Good morning. Welcome to SunOpta's first 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's website at www.sunopta.com. This call is being webcast, and its transcription will also be available on the company's website. As a reminder, please note that the prepared remarks which will follow contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them.
We refer you to all risk factors contained in SunOpta's press release issued this morning, the company's annual report filed on Form 10-K, and other filings with the Securities and Exchange Commission for 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 the applicable securities laws. Finally, we would like to remind listeners that the company may refer to certain non-GAAP financial measures during this conference. The reconciliation of these non-GAAP financial measures was included with the company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in U.S. dollars and are occasionally rounded to the nearest million.
I'd now like to turn the conference call over to SunOpta CEO, David Colo.
Good morning. Thank you for joining us. With me this morning is Robert McKeracher, our Chief Financial Officer. We had an encouraging first quarter generating revenue growth and improved profitability across our global ingredients, healthy beverage, and healthy snacks portfolios. As expected, these improvements were masked by softer sales and margins in the healthy fruit platform. As we discussed last quarter, we have a plan in place to improve financial performance in frozen fruit, which will take time. However, we continue to make good progress in all parts of the plan, and we are well prepared for a successful start to the strawberry season at our California plants. We continued to capture incremental EBITDA improvements through the value creation plan and converted several opportunities in our sales pipeline during the quarter, which is bolstering our confidence in returning to consolidated revenue growth in the second half of the year.
Let me review the first quarter highlights and then provide an update on the value creation plan. First quarter revenue was $312.7 million, down 5.3% as reported, or down 1.6%, excluding the impact of commodities, currencies, and removing the impact of the bar and pouch lines of business. First quarter adjusted EBITDA was $12.4 million, which includes $2.8 million of timing-related losses on commodity hedge contracts relating to cocoa. Rob will provide more detail on this item in his prepared remarks. In the global ingredients segment, we reported a 7.7% year-over-year increase in revenue or a 4.1% increase excluding the impact of commodities and currencies. The growth was driven by strong demand for internationally sourced organic ingredients, including sales growth in the U.S. and European markets. Our sales contract book is larger than last year's, and we are confident with the growth outlook in organic ingredients.
In our North American grains and seeds business, revenue remains lower than a year ago as we are cycling over sales related to specialty soy products, which we decided to exit last year. In total, we are pleased with the performance of the global ingredient segment, which is tracking in line with our expectations. Turning to consumer products, we had a strong quarter in healthy beverage, generating 4.9% year-over-year growth, despite lapping the loss of a significant private label account while also driving improved gross margins. This growth was driven by strong performance in both the aseptic and premium juice categories. As we have discussed over the past couple of quarters, our go-to-market effectiveness strategies have generated a robust sales opportunity pipeline in the healthy beverage platform, and we are seeing this pipeline convert. I will cover this in more detail as part of the go-to-market effectiveness update.
Healthy snacks also posted a strong first quarter. Excluding the refillable pouch and nutrition bars businesses that we had exited last year, snack sales were up 29.8% and gross margins were up significantly over the prior year. As I evaluate the performance of beverage and snacks, it is clear that these platforms are entering the second phase of the value creation plan. Turning to the healthy fruit platform, we continue to experience challenges as first quarter sales declined 17.1%, adjusting for commodity prices, and gross margin declined as a result of lower volume, sales mix, and increased spending. The lower sales and margin partly reflect our investments in price that began during the fourth quarter, as well as our efforts to improve quality and deliver a high level of customer service.
As mentioned on our last earnings call, we continue to work through an excess inventory position in fruit, and as a result, we are incurring increased storage and internal transportation costs, as well as heightened fruit sorting, resulting in unfavorable labor and yield variances. These costs are being incurred to ensure quality and customer service are not sacrificed as we work to level set our inventory through a reduced pack plan over the next two quarters. Additionally, the category remained in a state of modest decline during the first quarter, as syndicated data for the 12 weeks and four weeks ended April 21st showed declines of 1.5% and 1.2%, respectively. Despite the challenges in our frozen fruit segment, we remain confident with the long-term outlook for this healthy food category and our competitive positioning.
