SunOpta, Inc.

Second quarter fiscal 2021 earnings conference call. By now, everyone should have access to the earnings press release that was issued this morning and is available on the investor relations page on Sunopta's website at www.sunopta.com. This call is being webcast and its transcription will also be available on the company's website. As a reminder, please note that the prepared remarks which will follow contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. We refer you to add all risk factors contained in Synoptus 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 security laws. Finally, we would like to remind listeners that the company may refer to certain non-GAAP financial measures during this teleconference. A reconciliation of these non-GAAP financial measures was included with the company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in U.S. dollars and are occasionally rounded to the nearest million. And now I'd like to turn the conference call over to SunOpta CEO, Joe Innan.

Good morning, and thank you for joining us today. With me on the call is Scott Huckins, our Chief Financial Officer. Our second quarter results of nearly 10% revenue growth and 61% EBITDA growth demonstrates the strength of our strategies and the quality of our execution against our corporate priorities. These priorities are portfolio transformation, accelerating customer-centric innovation, and doubling the plant-based business. We continue to emphasize top-line growth in our plant-based business and improving profitability in fruit-based. The significant revenue increases we are realizing in plant-based beverages reflects our competitive advantages combined with continued strong consumer demand. In our fruit-based business unit, the progress we continue to make is being driven by internal efforts to optimize customers, capacity, operating costs, and pricing. Before I begin unpacking our Q2 results, let me offer three key takeaways from the quarter. First, the momentum in plant-based beverages remains strong and continues to be led by oat-based products and by our core customers. Second, based on our business development pipeline with existing and new customers, we remain optimistic about the long-term growth prospects for our plant-based portfolio. Third, though we remain very focused on co-manufacturing, our portfolio of own brands in plant-based is also performing well, delivering solid gains, helping us bring innovation to market faster, and increasing in importance in both revenue and margins. Let me first start with a high-level view of key accomplishments from the second quarter, and then I'll share some of the details by segment. Overall, second quarter results were ahead of the outlook we shared with you on the Q1 call. For the second quarter, total revenue was up 9.7% versus Q2 2020 to $202.3 million and up 17.5% compared to Q2 2019. Growth margin improved by 40 basis points to 13%, and adjusted EBITDA advanced 60.8% to 16.1 million, or 8% of revenue. Plant-based continued to be our key growth driver, while our focus in fruit-based remained on improving productivity and profitability, and we demonstrated the significant leverage inherent in our model. with adjusted EBITDA increasing at a much faster rate than revenue. We are pleased with the progress of our strategic initiative around expanding capacity in plant-based and improving productivity across the network. Manufacturing is core to our business, and the progress we have made in transforming our operations has been impressive. From multiple capacity expansions in plant-based to footprint optimization and automation in fruits, we are building real competitive insulation in our business. The added production we brought online and plant-based in the fourth quarter of 2020 is performing well, giving us headroom to aggressively pursue new business opportunities. Our Allentown project is also tracking the plan, expected to be operational in late Q4, and we are starting a similar-sized project in Modesto. Automation implemented in our plant is driving solid gains in productivity and making us more nimble around core capacity utilization. We have made considerable progress in consolidating our fruit-based operations with the exit of our South Cape facility in July and closure of our Santa Maria facility in Q1. Finally, we've made significant progress de-risking our fruit-based operations, including sourcing three times more fruit from South America and processing over 50% more in Mexico versus a year ago. The trends around plant-based, combined with our strategically advantaged capabilities, have set the stage for yet another expansion of our plant-based operations. I'm pleased to announce that we are in the final stages of negotiating a lease for the construction of a new mega facility in the Dallas-Fort Worth area to support long-term growth in our plant-based business. This Greenfield 275,000-square-foot facility is by far the largest CapEx project we have ever undertaken. Having capacity to grow is a core element of our five-pronged service offering, and we are excited that this capacity will continue to allow our customers and our brands to keep pace with consumer demand. The plant is expected to be operational by late 2022 and will augment the incremental capacity we brought online at the end of 2020, along with the Allentown and Modesto expansion projects. In aggregate, the projects we have in motion now effectively give us the ability to double the business. We have intentionally