For our fireside chat with SunOpta. I'm Rob Mosco. I'm the senior analyst at TD Cowen, covering consumer staples. Very happy to have Brian and Greg with us today. Brian Kocher is CEO of SunOpta since 2024, and Greg Gaba has been CFO for several years. I'm going to ask them to give an intro of the business and then ask a bunch of questions. I'll also send it out to the audience at some point and see if anyone has any questions. Think about a few as we go through it. Brian, why don't you give us a little bit of a background on SunOpta's history and why you came to the company? What attracted you?
Sure. Thanks so much for having us, Rob. We really appreciate it. SunOpta is a 50-year-old company that now is very much focused on providing solutions in better-for-you categories. We provide private label and co-manufacturing solutions for brands, for retailers, for food service customers across beverages, broth, and then better-for-you fruit snack categories. If you look at SunOpta maybe five, six, seven years ago, it was full of what I would call more commodity-oriented businesses. Maybe 80% of the revenue was associated with commodity trading businesses, sunflower business, frozen fruit business. The volatility of those commodities also showed up in the volatility of the revenue and the profit line. Over the course of the last six years, ending in the fourth quarter of 2023, SunOpta divested of those businesses, and two things happened.
First and foremost, it unveiled this jewel of a value-added manufacturing business that was hidden underneath the volatility. Since then, you've seen a very focused business that's grown revenue on an 11% CAGR and adjusted EBITDA at a 20% CAGR. Very consistent, very focused, very value-added manufacturing oriented. The second thing that those divestitures did was allowed us, created the cash to pay down a little debt, but to reinvest in the capabilities and the infrastructure of the company. Now you're looking at a SunOpta that is very focused on supply chain solutions for winning customers in growing categories with the investment plan that was really consummated in '23, end of '23 time, and allows us now to focus on operational efficiencies to fuel growth and margin expansion.
You joined less than two years ago. What attracted you to the business?
I think part of it was timing. Part of it was they'd gone through the divestitures. SunOpta very much now needed an operationally oriented CEO who could drive operational efficiencies, unlock trapped capacity, continue the growth trajectory on the customer side. That was one of that. I think the other opportunity is I really love the long-term growth trajectory of the categories. We participate in plant-based beverages, in broth, in tea, in ready-to-drink protein shakes, in fruit snacks, better-for-you fruit snacks, all of which are growing and have long-term tailwinds behind it. I was excited about that. Lastly, and again, it's not a philanthropic exercise. I thought there was then, and I still believe there's a disconnect between the long-term earnings power of the business and the market value of the business.
Okay. And just a little background for the audience. The revenues last 12 months are $740 million. The market cap is $700 million, EBITDA $79 million. And about 79% of the business is plant-based beverages, protein beverages, broth. And will you describe all that as the aseptic process?
Aseptic processing. We process commercially sterile, shelf-stable products in Tetra Pak packaging.
Right. Okay. One of the most remarkable things that you can see in the grocery store over the past 15 years is how plant-based milk products have captured more and more share of conventional milk. There has been a lot of evolution within plant-based beverages. What % of the conventional milk market now is plant-based beverage? How do you see that continuing to evolve?
Oh, I certainly see plant-based continuing to grow. As a matter of fact, we believe shelf-stable plant-based beverages are growing in the high single digits this year. Volume-based, high single digits. We continue to see it grow. I think it is growing for a couple of very fundamental reasons. You have medicinal purposes. There are either intolerance or allergies to traditional dairy products. You have taste profile. You have environmental or animal welfare concerns, none of which, by the way, are really price dependent. They are all very disconnected from the way the price happens. I think that is one. The other thing that I would say is we over-index significantly to the younger generations. The younger generations participate more frequently. They participate more in total.
As you know, what happens with the younger generation then follows them in terms of their habits the rest of their life cycle. We just believe there's fundamental long-term tailwinds to the categories in which we participate.
Is it about 30% of conventional milk today if you had to estimate?
I think it's around 20-ish.
20-ish. Okay.
Has continued to grow.
