We're ready.
Hello, everyone. Thank you so much for joining us today. My name is Brian Holland, Senior Research Analyst at D.A. Davidson. Pleased to be joined on this stage by the leadership team from SunOpta. So, to my left, I have outgoing CEO, Joe Ennen; incoming CEO, Brian Kocher; and CFO, Greg Guba. SunOpta is a manufacturer of plant-based foods and beverages. Thank you so much for being here with us today. Just to, by way of introduction, Joe, if you just want to explain to folks who are new to the story a little bit about the background of this company.
Awesome. Thanks, Brian, and thank you for being here today. SunOpta is a 50-year-old sustainability food company. We are a growth company. We have gone through quite a portfolio transformation. Our core business today is focused on three segments: plant-based milks, protein drinks, protein shakes, and third is better-for-you fruit snacks. We go to market several different ways. We are a co-manufacturer, we do private label, and we also have a portfolio of our own brands. From a channel exposure standpoint, very big food service business. Plant-based milks is the go-to format. Shelf-stable plant-based milks is the go-to format for food service. It is the significant majority of our revenue, coffee shops across America, and we also have, though, a retail business, club business, e-commerce, et cetera.
If we could just focus in on the transformation that's happened here over the past, I guess almost five years now during your tenure. Talk about the playbook that you applied upon joining the company and how it's evolved against an ever-changing backdrop, and then kind of close with how the business is positioned today.
Sure. So I joined in 2019. At that time, 70% of the revenue of the business was in commodities, and 30% was in value-added manufacturing. Through a series of both acquisitions and divestitures, today the business is 100% focused on value-added manufacturing. For perspective, over that time period, we've divested $500 million of revenue, and our EBITDA has grown $30 million. So clearly, we've been taking the proceeds from those divestitures, putting them back into the value-added segments where we have the deepest competitive moats, where we have the stickiest customer base, where we have our core competencies that being principally focused on plant-based milks, protein shakes, and fruit snacks. Driving capital expansion into those businesses to drive not just EBITDA expansion, but certainly EBITDA margin expansion as a result of that.
Where we are today, a very well-insulated business focused on sustainability-oriented categories with capacity-constrained environments. We think that's a great place to be, where we have deep competitive intellectual advantages versus our competitors. What is probably a little-known fact, plant-based milks are extremely difficult to manufacture, and so being great at it, in and of itself, that's not, I've been in the food industry for 35 years, not all food manufacturing is difficult. This is by far the most technically sophisticated, challenging product to manufacture that I've ever seen. And so being great at it, in and of itself, is a competitive advantage.
So when we talk about value proposition and competitive advantage moat, it's primarily rooted in capacity-constrained categories where you have advantage manufacturing process, like you explained with plant-based beverages, and that is how you go to market with your customers?
Correct. That's how we go to market. And again, our sustainable competitive advantages are rooted in several key things. Number one, we have the biggest network in the U.S. to manufacture plant-based milks. So we have built a, what you would describe as a perfect diamond shape supply chain network. We have a plant in Pennsylvania, one in Texas, one in California, and one in Minnesota. That affords a huge supply chain advantage for our customers. Second, service is a core differentiator for us. If you're not great at running the assets, surprise, surprise, you don't end up filling your customer's orders. So we are great at running these plants and our manufacturing asset base. We're great at manufacturing plant-based milks, and as such, we provide our customers great service.
Beyond that, really the important part to understand is just our true depth of expertise in producing plant-based milks. For perspective, in the shelf-stable plant-based milk segment, we would estimate we produce roughly 60%-70% of all the plant-based milks sold in the United States. 60%-70%. Our next biggest competitor is single digits. So the technical expertise that we bring to bear, combined with the manufacturing network, combined with the fact that we have capacity for our customers to grow, is hugely important. When you think about it, this has been a capacity-constrained environment for a decade. We have been one of the few players in the category and in the industry that's been investing in capital, and as such, brands and customers want to partner with us because they know partnering with SunOpta gives them capacity and headroom to grow.
And so if we isolate down to continued operations over the past three years, revenues have grown 35%, EBITDA has grown 45%. Beyond just having the capacity to grow, what else explains that magnitude of performance over the last three years? And then what levers are available to you to pull forward?
Yeah, you know, I'm gonna say those numbers again 'cause it feels good. You know, talk to me about a food company that has grown top line 35% and EBITDA 45% in the last 36 months. Again, a testimony to our capital allocation priorities of investing in capacity to grow, resulting from the divestitures of the business we've made. So again, we're super proud of the growth that we've delivered, and we're just getting started, so to speak. Our growth has come and will continue to come from three big strategies. The first is growing market share with existing customers. We have grown market share with four of our top five customers in the last 12 months. Adding new customers is the second one.
