This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning, and welcome to SunOpta's fourth quarter fiscal and full fiscal year 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 all to risk, all risk factors contained in SunOpto's press release issued this morning. the company's annual report filed from 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. A reconciliation of these non-GAAP financial measures was included in 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. And now, I'd like to turn the conference call over to SunOpta CEO, John Ennin. John Ennin.
spk04: Good morning, and thank you for joining us today. With me on the call is Scott Huckins, our Chief Financial Officer. I want to start by saying, while we are disappointed in the fourth quarter results, we are confident these results are a point in time and do not reflect the current or future earnings potential of the company. The causes are clear and are not unique to Synopta. The supply chain issues and labor market shortages are broadly felt and well publicized. Now let me share some key takeaways from the fourth quarter. First, Q4 consolidated gross margin was impacted by three headwinds. The most significant was higher costs in our plants without a corresponding increase in output. We were also impacted to a lesser extent by unrecovered inflation and yield-related issues in fruit. Let me share a bit more perspective on the Q4 challenges in our production facilities and provide an update on progress in Q1. First, 70% of the decline in plant-based gross margin was due to increased plant expense and lower utilization. Higher expenses were driven by hiring and training approximately 90 new employees, fueled by the great resignation over the summer. However, this infusion of new employees did not immediately produce a step change in production output, partially as a result of significant Omicron-related absences across the network. Additionally, our plant-based facilities are sophisticated and complex plants, and employees require weeks and even months of training to become proficient. Additionally, we incurred costs to improve overall equipment effectiveness, which disproportionately hit us in Q4. In total, these Q4 investments are paying dividends in Q1. We have staffed our plants and ended the year up 73 employees. We are deep into training our new employees, and retention of these new hires is consistent with our expectations. We have seen material improvement in our manufacturing output in the first seven weeks of Q1. We are currently forecasting Q1 production to be approximately 15% above Q4 levels and are tracking to this level of improvement halfway through the quarter. Beyond labor, let me comment on what is happening in the macro environment, which you are all very familiar with as these factors are impacting nearly every CPG company. Raw material availability in Q4 was tight, but we saw sequential improvement. There were a couple exceptions in the fastest-growing segments of our business, one being fruit purees from South America for our fruit snacks business and oats for our plant-based business. We still grew our oat business 120% in Q4, but we could have grown even more, and the same goes for our fruit snacks business. In an effort to support growth, we have added incremental suppliers, have improved safety stock on both ingredients, and we are working to secure additional volume for anticipated growth in 2022. As it relates to raw material inflation, all the currently known raw material cost inflation has been presented to customers, accepted, and implemented. There is always a delay between cost increases and price increases. It is typically a 90-day process from realized cost inflation to the new price being on an invoice to the customer. Lastly, let me comment on freight. The back half of Q4 saw even more inflation than the run rate, and this impacted Q4 by approximately $2 million. Additionally, the availability of trucks was very tight. In our plant-based business unit, almost every customer, and remember, these are some of the biggest CPG companies in the world, had difficulty lining up trucks to pick up their product, which impacted our revenue. In fruit, where we are generally responsible for the freight, we also saw availability issues and cost inflation. Pricing, reflecting the new freight costs, would be fully passed on to customers by the end of Q1. The revenue impact of the production shortfalls and transportation availability challenges was estimated to be at least $10 million in the quarter. While Q4 was a challenging quarter, it is important to recognize the long-term core earnings power of the plant-based business remains strong. Industry supply is still very tight, demand is very strong, and our manufacturing network remains strategic and will further improve with the new Texas plants. Despite our temporary production challenges, we continue to win in the fastest-growing segment of the market, which is oat. We are aggressively adding capacity, and we are aggressively passing on inflation through price increases. All of this leads me to the view that the future of the company has never been brighter. In 2022, we expect strong top-line growth with plant-based growing double digits. and we expect the fruit business to return to growth largely via pricing, as we have consistently stated during 2021. At a total company level, we expect at least double-digit revenue and adjusted EBITDA growth in 2022. Our plant-based capacity expansion, takeability additions such as 330 ml, and new business development efforts in plant-based indicate adjusted EBITDA will increase significantly in 2023 and 2024 as our new Texas plant comes online. Based on our success to date pre-selling Texas capacity, we have line of sight to $100 million of adjusted EBITDA in 2023. Now let me share some of the top line results for the total company. Total company revenues, as reported in Q4, were