity for years to come.
Reed Anderson: We can see a future where our unlocked capacity enables expanded margin and significantly defers the timing while reducing the overall amount of capital investment needed for growth.
Reed Anderson: While it's still early in our supply chain journey, we are starting to see the benefits, and we look forward to updating you on our progress during our next earnings call.
Reed Anderson: We are confident in our direction and our expectations for the future continue to be based on what we see, not what we hope. Our priorities remain the same.
Reed Anderson: First, drive operational improvements to fulfill customer growth and expand sustainable margins.
Reed Anderson: Secondly,
Reed Anderson: grow volume through expanding our current customer relationships via both share gains and innovative solutions, acquiring new customers, and expanding our TAM.
Reed Anderson: And thirdly, maintain our disciplined financial approach and continue deleveraging to under three times adjusted EBITDA by the end of the year.
Reed Anderson: Our immediate focus is on delivering another good quarter and we are reaffirming our fiscal 2024 revenue and adjusted EBITDA guidance.
Reed Anderson: as well as our midterm target of $125 million adjusted EBITDA run rate by late fiscal 2025 or early fiscal 2026.
Reed Anderson: We will provide our outlook for 2025 on our next earnings call when we announce fourth quarter results.
Reed Anderson: In summary, we continue to deliver strong results. We are a growth company in growing categories with winning customers.
Reed Anderson: And over the past four consecutive quarters, we've consistently delivered top and bottom line results that were in line or better than expected.
Reed Anderson: Our revenue growth is broad-based and volume-driven, at rates that are several times faster than the respective categories in which we participate.
Reed Anderson: our temporary operating expense investments
Reed Anderson: and focus on operational excellence and productivity positions us for sustainable margin improvement commencing in the fourth quarter and accelerating through 2025 and into 2026.
Reed Anderson: I am confident in the direction of our business and our significant potential to drive growth, cash flow, and shareholder value over the longer term.
Reed Anderson: Now, I'll turn the call over to Greg to cover the third quarter and full year outlook in more detail. Thank you, Brian, and good afternoon, everyone.
Greg: We had another strong quarter. Revenue of $176 million was up 16% compared to last year and continued to be driven by outstanding broad-based volume growth.
Greg: Gross profit increased $3.3 million or 16% to $23.6 million in the quarter and reported gross margin was 13.4 percent.
Greg: Adjusted gross margin was 17% compared to 16.4% in the prior year, reflecting higher sales and production volumes that drove improved plant utilization partially offset by incremental depreciation for newly launched production assets.
Greg: along with some manufacturing inefficiencies as we continue short-term investments to drive future sustainable supply chain efficiencies.
Greg: Operating income of $1.5 million was up slightly compared to prior year as increased gross profit and lower business development costs and employee severance costs following the divestiture of frozen fruit.
Greg: were largely offset by higher variable compensation and increased professional fees related to operational productivity initiatives.
Greg: Loss from continuing operations was $5.5 million compared to a loss of $5.7 million in the prior year period.
Greg: Adjusted EBITDA from continuing operations increased 13% to $21.5 million compared to $19.1 million last year.
Greg: Turning to our balance sheet, at the end of the quarter, debt was $290 million, which was $13 million lower than the end of Q2. Net leverage was 3.3 times the decrease from 3.5 times last quarter, and we expect to achieve our target of being under 3 times leverage by the end of the year.
Greg: Year-to-date cash provided by operating activities of continuing operations increased significantly during the quarter to $19.2 million, and year-to-date cash used in investing activities of continuing operations was $16.5 million.
Greg: Now turning to our full-year outlook.
Reed Anderson: We are reaffirming our outlook for fiscal 2024.
Reed Anderson: We continue to expect revenue in the range of $710 to $730 million, which represents growth of 13 to 16%, and adjusted EBITDA of $88 to $92 million, which represents growth of 12 to 17%.
Reed Anderson: In summary, it was another quarter of exceptional, volume-driven, top-line growth rates with improved gross margin and cash flow.
Reed Anderson: We continue to accelerate short-term investments in the supply chain initiatives, which we anticipate will wind down in the fourth quarter.
