Brian Holland: Yes. Sorry, appreciate the color, Brian. So I’m probably going to move on.
Brian Kocher: Sorry, man.
Brian Holland: Yes. Thank you very much.
Brian Kocher: All right.
Operator: Your next question is from Ryan Myers with Lake Street Capital Markets.
Ryan Myers: Hi guys, thanks for taking my question. It sounds like the growth was broad-based, but I’m curious as you communicated that prices have come down a little bit. I mean, have you seen any improvement in the track channels? And I know that’s the smaller portion of revenue, but just kind of curious what the dynamic of that is?
Brian Kocher: Ryan, appreciate the question on track channels. We have seen, I wouldn’t say go so far as to say we’ve seen improvement in the track channels. You see a little bit of volatility. You see a little bit of promotion. I think one of the advantages of SunOpta is our customer relationships with winning customers. And what winning customers look like to me are those that are innovating, those that we can co-develop solutions for, those that are investing behind their brands, and those that ultimately are growing faster than the category. And if you look at all the brands that we support in track channels, the brands we support are growing and performing, performing 300 to 400 basis points better than the category, whether it’s in the 52-week look or the 26-week look. And I think that’s one thing that, again, creates a little bit of divergence between how we can perform versus the overall track channels, positive divergence, by the way.
Ryan Myers: Okay. Yes, no, that’s helpful to understand. And then, it didn’t sound like there was a lot of this during the quarter, but I am curious if there’s any way that you guys can quantify new customers or any sort of impact in putting new customers on board?
Brian Kocher: Yes, I think I mentioned at the beginning of Q&A, if we split revenue growth between TAM expansion or share of wallet gains with our existing customers and new customers, the growth with existing customers was probably the largest of those three, but it was relatively broad-based.
Ryan Myers: Got it. Thank you for taking my question.
Brian Kocher: Sure.
Operator: Our next question is from the line of Andrew Strelzik with BMO.
Andrew Strelzik: Hi, good afternoon. Thanks for taking the questions. I wanted to maybe go back to some of the supply chain opportunities that you’ve talked about, which I know you’ve already addressed several times here, but I wanted to try again. And maybe thinking about the 2025 outlook that had been provided, obviously well before you joined and started attacking a lot of the supply chain opportunities. And so I guess what I’m curious about is, is it fair then to think that whatever that contributes or materializes into, whatever that bucket looks like, would be incremental to the guidance that was put out there for 2025, or is that not a fair way to look at it?
Brian Kocher: Yes, Andrew, I think the way I would look at that is the guidance, which again, we thought we could get to $125 million EBITDA run rate at the end of 2025, beginning of 2026. That included some revenue growth. It certainly included some margin expansion. In fact, if you look at the last time SunOpta plants were full, it was about a 20% gross margin, and we expect again when we’re “full” sort of at the end of 2025, beginning of 2026, that we would be right around that 20% gross margin amount. So that is all baked into, I would say, baked in or considered is probably a better word in that $125 million guidance. Now, longer term, Greg and I have both spoken publicly about our opportunity to maybe get a little bit better than 20%, because again, you are never finished on supply chain initiatives, supply chain efficiency, and supply chain effectiveness. So that’s one thing I can guarantee you we’ll never stop working on.
Andrew Strelzik: Okay.
Brian Kocher: So, hopefully that in terms of the $125 million midterm guidance?
Andrew Strelzik: Yes, I mean, I guess it sounds more incremental than that, but that is helpful context for sure. And then I guess my other question is just about capital allocation. And I know you talked about 2Q, debt levels are going to go up, leverage is going to go up, but you’re not far away from a timeline perspective from getting to your leverage targets that you seem very confident in achieving. So you talked about some capital projects that are under consideration. I’m just curious if you could kind of elaborate on what you’re thinking about there and any other, and any other, I know you’ve talked about whether it’s M&A or buybacks, how you kind of rank order some of those opportunities once you do get to those leverage targets?
Brian Kocher: Yes, Andrew, thanks for the question. So our capital allocation strategy remains the same, right? So once we get that under three times levered, which we believe will be by the end of this year, we will look at three things. We’ll look at attractive ROI projects, we’ll look at potential share buybacks based on the stock price at that point in time, or attractive M&A deals. So those continue to be the options, we continue to evaluate every day. And once we get there towards the end of the year, we’ll give you a further update.