designed the project to be developed in phases as customer demand rises. In addition to supporting continued growth in our core business, this new facility broadens our geographic footprint, adds new capabilities, and further strengthens our competitive position as a partner for our customers. With this new plant, we will have facilities in the east, the west, the midwest, and now the south, allowing us to offer very competitive costs and improved environmental footprints. and redundant manufacturing capabilities to lower risk for our customers. The added scale will improve our margin profile over time as we expect to realize further supply chain savings by having a more efficient national network. Now let me turn to our segment results. Starting with our plant-based segment, we have three strategic priorities. First, build a competitively advantaged business model around quality, capacity, cost, customer service, and R&D. Second, build a robust ingredient business to enable further participation in refrigerated plant-based milks. And third, build a multi-pronged go-to-market business that includes co-manufacturing, private label, and owned brands. Results in the second quarter show significant progress on all measures, including a 21.4% increase in plant-based revenue, which was on top of an 11.9% increase in the second quarter of 2020, generating a two-year stack of 33.3%. Now let me share a bit of retail sales category data to help frame our results. The plant-based beverage category in retail continues growing despite overlapping the COVID frenzy of Q2 2020. For the 13-week period that aligns with our Q2, plant-based milks increased 3.7% overall due to continued strong sales of oat milk. From a food service standpoint, plant-based milks are an ingredient in coffee beverages, and therefore we don't have syndicated data for food service. But based on our sales results, It is safe to say there were robust sales of plant-based coffee drinks in food service. There are three primary drivers of our growth in the quarter. From a product standpoint, it was oat milk. From a channel standpoint, it was food service. And from a go-to-market standpoint, it was both our core co-manufacturing customers and our own brand. Oat milk accounted for half our growth in Q2, which is similar to what we experienced in Q1. Importantly, the gains we are realizing in oat milk are coming from both existing customers, like Starbucks, as well as winning new business. In addition to strong food service new business, we signed a multi-year extension to continue supplying oat milk to a large CPG company who is currently the market share leader in retail oat milk. Their sales success, along with strong results from other customers, provide authentic marketplace testimony to the quality of our oat milk and the proprietary manufacturing process we have built to help our customers differentiate their product offerings. It is quite likely that the demand we are seeing for our industry-leading oat milk will necessitate the construction of yet another oat processing system in the not-too-distant future and would be in addition to the Texas project. As I mentioned, we will phase these projects in as good capital stewards. From a go-to-market standpoint, we saw very strong growth in our top five customers with sales growth of 49% in the quarter. As it relates to our own brand, the addition of Dream and West Soy, which we acquired in mid-April, were additive to plant-based revenues in the second quarter, accounting for approximately four percentage points of our segment growth. In addition to this, our recently launched brand of organic oat milk creamer, Soan, is seeing strong sales velocities in both retail and e-commerce and is gaining distribution with a line of sight to being in over 3,500 stores by year end. From a channel perspective, our growth in plant-based during the second quarter was more concentrated in food service, which has been experiencing a rebound versus last year when COVID was significantly pressuring this channel. Moving to our fruit-based segment, our three strategic priorities are, number one, de-risking the business through geographic diversification, customer pricing programs, and better grower relations. Number two is a focus on becoming the low-cost operator in frozen fruit through automation and footprint reengineering. And number three is to evolve the portfolio via innovation towards more value-added offerings. We made solid progress against all three of these in the quarter. We have been focused on supply chain reengineering to lower costs and improve margins, which is expected to enable us to deliver sharply higher earnings when revenue growth returns to a consistent upward trajectory. Second quarter results in fruit-based were illustrative of these efforts. Despite revenue being down 1.9%, we showed improvement in both segment-level gross margin as well as segment-level operating margin. Similar to plant-based, the normalization of at-home consumption trends contributed to lower retail sales volume of frozen fruit partially offset by increased food service volume. For the 13-week period that coincided with our results, retail frozen fruit category sales were down 1.7% due to lapping significant COVID-driven growth in the prior year period. It's a much different story in fruit snacks, with the category experiencing strong growth of 10.4%. Our initiatives around rationalizing marginally profitable customers and products were another factor pressuring