SunOpta Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 12 speakers on the call.

Operator

Greetings, and welcome to SunOpta's 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the prepared remarks. As a reminder, this conference is being recorded. I will now turn the conference over to your host, Reed Anderson with ICR.

Operator

Thank you. You may begin.

Speaker 1

Good afternoon and thank you for joining us on SunOpta's Q4 fiscal 2023 earnings conference call. On the call today are Joe Inan, former Chief Executive Officer, retired at the end of 2023 and is serving in an advisory role through the end of the Q1 Brian Kooker, who was appointed Chief Executive Officer effective at the start of 2024 and Greg Gaba, Chief Financial Officer. By now, everyone should have access to the earnings press release that was issued earlier this afternoon and is available on the Investor Relations page of SunOpta's website at www dotsynopta.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 follow, contain forward looking statements and management may make additional forward looking statements in response to your questions.

Speaker 1

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 Synaptis' press release issued this afternoon, the company's annual report filed on Form 10 ks and other filings with the Securities and Exchange Commission for a 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,

Speaker 2

we would like

Speaker 1

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 in the prepared remarks to follow, unless otherwise stated, the company will be referring to the continuing operations portion of the business and all figures are in U. S. Dollars occasionally rounded to the nearest $1,000,000 Given Joe's tenure as CEO, fully encompassed the 4th quarter, Joe will speak to quarterly results before turning the call over to Brian.

Speaker 1

Joe?

Speaker 3

Good afternoon, and thank you for joining us today. As most of you know, this will be my last SunOpta earnings call. It's been great getting to know all of you over the past several years and I've enjoyed our interactions. Today SunOpta is a much different business than when I started in 2019. The journey from beginning to end was incredibly rewarding and it is exciting to be reporting a strong Q4 today along with a solid outlook for 2024.

Speaker 3

Our results demonstrate the power of our platform and it's clear that the new SunOpta is a highly focused growth company that leverages its differentiated model to participate in some of the industry's most attractive categories. For today's call, I'm going to cover the highlights from Q4 and then turn it over to Brian to discuss his views of the business, priorities and the outlook. Greg will follow with a review of the financials and then we'll take your questions. Now let me offer some key takeaways from the 4th quarter results. Overall revenue growth was volume driven and very strong.

Speaker 3

For the quarter, revenues increased 14% year over year, a sharp sequential acceleration from the 6% increase we delivered in Q3 and in line with our long term growth algorithm. Growth continued to be broad based. We continued to see similar growth rates from each of our 3 primary growth levers. Share gains with existing customers, adding new customers and expanding our total addressable market. Plant based melts led by oak based offerings had another strong quarter of growth including significant gains in foodservice.

Speaker 3

Of all our product groups, fruit snacks had the highest growth rate for the quarter at 31%, reflecting strong customer demand that leveraged our expanded capacity. Adjusted EBITDA increased 17.5% to over $22,000,000 as higher utilization of capacity investments further leveraged our volume driven revenue growth to increase profitability. We had the best quarter of the year in terms of plant operations as all 4 of our plant based milk facilities performed well in meeting the strong customer demand. Last week, we signed an agreement to sell our frozen smoothie bowl business for 6,000,000 dollars This small business was our last remaining frozen asset and the supply chain had become highly inefficient after the divestiture of frozen fruit. Lastly, we continue to have a strong pipeline of additional growth opportunities.

Speaker 3

Now let me offer some additional color on the Q4 results. In the beverage and broth product group, revenues increased 19% to $147,000,000 The growth was over 100% attributable to volume and mix, reflecting share gains with existing customers, the addition of new customers and TAM expansion. This product group represented 81% of our Q4 revenue. Growth in oat milk was incredibly robust and remains a key driver as it has been for over 3 years. We also delivered sizable gains in creamers and tea along with continued ramp up of our protein shake business.

Speaker 3

By the end of Q2, we should be close to our end state run rate on this line. The operations and R and D teams have done an outstanding job in scaling our new plant in Texas, truly an impressive accomplishment. In Fruit Snacks, revenue was up 31% to over $27,000,000 driven by volume growth, which was enabled by our capacity expansion in Omak, Washington that came online late in Q3. This was our 14th consecutive quarter of double digit growth for our fruit snacks business. From a go to market perspective, trends remain similar to what we've seen throughout the past several quarters.

