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spk06: and welcome to Synopta's second quarter 2022 earnings conference call. By now, everyone should have access to the earnings press release that was issued this afternoon and is available on the investor relations page on Synopta's website at www.synopta.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 all risk factors contained in Synoptys press release issued this afternoon, the company's annual report filed on Form 10-K, and other filings with the Securities and Exchange Commission for more detailed discussions of the factors that could cause actual results to differ materially from those projections and any forward-looking statement. 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 this may be required under applicable securities laws. Finally, we would like to remind listeners that the company may refer to certain non-GAAP financial measures during this teleconference. A reconciliation of these non-GAAP financial measures was included with the company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in US dollars and are occasionally rounded to the nearest million. I'd like to now turn the conference over to the SunOpto CEO, Joe Ennen.
spk09: Good afternoon, and thank you for joining us today.
spk08: With me on the call is Scott Huckins, our Chief Financial Officer. The second quarter was one of the strongest in company history, with quarterly sales, gross profit, and adjusted EBITDA all at or near record levels. I'm particularly pleased with the quality of the quarter as it demonstrates the potential of our strategic plan, showcases the depth of our competitive advantages, and highlights our culture of execution. In addition, these results reflect favorably on the actions we took in late 2021 and early 2022 to mitigate inflation and improve operational performance. It is exciting to know that we are just getting started in realizing our long-term goals. As a reminder from our investor day, we outlined five strategic imperatives. Transforming the portfolio, fortifying our competitive advantages, leveraging our competencies to expand the total addressable market of the business, be and be recognized as a sustainability company, and codifying our culture. Before we begin unpacking the results in detail, let me offer some key takeaways from the quarter. On a total company basis, our 20% revenue growth was very balanced with both volume growth and pricing growth. 60% of the consolidated gain came from pricing and 40% from volume. In our plant-based business unit, revenue grew 31% fueled by strong gains in both volume and price. Growth in plant-based was exceptionally broad. with nearly every major customer up double digits, every channel up double digits, every product type up double digits, and every go-to-market business up double digits. Gross margin rate improved 130 basis points versus last year to 14.3% and was up 260 basis points sequentially. This gain was despite a headwind of 140 points of margin rate solution related to the effect of pricing inflation. Gross profit improved 33% versus a year ago, driven by strong management of all the gross profit levers, from revenue to production output to cost control. While the consumer landscape is always dynamic, we have not seen any abrupt changes in consumer behavior. Given how balanced our portfolio is, we feel we are well positioned to evolve with any future changes in purchase patterns. It is worth pointing out that we have not seen a significant change in consumer behavior as it relates to trade down in our core categories. Production output in our plant-based facilities was once again excellent, with Q2 production levels plus 20% to prior year and similar to our record-setting Q1. demonstrating the strength of our operational and technical competencies. All our major manufacturing plant expansion projects are on track, and we continue to make progress lining up customers for our new capacity. In terms of the impact of inflation, similar to the first quarter, higher customer pricing helped us recover over 95 percent of the inflation we incurred during the second quarter. We saw $25 million of year-over-year inflation in Q2, up a bit versus what we experienced in Q1. There are some indications of lower crop prices headed into 2023. However, we expect inflation to remain stubbornly high in other areas like packaging, wages, and utilities. Lastly, based on the strength of the first half, we are raising revenue and adjusted EBITDA guidance for 2022 to reflect our strong first half results. and we remain confident in the long-term growth targets we shared with you at Investor Day. At the same time, we acknowledge that there are consumer uncertainties with real pressure on consumer spending. Now I'll turn to our segments, starting with plant-based. I would like to remind listeners that we have three strategic priorities within plant-based. Number one, strengthening and fortifying our competitive advantages. Number two, winning in oat milk to capitalize on this consumer trend and increase our participation in refrigerated beverages. And three, building a balanced, multi-pronged, go-to-market business that includes co-manufacturing, private label, and owned brands. Plant-based revenues surged 31% to $146 million in the second quarter, another record in our 15th consecutive quarter of revenue growth. The quality and structure of the growth was impressive. Volume accounted for over half of the revenue growth, while pricing made up the balance. As we mentioned on the Q1 call, there were some Q1 orders that didn't get out the door. Encouragingly, we are now fully caught up, resulting in a first-half growth rate of 22%. From a product category standpoint, as I mentioned earlier, every category delivered double-digit