Sunopta Inc (STKL) 2020 Q3 法說會逐字稿

Good morning and welcome to SunOpta's Third Quarter Fiscal 2020 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 this transcription will also be available on the company's website. As a reminder, please note that the preferred 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 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 that unless otherwise stated, all figures discussed today are in US dollars under are occasionally rounded to the nearest million. And now I'd like to turn the call over to SunOpta's CEO, 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 Q3 results, there are 3 key takeaway that I would like to offer. First, strong execution of our core strategy continues to deliver consistent, strong performance across all 3 business segments.

Second, our prioritized investments in plant based foods and beverages is paying dividends. We are playing offense, we are winning and we expect to continue to win as our expansion projects come online in the fourth quarter, further strengthening an already strong position. And third, we are optimistic about our future ability to deliver consistent, sustainable, above average EBITDA growth.

As anticipated, the third quarter results were strong, delivering our fourth consecutive quarter of more than doubling year-over-year adjusted EBITDA and the third consecutive quarter in which each of our segments generated both revenue and margin growth. Trailing 12 month adjusted EBITDA at the end of Q3 2019 was $40 million, today our trailing 12 month adjusted EBITDA is $84 million.

With 4 consecutive quarters more than doubling adjusted EBITDA. Combined with the momentum and plans we have, it is safe to say that SunOpta is no longer a turnaround story. We are quite simply, a well positioned sustainability minded growth company with a clear vision to fuel the future of food.

Our performance reflects strong execution of our core strategy along with investment and focus on our core strengths. We have now fully transitioned from our turnaround successes, to driving profitability and growth across each of our business segment.

I'm pleased with our positioning and the performance across our entire organization. For the third quarter, we delivered 5.4% revenue growth adjusted for changes in commodity related pricing and FX rate. This growth was fueled by very strong consumer demand in all 3 of our core segment led by robust growth in our global ingredients and plant based business segment. I would like to share some indicated data help dimensionalize the consumer fueled the momentum in our core businesses.

Consumption in the last 13 weeks, shows both refrigerated and shelf stable plant based milks growing 18% and 16% respectively. We are excited to see the continued tremendous growth in oat milk with triple-digit growth rates. Oat milk is now the second larger plant-based milk, behind only almond milk.

This momentum in oat we'll certainly provide tailwind for our plant-based business unit as our oat extraction facility is in the final stages of commissioning and as previously discussed gives us a fourfold increase and extraction volumes.

Frozen fruit also continue to see very strong consumer demand and while our supply constraints have somewhat limited our upside, we are encouraged by the consumers enthusiasm for this category.

Lastly, we continue to see strong growth and organic food sales in many of our core markets around the world fueling growth in our global ingredients segment. It is encouraging that we are so well positioned in such strong growth categories and we fully intend to capitalize on consumer demand or are on trend sustainable products.

Since I joined SunOpta, I've talked about improving execution of the top priority. Nowhere is the improvement in execution more evident than in our gross margin performance. Total company gross profit margin in Q3 was 13.3%, the best gross margin since Q1 of 2012. Total gross profit margin improved 440 basis points with our fruit business contributing the most to this improvement.

Our productivity initiatives with a focus on automation, reducing line downtime, and more disciplined operations management are paying off around the world. Manufacturing plant from our cocoa facility in Holland, to our plant-based aseptic beverage facility in Pennsylvania, to our frozen fruit bagging operation in Kansas, are setting production records and doing it with fewer people.

While these records are impressive in their own right, it's important to recognize that these results are coming at a time when we are also managing all of the challenges related to COVID-19 prevention in our plan. To date, we continue to have zero confirmed cases of community transmitted COVID-19.

This accomplishment is something we are all very proud of as employee safety is our top priority. While the challenges of managing around COVID-19 are significant, the overall impact on our financial performance for the quarter were not significant on a year-over-year basis. When we net the headwinds and tailwinds, the impact on revenue and EBITDA offset each other.

Turning to EBITDA, as mentioned, we more than doubled adjusted EBITDA on a year-over-year basis for the third quarter with an increase of 129% to $22.8 million on 5.4% adjusted revenue growth. Adjusted EBITDA as a percentage of revenue was 7.2% and showed solid progress against our long-term stated goal of 10% EBITDA margin rate.

Turning to our segment results, let me begin with our plant-based segment. Sales momentum continued overcoming the impact of softer food service sales, as COVID-19 continue to impact the channel as all would anticipate. Sales increased 6.6% on an adjusted basis, despite our largest customer not contributing to the growth given their food service focus.