Our plan involves taking the appropriate actions and making the necessary investments to lead in this category as the low-cost, high-quality producer of frozen fruit, focused on driving innovation and bringing growth back to the category. In support of this plan, we have initiated the engineering phase of a multi-step project to optimize our frozen fruit supply chain and production processes. This includes leveraging expanded procurement and processing capabilities at our Mexico facility. The completion of our expansion project that added retail bagging capabilities in Mexico allows us to ship directly to customers. We are also planning to utilize the most cost-effective combination of our California-based facilities as we process a reduced strawberry crop versus last year.
We remain focused on building a pipeline of sales opportunities and enhancing relationships with our customers through our investments in quality, service, and co-development to ensure the correct assortment, merchandising, pricing, and innovation strategies are brought to the category. We believe the combination of these efforts will allow us to stabilize and return this business to growth over time. We remain confident in the business and see significant opportunity to improve sales and margin as we work through the 2018 plan. Let me turn to an update on the value creation plan. As we have discussed over the last year, the first phase of the value creation plan is targeting implementation of $30 million of productivity-driven annualized EBITDA enhancements over 2017 and 2018.
Recall that for 2017, these EBITDA benefits were offset by structural investments made in the areas of quality, sales, marketing, operations, engineering, and other functional resources, as well as non-structural third-party consulting support, severance, and recruiting costs. The plan also calls for increased investment in capital upgrades at several manufacturing facilities to enhance food safety and manufacturing efficiencies, of which many are already completed. Over time, these investments are expected to yield EBITDA improvements that go beyond the $30 million that is being targeted in the first phase. We expect to deliver ongoing productivity improvements as our go-to-market strategies drive revenue growth, which drives higher utilization and improved profitability. We have made good progress to date, cumulatively implementing actions that are expected to yield $20 million of annualized EBITDA improvements.
The focus of the portfolio optimization pillar is to simplify the business, investing where structural advantages exist, while exiting businesses or product lines where the company is not effectively positioned. We have largely cleaned up our portfolio and are now focused on strategically investing in key areas to drive growth and margin expansion. Our portfolio optimization efforts during the first quarter included the commercialization of our second roasting and processing line at our organic cocoa facility in Holland, which doubles processing capacity in addition to adding new capabilities. We also made additional progress with commissioning the new organic sunflower oil processing line at our Bulgarian sunflower facility. Last quarter, we announced a significant investment to expand our roasted capabilities at our Crookston, Minnesota facility.
During the first quarter, we completed installation and began commissioning of the new roasting equipment. We are expecting to be in commercial production in the third quarter of 2018. This expansion will support further growth of a variety of roasted grain, seeds, and plant-based snacks. As I noted earlier, we also completed the expansion project to add incremental freezing capacity storage and retail bagging capabilities to our Mexican frozen fruit facility. The focus of the operational excellence pillar is to ensure food safety and quality, coupled with improved operational performance and efficiency. These efforts continue to generate productivity improvements and cost savings in manufacturing, procurement, and logistics. During the first quarter, we continued to advance food safety and quality efforts across the entire manufacturing footprint. The excellent results in customer audit scores seen across all product platforms is evidence of the success of these activities.
We also identified productivity improvement opportunities as the SunOpta 360 continuous improvement initiative progressed. These productivity initiatives focus on manufacturing efficiencies, purchasing synergies, and effective supply chain management. During the quarter, we also invested considerable time and resources into pack plan readiness across the company's fruit facilities in California and Mexico in preparation for the 2018 strawberry harvest. The focus of the go-to-market effectiveness pillar is to optimize customer and product mix in existing sales channels and to identify and penetrate new high-potential sales channels. Efforts under this pillar are expected to improve revenue growth and profitability over time. We have continued to grow the pipeline of future commercial opportunities across the healthy beverage, healthy snack, and healthy fruit categories and have a strong book of business in global ingredients.
During the quarter, we realized meaningful sales wins in key categories, including everyday aseptic broth items with large club, mass, and traditional retailers and expanded geographic sales for private label orange juice. We also continued to penetrate the broadline food service channel with frozen fruit and innovative beverage offerings that utilize proprietary formulas, packs, and control labels. Recently, we secured a multi-year supply agreement with a large food service operator for aseptic beverage products and successfully rebid and retained business with a large retail frozen fruit account while being awarded a 14% increase in distribution with the same customer. We also continue to experience strong reorders of innovative private label broth Both organic and conventional in the club and mass channels on products launched last year.