revenue growth. Plant-based milks, which are two-thirds of the overall plant-based business unit, had revenue growth of more than 30%. Our tea business remained strong with growth in the mid-40% range, reflecting strong customer demand. Finally, sunflower and broth each delivered double-digit growth in the quarter, reflecting strength throughout our portfolio. Drilling into the plant-based milks, growth was very broad-based. every single product format grew double digits. Oat, almond, rice, coconut, and even soy generated double-digit growth. Growth was led by over 40% increases in both almond milk and oat milk, with each having revenues of over $30 million. Growth in almond milk was fueled by both our existing customers and a sizable new customer. Oat milk growth continues to be supported by category growth, and the ongoing shared leadership position of the brands we support, limited only by our current capacity availability. Once again, Synoptic was privileged to work with several leading open-up brands, including the number one brand in measured channels for the last seven quarters. This is a strong testimony to the strength of our R&D and technical operations. From a channel standpoint, retail sales were up over 40% and total food service through 20%. Relative to our go-to-market strategies, our branded business continued to shine with year-over-year gains approaching 40%, including more than doubling of our revenue from Zone and Dream, driven by expanded distribution with our top food service customer. Our command business increased 31%, driven by continued strength in O&T, the ramp-up of a significant new customer, and catching up on a backlog of orders with several customers. Our private label business, which is mostly broth, grew 15%, benefiting principally from pricing. Our aggregate ingredients business grew 47%, driven by the continued success of selling oat base for use in refrigerated oat milk, ice cream, and yogurt. Additionally, our sunflower business grew more than 30%, driven by pricing and new customer development. As we also outlined at our investor day, we have a keen focus on innovation and using our expanding manufacturing capacity to attract new customers and develop new products. 25% of our growth in the quarter came from new customers or new products. I'd like to take a couple minutes and provide an update on the overall plant-based milks category based on what we see in retail scam data. Let me remind everybody that the plant-based milk category is over 40 years old, dating back to the early 1980s with the introduction of soy milk. The plant-based category has grown consistently and steadily year over year, driven by multiple consumer dynamics. In the last 13-week period, the combined refrigerated and shelf-stable plant-based milk category sales grew 9%. There has been some unit sales growth softening, but the consumer continues to spend more on the plant-based milk category. As it relates to private label, there has been no share gain in plant-based milks. In the latest 13 weeks, the category was up 9% and private label was up 1%. Even in the latest four-week period, private label is growing at half the pace of the total category. As it relates to product type, the big three, Almond, oat, and soy all grew. Almond continues to dominate the category with 61% of the sales and growing mid-single digits. Oat continues to grow and is now 20% of the plant-based milks category, resulting from a 33% increase in sales. Outside of tracked retail, we continue to see and benefit from plant-based milk growth in food service, e-commerce, and untracked retail channels and customers. Lastly, let me comment on the progress around some of our capacity expansion efforts. The additional line we are adding in Modesto is on schedule and will be online at the end of Q3, giving us some much-needed breathing room in support of our core West Coast business. We also recently started construction of a second oat extraction facility to provide additional capacity to support the growth of our current customers and enable the development of new customers and products. This new facility is strategically located on the West Coast and expected to open in the third quarter of 2023. Turning to Texas and our new Greenfield plant south of Dallas-Fort Worth. Despite all of the macro challenges involving obstacles like computer chip shortages, labor shortages, equipment backlogs, et cetera, we are still on time for our first saleable production run at the very end of the year. At this point, all of the major equipment is on site. We have hired the entire management team, and they have spent the summer training in our other facilities to assure a strong startup of the plant. As a reminder, we broke ground on a dirt field in mid-September of last year, and we expect to have our certificate of occupancy in early October. I'm very proud of the team and how far we have come. This is Synoptat at our best, executing in the face of adversity. We are fortunate to have a dedicated team that is long on solutions and short on excuses. As mentioned, we are pleased with the business development efforts surrounding our added capacity, and we are excited to begin working with several new customers once Texas is online. Moving on to our fruit-based segment, recall 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 mix shift and innovation towards more value-added offerings. In the second quarter, fruit-based revenues increased 7.4% to $98 million, all of which came from growth in our margin-advantaged fruit snacks business. This growth is a direct reflection of our third strategy focused on evolving the portfolio. Revenue from fruit snacks increased 48% versus last year. Impressively, the vast majority of this growth was volume-driven. Sales in fruit