SunOpta, Inc.

Q1 2023 Earnings Conference Call


spk00: Greetings and welcome to SunOptis first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the prepared remarks. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Reid Anderson with ICR.
spk04: Thank you. You may begin.
spk07: Good afternoon, and thank you for joining us on Synopta's first quarter fiscal 2023 earnings conference call. On the call today are Joe Ennin, Chief Executive Officer, and Scott Hawkins, Chief Financial Officer. By now, everyone should have access to the earnings press release that was issued earlier this afternoon and is available on the investor license page of Synopta's website at This call is being webcast and transcription will also be available on the company's website. As a reminder, please note that the prepared remarks, which will follow, contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. We refer you to all risk factors contained in Synopta's press release issued this afternoon, the company's annual report filed on Form 10-K, and other filings with the Securities and Exchange Commission For a more detailed discussion of the factors that could cause actual results to differ materially, 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'd like to remind listeners that the company may refer to certain non-GAAP financial measures during this teleconference. The reconciliation of these non-GAAP financial measures was included with the company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in U.S. dollars and are occasionally rounded to the nearest million. Please note, in the prepared remarks that follow, the company will generally exclude the impact of the divested sunflower business. I'd like to now turn the call over to Joe.
spk02: Good afternoon, and thank you for joining us today. If I was to summarize the quarter in two words, those words would be continued strength. We delivered a significant improvement in profitability, with the last 12 months adjusted EBITDA now over 90 million. We continue to execute well against our five strategic imperatives, and we continue to see strong underlying trends in our core businesses, giving us a high degree of confidence in our outlook for 2023 and beyond. Let me offer some key takeaways before we begin unpacking the quarterly results. Our focused efforts to drive profitability across the company delivered a record level of adjusted EBITDA. Q1 adjusted EBITDA increased 50% to $23.6 million. Our core strategic growth areas, including plant-based milk products and fruit snacks, continued to drive strong growth in Q1. In plant-based, revenue growth remains broad-based with our plant-based milk products growing 25%. The ramp up of production in our Texas plant is progressing and will materially contribute to growth in the second half. Thank you again to the 30 plus guests who came to Texas on April 11th to see our new 285,000 square foot greenfield plant up and running. Our business development pipeline has never been stronger, supporting our long-term growth algorithm of doubling the plant-based business off of the 2020 base. We continue to see strong demand and growth in our fruit snacks business, which on an LTM basis is now almost $100 million in revenue, up from $50 million in 2020. Execution in our manufacturing plants continues to be strong and execution in general continues to be a defining factor in our performance and gives us a high degree of confidence in our outlook for 2023. Lastly, oat milk and food service continues to more than double quarter on quarter. This success is creating some reprioritization within the business as it relates to usage of our proprietary oat base and line time on our half-gallon fillers. For the total company, first quarter revenues were up fractionally from a year ago as the growth in plant-based was offset by revenue declines in frozen fruit. Our profit expansion continues to reflect growth in key strategic categories and value-added offerings, along with pricing actions and steady progress optimizing performance across our business. Consolidated adjusted gross profit, which excludes startup costs, grew more than $5 million in Q1, or nearly 20%. This improvement was a result of strategic mix shifts and strong operational performance in our manufacturing plants. We saw operational efficiency improve, we delivered best-in-class case fill rates, and we saw improvements in employee retention. Now we'll turn to our segment results, starting with the plant-based food and beverage segment, where we remain focused on three strategic priorities. Number one, strengthening and fortifying our competitive advantages. Number two, expanding the TAM of the business, including winning in oat milk and entering the protein shakes category. And three, building a multi-pronged go-to-market business model. thereby creating multiple ways to win. Plant-based segment revenues were up over 9% in the first quarter to $129 million, driven by 2022 pricing actions. We saw strong growth in our core plant-based milk products and teas, partially offset by declines in broth and ingredients, which were tradeoffs to support the rapid growth we're seeing in packaged oat milk sales. Starting with customers, we continue to see broad-based growth in the first quarter, with three of our top four customers growing by 40% or more. This is a result of both their growth and Synopto winning a larger percentage of their business. Our performance in core plant-based milk products remains strong, with revenue and volume growth of 25% and 6% respectively. These products accounted