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Operator
Call is being webcast and its transcription will also be available on the company's website. As a reminder, please note that the prepared remarks which will follow contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. We refer you to all risk factors contained in Synopta's press release issued this morning, the company's annual report filed on Form 10-K, and other filings with the Securities and Exchange Commission for more detailed discussion of the factors that could cause actual results to differ materially from those projections and any forward-looking statements. The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances, except as may be required under applicable securities laws. Finally, we would like to remind listeners that the company may refer to certain non-GAAP financial measures during this teleconference. The reconciliation of these non-GAAP financial measures was included with the company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in U.S. dollars and are occasionally rounded to the nearest million. And now I'd like to turn the conference call over to Sunopto's CEO, Joe Ennin. Please go ahead, sir.
Joe Ennin
Good morning, and thank you for joining us today. With me on the call is Scott Huckins, our Chief Financial Officer. Before we begin unpacking the results, let me offer several key takeaways from the first quarter. First, our strategy of focusing on top-line growth in plant-based and margin growth in fruit continued to fuel strong EBITDA growth in Q1, as it did all of last year. Second, the top-line momentum in our plant-based business remains strong, reflecting our leadership position in beverages, ongoing capacity expansion, and steady consumer demand as plant-based continues to be the number one global food trend. Third, our focus on productivity in our fruit-based business continues to drive solid margin expansion. Lastly, we all know team and culture are critical to driving great performance, and the efforts we have made in the last 18 months around creating accountable business units, building a high-performance team with a winning culture, and investing in talent have been instrumental in fueling our business. Execution ties everything together, and our team continues to excel at operational excellence, which is delivering consistently strong results. The first quarter played out largely as expected, with plant-based revenues continuing to grow rapidly, margins improving in fruit-based, and very strong double-digit growth in adjusted EBITDA. Total revenue of $207.6 million was comprised of 12% top-line growth in plant-based, largely offset by planned revenue rationalization in fruit. resulting in aggregate sales that were flat to year-ago levels and plus 21.8% compared to pre-COVID Q1 2019. Compared to Q1 of 2020, gross margin improved by 130 basis points to 14.4% and adjusted EBITDA grew 33.5% to $18.3 million, or 8.8% of revenues. Q1 saw continued transformation of our operations across the board. We continued to dial in production on the three capacity additions in plant-based that came online in Q4 of last year. We made good progress on our latest expansion project in Allentown, Pennsylvania, which is on schedule to be fully commissioned in Q4 of this year. And we closed our fruit processing plant in Santa Maria under budget and ahead of schedule. We expanded fruit operations in Mexico, and we are having a productive strawberry season there. We are also executing the closure of our fruit ingredients plant in Los Angeles, which we will cover in more detail in a few minutes. Next, the pace and impact of our operational transformation continues to put the company in a stronger and stronger position. Our new oat extraction capability is operating well, and oat revenue was up significantly as we continue to ramp up new and existing customers. Overall, I am pleased with our business development progress, and at our current pace, we continue to believe that we will exit 2022 with the additional capacity effectively utilized. We think our added capacity gives us a unique competitive advantage as we strive to provide our customers with an unparalleled combination of product quality, cost, service, capacity to grow, and unrivaled technical and innovation support. These five ring fences are critical to our long-term success. Now let me comment on the announcement from a couple weeks ago on the acquisition of the Dream and West Soy brands from Haines Celestial for $33 million. Our rationale for this acquisition was simple. First, there is an opportunistic element to this acquisition as we currently manufacture all of the West Soy products and approximately half of the Dream product lines. We believe these brands have significant brand equity based on what we're seeing and believe we were able to acquire them attractively given our supply chain advantages. Second, we have the opportunity to insource the half of the dream product line we don't currently produce. Therefore, we benefit from gaining that margin and absorption benefit in our plan. It is important to understand these brands don't materially compete with existing customers. Dream is 90% rice milk, and West Soy is 100% soy milk, and we don't produce either of these formats for any other Coman customer. It