To support the growth we are experiencing with our existing customers, combined with recent new business wins and our robust sales pipeline, we will be expanding our aseptic platform later this year and into next year. This expansion is expected to cost approximately $22 million and is designed to add enhanced mixing and processing capabilities, which will enable us to bring additional innovation to the growing broth and plant-based beverage markets. The expansion will also add increased processing and filling capacity that will allow us to redistribute current production across our national network of aseptic plants, which is expected to drive cost advantages while creating needed capacity to continue to support future growth. To date, we are converting our sales opportunity pipeline at a rate sufficient to meet our expectations to deliver consolidated revenue growth in the back half of the year.
The focus of the process sustainability pillar is to ensure the company has the infrastructure, systems, and skills to achieve and sustain the business improvements captured from the value creation plan. During the first quarter, we completed the implementation of a new ERP system at our Mexican frozen fruit facility. We enhanced our employee health and safety processes, resulting in a nearly 50% improvement in employee safety results year to date. We advanced our sales and operations planning processes and tools in the healthy fruit platform, which is enhancing our readiness for the upcoming fruit season and will allow us to have the right products in the right place at the right time to meet our customer service requirements. We also completed consolidation of our transactional and other support functions of the healthy fruit platform into the North American Shared Services Group.
Overall, I'm pleased with the benefit the value creation plan is delivering to our business performance. As an example of this, I'd like to briefly highlight our progress to date in the healthy beverage platform. When we initiated the value creation plan just over a year ago, we identified that our aseptic processing capabilities, production footprint, and specialized knowledge in plant-based beverages meant that beverage was part of the portfolio that had a strategic right to win. At the time, however, beverage was challenged with customer service and quality issues, operational inefficiencies, underutilized capacity, a stagnant pipeline of sales opportunities, and a lack of focused innovation. Under the four pillars of the value creation plan and with the newly formed leadership team, we set out to address these issues.
To start, we implemented a new S&OP process, which corrected an inconsistent and unpredictable production schedule and brought case fill rate and on-time delivery metrics to the top of daily KPIs, resulting in improved performance on both metrics. Next, we launched SunOpta 360, our continuous improvement program that was first introduced at our aseptic beverage facilities. By first establishing and then standardizing operating procedures in the areas of food and employee safety, quality, production, and maintenance, we have seen improvement in the first-time quality scores, employee safety, overall equipment effectiveness, and a significant decrease in yield losses and other costs of non-performance. After repositioning our go-to-market approach to be channel based and revamping the talent in our sales organization, we began rebuilding customer relationships and developing a robust pipeline of sales opportunities.
The benefit from these efforts are evident in the return to year-over-year growth in aseptic sales this quarter, increased facility utilization, a new multiyear commitment with a key customer, recent sales wins, and the need to invest in additional processing and filling capacity in order to keep up with forecasted customer demand. Once complete, we expect the expansion will increase our aseptic network capacity by approximately 20%. We are excited about the additional opportunities we will be able to target with this expansion. Finally, after investing in a marketing function that previously had limited resources, we researched the market and leveraged category insights to identify white space opportunities that accomplish the goal of growing our business in adjacent categories and penetrating new channels to diversify our top line.
As a result, we now have a consistent and ongoing organic and conventional broth business that serves a fast-growing private label category. We've been able to broaden our exposure to food service, in part through the development of a lineup of innovative, control label, non-dairy beverage products. I believe that we have demonstrated in healthy beverage a blueprint for success. We are replicating this success across each of our platforms. We can and remain committed to do the same thing in healthy fruit. Our S&OP process is now in place. Under the leadership of new plant management, the frozen fruit facilities are more prepared for the upcoming pack season than in years past.
Thanks, Dave. I will take you through the rest of the financial results as well as balance sheet and cash flow metrics for the first quarter. As Dave mentioned, first quarter revenue was $312.7 million, a 5.3% year-over-year decline as reported. Excluding the impact on revenues from changes in commodity related pricing and foreign exchange rates, removing the impact of the bar and pouch lines of business, revenue declined 1.6%. The global ingredient segment generated revenues from external customers of $136.3 million, an increase of 7.7% compared to $126.6 million in the first quarter of 2017. Excluding the impact of changes in commodities and foreign exchange, revenues in global ingredients increased 4.1%. The increase in revenue reflected strong demand for internationally sourced organic ingredients, which grew 15.3% during the quarter, driven by higher volumes of feed, oils, grains, and cocoa.
