Good morning, welcome to SunOpta's fourth quarter fiscal 2018 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.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 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 US dollars and are occasionally rounded to the nearest million. Now I'd like to turn the conference call over to SunOpta Interim CEO, Kathy Houde.
Good morning, thank you for joining us today. With me on the call is Rob McKeracher, our Chief Financial Officer, and Mike Buick, our Senior Vice President of Consumer Products. Mike joined SunOpta two years ago and has been instrumental in leading the return to growth in revenue and margin improvements in our healthy beverage and snacks operation, and recently has taken over the leadership of the healthy fruit platform. Also, we note in the press release issued earlier today, former CEO and President, David Colo, has been terminated, and the board has initiated a search for a new CEO. I will serve as Interim CEO until the successor has been identified. As you may recall, I previously served as Interim CEO of SunOpta in late 2016, which coincided with the development and launch of our value creation plan.
Since the launch of the plan, SunOpta has exited and sold unprofitable and non-core lines of business, made significant investments in food safety and quality, and in 2018, returned to meaningful revenue growth. My deep familiarity with the company and the plan will ensure that our efforts to drive sustainable, profitable growth will continue uninterrupted until the transition period. In addition, the board and I will take full advantage of available resources to continue making progress against the company's operational, go-to-market, and process sustainability initiatives. Before I turn the call over to Rob, I'd like to reaffirm SunOpta's purpose and key strategies, which are not changing. Our purpose is to be the most innovative, integrated provider of organic ingredients and healthy food solutions across multiple channels.
SunOpta is well-aligned with consumer trends towards organic and non-GMO foods. I believe the acceleration in growth that we delivered in the fourth quarter affirms our right to win in this attractive market. Our strategies to accomplish our purpose are, first, to innovate in growing and healthy food and beverage categories. For example, we have long been a leader in the fast-growing category of non-dairy beverages, and we expect to continue to grow in this category with innovations such as oat and hemp milk. Second, to invest in and grow efficient, integrated supply chains. With Tradin Organic, our organics ingredient sourcing business, we can quickly identify consumer trends and leverage our sourcing expertise to deliver field-to-table innovations to our consumer products customers while benefiting from a vertically integrated supply chain. Third, to focus on food safety and quality and best-in-class operational performance.
Since 2016, we've made substantial investments in food safety and quality, which have resulted in meaningful improvements to third-party audit scores of our manufacturing facilities. In addition, our productivity efforts have taken approximately $30 million of costs out of the business since the launch of the plan. While the board and I remain confident in our purpose and strategy, and we have driven success in many parts of our portfolio, it is clear the performance of our healthy fruit business has not met our expectations. Accordingly, our top priority in 2019 is to drive long-term margin improvements through our fruit margin optimization plan. Under this plan, we will intensely focus on optimizing our cost base, leveraging existing capabilities to improve mix, and drive innovation in the category, all with the objective of returning our healthy fruit business to historical margin performance over the next two crop cycles.
Finally, I'd like to acknowledge the efforts of our world-class leadership team, many of whom joined SunOpta since the launch of our value creation plan. I'm extremely proud of their dedication and efforts over the last few years, and I look forward to working closely with the team once again during this transition period. With that, I will turn the call over to Rob to discuss the sale of our soy and corn business and provide an overview of our fourth quarter results. Rob?
Thanks, Kathy. Let me begin with the sale we announced yesterday of our North American specialty and organic soy and corn business to Pipeline Foods for proceeds of $66.5 million.
One of the key pillars of the value creation plan we initiated two years ago is to optimize our portfolio, investing where structural advantages exist and divesting businesses where we are not effectively positioned. This allows us to simplify the business and deploy both our capital and human resources into areas of the business where we have market leadership with long-term growth and favorable margin opportunities. This sale is consistent with this strategy and allows us to focus our global ingredient operation on our international organic capabilities, where we believe we have built the largest organic sourcing platform in the industry and are investing in expanded capabilities and capacity with more attractive margins and consistent growth. Additionally, this transaction increases the company's focus and mix towards consumer products, including retail and food service offerings in beverage, fruit, and snacks.
Included in the sale of our soy and corn business are five facilities in the Midwest that contributed $104.4 million of external revenue and $8.3 million of gross profit, which included $0.8 million of depreciation and $6.8 million of earnings before income taxes. Not included in the sale are sunflower and roasting operations. The sale of the business is expected to simplify the company's operations, enabling cost reductions that extend beyond the employees and expenses that will transfer to the buyer. As a result, the company expects to rationalize an additional $3 million of SG&A expenses. On a pro forma basis, assuming the transaction had occurred at the beginning of 2018, and taking into consideration the contribution from the business sold as well as rationalized SG&A, adjusted EBITDA would've decreased by approximately $4.6 million. We are pleased to be able to complete this transaction.
We view Pipeline Foods as a strong long-term sourcing partner. We have agreed to a multi-year supply agreement with Pipeline to continue to source certain organic and non-GMO ingredients for our beverage and snack consumer platforms. The transaction enhances our competitive positioning and business focus and provides us with incremental capacity to invest in the key areas of our business where we are strategically advantaged and positioned to create long-term value. Last but not least, we are pleased with the value we received in this transaction and believe it reflects the strength of the specialty non-GMO and organic food and feed business we have built over the last 20 years. Now, let me provide an overview of SunOpta's fourth quarter results before turning the call over to Mike to discuss our consumer product segment in greater detail. As expected, revenue growth continued to accelerate during the fourth quarter.
After returning to positive revenue growth in the third quarter, where adjusted revenue was up 2%, we generated 16% adjusted revenue growth in the fourth quarter. The growth was driven by double-digit gains in both the Global Ingredients and Consumer Products segments. Global Ingredients produced 15.5% revenue growth, including 17.1% growth in international organic ingredient sourcing and 11.3% growth in domestic raw material sourcing and supply, each adjusted for commodity and/or currency changes. Consumer Products is up 16.3%, driven by 17.8% growth in the healthy beverage platform and 17.3% growth in healthy fruit, adjusted for commodity pricing variances. The accelerated growth is being driven by our go-to-market effectiveness enhancements across the portfolio as part of the value creation plan.