Sunflower, which is reported within this segment, saw revenue decline in Q3, which dampened overall segment performance. If we remove the sunflower headwind, the remainder of the segment grew revenue 10.8%. Gross margins improved to 19.9% reflecting improved utilization and execution of our productivity initiatives.

With the significant growth in consumer demand that I mentioned earlier, you will not be surprised to hear that in Q4, we will be operating at close to capacity as possible, and as a result, we expect a strong Q4 in our plant-based business unit. Our 3 expansion projects, which we have discussed several times are on time and on budget.

Combined, they will further expand our leadership position in aseptic plant-based beverage production through a new capabilities and plant extraction and added aseptic production. These projects when fully utilized, have the potential to add approximately $100 million to our annual sales.

I continue to be pleased with our sales development effort and we are in advanced discussions with several large customers, who will consume a sizable portion of the incremental volume. I would like to remind listeners that adding this enormous new business does not happen overnight. In many cases, these are large new customers with complex needs and it is not a simple as flipping a switch, but we continue to believe that we can have this incremental capacity fully utilized by the end of 2022. Our new capacity additions in the 4th quarter, position us for a strong 2021 and 2022. Our leadership in plant-based beverages, our broad capabilities along with our strong positioning, are the key drivers of the significant new business opportunity and is the foundation of our plan to double our plant-based business unit over the coming years.

In global ingredients, sales growth accelerated to an impressive 8.3% on an adjusted basis, reflecting very strong performance in cocoa, oils and juice to highlight just a few categories. We generated another quarter of improved gross margin as a result of top line growth along with executing our productivity plan. In particular our Crown of Holland cocoa processing facility generated record production levels with higher efficiency. Further, our efforts in driving Return On Investment yielded a roughly 10% reduction in year-over-year inventory while our revenue growth accelerated. Gross margin in this segment was 12.2%, again, reflecting strong execution of our plan. While this business has had some historical volatility, it is encouraging to see a heightened level of discipline and execution at that time.

Within our fruit platform, our focus on driving improved margin yielded significant year-over-year gain, with gross margin improving to 7.7%, up 990 basis points from the prior year, on approximately 1% adjusted revenue growth. Our investments in automation are driving significant improvements in productivity, partially offsetting a challenging fruit procurement environment.

We have wrapped up the California strawberry season and despite the lower than expected freezer crop, our renewed focus on grower relation helped us here a significantly larger share of the available fruit compared to 2019. We maintained our plant throughput for the whole season utilizing roughly 40% less seasonal labor compared to 2018, as a result of our automation initiative. We remain confident in our ability to meet our expectation for further sequential margin improvement in the fourth quarter.

While there were many questions last quarter on the impact of the California strawberry season, I will share that this business is different now than in the past. For context, conventional strawberries grown in California, represent less than 5% of our total company gross profit. Do I wish the season had been better? Of course. Give some headwinds on 5% of the business to find SunOpta? No. Our fruit business has had a history of negative Q3, Q4 surprises. But this is not historical SunOpta. And our view of 2021 has actually improved compared to last quarter, as we are now incrementally more optimistic about next year.

We have more clarity into customer commitments and we are seeing success in passing true pricing to offset more costly fruit. Therefore, while there are still some unknowns, we can now communicate, a more optimistic view that we expect profit growth improved in 2021. In conclusion, we delivered yet another doubling of year-over-year adjusted EBITDA, drove the third consecutive quarter of growth and gross margin improvement in all 3 of our segments and produce the best consolidated gross margin percentage performance in 8 years. Further, we are seeing significant increased consistency across each of our segments, which is reflected in our quarterly results.

Our positioning and key healthy natural and organic categories, along with our leadership in plant-based foods position not exceptionally well with consumers. We have successfully executed and completed our turnaround efforts, reduced leverage, invested in promising opportunities and are now focused on driving growth across our core platform.

Now, I will turn the call over to Scott to take us through the rest of the financials. Scott?

Thank you very much, Joe, and good morning everyone. Let me walk through gross profit and the rest of the income statement, given Joe's expression of the commercial activities and revenue during the quarter. I will also cover our balance sheet and cash flow result. We're very pleased to report another strong quarter.

