Sunopta Inc
TSX:SOY
Earnings Call Analysis
Q4-2023 Analysis
Sunopta Inc
Investors have reasons to pay attention to SunOpta's positive momentum, with revenue climbing to $181.6 million, marking a significant increase of 13.7% from the previous year. This uptick was primarily fueled by volume growth, and it set the stage for an overall sunny financial outlook, despite a slight compression in adjusted gross margin which settled at 17.3%, a minor step down of 50 basis points due to amplified depreciation from new production equipment. Impressive increments in operating income by 48% and more than a doubling of adjusted earnings from continuing operations reflect the company's capacity to yield profitability against upward swings in interest and depreciation. Adjusted EBITDA from continuing operations too received a boost, punching in at an increment of 17.5% to $22.3 million.
In Q4, SunOpta turned a significant page in its financial playbook, streamlining its debt via refinancing into a new $180 million term loan and $85 million revolving credit facility, each set with a 5-year horizon to infuse the company with improved fiscal agility and alignment with longer-term economic blueprints.
The free cash flow narrative is also looking bright, with SunOpta holding steady to a free cash flow target range of $35 million to $45 million for 2024. A conscientious eye is cast towards reducing the debt-to-leverage ratio below the 3x mark within the second half of the next year, laying out a plan where refinanced debt will dwindle from its current zenith of $263 million.
The path ahead is paved with optimism as the company reasserts its outlook for 2024, positioning expected revenue between $670 million and $700 million, a growth corridor of 6% to 11%. Adjusted EBITDA is similarly anticipated to burgeon by 11% to 17%, falling in the range of $87 million to $92 million. This growth is not linear across the year, however, with the latter half primed to outpace the first, thanks to seasonal influences that also predict Q1 to edge out Q2 in performance. Adhering to this expected trajectory, the planned capital expenditures envisaged for 2024 amount to about $25 million to $30 million.
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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.
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?
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'm 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 4 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?
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 where 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 1, 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 2, 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 #1 priority.In summary, SunOpta is a growing company in growing categories and is focused on supply chain excellence to leverage 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.
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 Instructions] Your first question comes from the line of Andrew Strelzik with BMO Capital Markets.
And Joe best of luck in the future. It's been great working with you.
Thanks, Andrew.
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?
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 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.
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 2 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?
Yes. I think the best way I could say it is it's ramping as expected. The first 2 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.
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.
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 3 areas.
Your next question comes from the line of Bobby Burleson with Canaccord Genuity.
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?
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.
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?
Well, Bobby, I think a couple of things to think about. We definitely saw oat driving growth in the category, foodservice as well as our co-man business and private label business. So we saw oat as a driver. Remember, we also anticipated that and our oat extraction line in Modesto is in place. It's coming online in the first quarter, and we expect it to be positively impacting profits in the second quarter. So we foresaw the oat expansion.I think we've been able to partner with our customers. Again, I would say we have a really blue chip customer base. And so we've been able to partner with them across a spectrum of different outlets to make sure that we're executing well and they're executing well. And that's what's taking advantage of the growth in the fourth quarter. And certainly knowing some of our customers and our existing customers and our existing product lines when we charted out our '24 growth, we've been able to see those trends be exactly in line with what we were expecting.
Your next question comes from the line of Ryan Meyers with Lake Street Capital Markets.
First one for me. If we think about the guidance ranges that you guys gave for 2024, what are some things that you're looking for, you could potentially see where you could come in at the high end, if not better than what you have initially guided here?
Yes. I think there's a couple of things that would positively impact our '24 outlook. One would be if some of these new business development opportunities got across the goal line, I would think of those as additive. The other thing that I would say is we certainly have visibility to what our customers who operate in tracked channels were forecasting for '24, and they're forecasting in tracked channels again, not for the entire category, I think we've explained well enough that the entire category is growing mid-single digits, but tracked channels, we see some softness there. If that would turn around, if promotional volume would drive some increases, if that would turn around and start growing, I think that would be additive to the '24 outlook as well.
Got it. That's helpful. And then as we think about the growth levers and the expansion of the new customers, I was wondering if you could talk about how penetrated you are in foodservice and how much ability there is to add new customers in that channel.
Well, I think it's a great question. I mean, we certainly have customers that we're penetrated in, and we're working on new product development or TAM expansion ideas. I think if you look at shelf stable, we believe we're about 65%, 70% of the overall shelf stable market, including tracked and untracked channels.
