SunOpta Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 26, 2025

There are 9 speakers on the call.

Operator

Greetings and welcome to SunOpta's Fourth Quarter twenty twenty four 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 would now like to 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 Synaptis' fourth quarter fiscal twenty twenty four earnings conference call. On the call today are Brian Kooker, Chief Executive Officer 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 Synapta's website at www.synapta.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.

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 SynOpta's press release issued this afternoon, the company's annual report filed on Form 10 K and other filings with the Securities and Exchange Commission for a more detailed discussion of the factors which could cause actual results to differ materially from those projections and any forward looking statements. The company undertakes no obligation to publicly correct or update the forward looking statements made during the presentation to reflect future events or circumstances except as may be required under applicable securities laws. Finally, we would like to remind listeners that the company may refer to certain non GAAP financial measures during this teleconference. A reconciliation of these non GAAP financial measures was included with the company's press release issued earlier today.

Speaker 1

Also, please note in the prepared remarks that 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 million. Now, I'll turn the call over to Brian to begin. Brian?

Speaker 2

Good afternoon and thank you for joining us today. With today's prepared remarks, I want to accomplish the following goals: wrap a bow on a growth filled 2024 share more details of our long term strategy and provide our financial outlook for 2025. I will cover several of the main themes and Greg will finish by providing more detail on the numbers. Then we'll take your questions. Let me begin by saying that Q4 performance unfolded substantially as we anticipated.

Speaker 2

Revenue grew, we invested some operating dollars in supply chain improvements and we finalized the last significant step in our Midlothian build out. Our business fundamentals are solid. Our strategic initiatives are delivering results and we continue to demonstrate our ability to drive significant growth, improve productivity and profitability and build processes for sustainable shareholder value creation. As it relates to closing out 2024, fourth quarter results were in line with our expectations. Revenue increased 9% driven by volume growth of 13%, again reflecting broad based gains across segments, products and customers.

Speaker 2

Adjusted EBITDA increased 20%. Adjusted EBITDA margin improved 130 basis points to 13.4% resulting from strong revenue growth and operational efficiencies net of some temporary investments. Our co manufacturing and private label solutions continue to resonate in the market. The end consumer categories in which we participate continue growing. Our customers on average continue to over index to the fastest growing categories and our solutions based sales approach is enabling us to expand share with existing customers and acquire new customers.

Speaker 2

Within our portfolio, four of our top five customers grew double digits in the quarter, growing an average of 13%. In total, supported by the factors we just discussed, it enabled us to deliver 21% volume growth in 2024, a truly extraordinary number considering the current food and beverage consumer landscape. In Q4, we also officially completed the startup phase in Midlothian. In December, we swapped temporary electrical distribution equipment in the facility for the new permanent solution, which was on back order for the last two years. Although the equipment upgrade went well, it did cost us ten plus days of downtime and resulted in inefficiencies and some waste as the facility came back online.

Speaker 2

By mid December, the new equipment was in place and functioning well. When I joined the company over a year ago, I was incredibly excited about our asset base and the potential to leverage our deployed equipment and facilities. I am more excited today. Throughout 2024 and notably in Q4, our supply chain was fighting to keep pace with our growth. We invested in people, training, processes and engineering support during the last three quarters of the year.

Speaker 2

We delivered improvements and are sustaining those improvements as we move through Q1 of twenty twenty five. The supply chain improved significantly in Q4 and allowed us to produce enough product to satisfy our 13% volume growth and to achieve our adjusted EBITDA target for the quarter. To wrap up 2024 succinctly, volume growth resulted in significant revenue growth. We finished off our capital expansion efforts that were started in 2022 and 2023 and we made enough progress in improving the efficiency of our existing assets that we could satisfy a 21% expansion in volume, grow adjusted EBITDA, improve operating income and increase cash flow. Greg will cover our 2025 financial outlook in more detail in his section.