for nearly three quarters of our plant-based segment revenue. In addition, our tea business remains extremely strong with revenue and volume growing significantly as a result of us gaining supply share. Broth revenue was down 29% in the quarter as we exited a portion of our broth business specifically the portion that competes internally for half gallon line time that we use for oat milk for our largest customer. Taking a deeper look at our core plant-based milk products performance, oat remains the key driver with total oat up 33% and packaged oat milk up 89% on a 70% increase in volume. Oat was once again the largest product type in our portfolio. Coconut milk was also up significantly as our top customer continues to feature this product. We also saw soy milk grow low double digits. From a go-to-market standpoint, owned brands continued to deliver the highest growth rate and were up 59% versus last year, reflecting solid gains in both Dream Oat Barista and Sewn Organic Oat Creamers. Our command business was up mid-teens, and private label sales were up slightly, with private label plant-based milks up 31%, partially offset by broth declines previously described. While ingredient sales were off significantly, it's important to understand that packaged oat milk sales were up 101%, 46%, and 89% in the last three quarters. This continued growth in packaged oat milk has created a supply constraint on our oat base available for ingredient customers. As such, our largest ingredient customer added a second oat base supplier to compensate for our contracting available supply. We continue to support this ingredient customer, but at a lower level. This oat base, which was used for ingredient sales, will now be used in finished goods which in total is twice as profitable as selling it as an ingredient. Most importantly, this now creates a runway in both oat base and half-gallon packaging to continue to support the strong growth of oat milk in food service. We expect oat base capacity utilization to be back to full by the end of Q2, with almost all of it being used in double-touch finished goods. As it relates to extraction in general, there is a customer lifecycle dynamic between ingredients and finished goods, and we would expect the same dynamic to occur with our new Modesto extraction facility. Last month, many of you attended the plant tour we hosted at our new facility in Midlothian, Texas. As a reminder, there are four distinct phases to a project like this. Number one, construction and installation. Number two, validation and qualification of both equipment and products. Number three, startup ramp up. And number four, steady state production. The past five months have been a whirlwind of activity and we have finally completed the gauntlet of one time important, necessary, but time consuming elements of validation and qualification. And we are now excited to be shifting gears towards full-scale production on the first two lines. This Texas facility is the final piece of our broader expansion initiative to double capacity and will serve as the cornerstone of our growth agenda. Volumes will be ramping up over the next several months, including the initial production run from our 330 ml protein shake line, which started on Monday. As exciting as this is, we don't anticipate a recognizable contribution until the second half of 2023 as the initial two production lines hit their stride. We remain very pleased with our business development efforts, and with the additional capacity, we're able to support the planned growth for existing customers as well as bringing on several new customers in 2023. 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 mixed shift and innovation towards more value-added offerings. The fruit-based business segment revenue was down 10% in the first quarter, with lower volumes in frozen being partially offset by strong volumes in fruit snacks and smoothie bowls. Trends remain very strong in our fruit snacks business, with revenues up more than 20%, driven by both volume and pricing. In addition, we delivered another solid quarter of margin improvement in fruit-based, led by mixed shift, pricing, along with driving efficiencies in frozen fruit. First quarter, fruit-based gross profit was flat to last year on $10 million less revenue. We continue to see new growth opportunities and are very excited for our snack capacity expansion to come online in Q3, which will enable a 40% expansion of the business over time. Lastly, I'd like to make a couple comments about our ESG initiatives as we continue to make significant progress on this journey. Focusing on our new Texas facility, it was very much designed with sustainability in mind, using energy and water saving features and using recycled materials as some of you saw firsthand last month. The Texas location will help save 15 million freight miles annually from our supply chain, eliminating 59 million pounds of carbon emissions. I'm also excited to share that we published our comprehensive ESG report on May 4th, highlighting progress across the business. This report is available on our website. In summary, the first quarter once again proved the power and resiliency of our model to consistently deliver strong profitability. Our go-to-market flexibility, expanding capacity and leverageable platform provide a demonstrable competitive advantage that has proven highly durable. Our outlook for 2023 is unchanged, and 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 I'll turn the call over to Scott to take us through the rest of the financials. Scott?