Reed Anderson: These investments are expected to deliver higher sustainable margins, improve profitability, and provide great momentum as we enter 2025, helping us achieve higher rates of return and significant long-term value for shareholders.
Reed Anderson: 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.
Reed Anderson: And with that, Operator, please open the call for questions.
Speaker Change: Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again.
Reed Anderson: If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Reed Anderson: We ask that you ask one question and queue up again for any follow-up questions.
Speaker Change: Your first question comes from the line of Jim Salera of Stevens. Your line is open.
Jim Salera: You guys, good afternoon. Thanks for taking our question.
Jim Salera: I wanted to ask on, obviously, recent headline news, a big customer of yours removing surcharge on
Jim Salera: plant-based add-ons for their drinks.
Jim Salera: Just any thoughts on how that could potentially both increase the demand for your product among people who are familiar with plant-based add-ons, and do you have any sense for if that incremental surcharge was kind of a
Jim Salera: prohibiting factor for maybe people that haven't tried the plant-based milk, and this opens up an opportunity for them to try it for the first time and kind of convert and bring them into the fold.
Speaker Change: Yeah, Jim, thanks for the question. Let me kind of answer that and then also put it in the context for you. If I think about it in general, we believe anything that that fosters trial
Jim Salera: penetration or repeat buys in general is good for us. So I think in general that that's how we view that those types of activities. Now I will also say we don't comment on any particular customer but as you remember we are tied into the supply chains of our top 15 customers.
Jim Salera: So, we work with them on product development, on responses to consumer demands, on...
Reed Anderson: pricing developments and make sure that our solutions are available to ensure that they're in supply and they can satisfy their customers. So, I guess that's a long way of saying, look, we've been working with our customer base.
Jim Salera: throughout food service and retail in trying to ensure that we're meeting the demands and providing solutions for that.
Speaker Change: Your next question comes from the line of Andrew Strelzyk of BMO Capital Markets. Your line is open.
Reed Anderson: Hi, this is Daniel Gold on for Andrew Strzok. Thanks for taking my question.
Speaker Change: Sure, Daniel.
Daniel Gold: Thanks. So you guys still have a pretty wide range for 4Q. What are the swing factors for the high and low ends of that range?
Greg Gaba: Yeah, Daniel, it's Greg.
Greg Gaba: Thanks for the question, you know, we put our guidance out for the back half of the year And we raised twice already this year and when we look at the quarter, it basically came in exactly as we expected So not to overthink it. We just kept the guidance. We reaffirmed it for the full year and didn't make any full changes
Speaker Change: Your next question comes from the line of Ryan Myers of Lake Street Capital Markets. Your line is open.
Ryan Myers: Hey guys, thanks for taking my question. Just, you know, kind of as a follow-up to the unchanged guidance question, you know, is there any potential for new business to come in the pipeline here in Dufour where there could be upside or is most of the capacity for this quarter pretty much accounted for already?
Speaker Change: Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: Yeah, Ryan, hey, it's a really good question. We appreciate it. I will go back to, we continue to try to...
Speaker Change: to frame our guidance and our outlook in what we can see versus what we hope that happens. We know we've seen a lot of data that's come through over the course of the last
Speaker Change: several weeks. We've worked with customers, so I think we're fairly confident in our guidance for the for the fourth quarter. Probably just in terms of repeating Greg's answer and feedback,
Speaker Change: I wouldn't overthink it too much. We had the guidance, we basically came in for the quarter the way we thought in the third quarter, and therefore we left the fourth quarter the same.
Speaker Change: Your next question comes from Brian Holland of D.A. Davidson. Your line is open.
Brian Holland: Yeah, thanks, good afternoon. I'm curious, you referenced at the top, Brian,
Brian Holland: top customer growth at a pretty meaningful magnitude. I'm curious if you can sort of...
Brian Holland: discern for us between you know how much of that is a byproduct of you picking up incremental business with these customers versus what these customers underlying growth trend is and to the extent that it's the former how sustainable do you view that magnitude of growth to be for you?