is also important to understand that shoppers are fairly loyal to one type of plant-based milk, so that also reduces the potential for conflict. Finally, from a financial perspective, our forecast is that these brands next year in 2022 will add 15 to 20 million of incremental revenue and 6 to 8 million of incremental EBITDA when we complete the insourcing of all volumes. Our current priorities with Dream and WestSoy are to realize the insourcing synergies, transition the business, and build the capabilities needed to manage these brands. Turning to our segment results, let me start with our plant-based business. The 12.4% increase in plant-based revenue was on top of a 30% increase in the first quarter of 2020. To put Q1 into perspective, this was the highest plant-based revenue quarter in company history. And compared with the first quarter of 2019, our Q1 2021 plant-based revenues were up 47%. Both based offerings were a key factor in our growth, delivering roughly half of our growth on a year-over-year basis. We remain extremely well-positioned to capture additional share in this product category where consumer demand is surging. We also benefited from increased retail sales volumes of other plant-based beverages during the first quarter. While not a significant contributor to revenue growth this quarter, I would like to offer we are pleased with the sales velocity of our organic oat milk creamer launched under the brand name Soan late last year. In addition to strong initial sales velocity, we also continue to build focused distribution for this brand. Growth margin in plant-based was 19.4%, down only 40 basis points from a year ago as we added the depreciation expense associated with our plant expansion and absorbed increased transportation costs. These negatives were mostly offset by continued improvements in productivity. In the fruit segment, revenues were down 13% due to overlapping the initial COVID surge in the first quarter of 2020. and the planned rationalization of marginally profitable business affecting customers and SKUs. Compared to 2019, fruit revenue was basically flat. We experienced two headwinds, COVID overlap and frozen, and customer and SKU rationalization in fruit ingredients, with a tailwind in fruit snacks as we put more emphasis on this margin-advantaged business. As we have discussed in the past, we are executing three strategies to de-risk the frozen fruit business. First is geographic diversification of supply, where we have made significant progress. In Q1, we sourced three times as much fruit from South America as 2020. And year-to-date, Mexico strawberry production is plus 25% to 2020. Second is pricing mechanisms and pricing courage with our customers. We are now in a position with this business where we can confidently pass on a majority of cost inflation. Third, better grower relations to source more of the available fruit. In 2020, we sourced 25% more of the available fruit out of California than in 2019, and we are looking to build on that momentum in 2021. All of this may prove fortuitous as the California freezer season is off to a slow start as beautifully cool weather and strong demand for fresh has kept the growers growing for the fresh market versus switching over to frozen. Net-net, no matter how the season comes in, we are better prepared to manage the impact. Consistent with our strategic priorities, improving margins was the big story in our fruit-based business during the first quarter. Gross margin in fruit increased 170 basis points versus last year to 7.7%. Some of the planned factors that reduced fruit-based sales in the first quarter also had the intended positive impact on margins, including fruit snack growth, planned rationalization, and productivity improvements. In mid-April, we began the process of exiting our Southgate, California, fruit ingredient plant with closure expected this June. Our plan is to migrate some of that volume to other plants within the network. It was a small, older facility, and its closure represents another margin opportunity for us. As we have consistently stated, we want to position fruit as a more cost-advantaged business in 2021, expecting to turn to revenue growth in 2022. In summary, our strategic priorities are firmly on target, and we are executing at a high level across the organization. Over the near term, we continue to prioritize plant-based revenue growth, fruit-based margins, and increasing adjusted EBITDA. Synoptic's strong position in some of the fastest growing CPG categories and sharp focus on operational excellence underscore my continued optimism about our future. Our balance sheet remains strong, capable of supporting multiple growth drivers for the foreseeable future. Capacity expansion continues in earnest, and our pipeline of new business opportunities is robust, providing a long runway with existing and new customers. Finally, we are just starting to add M&A to our playbook with the recent completion of two brand acquisitions that are strategic and opportunistic, as well as additive to sales and profitability. We remain committed to the previous 2021 outlook, and we believe our strategy and our team will continue to deliver as we seek to fuel the future of food. Now I'll turn the call over to Scott to take us through the rest of the financials.