Speaker 2

But I also want to share some high level thoughts. As we turn to 2025, I foresee more volume fueled growth, expanding margins, increasing adjusted EBITDA and a continued strengthening of the balance sheet. Most pointedly, I see and am confident in our path to exiting 2025 at a $125,000,000 adjusted EBITDA annual run rate, a number we have affirmed multiple times over the past fifteen months. Our expected revenue growth stems from two powerful forces. First, we continue to see a steady growth trajectory for the categories we support.

Speaker 2

The shelf stable plant based milk market including tracked and untracked channels continues to grow in the mid single digit range. Broth is growing in the mid single digits. We serve the ready to drink protein shakes category, which continues to see strong double digit category growth. In Better For You Fruit Snacks, momentum remains incredibly strong with demand still outpacing capacity. The category has been growing over 20% and our business has achieved eighteen consecutive quarters of double digit growth.

Speaker 2

Secondly, and equally important to revenue growth, we provide great solutions by listening to our customers so we can uncover their problems and challenges. Our model has numerous competitive advantages including a national manufacturing footprint, broad packaging format capabilities, production redundancy across facilities and a world class R and D team. We deploy our advantages to solve customers challenges. When our customers win, we win. The combination of these competitive advantages allows us to grow share with existing and new customers and participate in TAM expansion opportunities.

Speaker 2

Operationally and structurally, we are well positioned to win. Short term supply chain investments throughout 2024 provided a roadmap to improve output, expand capacity, deliver high quality products to our customer and fuel increased volumes without significant growth CapEx until late twenty twenty six and potentially further. With our operational improvement roadmap and some investments in plant level leadership, quality assurance and oversight roles focused on maintenance, reliability and continuous improvements, we are targeting a 20% increase in overall aseptic processing capacity by the end of twenty twenty six. The investment in people will take a couple of quarters into 2025 to deliver the steps function change in efficiency and margins that we are anticipating. Therefore, we expect the second half of twenty twenty five improvements will allow us to exit the year at a notably higher gross margin run rate.

Speaker 2

Together, revenue growth in the 7% to 11% range, Q4 twenty twenty five gross margin between 1819% and a realization of SG and A leverage gives me great confidence in achieving our targeted annual adjusted EBITDA run rate of $125,000,000 as we exit 2025. With significant growth CapEx needs pushed out at least to the end of twenty twenty six, free cash flow will continue to be strong, enabling us to further delever and strengthen our balance sheet. Our management goals are simple, grow the business, make money and spend capital wisely. To reinforce that philosophy, we revised each of our executives incentive metrics for short and long term performance. All incentive compensation will be determined by achieving a combination of adjusted EBITDA, revenue growth and return on invested capital.

Speaker 2

We believe there is significant opportunity for continued growth, higher margins and lower leverage, all of which drive value for shareholders. In summary, volume growth remains the key driver for our top line and we are gaining share with growth rates that are outpacing the respective categories in which we compete. Our confidence in the future continues to be based on what we see not on what we hope. Our priorities are unchanged. One, drive operational improvements to fulfill customer growth while expanding margins.

Speaker 2

Two, grow volume through expanding our current customer relationships via both share gains and innovative solutions, acquiring new customers and expanding our TAM. And three, leverage our growth and operational efficiencies to drive increasing free cash flow and higher returns on invested capital. Now, I'll turn the call over to Greg to cover the fourth quarter and the fiscal twenty twenty five outlook in more detail. Thank you, Brian, and good afternoon, everyone.

Speaker 3

We had another strong quarter. Revenue of $194,000,000 was up 9% compared to last year and continued to be driven by solid volume growth. Gross profit decreased by $3,900,000 compared to the prior year, mainly due to an increase in cost to complete the startup at Midlothian as we installed a new electrical switchgear as Brian discussed. This is the final piece to complete the startup at Midlothian and we do not expect to have any startup costs in 2025. Adjusted gross profit increased 2% to $31,500,000 and adjusted gross margin was 16.1% compared to 17.2% in the prior year.

