SunOpta Inc.
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Good morning and welcome to SunOpta's First Quarter Fiscal 2021 Earnings Conference Call. By now, everyone should have access to the earnings press release that was issued this morning and is available on the Investor Relations page on 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 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 SunOpta's press release issued this morning, 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.

[Joe Ennen:]

Good morning and thank you for joining us today. With me on the call is Scott Huckins, our Chief Financial Officer. Before we begin unpacking the results, let me offer several key takeaways from the first quarter. First, our strategy of focusing on top-line growth in plant-based and margin growth in fruit continued to fuel strong EBITDA growth in Q1, as it did all of last year. Second, the top-line momentum in our plant-based business remains strong, reflecting our leadership position in beverages, ongoing capacity expansion and steady consumer demand, as plant-based continues to be the number one global food trend. Third, our focus on productivity in our fruit-based business continues to drive solid margin expansion. Lastly, we all know team and culture are critical to driving great performance and the efforts we have made in the last 18 months around creating accountable business units, building a high-performance team with a winning culture and investing in talent, have been instrumental in fueling our business. Execution ties everything together and our team continues to excel at operational excellence, which is delivering consistently strong results. The first quarter played out largely as expected, with plant-based revenues continuing to grow rapidly, margins improving in fruit-based and very strong double-digit growth in adjusted EBITDA. Total revenue of $207.6 million was comprised of 12% top-line growth in plant-based largely offset by planned revenue rationalization and fruit, resulting in aggregate sales that were flat to year ago levels and plus 21.8% compared to pre-COVID Q1, 2019. Compared to Q1 of 2020, gross margin improved by 130 basis points to 14.4% and adjusted EBITDA grew 33.5% to $18.3 million or 8.8% of revenue. Q1 saw a continued transformation of our operations across the board. We continue to dial in production on the three capacity additions in plant-based that came online in Q4 of last year. We made good progress on our latest expansion project in Allentown, Pennsylvania, which is on schedule to be fully commissioned in Q4 of this year. And we closed our fruit processing plant in Santa Maria under budget and ahead of schedule.

[Scott Huckins:]

Thank you very much, Joe, and good morning everyone. We're excited to report another solid quarter. As Joe discussed, first quarter revenues of $207.6 million were flat year-over-year, as the strong 12.4% growth in plant-based was offset by planned rationalization, but marginally profitable business in fruit-based. Demonstrating the power of our strategy, adjusted EBITDA increased 33.5% on flat revenue aided by further improvement in gross margins as we add margin to fruit and consolidated margins benefit from more plant-based revenue in the sales mix.

[Question-and:]

[Operator:]

Great. Thank you. And your first question here comes from the line of Bill Newby from D.A. Davidson. Please go ahead. Your line is now open.

[Bill Newby:]

Good morning gentlemen. Thanks for taking my questions and congrats on the solid Q1.

[Scott Huckins:]

Thanks, Bill. Good morning.

[Bill Newby:]

Joe, I was hoping we could start here and just kind of get maybe your kind of broad state of the union on domestic oat milk capacity. I mean, obviously, you guys bring on a ton of capacity. We saw the early filing and then, talking about bringing on a lot of capacity additions this year. I guess, as you stand today, maybe what is the supply versus demand picture look like? And maybe, if you could compare that to, what it looked like a year ago, and maybe what you expect it to look like a year from now? Anything there would be super helpful.

[Joe Ennen:]

Yeah. So we're seeing incredible consumer demand. Triple-digit increases in demand across the board. You're seeing a very robust competitive landscape with really kind of four or five brands procuring the vast majority of the market share. We partner with several of those leading brands, as they are going to market with oat milk offerings. So we feel like, from a demand standpoint, we are in a really good position in terms of, who our brand partners are. As it relates to capacity, we were incredibly fortuitous with the investment that we made in 2019, around oat milk. We are seeing really strong business development and utilization from both, existing and new customers around our oat milk production. At this juncture, we still have available capacity. We still have the ability to take on new customers. And as you might imagine, given a market that's growing triple-digits, we have a real eye to the future in terms of understanding how high is up with oat milk and if we'll need to add additional capacity or capabilities in oat milk. But right now we're in a really good position with that facility that we stood up at the end of last year, really starting to crank out volume and helping our brand partners drive growth in oat milk.

[Bill Newby:]

Great. No, that's super helpful. And then I guess just wanted to touch on the acquisition of the Dream and WestSoy brands here. I mean I guess help me understand a little bit what the plan is for those going forward? I mean was this just an opportunity to kind of consolidate some of the brands that you were already manufacturing for and get a little benefit in the P&L with that, or is there more that we should be thinking about here from an innovation or building the brands going forward?

[Joe Ennen:]

It was largely opportunistic. We saw a real in-sourcing opportunity to take on the volume that we don't manufacture. And we've also talked about interest in expanding beyond plant-based milks and Dream especially has strong consumer brand equity and gives us optionality if we were to look to categories outside of plant-based milk that gives us some optionality as far as the brand platform to access some of those opportunities. But our priorities at the moment relative to these brands are very simple, which is in-sourcing the volume and standing up the internal capabilities to manage these brands.

[Bill Newby:]

Great. And then I guess if you look across your partners your manufacturing for today, I mean are there similar opportunities with the relationships you guys have or is this kind of a one-off?

[Joe Ennen:]

When you say similar opportunity?

[Bill Newby:]

I guess similar opportunities to brands you're manufacturing for today that you could potentially bring in house and it might make sense to do a similar transaction.

