SunOpta Inc. (NASDAQ:STKL) Q4 2023 Earnings Call Transcript

SunOpta Inc. (NASDAQ:STKL) Q4 2023 Earnings Call Transcript February 29, 2024

SunOpta Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to SunOpta’s Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to your host, Reed Anderson with ICR. Thank you. You may begin.

Reed Anderson: Good afternoon and thank you for joining us on SunOpta’s fourth quarter fiscal 2023 earnings conference call. On the call today are Joe Ennen, Former Chief Executive Officer, retired at the end of 2023 and is serving in an advisory role through the end of the first quarter; Brian Kocher, who was appointed Chief Executive Officer effective at the start of 2024; 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 of SunOpta’s website at www.sunopta.com. This call is being webcast and its transcription will also be available on the company’s website. As a reminder, please note that the prepared remarks which 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 SunOpta’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 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. Also, please note in the prepared remarks to 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. Given Joe’s tenure as CEO fully encompassed the fourth quarter, Joe will speak to quarterly results before turning the call over to Brian. Joe?

Joe Ennen: Good afternoon and thank you for joining us today. As most of you know, this will be my last SunOpta earnings call. It’s been great getting to know all of you over the past several years and I’ve enjoyed our interactions. Today SunOpta is a much different business than when I started in 2019. The journey from beginning to end was incredibly rewarding, and it is exciting to be reporting a strong fourth quarter today, along with a solid outlook for 2024. Our results demonstrate the power of our platform and it’s clear that the new SunOpta is a highly focused growth company that leverages its differentiated model to participate in some of the industry’s most attractive categories. For today’s call, I am going to cover the highlights from Q4 and then turn it over to Brian to discuss his views of the business, priorities and the outlook.

Greg will follow with a review of the financials and then we’ll take your questions. Now let me offer some key takeaways from the fourth quarter results. Overall revenue growth was volume-driven and very strong. For the quarter revenues increased 14% year-over-year, a sharp sequential acceleration from the 6% increase we delivered in Q3 and in line with our long-term growth algorithm. Growth continued to be broad based. We continued to see similar growth rates from each of our 3 primary growth levers, share gains with existing customers, adding new customers and expanding our total addressable market. Plant-based milks, led by oat-based offerings, had another strong quarter of growth, including significant gains in foodservice. Of all our product groups, fruit snacks had the highest growth rate for the quarter at 31%, reflecting strong customer demand that leveraged our expanded capacity.

Adjusted EBITDA increased 17.5% to over $22 million as higher utilization of capacity investments further leveraged our volume-driven revenue growth to increase profitability. We had the best quarter of the year in terms of plant operations, as all four of our plant-based milks facilities performed well in meeting the strong customer demand. Last week, we signed an agreement to sell our frozen smoothie bowl business for $6 million. This small business was our last remaining frozen asset and the supply chain had become highly inefficient after the divestiture of frozen fruit. Lastly, we continue to have a strong pipeline of additional growth opportunities. Now let me offer some additional color on the Q4 results. In the beverage and broth product group, revenues increased 19% to $147 million.

The growth was over 100% attributable to volume and mix, reflecting share gains with existing customers, the addition of new customers and TAM expansion. This product group represented 81% of our Q4 revenue. Growth in oat milk was incredibly robust and remains a key driver as it has been for over 3 years. We also delivered sizable gains in creamers and tea along with continued ramp up of our protein shake business. By the end of Q2, we should be close to our end state run rate on this line. The operations and R&D teams have done an outstanding job in scaling our new plant in Texas, truly an impressive accomplishment. In fruit snacks, revenue was up 31% to over $27 million, driven by volume growth, which was enabled by our capacity expansion in Omak, Washington that came online late in Q3.

This was our 14th consecutive quarter of double-digit growth for our fruit snacks business. From a go-to-market perspective, trends remained similar to what we’ve seen throughout the past several quarters. Our own brand continues to deliver the highest growth rates, followed by our contract manufacturing business. Private label was down in Q4 due to competitive dynamics in the broth category as we foreshadowed on the Q2 call. The decline in our ingredient revenue stemmed from the strategic shift we have discussed several times to prioritize the internal use of oat base versus selling it externally as an ingredient. We continued to see the P&L benefits of that shift and it was a major contributor to the 19% in beverage and broth growth. Now I’d like to touch on overall category performance for our major businesses.