This growth was partially offset by lower volumes of North American-sourced grains and seed products, which declined 18.5% during the quarter, mainly as a result of our exit from certain specialty soy products. The consumer products segment generated revenues of $176.3 million during the first quarter of 2018, a decrease of 13.3% compared to $203.4 million in the first quarter of 2017. Excluding the impact of commodity prices, removing the impact of the bar and pouch lines of business, revenues in the first quarter decreased by 5.5%. The decline in revenue primarily reflects 17.1% lower sales of frozen fruit due to ongoing declines in consumer demand, reduced distribution to certain retail customers, and timing of deliveries to a large food service customer.
This growth was partially offset by lower volumes of North American-sourced grains and seed products, which declined 18.5% during the quarter, mainly as a result of our exit from certain specialty soy products. The consumer products segment generated revenues of $176.3 million during the first quarter of 2018, a decrease of 13.3% compared to $203.4 million in the first quarter of 2017. Excluding the impact of commodity prices, removing the impact of the bar and pouch lines of business, revenues in the first quarter decreased by 5.5%. The decline in revenue primarily reflects 17.1% lower sales of frozen fruit due to ongoing declines in consumer demand, reduced distribution to certain retail customers, and timing of deliveries to a large food service customer.
The revenue pressure on fruit was partially offset by 4.9% growth in our beverage platform, driven by continued growth in the food service channel for aseptic non-dairy and the retail channel for broth products, as well as expanded distribution in premium juice. Excluding sales relating to a large private label account that we stopped servicing in April of 2017, revenue in the beverage platform would have grown approximately 13% during the first quarter. In our snacks platform, excluding the bar and pouch lines of business, revenue grew 29.8% in the first quarter, driven by increased contract manufacturing volume and fruit snacks. Consolidated gross profit was $33.7 million for the first quarter of 2018, compared to $38.7 million for the first quarter of 2017. As a percentage of revenues, gross profit for the first quarter of 2018 was 10.8%, compared to 11.7% in the first quarter of 2017.
The gross profit percentage for the first quarter of 2018 would have been 11.7%, excluding the impact of $0.1 million in costs associated with the value creation plan, as well as $2.8 million of timing related losses associated with commodity futures contracts used to hedge our organic cocoa position, which I will explain in a few moments. This compares to a normalized gross margin percentage of 11.9% in the first quarter of 2017. In consumer products, margin pressure in healthy fruit was driven by lower plant utilization due to declines in sales volumes, pricing passed through on lower fruit costs, an unfavorable shift in sales mix towards lower margin product offerings, and significant costs in manufacturing related to yield losses, excess labor and handling, storage costs, and outbound freight.
The increased cost of manufacturing I just mentioned amount to approximately $3.5 million in the first quarter and do not include volume related inefficiencies. We are addressing these cost challenges by reducing our California pack plan for 2018 and will leverage our Mexican procurement and enhance production capabilities to improve our cost position. It will take a few quarters to work through this plan, and as a result, we expect to see frozen fruit continue to weigh on our consolidated margins at least into the fourth quarter. We believe this pressure is expected to be significant in the second quarter before moderating in the third and fourth quarters. Accordingly, while we expect modest sequential improvement in adjusted EBITDA in the second quarter, we would expect adjusted EBITDA to remain lower than the prior year. However, we anticipate generating meaningful year-over-year growth in adjusted EBITDA in the second half of 2018.
The margin pressure experienced in fruit was partially offset by margin expansion in the healthy beverage and snacks platforms, reflecting favorable plant utilization due to higher production volumes to meet sales demand, productivity driven cost savings, and operational savings following the discontinuation of flexible resealable pouch and nutrition bar production in the fourth quarter of 2017. In global ingredients, we recognized approximately $2.8 million of costs relating to negative hedge results due to the steep rise in the market price for cocoa during the first quarter. We expect the impact of these hedge losses to be offset by improved forward margins on cocoa that should be realized over the balance of the year as we sell through our cocoa position, which grew during the first quarter as a result of the expansion of the cocoa processing facility in Holland.