Recall that approximately 18 months ago, we built an entirely new retail and food service sales and marketing organization inside our Consumer Products segment, realigned our sales efforts by key customer and channel, and got to work building a sales opportunity pipeline. We started converting the pipeline into tangible pieces of business in early 2018, which started to deliver in the back half of 2018, in particular in the broth and frozen fruit categories. The benefits of these investments and the team we have built are increasingly evident in our revenue growth. During the second half of 2018, we commercialized approximately 100 new broth and frozen fruit SKUs. I would like to emphasize that a key driver to our improved revenue growth has been the significant enhancement to customer relationships, driven by our improvements in food safety, quality, and service.
Implementing lasting improvements in these areas was a key initial focus of the value creation plan. We enter 2019 confident in our ability to generate sustainable growth and are well-positioned in our key categories and with key customers. While we are pleased and very encouraged by our accelerated revenue growth and enhanced positioning, we are not satisfied with our profitability. adjusted EBITDA was $9.1 million during the fourth quarter, compared to $9.4 million in the prior year. While we have delivered higher margin from growth and productivity improvements over fiscal 2018 in key platforms such as beverage, snacks, and organic ingredients, the decline in profitability of our frozen fruit operations more than offset these improvements. In 2019, we'll be intensely focused on increasing consolidated profitability as we continue to grow revenue and execute our fruit margin optimization plan.
We've cleared the first hurdle of the fruit plan, which was to win back lost business, restore customer confidence, and improve our position with existing and potential key customers. While these efforts have come at the expense of near-term margin, they are a key part of the critical path towards a complete turnaround in this business. With that, I will turn the call over to Mike to provide deeper insight into our Consumer Products business and provide an update on the fruit margin optimization plan. Mike?
Thanks, Rob. It's a pleasure to be able to join you and Kathy on the call today. Let me run through our consumer product platforms and address our frozen fruit margin optimization plan. In the healthy beverage platform, growth accelerated throughout 2018, as we expected. We successfully diversified our revenue base by customer and category as we entered the broth market. Production and shipments of broth started in the third quarter and ramped up very quickly in the fourth quarter. During the fourth quarter, we realized significant costs in our aseptic network as a result of the increase in production levels to support broth. We transitioned all facilities across our three-plant aseptic network to 24/7 continuous production schedules, which led to increased labor and training costs.
This investment countered some of the efficiency gains caused by higher utilization, but it was the right investment for future volume and profit expectations and was needed to support the peak broth season, particularly given the timing of our late entrance into this category. The speedy launch into broth also caused us to experience increased changeover, freight, and logistics costs to meet delivery schedules, as we were unable to pre-build any inventory ahead of the primary broth production season. We also had to manage higher maintenance costs as we adjusted to the processing of new ingredients. In 2019, we will have the ability to lock down a more optimal production schedule and pre-build inventory, which will enable us to prevent a repeat of these inefficiencies.
In short, I consider our accelerated entry into the broth category a great success and a key addition to our beverage portfolio that will contribute to our growth and long-term margin targets. Healthy Beverage delivered 17.8% growth during the fourth quarter, despite some non-dairy customers reducing their inventory levels. As evidence of our efforts under the Value Creation Plan, over the course of the full year 2018, beverage revenue grew 7.7% and gross margin increased 260 basis points on an adjusted basis, and we expect to realize continued improvement in 2019. Volume will now have a back-half bias as we serve the peak season of the recently introduced broth business. While we are very pleased with our commercial and profitability achievement in beverage, we still have additional margin opportunities given the inefficiencies of the broth launch and the capital investment we will bring online in 2019.
Healthy Snacks was softer during the fourth quarter, as expected, following the strong third quarter push that served back-to-school demands. As a result, both revenue and gross margin dollars were lower sequentially. Looking ahead, we expect volumes to ramp back up again in the first quarter of 2019 as we begin to fill additional orders to support the promotional calendar of certain customers. Our snacks business remains strong, and due to our go-to-market and productivity efforts over the course of the full year, 2018 snacks revenue grew 22.3% and gross margin increased 640 basis points on an adjusted basis. Turning to healthy fruit, we saw strong revenue growth reflecting increased volume with existing and new customers.
On a combined basis, sales of frozen fruit into the retail and food service channels were up 20% on a dollar basis and up 33% on a volume basis compared to the prior year fourth quarter. We have solidified the sales base, and as I will discuss shortly, we are beginning to execute our fruit margin optimization plan, which will add automation, reduce labor, and increase productivity. However, fourth quarter profitability remains below our expectation, primarily driven by three factors: inventory write-downs, higher production costs, and sales price reductions. As part of our margin optimization plan, we are tightening management of our fruit inventory. As we enter 2019, on a dollar basis, inventory levels of frozen fruit are down 17% and 27% compared to the 2017 and 2016 year-end balances, respectively. Ensuring our inventory levels are balanced is an important aspect of our improvement plan.
In order to achieve this inventory reduction, production levels in the fourth quarter were below sales levels, which contributed to less efficient overhead absorption and thus lower margins. In addition, we recognized $3.1 million in inventory write-downs in fruit during the fourth quarter. Fourth quarter margins were also compressed as a result of high costs of production in 2018, which included increased costs related to fruit produced in Mexico as we learned to produce finished products of a higher quality. Also, during the fourth quarter, we started experiencing lower volumes in our fruit ingredient operation as consumption trends in the yogurt category are declining. Finally, the last significant price decrease to a retail customer took effect at the start of the fourth quarter.
As an update on the 2019 Mexican fruit season, the market is experiencing a delay in freezer berries due to cold, wet weather in central Mexico, which is delaying our pack and placing some price pressure on fruit cost. We are taking appropriate steps to ensure that customer needs are being met during this delayed start and to minimize the financial impact caused by the higher purchase price and lower production levels. Over the course of the full year 2018, fruit gross margin decreased 880 basis points on an adjusted basis, reflecting our investments in price, quality, and service, as well as the reduced level of production to improve our inventory position. While we're in the early stages, our margin recovery plan is on track, and restoring the profitability in the fruit business is the top priority of our management team.