Speaker 3

Our own brand continues to deliver the highest growth rate followed by our contract manufacturing business. Private label was down in Q4 due to competitive dynamics in the broth category as we foreshadowed on the Q2 call. The decline in our ingredient revenue stems from the strategic shift we have discussed several times to prioritize the internal use of oat base versus selling it externally as an ingredient. We continue to see the P and L benefits of that shift and it was a major contributor to the 19% in beverage and broth growth. Now I'd like to touch on overall category performance for our major businesses.

Speaker 3

Looking at the plant based milk category in tracked and untracked channels, we estimate the category grew mid single digits. Recall that much of our revenue is derived from untracked channels. In Q4, we continue to see very strong trends for plant based milks in the foodservice channel, which as a reminder, we estimate to be at least 4 times larger than all of tracked channels. Also protein shakes continued to show very robust growth in tracked channels, up 40% in the last 13 weeks versus prior year. In closing, I'd like to thank investors for your support and all of our employees for your passion and tenacious execution of our strategies.

Speaker 3

When reflecting on the past 5 years, I'm extremely proud of the transformation of the company. We optimized the portfolio by divesting our commodity based businesses to focus and invest in high growth, competitively advantaged businesses operating in very attractive categories. We have built a great team with a great culture and we live our sustainability values every day. We have delivered results. On a pro form a basis, over the last 5 years, the new SunOpta has more than doubled revenue and adjusted EBITDA has quadrupled.

Speaker 3

I look forward to the continued success of the new Synapta under Brian's leadership as we continue to fuel the future of food. With that, I'm going to pass the call over to Brian. Brian?

Speaker 4

Thank you, Joe, and thanks everyone for joining us on the call today. I want to start by saying how excited I am to be a part of SunOpta and grateful for the opportunity to lead this company in its next chapter. I'd also like to recognize Joe and the transformational change he drove over the last 5 years. The new SunOpta is the culmination of Joe's leadership. As a result of those efforts, we are a stronger, more focused company with a clearer long term growth trajectory.

Speaker 4

Joe, you should be very proud of your leadership at SunOpta and we are definitely proud of you. Thank you for your impact and thank you for your continued support. As I have discussed with many of our shareholders over the last 2 months, I'm excited about the future of SunOpta for several reasons. 1st and foremost, I love the categories in which we play. Our categories are growing and we have an excellent customer base to fuel further growth.

Speaker 4

Secondly, the timing was right from a strategic perspective. Joe and his leadership team transformed the portfolio from largely commodity based to one that is purely value add. SunOpta then deployed significant capital and we are now leveraging that capital for growth. In short, the SunOpta CEO role is migrating from 1 of portfolio transformation to a role where operational excellence is the next unlock for volume and profit growth. That fits with my strengths perfectly.

Speaker 4

Thirdly, the new SunOpta has already demonstrated several years of growth. With the portfolio transformation now complete, you can see the power of the core business. Over the last 36 months, revenue has grown 40% and adjusted EBITDA has grown approximately 60%. We are a growth company focused on growing categories and I'm excited to lead our next chapter of growth. Additionally, every strand of this company's DNA is built on doing good by our customers, the environment and the communities in which we work and live.

Speaker 4

We are blessed to operate in food and beverage categories. We're doing right for our products and our customers is 100% aligned with doing right for our environment. And I'm proud to be associated with a company that lives its sustainability values. Lastly, and probably most importantly, the culture, people and values of the company were a great fit for me personally. Once I joined SunOpta and started meeting everyone, it was clear that there is an everyday passion within the entire employee base that exceeded my expectations.

Speaker 4

The culture is great and it is a core differentiator for the company. Next, let me provide you with an update from my 1st couple of months. I've been able to align with the Board on priorities as well as validate my initial views on the business. I understand the underlying growth drivers and believe they are sustainable and enduring. After digging into all key aspects of our business model and spending a lot of time working with the leadership team, I've grown increasingly more excited about SunOpta's potential.

Speaker 4

I understand the demand trends and have greater visibility into the sales pipeline. I've had a chance to see the improving throughput and efficiency trends in our facilities. I've even seen our capacity expansion plans for Oak Basin Modesto and the 3rd production line in Texas. These projects are progressing and I'm excited about their ability to contribute to long term growth. All of this has solidified my confidence in our 2024 outlook as well as my confidence in the overall trajectory of our growth.