As Joe discussed, we saw 6.4% revenue growth and more than doubled adjusted EBITDA for the fourth consecutive quarter. Gross profit was $41.9 million for the third quarter of 2020, an increase of $15.6 million or 59% compared to $26.3 million during the third quarter of 2019. The prepaid segment was responsible for $9.1 million of the gross profit improvement. For perspective, that brings year-to-date gross profit in fruit to $19.8 million or nearly 5x the prior year's result. The improvement in fruit came from improved revenue, pricing, a favorable mix of higher margin retail versus Food Service revenue and the benefits from increased automation in productivity initiatives implemented in our plants.

The plant-based segment accounted for $3.4 million of the increase in gross profit, mainly reflecting revenue growth of 10.8% in the plant-based beverage and extraction businesses offset in part by a reduction in revenue in the sunflower business. In addition to revenue growth, increased production volumes as well as strong execution of our productivity plan and higher capacity utilization drove improved margins.

This was partially offset by lower revenue production volumes and plant utilization, in the sunflower operation. Global ingredients contributed $3.1 million of improvement, primarily due to solid execution of our portfolio optimization efforts that resulted in increased pricing spreads and higher margin product mix, organic ingredients and premium juice products. This was supplemented by manufacturing efficiencies and productivity improvements.

These results were partially offset by an unfavorable cocoa commodity hedging results of $1 million versus the prior year, and manufacturing efficiencies related to organic avocado oil production. As Joe noted, we were quite pleased with the performance of our cocoa processing operations, which set record production volumes in the third quarter with improved efficiencies.

As a percentage of revenues. third quarter gross margin was the highest since 2012 at 13.3% compared to 8.9% last year, a 440 basis point increase. All segments contributed significantly to the gross margin expansion, with the gross margin expanded 990 basis points in the Fruit segment, 210 basis points in the Plant-based segment and 160 basis points in the global ingredients segment.

Operating income was $9.4 million or 3% of revenues in the third quarter, compared to a loss of $3.5 million last year. SG&A increased $1.6 million to $29.3 million in the third quarter with the savings initiatives being offset primarily by variable compensation expense. Loss attributable to common shareholders for the third quarter, was $2.8 million or $0.03 per diluted share, compared to a loss of $13.8 million or $0.16 per diluted share during the third quarter of 2019.

On an adjusted basis, net loss was $1.3 million or $0.01 per diluted share compared to a loss of $9.9 million or $0.11 per common share in the prior year. As Joe mentioned earlier, for the third quarter of 2020, adjusted EBITDA was 22.8 million compared to $9.9 million in the prior year, bringing the trailing 12 months adjusted EBITDA to $84 million.

I'd like to remind listeners that adjusted EBITDA and adjusted earnings are non-GAAP measures and a reconciliation of these measures to GAAP can be found towards the back of the press release issued earlier this morning. Turning to the balance sheet and cash flow, Q3 total debt was $443.8 million, down approximately $47 million from Q4 2019.

Total debt reflects $219.5 million net of issuance costs of our second lien notes due in October of 2022, $199.7 million drawn on our global asset-based credit facility, with the balance representing smaller credit facilities, leases and other financing arrangements. Leverage has improved to 5.3 times from 10.3 times, as we entered 2020. We are now nearing completion of the refinancing of our ABL, which matures in March of 2022.Following this, we will begin the process of refinancing our second lien notes, which are due in late 2022. Our significant improvements in adjusted EBITDA over the trailing 12 months is a significant out that in the refinancing process and we are very confident with our refinancing prospects. From a cash flow perspective, during the quarter, cash generated from operating activities was $20.2 million compared to cash generated of $4.3 million during the third quarter of 2019. The $15.9 million improvement, reflects improved operating performance and continued working capital management.

It is worth pointing out that our global ingredients segment reduce nearly 10% of its inventory position versus Q3 of last year. Cash used in investing activities was $11.8 million compared with $7.6 million in the third quarter of 2019. The increase in capital investments, primarily relates to investments to expand capacity in our plant-based operations. As we look forward, we continue to expect that our executional excellence, will generate strong P&L flow through. In the fourth quarter, we will likely see high single-digit revenue growth, creating robust double-digit gross profit growth, cascading into what could approach and nearly 50% increase in EBITDA versus Q4 2019, which was in turn a doubling of EBITDA versus Q4 of 2018.

With that, I'd ask the operator to please open up the call to questions.

(Operator Instructions) Our first question comes from Brian Holland of D.A. Davidson.