The details behind our fruit margin optimization plan are as follows. First and foremost, we will continue to make food safety, quality, and customer service our top priorities. Second, we continue to be focused on volume growth and made significant progress in this area during the fourth quarter. Third, we are committed to driving cost out of the business. The capital enhancement project to be implemented over the 2019 and 2020 crop seasons is the first step in this direction. We are increasing automation with proven technology in our facilities, which includes further automation of our packing lines and adding optical sorting capabilities, expected to lower labor and other conversion costs while improving yield. We will be increasing IQF capacity to maximize efficiency during the peak of the season, which will help improve yield and reduce the number of days needed to achieve the pack plan.
As a result of extending our lease at the Santa Maria location, the landlord will be building a new cold storage facility adjacent to the plant, which is expected to lower overall storage, handling, and freight costs. Finally, we will bring margin-accretive innovation to the platform to increase the number of value-added products we offer to our customers. With that, I will hand the call back to Rob to discuss the Global Ingredients segment, provide an update on the value creation plan, and recap the fourth quarter financials, including the balance sheet. Rob?
Thanks, Mike. In the Global Ingredients segment, we generated strong revenue growth in both international organic sourcing and the domestic raw material and supply platforms. We continue to see strong organic ingredient demand and have further enhanced our focus on our Tradin Organic operations as a result of the sale of the specialty and organic soy and corn business. In 2018, we commercialized the second organic cocoa processing line in the Netherlands and are now focused on enhancing efficiency and margin with this new capacity. We've also now fully commercialized the new roasting equipment in our Crookston facility and are positioned to pursue margin-accretive growth opportunities in healthy roasted snacks, including products such as chickpeas, pumpkin seeds, and other non-allergen based snacking items. In addition, we are in the early stages of expanding our global organic sourcing capabilities in an attractive new category.
We have broken ground on an organic avocado oil processing facility in Ethiopia, which is expected to come online in the second half of 2019. Avocado oil demand is strong and certified organic avocado oil is in very short supply. Now on to the value creation plan. Our focus on operational excellence was the primary driver of productivity in 2018. We achieved our 2018 target of $20 million of productivity improvements, this is most noticeable in our beverage, snacks, and ingredient platforms. These productivity improvements were offset by investments in price, quality, and service in the frozen fruit platform. We developed and began to implement our fruit margin optimization plan, as Mike just discussed, the investments in automation have already begun in our frozen fruit operations.
Our portfolio optimization efforts during 2018 included the sale of our soy and corn business, the addition of a second organic cocoa processing line in the Netherlands, our ongoing project to expand capacity and capabilities in our Allentown beverage facility, expanded roasting capacity and capabilities in our Crookston facility, and most recently, the new avocado oil facility that we have begun constructing in Ethiopia. Our accelerated revenue growth during the second half of 2018 reflects our go-to-market effectiveness strategies. We successfully innovated to enter the broth category in a very short timeframe, ramped up operations to commercialize over 40 new broth SKUs in the back half of 2018. As previously mentioned, our new sales and marketing organization has driven growth, we are pleased with our commercial efforts across channels, categories, and customers.
As we enter 2019, we will continue to focus our efforts to deliver sustained, profitable growth across the four pillars of our value creation plan. These pillars form the basis of the framework that guides all of the company's enterprise-wide objectives. Our focus for 2019 will intensify in two key areas. The first is operational efficiency and expansion, which includes the on-time and efficient cost execution of critical improvement and expansion projects, namely executing our fruit margin optimization plan, completing the addition of new filling and processing capacity and capabilities at our Allentown beverage facility by the third quarter of 2019, opening the new organic avocado oil facility in Ethiopia during the second half of 2019.
In addition, the company is targeting $10 million of in-year productivity driven cost reductions during 2019, with a significant portion of this being generated within the healthy fruit platform as a result of the fruit margin optimization plan. The second key area of focus is commercial growth and innovation, which includes further growth within the consumer product segment, including expansion of margin-accretive innovative private label and control brand offerings, additional growth across the international organic ingredient portfolio, including achieving 85% capacity utilization in the recently expanded organic cocoa processing facility by the end of 2019. We are also targeting to be at approximately 80% capacity utilization by the end of 2019 across our aseptic beverage network following the addition of new capacity. We will update you on these key initiatives throughout 2019.
Now let me recap the fourth quarter financial results as well as balance sheet and other metrics in greater detail. Unless otherwise noted, all growth percentages for the fourth quarter of 2018 reflect the year-over-year change as compared to the fourth quarter of 2017. Fourth quarter revenue was $320.5 million, a 9.6% increase as reported. However, excluding the impact on revenues from changes in commodity related pricing and foreign exchange rates and removing the impact of the bar and pouch lines of businesses that were exited last year, revenue increased 16%, with both our reportable segments posting double-digit adjusted growth.
The Global Ingredients segment generated revenues from external customers of $139.9 million, a 10.3% increase as reported, or a 15.5% increase after excluding the impact of changes in commodity related pricing and foreign exchange. The consumer products segment generated revenues of $180.6 million during the fourth quarter, an increase of 9.1% as reported. Excluding the impact of commodity prices and removing the impact of the discontinued bar and pouch lines of business, revenues in the fourth quarter increased by 16.3%. Consolidated gross profit was $21.3 million for the fourth quarter of 2018, a decrease of $7 million compared to the fourth quarter of 2017.
Consumer products accounted for $5 million of the decrease in gross profit, primarily as a result of strategic price reductions and unfavorable product mix for frozen fruit, combined with $3.1 million of inventory write-downs due in part to a change in expected use of aged stock, and $2 million of costs related to the commercialization of new beverage products. These factors were partially offset by increased sales volume and productivity-driven cost savings for aseptic beverages and operational savings from the discontinuance of pouch and bar products.
Global Ingredients accounted for $1.9 million of the decrease in gross profit, which was largely due to $0.7 million of startup costs associated with new roasting equipment and the second organic cocoa processing line, and a $0.5 million net reduction in commodity and foreign exchange gains related to the organic cocoa hedging activities and mark-to-market measurements on certain contracts within the European-based operations of the international organic ingredient platform. Global Ingredients also experienced margin compression due in part to sales mix and lower margin and more price-competitive commodities, and storage costs from increased inventory levels as the business stocks up to support the 2019 contract book. In addition, the overall performance of the organic cocoa facility was below targeted levels, due mainly to increased labor and plant spend as we ramp the facility. We expect this drag to continue in the near term, but improve over the course of 2019.