Speaker 4

The Q4 provides an early look of what is possible as we continue to execute our growth plan and focus on operational excellence to drive increasing rates of return. All the initiatives that help to shape and transform the business over the past several years under Joe's leadership have clearly positioned us as a growth company. When taken as a whole, these observations give me strong confidence in our operating model and our sales momentum in the New Year. In fact, I am so confident that I am reaffirming our outlook for 2024. Actually, reaffirming our outlook is effectively raising as we did not adjust for the divestiture of the smoothie bowl business, which contributed $12,000,000 of revenue in 2023.

Speaker 4

I am confident in the guidance due to the momentum and the competitively advantaged business model that we've built. After my discussions with the team, seeing the pipeline on the horizon and validating those observations with our board, I am also confident in our plan to deliver $125,000,000 of adjusted EBITDA run rate by the end of 2025 or in early 2026. I'd like to take some time to reaffirm our strategic priorities. Number 1, increasing the efficiency and the effectiveness of our supply chain. We have invested in capacity and deployed capital.

Speaker 4

Now we need to ensure we are driving operational improvements with a daily relentlessness. We need to operate our plant and physical assets highly efficiently to optimize the demand side momentum. Number 2, drive growth, continue our trajectory via share growth with existing customers, new customer acquisition and TAM expansion. And finally, remain focused and disciplined in executing our capital allocation priorities of which deleveraging is currently the number one priority. In summary, SunOpta is a growing company in growing categories and is focused on supply chain excellence to leverage its installed base of assets.

Speaker 4

We're focused on driving margin enhancement through volume growth and operational efficiencies and I look forward to updating you on our progress throughout 2024. Now, I'll turn the call over to Greg to cover the Q4 in more detail.

Speaker 5

Thank you very much, Brian, and good afternoon, everyone. We had a strong 4th quarter. Revenue of 181,600,000 was up 13.7% versus last year driven by volume growth. Gross profit increased by 7.7% to $25,600,000 Adjusted gross margin was 17.3%, down 50 basis points from the prior year period, net of absorbing an 80 basis point increase in depreciation related to new production equipment. Operating income increased by 48% to $5,100,000 driven by profitable volume growth.

Speaker 5

Adjusted earnings from continuing operations more than doubled to $5,700,000 compared to $2,600,000 in prior year period due to improved operating performance more than offsetting increases in interest expense and depreciation. Adjusted EBITDA from continuing operations increased 17.5 percent to $22,300,000 and was up 40 basis points as a percentage of revenue 12.3%. Turning to the balance sheet and cash flow. As planned with the divestiture of the frozen fruit business and the significant reduction of working capital needs, we completed a refinancing of our debt in December. We entered into a new $180,000,000 term loan credit facility and a new $85,000,000 revolving credit facility.

Speaker 5

The new credit facilities have a 5 year term, provide greater flexibility, strengthen our balance sheet and provide a structure that is aligned with our future capital needs. At the end of Q4, debt was $263,000,000 complying leverage of 3.4 times. Cash provided by operating activities of continuing operations during the Q4 was 12,000,000 dollars and cash used in investing activities of continuing operations was $9,200,000 resulting in free cash flow generated from continuing operations of $2,700,000 For 2024, we are maintaining the free cash flow target of $35,000,000 to 45,000,000 that we first shared with you on the Q3 call. Let me reiterate our current borderline capital allocations priorities. Given current interest rates, the first use of cash will be to pay down debt until we are under 3 times levered.

Speaker 3

We expect to reach this level

Speaker 5

in the second half of 2024 as debt will increase slightly in the first half due to the completion of the Modesto extraction project Brian referenced. Once we are under 3 times levered, we will continuously evaluate the best use of free cash flow. This may include share buybacks, funding high ROI capital projects and or accretive M and A. Let me close with comments on the outlook. From a guidance standpoint, we are reaffirming the 2024 outlook we provided on our previous call.

Speaker 5

We expect revenue in the range of $670,000,000 to to $700,000,000 which represents growth of 6% to 11%. From a profit perspective, we expect adjusted EBITDA of $87,000,000 to $92,000,000 which represents growth of 11% to 17%. From a pacing standpoint, as you would expect, we see the back half of the year to be somewhat stronger than the first half with a split of approximately 48% first half and 52% second half. In addition, in the first half of the year due to seasonality, we expect Q1 to be stronger than Q2 with an expected split of approximately 52% to 48% for Q1 and Q2. From a balance sheet and cash flow standpoint, we continue to expect capital expenditures on the cash flow statement of approximately $25,000,000 to $30,000,000 in 2024.