Right. Okay. Consumer preferences have moved from soy to almond and now more and more oat milk. Can you talk about the flexibility of your operations to adapt to all of that? Maybe even also touch on who are the key customers? Is it the retailers or is it the processors, like the branded processors?
Sure. A couple of things. If we talk about customers first, we love the fact that we participate across all channels with all what I'm going to call marketers. Sometimes it's the brands where we're their entire supply chain. Sometimes it's a brand where we provide either a surge or a portion of their production. We do private label. We do direct-to-food service. We love the fact that no matter where the consumer shops, I talked about purchase drivers before, but there's also shopper behavior. The good news is no matter where a shopper participates in the category, our customers are there and we're helping fuel that growth. I'm excited whether it's in high-end coffee houses or quick service restaurants or retail or club or mass merchandisers. We get an opportunity to support our brands in those areas too.
If I look at the breadth of our base, of our bases, oat, soy, almond, I do not want to say we are indifferent, like we do not care. Of course we care. The good news is our aseptic manufacturing equipment, they produce all of that. We do not have to do much more than sanitation between processes. The same equipment that is producing oat milk is producing almond, is producing soy, is producing coconut. I think that gives us two things. One, better value for our customers. They can come to us as a one-stop shop. Two, it allows us as consumer needs migrate. We can migrate right along with them. There is not what I will call a barrier or a time lag. As orders change, we can change with those orders.
Okay. Can you name drop a little bit like some of the big customers that you have? I think I remember hearing Starbucks and Costco. Did I get that right? If not, please correct me.
I think we have not traditionally disclosed a bunch of customers. We do have one concentration of customer, which is a very big coffee house, which is very easy to guess. We have a public relationship with Bell Ring Brands, and their ready-to-drink protein shake. If you look at our investor website, I think we have said representative customers could be the Costcos of the world and the Krogers and the Targets. Those are all people that we service. I love the fact that, again, we're probably more indexed to club and food service right now than we are traditional retail. I think it's a great time to be there because club is clearly winning. Food service continually sets the bar with respect to consumer trends. We are excited to be over-indexed there.
Okay. You're a business-to-business model.
For sure. For sure.
EBITDA margins are around 10-11%. Is that the right margin for the business? I cover another private label company that is right around the same level. Maybe it's coincidence, maybe it's not. Because you're dealing with big customers who are watching your financials, how much opportunity for margin expansion do you have? How much of your efficiencies do you have to share with a customer?
Yeah. When we look at our model, right, it's really about making a fair manufacturing margin. The way we structure a majority of our contracts is when the raw material price goes up, we increase that to our customer. If it goes down, we give them the decrease. We're trying to make a fair manufacturing margin. As you said, there has to be a reasonable amount there. They're not going to pay an extreme amount, and we have to be able to make money. I think if you look at our guide for this year, we're going to be 12-ish %. I think we have an opportunity through the margin expansion work we're doing. We've talked about the gross margin expansion that we're working on, right? We were 15.3% adjusted margin in Q1.
We've said we're going to be 18-19% at the end of the year. There's really a few levers. The biggest lever is producing more units on the fixed asset base that we have today. We call it unlocking our trap capacity of our lines. What that really means is we're going to get more units out, roughly the same fixed cost. Obviously that's going to drop to the bottom line as we get the leverage there. We also have work streams on our yield improvement. Right now we're using a little bit more raw material than we'd like to. A lot of work streams going on there. We do see some nice improvement coming there by the end of the year as those work streams get in place.
Last year we spent some money on some consultants to help us with the processes. With the growth that we've had in the last few years, how do we maintain the performance to get that level of performance consistent and lock it in and then actually continue to improve from there? We went ahead and we hired some key folks, whether it's nights and weekend supervision, engineering, continuous improvements, folks. Those people are really helping us maintain the performance and improve the performance. Between those three areas, we expect to be at 18-19% by the end of the year. The last thing I will say is in Midlothian specifically, we said on our last call, we have a wastewater challenge right now where it's limiting the production.