fruit-based revenues in the second quarter. Finally, supply constraints with certain fruit varieties negatively affected revenue from blended fruit offerings. This was also a headwind in Q1, so not a surprise. Partially offsetting these factors was a strong performance in our innovation-driven fruit snacks business, reflecting volume growth from new business development and very strong consumer demand. Finally, increased commodity pricing for raw fruit provided a 3% lift to second quarter fruit-based revenues as we passed along higher costs to customers. From a customer standpoint, lower distribution from large retail customers coupled with supply challenges negatively affected our frozen fruit business in Q2. Conversely, significant growth, especially from large CPG customers, in snacks drove revenue and margin increases. Our top five strategic customers in snacks collectively grew 76% in Q2 versus the same time in 2020. As part of our effort to evolve the portfolio through innovation to more value-add, we are launching a line of value-added fruit-based breakfast bowls. This is a rapidly growing segment with brands like Tattooed Chef, and we are excited about the innovation we are bringing to this segment. Some of the bowls we are launching will have a fruit smoothie base, whole fruit, and toppings like quinoa crisps and granola. We are also launching chia seed bowls, which feature a chia seed base and whole blueberries. Consistent with our agnostic go-to-market approach, this product innovation will launch in some retailers under our brand, Sunrise Growers. It will launch as a private label offering in other retailers, and we are also in development to co-manufacture this product for a large CPG company. We are currently in test with the major club store chain under the Sunrise Growers brand, and we have authorization from several customers starting in Q4 of 2021 and rolling into 2022. In summary, we continue executing at a very high level across the organization. Through the first half of 2021, we've delivered on our plan of aggressive plant-based growth, higher margins, and substantial growth in adjusted EBITDA. We've been winning business with new customers, capturing additional business from existing customers, adding capacity, and expanding our portfolio of products. Coupled with our strong balance sheet, Synopta remains well positioned for substantial long-term growth in some of the fastest growing CPG categories, all of which support my continued optimism for the future. We remain committed to the previous 2021 outlook and believe our strategies and our team will continue to deliver as we seek to fuel the future of food. Now we'll turn the call over to Scott to take us through the rest of the financials. Scott? Thank you very much, Joe, and good morning, everyone. We're excited to report another solid quarter. As Joe mentioned, second quarter revenues of $202.3 million were up 9.7% year over year. Strong volume gains led to a 21.4% increase in plant-based, while fruit-based had a modest decline of 1.9% as we continue to focus on rationalizing marginally profitable business. Adjusted EBITDA increased 60.8% to $16.1 million as our strategic focus on growing plant-based and optimizing fruit created significant leverage across our business. Gross profit was $26.3 million for the second quarter of 2021, an increase of $3.1 million, or 13.2%, compared to $23.3 million during the second quarter of 2020. The plant-based segment accounted for $3.2 million of the increase in gross profit due to higher volumes, the addition of the Dream and WestSoy brands, and productivity improvements within our plant-based beverage and ingredient operations. Gross profit in the fruit-based segment was basically flat as lower volumes of retail frozen fruit higher strawberry and transportation costs, and unfavorable foreign exchange impacts from a stronger Mexican peso were largely offset by volume growth in fruit snacks and fruit-based toppings, along with productivity gains in the plants. As a percentage of revenues, second quarter gross margin was 13% compared to 12.6% a year ago, a 40 basis point increase. The plant-based segment gross margin was 17.9%, down only 30 basis points from last year. This is a very strong result, considering plant-based absorbed 110 basis points of depreciation expense associated with the capacity expansions we added in the fourth quarter and 40 basis points of increased transportation costs. These headwinds were almost entirely offset by increased revenue and productivity gains, reflecting our investments to drive scale and efficiency. Raw material pricing did not have a material impact on plant-based gross margins because of the weighting toward co-manufacturing customers, which tend to operate under pass-through pricing arrangements for all raw material inputs. Gross margin in the fruit-based segment was 7.1% compared to 7% last year, an increase of 10 basis points. Our near-term focus in fruit-based continues to be optimizing profitability through a combination of rationalizing marginal business, improving productivity, taking costs out of the business, and focusing the business around our large retail customers. Operating income was $1.7 million in the second quarter, compared to a loss of $0.4 million in the prior year. SG&A increased $0.8 million, or 3.8% to $22.7 million, as integration expenses related to the Dream and Westside acquisition were partially offset by lower variable compensation costs. loss attributable to common shareholders from continuing operations for the second quarter was $1.7 million, or $0.02 per diluted share, compared to a loss of $7.7 million, or $0.09 per diluted share, during the second quarter of 2020. Note that this quarter's loss is after giving effect to $4.7 million of other expense charges primarily related to the exit of our Southgate fruit processing facility compared with other income of 0.8 million last year. On an adjusted basis, second quarter 2021 earnings were 0.1 million or 0 cents per diluted share versus an adjusted loss of 7.9 million or 9 cents per diluted share in the prior year period. As Joe mentioned, adjusted EBITDA was 16.1 million compared to $10 million in the prior year, a 60.8% increase. 