Speaker 3

The decline in adjusted gross margin was primarily due to incremental depreciation for newly launched production assets along with our short term investments to drive future sustainable supply chain efficiencies. Loss from continuing operations was $4,600,000 compared to a loss of $3,000,000 in the prior year period. Adjusted earnings from continuing operations was $7,600,000 compared to $4,500,000 in the prior year period and adjusted EBITDA from continuing operations increased 20% to $26,100,000 Turning to our balance sheet. At the end of the fourth quarter, debt was $265,000,000 down $25,000,000 from the end of the third quarter. We achieved our year end net leverage target of three times, which was down from 3.4 times last quarter.

Speaker 3

We are also very pleased with our strong cash generation as full year cash provided by operating activities of continuing operations increased significantly to $52,000,000 compared to $4,000,000 in 2023 and cash used in investing activities of continuing operations was $25,000,000 compared to $47,000,000 in 2023. Now turning to our full year 2025 outlook, we expect revenue in the range of $775,000,000 to $8.00 $5,000,000 growth of 7% to 11% versus 2024 and adjusted EBITDA of $97,000,000 to $103,000,000 which represents growth of 9% to 16%. From a pacing standpoint, we expect revenue to grow 8% year over year in the first half of the year and 10% year over year in the second half. From an adjusted EBITDA perspective, we see the back half of the year to be stronger than the first half with a split of approximately forty four percent first half and fifty six percent second half. One of the outcomes of the temporary investments we made to deliver higher sustainable margins was identifying opportunities in our supply chain that required additional positions focused on maintenance, reliability and continuous improvement.

Speaker 3

We are anticipating that it will take a couple of quarters for the new positions to deliver the step function change in efficiency and margins. We expect adjusted EBITDA to improve sequentially throughout the year. As Brian mentioned, we expect to achieve our target of $125,000,000 run rate adjusted EBITDA in the fourth quarter. We also expect to continue generating strong operating cash flow and anticipate CapEx needs will be primarily for maintenance and productivity as we remain focused on unlocking trapped capacity and enabling growth through further efficiency gains. For fiscal twenty twenty five, we expect interest expense of $24,000,000 to $26,000,000 capital expenditures on the cash flow statement of approximately $30,000,000 to $35,000,000 and free cash flow of $25,000,000 to $30,000,000 We have achieved our stated leverage target of three times as planned and we continue to prioritize reducing our leverage.

Speaker 3

We are establishing a new target of 2.5 times, which we expect to achieve by the end of twenty twenty five. Beyond 2025, we believe our long term growth algorithm will remain robust with annual revenue growth of 8% to 10% and adjusted EBITDA growing at a slightly faster rate driven by further progress on initiatives to drive efficiency and productivity across the enterprise to deliver higher sustainable margins. We plan on spending capital wisely, maximizing returns and expect to deliver ROIC of 16% to 18% by the end of twenty twenty six. In summary, in the fourth quarter, we again delivered strong volume driven top line growth along with the solid increase in adjusted EBITDA as well as significant free cash flow generation. We remain well positioned for further growth and profitability improvement in 2025 along with higher rates of return to deliver significant long term value for our shareholders.

Speaker 3

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

Thank you. The floor is now open for questions. Your first question comes from the line of Jim Celera of Stephens. Your line is open.

Speaker 3

Brian, good afternoon. Thanks for taking our question.

Speaker 4

I wanted to start maybe on the composition of the revenue growth. If we just think about the categories you feel the best about and maybe if you could help us bridge in your embedded in your guidance, is there any new business wins for 2025 or is that primarily just volume growth with existing customers?

Speaker 2

Jim, thanks a lot for the question. I appreciate it. Here's how I look at '25 volume growth. The one thing I want to make sure everyone remembers is our categories are growing. We've said it consistently.

Speaker 2

We've said it throughout the year. Our categories are growing. Shelf stable plant based beverages, when you look at tracked and untracked channel growing in the mid single digits, ready to drink protein shakes growing significantly, better for you fruit snacks growing, broth, tea, all of those areas are growing. So I think there's a portion of our guidance that's associated with category growth. There's also a portion of our guidance that is associated with the fact that the brands we support are outperforming the categories in which they play.