As a percentage of revenues, gross profit for the fourth quarter of 2018 was 6.6% compared to 9.7% in the prior year. The gross profit percentage for the fourth quarter of 2018 would have been approximately 8.5%, excluding $3.1 million of inventory write-downs in frozen fruit, $2 million of costs related to the commercialization of new beverage products, and startup costs of $0.7 million inside the Global Ingredients segment. This compares to a gross margin percentage for the fourth quarter of 2017 of 10.1%, excluding the impact of $1.3 million in inventory write-downs and facility closure costs associated with the exit from the flexible resealable pouch and nutrition bar operations. As discussed earlier, we are not satisfied with our performance on margins in the fourth quarter. The biggest driver in improving margins in the business will be the fruit margin optimization plan.
That said, we do not believe overall gross profit in the fourth quarter of 2018 is reflective of the run rate of our business, due in part to the seasonality and timing of inventory builds, production efficiency, and cost of manufacturing in our consumer products segment. In our aseptic beverage business, we ramped our network to near maximum production schedules for most of the quarter as we very quickly brought on a substantial amount of new broth business. Due in part to the production inefficiencies previously mentioned, as well as customer ordering patterns, our broth shipments were somewhat held back in the fourth quarter. At the same time, key non-dairy customers drew down their inventory levels, which overall led to lower production utilization levels compared to our expectation. This weighed on fourth quarter beverage margins by approximately 100 basis points or $1 million during the fourth quarter.
Similarly, in our fruit snack operations, the fourth quarter was seasonally the lowest sales and production quarter of the year, reflecting timing of promotions and back-to-school activities. Compared to the quarterly average for 2018, gross profit for healthy snacks was down $1.3 million in the fourth quarter. As noted earlier on the call, low production levels in the fourth quarter, combined with higher costs of production, contributed to less efficient overhead absorption and higher cost of goods sold inside the fruit platform, which weighed on gross margins approximately 130 basis points or $1.1 million when compared to a more balanced production schedule. Operating loss was $6.9 million or 2.2% of revenue, compared to an operating loss of $3.9 million or 1.3% of revenue in the prior year period.
Excluding the costs I previously mentioned related to inventory write-downs of frozen fruit, costs related to commercialization of new beverage products, startup costs inside the Global Ingredients segment, $0.4 million of SG&A costs related to new product commercialization, and a $0.2 million gained from the reversal of previously recognized stock-based compensation, segment operating loss would have been $0.9 million for the fourth quarter of 2018, compared to an adjusted segment operating loss of $1.1 million for the fourth quarter of 2017. On a GAAP basis, for the fourth quarter, we reported a loss attributable to common shareholders of $99 million, or $1.13 per common share, compared to a loss of $119.4 million or $1.38 per common share during the fourth quarter of 2017. In the fourth quarter of 2018, the company recognized an $81.2 million non-cash goodwill impairment related to the frozen fruit operations.
The fourth quarter of 2017 included a non-cash goodwill impairment of $115 million. On an adjusted basis, we reported a loss of $9.3 million or $0.11 per common share, compared to an adjusted loss of $8.8 million or $0.10 per common share in the fourth quarter of 2017. Adjusted EBITDA for the fourth quarter of 2018 was $9.1 million, compared to $9.4 million in the prior year period. 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 towards the back of the press release issued earlier this morning. From a cash flow perspective, during the fourth quarter, cash generated by operating activities was $5.1 million, compared to $48.9 million in the fourth quarter of 2017.
The lower cash from operations reflects an increase in accounts receivable as a result of higher sales and higher inventory levels, primarily in organic ingredients, to support expected 2019 sales volume. We invested $6.7 million in capital expenditures during the fourth quarter of 2018, compared to $18.4 million in the prior year period. For full year 2018, we invested $31.6 million in capital expenditures, compared to $41.1 million in 2017. For 2019, we anticipate capital expenditures in the range of $25 million-$30 million. At the end of the fourth quarter, total debt was $509.2 million, reflecting $217 million net of issuance costs of 9.5% senior secured second lien notes due in 2022, $276.8 million drawn on our first lien global asset-based credit facility, with the balance representing smaller credit facilities, lease, and other financing arrangements.
The global asset-based credit facility is a syndicated credit agreement maturing in February of 2021 with an aggregate commitment of up to $370 million. For 2019, we anticipate cash interest expense of $30 million- $32 million, non-cash interest expense of approximately $2.5 million, and cash dividend payments against the Series A preferred stock of approximately $7 million. As a result of available non-capital loss carryforwards, in 2019, we do not expect to have significant cash income tax demands, which includes tax related to the sale of the soy and corn business. Gross proceeds on the sale were $66.5 million, and we expect net proceeds after fees, expenses, and taxes to be approximately $64 million.
The net proceeds will initially be applied against our first lien global asset-based credit facility, which on a pro forma basis, would lower total debt as at December 29th, 2018 to approximately $445 million and would create $46 million in incremental borrowing capacity, which would bring total available capacity in our global asset-based credit facility to approximately $101 million. Before I turn the call back to Kathy for concluding remarks, I want to provide some thoughts on the cadence and seasonality of 2019 revenue and adjusted EBITDA improvements, all normalized for commodity, foreign exchange, and changes such as the sale of the corn and soy business. From a top-line perspective, we expect to realize revenue growth over 2018 levels in the low to mid-single digits in the first half of 2019, growing to the mid to high single digits in the back half of 2019.
This expectation represents continued growth in our consumer products and Global Ingredients segments, driven primarily by the aseptic beverage and organic ingredient platforms. We expect limited growth in adjusted EBITDA in the first three quarters of the year compared to 2018 levels, given the margin pressure in fruit and the fourth quarter timing of realizing the benefit from the first round of margin optimization efforts, the expected progression of our productivity efforts over the course of the year, startup costs, and the seasonal ramp-up of volume and beverage, which is concentrated in the back half of the year from a production and sales perspective, and a steady improvement in margin over the course of the year from our recently commercialized roasting and cocoa assets in the Global Ingredients segment. As a result of the factors I just mentioned, we expect improved EBITDA in the fourth quarter of 2019.