nearly flat the prior year. Adjusted for the extra week in the year earlier period, our top line growth would have been 2.5% in the fourth quarter of 2021. Full-year revenue was $813 million, with full-year plant-based revenue growing 13% on an as-reported basis, or 14% excluding last year's 53rd week. Gross profit declined 650 basis points on a consolidated basis during the fourth quarter, with both plant-based and fruit-based segments down materially. For the full year, gross profit was $98 million, down 10% versus prior year. We managed SG&A aggressively to offset a portion of the corresponding decline in gross profit, but the net result was still a 48% decline in adjusted EBITDA in the fourth quarter to $11 million. Full-year adjusted EBITDA was $61 million, growing 3.4% versus 2020, with three times 2019's adjusted EBITDA. Now we'll turn to our segments, starting with plant-based. I would like to remind listeners that we have three strategic priorities in plant-based. One, strengthening and fortifying our competitive advantages. Two, building a strong ingredient business focused on oat to drive growth in refrigerated beverages. And third, building a multi-pronged go-to-market business that includes co-manufacturing, private label, and owned brands. Plant-based revenues, adjusted for the extra week last year, increased 9.2% versus prior year to $125 million in the fourth quarter, another record for Sinopta. This represents our 13th consecutive quarter of revenue growth, and this was up 18% versus two years ago. Plant-based beverages were the primary driver, reflecting strong demand for oat-based offerings, which increased over 120% versus prior year period. Oat now accounts for 22% of our plant-based milk portfolio, up from 10% a year ago. We also saw strong gains in tea stemming from growth at our two biggest tea customers. Production capacity challenges negatively impacted our broad business and partially offset growth in other plant-based beverages. However, as I mentioned, we have seen a solid improvement in output so far this year. As it relates to product categories, we continue to focus on oat. Our oat sales were 80 million in 2021, and we expect continued strong acceleration of this business. Plant-based milks continue to see solid overall category growth, with the latest 13 weeks showing 5% growth, and oat continues to be the driver with 55% growth. In 2022, we expect to continue to see strong oat segment growth. The national brands we support continue to lead the market and grow faster than the oat segment in total, which in part explains why Sonopta grew two times the rate of the oat category. In addition, we see significant upside in oat at our largest customer for 2022. Based on all of these exciting developments, we expect to continue to have strong double-digit growth in oat milk sales in 2022. In addition, as previously communicated, we are expanding oat extraction production to keep pace with demand. This added capacity will likely come online at the end of Q2 2023. From a go-to-market standpoint, the brands we acquired in 2021, Dream and West Soy, contributed to growth. We will be relaunching these brands in Q2, Q3 with new packaging, new products, and a push to rebuild distribution that had been lost over the last several years. Several of the people on this call have seen Dream Oat Milk at Starbucks, so I thought it would be worth confirming the go-forward approach with oat milk at Starbucks is via the Dream brand. We also launched a brand, the organic oat coffee creamer last year called Sunn. Our focus has been the natural channel, and we are seeing great success with this effort. As the leading natural channel retailer, Zone is now the number two brand in terms of sales velocity for the plant-based creamers after less than 15 months in market. Moving on to our fruit-based segment, our three strategic priorities are, one, de-risking the business through geographic diversification, customer pricing programs, and better grower relations. Two, becoming the low-cost operator in frozen fruit through automation, footprint reengineering, and aggressive cost takeouts. And three, evolving the portfolio via innovation towards more value-added offerings. Fruit-based revenue decreased 9.4% to $79 million in the fourth quarter, reflecting ongoing efforts to rationalize cues in customers, along with the impact of supply constraints in certain fruit varieties, partially offset by pass-through pricing actions. Fruit snacks had another strong quarter, with growth accelerating to 23.5%. As we communicated all last year, we expect a sharp return to revenue growth in 2022 on the frozen fruit side of the business, fueled by aggressive pricing moves and confirmed distribution gains beginning in mid-Q2 at our largest frozen fruit customer. As it relates to de-risking the business through geographic diversification, we are largely complete on this strategic initiative with Mexico now representing the largest source of fruit. More geographies, more fruit types, fewer customers for less complexity, all equal less risk. As we discussed last quarter, all pricing and support of the higher cost fruit has been passed on and reflects the strength of our customer relationships and our expertise in the industry. With regard to becoming the low-cost producer, the automation we have installed, combined with the simpler business and the cost advantages we have in Mexico, along with the 2021 cost takeouts, point to improved performance in 2022. I'll recap the totality of the actions taken in fruit in 2021 to give you a sense of the breadth and depth of work completed. First, we passed on about $40 million of pricing. Second, we took out an additional 10 million of manufacturing costs, including the closure of two of our six plants in the network in 2021. Third, we took out several million dollars of people costs, creating a leaner, simpler business model. Please note that a