snacks were $24 million, generating a nearly $100 million run rate. By comparison, 24 months ago, Q2 sales were $10 million. Strong demand for our fruit snacks, as well as our new smoothie bowls, combined to deliver this impressive growth. By customer category, growth was broad-based, with both large CPG command customers and private labels showing strong double-digit increases. In Q1, we added capacity in our Ontario fruit snacks plant, which has helped fuel this growth. Our growth in fruit snacks continues to significantly outpace the broader category trends. Nielsen data for the 13 weeks that overlaps with our second quarter shows total fruit snacks up 9.5% in dollars, but down 11% in units. We have also been pleased with the early success of our smoothie bowls innovation, which is part of our fruit snacks business units. We have commercialized 12 SKUs so far, and the very early read on consumer takeaway is encouraging. We approached this launch very entrepreneurially, meaning we didn't put a lot of capex into automation as we wanted to see how the consumer responded. As we get more confident in the long-term success, we will have significant opportunity to improve the output and profitability to maximize the value of our innovation. As we also shared at Investor Day, We have started a significant expansion project in Washington State that will come online in a year to continue to fuel growth in fruit snacks. Net-net, the outlook for our fruit snacks business is very encouraging. Frozen fruit sales were fractionally lower versus a year ago, reflecting higher pricing and lower volumes. Revenue from our top five frozen customers increased 13% and represented over three-quarters of our total revenues. large mass and club customers had significant double-digit increases. This was partially offset by lower revenues from FKU rationalization efforts in 2021. From a category standpoint, frozen fruit sales grew 3.4% in the quarter, with private label growing 4.1% and unit volume down 6.5%. As a reminder, 70% of the category is private labels. What we see is retail customers are taking different approaches to passing on pricing, with some customers passing on all of the price increase and some only a portion. As a result, we see buying shifting away from the more premium retailers to more value-oriented retailers. We have materially wrapped up the California and Mexico strawberry processing season. We procured the pounds we needed, pricing was generally favorable, We ran efficiently. Mexico fruit quality was good, and California quality was just average. Net, we came out of the season in a solid position. As we have discussed many times, the multi-year efforts to reduce risk on this business is taking hold. California sourced fruit now represents less than 10% of our total pounds, with Mexico now functioning at the center of our fruit operations, helping to further de-risk the business. Mexico affords us lower costs and greater access to more fruit types. And we have a very strong management team in Mexico. In summary, we have substantial momentum across our business and our passionate team continues to execute extremely well against our strategic growth priorities. While the macro environment remains challenging, we've been able to offset the vast majority of inflation with pricing and our productivity initiatives continue to gain traction. Customer demand for our high-quality, unique products remains very strong, reflecting our leadership position in the fastest-growing plant-based and fruit-based categories. Our model is competitively advantaged from the perspectives of capacity and capability, and we expect to continue leveraging the power of our platform to rapidly scale. We remain committed to our long-term growth algorithm of annual double-digit plant-based revenue and profit increases and increasing returns on invested capital. Now we'll turn the call over to Scott to take us through the rest of the financials. Scott?
spk05: Thank you very much, Joe, and good afternoon, everyone. Second quarter revenues of $243.5 million were up 20.4% year over year with continued growth in both segments. Plant-based revenue increased 31%, driven by solid volume growth of 17.3%, along with pricing actions of 13.7% to offset inflationary pressures. Fruit-based revenues increased 7.4%, as we benefited from pricing actions of 10.4% to offset inflationary pressures, while volumes declined 3% as strong demand for fruit snacks and smoothie bowls was more than offset by lower demand and the impact of skew and customer rationalization for frozen fruit. Gross profit was $34.9 million for the second quarter of 2022, an increase of $8.6 million, or 33%, compared to the second quarter of 2021, and consolidated gross margin was up 130 basis points to 14.3%. As a reminder from the Q1 call, we pointed out that we left approximately $7 million of revenue and $2 million of profit on the table in Q1 due to the challenging logistics environment. The second quarter benefited from getting caught up and getting that volume out the door to customers. In plant-based, segment-level gross profit increased $4 million or 20.3% to $23.9 million driven by higher volumes and pricing for plant-based beverages and ingredients, coupled with strong production volumes. Gross margin was down 150 basis points to 16.4% versus the prior year, primarily due to the dilutive effects of pass-through pricing to recover cost inflation, representing approximately 215 basis points of headwind. In fruit-based, Segment-level gross profit rose 4.5 million, or 70.2%, to 11 million, driven by pricing actions and reduced manufacturing costs in frozen fruit, along with very strong volume growth in fruit snacks. Gross margin increased 410 basis points to 11.2%, despite an approximately 70 basis