spk01: Thank you very much, Joe, and good afternoon, everyone. First quarter revenues of $224 million were up slightly versus last year. Plant-based revenue increased 9% with pricing up 10% and volume 1% lower. Fruit-based revenues were down 10% as growth in fruit snacks was more than offset by lower volumes in frozen. It's important to remember that we called out in the first quarter of 2022 a significant one-time order from a major frozen fruit customer that was not repeated, so the comparison is somewhat skewed. Gross profit, as reported, was $28 million. Removing the $6 million of startup expenses, gross profit was $34 million, up 18%. Consolidated gross margin was up 80 basis points to 12.6%, as reported. despite the impact of 260 basis points of startup costs. On an adjusted basis, removing the impact of startup costs, gross margin improved 320 basis points to 15.2%. In plant-based, segment level gross margin was up 60 basis points to 15.6% and would have been 470 basis points higher or 20% excluding startup costs for Texas. The increase in gross margin reflected approximately 170 basis points of benefit from the divestiture of our low margin sunflower commodity business, combined with operational efficiencies and the positive gross profit and margin impact of a favorable mix shift. In fruit based, segment level gross margin increased 80 basis points to 8.5%, mainly driven by strong revenue growth in fruit snacks, partially offset by a higher mix of lower margin bulk frozen fruit sales. Earnings from continuing operations were 1.4 million compared to 1 million in the prior year period. Adjusted EBITDA increased over 50% to 23.6 million and was up 400 basis points as a percent of consolidated revenues to 10.5%. Turning to the balance sheet and cash flow. As of Q1, total debt was 326 million with leverage of 3.6 times down slightly from Q4 and in line with our target leverage of two to four times. We continue to expect to be within that range at year end with the first half of the year toward the high end of the range followed by improvement as we continue ramping the production capacity that came online over the last couple of quarters. Cash provided by operating activities during the first quarter of 2023 was $4 million, compared to $16 million in the prior year, primarily reflecting an increase in working capital resulting from payables timing. Cash used in investing activities was $25 million and flat to last year. we would expect a significant step down in capital expenditures for the balance of the year. Let me close with comments on our outlook, recognizing the environment remains very fluid. From a guidance standpoint, we are reaffirming our prior outlook, introduced on our Q4 call, expecting revenue in a range of $1 billion to $1.05 billion, representing 14% to 20% growth. We are expecting adjusted EBITDA in a range of 97 to 103 million, which represents 16 to 23% growth. We expect the pacing of both revenue and adjusted EBITDA in 2023 to be a roughly 45-55 split in the first and second half of the year, with the back half benefiting from the ongoing ramp up of our growth initiatives. Reflecting on the business dynamics that Joe outlined, we thought we would provide some color that we would expect Q2 revenue to look a lot like Q1 revenue. Finally, we would expect to incur 5 to 7 million of additional startup costs related to our capital expansion projects, with the flow being approximately 4 million in Q2 and 1 million each in Q3 and Q4. From a balance sheet and cash flow standpoint, we would expect capital expenditures on the cash flow statement of roughly 35 to 45 million, assuming no material new growth investments. Free cash flow is expected in a range of 25 to 35 million, with year-end leverage in the low to mid threes. Each of these estimates are consistent with our outlook provided on the Q4 call and with what we laid out at our investor day in June of 2022. As a reminder, the investment, cash flow, and leverage outlook assume no newly identified growth investments. That could change in 2023 as we assess further investment opportunities in Texas, for example. 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.
spk00: At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Your first question is from the line of Andrew Strelzyk with BMO. Your line is open.
spk09: Hey, good afternoon. Thanks for taking the questions. I guess I'd like to start on the exit of the broth business and also the transition with the ingredient customer. I guess what I'm trying to figure out is how much that impacted your 1Q and maybe how you're thinking about 2Q, whether from a sales or an EBITDA perspective. Was there a mismatch on broth? It sounds like there was maybe on ingredient. And how long some of that lasts for?
