SunOpta, Inc.

Greetings and welcome to Synopta's third 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, and that is Reed Anderson with ICR. Thank you, and you may begin.

Good afternoon, and thank you for joining us on Synopta's third quarter fiscal 2023 earnings conference call. On the call today are Joe Annan, Chief Executive Officer, and Greg Gaba, 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 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 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 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 with the company's press release issued earlier today. Given the divestiture of a frozen fruit business in the third quarter of 2023, the company has changed reporting structures and is now reporting as a single operating segment. Also, please note in the prepared remarks that follow, unless otherwise stated, the company will be referring to the continuing operations portion of the business, and all figures are in U.S. dollars, occasionally rounded to the nearest million. I'd like to now turn the call over to Joe.

Good afternoon, and thank you for joining us today. First, let me say welcome to the new Synopta. With the divestiture of the frozen fruit business, we have completed the heavy lifting around our portfolio transformation that began in 2020 with the divestiture of our global ingredients business, the sunflower business in 2022, and finally, frozen fruit last month. Over the last several years, we've been very focused on aggressively investing in our plant-based and snacks businesses, and the results of these investments are now more obvious. The new Synopta is a focused, high-growth, competitively advantaged business operating in very attractive categories. Let me give you a few facts about the new Synopta. On a pro forma basis, factoring in our Q4 outlook, In the last 36 months, the new Synopta has grown revenue approximately 40% and EBITDA has grown 45%. Over this time, our EBITDA margins have consistently been in the 10 to 12% range. We have achieved this impressive growth in revenue and EBITDA in a highly efficient manner with SG&A only up 5% in those 36 months and SG&A has declined as a percentage of revenue every year for the last three years. Additionally, going forward, the divestiture has reduced the working capital needs of the business by over $100 million. The capital investments we made in 2021 and 2022 have been fueling this revenue and EBITDA growth, and we are excited about the future growth prospects for the new Synopta. as we further optimize the investments we have made. It is worth noting that Texas was half the investment quantum and has not yet contributed to EBITDA, thereby supporting continued EBITDA growth as Texas pivots from startup mode to delivering cash flow. I will now share our strategic priorities going forward. First, operational excellence. We are focused on sweating our assets to gain maximum value from the investments we have made to fuel growth organically. We believe there is significant opportunity to do this over the next several years. Second, capital allocation. We have come out of a large investment cycle and we are focused on demonstrating and creating strong returns for shareholders. And third, growth. We are a growth company and our focus is on share gains with existing customers adding new customers, and TAM expansion. Now let me offer some key takeaways on the Q3 results. We had solid volume growth. We had 5.5% volume growth in Q3, and importantly, Q4 is looking even stronger as momentum builds. Our growth was fueled by three things, share gains with existing customers, new customers, and TAM expansions. FruitSnacks had another strong quarter of volume-fueled growth, and with our capacity expansion that came online at the end of Q3, we expect continued strong growth. Adjusted EBITDA increased 8% to 19 million as volume flowed through to EBITDA. At this point, all 2023 new business customers are in production and will positively impact growth in Q4 and 2024. Additionally, we have a strong pipeline of new business opportunities for the second half of 24 that we are aggressively working to close. We are reaffirming 2023 guidance, adjusting for the sale of frozen fruit, and projecting high single to double digit volume and revenue growth in 2024. In terms of details around the Q3 results, in beverages and broth, which is all of our packaged plant-based milks, teas, broths, and protein drinks, revenue increased 9% to $123 million. This product group represents 80% of our Q3 revenue. The 9% revenue growth came from a 6% increase in volume, resulting from share gains with existing customers, new customers, and TAM expansions. We saw growth in oat milk, creamers, teas, and of course, protein shakes. Our fruit snacks business continued to deliver very strong growth with revenues up 16% to 24 million, driven completely by increases in volume and led by private label growth. Q3 marks the 13th consecutive quarter of double digit growth for our fruit snacks business. For the total company, from a go-to-market standpoint, we saw very balanced growth with positive gains in