point negative impact from the dilutive effect of past due pricing to offset commodity cost inflation. Segment operating income was 8.1 million in the second quarter compared to 1.7 million in the year earlier period. The year-over-year growth was attributable to the previously mentioned 8.6 million of higher gross profit on a consolidated basis, partially offset by a 1.6 million increase in SG&A due to higher incentive compensation costs, which were partially offset by reduced employee costs related to headcount reductions in frozen fruit operations and lower business development expenses. Finally, we experienced an unfavorable $0.5 million foreign exchange impact year-over-year related to Mexico operations. Earnings from operations attributable to common shareholders for the second quarter was $0.9 million, or one cent per diluted share, compared to a loss of 1.7 million or a loss of 2 cents per diluted share in the prior year period. On an adjusted basis, we had earnings of 3.5 million or 3 cents per diluted share in the quarter of 2022 versus adjusted earnings of 0.1 million or 0 cents per diluted share in the prior year period. In the second quarter, adjusted EBITDA was $22.3 million, or 38% higher than $16.1 million in the prior year. The sharp increase in adjusted EBITDA was driven by the $8.6 million increase in gross profit, partially offset by an increase of $1.6 million in SG&A. 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 afternoon. Turning to the balance sheets and cash flow, as of July 2, 2022, total debt was $296.5 million and reflects $176.7 million drawn on our asset-based credit facility, $95.9 million of capital leases, with a balance representing smaller credit facilities. Leverage stood at 4.6 times at the end of the second quarter. As we communicated at our investor day on June 2nd, we target two to four times leverage and expect to be just above that range in 2022, returning to within the range in 2023. It is important to point out that our current leverage position is largely reflective of the timing and scale of our significant and planned investments in capacity expansion over the last two years. As we have said for many, many quarters, these investments are needed to double the capacity, revenue, and profits of our plant-based business. We continue to believe we will be rewarded over the next several years for executing these investments in such a challenging environment. From a cash flow perspective, Cash used by operating activities during the second quarter of 2022 was $2.5 million compared to cash used of $39.1 million during the second quarter of 2021. Cash used in investing activities of continuing operations was $34.1 million compared with $32.4 million in last year's second quarter, primarily reflecting investments in capacity expansion projects. Let me close with comments on our outlook for the balance of 2022, recognizing the environment is very fluid as it relates to inflation, supply chain, labor, raw materials, and the state of the consumer. We are increasing our 2022 guidance to reflect strong first half results and continued confidence in our second half outlook. We are raising our revenue guidance to a range of 930 to 960 million, up from 890 million to 930 million previously, representing growth of 14 to 18% versus 2021. Our adjusted EBITDA guidance is increasing to a range of 72 to 78 million, up from 67 to 75 million previously, representing growth of 18% to 28% versus 2021. I'd also like to remind listeners about how we see the new plant-based facility in Midlothian, Texas, affecting 2022 gross profit and 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 in the second half of 2022. Now that we are partway through Q3, our refined estimate for the second half of 2022 is that we expect approximately $4 million of these costs in Q3 and $6 million in Q4. While these startup costs are headed back to adjusted EBITDA, they will affect gross profit and gross margin rate as reported. 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 the call for questions.
spk06: At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from the line of John Anderson with William Blair. Your line is open.
spk04: Hi, good afternoon, everybody.
spk09: Hi, John.
spk04: Hi there. Thanks for the questions. I wanted to ask first about the guidance raise. And as you think about the step up in sales, about $35 million at the midpoint for the year, and even to about $4 million, I believe, at the midpoint, how much of that would you attribute to kind of over-delivery, I guess, in the second quarter? for first half and how much would you attribute to, you know, momentum above initial plan in the second half of the year?
spk05: Yeah, John and Scott, I'd say it's probably a relatively even mix of both because, you know, I think if you go back to February when we started guidance, you know, I think we expected the first half, you know, to be more challenging than the second half and I think as we proved, you know, with the release today, second quarter was really, really strong. So, you know, I think part of it is memorializing or recognizing, you know, that over-delivery relative to expectations and continued strength. So I think the bottom line is it's a mix of both.
spk04: Okay. And the sales and EBITDA that you left on the table in one Q, 7 million in sales, I think 2 million in EBITDA, were to kind of read your comments as that was incremental to Q2. that was fully made up during the quarter and there wouldn't be additional benefit from that as you move into the second half?
spk09: That's correct, John.
spk04: Okay. From a pricing perspective, where are you from a pricing standpoint in terms of fully recovering inflation? Is there additional pricing to come or are you largely caught up at this point?