Again, we just built a brand-new greenfield manufacturing plant in Texas that has given us additional capacity to be able to take on new customers. So we added several big new customers in 2023. And then third is TAM expansion. We entered into the protein shake category. We have a public partnership with Premier Nutrition, and that, again, has been part of our growth story. So growing share with existing customers, adding new customers, and TAM expansions have all contributed to growth and will absolutely be the growth drivers and the growth platforms going forward.
Joe, you talk about the ways you go to market. You know, one of the interesting things that you did was, or one of the pieces you had was that this does not just have to be a co-manufacturer, that there's other ways to go to market. You can also manufacture your own brands. I think a co-manufacturer making their own brands, obviously, when you acquired some assets from Hain Celestial a couple years ago, that was the question: How do you do both? So wanna understand the own brand strategy and how it's going.
So, we've gone from zero revenue of own brands to approaching $100 million in revenue with our own brands. It has opened up many, many avenues of growth for us. It has allowed us to significantly expand our footprint in food service. It has allowed us, principally though, to bring innovation to market. So it's one thing to have an idea. As a co-manufacturer, if you're just doing co-manufacturing and private label, and you wanna drive your business with innovation, how do you bring ideas to market? 'Cause you're beholden to somebody else thinking your idea is a great idea. Well, when you have your own brands, you have the ability to drive that innovation all the way to the shelf.
And what we have done in at least three product platforms now is we've used our own brand to spearhead, tip of the spear, if you will, to drive the innovation through to the market, onto the shelf, and then we use that to demonstrate to our co-manufacturing partners and to our private label customers, "Hey, look it, this product already exists. It's doing well in the marketplace. We'd love to manufacture it for you." And so in a number of instances, take organic creamers, for example, we were the first in the U.S. to launch organic oat milk creamers. No one else was doing it. We saw the market opportunity. We developed and launched a brand. We now manufacture that same product for one of our big national brand partners, and we make it for private label, and we sell it as our own brand.
We're about monetizing innovation ideas, and we are absolutely agnostic as to how that innovation goes to market.
Underneath a lot of the divestiture noise that you raised at the top, SunOpta's fruit snacks business has increased by 2.5x, I think, over the past three years. You'll exit fiscal 2023, I believe, as a $100 million business. What's fueled that growth, and how does the company sustain it?
Yeah, I mean, it's absolutely fabulous. I'd love to give some applause to the parents out there who are making healthy choices for their kids. Our fruit snacks business, the vast majority of it is clean label, organic fruit snacks. Thirty-six months ago, that business was $40 million in revenue, will now do $100 million, and really just through consumer demand, consumer pull. So we've added a big customer in 2023 that will drive growth into 2024. It's a pretty simple business. We've got a few key power customers, both co-manufacturing and private label, and that business is on a tear.
In terms of how we sustain the growth, we just finished, at the end of the Q3, a big capacity expansion in our fruit snacks business, which gives us 40% more capacity and should, knock on wood, be able to allow us to support customers for at least the next 24 months.
Rewinding back to the, the Q2 of this year, SunOpta results missed expectations, you revised guidance lower. I, I think the market interpreted this as a by-product of the softness we were all seeing in the plant-based category, at least within tracked channels. Though I believe the core issue was timing of new business. So can you provide an update on the onboarding of new business, as well as a broader perspective on how the plant-based category is performing right now?
Yeah, so the plant-based milks category, the shelf-stable plant-based milk category, where we principally compete, it's growing mid-single digits. I'll say that again, it's growing mid-single digits. Unlike many, many food and beverage categories, which are dominant in the tracked channels category, tracked channels for shelf-stable plant-based milks is maybe 20%-25%. 75% of the volume goes through untracked channels: food service, club stores, e-commerce, et cetera. So when we aggregate those, and it's an estimate, we would estimate that it's growing mid-singles. In terms of our 2023, basically, Brian, right now, I would say we are sorta, call it four or five months behind where I thought we would be. We built Texas, we onboarded a whole bunch of new customers, and we anticipated those coming at a certain cadence of timing.
And candidly, we just missed the mark on when those customers were gonna bring their volume into our plants. The good news is, for 2024, we've taken that learning, and we've said, "Okay, the forecast that we have put out for 2024 does not include any new business." So we certainly feel good about our business development pipeline and our ability to onboard and bring on new customers, but we have not built any new business into the 2024 forecast.