Things are going well at Midlothian, but think of it as if we can run at 100 miles per hour. Right now we have to tone it down to 80, just a theoretical example, right? Until we unlock that wastewater, which is the fix to that, is putting some CapEx in, which will be in place by Q2 2026, and then we can bring it back up to that 100 miles per hour and get that additional fixed cost benefit.
Okay. Are your protein beverages only made at Midlothian, is that right?
They are. We have one line in our Midlothian facility that's dedicated to protein beverages.
Right. The reason I bring it up is that I cover those protein beverages companies, including Coke. I mean, it's an extraordinary amount of growth in that segment of the market. There are a lot of factors behind it. I think GLP usage is one. I think also they just, I think the taste has gotten better over time. Maybe you could tell us a little bit, I don't think you break it out, but about what % of your sales is ready-to-drink beverage, ready-to-drink protein? Am I right to say that this is the fastest growing segment of your business? If so, what can you do to invest more in capital to, I don't know, should you be thinking about doubling this capacity over time?
It is the fastest growing segment that we service. Actually, only barely. Better-for-you fruit snacks is actually growing almost as fast as that. Right now, because it is only one line in our manufacturing network, it is a relatively small portion of our overall. It is growing. We constantly are looking at where is the next best choice to deploy growth CapEx when we need to. I think we are very focused right now. Greg mentioned unlocking this trap capacity. We believe we have the fixed assets in place to fuel our growth in 2025 and in 2026. Again, just for those of you new to the story, we have kind of guided to approximately 10% annual growth, volume-based annual growth for 2025 and 2026 and into the long term. We believe we have the assets to achieve that.
Afterwards, in the 2027, I think we're going to need some growth CapEx. But think of it as adding a line in Midlothian as opposed to we don't need another greenfield facility. So the CapEx is less intense. The investment is de-risked a little bit because it's in an existing facility with existing leadership and existing protocols and existing processes. But certainly we evaluate ready-to-drink protein shakes because of its incredible growth.
Okay. Maybe I'll pivot a little bit to broth because it's one of these categories that's probably benefited the most from consumers trying to stretch their meals.
Find value.
How much of your business roughly is broth? I think there was also an unusual event a year ago at one of your competitors where they had to shut down an entire facility for a while. Are both of these things helping your business equally and is one of them more transitory than the other?
First of all, broth as a category is growing. I think part of it is the value equation. I think another part of it is you see a lot of health and wellness trends around broth, either as a base for other dinners and meals at home or potentially an ingredient for others. Broth as a category is growing and we like that. I think in general, we believe aseptic processing is capacity constrained. Now remember, I said all our equipment can do coconut, soy, almond, does not matter. Our equipment can do it. That same equipment does broth too. We have an opportunity in an environment where we believe aseptic processing is constrained. Whether it is constrained from a temporary plant closure, that certainly has a temporary effect, but we believe it is constrained overall. That gives us an opportunity as we create capacity.
Remember, we've got blood, sweat, and tears that go into creating capacity. In general, we don't have to pour more CapEx into creating capacity. We believe that's an area that we can take advantage of great customers. We can take advantage of a category that's growing and certainly goes into our mix and our pipeline in terms of where's the next opportunity we want to capitalize with this capacity we're creating.
Okay. Greg, can I ask a little bit about a little bit of history of your stock over the last five years? I mean, this has been on a very volatile ride. An outsider would look at it and say, well, maybe it was a pandemic darling for a couple of years. You were there for that period. What did you notice in terms of how the company was doing and how the market was perceiving the business and how has it changed?
Sure. I'd say a couple of things, right? Over the last few years, we've sold off a lot of our commodity-based businesses. Those businesses, by definition, were very volatile, right? There were a lot of swings in our earnings. That created some of the swings in the market. I would say a couple of other things, right? In Mid-2023, we saw all of this growth coming. I would say we made the mistake of being a little too aggressive on calling the timing of that growth. We had our guide out for the year and we had to call it down midway through the year, which really brought the stock down. Obviously, we've learned from that.
