Good morning. Welcome to SunOpta's conference call to discuss strategic divestiture of the global organic ingredients business. By now, everyone should have access to the 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. Management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance. Therefore, undue reliance should not be placed upon them.
We refer you to all risk factors contained in SunOpta's press release issued this morning, the company's annual report filed on Form 10-K and other filings with the Securities and Exchange Commission for more detailed discussion of the factors that could cause actual results to differ materially from those projections and any forward-looking statements. The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances, except as may be required under applicable securities law. Finally, we would like to remind listeners that the company may refer to certain non-GAAP financial measures during this teleconference. The company uses measures such as segment operating income and adjusted earnings before interest, taxes, depreciation, and amortization, which are not measures in accordance with US GAAP.
The company believes that the segment operating income and adjusted EBITDA assisted investors in comparing performance across reporting periods on a consistent basis by excluding items that are not indicative of its operating performance. Now I'd like to turn the conference over to SunOpta's CEO, Joe Ennen. Please go ahead, sir.
Good morning. Thank you for joining us on such short notice this morning. With me on the call is Scott Huckins, our Chief Financial Officer. As I'm sure you've seen in the press release, SunOpta has agreed to sell its global ingredients business, often referred to by its operating identity as Tradin Organic, to Amsterdam Commodities, known more commonly as ACOMO . The transaction provides cash consideration of EUR 330 million or approximately EUR 337 million after giving effect to accrued interest consideration. This equates to roughly $400 million based on the recent exchange rate. For SunOpta, there are three major benefits of this transaction. First, the proceeds of this sale will give us additional funds to invest strategically in our competitively advantaged plant-based food and beverage platform. Second, this reduces our exposure to the ebbs and flows of a commodity trading business.
Third, this significantly strengthens our balance sheet, giving us additional flexibility to play offense. Since 2019, we have been talking about portfolio prioritization as a strategic imperative. After a diligent and exhaustive process, we believe this transaction will be transformational for SunOpta. While Tradin has been a significant and valued part of the portfolio over the last 12 years, this divestiture will further accelerate our strategic growth ambitions in our competitively advantaged plant-based food and beverage business unit. This acceleration will take the form of additional capital investment and likely relevant acquisitions that will complement our current business model. As we have shared before, we have plans to double our plant-based business. It is an on-trend business being driven by five long-term sustaining consumer tailwinds. It is an attractive margin business, and it is a business where we have competitive advantage. Our competitive advantage centers around three differentiators.
First is our technical and operating knowledge of these complex and sophisticated plants. Second is the strength of our customer partnerships. Third is the geographic diversity of our supply chain footprint, which gives us cost efficiencies in working with national customers. This diversity also provides customers supply redundancy. On this call, we will not be going into any additional details on our plans to further accelerate plant-based growth. Let me assure you, we are confident we can deploy a portion of these proceeds into incremental initiatives to further accelerate margin-accretive growth. Another dimension of this divestiture is a reduction in the commodity trading exposure. Volatility is a part of all trading businesses, and it is our view that this is best managed as part of a larger trading organization, allowing us to focus on what we do best.
As it relates to the balance sheet, as many of you are aware, we have doubled EBITDA the last four quarters in a row. This has greatly reduced our leverage. The proceeds of this sale will further enable us to make progress in de-leveraging the business as we target a long-term range of 2x to 4x EBITDA. Lastly, it is important to understand the strategic shift we have been pursuing for the last 18 months and how this is consistent with all previous communication. Tradin was acquired in 2008 under a corporate strategy of vertical integration. For those historians listening in, you will recall we also owned a corn and soy business which had similar ingredient roots. The idea with Tradin was that Tradin would source organic ingredients, and the CPG business would take those ingredients and turn them into UPC products sold at retail.
SunOpta learned, as almost every other company has learned, that vertical integration sounds great, but it is a very hard business model to execute. Despite more than a decade of trying, the synergies between Tradin and the CPG business are fairly limited. The good news is that in the areas where we do have synergy, we have signed a long-term supply agreement with ACOMO that assures our continuity of supply and long-term partnership. While not obvious to those on the outside of the company, the Tradin business is very autonomous from our fruit and plant-based businesses. Tradin is headquartered separately. It has its own ERP, its own sales force, and all its own back-office function. It really did operate as a separate company. Before I turn the call over to Scott, let me reinforce why this transaction is so transformational.
Number one, this will accelerate our growth in our competitively advantaged plant-based business. Number two, this divestiture reduces our exposure to commodity trading. Number three, this significantly strengthens our balance sheet and very much puts SunOpta in a position to play offense. Now let me turn the call over to Scott to take you through the financial details. Scott?