spk08: You know, in Q1, we indicated we had covered approximately 90% of the inflation we had incurred in Q2. We indicated we recovered 95% of the inflation incurred. Going forward, we would really see any additional pricing actions we would take as surgical and very specific to either a customer or a product type, but we do not anticipate the need for wholesale pricing on a go-forward basis.
spk04: Okay. And, Scott, you kind of talked about the startup costs, which would be specified related to the Texas facility and any impact of reported gross margin. But as we think about the transition through the back half of this year more so into 2023, how should we think about the margins in the plant-based business kind of progressing? I guess I'm thinking, and you can correct me if I'm wrong, that through the back half of this year, you know, you're continuing to leverage capacity in your existing facilities, benefiting from incremental price. That's helping you from a margin perspective relative to Q2. And then we get into 2023, and the Texas plant comes online, and there's maybe a bit of a step back until you more fully utilize that plant. But can you kind of talk us a little bit through the cadence as you're thinking about it so we can understand that and no surprises?
spk05: Sure. So I think the first thing just to maybe take a step back on is when you think about the result or the margin result in plant-based, To kind of compare it to history, you've got to add the exact about 215 basis points because I think we're trying to be clear that that was the headwind in the quarter from just passing on price, meaning 16.4 as reported would be called 18.5 to compare to years past. I do agree with your analysis that on a sequential basis, you've got $4 million plus or minus the headwind in Q3. six million plus or minus in Q4. You're probably talking two to 250 basis points, you know, approximately of headwind. That's part one. Then I'd say I would bet that 2023 probably improves sequentially through the year because recall that investor day, we unpacked a pretty detailed bridge. You know, we're going to have, you know, considerable stuff up in depreciation. So as we sell through that capacity in 23 and beyond, I would expect, you know, continued improvement in margins.
spk04: Excellent. Thanks. And just one more on fruit-based. The margins, obviously, were terrific there, double-digit, I think, for the first time in some time, at least according to my model. Is that – are we getting to a point where the consolidation work you've done in frozen fruit, the de-risking efforts, the skew rationalization, it really supports – double-digit or gross margins in the teens, perhaps, on a sustainable basis. Obviously, fruit snacks and smoothie bowls, I would assume, are contributing to that as well.
spk05: Yeah, I guess what I'd say, Joe, is I would not expect teens in the very near term. I think we've been clear we've been trying to get into the double digits, which I appreciate you acknowledge we did. I would say that the point estimate is very mix-dependent. If you go back and you look at the year-over-year 410 basis point improvement. For round numbers, about half of that is mixed shift toward fruit and snacks, which I think you know is margin accretive. The other half was just absolute improvement in frozen. And to your point about the consolidation, yeah, I mean, we're seeing the results of that from last year's exiting of each of the Santa Maria and Southgate facilities, allowing a more cost-efficient operating base.
spk04: I could just squeeze one more in. Bigger picture on plant-based milk, you said you haven't seen trade down by the consumer to date. How do you think about the potential for trade down going forward? And is that a real negative for your business? I assume that you're doing maybe some private label. I know that's bigger on the frozen fruit side than it is in plant-based milk. And the second kind of corollary to that is all of your crop forms were up. It sounds like double digits. That sounds like a pretty unique situation. Any more color there? I think you mentioned maybe a new customer or new customers that were contributing to that. That would be helpful to understand that a little bit better. Thanks.
spk08: Yeah, we brought on a significant new customer earlier this year and is definitely contributing to growth. We saw it especially on the almond milk side of things. And, you know, as it relates to private label, private label is about 15% of the total category. We do make some private label business. And so if there was a shift in that direction, we would certainly benefit from that. However, you know, we're pretty strongly branded as the category is. I mean, the category is 85% branded, and so not surprising. A significant majority of our business is through co-manufacturing or own brands. And, you know, we just haven't seen the shift. I mean, I know that is the consumer story that everyone thinks is happening, but as it relates to our specific categories, we're just not seeing wholesale shifts. Okay.
spk09: Thanks for taking all the questions. I appreciate it. Thanks, John.
spk06: Your next question is from the line of Andrew Strzelczyk with BMO Capital Markets. Your line is open.
spk03: Great. Thank you. Thanks for taking the questions. My first one, I guess I just wanted to go back to the EBITDA guidance. To the best that I can tell, it doesn't look like you fully flowed through the upside from the quarter. I guess maybe I was unclear on how you were answering the original question before, but I guess That's at least from my perspective how I think I see it. I'm just curious. I recognize that you're looking at passing through the strength from the first half, but what goes away, I guess, in the back half? What would be, aside from the catch-up from 1Q to 2Q, what dynamics would be going away? Is it lapping some of the pricing, or is there something else aside from just some of the uncertainty that you're considering for the back half of the year?