spk02: Sure, so to summarize simply, it'll be a first half headwind, second half tailwind. The impetus for the change and the thing that we are executing is we have the opportunity to increase our market share to deliver long-term growth with our largest customer in oat milk. And in order to do that, we needed to free up both oat base and half gallon packaging to be able to serve our largest customer. And so we needed to make those pivots. So we didn't exit broth completely, we just exited one of the two sizes of broth that we do in that category. So we do a 32 ounce and a 48 ounce. We exited the 48 ounce because it shares the packaging line time with the half gallon. Maybe more detailed than you wanted, but the details are important there.
spk09: No, that was perfect. That was exactly what I needed. Thank you. And then I guess the other question, you continue to have really strong growth among your top customers. I think you said three out of four growing 40% plus this quarter, I guess. And I think at the event down in Texas, you said you had 100 customers. And I think I might have asked this, but I'll ask again. I mean, how is that impacting your, how you're managing your customer base? Are you having to reprioritize, you know, even more? Is there more of this on the horizon? Obviously, you have a lot more capacity coming online. But again, I'm just curious how you're thinking about managing the customer base. Thanks.
spk02: Yeah, so the 100 was a reference to all customers, which includes frozen fruit, fruit snacks, plant-based, the whole business. And there are quite a few customers. It's a fairly long tail on the oat-based, the ingredient sales side of things. So in core plant-based milks, it's a more concentrated list, and we would not expect to have to make a pivot like this, especially with Texas capacity coming online. We don't anticipate the needs to make any kind of big shifts other than the one just described. And again, you know, that is our largest customer. And, you know, we're simply prioritizing the most strategic, stickiest business that we have.
spk03: Makes sense. Thank you very much.
spk04: Your next question is from the line of Bobby Burleson with Canaccord.
spk00: Your line is open.
spk06: Great. Thanks for taking my questions. So I was just curious, with Midlothian as that ramps, and you talked about a more meaningful contribution in the second half, can you maybe just give us a sense for what the dollar growth contribution might be of that facility to your overall plant-based revenue in the second half?
spk01: Hey, Bobby, it's Scott. We refrain from sharing too much in the way of plant-level or line-level economics. Probably the easiest way to think about it would be, if you think about 2022, stripping out sunflower, plant-based business was around a $500 million business. And we've pretty consistently said we would expect, on average, circa 15% growth per year. Obviously, Texas, then, to your core question, would be a meaningful part of that journey. But it's not all of the journey, because recall, we had a handful of other projects we've executed.
spk06: OK, thanks for that. And then, clearly, your customers are outgrowing growth in the plant-based milk category that we're seeing out there. and you, as a result, are also outgrowing that growth, maybe characterize where that share gain is coming from. Is it simply the outperformance with an OAT, or is there something more nuanced happening maybe across other formats?
spk02: I think there's a couple things to appreciate, Bobby. Number one is we're seeing significantly higher growth rates in non-tracked channels than tracked channels. And as it relates to our business model, we would estimate roughly two-thirds of the business flows through non-tracked channels. Second, we've been very public about communicating that we want to win without. You know, we've taken that business from circa a million dollars of sales in 2019 to 120 million last year. So we are certainly winning in the winning segments. We're winning in non-track channels. And the third piece, which is hard to report out on, but we are gaining share within the supply base. So, you know, we have customers who have more than one supplier, so they would use Synopta and someone else. And as we've added capacity, as we've consistently demonstrated, you know, great customer service, product quality, cost containment, et cetera, that is affording us the opportunity to win a larger percentage of their business.
spk03: Great. Thank you.
spk00: Your next question is from the line of Ryan Myers with Lake Street Capital Market. Your line is open.
spk08: Hey, guys. Thanks for taking my questions. First one for me, I'm curious what kind of feedback you guys have gotten from your existing customers so far as you guys have begun to ramp the 330 ML production line. Does it seem like they're pretty excited to see that getting kicked off and kind of how they're thinking about the demand for that product?
spk02: Yeah, so great question. We hosted the entire management team of the principal customer that we'll be partnering with on 3.30, I think three weeks ago. Super pleased with the progress. It's been very collaborative and very supportive. As I mentioned, we started the very first saleable production on Monday. So, you know, this is definitely going to ramp over time. But, you know, we're excited to get going. So far, so good. And, you know, we have a lot to learn in this space. So we're approaching it with a fair amount of humility and understanding that, you know, we're going to learn. But the partnership has been really incredible. They've been incredibly supportive.