Speaker Change: Yeah, Brian, thank you. Great question. Let me start even with our categories, because I think the other thing that we mentioned in our prepared remarks, and I want to make sure it doesn't get lost in the Q&A, every category we're participating in is growing.
Speaker Change: If you look at shelf-stable plant-based beverages growing mid-single digits, if you look at
Speaker Change: broth growing, if you look at fruit snacks growing. So first and foremost, it starts off with categories that are growing.
Speaker Change: We also have had some investments starting in last year into the beginning of this year that were TAM expansion so clearly our Investments in protein shake capacity as well as some other innovation. I would say was clearly TAM expansion or innovation related that helped spur growth
Speaker Change: And then we also have been very open about shares that we've gained. If you remember, we are, at our heart, we are a customer-focused solution provider.
Speaker Change: customer focused solution provider. And that gives us the opportunity to innovate with our customers, it gives us the opportunity to grow the market, but it also gives us the opportunity to
Speaker Change: to see share advances and share increases. And if you look at our revenue for the first...
Speaker Change: six months of the year, we would have said that, you know, we're probably a third TAM expansion, a third rep share growth with existing customers, and a third share growth with new customers. I think if you look at this third quarter, it's more 50-50 between new products and share growth.
Speaker Change: Your next question comes from the line of Alex Furman of Craig Hadlam Capital.
Speaker Change: Group. Your line is open.
Alex Furman: Hey guys, thanks for taking my question and I'll add my congratulations on another really good quarter. I wanted to ask about the announcement you guys had about a month ago about expanding your dream brand, Oat Milk Barista product.
Speaker Change: through the Coffee Shop Channel. Looks like a pretty big rollout of 6,700 stores. I think my understanding here of your business in the Coffee Shop Channel has been consumers wouldn't generally see your product, or your product would be in a fairly nondescript container. Can you talk a little bit about this shift into having a bigger role for your brands in the Coffee Shop Channel? Does this represent any sort of a change in strategy now that you have a larger portfolio of brands to work with?
Speaker Change: Yeah, Alex, appreciate the question. I don't know that I would go so far as to say this is a change in strategy. Certainly having our brand available to consumers is a unique option for any one of our customers. And again, you know we can do co-manufacturing, we can do private label, but we can also have a brand offering. I think the opportunity
Speaker Change: that led to this distribution expansion was one of providing a supply chain solution.
Speaker Change: And this happened to be a unique opportunity where we could draft a solution that could be implemented relatively quickly and implemented on a wide scale, and our brand was the best product or the best format to do that.
Speaker Change: So, I don't know that I would think of it as a strategy change as much as a perfect example of how we try to provide solutions for our customer base.
Speaker Change: And when you provide solutions, you get chances on innovation. When you provide solutions, you get chances for share growth, and this was one of those.
Speaker Change: Okay, that's really helpful. Thanks, Brian.
Speaker Change: Your next question comes from the line of John Baumgartner of Mizzou Securities. Your line is open.
John Baumgartner: Good afternoon. Thanks for the question.
John Baumgartner: Hey John, good to hear from you.
John Baumgartner: Good afternoon. Thanks for the question. Maybe first off, I wanted to ask about reinvestment. As you're sort of rolling through these process efficiencies and as the business develops, the volumes and customers develop, how do you think about other areas of potential reinvestment? Whether it's R&D, adding support or resources to the Salesforce, how do we think about your ability to maintain OPEX leverage going forward?
Speaker Change: Yeah, thanks John. I appreciate that. Look, we're really excited first and foremost about our demand generation engine. I think we've been saying that for several quarters now. We also have tried to be
Speaker Change: responsible in providing an outlook or guiding to what we see and not what we hope that happens, but then go work our tails off to make what we hope happens is a reality.
Speaker Change: So, I continue to believe that we'll have operating expense leverage as we go through here. We are a solutions provider that are drafting great answers and great...
Speaker Change: initiatives for our customers to continue growing and our categories to continue growing. So I love that aspect of it and we can do that while continuing to think about how we support our customers in R&D, how we support them with the with the sales team and representation.