Your next question comes from the line of Jim Salera with Stephens.
First of all, Joe, congrats on retirement. I think you leave the business in a really great spot moving forward. And I'd be lying if I said I wasn't a little envious of your future escaped. So have fun with that. Maybe one last question for you to kind of close the loop on everything. If we look at the sales composition moving forward into 2024, it sounds like smoothies are gone. You guys are using the majority of the ingredients internally now. Is it really just 2 categories now, the beverages and broths and the fruit snacks?
I mean, I think, Jim, it depends upon how you think about protein shakes. We certainly see that as an incredibly untapped market for us for the next half a decade, if not decades. So I would think about that as -- even though from a reporting standpoint, it rolls up in there, just really outstanding revenue potential growth territory for us.
Okay. And I'm sorry if I missed this, but did you give the 4Q number for beverages and broth? I know fruit snacks was 31%, but maybe I missed the beverage and broth growth rate?
We said plus 19%. Yes, beverages and broths, I think it was 81% of total revenue and plus 19%.
Okay. Great. In 2024, the midpoint for the sales guide is like 8.5%. Should we think about that as being evenly split between beverages and broths and fruit snacks or is there a little bit more leverage on fruit snacks just given the capacity unlock that you guys are working through there?
Yes. Jim, I think it's probably fair to say there might be a little accelerated growth rate on the fruit snacks side versus the beverage and broth. But remember, the size of the beverage and broth is so big that the absolute dollar amount may be similar.
Okay. Great. And then maybe switching gears to the operations side. So, Brian, I know that's your area of expertise and excited to see what you can do with the business here. But especially on the Tetra Pak side, you already inherit a very well-functioning supply chain and operations piece. Can you just maybe walk through where you think there's opportunity to cross the manufacturing base to really see operating leverage that you can extract out of the business and hopefully see that flow through to the EBITDA line?
Yes, Jim, thanks for the question. I think, A, you are right. We do have what we believe is a competitive advantage in our supply chain and our ability to fulfill customer demand. So I agree with you there. Even with that, I think if you look at the supply chain in total and what we do is essentially break it down into its component parts, everywhere from long-term planning to procurement to inventory to conversion to distribution, there are points along that line that you find that maybe there's some leakage in either productivity or opportunity. And we've spent a large part of last year implementing some shop floor metrics that allow us to track that, but most importantly, to track the operating metrics at each one of those, for lack of a better word, component parts of the supply chain, pareto the defects and then start working against fixes and opportunities to improve that.I would say, to answer your question sort of philosophically, we will never ever, ever be done trying to drive supply chain efficiency and supply chain excellence. And we're not done for 2 reasons. One, there's an opportunity to -- if we can push more units to a fixed cost network, certainly, we can enhance margin. And that's just straight math, right, Jim, that's easy. I think the second part of that is the more units we can get through our fixed cost network, we create what I'd like to call, non-CapEx capacity. And that allows us to fill customer demand. It allows us to manage our schedules. So we're producing at the most time -- effective time of the quarter, the month and the year. And so there's a lot of advantages to continue pushing on supply chain excellence and free up any amount of shop capacity that we can in our network.
Okay. That's great. And then maybe if I could sneak in 1 more question. Just thoughts around CapEx spend in 2024, obviously, coming off a big lift with Midlothian and getting that up and running either like a dollar amount we should think of or percentage of sales, whatever is easier for you guys to just think about that for 2024?
Yes, Jim, in the prepared remarks, we gave an estimate between $25 million and $30 million for CapEx in 2024, and we feel pretty good about that range.
Your next question comes from the line of John Baumgartner with Mizuho Securities.
I wanted to come back -- first off, I wanted to come back to operating leverage and specifically at the SG&A line. The last 9 months showed some pretty solid improvement there. I'm curious as to how you're thinking about SG&A in 2024 as volume drives the top line. I mean is there any reason to expect a material uptick in SG&A spending? Are there incremental resources you need to add as you go forward? Just trying to understand how SG&A evolves from here.
John, great question. Thanks for asking that. How I look at '24 is pretty similar to our SG&A as a percentage of revenue as it was in '23. In Q4, it was a little bit lower, the percentage. That was due to all of the change, change in leadership, change in the -- with the divestiture of the frozen fruit business and there was a bit of a reversal of stock-based compensation in Q4. You'll see that on the cash flow statement. But going forward, we're roughly 12.3% SG&A as revenue -- as a percentage of revenue, and I would view that to be pretty similar in '24.