Excluding the negative hedge result, gross margin in global ingredients would've been 12.8% compared to 12.1% in the prior year. Operating income was $1.7 million, or 0.5% of revenues, compared to a loss of $3 million or 0.9% of revenues in the first quarter of 2017. The increase in operating income primarily reflects lower non-structural SG&A costs when compared to the prior year. For the first quarter of 2018, operating income would've been $4.9 million or 1.6% of revenues, excluding $0.3 million of non-structural costs in SG&A related to value creation plan, as well as the hedge losses and other value creation plan costs that impacted gross profit, as compared to a normalized operating income of $9.6 million or 2.9% of revenues in the first quarter of 2017.
On a GAAP basis for the first quarter, we reported a loss attributable to common shareholders of $6.3 million or $0.07 per common share, compared to a loss of $13.3 million or $0.16 per common share during the first quarter of 2017. First quarter results include several charges and gains that are not reflective of normal operations and have been excluded in calculating adjusted earnings. On a pre-tax basis, these items include a $2.5 million gain on reversal of contingent consideration, $2.2 million of costs primarily related to the value creation plan, and $0.3 million of product withdrawal and recall costs. Excluding these items, for the first quarter of 2018, we reported an adjusted loss of $6.4 million or $0.07 per common share, compared to an adjusted loss of $0.9 million or $0.01 per common share in the first quarter of 2017.
For the first quarter of 2018, we realized adjusted EBITDA of $12.4 million compared to $18.9 million during the first quarter of 2017. 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 first quarter, cash provided by operating activities was $7.5 million, compared to $19.5 million in the first quarter of 2017. The decrease reflects the immediate cash benefit generated from working capital efficiency initiatives implemented in the first quarter of 2017, partially offset by improved operational performance, largely due to lower non-structural cash costs incurred in support of the value creation plan. Cash used in investing activities was $6 million during the first quarter, compared to $8.7 million a year ago.
We invested $6.7 million in capital expenditures during the first quarter and continue to anticipate CapEx of $25 million-$30 million for the full year of 2018. At the end of the first quarter, total debt was $464.4 million, reflecting $216.1 million net of issuance costs of 9.5% senior secured second lien notes due in 2022, $233.6 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 $365 million. With that, let me turn the call over to the operator to facilitate Q&A. Operator?
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 touchtone 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, if you'd like to ask a question at this time, that's star then one. Our first question comes from the line of Amit Sharma with BMO Capital Markets. Your line is now open.
Hi. Good morning, everyone.
Good morning.
Rob, just a quick clarification. Second quarter EBITDA now expected to be down year-over-year a little bit. For the full year, should we still expect you to add at least $20 million EBITDA versus 2017?
We expect to add $20 million through productivity initiatives versus 2017. That's correct.
As we look at the puts and takes from an operating business, how much of that should we expect to flow through?
Well, we don't give guidance on the full-year EBITDA. What we're commenting on in the prepared remarks is trying to give folks a sense of the weight of the fruit pressure we're experiencing right now and working through. That's going to be the primary driver of pressure in the second quarter. This quarter, obviously, we posted a $12.4 million adjusted EBITDA number. I believe last year in the second quarter, it was a little over $19 million, so that kind of gives the range for the second quarter. Really what you've got is a situation where we're confident in delivering our productivity, $20 million. We're seeing good growth and progression of margins, certainly in the beverage and in the snacks and absent the timing related pressures in global ingredients in that platform. Really our main source of pressure is fruit.
Can you quantify the margin pressure in that business through the first half? Like how many millions of dollars of EBITDA is lost and not going to be recovered at least this year?
In the first quarter, we've quantified three and a half million of costs that I laid out in my prepared remarks that aren't sort of volume dependent, if you will. They're costs related to things like excess storage, right? Our inventory is at a higher level than would otherwise be required for the current demand forecast. We're also incurring increased freight, storage, handling, a variety of costs as we consolidate warehouses and as we reposition fruit, really to be putting ourselves in a spot where we can service our customers effectively, as well as yield costs. Again, really a service matter for customers. When you add all that up, there's about three and a half million that sits inside of the first quarter.