[Joe Ennen:]

I wouldn't see us executing anything beyond this just because it gets a little bit entangled with existing customers. Part of what made this an easy access opportunity was the fact that 90% of the volume of Dream is rice milk and 100% WestSoy is soy. And -- but beyond that I think we would get into a pretty entangled position if we were to do something bigger in the space as far as acquiring a brand.

[Bill Newby:]

Great. No, very helpful. I got something, but I'll get back in queue for now. Thanks guys.

[Operator:]

Our next question comes from the line of Alex Fuhrman from Craig Allen Capital. Please go ahead, your line is now open.

[Alex Fuhrman:]

Great. Thank you for taking my question and congratulations on a strong start to the year. I wanted to ask about the food service recovery that's going to be coming here? You're already operating at record revenue levels on the plant-based side of your business. And I would imagine a lot of your food service customers are right on the verge of showing pretty strong double-digit comps for the rest of the year. So, as that demand starts to come back do you have enough capacity for all of that in existing to your existing customers? And just as you start to think about incremental capacity coming online over the next year where do you see that incremental product going out the door to?

[Joe Ennen:]

Yes. So, we are in a good position relative to available capacity to support food service recovery absolutely. I mean again three capital projects that came online in Q4 an additional capacity addition that will come online in Q4 of this year puts us in a very comfortable position to support our customers' growth. And as I mentioned that is one of the core components of our service offering to our customers is making sure that we have capacity available for them to drive growth as hard and as fast as they want to. So, it is a pretty violent shift in demand that we saw during COVID and now kind of coming back again. But I'm pleased to report that the operations team and the whole business has done an outstanding job in filling customer orders, especially on the foodservice side of things as they I think candidly have been a bit surprised by the rapid nature of the recovery of their business and we are doing an excellent job in keeping them in stock filling orders. Our case fill rate is very, very high and again speaks to one of the core themes that I covered which was execution and right now we're nailing it.

[Alex Fuhrman:]

That's great to hear. Thanks very much. And I guess just curious given that it is such a kind of dramatic shift and now shift back in demand, what are the biggest concerns you're hearing from your foodservice partners as they tool up for the next couple of years and their menus? Is it having consistent access to supply? Is it a variety of products or particular formulations? Just kind of curious what restaurants are really thinking about from you as they look to kind of reopening in the next leg of their businesses?

[Joe Ennen:]

I would say, there's two things that we're hearing pretty consistently. One is, are you guys ready for a pretty dramatic snapback in demand. And our answer is absolutely we're ready. The second thing is on the upstream availability of ingredients, and I think there's been innumerable new stories of kind of upstream raw material shortages from computer chips to copper, et cetera, et cetera. I mean we've all seen the stories. And so, that would probably be the second theme we're hearing, Alex, is just do you have any upstream pinch points or supply constraints? And again, to date, we feel very confident in our procurement and sourcing efforts to make sure that we have good flow of raw materials. We obviously source raw materials from around the world. And we feel good at this point that we have the right flow of raw material ingredients into our manufacturing plants to support the snapback in growth.

[Alex Fuhrman:]

That’s great. Thanks very much.

[Operator:]

Your next question here comes from the line of Mark Smith from Lake Street Capital. Please go ahead. Your line is now open.

[Mark Smith:]

Hi, guys. First question for me, just wanted to check on kind of the cadence of in-sourcing on the Dream products. It sounds like you expect this to be complete by the end of next year, but any additional details you can give us would be great on the timing.

[Joe Ennen:]

Yes. We expect to complete it by the end of this year.

[Mark Smith:]

Perfect.

[Joe Ennen:]

The EBITDA, the incremental EBITDA would be fully affected and in place for 2022.

[Mark Smith:]

Excellent. And then you just talked a little bit about logistics and supply chain. And it sounds like, you're in good shape there, but are you seeing anything on kind of inflationary pressure and pricing?

[Scott Huckins:]

Yes. It's Scott. I would say we had modest headwinds, which we talked about in Q1 something, as Joe talked about a moment ago, we're looking at actively. And probably the easiest way to think about it is we have really three categories of costs. There's raw materials, operations and supply chain, and they behave a bit differently between the two channels. So co-man, think plant-based a significant amount of installation from raw material volatility as those are generally pass-throughs. Of course, our operating costs are for our account. And then lastly, I'd say supply chain there's some insulation because a fair amount of co-man businesses pick up. And then, when we think about the second channel or private label, and as we've talked about, we can pass on the majority of raw material costs. Again, operating costs are for our account, there's probably a little more exposure on supply chain since that tends to be delivered business. So, net-net-net, we've been in a pretty good place for Q1 but the headlights are up.

[Mark Smith:]

Okay. And then the last question for me. Just any update on kind of the SOWN. Also, as we look back at Arbor Bar, learning's and results on kind of branded products?

[Joe Ennen:]

Yes. So far we're pleased with the sales velocities on SOWN. We're in the right accounts, which I think is important. This is an organic offering. But, I would just tell you that the early velocities that we're seeing out of the lead accounts are exceeding our expectations. And we're being systematic and surgical as we look to add distribution to make sure that we're putting it into the right accounts that have a shopper profile that's going to fit a premium product like this.

[Mark Smith:]

Excellent. Thank you.

[Operator:]

And I'm not showing any further questions at this time. So, I'll turn the call back over to Joe Ennen for closing comments.

[Joe Ennen:]

Great. Well, thank you everyone for your time and interest. We appreciate it, and look forward to speaking to you again soon. Thank you.

[Operator:]

And this concludes today's conference call. Thank you for your participation. You may now disconnect.