And then coming back to the comments on the mid-single-digit all outlet growth for plant-based beverages, obviously driven by away from home. Are you seeing any sort of commonalities in terms of where the away-from-home channel is gaining that acceleration? Are there certain sectors adopting plant-based for the first time, like universities or hospitality? Is this still largely coffeehouse driven? I'm just trying to figure out, understanding better the TAM, how the TAM is evolving across the verticals in away from home.
Yes, John, it's Joe. We're definitely seeing that driven by coffee shops. What you're seeing is, and this isn't a new trend, we've seen for years and years the migration of consumers from cow dairy to plant based. Additionally, you see coffee houses putting an increasing emphasis on the promotional drinks featuring plant based. All one has to do is look at the menu board and you will see a plethora of plant-based specialty drinks. And so between the consumer shift and then the coffee shops enthusiasm for promoting and pushing specialty drinks, it has been the same drivers for several years now, and we would expect those to continue.
Your next question comes from the line of Brian Holland with D.A. Davidson.
Yes. So I think this has been addressed in a few different spots, but maybe just to tie it all together. So it sounds like on whole plant-based beverage growth around mid-single digits has been the trend here for a little while now, stronger in foodservice, a little softer in what we can see in the tracked channels. Just want to make sure I understand, to the extent that this is possible to look at it this way, what needs to be assumed for category growth that underpins your outlook? Are we still sort of like on whole mid-single digits? Is it a little bit softer than that, a little bit stronger than that? I just want to make sure I'm sort of centered there.
Yes, Brian, really good question. I think the way to think about this in terms of what underlies our outlook is, remember, we don't necessarily start off our outlook and forecast with a category growth number. We start off with the growth forecast from our customers. And so then that gives us, obviously, insight to where the category as a whole is growing.Now that's sort of insight into the process that we have. But ultimately, I would say the growth that we have with our customers would translate to a category that's growing in the mid-single digits. So they happen to be very aligned in this example.
Okay. And if I just kind of follow up on that, so maybe ask the question another way because I think this was an issue a few quarters ago where maybe some assumptions were made about the category, the category softened and some plans changed. Any sense as you talk to your customers on whole that some of the slowdown in that category that we have seen, where we've seen it, in tracked channels and the like, that they've gotten a little more conservative about those assumptions over the next 12 months relative to maybe the prior 12 months?
Yes. I think that's absolutely true that they've been a little bit more conservative. And as we -- we may -- I think we answered this in one of the earlier questions, that's why also if tracked channels returns to sort of growing, we believe that would be upside to our outlook for 2024. So we base some of our overall forecasts for '24 on the feedback directly from customers that they were being a little bit more conservative than the tracked channel arena.
Appreciate it. That's very helpful. Last one for me. We talk a lot about new business development. But I think one of the more underappreciated components of the growth story here over the last few years has been the innovation pipeline, which I think has sort of come to fruition in a number of forms. Where does that stand today?I don't know to the extent you can actually talk about specific products. I appreciate some things that maybe haven't been unveiled that you can't talk about. But just understanding how actively we are managing the product innovation pipeline. And to what extent is that proving to be a lever that you are using to either gain more business from existing customers or help penetrate new customers?
Yes, Brian, it's a great question and let me just try to kind of simply talk about that a little bit. If you look at the growth that we had in Q4, basically almost $22 million worth of revenue growth from Q4 '22 to Q4 of '23, that really was split almost equally between TAM expansion, share growth with existing customers and the acquisition of new customers. Now some of the acquisition of the new customers were also coinciding with new products and new product launches. So as I -- so it's a real key contributor to our growth platform.As I mentioned earlier in the call, we are at various -- every day, we're at various stages in the new product development and sort of the new business development pipeline with customers. And sometimes, we're at multiple stage or different stages in multiple projects with the same customer. So we'll continue to try to make sure on our regular updates that we update you on the progress. But what I think you'll see is you'll see that product roll into the financials, and that's the best way to see it work and the best way to see the impact that it's had on the organization.
Your next question comes from the line of Jon Andersen with William Blair.