I'd like to direct listeners to the back of the press release issued earlier this morning, where they can find additional disclosure regarding the results of operations from the soy and corn business on a quarterly basis for 2018. With that, let me turn the call over to Kathy, who will conclude our prepared remarks. Kathy?
Thanks, Rob. Before we begin the Q&A, I'd like to leave you with a few key messages. When we launched the Value Creation Plan, we gave our commitment to generate long-term value for all our stakeholders, our customers, our employees, and our shareholders. We remain steadfast in achieving this goal. SunOpta is well-aligned with consumer trends towards organic and non-GMO foods, and we are more convinced than ever that we have the right team and the platform needed to succeed. With that, I'd like to ask the operator to please open up the call to questions.
Ladies and gentlemen, if you'd like to ask a question at this time, please press the star then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, you may do so by pressing the pound key. Again, that's star then one if you'd like to ask a question. Our first question comes from the line of Amit Sharma with BMO Capital Markets. Your line is now open.
Hi, good morning, everyone.
Hey, Amit.
Kathy, lots of discussion on the operation, but very light on details of why David was let go. Can you provide a little bit more clarity on that issue?
Sure. Thanks, Amit. I think the overall results were the main factor in the board deciding that it was time to make a change in leadership, which was highlighted by Q4. The board has a commitment to the shareholders to deliver this plan. As a result, we acted decisively, and we believe that the company is best served by finding a new leader at this time.
You're not changing operational metrics around Value Creation Plan or the speed of what the changes are. Is that going to change with the new leadership? Simply, the impression was that we are not as far along as we would have liked to at this time of Value Creation Plan?
You're correct, we're not as far along as we'd like to be, and we also believe that different phases of the plan require different leadership skills. If we can reflect on what's happened. We've cleaned up the portfolio by selling non-core assets such as our soy and corn business. We've stabilized our foundation, we've improved quality, systems, and process, and now we're much more a CPG company. We feel we've progressed through phase 1 and partway through phase 2. Going forward, we're focused on accelerating sales and generating increased growth margin and profit, and we feel that it would be best served with different leadership skills at this time.
Rob, a little bit more clarity on the CPG margins. Obviously, top line exceeded everybody's expectations, including ours. You did provide a little bit of detail on what was the margin headwind. Can you provide a little bit more clarity on what those headwinds are? I want to make sure that I heard you correctly, that EBITDA for the first three quarters is going to be very limited growth, and then most of the growth or whatever growth is in the fourth quarter. Is that fair?
Exactly, Amit, you interpreted that correctly. To help to provide some clarity on what we're thinking and our expectations are in 2019, we are seeing limited growth in the first three quarters. The biggest headwind being, of course, the fruit business. I reflect on where we're at from a progression through the value creation plan, and it's very similar to what we commented on last quarter. When it comes to beverage, when it comes to snacks, when it comes to the organic ingredient operations, we're more or less right where we expected to be at this phase. The prepared remarks included some insight into what the margin step-ups were inside of each of those platforms. Obviously, fruit is one of the areas where there's a big headwind, and we need to overcome that.
As we look at the puts and the takes and the work it's going to take to get the margin improvement on the way and the EBITDA lift, it really is back half and especially fourth-quarter oriented. The fruit efforts that we're undertaking with the optimization plan, they're designed to lower the cost of our 2019 pack season. Of course, the effort that goes into that doesn't present itself on the P&L until you get to selling that inventory, which is really in the fourth quarter and beyond. When you consider that, when you consider the buildup and the things like productivity efforts where they build upon themselves, when you consider the seasonality of our broth business, which is very back-half centric with production really starting in the third quarter, but the sell-through peaking just ahead of the Thanksgiving season.
All those factors taken into consideration really point to the reason why we'd expect EBITDA to show up more from an improvement perspective, more predominantly in the fourth quarter.
How much of a drag was fruit in 2018?
If you look at 2018
From a. Sorry, go ahead.
No. From a gross margin perspective in 2018, I guess it'll be in the MD&A as we release the 10-K, Fruit's down $33 million year-over-year, just to add some context, if you will, to the size of the drop-off. That means it's an additional $7 million here in the fourth quarter. Within that, we did take $3.1 million of inventory write-downs and decisions on cleaning up inventory and reducing our overall inventory levels, which we provided some context on that in the script. That also weighed on margins. The fourth quarter change compared to prior year was nowhere near what we'd experienced the first three months of the year. Nonetheless, it was down. You can think about 2018 in that context, where fruit's down $33 million and beverage and snacks and the organic ingredient operation not being able to compensate.
Thank you. Let me get back in the queue. Thanks.
Thanks.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, that's star then one. Our next question comes from the line of Jon Andersen with William Blair. Your line is now open.
Hey, good morning, everybody.
Hi, Jon.
Hi. I do want to come back to Amit's question about the leadership change because, just from outside, kind of looking in, it seems a strange time to make that kind of a change. The company is on the cusp of an inflection in the frozen fruit business, i.e., you've made significant improvements, as you pointed out today, in the beverage business and the snacks business, some improvement in Global Ingredients, particularly on the international organic side. It feels like what you're trying to communicate today is that you're getting close on fruit, which is in many ways, I think, the last piece to the puzzle. I think the external perception here would be that, why make a change if that's the case? It just doesn't seem to make sense.
I don't know if you can comment a little bit about that, Kathy, if there's anything more you can say.
Sure. I think that I go back to my previous comment. The results were not there, and they were not quick enough, and it was highlighted by what's happened in Q4. We feel like we've made some great progress, as you've indicated, through phase one and partway through phase two, and certainly the issue lies in the fruit business. However, our ongoing demand will be to accelerate sales and generate increased growth margin and profit. Decisively, we believe that a change in leadership will help escalate that and improve skill sets, and a different CEO will aid in that as well.