Speaker 2

So we actually benefit from their performance, the performance that we help them generate. So that's another component of growth. If you look at that, if I'm looking at our '25 guidance, I'd say two thirds of that guidance is associated with growth from the category and growth from our customers. I'd say there's another third of that that is based upon known distribution wins that we have or innovation that we've partnered with on our with our customers. Remember, we're embedded deeply with our top 15 customers.

Speaker 2

We talk to them at least monthly but many weekly on their twelve month outlook, what are they seeing in the consumer landscape, how are they thinking about promotions. All of that shapes our guidance and we're sticking to our philosophy of guiding to what we can see not what we hope that happens. So hopefully Jim that rounds out a little bit of where those growth components are coming from.

Speaker 4

Yes, that's super helpful. Thank you. And Greg, maybe one question on kind of the margin opportunity for

Speaker 3

the year. I appreciate the commentary around kind of the shape of

Speaker 4

the year. If my back of the envelope map is correct, I think at the midpoint, you're calling for like 12.7% adjusted EBITDA margin, which is up I think around 50 basis points year over year. Can you give us any thoughts on maybe the sequencing of gross margin and how we should think about the flow through there versus G and A leverage?

Speaker 3

Yes, for sure. So this first half of the year, we expect 44% gross margin, in the second half, 56% gross margin. A couple of reasons for that. First off, we mentioned the positions that we're adding, right, to help us continue with maintenance reliability and continuous improvement. So those investments will have an impact, more so on the first half and the back half because it takes folks some time to get up to speed and really drive that value to improve our margin.

Speaker 3

That's kind of the biggest impact on the first half of the year. But we expect if you look by the end of the year, as Brian mentioned in his results, we're going to ramp up to an 18% to 19% gross margin by the time we get to Q4.

Speaker 4

Great. I appreciate the call guys. I'll hop back in the queue.

Operator

Thanks, Dan. Your next question comes from the line of John Anderson of William Blair. Your line is open.

Speaker 4

Hey, good afternoon everybody and congratulations on a strong 2024. Hey, thanks John. I appreciate it. You bet. Just sticking with the question around gross margin, just a clarification, Greg, on what you mentioned.

Speaker 4

I think you indicated gross margin forty four percent first half, fifty six percent second half. That's we should think of that as gross profit dollars, right? Not a gross margin rate. So gross profit dollars 40 4 percent.

Speaker 3

That's correct.

Speaker 4

Fifty six percent second half. That is again nothing to do necessarily with business mix. It's really mostly a function of these new roles that you're hiring for. Is there also kind of a contribution in the second half as you continue to scale production lines and from some of your productivity efforts that you kind of invested in 2024?

Speaker 3

Absolutely, absolutely. And the new roles that we have, think of it as a $2,000,000 to $3,000,000 impact on the first half of the year. Those roles are more than pay for themselves in the second half of the year. But these roles are going to be a key driver of helping us unlock that trapped capacity. We expect to see double digit increased volume in the back half of the year and starting the year a little bit slower than that.

Speaker 3

So those are kind of the biggest drivers, but we feel very confident in our ability to go unlock that trap capacity. And if you think about our business, the demand continues to drive our business from our customers. And it's really a matter of us unlocking that capacity and fulfilling that customer demand that will help us reach those growth targets.

Speaker 4

Okay, that's helpful. Thank you. And you mentioned exiting your fourth quarter gross up in the high teens. Is 20% still you have line of sight to 20% gross margins in 2026? That hasn't changed, has it?

Speaker 3

That continues to be our long term target, at 20% gross profit. And we do have a lot of sight to get there.

Speaker 4

Okay. Pivoting over to sales for a minute, I'm curious on the range, the 7% at the low end and 11% at the high end. What some of the, that you see as some of the swing factors that might put you towards the lower end of the range or factors that frankly might drive you to the high end or above that range? And then if you could also talk a little bit about this, this cadence that you've mentioned, eight percent first half, 10% growth second half, What's driving that? Is it just comparisons?