Scott Huckins
Scott. Thank you very much, Joe, and good morning, everyone. We're excited to report another solid quarter. As Joe discussed, first quarter revenues of $207.6 million were flat year over year as the strong 12.4% growth in plant-based was offset by planned rationalization of marginally profitable business in fruit-based. Demonstrating the power of our strategies, Adjusted EBITDA increased 33.5% on flat revenue, aided by further improvement in gross margins as we add margin to fruit and consolidated margins benefit for more plant-based revenue in the sales mix. Gross profit was $30 million for the first quarter of 2021, an increase of $2.8 million, or 10.4%, compared to $27.2 million during the first quarter of 2020. The plant-based segment accounted for $2.1 million of the increase in gross profit due to higher revenue, production volumes, and productivity improvements within our plant-based beverage and ingredient operations. The fruit-based segment was responsible for $0.7 million of the gross profit improvement, reflecting strong fruit snack volumes, pricing, rationalization of marginally profitable SKUs and customers, and productivity gains in frozen fruit. As a percentage of revenues, first quarter gross margin was 14.4%, compared to 13.1% a year ago, a 130 basis point increase. The plant-based segment gross margin was 19.4%, down only 40 basis points from last year, primarily due to the depreciation expense associated with our three new projects onboarded in Q4, along with increases in freight costs partially offset by improved productivity. Recall that we added a four-fold increase in our oat extraction capacity in our Alexandria, Minnesota plant and additional processing and packaging capacities in our Modesto, California and Allentown, Pennsylvania plants. Gross margin in the fruit-based segment was 7.7% compared to 6% last year, an increase of 170 basis points. Gross profit dollars grew 0.7 million on lower revenue, indicating the strong impact of our productivity efforts. As you know, we've prioritized profitability improvement in fruit during 2021, and the solid improvement in Q1 stemmed from several factors, including higher snack volumes, pricing, rationalizing marginal skews in customers, and productivity gains in frozen. Importantly, we were able to significantly expand fruit-based gross margin during the quarter despite the impact of lower sales volumes, demonstrating the merits of our strategy. Operating income was $6.1 million, or 2.9% of revenues in the first quarter, compared to $2.8 million, or 1.3% of revenues in the year-earlier period. SG&A increased $0.9 million, or 4.7%, to $20.9 million, reflecting higher variable compensation costs and increased headcount to support growth initiatives. Loss attributable to common shareholders for the first quarter was $0.3 million, or zero cents per diluted share, compared to a loss of $6 million, or seven cents per diluted share, during the first quarter of 2020. On an adjusted basis, first quarter 2021 earnings or $1.3 million or $0.01 per diluted share versus an adjusted loss of $5.4 million or $0.06 per diluted share in the prior year period. As Joe mentioned, adjusted EBITDA was $18.3 million compared to $13.7 million in the prior year, a 33.5% increase. Note that this was after absorbing inflationary costs in transportation and insurance. I'd like to remind listeners that adjusted EBITDA and adjusted earnings are non-GAAP measures, and a reconciliation of these measures to GAAP can be found toward the back of the press release issued earlier this morning. Turning to the balance sheet and cash flow, as of April 3, 2021, total debt was $137.5 million, down approximately $332 million from the first quarter of 2020, and up from $69.7 million at the end of 4Q 2020, as expected from the additional lease obligations related to our capital projects, as well as the seasonal inventory build we discussed last quarter. Total debt reflects $88.9 million drawn on our asset-based credit facility, with the balance representing smaller credit facilities, lease, and other financing arrangements. Leverage stood at 2.2 times at the end of the first quarter versus 7.7 times a year earlier. From a cash flow perspective, cash used in operating activities of continuing operations during the first quarter of 2021 was $7 million compared to cash generated of $23.7 million during the first quarter of 2020. As we discussed on the fourth quarter call, we expected to see a seasonal build of inventory in the quarter. Cash used in investing activities of continuing operations was $7.9 million compared with $9 million in last year's first quarter. In addition, we paid over $13 million in the quarter to settle accrued transactions costs associated with the global ingredients divestiture. Prior to discussing our current outlook, let me add some color on the Dream and Wesley acquisitions from a financial perspective. These brands generated approximately $40 million of external revenue in 2020. Since we produce all of the West Soy and half of the Dream volume, this represents $15 to $20 million of incremental revenue to Synopda. As Joe pointed out, with Synergies, we expect approximately $6 to $8 million of incremental 2022 EBITDA from the acquisition. Let me close by offering some perspective on what we are seeing in terms of Q2 and full year 2021 results. From a top line perspective, with the acquisition and our continued momentum in plant-based, we could see growth in the 20% area for the balance of the year. In fruit, as a reminder, we closed the facility, ensured that we would be rationalizing a second plant, customers and SKUs, and are therefore forecasting revenue declines as a result. Given some uncertainty in the fruit business, it would be conservative to assume single-digit revenue declines for the rest of 2021. From a margin perspective, we would expect plant-based to remain in the high teens area and fruit-based to make year-over-year improvements each quarter from a more efficient portfolio of manufacturing plants and customers. Finally, from an adjusted EBITDA perspective, given some of the tailwinds we are experiencing, we could see growth of up to 50% in Q2. Our outlook for the balance of the year is solid double-digit EBITDA growth. With that, I'd like to turn the call over to the operator for Q&A.