Speaker 5

Before opening the call for questions, just a reminder that for competitive reasons, we do not provide detailed commentary regarding customer or SKU level activity. And with that, operator, please open the call for questions.

Operator

Your first question comes from the line of Andrew Strelzik with BMO Capital Markets. Your line is open.

Speaker 6

Hey, good afternoon. Thanks for taking the questions. And Joe, best of luck in the future. It's been great working with you.

Speaker 5

Thanks, Hunter. My question

Speaker 6

absolutely. My first question, I guess, is about the new business pipeline. And I guess I wanted to tie that back to the comment you made that there's kind of an underlying increase, I guess, in the revenue assumptions just given that now you'll be without the smoothie business. So have you seen any movement there converting some of those new business opportunities over? Is that contributing to that?

Speaker 6

Or how is that new business pipeline building?

Speaker 4

Yes. Andrew, thanks a lot for the question and for joining the call. A couple of things that I would say about our new business pipeline. 1st and foremost, we have multiple ways to grow our revenue line. We're growing share with existing customers.

Speaker 4

We're acquiring new customers. We're expanding the TAM with some of the investments that we made recently. And also don't forget, we've got really a 4th area. And that 4th area is the fact that a lot of our blue chip customer base is growing in and of themselves and that carries along our growth with it. So I think specifically when we looked at that 2024 guidance, I've had a chance now with 2 months in the role to see facilities, to meet sales people, to meet a few customers, to understand the order volumes that are coming in and the pace that they're coming in at.

Speaker 4

And I would say they're all in line with the forecast that we outlined in the Q3 call. So new business is always a part of our process, new business development. That new business development runs from anywhere from discovery stage close to implementation and we're at various points along that horizon with each of our customers. So I guess with respect to new business development specifically, it's on the horizon. We continue to invest in new business development.

Speaker 4

But right now, we're looking at the strength of our current customers with our current product portfolio and the growth that we see with them. And that's what gave us the confidence to affirm our guidance for 2024.

Speaker 6

Got it. Okay, that's helpful. And then the second question is just on the ramp of the Texas facility. And you noted the first that by the end of the second quarter, you would be kind of at end state. So I guess in terms of the first two lines, where are those from utilization rate perspective?

Speaker 6

And I know the 3rd line was coming on in the Q1, is that online right now? Can you just give us an update on how that's ramping?

Speaker 4

Yes, I think the best way I can say it is, it's ramping as expected. The first two lines are demonstrating both the production and productivity that we expected and are absolutely on the trajectory to be at our end run rate, so to speak, in the Q2, middle of the year. And then the 3rd line is in process right now. So it comes in and then we do some qualification and other things. But yes, we're excited about the path that it's on and we believe in by the end of the second quarter, the third line would be contributing to profits

Speaker 7

as well. Okay.

Speaker 6

And then just one quick last one for me and that's on the foodservice side where it's impressive to hear the strength there, especially as some of the larger players note maybe a little bit of softness in some of the top line trends that they're seeing. Can you just talk about what you're seeing on the foodservice side maybe more recently and what gives you the confidence there kind of underpinning the outlook in terms of whether it's share gains or new customers or those types of things, where you're seeing

Speaker 4

the bulk of that growth would be helpful? Thanks. Yes. I think the story is similar to what Joe described in the Q4 results. We do see still growth in the foodservice area with many of our customers.

Speaker 4

I think Oat is driving that. There is a preference in particular in the coffee shops and quick service restaurants for oat products. So I think that's been a driving factor of it. But it really comes across all of those spans where we think we have growth. It comes from expansion of share with existing customers.

Speaker 4

It comes from acquisition of new customers and it comes from TAM expansion. And in particular, it really is even across those three areas.

Speaker 6

Great. Thanks. I'll pass it on.

Speaker 4

Thanks, Andrew.

Operator

Your next question comes from the line of Bobby Burleson with Canaccord Genuity. Your line is open.

Speaker 7

Great. Thanks for taking my questions. Hopefully, you can hear me. So I guess the first one is just curious how your volumes look versus the industry. You mentioned share gains and I'm wondering it's tough to look outside of tracked channels, but just overall, where do you think the share gains are the most substantial?