significant amount of pricing actions will be absorbed by higher fruit costs and other forms of inflation. So these numbers are not designed to simply be added to 2021 profitability. Instead, I share these numbers to give you a sense of what we have undertaken to transform the results in this business. Lastly, on the innovation front in fruit, we've had great success in the launch of our Smoothie Bowls platform, which is part of our fruit snacks business unit. We have partnered with three major retailers who are launching product brand versions of Smoothie Bowls and a CPG leader in frozen foods who will be launching our Smoothie Bowls under one of their globally recognized brands. Lastly, we will continue to use our own brand, Sunrise Growers, to lead the innovation and push the edges of what we can develop. While fruit has certainly been a challenging business for SunOcto over the last five years, the transformation of the business against our three priorities gives me hope that 2022 will be the year where you are hearing about positive surprises on fruit. Let me end by updating on the progress we are making in Texas with our new Greenfield plant-based manufacturing facility. If you want to follow our progress, please follow us on LinkedIn where we share periodic updates. We posted an updated photo on Tuesday so you can see the scale of the plant and the tremendous progress we are making. As I shared on the last call, one of the capabilities we are putting in Texas is 330 milliliter production equipment. For those not familiar with the term 330 M.O., this is the Tetra Pak carton most associated with on-the-go protein shakes. This is a $3 billion segment and is an industry that is short in capacity, and we currently have a zero share of this market. Based on preliminary awards to date, we are confident we will sell out the capacity on this asset in the first year. In addition to 330ML, we are putting in three other capabilities all in phase one. We are installing T-extraction, which has seen huge growth in the last two years, along with two processing packaging lines to support our core business. We are similarly confident that we will have strong utilization of this T-extraction capability and one of the two processing and packaging lines in year one. Progress selling the incremental capacity created by this plant is ahead of our internal expectations, and the project is on track to be operational by the end of the year, generating saleable product no later than 12-31-2022. In summary, our strategic growth priorities around portfolio transformation, innovation, and doubling the plant-based business have not changed. We continue emphasizing growth in our plant-based business and improving profitability in fruit-based. We remain committed to our long-term growth algorithm of annual double-digit plant-based revenue and profit increases and continue to focus on improving return on invested capital. Now I'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. Fourth quarter revenues of $204.2 million were down basis, reflecting continued demand growth in plant-based, where revenues increased 5.8%, offset by a 9.4% decline in fruit-based revenues due to planned skew rationalization, along with constraints in certain fruit varieties. Adjusting for the 53rd week in 2020's fourth quarter, revenue grew 2.5%, with plant-based delivering 9.2% growth. Gross profit was $18.4 million for the fourth quarter of 2021, a decrease of $13.4 million compared to the fourth quarter of 2020, and consolidated gross margin declined at 650 basis points to 9%. The factors that negatively impacted consolidated gross margin during the fourth quarter were, one, plant operations, including higher plant spend and lower than planned production and lost absorption of 340 basis points. Two, yield-related issues on raw materials of 210 basis points. And three, net unrecovered inflation of 100 basis points. In plant-based, segment-level gross profit decreased 8.4 million, and gross margin was down 770 basis points to 11.7%. Let me take you through the major drivers. First, plant spend was up 380 basis points as we hired and trained the 90 positions Joe spoke about earlier. Second, unrecovered inflation was 160 basis points, primarily comprised of freight. And third, underutilization of our plants was 140 basis points. Let me provide further detail on the 380 basis point plant spend drivers. This is comprised of 150 basis points of labor costs, 130 basis points of overhead, and 100 basis points of depreciation. We expect to recover roughly 40% of the margin rate decline in Q1 and expect the business to return to a high team's margin rate on existing capacity in the second half of the year. In fruit-based, segment-level gross profit declined to $5 million and gross margin decreased 530 basis points to 4.8%. The decline in fruit-based gross margin reflected poor raw material yields as a result of excess spoilage of 350 basis points, with plant variances representing, on a net basis, the remaining 180 basis points. The yield issues became known as we pulled work in process to produce finished goods. The vast majority of these costs are now behind us. Segment operating loss was $1.6 million in the fourth quarter compared to operating income of $6.8 million in the year-earlier period, reflecting lower gross profit, a $3.4 million adverse foreign exchange result, and $0.5 million of incremental amortization expense related to Dream and Westside. These factors were partially offset by a reduction in SG&A expense, which was down 8.8 million versus a year ago, largely due to lower variable compensation. Loss from continuing operations attributable to common shareholders for the fourth quarter was 2.6 million, or two cents per diluted share, compared to a loss of 37.2 million, or 41 cents per diluted share, during the fourth quarter of 2020. On an adjusted basis, fourth quarter 2021 loss was $1 million or $0.01 per diluted share versus an adjusted loss of $2.5 million or $0.03 per diluted share in the prior year period. In the fourth quarter, adjusted EBITDA was $10.7 million compared to $20.6 million in the prior year. In addition to the $8.4 million decline in segment operating income, Depreciation and amortization increased $1.4 million versus a year ago, reflecting our capacity expansion initiatives and plant-based. Partially offsetting this increase was a $4.7 million reduction in stock-based compensation expense. Finally, adjusted EBITDA included a net increase of $1.8 million in EBITDA adjustments related to business development and startup costs. 