Thank you, Joe and good morning , everyone. Further to Joe's comments on the transaction fundamentals, please let me provide some additional color. First, we think that the transaction will close as early as late December or into January of 2021. Next, to put into perspective Joe's comments on the balance sheet, if all proceeds are exclusively used to pay down debt, pro forma leverage following the transaction would be just under 2x . As a result, we would also expect a material reduction in interest expense, including an expected reduction of our 9.5% second lien notes due in October 2022. However, to be clear, this transaction was absolutely not a necessary input for the successful refinance of the SunOpta balance sheet.
Finally, from a cash flow perspective, if we net from the lost EBITDA the reduction in cash CapEx, taxes, and interest expense, the result would be a single digit million-dollar number. From a strategic perspective, it is important to understand that Global Ingredients is a capital-intensive business. The form of this capital intensity is primarily net working capital investment, which represents over half of SunOpta's total net working capital. The plant-based segment also consumes capital, albeit more in the form of capital expenditures. In order for both businesses to realize their full potential, we believe that the next chapter of growth for Tradin will be best realized as part of an integrated trading company, which is why ACOMO will be a strong owner of the business going forward.
Therefore, we ultimately believe more strongly in our ability to create superior returns for shareholders in our 20% gross margin rate plant-based business. Simply put, we are divesting a capital-consuming 13% margin business, which allows us to accelerate the growth of a 20% margin plant-based business. With that, I'd ask the operator to please open up the call to questions.
Thank you. To ask a question, you will need to press star one on your telephone keypad. Again, that is star one on your telephone keypad. To withdraw your question, press the pound or hash key. Your first question comes from Jon Andersen from William Blair. Your line is open.
Thanks. Hi, Joe and Scott, and congratulations on the announcement.
Good morning. Thank you.
First off, could you talk a little bit more about the process that you followed in selling the business? Was it an auction, duration, the level of interest, and just kind of where you ended up from an overall price perspective? If you can. Thanks.
Sure. As you would expect, Jon, first of all, good morning. We ran a full CIM process with a regular investment banking advisor and a full complement of professionals. That process took, as you would expect, a fair amount of time, ultimately concluding in this being the best transaction for SunOpta.
There has been, and I go back a little ways, the vertical integration part of the story, which you mentioned in the prepared comments. Is that something that as you came into the business you found just didn't matter as much, wasn't as relevant to the future of the company? Some investors may wonder with the selling of this business if you lose something there with respect to the vertical integration aspects of having Tradin as part of the organization.
Yeah, Jon. As I previously mentioned, we have a long-term supply agreement in place with ACOMO that affords us the opportunity to continue to work with ACOMO on the areas of the business where we are vertically integrated. That is an absolute certainty for us going forward, and we feel great about our ability to continue to work with them.
As you think about the funds that you're raising through the transaction, is there any more maybe thought you can share with us around the allocation of those funds towards, as you point out, accelerating perhaps growth in plant-based foods and beverages versus paying down debt? How do you see that in the near term playing out?
Yeah, Jon, at this point, we're not prepared to go into a detailed discussion about how we view the funds being allocated between the three uses that we outlined.
Okay. Clearly, this will give you much more strategic flexibility, and you mentioned that that strategic flexibility includes potential future acquisitions. Since it's been a while since you've had maybe that kind of flexibility to do acquisitions, could you talk a little bit about maybe your criteria? What's most interesting? What areas are most complementary? Any kind of return criteria that you may apply as you think about that going forward.
Maybe not surprisingly, our key focus would be acquisitions that complement and extend our current plant-based capabilities. We see opportunities in the ecosystem around the plant-based food and beverage landscape and are excited about the prospects of expanding our business in plant-based. In terms of criteria, we would look at it on a fulsome set of financial metrics to make sure anything we do is complementary and accretive to the existing business.
Okay. One more from me. Where does this leave the fruit-based food and beverage business? The talk today, for all the right reasons, has been about the real opportunity that the sale of Tradin enables in driving your plant-based business and growth there. How do we think about the fruit-based business, and is that core? Is it non-core? Is it somewhere in between? Any thoughts on that would be helpful.
Sure. I would offer up a couple of thoughts. Number one is certainly from a synergy standpoint, the fruit business and the plant-based business are very synergistic in terms of back-office support, sales support, et cetera. Unlike Tradin, fruit is synergistic to the plant-based business. As we discussed on the Q3 earnings call, we're pleased with the progress that we're making on profitability on that business. That has been our core focus for the last 18 months, is really improving the margin structure and profitability of that business. As we look forward to 2021, as we shared on the last call, we see opportunity for continued profit growth in that business and think it will contribute to the overall results of SunOpta.
Great. Thanks. I'll pass it on, and congratulations again.
Your next question comes from Brian Holland from D.A. Davidson. Your line is open.