Operator
Great, thank you. At this time, if you would like to ask a question, please press star followed by the number one on your touchstone phone. To withdraw your question, press the pound or hash sign. Please stand by while we compile the Q&A roster. And your first question here comes from a line of Bill Newby from DA Davidson. Please go ahead. Your line is now open.
Bill Newby
good morning gentlemen thanks for taking my questions and congrats on that solid q1 thank you bill good morning joe i was hoping we could start here and just kind of get maybe your kind of broad state of the union on domestic oat milk capacity i mean obviously you guys bring on a ton of capacity oh we saw the only filing and then talking about bringing on a lot of capacity additions this year i guess as you stand today maybe what is the supply versus demand picture look like and maybe if you compare that to what it looked like a year ago and maybe what you expect it to look like a year from now any anything there would be super helpful
Joe Ennin
We're seeing incredible consumer demand, triple-digit increases in demand across the board. You're seeing a very robust, competitive landscape with four or five brands procuring the vast majority of the market share. We partner with several of those leading brands as they are going to market with oat milk offerings. So we feel like from a demand standpoint, we are in a really good position in terms of who our brand partners are. As it relates to capacity, we were incredibly fortuitous with the investment that we made in 2019 around oat milk. We are seeing really strong business development and utilization from both existing and new customers around our oat milk production. At this juncture, we still have available capacity. We still have the ability to take on new customers and As you might imagine, given a market that's growing triple digits, you know, we have a real eye to the future in terms of understanding how high is up with oat milk and if we'll need to add additional capacity or capabilities in oat milk. But right now we're in a really good position with that facility that we stood up at the end of last year, you know, really starting to crank out volume and, you know, helping our brand partners drive growth in oat milk.
Bill Newby
Great. That's super helpful. And then I guess just wanted to touch on the acquisition of the Dream and West Soy brands here. I guess help me understand a little bit what the plan is for those going forward. I mean, was this just an opportunity to kind of consolidate some of the brands that you were already manufacturing for and get a little benefit in the P&L with that? Or is there more that we should be thinking about here from innovation or building the brands going forward?
Joe Ennin
You know, it was largely opportunistic. You know, we saw a real insourcing opportunity, you know, to take on the volume that we don't manufacture. You know, and we've also talked about interest in expanding, you know, beyond plant-based milks and, you know, Dream especially has strong consumer brand equity and gives us optionality if we were to look to categories outside of plant-based milk. You know, that gives us some optionality as far as a brand platform to access some of those opportunities. But, you know, our priorities at the moment relative to these brands are very simple, which is, you know, insourcing the volume and standing up the internal capabilities to manage these brands.
Bill Newby
Great. And then I guess if you look across your partners you're manufacturing for today, I mean, are there similar opportunities with the relationships you guys have, or is this kind of a one-off?
Joe Ennin
When you say similar opportunity?
Bill Newby
Are there similar opportunities to brands you're manufacturing for today that you could potentially bring in-house and it might make sense to do a similar transaction?
Joe Ennin
I wouldn't see us executing anything beyond this, just because it gets a little bit entangled with existing customers. Part of what made this an easy access opportunity was the fact that 90% of the volume of Dream is rice milk and 100% of West Soy is soy. But beyond that, I think we would get into a pretty entangled position if we were to do something bigger in the space as far as acquiring a brand.
Bill Newby
Great, great. No, very helpful. I've got a couple more, but I'll jump back in queue for now. Thanks, guys.
Operator
Your next question comes from the line of Alex Furman from Craig Allen Capital. Please go ahead. Your line is now open.
Alex Furman
Great. Thank you for taking my question, and congratulations on a strong start to the year. You know, I wanted to ask about the food service recovery that's going to be coming here. You're already operating at record revenue levels on the plant-based side of your business, and I would imagine a lot of your food service customers are right on the verge of showing pretty strong double-digit comps for the rest of the year. So as that demand increases, starts to come back, you have enough capacity for all of that in existing to your existing customers. And just, you know, as you start to think about incremental capacity coming online over the next year, where do you see that incremental product going out the door to?
