SunOpta Inc. Q3 FY2024 earnings call

Key Highlights

• Revenue growth of 16% driven by 21% volume growth across broad customer, channel, and product categories.
• Adjusted gross margin improved 60 basis points year-over-year, and adjusted EBITDA increased 13%.
• Supply chain was a major focus; short-term operating expense investments in supply chain processes, scheduling, training, and uptime improvements are showing progress. For example, third quarter output was up 18% in aseptic facilities and 49% in fruit snack facilities.
• Priorities include driving operational improvements to expand margins, growing volume through customer relationships and innovation, and maintaining disciplined financial approach to deleveraging.

Operational Examples

• September saw record-breaking production at fruit snack facility in Omak, WA, and Allentown facility achieved highest operating uptime metrics of the year. Oat extraction in Modesto and Midlothian facilities are ramping up, with Midlothian producing more than double the volume of 3Q 2023.

Revenue for the third quarter was $176 million, up 16% year-over-year, driven by 21% volume growth across customers, channels, and product categories. Gross profit increased $3.3 million to $23.6 million, with reported gross margin at 13.4% and adjusted gross margin at 17% (up from 16.4% prior year). Adjusted EBITDA from continuing operations increased 13% to $21.5 million. Debt was $290 million, down $13 million from Q2, and net leverage is expected to be under three times by year-end.

Fiscal 2024 Outlook

• Reaffirms revenue in range of $710 million to $730 million (13%-16% growth) and adjusted EBITDA in range of $88 million to $92 million (12%-17% growth).

Midterm Target

• Midterm target of 125 million adjusted EBITDA run rate by late fiscal 2025 or early fiscal 2026. Guidance for 2025 will be provided on next earnings call when announcing fourth quarter results.

Q: Recent headline news about big customer reviewers removing surcharge on plant based add-ons. Thoughts on demand and conversion.

A: Brian said they view anything fostering trial, penetration, or repeat buys as good for them, working with customers on product development, pricing, and supply to meet demands.

Q: Swing factors for 4Q supply range.

A: Greg said guidance unchanged as quarter came in as expected, reaffirmed full year outlook.

Q: New business pipeline in Q4.

A: Brian said guidance is based on what they can see, confident in Q4 guidance as they've worked with customers and have data.

Q: Customer growth between incremental business and underlying trend.

A: Brian said categories are growing, with TAM expansion, third of revenue growth from new products, third from share growth with existing customers, and third from new customers.

Q: Expansion of Dream brand oat milk in coffee shop channel.

A: Brian said it's a solution for customer supply chain challenges, not a strategy change, providing a supply chain solution with their brand.

Q: Reinvestment in R&D, sales force, OpEx leverage.

A: Brian talked about demand generation engine, supply chain efficiencies, and working capital, with next dollar investment in unlocking trap capacity in supply chain.

Q: Balancing growth and operations for profit.

A: Brian said next dollar investment is in unlocking trap capacity in supply chain to fulfill growth through operational efficiencies, not CapEx.

Q: Productivity gains, capacity, new vs existing plants.

A: Brian said existing plants up 10%, new assets ramping up, operational efficiencies in mature assets can fulfill volume growth without significant CapEx.

Q: Coffee shop channel penetration.

A: Brian gave general comments on benefiting from product, assortment, pricing, or distribution initiatives that encourage penetration, trial, or repeat buys.

Q: Drag from manufacturing efficiencies and supply chain investments on EBITDA.

A: Brian said costs will wind down by end of Q4 as volume growth stress on system eases