Yeah, thanks. Good morning and allow me to add my congratulations as well. On the plant-based business, I'm just curious when you talk about M&A, to the extent that you can, would your search be more focused on capabilities or adding brands? Maybe it sounds like, and maybe you can correct me here if I'm wrong, that you'd be looking to expand your plant-based capabilities outside of kind of what your core offerings are today. I don't know if that's a misinterpretation on my part, but maybe if you could just clarify a little bit there.
Sure. I would say ground zero would be anything that looked exactly like our current business because we would confidently be able to add value and improve operating efficiencies of assets that look a lot like the business we're in today. Then as it radiates out from our core, we are open to and looking to expand either capabilities, business segments, or go-to-market options.
Okay. That's helpful. Thanks. Just, I guess tacking onto Scott's question about the fruit segment here. Two-part question. One, I would've presumed, right or wrong, that fruit was the more likely candidate for a sale. Wondering if it is indeed a candidate, if that's something that you are working on or considering. Just how this affects procurement on that business, if there's any material change there as a result of the Tradin sale.
Yeah. As I mentioned, from a procurement standpoint, we have a long-term supply agreement in place with ACOMO that affords us the opportunity to continue to work with them on the parts of the business that they support us on. We feel great about that component. In terms of fruit as a core part of the portfolio, again, just to underline what I shared with Jon. We continue to view the progress that we're making on the business as encouraging. The team is doing really significant work in improving the overall margin structure of that business. Our focus at the moment is finishing the fourth quarter strong and having a great 2021.
Okay, great. Then maybe one last one sort of skipping around here. Back to plant-based. Can you kind of talk through the differences in economics as you see it in brownfield versus greenfield as far as expanding your capacity and capabilities? I'm just wondering how you think about that.
Yeah, good question. We have the three capital investment projects that we've talked about on several calls that certainly afford us the opportunity for further growth. I think anything beyond that will require us to do some additional analysis around where we see our customers going and where we think we need to add capabilities. That could take the form of additional expansions within our existing assets and/or a brownfield, greenfield development if we found ourselves in the position of needing a fourth manufacturing plant. I think that is something that at some point in the future, we're going to have to entertain, and we think there's some very logical areas of the country where we would put that when we need to take that on.
Sorry, last one from me. Would you still look to redo the ABL or is that less of an imperative for you guys given you can clearly handle the credit facility now?
Yeah, Brian, it's Scott. We will continue to execute the refinance of the ABL I spoke about on the third quarter call. Obviously, this gives us a little more flexibility in how to execute that, but that is still on the docket for Q4.
Appreciate it. Thanks again.
Thank you.
Your next question comes from Mark Smith from Lake Street Capital. Your line is open.
Hey, guys. Just any more insight into kind of tax treatment on this?
Hey, Mark. Good morning. It's Scott. I guess all I would share here is this is a very tax efficient transaction for the company. I'm going to refrain from going into specifics, but I think that gives you some pretty strong perspective there.
Okay, great. Thank you.
Your next question comes from Jon Andersen from William Blair. Your line is open.
Oh, thanks for the follow-up. Just a couple things. Scott, you mentioned you will continue to refi the ABL in the fourth quarter. What about the second lien? Anything you can say about what your plans are there now?
Yeah. As Kerry shared, we're not in a position today to kind of go through allocation of the proceeds against the opportunities and debt pay down. I think what I tried to give you in prepared remarks is just to give you an idea of the coverage of the proceeds relative to the debt. We'll obviously be back as we come back to the group in our next call with those specifics.
Can't blame a guy for trying. Last question. Are there any stranded costs that we should be thinking about with the sale of the business? When we think about kind of the ongoing EBITDA run rate, is it as simple as if the purchase price multiple is 10x $390 million, $39 million of EBITDA is coming out? If you could talk a little bit about, I didn't quite follow you on the free cash flow implications. I just want to make sure I understand that. Stranded costs, EBITDA run rate, and free cash flow implications.
I guess in order, your assumption around EBITDA would be inclusive of or giving effect to those stranded costs. That's been considered in that number. The run rate obviously would be take your pick, either the LTM of $84 back out that or a similar number to try to get to run rate. I guess the point I was trying to drive at on cash flow was if we assume, as I was mentioning in my prepared remarks, if all of the proceeds that were used to pay down debt, you'd have the give up on EBITDA, but you'd also avoid CapEx for that business, cash taxes for that business, and then enjoy the interest expense reduction. That was the framework.
Thank you very much.
No problem.
There are no further questions. I will turn the call back over to Joe Ennen.
Thank you, operator. On behalf of myself, the board, and the entire organization, I would like to take this opportunity to thank the Tradin team for their passion and commitment to the business. We wish them all well as part of ACOMO and look forward to continuing working with them in the future. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.