Looking at the plant-based milk category in tracked and untracked channels, we estimate the category grew mid-single digits. Recall that much of our revenue is derived from untracked channels. In Q4 we continued to see very strong trends for plant-based milks in the foodservice channel, which as a reminder, we estimate to be at least 4x larger than all of tracked channels. Also, protein shakes continued to show very robust growth in tracked channels, up 40% in the last 13 weeks versus prior year. In closing, I’d like to thank investors for your support and all of our employees for your passion and tenacious execution of our strategies. When reflecting on the past 5 years, I’m extremely proud of the transformation of the company. We optimized the portfolio by divesting our commodity-based businesses to focus and invest in high growth, competitively advantaged businesses operating in very attractive categories.

We have built a great team with a great culture and we live our sustainability values every day. We have delivered results. On a pro forma basis over the last 5 years, the new SunOpta has more than doubled revenue and adjusted EBITDA has quadrupled. I look forward to the continued success of the new SunOpta under Brian’s leadership as we continue to fuel the future of food. With that, I’m going to pass the call over to Brian. Brian?

Brian Kocher: Thank you, Joe and thanks everyone for joining us on the call today. I want to start by saying how excited I am to be a part of SunOpta and grateful for the opportunity to lead this company in its next chapter. I’d also like to recognize Joe and the transformational change he drove over the last 5 years. The new SunOpta is the culmination of Joe’s leadership. As a result of those efforts, we are a stronger, more focused company with a clearer long-term growth trajectory. Joe, you should be very proud of your leadership at SunOpta and we are definitely proud of you. Thank you for your impact and thank you for your continued support. As I have discussed with many of our shareholders over the last 2 months, I’m excited about the future of SunOpta for several reasons.

First and foremost, I love the categories in which we play. Our categories are growing and we have an excellent customer base to fuel further growth. Secondly, the timing was right from a strategic perspective. Joe and his leadership team transformed the portfolio from largely commodity based to one that is purely value add. SunOpta then deployed significant capital and we are now leveraging that capital for growth. In short, the SunOpta CEO role is migrating from one of portfolio transformation to a role where operational excellence is the next unlock for volume and profit growth. That fits with my strengths perfectly. Thirdly, the new SunOpta has already demonstrated several years of growth. With the portfolio transformation now complete, you can see the power of the core business.

Over the last 36 months, revenue has grown 40% and adjusted EBITDA has grown approximately 60%. We are a growth company focused on growing categories and I’m excited to lead our next chapter of growth. Additionally, every strand of this company’s DNA is built on doing good by our customers, the environment and the communities in which we work and live. We are blessed to operate in food and beverage categories were doing right for our products and our customers is 100% aligned with doing right for our environment and I’m proud to be associated with a company that lives its sustainability values. Lastly, and probably most importantly, the culture, people and values of the company were a great fit for me personally. Once I joined SunOpta and started meeting everyone, it was clear that there is an everyday passion within the entire employee base that exceeded my expectations.

The culture is great and it is a core differentiator for the company. Next, let me provide you with an update from my first couple of months. I’ve been able to align with the Board on priorities as well as validate my initial views on the business. I understand the underlying growth drivers and believe they are sustainable and enduring. After digging into all key aspects of our business model and spending a lot of time working with the leadership team, I’ve grown increasingly more excited about SunOpta’s potential. I understand the demand trends and have greater visibility into the sales pipeline. I’ve had a chance to see the improving throughput and efficiency trends in our facilities. I’ve even seen our capacity expansion plans for oat base in Modesto and the third production line in Texas.

These projects are progressing, and I’m excited about their ability to contribute to long-term growth. All of this have solidified my confidence in our 2024 outlook as well as my confidence in the overall trajectory of our growth. The fourth quarter provides an early look of what is possible as we continue to execute our growth plan and focus on operational excellence to drive increasing rates of return. All the initiatives that helped to shape and transform the business over the past several years under Joe’s leadership have clearly positioned us as a growth company. When taken as a whole, these observations give me strong confidence in our operating model and our sales momentum in the New Year. In fact, I am so confident that I am reaffirming our outlook for 2024.