Great. We'll circle back on the outlook stuff here in just a moment. But talking about the category holistically, a lot of time, obviously, spent focused on the tracked channels, the scanner data that we can see. You obviously talked about the untracked performance. So just staying there for a moment, increasing focus on food service trends, including concerns about slowing traffic at your largest customer, what are you seeing in that channel? And if indeed momentum does slow or is slowing at a macro level, how is SunOpta not affected?
Yeah, we're absolutely not seeing any loss of momentum in the food service channel, period, full stop. You know, we see continued great growth and strength there. You know, Starbucks reported 8% comp store growth in their Q3. But our business grows in food service a number of different ways. Number one is, and all you have to do is walk into a coffee shop and see the promotional focus on plant-based milks. That is driving customer conversion. And remember, plant-based milks as a percentage in coffee shops is actually lower than in tracked channels. So again, there's a whole consumer penetration and adoption road to run there. So we continue to see, you know, really strong performance there. We have not seen any slowdown.
Pivoting over now, obviously, I mentioned at the top, outgoing CEO, incoming CEO, been some management departures of late. Just talk about, for investors, why now is the right time for you to step aside, and get investors comfortable with the timing of the transition?
Sure. So, you know, Brian I think if you learned anything about me in the last five years, it's I'm a planner. And this has been my plan for a long, long time, 35 years, in the food business. And, you know, I feel like we're at a great inflection point of the business. You know, the portfolio transformation work, at least what the portfolio was, is complete. The big capital deployment chapter is behind us. Texas is ramping, and it feels like a great time to bring on a new leader. As well as, you know, this was my long-planned timing. You know, back in 2022, the board and I agreed on April of 2024 as my retirement date.
You would see in the proxy, the 2022 proxy, a retirement provision in there that we agreed at that time. So long planned and, I feel great about bringing Brian on board.
Joe, as I understand it, you were involved in the process of selecting this, your successor. Talk about what made Brian the right choice as the next CEO of SunOpta.
Well, we were certainly looking for somebody better looking than me. That was a kind of key starting point.
I didn't get the call.
We were really focused on three key things. Number one was somebody that could continue to come in and be a people leader and build the culture. We absolutely think that is part of our secret sauce and what makes us such a force in the marketplace. Number two was somebody who could lead and drive operational excellence. The next chapter for SunOpta is very focused on operational excellence. And third is, you know, we have very big, demanding customers, and we needed somebody who really understood what running a customer-centric company looked like, and Brian absolutely checked the box on all three of those things.
And so, Brian, bringing you into the conversation, would you mind providing us with your background, specifically, you know, what experiences or skills will be most useful to you in this role?
Yeah, probably the most relevant pieces of my background have been the last 20 years, where I've been in the food business, predominantly in produce. But two major components of that experience carry over very well to SunOpta. First of all, on the commercial side, I've sold into every category that SunOpta is selling, whether it's retail, food service, ingredients business, I've sold in co-man or private label environments. So I don't, obviously, I need to know the particular idiosyncrasies of SunOpta's relationship with each of those customers, but explaining the channel or explaining the category or explaining the mode of delivery, that's something I'm very accustomed to. So that was one.
I think the second thing, and Joe mentioned it here, sort of the next phase of growth is associated with operating excellence and particularly supply chain excellence. And again, for the last 20 years, I've been involved in processing, food processing facilities, where the product dies in seven-10 days. So you have to be really disciplined with respect to planning, procurement, inventory management, all the way through conversion to delivery. And although I am not a low-acid, aseptic-processing engineer, I do know the discipline required to run a really good supply chain, and I think that's one of the biggest opportunities SunOpta has.
As great as we do with servicing customers, we've invested in a capital base, and now is the time to sweat those assets, to drive operating efficiencies that create both cost advantages as well as potentially defer future CapEx.
And I think this is officially day seven for you, so I won't ask for a full state of the union at this point. But, but since your appointment in early December, what, what has most stood out to you about this opportunity, about SunOpta, and what has you most excited going forward?
I'd say my the investment thesis I had has been confirmed time and time again. And really, Joe mentioned a lot of this. It's a growing category in a continuing, and at least in a business model now, and we'll call it continuing operations, that has grown, again, Joe, we might as well say it a third time, 35% on the top line, 45% on the bottom line. So a growing business in a growing category, where the portfolio changes have been implemented, where the investment capital has been deployed, and now we have an opportunity to leverage the capital and drive future efficiency. So Joe mentioned kind of this being an inflection point for SunOpta. It also looked like a really good entry point for me.