Okay. Going to the fruit business specifically, maybe Rob, can you talk in a little bit more detail about what happened in the fruit business in the fourth quarter, more from a sales perspective? The business was up in aggregate, in revenue. I'm wondering if you can kind of parse that for us, by the retail side of the business versus the industrial and food away from home portions. Were there any kind of one-time factors that lifted sales in the quarter such that, the revenue growth that you reported might have been a little bit stronger than we'd expect on kind of a go-forward basis?
Sure, Jon. Let me start, then from a market perspective, maybe I'll hand it over to Mike and he can provide some insights on from what we're seeing in the market. Yeah, definitely we saw quite a large step up over the prior year, in the fruit business and what's driving that, and it was in the prepared remarks, is obviously, we've seen volume increases, but those volume increases far surpass the revenue increases, that obviously correlates to sales price reductions that we've been talking about. When I look at the fourth quarter specifically here, we definitely saw the volume increases both in the retail space and the food service space. We do have a large program, that we serve that basically serves school lunches, for the most part. There's very high shipments against that program here in the fourth quarter.
That's one seasonal anomaly, I guess you'd call out, where we did see increased levels of shipments of that food service. It's like a fruit cup program here in the fourth quarter. I'd quantify that, Jon, maybe in the $7 million-$8 million range of lift here compared to kind of normal. Good shipments there, it definitely helped out here in the fourth quarter to see that flow through in terms of getting our inventories down. Maybe I'll hand it over to Mike here to comment on some of the things we're seeing on the measured channels.
Sure. From a measured channel basis, in the last 12 weeks, while the category is flat in dollars, up 4% in pounds, private label is up 6%, on a volume basis, up 16%. As I look at the performance, the top-line performance of the business in the fourth quarter, what makes me feel very confident about the go-forward plan in fruit is that, we've really established trust and partnership with our customers as a result of the heavy work the team has done in the last two years in areas of food safety and quality, customer service, introducing new tools and processes to manage the business. We've really hit a really strong spot with our customers. We've expanded distribution within some of those customers. We're really seeing the benefits on the top line.
That's why the fruit margin optimization plan is so important, it's our singular focus on a go-forward basis. It's all about getting margin back into this business. We're very clear-eyed and laser-focused on how we're going to achieve that. It starts with making sure that you have a very healthy, strong business, a customer base, right? For all those reasons, we feel like we're in very good position, as we look forward on that business.
That's helpful color. Step one is to kind of take some medicine in terms of pricing, cost, investment to improve quality and service levels, and it seems like that's translated into stronger customer relationships and volume growth as you've described. What are steps two and three, and what should we be looking for, or what are you looking for as milestones in that business, to help assess whether you're on track towards getting back to, I think what you said, are more normal profitability levels by the end of 2020? What are the next milestones we should be looking for?
The next milestones I'm looking for is we're getting ready, we're preparing for the pack season, which is a critical part of delivering the plan on fruit. We have some operational and supply chain efficiency programs that we're executing. We're measuring the results on a weekly basis, and we've got full support of the broader team. The next step is the capital investment we're making in the business. It's really a two-step program. In year one, the 2019 plan, it's about downstream packaging efficiencies, bringing in automation into things like case erecting, palletizing, et cetera. That's going to enable us to reduce or eliminate a lot of our manual labor that's in the plants.
That will be stepped up in 2020 as we look to drive even greater efficiency, improving and expanding our IQF tunnels, optical sorting, and really bringing a higher level of automation into these fruit plants, which they so desperately need. That's all kind of what I would call step two. Step three is about innovation. We are an extremely innovative company. We've got very strong R&D teams. We've proven it in beverage and snacks that we can not only develop great innovation, but bring it to market and bring it to our customers. We are working on some very exciting programs on the fruit side to do that as well. As we think about fruit margin optimization, about 70% of that is optimizing our cost base. The other 30% is improving customer and product mix and bringing innovation to market.
It's really a holistic plan that's going to help us achieve the margins that we expect to deliver on this business on a go-forward basis.
You referred a little bit to the slow start to the, I think, in Mexico, the frozen berry season.
Yeah.
To what extent is that a risk factor from a cost or a supply perspective as you think about your kind of 2019 PAC plan? I think this is the time of year where you're usually taking in a lot of berries from Mexican farmers. If you could kind of dimensionalize whether is that a small concern? Is that something that could set you back in terms of some of your productivity or profitability objectives in fruit this year?
Sure. In a typical season right now, we would be bringing in quite a bit of strawberries from central Mexico. We would just be starting Baja California then moving up the coast. In Mexico, we're delayed, call it six weeks in terms of the strawberries that are coming in. Central Mexico had an extremely cold and wet early season, which has impacted the entire market. In terms of the pacing which we're receiving the strawberries and the cost, there are some headwinds that we are very actively addressing. They are important headwinds. They will not derail the overall margin improvement plan. We have some mitigation steps already in place. The good news is, even in the last week or two, the amount of strawberries that are coming into our central Mexico facility has increased substantially. We're behind, but we're making that up very quickly.
We don't expect it. Ultimately, once we execute our mitigation plans, we think we'll be able to minimize the impact to our P&L delivery.
Is pricing part of that? Do you have the ability to price? Is that built into it?
Absolutely. Pricing is one of the things that we're working through, and we've started to have those conversations with customers. Customers are aware of the weather conditions of Central Mexico. It's impacting Baja California. Even California has seen some colder and wetter weather. Kind of going back to the strong relationships we have with our customers, we're now in a position where we can have those strategic conversations and really, in a partnership fashion, figure out what's the best way to address it to deliver both of our objectives.
All right. Let me ask, I've got two more, probably 10 more, but I'll limit it to two. There've been a couple of large write-downs on the fruit business in the past couple of years. Rob, I think you mentioned the numbers. I didn't jot them down, but that would suggest that something maybe has structurally changed in the profitability or your future expectations for the profitability of this business. At the same time, the fruit optimization program is designed to get you back to what are more normal margins, which I think are in the mid-teens. Can you square the two of those? Are you still comfortable, confident, less confident that a mid-teen margin rate for this fruit business is achievable? Because it seems that it conflicts with some of the write-downs that you had to take.