Joe Ennin
Yes, so we're in a good position relative to available capacity to support food service recovery, absolutely. I mean, again, three capital projects that came online in Q4, an additional capacity addition that will come online in Q4 of this year. puts us in a very comfortable position to support our customers' growth. As I mentioned, that is one of the core components of our service offering to our customers is making sure that we have capacity available for them to drive growth as hard and as fast as possible. as they want to. So, you know, it is a pretty violent shift in demand that we saw during COVID and now kind of coming back again. But I'm pleased to report that the operations team and the whole business has done an outstanding job in filling customer orders, especially on the food service side of things, as they, I think, candidly have been a bit surprised by the rapid nature of the recovery of their business, and we are doing an excellent job in keeping them in stock, filling orders. Our case fill rate is very, very high and, again, speaks to one of the core themes that I covered, which was execution. And, you know, right now we're nailing it.
Alex Furman
That's great to hear. Thanks very much. And I guess just curious, you know, given that it is such a, you know, What are the biggest concerns you're hearing from your food service partners as they tool up for the next couple of years and their menus? Is it just having consistent access to supply? Is it variety of products or particular formulations? Just kind of curious what restaurants are really thinking about from you as they look to kind of reopening in the next leg of their businesses.
Joe Ennin
I would say there's two things that we're hearing pretty consistently. One is, are you guys ready, you know, for a pretty dramatic snapback in demand? And, you know, our answer is absolutely we're ready. The second thing is on the upstream availability of ingredients, And I think there's been innumerable news stories of kind of upstream raw material shortages from computer chips to copper, et cetera, et cetera. I mean, we've all seen the stories. And so that would probably be the second thing we're hearing, Alex, is just do you have any upstream pinch points or supply constraints? And, you know, again – To date, we feel very confident in our procurement and sourcing efforts to make sure that we have, you know, good flow of raw materials. We obviously source raw materials from around the world. And, you know, we feel good at this point that we have, you know, the right flow of raw material ingredients into our manufacturing plants to support the snapback and growth.
Alex Furman
That's great. Thanks very much.
Operator
Your next question here comes from the line of Mark Smith from Lake Street Capital. Please go ahead. Your line is now open.
Mark Smith
Hi, guys. First question for me, just wanted to check on kind of the cadence of insourcing on the Dream products. It sounds like you expect this to be complete by the end of next year, but any additional details you can give us would be great on the timing.
Joe Ennin
Yeah, we expect to complete it by the end of this year. The incremental EBITDA would be fully affected and in place for 2022. Excellent.
Mark Smith
And then you just talked a little bit about logistics and supply chain. It sounds like you're in good shape there, but have you seen anything on kind of inflationary pressure and pricing?
Scott Huckins
Yes, Scott, I would say we had modest Fed wins, which we talked about in Q1 You know, something, as Joe talked about a moment ago, we're looking at actively. And probably the easiest way to think about it is we have really three categories of costs. There's raw materials, operations, and supply chain. And they behave a bit differently between the two channels. So Coleman, you know, think plant-based, a significant amount of installation from raw material volatility, because those are generally pass-throughs. Of course, our operating costs are for our accounts. And then lastly, I'd say supply chain. There's some insulation because a fair amount of command business is pickup. And then we think about the second channel or private label. As we've talked about, we could be passed on the majority of raw material costs. Again, operating costs are for our account. There's probably a little more exposure on supply chain since that tends to be delivered business. So we've been in a pretty good place for Q1, but the headlights are up.
Mark Smith
Okay. And then the last question for me, just any update on kind of the sewn, also as we look back at Arbor Bar, you know, learnings and results on kind of branded products?
Joe Ennin
Yeah, so far we're pleased with the sales velocities on Zone. You know, we're in the right accounts, which I think is important. You know, this is an organic offering, but I would just tell you that the early velocities that we're seeing out of the lead accounts are exceeding our expectations. And, you know, we're being systematic and surgical as we look to add distribution to make sure that we're putting it into the right accounts that have a shopper profile that's going to fit a premium product like this.
Mark Smith
Excellent. Thank you.
Operator
And I'm not showing any further questions at this time, so I'll turn the call back over to Joe Emin for closing comments.
Joe Ennin
Great. Well, thank you, everyone, for your time and interest. We appreciate it and look forward to speaking to you again soon. Thank you.
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