That does not include the pressure that also comes from the fixed cost coverage, which is not as efficient as it was because we're not packing as much fruit this year, if that makes sense, Amit.
It definitely does. Thanks a lot. Second quarter, we expect a similar magnitude of loss from frozen fruit?
We expect the pressure to be sustained through the second quarter. Really, the way that the fruit business works is we need to get to the 2018 pack plan. Fruit, Mexico has of course started a couple of months ago, but the bulk of the California fruit is about to come off the field in the very near term here. Really, your opportunity to get back, let's say, into equilibrium in terms of where your fruit position is relative to your demand isn't until after you go through the pack season, which is why we're kind of guiding towards fourth quarter being where we see the pressure letting off.
Got it. Then, Dave, certainly encouraging performance or improvement in the aseptic business. Good to see new volume gains. Can you just help us quantify maybe in terms of numbers where that business is and where it was when it was running as efficiently as it could, like several years ago at this point?
Yeah. I'm not sure I understand the exact nature of the question, I'm going to answer it this way, Amit, you let me know if I answered it. We feel really good about the progress we've made on the business over the last year. I think
In the prepared remarks, we called out a case study to help people understand all the impact that the value creation plan is making, particularly on that business, we feel that we can do the same across all of our businesses. I think, one way to look at it is from a utilization perspective. I think we started last year out in the low 50% utilization of these facilities. As we exit the first quarter here, we're at about a 70% utilization, and that's on a continuous operation basis across all three of our facilities. We see good momentum in the business. The revenues are picking up, given the conversions we've had in the sales opportunity pipeline that I spoke to. Obviously, as we increase our capacity utilization, the plant costs are dropping in line as we expected.
Operationally, the plants are doing a very good job on making sure that we minimize cost of non-conformance. Yields are improving. Overall equipment effectiveness is improving, we still remain to have a very robust sales opportunity pipeline that we're chasing on that business. All of that's led to the capacity expansion that we spoke to. As you know, we need to make investments literally a year plus in advance to support the expected growth that we see in that business. That's what triggered the $22 million investment that we spoke of as well.
That's really helpful. I just wanted to get a little bit better flavor for the margin structure. Obviously, frozen fruit is hiding the improvement here, if you look at the total CPG segment. If you just looked at your aseptic business, where are operating margins or EBITDA margins, whichever way you want to go, now versus where they were when you were running it pretty efficiently before the loss of the co-pack business back in 2015, 2016?
Yeah, let me try to answer that. I will coach the answer, though, with we're not in a position to disclose discrete margins on the lines of business. We do report CPG as one segment. You're bang on that certainly the pressure in fruit is offsetting improved margin profile inside of the beverage business. If I'm going to give you a scale of magnitude, moving from more of a 50%-55% utilization into more of a 70% utilization, now you're talking anywhere from 200 to 400 basis points on margin. Kind of mix dependent a little bit, but we are seeing improvement there. That's just the volume piece. We are seeing also improvement when it comes to improved operating efficiencies, so things like better yield performance, less cost of non-performance, as we once referred to it, and other things.
Certainly what is hitting us in many regards to the downside in fruit, we're benefiting from year-over-year in beverage and snacks.
Got it. Thank you so much.
Our next question comes from the line of Jon Andersen with William Blair. Your line is now open.
Hey, good morning, everybody.
Hey, Jon.
Well, if it weren't for this pesky fruit business, we'd be in great shape. Congrats on the performance on the rest of the portfolio. I wanted to ask first, it sounds like you've had a number of new business wins in the past quarter, which suggests that commercial pipeline is converting well. Can you talk a little bit, David, about the feedback or the discussions that you're having with retailers that are leading to those wins? Is this SunOpta coming to the table with better pricing, more innovative product? Is it retailers have more confidence in your capabilities from a service perspective? What's driving this and what level of conversion are you seeing and what level do you want to aspire to down the road?
Yeah. I think what's driving the conversion and the success in our sales pipeline, Jon, is all of the things you mentioned, right? It's literally the value creation plan and the benefits of all the work that the team's been doing over the last year plus coming to light. I think the short answer is, if you have a good plan and you have good leadership working against the plan, you're typically, over time, going to start to see the benefits of that work, and that's what we're experiencing that's happening. I'd say we've done a pretty good job in rebuilding our relationships with our key customers, as well as penetrating opportunities with new customers across all of our product categories. That has led to a lot of these opportunities.