Actually, reaffirming our outlook is effectively raising as we did not adjust for the divestiture of the smoothie bowl business, which contributed $12 million of revenue in 2023. I am confident in the guidance due to the momentum and the competitively advantaged business model that we’ve built. After my discussions with the team, seeing the pipeline on the horizon and validating those observations with our Board, I am also confident in our plan to deliver $125 million of adjusted EBITDA run rate by the end of 2025 or in early 2026. I’d like to take some time to reaffirm our strategic priorities. Number one, increasing the efficiency and the effectiveness of our supply chain. We have invested in capacity and deployed capital. Now we need to ensure we are driving operational improvements with the daily relentlessness.

We need to operate our plant and physical assets highly efficiently to optimize the demand-side momentum. Number two, drive growth. Continue our trajectory via share growth with existing customers, new customer acquisition and TAM expansion. And finally, remain focused and disciplined in executing our capital allocation priorities, of which deleveraging is currently the number one priority. In summary, SunOpta is a growing company in growing categories and is focused on supply chain excellence to leverage in its installed base of assets. We’re focused on driving margin enhancement through volume growth and operational efficiencies, and I look forward to updating you on our progress throughout 2024. Now I’ll turn the call over to Greg to cover the fourth quarter in more detail.

Greg Gaba: Thank you very much, Brian, and good afternoon, everyone. We had a strong fourth quarter. Revenue of $181.6 million was up 13.7% versus last year, driven by volume growth. Gross profit increased by 7.7% to $25.6 million. Adjusted gross margin was 17.3%, down 50 basis points from the prior-year period, net of absorbing an 80 basis point increase in depreciation related to new production equipment. Operating income increased by 48% to $5.1 million, driven by profitable volume growth. Adjusted earnings from continuing operations more than doubled to $5.7 million compared to $2.6 million in the prior-year period due to improved operating performance more than offsetting increases in interest expense and depreciation. Adjusted EBITDA from continuing operations increased 17.5% to $22.3 million and was up 40 basis points, as a percentage of revenue, 12.3%.

Turning to the balance sheet and cash flow. As planned with the divestiture of the Frozen Fruit business and the significant reduction of working capital needs, we completed a refinancing of our debt in December. We entered into a new $180 million term loan credit facility and a new $85 million revolving credit facility. The new credit facilities have a 5-year term to provide greater flexibility, strengthen our balance sheet and provide a structure that is aligned with our future capital needs. At the end of Q4, debt was $263 million, implying leverage of 3.4x. Cash provided by operating activities of continuing operations during the fourth quarter was $12 million, and cash used in investing activities of continuing operations was $9.2 million, resulting in free cash flow generated from continuing operations of $2.7 million.

For 2024, we are maintaining the free cash flow target of $35 million to $45 million that we first shared with you on the Q3 call. Let me reiterate our current Board aligned capital allocations priorities. Given current interest rates, the first use of cash will be to pay down debt until we’re under 3x levered. We expect to reach this level in the second half of 2024 as debt will increase slightly in the first half due to the completion of the Modesto extraction project Brian referenced. Once we are under 3x levered, we will continuously evaluate the best use of free cash flow. This may include share buybacks, funding high ROI capital projects and or accretive M&A. Let me close with comments on the outlook. From a guidance standpoint, we are reaffirming the 2024 outlook we provided on our previous call.

We expect revenue in the range of $670 million to $700 million, which represents growth of 6% to 11%. From a profit perspective, we expect adjusted EBITDA of $87 million to $92 million, which represents growth of 11% to 17%. From a pacing standpoint, as you would expect, we see the back half of the year to be somewhat stronger than the first half with a split of approximately 48% first half and 52% second half. In addition, in the first half of the year, due to seasonality, we expect Q1 to be stronger than Q2 with an expected split of approximately 52% to 48% for Q1 and Q2. From a balance sheet and cash flow standpoint, we continue to expect capital expenditures on the cash flow statement of approximately $25 million to $30 million in 2024.

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.

Operator: [Operator Instructions] Your first question comes from the line of Andrew Strelzik with BMO Capital Markets. Your line is open.

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Q&A Session

Andrew Strelzik: Hey, good afternoon. Thanks for taking the questions. And Joe best of luck in the future. It’s been great working with you.

Joe Ennen: Thanks, Andrew.