Speaker Change: If you look at investment, it is abundantly clear to Greg and I, and it's more clear today than it was three months ago, it was more clear three months ago than six months ago, our next best dollar investment is in supply chain efficiencies.
Speaker Change: If we can unlock the trap capacity in our network
Speaker Change: We have an opportunity to really drive margin and more importantly, even do so in a way that either defers and or reduces ultimately the amount of growth capex that we have.
Speaker Change: are required to service our growth. So I'm excited about that. In fact, we still have a little bit of work to do to quantify the financials on that and we look forward to sharing that with you when we announce our fourth quarter results, but we can tell you as of today
Speaker Change: that we believe we have a line of sight in the operational improvements that would fuel our volume growth well in the 26 and possibly even further without significant CapEx, without significant growth CapEx, and we're really excited about that.
Speaker Change: Okay, and to follow up on the efficiency there, I think part of the process efficiency...
Speaker Change: There was some expectation.
Speaker Change: to get some benefits for inventory.
Speaker Change: And I'm curious, in thinking about working capital, do you have to hold more inventory going forward to accommodate stronger growth? Are there efficiencies in procurement and supply chain that are accretive to working capital? Just sort of your thoughts there on the balance of that.
Speaker Change: Yeah, you know, for inventory levels, they were up this quarter. A couple of reasons why. One, our revenue is growing, and as revenue grows, the absolute dollars of inventory will go up.
Speaker Change: In addition, it's a little bit seasonal, John, as we are going into our broth season. So we do typically have an inventory build here in Q3 to get us prepared for the Q4 broth season. So I would look at it more in the terms of days on hand. And, you know, we do strive for certain targets there, and we expect those to be consistent going forward. But as revenue grows, the absolute dollar of inventory will grow.
Speaker Change: Thanks, Greg. Thanks, Brian.
Speaker Change: Your next question comes from the line of John Anderson of William Blair. Your line is open.
John Anderson: Good afternoon, congrats on the good quarter. I may have missed this earlier so I apologize but
John Anderson: you know this year you your volume has been extremely strong and
John Anderson: It seems like you've satisfied that demand but it has caused some manufacturing inefficiencies as a result, thus, you know, spurring your investments in the supply chain.
John Anderson: How do you balance that equation of chasing that growth when it's there versus, you know, trying to maintain some balance in your operations to deliver on profit objectives, return objectives, and then as a second part,
Speaker Change: You know, could you talk a little bit about where you sit today from a capacity standpoint in terms of sales and and how incremental
Speaker Change: You know, are these short-term or near-term investments you're making in the second half of this year, how incremental is that to your capacity going forward? Thanks.
Speaker Change: Okay, John, a lot to unpack there. Let me start with the second part of your question first because it's a really important point that I want to make sure everyone understands and really is more clear for us now than it has been certainly in the ten months that I've been here.
Speaker Change: very clearly understand today.
Speaker Change: is
Speaker Change: The next best dollar that we can spend in investment
Speaker Change: is unlocking trapped capacity in our operating system, in our supply chain. And trapped capacity comes from all kinds of things. It comes from equipment downtime, it comes from sequence and scheduling, potentially it comes from order of production, product mix, there's all types of things that impact capacity and utilization rates.
Speaker Change: I am more clear today, and we as an organization are more clear today.
Speaker Change: that we have runway.
Speaker Change: to satisfy our growth initiatives and what we've talked about in the investment community with long-term growth targets, we're more confident in our ability to
Speaker Change: drive operational efficiencies which unlock that capacity and allow us to service growth well into 26 and potentially further out, thereby deferring significant growth capex.
Speaker Change: We don't have all of our answers yet, so we've got a little bit more work to do, but we're looking forward to sharing that with everyone when we announce our fourth quarter results.
Speaker Change: and provide an outlook on 2025 at the same time. So, I think that's the answer to the second question. The answer to the first part of the question on efficiencies and how do you balance that
Speaker Change: I think there's two answers. One is a lot of times when you are looking to fill your facilities and your plants, you're looking to gain volume.
Speaker Change: and you take the volume when you can get it, not necessarily when it's convenient.