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 July 3, 2021, total debt was $206 million, down approximately $243 million from the second quarter of 2020, and up $69 million from $137 million at the end of the first quarter due to the seasonal build of fruit inventory, along with the acquisition of the Dream and WestSoy brands. Total debt reflects $159 million drawn on our asset-based credit facility, with the balance representing smaller credit facilities lease, and other financing arrangements. Leverage stood at three times at the end of the second quarter versus 6.3 times a year earlier. From a cash flow perspective, cash used in operating activities during the second quarter of 2021 was $39.1 million compared to cash generated of $2.7 million during the second quarter of 2020. The change in operating cash flow versus last year was due to a stronger seasonal bill of inventory and more expensive inventory compared to this time last year. Cash used in investing activities was $32.4 million compared with $6.3 million in last year's second quarter, reflecting the acquisition of Dream and WestSoy. Prior to providing our outlook, I'd like to spend a few minutes on inflation. is this remains a major area of discussion across all industries. The potential impact of inflation on our business varies across three categories, which are one, raw materials, two, operating costs, and three, supply chain costs. These three categories have different impacts based on how we go to market, which are one, private label, two, co-manufacturing, and three, branded products. For example, in our plant-based business, a significant amount of our revenue is through co-manufacturing arrangements, where our customers typically bear most of the risk of price variation in raw material costs. In contrast, our fruit-based business is more concentrated in private label product, where price pass-through timing tends to lag, and where we are largely, but not fully, insulated from increases in raw material prices. In branded products, we did not experience any material inflationary headwinds in the quarter, but changes in commodity prices would need to be offset by pricing and or productivity gains. When we look at plant operating costs, we bear those costs entirely, so any inflation must be offset by plant productivity initiatives. Finally, when we look at supply chain costs, or more specifically freight, there is limited risk with our co-manufactured products because it's largely picked up by customers, so they bear the impact of changing freight rates. It's the opposite with our private label business, where we are typically delivering the product to the customer, noting there is some opportunity to pass along cost increases, but again, it's more limited and often lags in timing. Lastly, in branded products, we are exposed to changes in freight costs and need to offset those with productivity gains. In summary, like everyone, we are facing rising costs in many areas, but the most meaningful areas to us today are more associated with our fruit-based and branded businesses because of the delivered nature of the product, and we must absorb much of the outbound transport. Our plant-based business is largely insulated. Given our increase in overall margin, we have demonstrated our ability to grow gross profit and EBITDA despite an inflationary environment. At this time, we don't see any inflationary trends in our business that would dramatically impact this progress as we go into the second half of 2021. Let me close by providing some commentary around the outlook for the second half of 2021. Obviously, there is uncertainty surrounding the impact of COVID-19 and the potential changes in consumer behavior as a result. But based on our current expectations, we offer the following outlook. On the top line, we forecast plant-based to look similar to Q2 in terms of year-over-year growth. In fruit, we similarly think revenue will look like Q2 with single-digit declines. From a margin standpoint, it is very much the same story, with plant-based remaining in the high teens and fruit being similar to last year's margin levels, recognizing we have more challenging comps in the back half. Finally, from an EBITDA standpoint, we forecast strong year-over-year improvements, again recognizing our comps get tougher in the second half, where last year's second half represented 60% of 2020 EBITDA. Before opening up the call for questions, just a reminder that for competitive reasons, we do not provide detailed commentary regarding customer or SKU-level activity. With that, I'd ask the operator to please open up the call to questions.

At this time, if you have a question, please press star, then the number 1 on your telephone keypad. And your first question comes from Andrew Strozek with BMO.