spk05: Yeah, I guess the point I was trying to drive at, Andrew, to see if I can help, is two topics, right? You have a revenue outlook, which we called up in part informed by first half performance and in part by our outlook for 2F. And obviously the same for EBITDA. I think we would all acknowledge Q2 on any metric was really, really strong. But I'm also just trying to be clear, look, we're pretty optimistic about the second half. I think that was the takeaway I was trying to offer just in terms of the structure of the outlook.
spk09: Okay, okay.
spk03: That makes sense. But there isn't anything – you called out the startup cost, but otherwise there's no margin implications or incremental pricing. You said you're still at 95% plus. I mean, there isn't – or customer losses or anything like that. There's nothing that you would lose then from the momentum otherwise that you've seen so far.
spk08: No, absolutely not. I mean, we're raising EBITDA guidance for the full year. If you think back to the previous guidance, what we – had commented when we rolled that out was we thought the full year would flow something like 40% in the first half and 60% in the second half. We obviously recovered significantly faster, you know, in terms of the challenges that we had in the back half of last year. So we obviously have gotten the business back to grooved much faster than we had originally anticipated when we rolled out that guidance. But, you know, strong consumer demand, strong business performance throughout the channels, across product types, across every go-to-market is really the underlying reason for the raise of the EBITDA target for the year.
spk03: I completely understood, and I guess what I'm getting at is maybe that it feels like there's still a little bit of conservatism in there, so I just wanted to make sure that I wasn't missing something. So I completely understand. My next question, and I recognize we've had so many quarters now of talking about passing through inflation, and you called out that you're seeing some areas of relief, but some that are – you know, remaining elevated from a cost perspective. But can you just kind of walk us through how we should expect, how soon you could maybe start to see some relief on the input side if the markets continue to cooperate and how we would see that play out through the P&L just so we can make sure that we're watching the appropriate things there?
spk08: Yeah, I don't think that we anticipate any significant cost reductions this year. You know, as we've looked at some of the crop markets, both on the fruit side and the plant-based side, whether it's oats in particular or soy or some of the fruit types, you know, we're seeing some softening in the price, certainly versus the peaks of, say, two, three months ago. And so, you know, that bodes well for the future. However, those prices won't really be realized until we're rolling into 2023, given kind of think October, September, October harvest, a lot of times we're contracted for this full year anyway. So we wouldn't anticipate any impact from that if it does materialize to be felt until 2023. Got it.
spk03: And then my last one is on the fruit segment gross margins. And I think when we've talked about this in the past, You've taken actions that have obviously improved the margin structure, but there was still a lot of optimization. It felt like that kind of was left to be had in understanding that you said you're not going to tease margins in the near term. What remains to be done there on that side from an optimization perspective or efficiency perspective in fruit? And the capacity additions that you mentioned, how should we think about that impacting the trajectory in the segment over the next couple quarters? Thanks.
spk05: Yes, I think a few questions. I'd say that, you know, what's left to do, you know, on frozen fruit, I think in one word, I'd just say execute. You know, we spent all last year, you know, doing footprint consolidation of two facilities, taking a bunch of price to get caught up on, you know, obviously a more expensive crop last year than in 2020. You know, so it's really executing the business plan. In terms of fruit snacks, I think we flagged it investor day. what a pretty sizable expansion in capacity coming online almost exactly a year from now. So getting, you know, that plant ready to take on that incremental volume because, you know, as Joe pointed out in his prepared remarks, we saw high 40s growth in Q2. So, you know, we're feeling very good about that.
spk09: Got it. Thank you very much. You're welcome.
spk06: Your next question is from the line of Brian Holland with Callen & Company. Your line is open.
spk01: Yeah, thanks. Good afternoon. How do we interpret your fiscal 23 outlook of $100 million in light of your updated view of 22? I guess, you know, are you just snapping back? It sounds like faster than anticipated and ultimately expect to be in the same place at the end of next year as you thought when you initially gave that guidance. Or can we start thinking about a real inflection in earnings power that would convey the upside to that number?