Speaker Change: I think we're probably past that phase in our growth strategy now. And we have the opportunity, as I said, to fund volume growth.
Speaker Change: through operational efficiencies, but also ensure that we're working with our customers so that it's the right type of growth.
Speaker Change: We clearly have a plan to expand margins, to use that operational efficiency to expand margins. We have a margin target.
Speaker Change: that we're marching to at 20% gross margin. It won't be tomorrow, it'll be over the course of several quarters. But we do that by balancing not only operational efficiency, but the right type of growth as well.
Speaker Change: So hopefully that that clarifies.
Speaker Change: Yeah, that's very helpful. I appreciate it. Can I squeeze in a follow-up on...
Speaker Change: packaging and processing and packaging that you do at the beverage space. Is that a business we should think about is core or central to you know your strategy going forward or are you always thinking about a range of...
Speaker Change: you know, strategic alternatives across the portfolio, including that part of the business. Thanks.
Speaker Change: John, I love the product categories we're in. Every one of them is growing. That fruit snacks category is growing like crazy. I think over the last 52 week period it's it's up 21%. It's actually up more in the last
Speaker Change: 26-week period. So I'm really excited about fruit snacks. I actually think, although the the operating mechanism is different.
Speaker Change: you know, hot extrusion, single flow wrap, multi-packs, and fruit snacks.
Speaker Change: aseptic processing in our beverage and broth category, although the operating...
Speaker Change: Facilities are different.
Speaker Change: the customer base, the solution orientation.
Speaker Change: the opportunity to innovate, the opportunity to work with our customers on solving their supply chain challenges.
Speaker Change: the opportunity to grow with them as we solve supply chain challenges, they're actually extremely similar in terms of our go-to-market approach. So it feels to me like it's a very core part of our business.
Speaker Change: in a growing category where we can distinguish ourselves with
Speaker Change: customer-focused, innovative solution. So I really like the portfolio.
Speaker Change: Well said. Thanks.
Speaker Change: Your next question comes from the line of Daniel Biolsi of Hedgeye. Your line is open.
Daniel Biolsi: Thank you. Brian, I was hoping you can follow up on some of the answers you were talking about with the productivity gains your team has achieved in Q3.
Daniel Biolsi: and the rest of the year and what that opportunity is for next year and how much of that is at the newest plants, getting that up to where the other more existing plants are and just bringing it up to speed and how much is just sort of across the board with all your plants.
Speaker Change: Yeah, so, you know, if I think about it, Daniel, I'm really proud of what we've done in the supply chain so far. If you look at us year-to-date, I think we're up 18% in total.
Speaker Change: Actually in the third quarter we are, a year to date it's a little more. If I split that out, what I'll call our existing, so maybe legacy is a way to think of it,
Speaker Change: plants and manufacturing lines, they were up 10 percent.
Speaker Change: So, yes, part of it is the new assets.
Speaker Change: We're filling those, they're getting up to speed, they're getting up to the efficiency and throughput levels that we want in mature assets. But the other piece of that is, our mature...
Speaker Change: assets, we're also increasing output there. Again, that's what gives us so much confidence that...
Speaker Change: that we can drive and fulfill the revenue growth that we see over 25 and into 26, potentially even further.
Speaker Change: We can fulfill that with operational excellence initiatives because we're already seeing that in our mature legacy assets. To give you some perspective, and I think we said this last time, a 10% increase in that asset production
Speaker Change: is the equivalent of a manufacturing line. That's a free manufacturing line. We didn't have to pay any CapEx for that. Now, again, it's a little bit clouded because...
Speaker Change: Some of the volume gains that we took on came with some inefficiencies and we've had to...
Speaker Change: shore up a few processes as well as build sustainable processes for future margin expansion.
Speaker Change: But the fact of the matter is, we see a path, and we're excited about fulfilling our volume growth through operational efficiency initiatives and not through investment CapEx.
Speaker Change: Well then I'm looking forward to what you announce next quarter on what you see.
Speaker Change: Yeah, we need a little bit of work still to kind of crystallize everything, but we're excited to talk about what 25 can bring.