Joe, it's been fun to get to know you and best wishes as you go forward. Let's see. Most of my questions have been asked. I guess there was a reference in the prepared comments to the longer-term EBITDA goal of $125 million. And I think it was kind of portrayed that you're comfortable that you can achieve that by '25 or early '26. Am I right to think that's a bit of a pull forward from how you talked about that previously? And where is that kind of incremental confidence coming from?
Jon, let me just make sure we clarify. I would say we're affirming that we can be at a $125 million annual run rate at sort of the end of '25, beginning of '26.
Great. That's helpful.
And that is what we said in the Q3 conference and the investor conferences that we've been to date. So I think it's very consistent.
Okay. And then can you remind me, Line 3 in Midlothian what that line is going to be producing? And then if -- I guess, if the protein shake line is going to be at run rate production levels by the end of the second quarter, are there plans to add additional capacity in terms of TAM expansion, just given how strong that category has been, as you referenced in the prepared comments as well?
Sure. Yes. Line 3 -- just specifically, Line 3 is focused on plant-based milks. And I think our next best opportunity, again, we will be at the run rate -- we're on track to be at the run rate that we expect to be in Midlothian in sort of the middle of the year. I do think there's further opportunity to drive productivity and unleash some [ top ] capacity right now. So I would think the next step we do is continue to drive productivity and efficiency in those lines and create capacity in that manner.
Okay. That makes sense. Maybe 1 for Greg. So as you generate free cash, I can't -- it's been a while since I think you've generated the kind of free cash that you're talking about in 2024, could you talk about your plans for kind of just the cadence of debt paydown? Is that $35 million to $45 million earmarked for debt paydown in 2024? What's your long-term target leverage level? And with the refi that you did, how much of your debt is fixed versus variable right now?
All right. Thanks, Jon. I'll address the last one first. So roughly, our debt is 80% variable, 20% fixed. So our first goal, right, for our capital allocation priority is to deleverage, right? We want to get under 3x leverage. So our primary goal is to pay down debt to accomplish that. We think we'll be there, Jon, by the end of second half of the year. Other priorities, right, will either be stock buyback, will be purchase of ROI, high ROI investments or M&A acquisitions. So that hasn't changed. We continue to focus on paying down debt. We continue to focus on deleveraging. Continue to focus on getting under 3x, which is our long-term goal.
Your next question comes from the line of Daniel Biolsi with Hedgeye.
I just wanted to extend my best wishes, Joe. And my question is the mid-single-digit growth in plant based, would you be able to sort of bucket that between oat and almond and soy? I'm just curious how that looks for the industry.
We don't really kind of bucket that and segment that. I think it's fair to say that the growth rate that we're projecting includes all of the plant-based milks, whether it's oat, almond, soy, coconut, it's all of the plant-based milks.
Okay. And then does Modesto still look to be online in Q2 and when would shipping start? And then should we expect growth in ingredients once that comes online in the second half of the year?
Yes. Modesto is still on track. Yes, we believe that it will make a positive impact in the financials in the second quarter. Again, we will prioritize the internal use of oat for our own products. But I would say maybe by the end of the year, the first part of 2025, you might see some ingredient sales. But our priority will be the internal use first.
There are no further questions at this time. I will now turn the call over to Brian Kocher for closing remarks.
Thank you, operator. I'd just like to take a few minutes to summarize our key messages. If you only take away 3 items from this call, then the 3 items should be, first and foremost, we are a growing company in growing categories. In addition to the growth that's naturally coming our way via the growth of our blue chip customer base, we're growing via share gains in our existing customers, we're growing via new customer acquisition, and we continue to grow via TAM expansion. So that's one thing.Secondly, I'd just like to remind everyone. Our early visibility into the results and trends in 2024 have allowed us to both affirm our '24 guidance as well as that midterm guidance that we talked about and so that's really important to remember. And then I think the other thing that's important is my confidence in the demand side of the business is allowing us to prioritize our leadership efforts in the pursuit of operational excellence and pursuing operational excellence as a way to enhance margin and then create that non-CapEx capacity to unlock capacity from our existing network. So remember those 3 as the summary items. And then finally, I'd really like to thank you again, Joe, for your leadership. Your legacy will positively impact the culture and the business of SunOpta for many years to come and so thank you for your efforts.With that, operator, we can adjoin -- adjourn, excuse me. Thank you to all who joined us and we look forward to updating you throughout 2024. Thank you.
This concludes today's call. You may now disconnect.