Yeah, I'll comment on that, Jon. You're right. The write-downs this fourth quarter, the $81 million, and last year, same time, the $115 million, both pertain to frozen fruit. There is no more goodwill in that business. We did recognize the remaining write-down this fourth quarter. I think there's a couple of things at play here. The fruit margin optimization plan, as Mike just mentioned, it's the top priority, and we have inside the company our best people working on it, and it's weekly focus. We're tracking our improvements. We've built a plan that we're quite confident we can deliver to return the business back to the historical, which would be historical mid-teen margins.
When you look at it from a recovery perspective, when you do the accounting side of the equation, if you will, from a goodwill write-down standpoint, there's certain things you can include and certain things you can't, and you have to apply discount factors. One of the things that, and it's reflected in following the third quarter, even in our share price, right? The extended time that it's going to take and the extension that the fruit margin deterioration is causing to us getting our value creation plan goals, that's a really big determinant in taking a write-down. I wouldn't read into it that the write-down necessarily means that we don't have the conviction or the ability to deliver against this plan. We do.
At the end of the day, from an accounting perspective, you tend to err on the side of conservatism and a discounted cash flow basis. That pushing out of getting back to that margin level is really a key factor to this that led to the write-down.
Okay. Then on the 2019 outlook, you said a couple of times that you expect EBITDA. Is it fair to say to be level, to grow a little bit in the first three quarters of the year with then more significant growth in the fourth quarter? First, is that accurate? Do you expect any growth in Q1 through Q3 or just kind of level year-over-year?
Yeah. I think the word we used in our prepared remarks is limited. I would interpret that to mean more or less what you saw in 2018. Obviously, there's going to be puts and takes in the business. We have some new seasonality, especially inside of beverage. We've got good things going on in organic ingredients, and there are things that could lead to it being a little up. At this stage, Jon, I think it's safer to set an expectation that we expect the growth to show up here in the fourth quarter of 2019 from an EBITDA standpoint.
Okay. The follow-up to that is the base. I think you did, let's round numbers, $53 million of adjusted EBITDA in 2018. Again, I'm coming up with $53 million. You have with the sale of the soy and corn business, I think maybe Kathy mentioned that would be a 5% pro forma headwind or $5 million pro forma headwind. Are we working with a base then that's $48 million in 2018 when we talk about growth in 2019?
Yeah. We added a page to the back of the press release. You can see the adjusted EBITDA of $4.6 million that is the net of the business that we sold offset by rationalized SG&A actions that we've taken. That's a $4.6 million pro forma impact on 2018, and you can see what the quarterly effect of that is, too. Yeah, I would suggest that is the base from which to model 2019.
Okay. Promise the last one. Given that revised view, where are you from a balance sheet perspective? Are there any covenant issues? Where are things tight, to the extent that they are tight, and how do you manage through that to get to this kind of bridge over the next couple of fruit seasons so you can execute the optimization plan in fruit?
Yeah. I added into the script and you can see it. After the sale, of course, of the corn and soy business, which, of course, we did for all the right strategic reasons, but financially one of the benefits is that there was not a lot of taxes, in fact, very minimal taxes or fees on that transaction. We have reduced our debt by around $64 million on a pro forma basis and created almost an additional $50 million of borrowing capacity in our global ABL. Just to remind everyone, the way our debt capital structure today, it's on the one hand a global ABL, on the other hand, high yield notes. Both of those agreements are what I call covenant light.
From a covenant perspective and other things, apart from the strategic merits, this transaction really did create a much bigger buffer, if you will. We sit here on a pro forma basis with $100 million of excess capacity in that ABL. In other words, we've got the ability to borrow up to another $100 million. That's really what provides us the flexibility to continue on this value creation journey, including the capital investment it's going to take to succeed with the turnaround inside of the fruit business. Certainly after the sale, we don't have any concerns with our ability, if you will, to do what we need to do to drive margin and growth in the business. We feel all right there.
Okay. All right. Thanks for all the time. Appreciate it.
Bye, Jon.
Our next question comes from the line of Chris Krueger with Lake Street Capital Markets. Your line is now open.
Good morning. I just have a few quick ones here. As far as the CEO search is concerned, does the board of directors have any kind of goal as far as the timeline for when we could see that come to fruition?
Chris, we're moving very quickly in terms of the search. We've created a search committee, and we've already begun discussions with candidates. We're hopeful that it'll be a very expeditious process, and we're working very hard at making sure that happens. We'll hopefully have an update for you on or before Q1.
Okay, that's good. When you talk about pack season for the frozen fruit, can you refresh my memory when roughly pack season begins and ends?
Sure. In the California plants, we're talking May through July sort of timeframe in the summer, depending on how quickly the growers convert from fresh to frozen. There's always some dynamics at play, and we've got to be ready. We're pulling together the group this week and then next week, and we're getting ready for season as we speak.
Okay. My last question. In the past, SunOpta has provided operating margin goals for the Global Ingredients segment as well as the consumer segment. I think the Global Ingredients was 6%-8% long-term goal, and the other was 11%-13% in consumer. Do you still have those same goals or has anything changed, especially since the sale of the soy and corn business?
Yeah. Those are pretty old targets, Chris. The target that everybody's aligned to now, and I can tell you that the company is still committed to delivering here, is an adjusted EBITDA, as a percentage of revenue, of 10%-11% as we progress and execute the Value Creation Plan. If you want to think of that in terms of segmented delivery, what it would basically mean is our Global Ingredients segment would be in the mid-teens, 14%-ish, maybe 15% gross margins. Your consumer product business would be up there in the high teens, so call it 18%-19%. On a blended average basis, to achieve the 10%-11% objective, our consolidated gross margins need to be in a 16%-17% range.
Chris, as we step back and look at the portfolio that we have and really focus the business on growing the top line and driving profitable sales, meaning gross margin, that's how we have structured the Value Creation Plan and the targets we set platform by platform to end up at that spot.
All right. Very good. That's all I have. Thanks.
Thanks.
Thanks, Chris.
We have a follow-up question from the line of Amit Sharma with BMO Capital Markets. Your line is now open.
