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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to SunOpta's Fourth Quarter Fiscal 2019 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.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 U.S. dollars and are occasionally rounded to the nearest million.And now I'd like to turn the conference 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. We are pleased with how we closed out 2019 as our fourth quarter results demonstrated strong progress in our efforts to turn around the business. Adjusted for disposed operations, in Q4, we doubled adjusted EBITDA on a year-over-year basis, delivering $16.4 million against last year's $8.2 million, and generated strong sequential growth from $9.9 million in the third quarter. Adjusted revenue was up slightly and gross profit increased by over 50% versus the prior year. This gross profit improvement, along with savings from the previously announced corporate reorganization, powered our improvement in EBITDA. These results drove a $24.1 million sequential reduction in total debt and aided our successful effort to extend the maturity of our $360 million ABL to March of 2022.Our EBITDA growth was driven by outstanding performance in our Plant-Based Food and Beverage business unit, along with delivering what we said we would deliver in the frozen fruit platform. While the results in Global Ingredients were pressured by several nonsystemic external and internal factors, we feel these pressures are largely behind us, and we expect solid improvement in 2020.Total company gross profit was up over 50% year-over-year, driven by plant-based foods and beverages and fruit. As I noted, we delivered on our fruit expectations this quarter, returning to slightly positive gross margins. While we are pleased with our progress, we are certainly not yet satisfied and see considerable opportunity to further improve.The corporate reorganization, announced in Q3, is on track to reduce SG&A by $8 million to $10 million on an annualized basis. Besides providing cost savings, the reorg has provided real value by improving the organization's speed and effectiveness, driving a culture of entrepreneurialism and enhancing accountability. Scott will provide more detail later. But as we stated on the Q3 call, there will be some offsets to these savings, such as incentive compensation and cost inflation in certain categories.We have realigned our financial reporting structure to be consistent with how we view the business. And as such, we will discuss the business performance in our 3 core business units: Plant-Based Foods and Beverages, Fruit-Based Foods and Beverages and Global Ingredients. As we step through each segment, we will outline the composition of each one. Please also note that we have posted recasted quarterly historical financial results under our new segments as an appendix to our investor deck available on our website.Now let me walk you through each segment. Our Plant-Based Food and Beverage segment is composed of: all of our plant-based beverages such as soy, almond and oat, plus our broth business; extraction, where we convert plants into the concentrated base for making food and beverages; and our sunflower business is also included in this segment.During the fourth quarter, our crown jewel, the Plant-Based Food and Beverage business unit, delivered 25% revenue growth, more than doubled gross profit year-over-year and improved gross profit margins by 770 basis points. It ended 2019 as the most profitable segment of the business and as you can see in our new segment reporting, grew gross profit in the fourth quarter by $10.5 million versus 2018. We are pleased to share that our renewed innovation focus has resulted in 65% of Q4 growth coming from new items or new customers. Additionally, unlike last year, our holiday execution supporting the broth business was outstanding, with a case fill rate over 98.5%. Our ability to maintain exceptional customer service, while executing capital expansion projects and delivering mid-teens revenue growth for the full year, is a testament to our differentiated capabilities in this space.Stepping back and looking at the market. Today, plant-based beverages are approximately 15% of total milk beverages. And the continued migration towards plant-based beverages is creating structural changes in the milk beverage landscape that we expect to continue for decades. We also believe the same consumer dynamics that are transforming the dairy milk category will occur in other dairy categories. Already, we have seen players like the leading Greek yogurt brand announce the launch of plant-based yogurts and plant-based beverages. And we are also seeing new entrants into plant-based ice creams.While plant-based burgers have captured the imagination of Wall Street and the media, I will point out that plant-based beverages were the pioneer in the plant-based movement and have a modest 25-year head start. The total plant-based beverage category is growing at approximately 11% per year, with white hot segments, like oat beverages, that are seeing explosive growth in the hundreds of percent. The plant-based beverage category growth is being fueled by 5 underlying consumer drivers that represent a generational shift in preferences and purchase drivers. The 5 drivers of plant-based beverages are: number one, the consumers believe in the health benefits of plant-based beverages; second, dairy allergies and sensitivities, which affect 30% of U.S. consumers, but which tend to