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 January 1, 2022, total debt was $225 million and reflects $165 million drawn on our asset-based credit facility, 53 million of capital leases with a balance representing smaller credit facilities. Leverage stood at 3.7 times at the end of the fourth quarter. From a cash flow perspective, cash provided by operating activities during the fourth quarter of 2021 was 19.7 million compared to 19.8 million of cash provided by operating activities during the fourth quarter of 2020. Cash used in investing activities was $23.3 million compared with $11.2 million in last year's fourth quarter, primarily reflecting investments in capacity expansion projects. Let me close by providing our outlook for 2022, recognizing the environment is very fluid as it relates to inflation, supply chain, labor, and raw materials. On the top line, we expect revenue in the range of 890 to 930 million, which translates into growth rates of approximately 10% to over 14% compared with 2021. Revenue growth will be led by plant-based, but we do expect fruit to return to growth in 2022 as we have been communicating. We generally expect the first half of 2022 to be more challenging than the second half of the year. As such, we would expect margins to be stronger in the second half of the year than the first on our existing capacity. I'd also like to offer commentary around the new plant-based facility in Midlothian, Texas, and how this is likely to affect 2022 gross margin. As we have previously stated, we expect commercial production to start at the very end of the year. In order to be ready for year-end production, we expect to incur approximately $10 million of startup costs, primarily in the second half of the year, roughly evenly distributed between Q3 and Q4. While these startup costs are added back to adjust the EBITDA, they will affect gross profit and gross margin rate as reported. From a profitability standpoint, we expect adjusted EBITDA in the 67 to 75 million range for 2022. This represents 10 to 25% growth over 2021. From a capital standpoint, we expect capital expenditures to be in the 110 to 115 million range, as reported on the cash flow statement, driven primarily by the new Greenfield plant in Texas. As we have previously communicated, these expenditures are largely financed through the company's credit and lease facilities. We have no reason to believe that we have the need for equity capital to support these investments. Finally, while we are a ways away from 2023, we are currently forecasting adjusted EBITDA of $100 million, benefiting from the capacity expansion projects we have across the network. Two final items to mention. First, we are planning to host an investor day during the second quarter, likely in the May-June timeframe. We intend for this to be both an in-person event and a webcast available to all investors. This event will be held at our new headquarters and innovation center in Eden Prairie, Minnesota, where we can showcase our full range of products and our pilot plan, provide a deeper understanding of our business, introduce you to the broader management team and map out the financial impacts of the significant progress we've made over the last two years, increasing our capacity and capabilities as a plant-based milks manufacturer. More details will be provided as we get closer to this event, and we hope you can join us. The second item is really housekeeping. Beginning with the first quarter of fiscal 2022, we intend to move our earnings release time to after market close based on feedback we've received from several of you. 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.
spk01: At this time, I would like to remind everyone in order to ask a question, press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Brian Holland. Your line is open.
spk02: Brian Holland Yeah, thanks and good morning. I appreciate all the color that you provided around the factors impacting the myths and how we think about the recovery, and particularly the color you gave around some of the gross margin dynamics. I'm curious on the top line with the plant-based segment. You know, the last two years, you've grown pretty consistently at about 15%. You were, you know, going back to 19 and 20, you were on pace for that throughout the first three quarters of 2022. How soon, if we think about the gross margin improvement, how soon can we get plant-based back to that level of growth? Is that something that happens in the first half of 2022 or are we kind of back halfway?
spk04: Yeah, Brian, thanks and good morning. You know, we would expect continued acceleration through the year. I think we will be on that pace in the first half and potentially accelerating past that. in the second half, but you know, certainly Q4 was impacted. I think we, we called out 10 million of, uh, lost revenue or opportunity loss. Um, that was nearly a hundred percent on the plant-based business. So, uh, to some extent you can, you can think about that as an ad to Q4. It obviously didn't show up that way, but, um, you know, we, from a demand standpoint, we continued to experience very strong demand. And, you know, if we had been operating at a higher level, you know, we certainly would have punched out a larger number.