Maybe first question here just kind of, near-term focus, the ramp of the new plant-based capacity I know we've talked about $100 million over 2 years, we just think about maybe the next couple of quarters though. As you ramp that up, the impact book to sales and also gross margin if there's anything we should be mindful, obvious, we're forecasting out.

Yeah, good morning Brian, Joe here. So first of all, just in terms of our expectations on ramping that production utilization, we put a marker out there that we expected to be fully utilized by the end of Q4 2022. At this juncture, we don't have perfect insight into how that's going to flow, we are making good progress in terms of working with significant new customers in the end, adding business to that capacity.

As it relates to gross margin impact, there are kind of 3 components certainly, the added capacity would be a bit of a headwind to gross margin. However, as we look forward to 2021, we think both customer mix as well as our productivity efforts will both be tailwind and net-net, those 2 tailwinds should net or mitigate any kind of negative impact from the added capacity. So we would expect 2021 gross profit margin to look broadly like 2020.

I appreciate the color there. And so, another question on plant is, you've been asked several times since your expansion announcement about whether you have the demand to fill that capacity and mindful, specifically in the significant growth within the oat milk segment, as well as the potential plan given the value proposition, vis-a-vis all miss out. I'm curious, whether you think you've added enough capacity and if not, and given the lead-time required to stand up that incremental capacity, are there plans in place for further -- How are you thinking about that?

On some levels, I hope didn't have enough capacity, but that would be a good problem to have. We are certainly encouraged by the consumer -- excuse me, the customer outreach that we'd had on that and the customers' interest in oat base. At this juncture, our focus is on getting that new facility fully up and running and utilized. And if we find that in kind of at some point in 2021 that we feel like we've got a 12-month view out of the business where we think we're going to sell that out, we're certainly willing and able to make further investments in that space.

Got it. Fair enough. Switching over to food service, bit of a headwind or an offset to the growth this quarter it's not surprising, but just curious if you could maybe kind of give us a little bit of incremental color on sort of the pace of recovery in that channel. I think high level, what we're seeing is obviously a trough, first half of the year, immediately following lock down and then we saw some steady progression moderating declines that seem to sort of key depending on what channel you're talking about maybe in a high-single low-double digit range. So I'm curious specific to your business, does that's kind of (inaudible) is what we're seeing high level.

And then secondly, with the concerns about second wave and new cases and maybe new measures being implemented, how you're kind of thinking about the plan going forward here and the pace of recovery in that channel as it pertains to your business?

Yeah. So yes, we're seeing a consistent pattern to what you articulated. In aggregate, foodservice was neither a headwind nor a tailwind for the quarter, it looked broadly similar to 2019. As it relates to the impact of a second wave of COVID, we're all certainly concerned about that at multiple levels, first and foremost, for our associate and the operations of our facilities.

But we are going to continue to monitor it and work with our customers and respond to their forecast and to date, we have not seen any significant adjustments in their forecast as they think about a potential second wave, but we'll certainly be ready to respond to that.

All right. And last one for me. I really appreciate the color and the clarity that you provided with respect to the food segment this quarter. But just to confirm, you are lapping pricing that you took I believe this time last year. So just curious, have you taken or will you need to take more price in this quarter and if so how those discussions progress.

So yes, we are in a position where we have been able to pass through the majority of the impact of higher cost fruit from this season, and many of those prices will go into effect here in the fourth quarter. That's a result of a lot of great work by our sales team over the last 12 months to get better relations with our customers as well as different pricing mechanisms in place and certainly has aided our efforts in mitigating the impact of the higher cost fruit.

Your next question comes from Ryan Meyers of Lake Street Capital.

For just a clarification, you gave some commentary on the fourth quarter for revenue, gross profit and adjusted EBITDA. I just want to make sure this is year-over-year growth, correct?

Correct.

Okay. And then can you discuss potential headwinds that you guys might see in the plant-based beverage including food service that you can potentially see going forward about maybe some of the growth, a little bit.

Yeah, I mean, I'd say, I certainly think of second wave of COVID could have an impact, I mean, I will remind that we now have several quarters of what a COVID environment looks like. And so I don't really have any material forward looking inside that would suggest that it would look different than our Q2 and Q3 results from this year. I think there is obviously an offset with retail growth and we see very, very strong growth on the retail segment. And I would, I guess, to expect the 2021 to look like 2020 if we were to kind of go back into a very deep kind of COVID shutdown.

Okay, that's helpful. And then now that you're through sort of a transition phase, what's your kind of outlook for gross margins on the plant-based business, they are pretty strong this quarter, just kind of, how are you thinking about that going forward, is it kind of going to be what it's been reported this quarter, or is there sort of the room for improvement?