Speaker 4

Is it the onboarding of new business? Is it capacity constraints? Just to give us a sense of what some of the assumptions underlying the cadence are as well. Thanks.

Speaker 2

Sure. Let's talk a little bit about what could be the low end of the range versus the high end of the range. And frankly, it's the same answer. It really comes down to timing. Now there's two timing components.

Speaker 2

One of that and Greg mentioned, remember our demand generation engine is pacing our business. If we could produce more units, we could sell more units. So a little bit of that range is associated with how quickly we can unlock capacity. If we can do that sooner than we're currently projecting, well then that allows us to go at the higher end of the range. If it takes a little bit longer, it might be at the lower end of the range.

Speaker 2

We have extreme confidence in getting in unlocking capacity and driving efficiencies that will allow us to fuel growth and get to that 18% to 19% gross margin figure as a run rate in the fourth quarter. So that's a little bit about the range. The second piece of that question

Speaker 4

Yes, Brian, just kind of like the

Speaker 2

cake I'm blanking on John. Remind me of the second piece.

Speaker 4

That's fine. I'm great at multiple part questions, but it's not fair to you. So first half, you're kind of calling for up 8%, second half.

Speaker 5

Oh, got it.

Speaker 4

Yeah. That's right.

Speaker 2

I think there's two components of that. One, we do have some distribution coming on that we know, we have estimated timing on in our outlook. We know it's coming on, but again timing can play

Speaker 6

a figure. Maybe it comes

Speaker 2

a little bit earlier in the year, maybe it's a little bit less, but it's a combination of the category growing as well as the distribution opportunities we see. So it really I wouldn't say that there's any significant mix change or anything of that nature. It just happens to be as the year rolls out, we've got some innovation and distribution changes that we see coming into the pipeline and we're confident enough in those that we can roll them into our guidance.

Speaker 4

Okay. I've got one more. It was interesting you mentioned you've completed the kind of the last step at Midlothian at least in the startup phase, but that upgrade of the electrical component, it caused ten days of downtime. Was that did that have a material impact on your shipments in the quarter? Or how do we think about that?

Speaker 4

And to what extent it drove or didn't drive volume variance in the quarter?

Speaker 2

John, I think it's fair to say. I mean, we produce less units than we could have if we didn't have if we could have produced those ten days. I would think of it this, over the

Speaker 4

course of

Speaker 2

the quarter, it probably cost us 50 basis points of margin.

Speaker 3

Okay,

Speaker 4

great. Thanks so much. Appreciate it.

Speaker 2

Thank you, John.

Operator

Your next question comes from the line of Andrew Strelzik of BMO. Your line is open.

Speaker 6

Hey, good afternoon. Thanks for taking the questions. My first one is actually on the category and you continue to talk about the mid single digit growth of the shelf stable plant based category. And I'm curious, number one, if you think that's the right way to think about category growth in 2025 and then kind of the composition of that growth. We know that on the foodservice side, there's a lot of positive things going on for the category.

Speaker 6

And then we've heard from CPG and staples companies broadly recently about some consumer incremental consumer softness and things like that. So I guess I'm just curious, are you thinking about the category growth any differently in 2025 than you have previously?

Speaker 2

Andrew, thanks for the question. I appreciate the opportunity to get a little bit deeper on that. I think it first starts with how we engage with our customers. Remember, we're having these conversations with our customers on what their promotional program is, what their demand looks like, what their inventory position is, what their new product development position is twelve months and fifteen months out. Now, I don't want to mislead you either.

Speaker 2

These are directional conversations. They're not firm purchase orders, but they give us a chance to plan and support our customers and their growth. So that's one that's helping us shape our understanding of the category. The other thing that I would also say is it is not just food service that is growing in that shelf stable category. Club channel we see growing too.

Speaker 2

Again, if you think of club channel, it's a great sales channel for shelf stable product. People can buy in bulk. They can buy at a discount per ounce or per unit because of the bulk nature. They can store product. So we continue to see growth in the category from consumers who participate and repeat buy.