spk02: And then I appreciate you may be somewhat limited on what you're willing to say, but you put it out there, so I'll ask about it. This $100 million of EBITDA in fiscal 23, you're – The reason for doing that now, given the issues that are inherent in the supply chain here right now, why go out with that number, which is obviously over 15% ahead of consensus? And really, what's the construct of that? How much of that is just revenue flow through from the new facility and contribution there versus anything else on the margins that we should be thinking about?
spk04: Yeah, the simple reason, Brian, for putting it out now is to underline our confidence in the number. You know, when we look at the build of the 2023 number, especially relative to Texas, and obviously there are material costs and capital investments coming with that, we wanted to frame up for investors the benefits of that investment and our progress in realizing the potential of that investment. And so when we look at 23, there is a combination of both, you know, pretty significant EBITDA contribution from the Texas plant, but certainly we see additional growth in our core business that, you know, isn't directly linked to new capabilities in Texas. So it's a combination of new business in Texas and continued core business growth.
spk02: And then maybe just taking a step back strategically on, you know, some of the new verticals that you're exploring and building capacity towards. I think certainly anyone that's looking at the competitive landscape and some of the commentary from public companies, especially in the on-the-go protein nutrition shape, you know, sort of segment, there are certainly shortages there. So on the one hand, I frankly, the logic is fairly obvious and straightforward as far as the need for that capacity at a high level. But the fact that you are supplying that, where is that coming from? Is that coming from customer requests? And I guess what I'm getting at is you know you're presumably you're adding some layer of execution risk by adding your your category exposure so good to to be diversifying but also adding some execution risk at a time of unprecedented challenges uh you know for manufacturers such as yourself so so help us understand why divert capacity towards some of these other categories as opposed to just staying focused on the plant-based beverage opportunity
spk04: Yeah, so first of all, we are and remain incredibly bullish and optimistic about plant-based. I mean, two-thirds of our growth in 2022 will come from plant-based, you know, core plant-based products, oat and others. So, you know, we continue to see very, very strong growth in plant-based The protein shake entry is really a logical extension of our technical capabilities as well as our operational capabilities. While the end consumer experience might seem quite different in practice producing protein, A vanilla protein shake in a tetra carton is not dramatically different than, say, making almond milk. So we think it's a very, very logical extension of our technical and operating capabilities. you know, we're confident that we can stand this up with very little interruption. And we've already been, you know, we've already been working with these products here in our new pilot plant and innovation center. It's given us a head start in terms of starting to formulate and gain expertise in the production of those products.
spk02: I appreciate the color. I'll hop back in the queue. Best of luck.
spk04: Thanks, Brian.
spk01: Your next question comes from the line of Andrew Strelzyk. Your line is open.
spk00: Good morning. This is Amanda Morley on for Andrew. Thank you for taking the question. Can you just discuss further your expectation for sales growth progression for each segment throughout the year?
spk04: Yeah, good morning, Scott. I think as we said in the commentary, we would certainly expect the core growth driver to be followed by fruit, you know, all throughout 2021. We commented on, you know, rationalizing customers and SKUs and resetting the manufacturing base and putting the fruit business in a position to grow. And I know Joe, in his commentary, outlined, you know, the quantum of pricing we've taken in 2021 that will benefit 2022. I think the only call out there is just remember we will be lapping quarters as we go through 2022 in fruit. that had what is today rationalized skews. So there's, you know, the benefit would be the pricing. The takeaway would be the skew rationalization overlap. But, I mean, I think that's the color in terms of the outlook that you saw in the range of revenue for 2022. Great.
spk00: Thank you.
spk07: You're welcome.
spk01: Your next question comes from the line of Bobby Burleson. Your line is open.
spk06: Bobby Burleson Yeah, good morning. I'm curious about your supply agreements, what kind of visibility you get there in terms of, you know, allocation and costs going forward.
spk04: Good morning, Bobby. When you reference supply agreements, obviously we have a number of... Raw materials that you guys are procuring. Yeah. On the raw material front, we have covered 100% of our current known raw material exposure through pricing. That has all been fully implemented. That's true on both the plant-based business unit as well as the fruit-based business unit. So we do not have any unrecovered inflation on raw materials as it relates to both business units. The dynamics of kind of the contract agreements are quite varied, but, you know, some of them are straight contracted pass-throughs. Others are negotiated agreements whereby, you know, we will present to them, hey, here's the raw materials, literally down to invoices if they want to see them. to outline what's happened with the raw material costs. And I can confidently share that, you know, we've had some lively discussions, but no material pushbacks on, you know, fact-based raw material pricing changes and getting those passed through to invoiced prices.