convert an entire household to plant-based beverages. In fact, 65% of the world's population is lactose intolerant; third, genuine concerns about animal welfare holistically and specifically the treatment of livestock supporting the dairy industry; fourth, consumer taste preference for plant-based, which, once ingrained, are not likely to change and will pass through the generations; and fifth, and certainly not last, is that from a sustainability standpoint, plant-based beverages are dramatically better for our planet.As the world looks for seismic solutions, individuals are looking for everyday ways to contribute to the health of our planet, and this is an easy switch. SunOpta is built to win in this important category. There is a supply-demand imbalance in the category, and the barriers to entry relative to other food categories are quite high. Beyond the CapEx requirements, the real obstacle to profitable growth lies in having the knowledge and expertise to know how to run these sophisticated plants. We feel we have the assets, expertise and the team to continue to be a low-cost, high-quality, reliable partner to some of America's leading national brands and to retailers. Plant-based beverages have, and will continue to be, a key focus of the company, which is evident in the significant capital investment announced in the second quarter that is underway to expand our extraction capabilities.In addition to this project, we are pleased to announce that our Board has approved 2 additional expansion projects to increase capacity and capabilities across our national footprint. We expect all 3 of these projects to come online in late Q4 2020, and we feel our current customer pipeline will allow for solid utilization out of the gate as we look to drive growth in 2021 and 2022. Turning to fruit. Our Fruit-Based Food and Beverage segment is comprised of frozen fruit, fruit ingredients and fruit snacks. The Fruit-Based business unit posted an 11.7% decline in fourth quarter revenues on a year-over-year basis, primarily as a result of lower revenue from one large foodservice customer as well as the reduction in noncore portions of the business. Excluding these activities, revenue was essentially flat on a year-over-year basis.During the fourth quarter, the volume decline was partially offset by increases in price as well as strong performance of fruit snacks. Our plan to improve margins in frozen fruit is progressing, and results are tracking in line with the expectations we outlined over the last couple of quarters. We delivered our anticipated slightly positive gross profit margin in the fourth quarter, and continue to execute on our efforts to improve pricing and reduce costs.As we progress into 2020, although early at this point, we are seeing decent weather and increased acreage in California, which we expect to translate into a more normal crop season. Currently, in Mexico, we're seeing an improved fruit harvest versus 2019, although fruit pricing remains higher than we would like. In summary, our new team, our extensive prework and our enhanced automation have a stage to deliver a decent year.Lastly, let me cover our Global Ingredients segment, which is comprised of Tradin Organic ingredients business, along with our premium juice offering. Global Ingredients saw some headwinds in the fourth quarter, which caused a 5.7% decline in revenue on an adjusted basis, which removes the impact of the disposed corn and soy business, FX and commodity price movements. The decline in revenue was driven mainly by 2 factors: first is technical production challenges with commissioning the new processing line at our cocoa manufacturing facility in Holland; and second is competitive pressures in fruits and vegetables in the North America market.As we look at the first half of Q1, we can share that we have made good progress in improving output in our cocoa plant. And in fruits and vegetables, we have had a good start to the year while awaiting the new crop season. The gross margin profile improved versus last year, delivering a 10.2% gross margin rate compared with 9.5% a year ago.In 2020, we will focus on improving the margin and the return on capital profile of the Global Ingredients segment by reducing exposure to lower-margin businesses and reinvesting into higher-margin businesses. While this will likely leave the top line relatively flat, we expect these actions to result in improved profitability.In conclusion, I am pleased with our progress during the fourth quarter in delivering $16.4 million of adjusted EBITDA, a doubling from the prior year. Our focus on plant-based beverages is delivering significant margin-accretive growth, and we are executing on the key initiatives we laid out to our investors and our partners. We remain well positioned in on-trend categories and have the organization to deliver on our opportunities and drive improved profitability.And now I'll 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. It's a pleasure to speak with you today. Let me walk through gross profit and the rest of the income statement, given Joe's discussion of the commercial activities and revenue during the quarter. I will also cover our balance sheet and cash flow results.Gross profit was $33.4 million for the fourth quarter of 2019, an increase of $12.1 million or 57% compared to $21.3 million during the fourth quarter of 2018. The Plant-Based segment accounted for $10.5 million of the increase in gross profit, mainly reflecting revenue growth, plant productivity efforts and higher capacity