Speaker Change: Thanks.
Speaker Change: Your next follow-up question comes from the line of Jim Salera of Stevens. Your line is open.
Jim Salera: Hey guys, just one follow-up question to my earlier question. You talked about how there's a big opportunity for penetration in retail and kind of closing the household penetration gap between
Jim Salera: plant-based milk and traditional dairy milk. Do you have a sense for, in the coffee shop channel, what that mix or what that penetration is at right now and what you think that could go to?
Speaker Change: You know, um...
Speaker Change: Jim, it's harder. That coffee shop data is much harder to get a hold of, as you know. I think what I tried to do is make a more general statement, which was...
Speaker Change: We view that we benefit any time there's...
Speaker Change: product initiatives, assortment initiatives, pricing initiatives.
Speaker Change: or distribution initiatives that encourage penetration, trial, or repeat buys. We think we benefit in those scenarios. So, that's a more general comment. I think I would keep steering this back to...
Speaker Change: a couple of high-level points. We've guided to kind of 10%
Speaker Change: revenue growth, 10% long-term revenue growth. We're more confident in that.
Speaker Change: today than we were three months ago. We're confident in our demand generation engine. Part of that is because, again, we are tied into our top 15 customers and work with them on their innovation pipeline, their new product, their product assortment, and when they make changes in promotional volume or pricing initiatives, we're there right beside them to help them ensure that they've got supply to meet the demand. All of that shapes our guide and our outlook.
Speaker Change: And we try to use all of that information as we then speak to you and others about what we think the potential of our business is.
Speaker Change: that's some background to say we've incorporated this data, we adjust the data based upon what we see and not hope, and then can communicate responsibly to you.
Speaker Change: Great, I appreciate the thoughts. Thanks guys.
Speaker Change: Your next follow-up question comes from the line of Brian Holland of DA Davidson. Your line is open.
Brian Holland: Yeah, thanks. Forgive me if this was referenced at some earlier point, but can you frame how much of a drag the manufacturing efficiencies and supply chain investments you referenced were to EBITDA in the quarter, and for how long these should continue to kind of weigh on the results? Obviously, you know, to the extent that these are transitory, it would be helpful to get a sense of kind of what the underlying trajectory here is.
Speaker Change: Yeah, Brian, we didn't quantify the amount, but what I will say, with 21% volume growth in the quarter, that does create a lot of stress on the system, right? And not all of the cost is to third parties. A lot of the cost is internal costs, and it's opportunity costs, you know, such as training.
Brian Holland: process improvement, working on equipment reliability. I mean we expect that those costs are going to wind down here and they have been winding down and we would expect those to be completely gone by the end of the fourth quarter.
Speaker Change: That concludes our Q&A session. I will now turn the conference back over to CEO Brian Kocher for closing remarks.
Brian Kocher: Thank you, and thanks to all of you for listening and joining. Hey, if you walk away with two things from this quarter, I hope you walk away with the following two. One, our customer-focused solution provider model is an enduring growth engine.
Speaker Change: the value of our solutions.
Speaker Change: and the offerings to our customers are reflected in the share gains and the TAM expansions which is that we've realized which are driving four straight quarters of plus 14 percent revenue growth and that also underpins our confidence in our long-term growth algorithm.
Speaker Change: We have a better vision.
Speaker Change: and increasing confidence in our ability to improve.
Speaker Change: operationally through our supply chain.
Speaker Change: Those initiatives unlock TrapCapacity.
Speaker Change: within the existing manufacturing network and that capacity is sufficient to service our growth, volume growth needs in the 26 and potentially beyond without the need for significant growth capex.
Speaker Change: Those would be the two points that I really hope you walk away from.
Speaker Change: We'll update you in more detail.
Speaker Change: when we provide 25 Outlook next quarter. So we're looking forward to talking about our fourth quarter to providing you Outlook on the, 25 Outlook on the next earning call. And until then, we thank you for your support and look forward to talking to you soon. Thank you all.
Speaker Change: This concludes today's conference call. You may now disconnect.