Brian and I have the philosophy of we guide to what we see, not what we can hope, which basically means we're not putting in our guide any potential timing on any new business coming in. We're putting in our guide what we see as our normal business with our customers. We went from that. I'd say a couple of other things that drove the volatility is just our size and our leverage over the years. It's been a real key factor for us to get our leverage down. We had a very high leverage a few years ago. We've worked hard to get it to three times leverage at the end of last year, which was our target. We've now reduced that target to two and a half times for the end of this year. I think that's really helping us now.
The last thing I would say is when it comes to understanding our growth, I think the natural place to look is track channel data. That really does not correlate to our business and our revenue as we continue to do very well in the club sector and the food service sector. We see plant-based beverage, which is our largest category, growing in the high single digits. That is just not visible in track channel.
Yeah. I covered plant-based beverage branded companies for a while. I found that they had excellent growth and then I think either got into price wars or had trouble keeping up with the changes in consumer preferences. It sounds like your model is more, what's the word? You don't care, right? As long as the consumer is just shifting more into this subsegment of the market in one way or another, you can just care about the volume.
We can adapt very quickly.
Yeah, you care about the volume.
One of the reasons we can adapt very quickly is we've got 20 food scientists who are at SunOpta. They'll engineer anything from taste profiles to nutritional content to even cost profiles or packaging sizes. They'll engineer all of that on behalf of the customer. They're also always keeping an eye on what's the next emerging technology. Our equipment is very flexible. If we produce rice milk, if rice milk suddenly started booming, it's produced on the same exact equipment. If rice milk boomed and let's say almond suffered the decrease, we just use the manufacturing line a different way for different products. I'm really excited about the diversity and the resiliency that we have, A, in our customer base, in the channels we serve, but then importantly in that product portfolio.
Every one of the categories in which we participate is growing. That is exciting.
Agnostic. I got there.
There we go. Agnostic.
Yes. I knew I would remember. You are below your capital, your leverage target. What does that mean for your capital priorities? I would imagine it's growth. Is that the number one priority?
Number one priority is still to deleverage to 2.5 times. We are on track to get there by the end of 2025. We expect to do so. That is the number one priority. Number two is growth in our capital. Every way we look at it, investing in our business for the long term is going to be the best result. We see tremendous opportunity. We see tremendous growth. The return on those projects far outweighs anything else. However, because we do not see the need for significant growth CapEx in 2025 and into 2026, what we did at the end of last quarter is we asked the board to authorize a $25 million share buyback program.
Because we're in a position now, since we don't need the growth CapEx, where if we're trending ahead of our leverage target of 2.5 times, there could be the opportunity to go ahead and buy back some shares because we too feel that the share price is very undervalued. That's just a great way to show the market that we believe that. We potentially have an opportunity to execute on that.
Your free cash flow in 2023 was negative. Then you are positive in 2024, depending on how you look at it, maybe $25 million. Is this year looking much better than last year? You told us what your leverage target is. I could probably back into it, but.
We put a guide out of $25-$30 million
cash flow for 2025.
Okay. So it's similar. All right. Got it. Okay. I'm going to see if anyone in the audience has something that they would like to ask, please raise their hand and I'll find you. You're still thinking, so I won't pressure you. The 8-10% growth that you talk about, how much of that comes from new business? You must have salespeople who are out.
100%.
Drumming up new business.
They better be.
Right. A lot of it is just from existing customers just growing with them. Can you talk about the mix of those two things in the forecast? I have a follow-up question.
Sure. As we think about growth in that 8%-10% outline, we think about it in a couple of ways. One, our categories are growing. We mentioned that. We should get some benefit from that. Two, remember we are with some really good customers. In fact, if you look at the category data, those customers are outperforming the markets and the categories in which they participate anywhere from 300 to 700 basis points. We get some growth from that as well. Share is the other piece. I mentioned on our last quarterly call that we have the largest pipeline that we have had, certainly in my time here. I think the largest pipeline we have had in a long time. If I look at that overall pipeline, which totals about 25% of our overall annual revenue in terms of opportunity.
If you got all of it.
If we got all of it. That's not a promise. It's a context.
Yeah, yeah.