Speaker 7

And then is there any kind of volume delta color by foodservice versus retail?

Speaker 3

Hey, Bobby, it's Joe. As we outlined category in the Q4 for total plant based, we would say was mid singles. And given the volume we reported, I mean, we were 3x faster growth than total category.

Speaker 7

Okay. And so in terms of like the tightness for I'm assuming outpaced you guys are prioritizing internal consumption rather than supporting some of the external. And I'm wondering, what is the industry seeing do you think in terms of boat based supply versus what the production needs might be more broadly? And have you guys gotten some gain some competitive advantage there?

Speaker 4

Well, Bobby, I think a couple of things to think about. We definitely saw oat driving growth in the category of foodservice as well as our co man business and private label business. So we saw Oat as a driver. Remember, we also anticipated that and our oat extraction line in Modesto is in place. It's coming online in the Q1 and we expect it to be positively impacting profits in the second quarter.

Speaker 4

So we foresaw the expansion. I think we've been able to partner with our customers. Again, I would say we have a really blue chip customer base. And so we've been able to partner with them across the spectrum in the in the Q4. And certainly, knowing some of our customers and our existing customers and our existing product lines when we charted out our 2024 growth, we've been able to see those trends be exactly in line with what we were expecting.

Speaker 7

Okay, great. Thank you. Congratulations.

Speaker 4

Thank you, Bobby.

Operator

Your next question comes from the line of Ryan Myers with Lake Street Capital Markets. Your line is open.

Speaker 5

Hey guys, thanks for taking my questions. First one for me, if we think about the guidance ranges that you guys gave for 2024, what are some things that you're looking for you could potentially see, where you could come in at the high end, if not better than what you have initially guided here?

Speaker 4

Yes. I think there's a couple of things that would positively impact our 2024 outlook. One would be if some of these new business development opportunities got across the goal line, I would think of those as additive. The other thing that I would say is we certainly had visibility to what our customers who operate in track channels were forecasting for 2024 and they're forecasting in tracked channels again, not for the entire category. I think we've explained well enough that the entire category is growing mid single digits.

Speaker 4

But track channels, we see some softness there. If that would turn around, if promotional volume would drive some increases, if that would turn around and start growing, I think that would be additive to the 'twenty four outlook as well.

Speaker 5

Got it. That's helpful. And then as we think about the growth levers and the expansion into new customers, I was wondering if you could talk about how penetrated you are in foodservice and how much ability there is to add new customers in that channel?

Speaker 4

Well, I think it's a great question. I mean, we have certainly have customers that we're penetrated in and we're working on new product development or TAM expansion ideas. I think if you look at shelf stable, we believe we're about 65%, 70% of the overall shelf stable market, including tracked and untracked channels.

Speaker 5

Got it. That's helpful. Thank you for taking my questions. Thanks, Ryan.

Operator

Your next question comes from the line of Jim Celera with Stephens. Your line is open.

Speaker 2

Hi, guys. First of all, Joe, congrats on retirement. I think you leave the business in

Speaker 5

a really great spot moving forward. And I'd be lying if I said I wasn't

Speaker 2

a little envious of your future escapades, so hats on with that. Maybe one last question for you to kind of close the loop on everything. If we look at the sales composition moving forward into 2024, it sounds like smoothies are gone. You guys are using the majority of the ingredients internally now. Is it really just 2 categories now, the beverages and broths and the fruit snacks?

Speaker 3

I mean, I think, Jim, it depends upon how you think about protein shakes. We certainly see that as an incredibly untapped market for us for the next half a decade, if not decade. So I would think about that as even though from a reporting standpoint, it rolls up in there, just really outstanding revenue potential growth territory for us.

Speaker 2

Okay. And I'm sorry if I missed this, but did you give the 4Q number for beverages and broth? I know fruit snacks was 31%, but maybe

Speaker 3

I missed the beverage and broth growth rate? We said, plus 19%. Yes, beverages and broth, I think was 81% of total revenue and plus 19.

Speaker 5

Okay,

Speaker 2

great. In 2024, I think the midpoint for the sales guide is like 8.5. Should we think about that as being evenly split between beverages and broth and fruit snacks? Or is there a little bit more leverage on fruit snacks just given the capacity unlock that you guys are working through there?