I think we're rebuilding the confidence with our customer base in our quality as well as our customer service capabilities, both of which have improved significantly over the last year. With that comes credibility and the opportunity to get back in front of customers and be viewed as a long-term strategic partner. You couple that also with some good innovation that we're bringing to the table across some of these different customers in different channels, and that's leading to some of these conversions. I would add to that, I think we're just beginning in this regard. We continue to have a pretty robust sales pipeline across all of our product categories.
With some of the expansion that we spoke to in aseptic, as well as the commercialization of our new roasted snacks facility. The bringing on and the commercialization of our organic cocoa processing facility in Holland. We have a lot of potential in front of us. Even in fruit, in the recent weeks, we're starting to see some new wins and good key wins for our fruit business, which again gives us confidence that a lot of the work that we're doing in our fruit business, we're starting to realize the benefits with our customer base and recognize, I know you guys all know this, but in store brands in particular, it's a long lead cycle to get business back with customers.
If you've had historical quality and service issues, you kind of get one kick at the can per year to try to get that right, and the timing of when those opportunities open up to you obviously influences when you're going to have the ability to regain the business and start growing the business again. We've seen a couple of key wins here in the last couple of weeks in our frozen fruit business that give us confidence that we're going to be able to accelerate that as we go throughout the year.
Would those be second half shipments, the newer wins in fruit?
Yeah, exactly. They actually are. The majority of it will hit towards the end of Q3 and going into Q4.
Great. Second topic on your beverage business, which is obviously performing well. Are you seeing an evolution of your beverage business? I think on the aseptic side, a lot of the nut-based beverages have moved, maybe been more action in the refrigerated section in nut-based beverages. Are you able to kind of navigate this transition, either by, it sounds like, category expansion into broth, maybe more work with food service operators. How is that playing out in terms of the composition of your aseptic beverage business? Is part of the capacity expansion or the investments you're making in capacity to bring on new capabilities to do maybe new packaging types as well as just enhance the capacity of your existing product lines? Thanks.
Yeah. I think as we spoke in the prepared remarks, what's going on in the beverage business is, I think the team's done a good job in identifying an adjacent category, which is broth. We also have a pretty good tea business that is growing. It's the combination of getting into different product categories as well as the benefit of our multi-channel focus in non-dairy aseptic. One of the benefits I think we have as a company is we sell from a contract manufacturing perspective, we sell into the food service channel, we obviously sell into retail, and we see good opportunities in all of those categories, in the non-dairy platform in particular, but also primarily in the retail channels on the broth category. In the tea business, we're seeing some pretty good growth, primarily in our food service business.
I think the diversification that we've done in the portfolio is allowing us to grow the category quite nicely. From an investment perspective, the capacity we're adding, it does give us additional capability to do different product forms, what we call hard-to-batch products, which are basically could be non-dairy, primarily products that have higher solid content levels to deliver a specific nutritional benefit. That's part of the capacity expansion includes that additional capability. The other piece of it adds further processing and filling capacity that allows us to basically leverage and reposition some of our different package formats across our three-plant network and puts us in a better position to continuously be a low-cost supplier to our customer base. There's significant benefits that come with the investment.
Okay, last one for me. Just as you think about the three-year plan or phase 1, 2, and 3 of the value creation program, I think you've talked at least somewhat broadly in the past about the desire to add revenue by 2020, and it sounds like we're going to start growing on a consolidated basis in the second half of this year, we're moving in that direction, but also bring the margins of the business up close to, I think, a 10% kind of level on an EBITDA margin basis. Given what you're seeing in the marketplace, given what you've kind of have worked on internally from an operational and process improvement perspective, and then thinking about fruit and hopefully the eventual recovery in fruit, is there any need to kind of rethink that?
Is that still a realistic set of objectives by kind of the 2020 timeframe, or do we need to be thinking out a little bit further at this point? Thanks.