The inflection point, the entry point, Joe's been gracious throughout this process, so not only helping in the last month, but being available for the next several months to make sure that our initiatives and our momentum stay on point.
Great. Well, welcome. Wish you the best of luck.
Thank you.
Greg, exiting Q3 results in early November, you provided fiscal 2023 guidance from continuing ops for total revs in the range of $614 million-$630 million, adjusted EBITDA in the range of $75 million-$77 million. I haven't checked my phone, but I haven't seen a press release, so I'll assume that outlook still holds today?
Yeah, Brian, that, excuse me, that outlook definitely stays. You know, when we announced Joe's retirement and the transition to Brian here, we reaffirmed our outlook for Q4 and for 2024, and we feel pretty good about it, Brian.
Okay, we'll come back to 2024 in just a second. Joe, I think you made the comment on the Q3 call, Q3 volumes were up 5.5%. You commented, Q4 was looking even stronger. Can you just talk about where that momentum is coming from?
Yeah, really coming from the three things I outlined: TAM expansion, new customers, and growing share with existing customers. Again, this was the plan in 2023. We just were sort of right-shifted a bit from some of the timing of onboarding new customers. But we were absolutely seeing it in Q3, and, you know, hence the comment about the strength in Q3 rolling into Q4, and obviously into 2024.
And looking ahead to fiscal 2024, I know that outlook is tied to some extent to the new facility that you're bringing, that you have brought on in [Uncertain] or excuse me, Midlothian, Texas. So how's that plant progressing, and what are your expectations for 2024?
Plant is progressing. You know, we put in three full-scale production lines. Two of the three are now running 24/7, and the third production line comes on in the Q1 , so we'll really be contributing to revenue in the back half. It is, you know, every day, if you will, we almost set new production records on a daily basis now, and we feel good about, you know, our ability to get to what we had forecasted as our sustaining run rates in 2024.
And then at an Investor Day event, June 2022, which feels like forever ago now, the company introduced financial targets looking out to fiscal 2025. Outlook is obviously stale today with the divestitures. So Greg, can you frame for us the go-forward algorithm you expect from the current portfolio?
Sure. So when we did the Investor Day in 2025, we had an EBITDA target out there of $150 million by the end of 2025. The frozen fruit division roughly was about $25 million of that 150, so the new target now would be $125 million. As we said on our last call, we think that we'll get there at a run rate by the end of 2025 or early 2026, and that's based on the timing of the new business that we are bringing in, and to get our assets up to full capacity. You know, that's still a good number. We feel good about it, and it's all gonna be about the timing, Brian.
On the Q3 earnings call, you signalled a shift in capital allocation priorities. Obviously, you had significant capital projects over the last few years. Can you just talk about what, how those priorities have shifted, and how you're thinking about capital allocation over the next few years?
Sure. So we've invested over $230 million since 2020 to really expand our network. You know, we've put expansions of capacity in our existing facilities, and as Joe mentioned, our new greenfield facility in Texas was a large project for us. You know, now our job is operational excellence, fill that capacity, and run those assets. And with that, we anticipate to generate significant cash flow in the current year. You know, we called out that we expect $35 million-$45 million of cash flow generation in 2024. With that, our first priority is to pay down debt. We'd like to get below three times levered. At the current interest rates, I think that makes a lot of sense to get us down there.
Once we get 3x levered, below 3x levered, our next priority is to look at share buybacks. You know, assuming that we view it undervalued as we do today, that would be a very attractive alternative for us. After those, you know, additional ROI projects, especially if we're growing even faster than we think we'll be growing, and then, of course, there would be an acquisition opportunity as well.
Fantastic. I think we are just about at time, so we can.. Well, you know what, Greg, just really quickly, you also announced towards the end of the year, you amended your credit agreement. Can you just talk about any additional flexibility or what that does for you before we wrap up?
Sure. Again, that's definitely tied to the divestiture of the frozen fruit business. You know, we took our working capital down. We used to be roughly 20% of revenue, down to 10% of revenue. We used to have an asset-based lending structure with that. With the significant reduction of assets and working capital requirement, the term loan were much more flexible for us. It creates a lot of availability, allows us to pay off some of the high-interest notes payable that we have, and also allowed us to roll some of the leases into that term loan, which really was more attractive of an amortization period, all relatively at the same interest rate. So really happy to get that done.
All right, we're at time, so we'll leave it there. Joe, Brian, Greg, thank you so much. Joe, congratulations, and best of luck in your next chapter. Thanks, everyone.
Thank you.
Thank you, Brian. Thank you.