Hi. Thank you so much for taking the follow-up. Kathy, one for you. Listening to the EBITDA progression for next year, it is really clear that EBITDA recovery is delayed. Even if we are going to get to that point at some point, it is certainly delayed. At the same time, if you look at the multiple that you received for the North American corn and soy business, around 8.5-9 multiple, that is fairly attractive. Given that, are the strategic options on the table from a company asset base perspective that perhaps these assets are better in the hands of somebody else, and let us look to see how we can monetize even the European business or the aseptic business. Can you talk about that, how the board views those options?
Let me kick it off here, I think, just because there is about three questions in there, all good ones. From a timing perspective in terms of delivery of the plan, as I step back and look at it is no surprise fruit is essentially the entire reason that we are not on the path and the timeframe that we had set out two years ago. If I look at what we are expecting in 2019, if I just put fruit back to where we are targeting to get it back to those historical mid-teen ranges, I would tell you that we are basically right on the algorithm and right on the pace that we expected to get to. I am speaking about beverage and I am speaking about snacks. Certainly the Tradin Organic business, which is right where we expected it to be.
Similar to what we had been commenting the last quarter and again now this quarter, it's definitely fruit that set us back. We do say that it's going to take two crop cycles to get back to the margin structure and margin delivery we need, and of course, that won't present itself until after we start selling through that inventory. From a timeframe perspective, it really is all shouldered by fruit and the development there. As I move on to the soy and corn business and the multiple, if you look at the multiple based on the business that was sold, certainly it's pretty attractive. I think that's in line certainly with what we see unique in specialty and organic, not necessarily organic, but specialty ingredient businesses going for.
From an overall company perspective because of the simplification it will allow us to bring, you're talking a mid-teens multiple after we remove the SG&A that would be stranded or no longer necessary. We're quite pleased certainly with the multiple and transaction. I've already talked about the proceeds. Your last question, as we look to the overall component parts of the business, obviously we look at our business and if you listen to our prepared remarks, we like all the businesses that we're in, and we think they're all attractive and they're all in great market positions for growth, including fruit, albeit we have a big opportunity in front of us to drive the margins up. As I think about the sum of the parts, that's what we're focused on really is driving the value out of this platform now.
Obviously now with a greater weighting towards consumer and in our ingredients business now, very unique, specialty, almost exclusively organic platform, which we think from a market perspective is pretty special.
Thanks for that, Rob. I think the question really is from a board perspective, are those options to monetize these assets at a higher multiple? Are those being considered? Are those part of the process, or is the thought that let's just find somebody else to run these assets and see if we can turn them around?
In answer to that, Amit, we're always looking at all the options. Our shareholders have indicated their strong commitment to what we're doing right now and executing the plan and the change in leadership. We're always considering other options, so neither one is exclusive.
Just one more, one for you and then one for Mike as well. You did say that you're looking for somebody with a different skill set. Can you be a little bit more specific? What are we looking for? Because we didn't hear that much change, at least in the strategy to get to from a turnaround perspective. What are the skill sets that we're looking for in the new CEO?
The skill sets we are looking for in the new CEO, I think our track record in execution, that's really important that we actually meet our numbers. We're focused on increasing our revenue and somebody who has a proven track record in that as well, somebody who's able to drive more profitable growth, and somebody with proven private label experience. I think those are the top four criteria.
Got it. One last one for Mike. Mike, you did talk about the delay in Mexico, and we saw that a couple of years ago that a delayed crop or a short crop generally leads to more inefficient processing on your end. Is that baked into your expectations as you laid out for the first three quarters? Or could that gird for us if the crop continues to get delayed in Mexico or even in California?
Yes. That is certainly a concern and one of the things that the team is focused on and managing through. Ultimately, there are a number of things that we're evaluating to mitigate any challenges on that business up into and including potential customer pricing. Short crops and strawberries are, especially when we're seeing the growth that we're seeing, is something that we have to navigate through. I have a tremendous amount of confidence in the team that we're going to pull all the right levers to make sure that we're as successful as we can be.
Got it. Thank you so much.
You bet.
That concludes today's question and answer session. We do have a follow-up question, actually, from the line of Jon Andersen with William Blair. Your line is now open.
Hey, thanks for taking it. There's some language in the press release and also in the prepared comments around your focus areas with respect to the value creation program in 2019. One of those calls out, the continuous improvement in looking to deliver $10 million of gross profit enhancement in 2019. I guess my question on that is that a veiled kind of forecast for profitability improvement in 2019? Is that a target that you think you need to offset some of the cost headwinds that you're going to be facing? Just characterize that $10 million, and is it a gross number? Is it a net number? Maybe, how you're going after it.
Yeah, sure, Jon. We didn't talk as much about it on this call because there's so much to cover, but we've really embraced and adopted what we call SunOpta 360, which is our continuous improvement program that goes right across the company. When you're managing and committing to programs like that, you set productivity targets every single year. That $10 million is really what I consider to be structural enhancements to our overall operations that can drive all things equal $10 million more profitability to the business. You set those things up because, in any given year, you don't set at the start of the year and then see where you end up.
This is a perpetual and ongoing stream, if you will, of opportunities that we can do to lower costs in terms of cost of manufacturing, in terms of labor, enhancing yield, lowering material costs, lowering conversion costs, all sorts of things. That $10 million is a gross number. Many years you'd be using that to offset or help offset some of the inflationary pressures you'd be seeing. I guess, the $10 million is our gross target just from a cost of goods sold perspective in 2019. Don't read into that as that's the only thing we're looking at because we've already talked, and certainly folks know we are in a growth pattern in beverage.
We've been in a growth and expect more growth inside snacks, inside Global Ingredients, and so, when you're in those modes, we do expect more contribution from that growth to also come and help then offset certain inflationary pressures and the work that we've got in front of us on the fruit business.
Okay, thanks for that.
Thanks.
That concludes today's question and answer session. I'd like to turn the call back to Kathy Houde for closing remarks.
Thank you, operator, and thank you all for participating in our fourth quarter conference call. Before I conclude, I would like to again thank all of the employees at SunOpta for their tireless efforts. We look forward to speaking with you in the future and updating you on our progress as we focus our efforts on expanding margins and profitability in 2019 and beyond. Have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.