Andrew Strelzik: Okay, nice try. Thank you very much.
Operator: Your next question is from the line of Daniel Biolsi with Hedgeye.
Daniel Biolsi: Hi, thanks for the question. So from your vantage point, what have you seen from price increases in the food service channel and what that has done to their demand? Can you follow that when they’ve raised prices, has that impacted demand, or do you see that in another way?
Brian Kocher: Thanks, Daniel, for the question. I think there probably are some impacts in food service with increased prices what you see, maybe on what I’ll call the less frequent or the fringe consumer. What we see more and more are food service providers planning for promotional and limited time offers. And I think that’s an area that we can really help our customers. We can deploy our 20 plus food scientists to help engineer new recipes. We can help them with a broad-based supply plan. So I think it’s kind of a two tails of the story, Daniel, is yes, the category may have some fringe users that are, let’s say, a little bit more price sensitive than your frequent or target users, but even our customers are targeting promotional activity to help drive growth across the network and across the category.
Daniel Biolsi: Thanks, Brian. So new contract wins were part of the upside in the quarter, but are you not including that continuing in the second half with the raised guidance you had today?
Brian Kocher: No, no, sorry, Daniel. Thanks for the clarifying question. That’s really good because we don’t want to miscommunicate. I think what we’re trying to say is, remember, we’re still guiding for the year. I think midpoint is 9% revenue growth. Midpoint is 11%, sorry, 11% revenue growth. So we’re still guiding for a pretty hefty revenue growth year-over-year. And I think what we were trying to articulate is the business development efforts that were announced in ’23 and the timing was maybe a little off, you’re seeing the benefit of that in ’24 and you will continue to see the benefit of that in ’24 for us to achieve our midpoint 11% revenue growth.
Daniel Biolsi: Okay. That makes sense. And then, if I could ask one last question for Greg, just what’s behind the inventory reserves? Is that just spoilage or?
Greg Gaba: Yes, great question, Daniel. So yes, as you know, we mentioned that our output has significantly increased in our plans versus prior year rate of 20% versus prior year. However, we need to get, and there’s opportunity to improve our efficiency of that output. And we did have a little bit more waste than what we wanted and we’re working on getting better.
Daniel Biolsi: Okay. Thank you.
Brian Kocher: Thanks, Daniel.
Operator: At this time, there are no further questions. I will now hand today’s call over to Brian Kocher for any closing remarks.
Brian Kocher: Thank you very much. I’d just like to take a couple of minutes to summarize our key messages. If you only take three things away from this call, please think about these three. First and foremost, we are a growing company in growing categories. In addition to the growth that we naturally see from our customers, our blue chip customer base, we’re growing share with our existing customers, we’re bringing on new customers, and we continue to grow via TAM expansion. Our revenue stream is diverse and resilient. Remember, in this quarter alone, our top three customers grew double digits. Each one of them grew double digits. Our food service channel revenue increased by 11% in the quarter. And almost every way you slice our revenue, we grew in Q1 of this year.
And that’s how you grow a quarter by 18%. So one is revenue growth. Secondly, we will never stop working on supply chain excellence. We’ve talked about it in the Q&A. I’m proud of the increased production we’ve had in the quarter. Plus 20% is not easy. That’s how much we’ve increased output in the quarter with our existing plans. We will continue to tighten and sharpen our other supply chain processes, and we expect to see that roll into our performance in the balance of the year, in both margin improvement as well as supply for future growth. So that’s the second thing. Finally, I would just like to remind people of our strategy on communicating guidance. We have visibility in the market trends, and that informs our guidance. However, visibility into actual order demand by customer, order forecast in the longer term by customer, customer innovation initiatives and activities, customer promotional activities, that’s what inspires and generates our guidance.
So remember, our communication philosophy is to communicate what we have visibility to in terms of customers, products, and timing versus what we hope happens. With that, operator, we can adjourn. Thank you very much for joining us, and Greg and I look forward to updating you on our progress throughout the year.
Operator: This concludes today’s call. Thank you for joining. You may now disconnect your lines.