spk08: Got it. That's helpful. And then, you know, as you've ramped the 330 ML and maybe some other, you know, adjacent product categories, have you seen any inbounds from new customers that are, you know, interested in what you guys have going and the fact that you can sort of fill the demand and the capacity there?
spk02: Yeah, it, you know, it is, sorry, the second part of your question, I didn't really touch on your first question. So, you know, we continue to see very, very strong growth rates in tract channels for protein shakes and protein beverages and you know it is a supply constrained category so not surprising as the knowledge of us putting 330 ml and getting into that space has gone out into the market we have received a large number of inbound calls of people interested in working with us so you know at the moment that 330 ml production line, all of the volume is spoken for. But if and when we were to put in a second system, we feel like there is certainly robust demand in the marketplace to fill that.
spk08: Great. Thanks for taking my questions.
spk00: Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question is from John Anderson with William Blair. Your line is open.
spk05: Hey, good afternoon, everybody. I wanted to ask on the Texas, I think it's line two or the second line to come up, which is part of the TAM expansion into 330 milliliter. From an industry perspective, it's a supply constrained industry right now. Is this Texas location unique or geographically advantaged, you know, from a From an industry perspective, I guess, does it, you know, put production in a place where there hasn't been production historically? Yeah, I'm just trying to get a sense for that, whether there's kind of a bigger value proposition here to this particular customer that you're partnering with and maybe others down the road.
spk02: Yes, John. Texas is and was a very strategic choice in that regard. As it relates to 330 milliliter production, there are other co-manufacturers around the U.S. I believe the nearest one to Texas is in the kind of southern Midwest. Um, but Texas being the second largest state in the union, uh, and one of the fastest growing, as you might expect, um, all of the brands have pretty big and robust businesses in Texas. It is a heavy product to ship. And so having production and manufacturing in Texas, uh, certainly represents supply chain savings, uh, for our customers and, and, um, you know, also additional capacity. So it's a double win in that regard. It's capacity to fulfill the unmet demand that they have, as well as it should afford them some supply chain cost savings, not having to ship the product from, you know, several states away. Thanks.
spk05: I think there was, I think Scott may have mentioned during the prepared remarks on guidance that we should expect the Q2 sales comparable to Q1. I'm assuming that was in dollar terms, and that would kind of imply an upper single-digit revenue decline year-over-year in Q2. Am I reading that right? And what are some of the puts and takes there that would cause that?
spk01: Hey, John, it's Scott. Thanks for the question. So you heard the statement correct. So what we're trying to point out is we would expect on a dollar revenue basis, Q2 total company to look a lot like Q1, so to make the statement. A couple of puts and takes. The headwinds, as I think Joe laid out, was we'd have that continuing diminution from the broth and ingredients business as we make that pivot. We also will have, like we do every year, a sequential Q1 to Q2 decline just in the absolute consumption abroad. Not very popular in the summer, as you know. When you were talking about percentages, though, don't forget we've got a back-out sunflower from the last year numbers. You know, so as you're calculating growth rates, we think about the comp being higher.
spk05: know last year's number x of sunflower compared to this year's number x of sunflower this is a reminder that's helpful thank you um let's see um so it if i was to kind of boil down the transition that's going on i mean you're essentially kind of your capacity constrained right now you're making some decisions around how to allocate that capacity to the highest value you know biggest opportunity customers and then those capacity constraints get relieved in the second half of the year as Midlothian scales, and there's a step change in the revenue run rate in the back half of the year. Is that fair?
spk02: Yeah, very fair. And as Midlothian ramps, but also, John, don't forget, we also have oat extraction or extraction coming online in Modesto at the end of Q3, which will also bring a relief valve to some of the oat-based constraints.
spk04: Super helpful. Okay. Thanks very much. There are no further questions at this time.
spk00: I would now turn the call back over to Mr. Joe Lannan.
spk02: Great. Well, thank you everyone for your interest and attention this afternoon. Look forward to hearing and connecting with all of you again soon. And again, thank you and have a good evening.
spk00: Ladies and gentlemen thank you for participating. This concludes today's conference call. You may now disconnect.

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.