Speaker 8

Yes. Jim, I think it's

Speaker 4

probably fair to say there might be a little accelerated growth rate on the fruit snack side versus the beverage and broth. But remember the size of the beverage and broth is so big that the absolute dollar amount may be similar. Okay.

Speaker 2

To the operations side. Brian, I know that's your area of expertise and excited to see what you can do with the business here. But especially on the Tetra Pak side, you already inherit a very well functioning supply chain and operations piece. Can you just maybe walk through where you think there's opportunity across the manufacturing base to really see operating leverage that you can extract out

Speaker 5

of the business and hopefully see that flow through to the EBITDA line?

Speaker 4

Yes, Jim, thanks for the question. I think, A, you are right. We do have what we believe is a competitive advantage in our supply chain and our ability to fulfill customer demand. So I agree with you there. Even with that, I think if you look at the supply chain in total and what we do is essentially break it down into its component parts, everywhere from long term planning to procurement to inventory to conversion to distribution.

Speaker 4

There are points along that line that you find that maybe there's some leakage in either productivity or opportunity. And we've spent a large part of last year implementing some shop floor metrics that allow us to track that. But most importantly, to track the operating metrics at each one of those, for lack of a better word, component parts of the supply chain, the defects and then start working against fixes and opportunities to improve that. I would say to answer your question sort of philosophically, we will never ever, ever be done trying to drive supply chain efficiency and supply chain excellence. And we're not done for two reasons.

Speaker 4

1, there's an opportunity to if we can push more units to a fixed cost network, certainly we can enhance margin and that's just straight math, right? Jim, that's easy. I think the second part of that is the more units we can get through our fixed cost network, we create what I'd like to call non CapEx capacity and that allows us to fill customer demand. It allows us to manage our schedules that we're producing at the most effective time of the quarter, the month of the year. And so there's a lot of advantages to continue pushing on supply chain excellence and free up any amount of trapped capacity that we can in our network.

Speaker 2

Okay, that's great. And then maybe if I could sneak in one more question. Just thoughts around CapEx spend in 2024, obviously coming off a big lift within Louthan and getting that up and running either like a dollar amount we should think of or percentage of sales, whatever is easier for

Speaker 5

you guys, just thinking about that for 2024? Yes, Jim. In the prepared remarks, we gave an estimate between $25,000,000 $30,000,000 for CapEx in 2024, and we feel pretty good about that range. Perfect. Thanks guys.

Speaker 5

I'll hop back in the queue.

Speaker 4

Thanks Jim.

Operator

Your next question comes from the line of John Baumgartner with Mizuho Securities. Your line is open.

Speaker 5

Thanks. Good afternoon. Thanks for the question.

Speaker 9

I wanted to come back first off, I wanted to come back to operating leverage and specifically at the SG and A line. The last 9 months showed some pretty solid improvement there. I'm curious as to how you're thinking about SG and A in 2024 as volume drives the top line. I mean, is there any reason to expect a material uptick in SG and A spending? Are there incremental resources you need to add as you go forward?

Speaker 9

Just trying to

Speaker 3

understand how SG and A evolves from here. Thank you.

Speaker 5

Hey, John, great question. Thanks for asking that. I would look at 24, it's pretty similar to our SG and A as percentage revenue, it was 23%. In Q4, it was a little bit lower the percentage. That was due to all of the change, change in leadership, change in the with the divestiture of the frozen fruit business.

Speaker 5

And there was a bit of a reversal of stock based compensation in Q4 and you'll see that on the cash flow statement. But going forward, we were roughly 12.3% SG and A as revenue as a percentage of revenue and I would view that to be pretty similar in 2024.

Speaker 9

Thanks for that. And then coming back the comments on the mid single digit all outlet growth for plant based beverages, obviously driven by away from home.

Speaker 3

Are you seeing any sort of

Speaker 9

commonalities in terms of where the away from home channel has gained that acceleration? Are there certain sectors adopting plant based for the first time like universities or hospitality? Is this still largely coffeehouse driven? I'm just trying to figure out understanding better the TAM, how the

Speaker 3

TAM is evolving across the verticals away from home? Yes, John, it's Joe. We're definitely seeing that driven by coffee shops. What you're seeing is and this isn't a new trend we've seen for years years, the migration of consumers from cow dairy to plant based. Additionally, you see coffee houses putting an increasing emphasis on the promotional drinks featuring plant based.