If I look at that, it's more heavily tilted towards existing customers, which obviously is the fastest and most efficient way to grow. It's more heavily tilted towards plant-based beverage opportunities. Fruit snacks very quickly follow. Actually, broth continues to be a big component of that pipeline. I would say it continues to be sort of weighted towards food service and club as a channel as opposed to traditional retail.
Okay. Got it. You keep bringing up fruit snacks. One of the companies I cover is one of the biggest branded leaders in fruit snacks and has said that private label expansion has become a real threat to their business or a challenge for them. I imagine that this must be part of what you do. These must be customers of yours that are taking this category more seriously.
One of the things that I love about SunOpta is we're completely transparent with our customers. They know that we produce for brands and we produce for private label. We've been upfront, open and honest. We promise not to share anything. We do not share anything, but they know in advance. We have zero channel conflict, which is really good. I mean, we even have our own brands, but think of that as more an innovation tool than anything else. We're not out. I do not want to compete against our customers. We want to partner with our customers. One of the things is that we're very open and transparent with our customer base. They know that they may have a branded product that we produce that is competing against a private label product that we produce.
I think transparency in that situation is what cures any potential conflicts.
Okay. I guess my follow-up question on the new business wins was my understanding from another company is the promises of the new business wins from the salesforce depend heavily on whether the customer actually executes on what they said they were going to do. To what extent over time do you see, hey, I know if these new business wins are X dollars, roughly half of it comes to fruition or 75%? Do you ever take maybe you would take a better look, know better on the look back, or is that just an unpredictable number?
Yeah, I'd say it depends case by case. We haven't disclosed what our win rate is, but I feel very good about our pipeline. One of the reasons is majority of that pipeline is with existing customers today, with additional opportunities with those existing customers. Typically, it's much easier to do that than to win a brand new customer and bring that in.
Sure. Right.
Rob, I will tell you one thing. We were confident enough in our ability to continue the growth that we actually raised the bottom end of our revenue guidance at the end of our first quarter. That gives you some perspective on how we think about our demand generation engine.
You mentioned a lot about tight capacity across multiple categories. Does that give you more confidence in your pricing, the integrity of your pricing structure today compared to in the past, or has it always been pretty?
I think that's a natural reaction, a natural sort of follow-on consequence. As Greg mentioned early in this discussion, we try to provide a fair manufacturing toll. We do not want prices to be too high on the shelf either because maybe that has a volume impact. We want to be fairly compensated for the value we are providing. Not only the product, but the value of the supply chain services, the value of the innovation, the value of taking problems off of a customer's plate. That is really where we win. If I can solve your problem, we win. I think, yeah, that gives us some confidence in our overall methodology. I think the other thing Greg mentioned is we are incredibly and brutally transparent in our raw product pass-through pricing. When the price goes up, we pass that along.
We've been doing it for years and years. When it comes down, we pass that along too. And we've been doing that for years and years. I think that gives us also a little bit of credibility with customers when we talk about being fairly compensated.
Right. Tariffs, I think it came up on the last conference call, but to what extent does that impact your business? When do you start reaching out to customers to tell them about the higher costs?
A long time ago. I'll answer that.
April 4th?
January.
January. Okay. January. Even better.
Yeah. For context, six out of our seven manufacturing facilities are in the U.S. 98% of our revenue from 2024 was U.S.-based customers. That helps quantify that a little bit. Some of our raw materials will have exposure to tariffs. For us, it's no different than our raw material pass-through for anything else from inflation, from the COVID years. We have those transparent conversations with our customers. As we mentioned on our last call, there may be some timing implication, a month or two, or the lag to recover that. We fully expect to recover the tariff impact.
Okay. So you've started having the conversations. And can you see it flowing through your P&L currently, or are there things you could do to mitigate, to delay it in some form or fashion?
Yeah. We are seeing some tariff impacts specifically in our fruit snacks business. We do have some fruit bars that we import from Canada into the U.S. and sell in the U.S. There is tariff impact there. We are working with our customers to pass on that tariff. There may be a lag for a few months, but we fully expect to recover.
Okay. Brian and Greg, I want to thank you very much for joining us today. Thanks to the audience for participating. Appreciate it.
Thank you, Rob.