utilization. Gross profit also benefited from improved results in the Fruit-Based segment.The negative impact to gross profit from the weather-related shortfall in the Fruit-Based business was in line with our previous communication for the fourth quarter. We recognized a $4.4 million impact during the fourth quarter and now anticipate $22 million to $23 million of total impact, slightly below the midpoint of the $20 million to $30 million range previously communicated.To date, we have incurred $17.7 million of costs and anticipate approximately $4 million to $5 million in the first half of 2020. The majority of this impact will fall in Q1 as we sell through fruit that was more costly to produce in 2019. The gross profit growth in the Plant- and Fruit-Based segments during the fourth quarter of 2019 was partially offset by decreased gross profit within the Global Ingredients segment of $2.5 million, of which $1.6 million was related to the corn and soy business sold in early 2019. The remaining $0.9 million was primarily driven by the revenue headwinds Joe touched on in his comments.As a percentage of revenues, fourth quarter gross margin was 11.3% compared to 6.6% last year, a 470 basis point increase. The largest contributor to this margin expansion was the Plant-Based segment, which saw 770 basis points of margin growth to 18.7%. Operating income was $3 million or 1% of revenues in the fourth quarter compared to operating loss of $6.9 million or negative 2.2% of revenues last year. The increase in operating income year-over-year reflects the $12.1 million growth in gross profit, partially offset by increases in consolidated SG&A expenses and foreign exchange losses. The increase in SG&A reflected higher overall employee compensation-related costs, which included $2.3 million of increased incentive compensation and $0.8 million of nonstructural costs. These costs masked $2 million to $3 million of SG&A savings realized during the quarter. Excluding the nonstructural costs and other items affecting gross profit that I just mentioned, operating income would have been $4.1 million in the fourth quarter of 2019 compared with operating loss of $0.9 million in the fourth quarter of 2018.Loss attributable to common shareholders for the fourth quarter was $7.6 million or $0.09 per common share compared to a net loss of $99 million or $1.13 per common share during the fourth quarter of 2018. On an adjusted basis, net loss, excluding disposed operations, was $5.6 million or $0.06 per common share compared to $9.8 million or $0.11 per common share in the fourth quarter of 2018. As Joe mentioned earlier, for the fourth quarter of 2019, adjusted EBITDA, excluding disposed operations, was $16.4 million compared to $8.2 million in the prior year.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 toward the back of the press release issued earlier this morning.Turning to cash flow and the balance sheet. At the end of the fourth quarter, total debt was $490.7 million in 2019 compared to $509.2 million in 2018. Total debt reflects $218.4 million net of issuance costs of our senior secured second-lien notes due in 2022; $241.7 million drawn on our first-lien global asset-based credit facility, with the balance representing smaller credit facilities, lease and other financing arrangements. We reduced bank indebtedness sequentially by $25 million in the fourth quarter, reflecting improved operating results and working capital management.From a cash flow perspective, during the fourth quarter, cash generated from operating activities was $36.2 million compared to cash generated of $5.1 million during the fourth quarter of 2018. The $31.1 million increase in cash provided by operating activities primarily reflects improved operating performance of $11.5 million, along with more efficient working capital management of $19.6 million. Cash used in investing activities was $9.2 million in the fourth quarter of 2019 compared with $6.7 million in the fourth quarter of 2018, an increase in cash used of $2.5 million, primarily related to the expansion of our extraction capabilities that are currently underway as well as investments in new automation for our frozen fruit facilities.Before we begin Q&A, I'm sure there are questions around our exposure to the impacts from the coronavirus. We all know this is an evolving situation, so what I can offer you is merely a point-in-time assessment. Based on what we know today, with the majority of the impact being China-centric, we have very little exposure to this region and would not expect any significant impact to our 2020 results. It goes without saying that if this has a dramatic impact in regions outside China, we will revisit this assessment.With that, I'd ask the operator to please open up the call to questions.
[Operator Instructions] Your first question comes from the line of Jon Andersen with William Blair.
I guess I wanted to start with the new food and plant food -- Plant-Based Food and Beverage segment. And specifically within that, the growth that you saw in the quarter, 25%, mid-20% growth, I think, on an adjusted basis, was actually a little stronger than that. And I'm hoping you can give us a little bit more color on the drivers of that growth, distribution, kind of velocity improvements you're seeing at shelf and maybe a little bit more color around how much beverages is contributing to that, how much broth is contributing to that, just so we get a little bit better sense of how you arrive at that because it's a terrific number, obviously.