Yeah. As I mentioned to Brian, we think that the 2021 gross margin will look broadly like 2020. There is a bit of a headwind with just some added capacity, which will be a kind of short-term headwinds to our gross margin rate, but there are 2 strong tailwinds our productivity initiatives certainly being one of them. So, and we also think mix, both product mix as well as customer mix, will be a tailwind in 2021. So net-net, 2021 will look broadly similar to 2020.

Okay. And then last one from me, any update on new product performance, such as the harbor.

Yeah. I mean we continue to monitor and look for additional customers to roll it out. We're happy with the product and are actively engaged in putting promotional effort against it and drive trial and we're encouraged by the repeat that we're seeing on the product. But we're looking for additional ways to drive trial.

Your next question comes from Jon Andersen of William Blair.

I hope the question is on the call. Only ask you about the oat base extraction process, can you talk about the quality of your process in producing the oat base. And is there a equivalent player in the market that does this. My understanding is there are some differences in the way oat milks are formulated and can have a difference on kind of the quality and the functionality of the products themselves.

Yeah, without getting key technical here where I might need some diagrams and schematics. There is 2 ways of making oat milk. One is you start with oat flower and add water. The result of that process is you get a very greedy, better, tasting product. The other way to do it as you start with raw oat, you soak them and you add enzyme that basically break the oat down into soluble and insoluble components. Obviously, the soluble component are turned into oat milk, you get a much cleaner tasting product. None of that gritty texture that consumers complain about and we think it's a superior process to the way many of the people are manufacturing it. I certainly don't have the detailed information into how everyone does it, but we are aware that one of the leading oat milk manufacturers that we don't make product for, also does it in a similar process to the way that we do it.

That's great. It's tough to go technical and do it in terms that Lehman like I can understand, so I appreciate that. Your plant-based beverage business, it was interesting, I thought it was great that you provided some of that consumption data, syndicated consumption data that showed both aseptic and refrigerated growing at very healthy rates. Which segment is more important to you, and I assume that, that might be changing a little bit with your oat base capabilities because that may allow you to serve the refrigerated market perhaps. I'm making that assumption in the way you have in the past, but if you could just talk a little bit about your outlook for aseptic versus refrigerated client based growth and in your exposure and ability to serve both of those end markets. Thanks.

So you're exactly right, our added extraction capability opens us up to being a supplier on the refrigerated side. Both of them are important to us. Obviously, we have significant aseptic manufacturing assets, and that is the core business for us, but the oat extraction project and capability, certainly affords us the opportunity to start to work with customers in the refrigerated space who aren't current customers today on the shelf stable aseptic side.

Okay, thanks on that. In terms of Fruit, what led you to be willing to kind of upgrade your outlook for gross profit in 2021? Some of the specifics may be in a prioritized form.

Yeah. Our success in working with customers to pass through the increased cost of fruit, are clarity around the customer commitments that we have for 2021 would be probably the 2 biggest ones that gave us confidence to suggest that 2021 is going to be better than previously forecasted.

And given that you're through the season, the 2020 harvest, does that provide you fast visibility through the bulk of 2021 at this point?

Typically it would provide us insight certainly into kind of Q1 and Q2. And then as it relates to our overall cost structure for the balance of 2021. While the fruit input cost is still a variable, we certainly understand the overall cost structure of our supply chain network, labor et cetera, et cetera.

Okay, that's helpful. Last one, just on the debt. Scott comments on the debt refinancing. So my understanding the ABL is in process and the second lien is soon to come. And I think you expressed confidence around the second lien, is your expectation on the second lien there would be an ability to get better pricing?

Yeah, good morning, Jon. So the comments that I was referring was really focused around here in the homestretch and getting the ABL done recognizing a debt has the March 22 maturity date. And just keep in mind that the 2 are almost due, about 2 years from now in October of 2022. So we're working on them sequentially. So I would expect that if all else or equal in the capital markets, I'd like our chances to have some rate reduction on the 2 old notes, but that will follow the work on the ABL.

Congrats on a great stretch here.

There are no further questions at this time, I will now return the call to our host for closing remarks.

Okay. Thank you, operator and thank you all for participating in our third quarter conference call. I look forward to speaking to you in the future and appreciate your interest in supporting SunOpta. Have a great day.

This concludes today's conference call. Thank you for your participation, you may now disconnect.