spk06: Okay, great. And it looks like you guys alluded to some pretty significant labor disruptions that look like they're resolved. But are there kind of longer-term plans to maybe explore implementing automation in places that maybe previously you weren't using automation? I know you've talked about the fruit-based business, but just maybe more broadly to kind of – you know, offset these types of disruptions in the future.
spk04: Yeah, you know, on the plant-based side of the business, I mean, they are already incredibly automated plants. I mean, we might only have 35, 40 people on a shift of production operating, you These are incredibly sophisticated plants that are highly automated. The touch points are at the very beginning of the process and at the very end of the process. There's always opportunities for small additional automation, case packing, automated palletizing, etc., but We're not operating, and relative to some of the manufacturing environments that I've been involved in throughout my career where you have literally hundreds and sometimes a thousand people on a production line or on a shop floor, we have a couple of dozen. And so we do have, you know, I'll never say never, and we always look for ways to improve efficiency through automation, but there isn't a big step change for us on automation because we're already highly automated.
spk06: And then just last one, on the sewn line, I think you talked about being number two in velocity automation. after, I guess, just not that long, obviously, of it being in the market. Are there additional launches that you're going to contemplate here this year to kind of build on that success?
spk04: Yes. We are, you know, looking at additional flavors to fill out the product line as well as potentially some small-scale opportunities to extend the brand outside of the core product plant-based milk category into other dairy alternative categories. So, you know, we're excited about the consumer response. We're really the only organic player in the category, and we've seen great enthusiasm for our organic offering. That is a core competency of Synopta is organic-based foods and beverages. And so, you know, we're going to take that kind of oat organic platform and see what else we can do with it. But, you know, I want to kind of underscore... I want to underscore we're a little bit of the little engine that could, if you will, in terms of how we will approach expanding distribution. We fully respect and understand and are focused on our core business, which is co-manufacturing. And, you know, the degree to which this helps us advance our technical capabilities and understanding as well as kind of push the boundaries of innovation, you know, we love it. But, you know, we're not going to be spending tens of millions of dollars on advertising to try to grow these brands. We're really making sure we get the product propositions right and, you know, see if they can seed and forge new ground for us.
spk06: Great. Thank you.
spk01: Your next question comes from the line of Alex Furman. Your line is open.
spk04: Great. Thanks very much for taking my question. You know, the $100 million target for EBITDA in 2023, that's obviously a pretty big number. Can you help us bridge the gap of how you get there from your 2022 guidance? How much of that is coming from the New Texas facility as opposed to other growth elsewhere in the company or just the expectation that supply chain costs are going to get back closer to normalized levels next year? Yeah, Scott, good morning, Alex. Appreciate the question. I think, you know, the main driver of that incremental EBITDA profitability is from capacity and top-line growth. And obviously, as we talked about through the prepared remarks, you know, recovery is certainly relative to Q4 and margin. Because just remember that in addition to Texas, we have, you know, a few other capacity projects that we've commented on throughout 2021 coming online. And so I think the way to think about it is that the network collectively, including Texas, big contributor, you know, is responsible for unlocking, you know, capacity and in turn, top line growth that flows through to, to even done. Okay. That's really helpful. Thank you. And then just for, for 2022, Your EBITDA guidance is a fairly wide range considering it sounds like you have pretty strong visibility into your demand for the year. Can you give us a sense of what the difference is between the high end and the low end of your guidance? Is that just uncertainty given the volatility of some of the costs that go into your model? Just any color on kind of what would cause you to hit the high end or low end of that range would be helpful. You bet. I think what we're trying to do, frankly, both on the top line and on EBITDAs, is consider, you know, a number of factors, including just the potential for price elasticity. You know, Joe talked about, you know, the quantum, for example, of pricing we've taken in fruit, and there's not a lot of comps, at least in the last 30 years of, you know, with that level of pricing, you know, might manifest itself in terms of consumer demand. So, Yeah, it's probably the biggest thing that runs through my mind in the fruit business. And I think on plant-based, it's just the progression, you know, over the course of the year, recognizing we're trying to call a year. It's tough to call or tougher to call, you know, the quarter-by-quarter sequential development. So I would say those are the things that went through our minds in trying to form the top line and the bottom line. Okay, that's really helpful. Thank you very much. You're welcome.
spk01: Your next question comes from the line of Ryan Myers. Your line is open.
spk03: Hey, guys. Thanks for taking my questions. First one for me, and I know you talked about this a little bit on the call, but when we think about some of the labor pressures that you guys are seeing, how much of this was just purely inflationary, and then where are these pressures sitting today in relation to the fourth quarter?