I'll take that one, Jon. I do think that's still realistic. The modeling that we've done and frankly, the trajectory that we're seeing the business is on and the pacing other than fruit really is in line with where we want it to be. We're very confident that we can address fruit and get it there, but the nature of that business requires us to go through a bit of an investment year, if you will, in 2018 to right size the inventories and get back to a level where we can be more nimble, if you will, with our margins and then get back to growth in that category through innovation. That's why in the prepared remarks David referred to the case study. We're bringing those same processes, the same level of discipline, if you will, to fruit that we've done with beverage.
While a different category, we're confident in being able to return that business to growth and growing margins as well.
Great. Thanks a lot. Look forward to seeing you in a few weeks.
Thank you.
Thanks.
Our next question comes from the line of Chris Krueger with Lake Street Capital. Your line is now open.
Hi, good morning.
Morning, Chris.
A quick question on the aseptic broth opportunity. If you looked at your pipeline of conversations and discussions and potential new customers or new wins, how has that evolved over the last 12 months or grown?
Hey, Chris, the broth category in general, it's on a measured basis, it's about a $900 million category, and it's been growing anywhere from 8%-10% over the last year. It's a significantly sized category and one that we obviously see good potential in. As we targeted different categories for sales opportunities, it was definitely one that was at the top of the list. We've seen good conversion on a lot of those opportunities with some major accounts. We continue to have opportunity in that category, but we've also had good success to date, converting some of those sales opportunity pipelines, and we see that category continuing to have good growth potential in the forward years as well.
If you look at the competitive environment for that category, what are your advantages? Is it the innovations and the different flavors, or how should we look at that?
Yeah, I think it's our innovation capabilities. It's our capability to provide both organic and conventional products. Again, it's our three-plant network that puts us in a position to be able to basically be a low total landed cost provider that I think the competitive advantage we have versus the majority of our competitors in that space.
All right. That's all I have. Thank you.
Thank you.
Thanks, Chris.
As a reminder, ladies and gentlemen, if you have any questions at this time, that's star then one. We have a follow-up question from the line of Amit Sharma with BMO Capital Markets. Your line is open.
Hi. Thank you so much for taking the follow-up. Dave, just wanted to circle back on the frozen. Can you give us an update on how's the strawberry crop in California this year? As you laid out the case for recovery in that business in the back half or into the fourth quarter, how much of that is contingent on where the crop comes and how the price gaps are with fresh and frozen?
Okay. Yeah, the crop this year is off to a, as far as converting from fresh to freezer, which we use freezer strawberries, it's off to a bit of a slow start because of the weather patterns that have played out this year. What happened earlier in the year is, the growing conditions were near ideal in Southern California, and we thought at that time that actually there was going to be too much fresh strawberry supply and that the market was actually going to convert to freezer earlier than it normally does. Then rains and cooler weather came to California, and it completely stalled that out, and it's put the growers in a position where they've had to extend their fresh season to try to make up for the lost revenue that they incurred during that weather pattern, if you will.
What we're anticipating is that the fields will start to convert over the next couple of weeks, and we'll start to get back to normal receipt levels on strawberries. We don't anticipate having a shortfall in the crop that's necessary to meet our needs for this year. However, we are seeing the strawberry costs go up a bit due to the delay and the need for processors like ourselves to post some prices to get the growers to start to convert. To the extent that that allows or is necessary, we'll have to consider that in our pricing considerations as we go forward as a way to potentially offset that increased cost.
Doesn't that help you, though, too? If your fresh prices are higher, the gap between fresh and frozen is wider, and that helps you push your inventories out?
Yeah, I think what we're learning is it's more about an availability of supply of fresh on a year-round basis that tends to drive more of the consumption pattern from frozen into fresh. The pricing obviously is also a component of that. Based on the prices spread that we're seeing right now, though, I don't know that there's going to be a significant enough gap between fresh and frozen to create that dynamic, Amit.
Got it. Okay. That's really helpful. Thank you. That's all I have.
Thank you.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Colo for any closing remarks.
All right. Thank you, operator, and thank you all for participating in our first quarter conference call. I look forward to speaking with you in the future and updating you each quarter on our progress as we unlock the opportunity and value in SunOpta. Rob and I will be presenting next week at the BMO Farm to Market Conference in New York City, as well as the William Blair Growth Stock Conference in Chicago in June. We hope to see you there. Have a great day.