Speaker 3

All one has to do is look at the menu board and you will see a plethora of plant based specialty drinks. And so between the consumer shift and then the coffee shops enthusiasm for promoting and pushing specialty drinks, it has been the same drivers for several years now and we would expect those to continue.

Speaker 5

Great. Thanks, John. All the best. Thank you. Thanks, John.

Operator

Your next question comes from the line of Brian Holland with D. A. Davidson. Your line is open.

Speaker 8

Yes, thanks. Good evening. So I think this has been addressed in a few different spots, but maybe just to tie it all together. So it sounds like on whole plant based beverage growth around mid single digits has been the trend here for a little while now, stronger in Foodservice, a little softer in what we can see in the tracked channels. Just want to make sure I understand, to the extent that this is possible to look at it this way, what needs to be assumed for category growth that underpins your outlook?

Speaker 8

Are we still sort of like on whole mid single digits? Is it a little bit softer than that, a little bit stronger than that? I just want to make sure I'm sort of centered there?

Speaker 4

Yes, Brian, really good question. I think the way to think about this in terms of what underlies our outlook is remember we don't necessarily start off our outlook and forecast with a category growth number. We start off with the growth forecast from our customers. And so then that gives us obviously insight to where the category as a whole is growing. Now that's sort of insight into the process that we have.

Speaker 4

But ultimately, I would say the growth that we have with our customers would translate to a category that's growing in the mid single digits. So they happen to be very aligned in this example.

Speaker 8

Okay. And if I just kind of follow-up on that, so maybe ask the question another way, because I think this was an issue a few quarters ago where maybe some assumptions were made about the category, the category softened, and some plans changed. Any sense as you talk to your customers on hold that some of the slowdown in that category that we have seen, where we've seen it in track channels and the like, that they've gotten a little more conservative about those assumptions over the next 12 months relative to maybe the prior 12 months?

Speaker 4

Yes, I think that's absolutely true that they've been a little bit more conservative. And as we may have think we answered this in one of the earlier questions. That's why also if tracked channels returns to sort of growing, we believe that would be upside to our outlook for 2024. So we base some of our overall forecast for 2024 on the feedback directly from customers that they were being a little bit more conservative than the track channel arena.

Speaker 8

Appreciate it. That's very helpful. Last one for me. We talk a lot about new business development, but I think one of the more underappreciated components of the growth story here over the last few years has been the innovation pipeline, which I think has sort of come to fruition in a number of forms. Where does that stand today?

Speaker 8

I don't know to the extent you can actually talk about specific products. I appreciate some things that maybe haven't been unveiled that you can't talk about. But just understanding how actively we are managing the product innovation pipeline and to what extent is that proving to be a lever that you are using to either gain more business from existing customers or help penetrate new customers?

Speaker 4

Yes, Brian, it's a great question and let me just try to kind of simply talk about that a little bit. If you look at the growth that we had in Q4, basically almost $22,000,000 worth of revenue growth from Q4 of 2022 to Q4 of 2023. That really was split almost equally between TAM expansion, share growth with existing customers and the acquisition of new customers. Now some of the acquisition of the new customers were also coinciding with new products and new product launches. So it's a real key contributor to our growth platform.

Speaker 4

As I mentioned earlier in the call, we are at various every day, we're at various stages in the new product development and sort of the new business development pipeline with customers. And sometimes, we're at multiple stage or different stages in multiple projects with the same customer. So we'll continue to try to make sure on our regular updates that we update you on the progress. But what I think you'll see is you'll see that product roll into the financials and that's the best way to see it work and the best way to see it, the impact that it's had on the organization.

Operator

Your next question comes from the line of John Anderson with William Blair. Your line is open.

Speaker 10

Hey, everybody. Joe, it's been fun to get to know you and best wishes as you go forward. Let's see, most of my questions have been asked. I guess, there was a reference in the prepared comments to the longer term EBITDA goal of 125,000,000 dollars And I think it was kind of portrayed that you're comfortable achieve that you can achieve that by 2025 or early 26. Am I right to think that's a bit of a pull forward from how you talked about that previously and where is that kind of incremental confidence coming from?

Speaker 4

John, let me just make sure we clarify. I would say we're affirming that we can be at a $125,000,000 annual run rate at sort of the end of 2025 beginning of 2026.

Speaker 10

Great. That's helpful. Thank you.

Speaker 4

And that is what we said in the Q3 conference and the investor conferences that we've been to date. So I think it's very consistent.