Great, Jon. So the 25% revenue growth was -- the majority of the growth was on the plant-based beverage side versus broth. So that was the last part of your question, was the balance between plant-based beverage and broth. The majority of the growth was in plant-based beverages. Relative to where the growth is coming from, it's great to say it's coming across the board. It's coming from existing customers. It's coming from new customers. It's coming from new items, and it's coming from growth in existing items. So we're seeing literally growth in every single dimension and in every single cut of the business.
Great. And that volume growth, obviously, drove a significant step-up in your margins in that segment during the quarter. Could you talk a little bit about where you are with respect to beverage capacity, assuming you're expecting strong growth in that part of the business to continue in 2020? Again, where are you from a capacity standpoint today on beverages? And is there additional CapEx or investment required in square footage or lines as we look forward?
Yes. So from a capacity standpoint, we have the capacity in 2020 to deliver a similar growth rate to what we delivered in 2019 full year. And the additional capacity expansion that we just announced, those 3 projects, in aggregate, will certainly give us line of sight to continued growth into 2021 and 2022.
Okay. Could you talk a little bit more about the 3 projects? I think, 1 is focused more on extraction. The other 2 you mentioned today, you didn't -- I don't think mentioned the focus of those specifically. But I'd like to understand a little bit more, if you could just revisit it, the extraction capacity, the spend, and what you anticipate that extraction capacity -- what's that going to allow you to do? How big is that market opportunity for you once that's in place? And then a little bit more color around what these 2 other projects are would be helpful.
Sure. So on the extraction side -- and just to give a little bit of color from a process standpoint what exactly that is. So that is the kind of first stage of making a plant-based beverage, where you start with -- literally start with the grains, whether it's oats or soy, and you create an enzymatic reaction that separates the soluble and insoluble components of the grain to which then you can add water and kind of create a viscosity that is a pleasant beverage. That extraction capability, for us, is a significant revenue driver and margin driver. We see that as potentially a $40 million, $50 million business. The other 2 projects that we announced are more in the processing and filling of the core business -- the core filling and processing side of the business.
Okay. That's super helpful. Just so I understand then, on the extraction side, when will that capacity be in place, i.e., when will you begin to commercialize that product? And where is that done? Is that done in 1 of the 3 facilities -- the aseptic facilities that you own right now? Or is there -- is this a separate location?
Yes. So that project is in Alexandria, Minnesota. And it comes online mid-Q4 -- start production in mid-Q4. So we would not expect a significant revenue bump in the fourth quarter from that, but start-up is in the fourth quarter. And we're on track for that project.
Terrific. And then the other 2 projects would be in place by the end of the year, presumably helping you support growth in 2021, fair?
Exactly.
Okay. I hope I'm not overdoing it. I'm going to ask quite a few questions here. I'm not sure how many people I have in the queue. But if you need to stop me, stop me.So on broth, just sticking with my base for a minute. So broth, it sounds like your execution in broth was good through the holiday season. Where does that business sit today, in your mind, on a run rate basis? And how much -- as you lap here the introduction of broth through your entry into the category, where does that business go from here? Does that continue to grow at a double-digit rate? Does it moderate from here with better margins? Just talk about that part of the business.
Yes. I mean we're happy with the margins on the broth business. They're not quite as strong as the plant-based beverage side of things, but we're certainly happy with them. And yes, we would -- we will continue to be aggressive in the broth space. It provides a nice kind of seasonality add to the plants that allows us to get great capacity utilization across the year. And it's a nice tuck-in, if you will, from an overall capacity standpoint. And our focus is really on driving plant-based beverages as the core of the business. But the broth business provides a nice capacity addition and tuck-in, which allows us to be incredibly price-competitive across the whole landscape of products that we produce.
Okay. Okay. Shifting over to fruit-based foods for a minute. Encouraged by the commentary you had that the margin effort is kind of on track at this point. Can you remind us -- gross margins were up slightly, which was as planned this quarter. How should we think about the progression -- sitting here today, what you know today, the progression of gross margin in that fruit segment as you move through 2020? Because I know there's the possibility of step changes as you work through the higher-cost fruit from last year and hopefully start to dip into some of the benefits of the automation, et cetera, associated with the new harvest. So can you give us your thoughts on the cadence of gross margin improvement from here in that business?