spk04: Yeah, so on the labor front, there's – Really a simple way to think about it, which is, you know, over the summer, I think everybody experienced a significant amount of employee turnover. And I commented on the Q3 call that we were seeing sequential improvement in labor availability and that, in fact, turned out to be true for us. We onboarded a significant number of new employees and actually ended the year net positive 73 employees versus the beginning of the year. So we did a great job of bringing people on board. What surprised us candidly was the productivity of those new employees lagged our expectations and specifically our ability to get our overall production levels, you know, think of it as weekly number of cases produced. We did not see those levels snap back or return as quickly as we thought they would with the infusion of new people. And so that is what I referenced on several occasions. And the prepared remarks was, you know, we are seeing a significant step change in Q1 versus Q4. As all of our new employees, you know, become much more proficient, we did some much-needed catch-up on maintenance in the fourth quarter as well. And so, you know, those two investments in new people and taking down time on our production lines to do maintenance is paying dividends for us in Q1. So, you know, we expect and, you know, I think we've said consistently that we would expect some first half headwinds. So, you know, I want to make sure I frame my comments as we're seeing material progress. But, you know, you know, the sky's the limit. aren't completely blue and tulips are blooming, et cetera, you know, we still have some wood to chop relative to getting everything lined up. But we're excited and encouraged by the progress we're making in Q1.
spk03: Great. That's helpful. And then can you give us some color on the food service business? I know you guys called that out in a press release there, just kind of looking where the demand is coming from.
spk04: Yeah, when we look at 2022, just based on the customer mix and where we see new business, we see a bit more sales growth on the retail side than the food service side, call it 60-40. We expect significant growth of oat milk sales in the food service channel in 2022 as we continue to find productivity efforts and raising our output in our oat extraction facility, we're able to serve more and more of the food service channel. And we expect really significant growth in oat, both in food service and retail.
spk03: Great. And then last one for me. On a fruit-based business, when do you guys feel like you'll be in a good spot on a skew count and customer count where we won't see this planned reduction in volumes anymore? Is that something that's going to kind of continuously be ongoing?
spk04: I would say that probably the shortest answer is thematically we're done with that. We spent a lot of time and in 2021, you know, aligning or realigning, you know, customer profile, customer profitability with plant capacity. Because remember, we took two of our six plants out of our network. So I would say that is materially behind us. You know, we always are looking for profit opportunities, you know, in fruits. I don't want to suggest that we never look at it because, of course, we do. But materially, it's behind us.
spk03: Great. Thanks, guys.
spk01: Your next question comes from the line of John Anderson. Your line is open.
spk05: Good morning, everybody. Good morning, John. Good morning. I wanted to ask just about raw materials first. Are there any materials, you know, whether it be oats or another main input where availability Just the ability to kind of get enough of it, if you will, has been or may be an issue that you're kind of watching closely. And if you could help us understand that, which is separate from kind of the cost-related matters, I guess.
spk04: Yeah, John, I would tell you the pain points, and I talked about this similarly on the Q3 call, the pain points are really in the areas of the fastest-growing parts of the business. which if you think about it isn't super surprising when, if you take Q4 for example, we grew our oat business 120%. So obviously we were able to secure enough oats to grow 120%, but we also could have punched out an even higher number had there been unlimited and easy availability of oats. Same on fruit purees. Many of those for us come up from South America And obviously with all of the log jam in the ports, et cetera, we experienced some production disruptions related to shipping delays with raw materials coming up from South America. But those two, and I think it's not surprising, two of the fastest growing parts of the business were the two places where we had some pain points. just because you're trying to ramp up the receipt of materially larger quantities of a raw material than, say, the prior year. So we've stood up additional suppliers. We definitely made progress in Q4 versus Q3 as it relates to getting more raw materials in. And as we look at Q1, I would say sequentially, now obviously with what is going on in the world, it's obviously impossible for anyone to predict what the world looks like on a go forward, but at least as we stand here today, In Q1, you know, we've seen sequential easing of the constraints around raw materials via Q4. So, you know, Q4 was better than Q3, and Q1 is better than Q4.
spk05: So is the $10 million of lost sales or opportunity sales in the fourth quarter Was some portion of that related to just the lack of availability of certain raw materials versus, say, internal production constraints or less yield, as you pointed out earlier, with respect to new labor that you've onboarded?