Speaker 10

Okay. And then can you remind me Line 3 in Midlothian, what that line is going to be producing? And then if I guess if the protein shake line is going to be at run rate production levels by the end of the second quarter, are there plans to add additional capacity in terms of TAM expansion, just given how strong that category has been as you referenced in the prepared comments as well?

Speaker 4

Sure. Yes, Line 3 just specifically, Line 3 is focused on plant based milks. And I think our next best opportunity, again, we will be at the run rate. We're on track to be at the run rate that we expect to be in Midlothian on in sort of the middle of the year. I do think there's further opportunity to drive productivity and unleash some trap capacity right now.

Speaker 4

So I would think the next step we do is continue to drive productivity and efficiency in those lines and create capacity in that manner.

Speaker 10

Okay. That makes sense. Maybe one for Greg. So as you generate free cash, I can't it's been a while since I think you've generated the kind of free cash that you're talking about in 2024. Could you talk about your plans for kind of just the cadence of debt pay down?

Speaker 10

Is that $35,000,000 to $45,000,000 earmarked for debt pay down in 2024? What's your long term target leverage level? And with the refi that you did, how much of your debt is fixed versus variable right now? Thanks.

Speaker 5

All right. Thanks, John. So I'll address the last one first. So roughly our debt is 80% variable, twenty percent fixed. So our first goal, right, for our capital allocation priority is to deleverage, right.

Speaker 5

We want to get under 3 times leverage. So our primary goal is to pay down debt to accomplish that. We think we'll be there, John, by the end of second half of the year. Other priorities, right, will either be stock buyback, will be purchase of ROI, high ROI investments or M and A acquisitions. So that hasn't changed.

Speaker 5

We continue to focus on paying down debt. We continue to focus on deleveraging. We continue to focus on getting under 3 times, which is our long term

Speaker 10

goal. Okay, great. Thanks very much. Thanks again. Good luck.

Speaker 4

Thanks, John.

Operator

Your next question comes from the line of Daniel Bialy with Hedgeye. Your line is open.

Speaker 11

I just wanted to extend my best wishes, Joe. And my question is the mid single digit growth in plant based, would you be able to sort of bucket that between oat and almond and soy? I'm just curious how that looks for the industry?

Speaker 4

We don't really kind of bucket that and segment that. I think it's fair to say that the growth rate that we're projecting includes all of the plant based milks, whether it's oat, almond, soy, coconut, it's all of the plant based milks.

Speaker 11

Okay. And then does Modesto still look to be online in Q2? And when would shipping start? And then should we expect growth in ingredients once that comes online like in the second half of the year?

Speaker 4

Yes, Modesto is still on track. Yes, we believe that it will make a positive impact in the financials in the Q2. Again, we will prioritize the internal use of Oat for our own products. But I would say, maybe by the end of the year, the 1st part of 2025, you might see some ingredient sales. But our priority will be the internal use first.

Speaker 6

Great. Thanks.

Operator

There are no further questions at this time. I will now turn the call over to Brian Kooker for closing remarks.

Speaker 4

Thank you, operator. I'd just like to take a few minutes to summarize our key messages. If you only take away 3 items from this call, then the 3 items should be, 1st and foremost, we are a growing company in growing categories. In addition to the growth that's naturally coming our way via the growth of our blue chip customer base, we're growing via share gains in our existing customers, We're growing via new customer acquisition and we continue to grow via TAM expansion. So that's one thing.

Speaker 4

Secondly, I'd just like to remind everyone, our early visibility into the results and trends in 2024 have allowed us to both affirm our 2024 guidance as well as that mid term guidance that we talked about. And so that's really important to remember. And then I think the other thing that's important is my confidence in the demand side of the business is allowing us to prioritize our leadership efforts in the pursuit of operational excellence and pursuing operational excellence

Speaker 8

as a

Speaker 4

way to enhance margin and then create that non CapEx capacity to unlock to unlock capacity from our existing network. So remember those 3 as the summary items. And then finally, I'd really like to thank you again, Joe, for your leadership. Your legacy will positively impact the culture and the business of SunOpta for many years to come. And so thank you for your efforts.

Speaker 4

With that operator, we can adjourn. Thank you to all of us who joined us and we look forward to updating you throughout 2024. Thank you.

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Earnings Conference Call
SunOpta Q4 2023
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