spk05: Hey, Brian, thanks for the question. I guess my reaction would be we're obviously increasingly confident, you know, about delivering, you know, what we laid out on June 2nd. I think as we're halfway through this year, you know, we took revenue and EBITDA guides up for this year, but, you know, we're obviously increasingly and increasingly confident, you know, about what we'll deliver in 23, 4, and 5. So, you know, more to come as we get to the end of the year. You know, we close out 2022, and as we promised we would on June 2nd, you know, we'll deliver formal 23 guidance, but as we're sitting here today, you know, feeling very good about what we laid out on June 2.
spk01: Got it. Thanks, Scott. And then I wanted to ask, Joe, you made some reference to private label and sort of called that out. Kind of interesting, I guess, you know, plant-based seems like it's fairly mature or private label seems like it's fairly mature in the other Plant-based categories, kind of in that high teen, low 20 range, that's been fairly steady. Oaths under-penetrated. When we just kind of look at the interplay between branded and private label, is that problematic or is that an opportunity for you as you think about kind of the positioning there?
spk08: I think about it as we have a fairly agnostic response to it. We obviously have very strong branded partners We also have private label business. And one of the things that we really like about the business model we built is we have a lot of ways to win. We can win with our own brands. We can win with national brands. Or we can win with private label. And I think we are not rooting for any particular outcome. And we stand to benefit from whatever shifts in consumer behavior are ultimately in front of us.
spk01: And, Joe, forgive me, I could have asked that question better. I guess what I'm getting at is, you know, oat still looks fairly underpenetrated. You know, what are you hearing from retailers as far as their approach to the category? Because it seems like that should be a source, as you play kind of like you said, all peers, all form factors. That seems like it should be an opportunity, i.e., private label shares should grow at least in oat milk. from where it is today, probably materially. And you would seem to stand to benefit from that, but I'm just curious why that isn't happening faster. And again, I'm not talking about you guys necessarily, but at a segment level, why private label is not taking share faster in oat milk?
spk08: Yeah, simple answer is oat capacity. You know, it's just not out there at the, you know, the oat extraction side of it, as well as the packaging side of it. So, You are absolutely correct. There is a future opportunity for private label growth in OAT that we think ultimately will materialize. However, there's just capacity constraints around the system. Okay, I appreciate that. And I'm not specifically referencing our system. I'm just saying the whole market.
spk01: Of course, understood. Last one for me, I think you spent a fair amount of time going through consumer behavior and what you're seeing in the U.S. Obviously, that question arises because of what has been said about Europe over the past couple weeks from some of the suppliers there. So I'll focus on a different area here. Oatly repatriated volume and demand is slowing a little bit. This is Europe-specific. You know, as this happens, the supply-demand equation shifts a little bit in Europe, even if temporarily. And I bring this up because it's one of the questions I hear most often from investors. What happens when supply catches up to demand in the U.S.? What happens to Synopta? So I'd appreciate that you've discussed this in the past, but it would be great to have you just remind us why the supply dynamics today in the U.S. might be different than what people are hearing and seeing in Europe and what you're actually hearing and seeing in in the U.S.? Thank you.
spk08: Yeah, I think there's a couple dynamics at play. One is the category continues to do well, plus 9% on revenue. Number two is we all understand just how challenging the environment is to do greenfield, whether you're doing a greenfield plant or just any kind of manufacturing expansion. Costs are going up, cost of capital is going up, equipment delays, et cetera, et cetera. And so when we have queried what is going on in the industry more broadly with our competitors, et cetera, we are hearing a lot of discussion around projects being delayed, pushed out, et cetera. And I think one of the things we're most excited about is us executing Texas in a fairly highly challenged environment, we should be rewarded for that because there are not a lot of capacity expansion projects going on around the industry.
spk06: Your next question comes from a line of Mark Smith with Lake Street Capital Markets. Your line is open.
spk02: Hi, guys. Most of my questions have been asked already, but I did want to just look into new products, impact that new products had on the quarter, and then how you feel about your pipeline for new products.
spk08: Really, really good. 25% of the growth in plant-based came from new products or new customers. We continue to be encouraged about the business development efforts going on around our Texas capacity additions. And as you heard us talk about on the fruit business, certainly the contribution of bowls and customer expansion on fruit snacks contributed significantly to the growth, just to remind, 48% growth in fruit snacks and certainly some of that being innovation and new product fueled.
spk02: The expansion that's coming online next year in fruit snacks, I think you said in Washington, is a lot of that kind of newer products or is that kind of traditional fruit snack products like we maybe think of today?