Yes. So where we sit today, we mentioned that we had a slight positive gross margin in frozen fruit. And it is our goal to exit the year in the double digits range. And so you can just think about sort of bridging from low single digits towards the 10%.We feel like, certainly, within the components of fruit business that we control, specifically the conversion components and building out grower relations, et cetera, that we feel like we're in a good shape. Obviously, we're sitting here today in February, and the heart of the California season is May, June, July. And so with what we know today, we're feeling cautiously optimistic, but we're not in the season.So -- but our prep work, the automation we've installed are real significant -- will be very significant contributors to our ability to drive margin. And all of that automation has been installed. It's been tested, and we are very encouraged by the test results that we saw from the kind of pilot testing, if you will.
Okay. And you recently put a new GM in place over -- I think, over the fruit business. Can you talk about why and why that individual, just why that change and what this individual brings to the table?
Sure. Yes. So he was someone who we moved over from the Tradin side of the business and have spent basically 1.5 decades on the fruit business from a global commodity trading standpoint. So he brings just an incredible wealth of knowledge into the agriculture side of the business, the grower side of the business, global pricing, price competition and really has been a great help to us in understanding the global marketplace, global pricing and the agriculture side of the business.
Okay. And the one large foodservice customer that you referenced that really drove the decline in the top line in fruit, is that a customer loss that is ongoing? Or was it more of a timing issue? How should we think about that impacting the fruit business going forward?
It's behind us. So there's no significant overlap in 2020 on that business. So it was -- it's a very lumpy order pattern, and it's basically behind us.
Great. Okay. Last one for me. Just next -- I know you had a good announcement around kind of the balance sheet and extending and redoing the facility. What is your road map? As you think about it at a high level, what should we be expecting from a debt refinancing perspective at this point? Have you done what you wanted to do for the time being? And then when, maybe, would you look at addressing the second lien?
Yes, Jon, it's Scott. I think we've done what we wanted to do to answer that part of the question. I guess the way I think about this is the second lien notes are 11 quarters out. And so pragmatically, that really leaves us with 7 quarters to address that instrument. So I think the focus across 2020 is to continue to improve the business and drive EBITDA.
Your next question comes from Chris Krueger with Lake Street Capital Markets.
A lot of my questions were answered. But now that you had these 3 segments, can you give us an idea of what your longer-term gross margin and EBITDA margin goals are for each of those 3 segments?
Sure. I think as you think about each of the segments, I think the outlook is pretty consistent with what we've previously shared. The Global Ingredients business, I think the margin targets there are low teens. Joe has commented on what we're trying to do with the other fruit business. We're obviously trying to recover the profitability of that business, exiting 2020 in a low double-digit category. And obviously, very, very pleased with what we've seen in the Plant-Based segment. And I would say that the margin print there is pretty indicative of what we would expect on a go-forward basis.
All right. And then just 2 more questions on -- in the broth category, can you talk a little bit about the market? I believe there's some signs that it's always been kind of an old category that wasn't growing that much, but you're going to hopefully gain some share. But has that category actually been growing more?
Believe it or not, that category has been growing double digits for the last several years. We think one of the main drivers of that has been the instapots believe it or not, where I think it was the #1 gifted item this Christmas. And basically, every recipe for an instapot requires a cup or 2 of chicken broth, beef broth or vegetable broth. And so we have seen a pretty significant growth in what you would kind of otherwise think of as a fairly sleepy category.The second consumer driver of that category is interest in bone broth. There's been a lot of movement and consumer interest in bone broth and the nutrition benefits of that. And so we've also -- the category has also seen renewed consumer interest, driven by the nutrition profiles in the -- in bone broth.
All right. Last question. I know you talked a lot about -- in the plant-based area, a lot about oat milk being a big category in the last couple of years. Are there any other maybe early-stage emerging categories for aseptic that we should keep our eyes open for that maybe could start to become meaningful in a couple of years?
Just a little bit of category landscape, soy and almond milk are, by far, the big drivers of category volume. Oat is really -- from an overall market share within plant-based beverages, is really the explosive growth. So there's been a lot written about it, and we've certainly talked about it. But from oat as a market share percentage in the category, there is volumes and volumes of share left to go for oat. So we would really see oat as the answer to your question. There's tremendous runway left in that. And if there is anything we see sort of glimmering on the horizon, it might be hemp milk, but that would be probably a half a decade away.
This concludes today's question-and-answer session. I'd like to turn the call back to Mr. Ennen for closing remarks.
Great. Well, thank you all for participating in our fourth quarter call. Look forward to speaking to you in the future, and appreciate your interest and support in SunOpta. Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.