Andrew Strelzik: My question – absolutely. My first question, I guess, is about the new business pipeline. And I guess I wanted to tie that back to the comment you made that there’s kind of an underlying increase, I guess, in the revenue assumptions just given that now you’ll be without the smoothie business. So have you seen any movement there converting some of that – those new business opportunities over? Is that contributing to that? Or how is that new business pipeline building?

Brian Kocher: Yes, Andrew, thanks a lot for the question and for joining the call. A couple of things that I would say about our new business pipeline. First and foremost, we have multiple ways to grow our revenue line. We’re growing share with existing customers. We’re acquiring new customers. We’re expanding the TAM with some of the investments that we made recently. And don’t – also don’t forget, we’ve got really a fourth area. And that fourth area is the fact that a lot of our blue chip customer base is growing in and of themselves and that carries along our growth with it. So I think specifically, when we looked at that 2024 guidance, I’ve had a chance now with 2 months in the role to see facilities, to meet salespeople, to meet a few customers to understand the order volumes that are coming in and the pace that they’re coming in at.

And I would say they’re all in line with the forecast that we outlined in the third quarter call. So, new business is always a part of our process, new business development. That new business development runs from anywhere from discovery stage, close to implementation, and we’re at various points along that horizon with each of our – excuse me, customers. So I guess with respect to new business development specifically, it’s on the horizon. We continue to invest in new business development. But right now, we’re looking at the strength of our current customers with our current product portfolio and the growth that we see with them, and that’s what gave us the confidence to affirm our guidance for 2024.

Andrew Strelzik: Got it. Okay. That’s helpful. And then the second question is just on the ramp of the Texas facility, and you noted the first – that by the end of the second quarter, you would be kind of at end state. So I guess in terms of the first two lines, where are those from a utilization rate perspective? And I know the third line was coming out in the first quarter. Is that online right now? Can you just give us an update on how that’s ramping?

Brian Kocher: Yes. I think the best way I could say it is it’s ramping as expected. The first two lines are demonstrating both the production and productivity that we expected and are absolutely on the trajectory to be at our end run rate, so to speak, in the second quarter, middle of the year. And then the third line is in process right now. So it comes in and then we do some qualification and other things. But, yes, we’re excited about the path that it’s on, and we believe in the – by the end of the second quarter, the third line would be contributing to profits as well.

Andrew Strelzik: Okay. And then just one quick last one for me and that’s on the foodservice side where it’s impressive to hear the strength there, especially as some of the larger players note maybe a little bit of softness in some of the top line trends that they’re seeing. Can you just talk about what you’re seeing on the foodservice side, maybe more recently? And what gives you the confidence there kind of underpinning the outlook in terms of whether it’s share gains or new customers or those types of things where you’re seeing the bulk of that growth would be helpful. Thanks.

Brian Kocher: Yes. I think the story is similar to what Joe described in the fourth quarter results. We do see still growth in the foodservice area with many of our customers. I think oat is driving that. There is a preference, in particular, in the coffee shops and quick service restaurants for oat products. So I think that’s been a driving factor of it. But it really comes across all of those bands where we think we have growth. It comes from expansion of share with existing customers, it comes from acquisition of new customers, and it comes from TAM expansion. And in particular, it really is even across those three areas.

Andrew Strelzik: Great. Thanks, I will pass it on.

Brian Kocher: Thanks, Andrew.

Operator: Your next question comes from the line of Bobby Burleson with Canaccord Genuity. Your line is open.

Bobby Burleson: Great. Thanks for taking my questions. Hopefully you can hear me. So I guess the first one is just curious how your volumes look versus the industry. You mentioned share gains. And I’m wondering, it’s tough to look outside of tracked channels. But just overall, where do you think the share gains are the most substantial? And then is there any kind of volume delta color by foodservice versus retail?

Joe Ennen: Hey, Bobby, it’s Joe. As we outlined, category in the fourth quarter for total plant base, we would say it was mid-singles. And given the volume we reported, I mean, we were 3x faster growth than total category.

Bobby Burleson: Okay. And so, in terms of like the tightness for, I’m assuming oat base, you guys are prioritizing internal consumption rather than supporting some of the external. And I’m wondering, what is the industry seeing do you think in terms of oat base supply versus what the production needs might be more broadly? And have you guys gotten some – gained some competitive advantage there?