spk08: It is an expansion of our existing capability and Really, those products are principally sold through the Club channel, which is why you see a pretty big disconnect between our results and the overall scanner data at retail that I referenced. Very clean label, organic products. Many of the products we make are no sugar added, organic, clean label, and very on trend with consumers. You know, we're not in the faux candy business. You know, we make incredibly high-quality fruit snacks, and we try to keep the ingredient deck as clean as possible. And, you know, as we've seen for years now, parents are interested in feeding their kids healthy snacks and a strong bias towards organic. Excellent.
spk09: Thank you, guys.
spk06: Thanks, Mark. You're next. Your next question comes from the line of Alex Furman with Craig Hellam Capital Group.
spk09: Your line is open. Your next question comes from Alex.
spk07: Hey guys, thanks very much for taking my question and congratulations on the really strong results in the quarter. I wanted to ask about the new capacity that you have coming online, and it sounds like there's a lot of demand for that, and most of that capacity has been already sold. Can you walk us through just your thought process a little bit about pre-selling that capacity? I mean, clearly you can see in the second quarter you took very substantial price on the plant-based side of your business, and imagine there's opportunities to continue to do that. as the year goes on. Can you kind of walk us through a little bit of the push and pull of, you know, the stability of having the visibility and selling all of your capacity now versus, you know, potentially upside opportunities as you get closer if, you know, maybe the pricing environment continues to rise for you? Just how are you thinking about, you know, the urgency to sell your new capacity?
spk08: Yeah, good question. I mean, the capacity we're adding in Texas is really part and parcel to our long-term strategic ambition to double the size of the business. And Texas capacity is a cornerstone to that doubling. You know, we outlined and will deliver that doubling by the end of 2025, you know, as we've communicated extensively. One of the things we outlined at Investor Day was we've sold through you know, roughly north of 50%, but closer to 50 than, you know, completely sold out for sure. I mean, one of the things we're excited about is having available capacity in Texas to be able to go out, bring on new customers, drive distribution expansion with existing customers, et cetera. So, you know, we certainly hope that we have some business development runway in front of us in Texas, and it's part of our long-term plan. we do not expect to have it completely sold out by the end of the first year.
spk09: Okay, that's really helpful. Thanks, Joe.
spk06: Your next question comes from the line of John Anderson with William Blair. Your line is open.
spk04: Thanks for the follow-up, guys. A question on protein shakes. I think you've said in the past that That's a larger category than plant-based milk. And you are bringing capacity on in Texas to serve that market. Is the supply-demand situation in that category as tight as it is in plant-based milk? And when you talk about doubling plant-based business by 2025, you know, what role does the protein shake business play and how big – Is that part of that doubling? And how big a contribution could that make to that doubling?
spk08: Thanks. Yes, our protein shake business is part of that doubling. And yes, we continue to hear repeatedly that there is a need for additional supply in that category. You know, there are a couple of publicly traded companies in that space who have talked extensively on their last couple of calls about the need for additional supply and constraints in the co-manufacturing ecosystem. So we are excited to get that project up and running in the first half of 2023. Okay.
spk04: Two quick more model-related questions. I know you haven't guided these lines, but You saw a nice sequential gross margin improvement in Q2. Given all the puts and takes you've talked about, is it fair to assume additional, you're kind of looking for additional sequential gross margin improvement, Q2 to Q3, Q3 to Q4, putting aside the startup costs that you talked about in Texas?
spk05: Yeah, John, I would say Q2 is just really, really solid performance. I certainly wouldn't be calling that up. If you hit on the head, I think the as printed, you have 200, 250 basis points ahead when coming. So I think if you exclude the effect of the startup costs, I wouldn't be calling it up. I think the name of the game here is continue to grow the business and drive adjusted EBITDA improvement with growth.
spk08: Yeah, just to underline what Scott said, I mean, we've been pretty clear that our overall strategy is driving EBITDA dollar expansion and that we intend to do that through revenue expansion.
spk04: Right, understood. And then last, I promise, in terms of the SG&A run rate, is Q2 pretty representative of where you expect things to be second half of the year?
spk05: No, good question. I think it really is, John. I would assume that Q2 is a very, very representative look of what we'll see in Q3 and Q4.
spk09: Great. Thanks so much, guys. Appreciate all the help. No problem, John.
spk06: There are no further questions at this time. I will now turn the call back over to the CEO, Mr. Joe Annan.
spk08: Well, thank you everyone for participating in our second quarter call. Appreciate all the questions and continued interest in Synopta and look forward to speaking to all of you again soon. Thank you.
spk06: Ladies and gentlemen, this concludes today's call.
spk08: You may now disconnect.
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