spk04: Yeah, I would say it's three things, John. And, you know, the 10 million, I would say, was a conservative estimate, to be honest. You know, there was a portion of that lost revenue that was related to freight and just the inability to get both our customers who often pick up their inventory, you know, their inability to line up trucks and arrive at our warehouse to pick up their orders. There was a portion attributed to the labor challenges that I referenced, specifically having orders in excess of our ability to produce. And then the third piece would just be the raw material input component where, you know, we had orders in the system and, you know, we would be delayed a few days on, say, receipt of a raw material. And, you know, obviously it's tough to make up those days once you lose them in the production schedule. So really those three factors contributed to what we would loosely articulate as at least 10 million of missed opportunity. Okay, that's helpful.
spk05: And then on the pricing side, I just wanted to make sure I understood the commentary there. You have commodity inflation, you have internal wage inflation, freight costs, etc. Is the pricing that you have communicated and has been accepted by customers, has that been put in place or accepted to offset all of these elements of inflation? And at what point will that be? Will you be fully realizing the benefit of that pricing?
spk04: Yeah, John, I would say from a raw material pricing standpoint, that has been materially passed through. I mean, probably it's easiest just to break it down. So we gave the number of the quantum of fruit pricing. I mean, that is every penny of all known raw fruit cost inflation. I would say the focus today, literally today, would be Really on the transportation side, I think Joe mentioned a little bit in his prepared remarks that we obviously saw a data point. Diesel fuel, Q421 v. Q420, up 50, 5-0 percent. It got sequentially worse from Q3. So where we've got any leaky buckets on freight recovery, those efforts are underway. And I think Joe had pointed out those are probably done by the end of the quarter, meaning the end of the first quarter. That's probably the way to think about the quantum of pricing and the drivers.
spk05: That's helpful. I wanted to ask, because you're seeing such strong growth in oat milk, and I'm assuming a good portion of that is driven by the extraction capacity that you put in place at the end of 2021. Where do you sit? I think there's another piece of extraction capacity coming on. I think you said mid-2023. That's still kind of a ways off. So, I mean, are you... constrained in any way at this point from a capacity standpoint on your ability to serve the demand that's out there for oat milk, whether that be, you know, co-pack or private label or extraction or finished goods. And I'm not talking from a labor standpoint necessarily. I'm just kind of like assuming the labor's in place and operating at a high level of Are you just limited for the time being and how much demand you can satisfy until that extraction capacity comes online in mid-2023?
spk04: You know, John, we shared the number that we had revenue of $80 million in 2021. We can grow up to probably 50% on top of that number. in 2022 through additional, you know, I think the team has identified eight productivity projects to increase the output of our oat extraction. So we are trying to move heaven and earth to make more oat-based. And right now, we have line of sight to 50% potential, 50% oat growth in 2022. After that, we will be somewhat constrained to grow beyond that until the new system comes online, unless we're able to find oat-based somewhere else in the marketplace for us to bring in and package. But you know, we definitely have headroom in front of us in terms of our ability to grow oat milk in 2022. And the second part of your question was just around demand. I mean, if I could wave a wand and, you know, stand up that facility that I referenced coming online at the end of Q2 2023, if I had it today, could I sell a good chunk of it? Yes.
spk05: Yeah, that's really helpful. And then the last one I had was on fruit. It sounds like you know, the combination of pricing and, um, I think you mentioned, uh, confirmed distribution wins, uh, it gives you confidence that the business can grow in 2022. Can you talk a little bit about these, these distribution wins and, um, are they fully confirmed and, and, um, uh, you know, what part of the fruit business those may be in, whether it be the snack side or the frozen, et cetera. Thanks.
spk04: You bet, John. Maybe two different thoughts. I mean, we saw very, very strong demand, you know, really accelerating throughout 2021 in our fruit snacks business. You know, we've posted a 23% plus or minus, you know, level of growth in the fourth quarter. And I think we've seen that continue. In the frozen business, your question around true distribution, I think we mentioned that with our largest frozen customer, what we've generally seen is kind of a whipsaw where in the last year or two, customers seeking to add a greater variety of suppliers and in a supply chain challenged environment that probably didn't work as well as maybe they would have hoped. And so I think there's maybe a view going the other way, which is to consolidate supply and As I think you know, we're one of the largest frozen processors in the United States, and I think our improved cost position and, frankly, credibility with customers around pricing we spoke about was helping us. So I'd say direct answer is, yep, we have seen firm volume awards, including that largest customer in frozen, back to the core about our level of confidence about growth that's very high.
spk05: Great. Thanks so much for the help. You're welcome.
spk01: There are no further questions at this time. Mr. Ennin, I turn the call back over to you.
spk04: Great. Well, thank you for your time today and look forward to speaking to you again soon. Thank you.
Disclaimer