co-manufacturing, gains in private label, and the fastest growing part of the business continues to be our own brands. The only go-to-market approach that was down was outside ingredient sales, resulting from the strategic shift we outlined in Q1 to prioritize internal use of oat base versus selling it externally as an ingredient. Here are a few comments on category performance for some of our major categories. From a category performance standpoint, we see a similar dynamic across plant-based milks, snacks, and broth, which is tract channel performance being flatter down in volume and non-tract channels performing strongly. Since there have been a lot of questions about plant-based milk category performance, we have made an internal estimate of total category performance based on all the channels And our aggregated estimate is that the total shelf-stable plant-based milk category is up low single digits in Q3, driven by food service and untracked club stores, despite tract channel category volume being down. It may be surprising to know that we estimate that the food service coffee shop channel consumes three to four times as much shelf-stable plant-based milk as all of tract channel retailers combined. One track channel bright spot last quarter was health and performance beverages, aka protein shakes. This category was up 18% in units with performance nutrition up 38%. Our major capacity expansion projects continue to show steady progress and we are tracking largely as expected. The new capacity at our snacks production facility in Olmec, Washington came online in the third quarter as planned. Once fully ramped, this expansion will create a 40% increase in our total fruit snacks capacity. Production continues to ramp at our Midlothian, Texas facility with output on the first two lines approximately 60% of the way to ideal state. Texas production continues to meet customer expectations and we feel good about the demand environment for utilizing the Texas capacity. The two lines we commissioned this year are now shifting to running 24-5 and 24-7 respectively, and the third line will come online in Q1. The focus continues to be on improving output and efficiency of these new lines to fully realize the volume potential in 2024 and 2025. Lastly, as we referenced on the Q1 2022 call, we have now completed construction of a new oat extraction capability in Modesto, and we will begin commissioning and production in the first half of 2024. With the divestiture of our frozen fruit business, we are at an inflection point and think it is a good time to outline in more detail our capital allocation priorities. Historically, our approach and target metrics were heavily influenced by the capital needs of our different lines of business, which did not allow for much flexibility. That changes with the divestiture frozen fruit. Our working capital needs are significantly reduced. This fact, combined with anticipated growth and lower internal investment needs over the medium term, will result in increased free cash flow thereby giving us more optionality for returning value to shareholders. Greg will cover this in more detail in his section, but it is a very important point and truly an inflection for Synopta that we feel is underappreciated today. Given the new, more focused portfolio, let me share a preliminary view of our outlook for 2024. In 2024, we will see steady, strong growth across the year with both volume and revenue growth in the high single-digit to double-digit range, specifically 8% to 13% volume in revenue growth. EBITDA will grow faster than revenue, with adjusted EBITDA growth expected to be in the 14% to 21% range. This is our core business forecast. And in addition to this, we have a very strong pipeline of new business development opportunities for the second half of 2024, which we will be able to update during the Q4 call. I will end by commenting on previously communicated forecasts. We have previously communicated a mid-term target of $150 million of adjusted EBITDA. This number would have included approximately $25 million for frozen fruit, as you can infer from the bridges presented in both 2022 and earlier this year. The 125 million for plant-based plus snacks represented full utilization of the network, and this number is still valid. As to when we see the network being fully utilized again, that is something that is informed by new business, but likely by 2025 or 2026. In summary, we continue to execute well against our strategic priorities and are well positioned to deliver significant growth and improved profitability as we leverage our flexible model and expanding capacity to fuel the future of food. In a moment, I'll turn the call over to Greg Gaba, who was appointed CFO in mid-October. Many of you know Greg and have interacted with him previously in his prior capacity as Deputy CFO. Greg has been with Synopta for over six years and has consistently provided critical financial insights and played a pivotal role in achieving our business goals. He has a strong background and extensive knowledge of our business, and I'm thrilled to have him lead our finance organization. Greg?