Speaker 2

Why is that? I think there's a couple of reasons. One, remember many of our usage occasions are enduring, medicinal purposes, health and wellness purposes, taste profile. I mean, just to give you a really brutal example, if you're lactose intolerant, you don't have an option to go somewhere else. You're going to stick with plant based and non dairy alternatives.

Speaker 2

So I think that there's a combination of those things. The last thing that I would say, Andrew, is we think about the consumer, in particular the category let me two other things. The consumer and the category and plant based is remember that track channel data is less than 20% of the overall category. In fact, with SunOpta, it's less than 10% of our overall revenue. So I don't want to say it's immaterial.

Speaker 2

We love that 10%. But if you want to gauge how we're progressing, follow our volume numbers. This is a business for the last three years has grown at double digit CAGR. Follow our volume numbers and I think that's one way. The other thing that oftentimes is maybe not as highlighted for SunOpta is we have a fruit snacks business that's now about 20% of our overall revenue and even the track channel data there says it's growing 20%.

Speaker 2

And by the way, that's capacity constrained. If I could put produce one more case of fruit snacks, we'd sell it. So remember, when you're looking at the SunOpta growth total, you're looking at a lot of categories that are growing with customers that are over indexed to those categories or in plain English, performing better than the category and you're looking at some really high growth categories. I mean fruit snack being 20% growth rate in track channel. If you throw club in, it's well over 30% on an annual basis.

Speaker 2

I think that hopefully that helps round out a little

Operator

bit of the landscape on how we're thinking

Speaker 2

about growth. Yes, that

Speaker 6

capital allocation priorities now that you've gotten to, the leverage target. I'm just curious resetting a lower leverage target makes a lot of sense. I just am curious how you evaluated some of the other capital allocation opportunities and what kind of pushed you in one direction versus the other?

Speaker 3

Thanks. Yes. Thanks for the question, Andrew. Given the current situation and the current interest rates, paying down our debt definitely seems to be one of the best options out there. There are other attractive options, but when you look at the current situation, I think that the best use of that free cash flow in 2025 is to continue to delever.

Speaker 3

And that's what our plan is. We think we'll get to our revised target of 2.5 times by the end of twenty twenty five.

Speaker 2

I think the other thing, Andrew, that we'd like to make sure that didn't get lost in the prepared comments. We've really pivoted from a capital fueled growth strategy to an operational excellence fueled growth strategy. We are so confident and committed to an asset utilization strategy that we've changed our incentive compensation metrics for executives. Return on invested capital is now a measurement that we as management have to achieve in order to really win here at SunOpta. And so that's another governor that we like to think about in terms of capital allocation decisions.

Speaker 2

We want to make sure we're driving better return on invested capital. Our goals reflect it. Our performance metrics reflect it. And we believe it's the clearest line to increasing overall shareholder value.

Speaker 6

Great. That's very clear. I appreciate it very much.

Speaker 2

Thanks, Andrew.

Operator

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

Speaker 1

Hey guys, thanks for taking

Speaker 5

my questions. Just one for me. Just curious how you think about the potential for new business to actually come into the pipeline. I understand that you're not guiding new business, but if we think about later on as

Speaker 3

we progress through the year, where

Speaker 5

are some areas that you potentially think

Speaker 4

you could win new business?

Speaker 2

Ryan, thanks a lot. I think it's very similar. If you go back to our strategy, very similar to last year, I will say. If you go back to our strategy, we are clear. We are a solutions provider to our customers.

Speaker 2

When they have challenges, when they have opportunities, it's our job to bring those to life. And so if I ordered them and ranked them in terms of profile, the most access we have is expansion of share, new product development, TAM expansion with existing customers. We're in there every month at least, sometimes more frequently, talking to them about their supply position, their new product development pipeline, their portfolio. So I mean that's clearly an area that I would rank at first opportunity. Secondly, we continue to win share.

Speaker 2

So having that chain and you win share by providing a great answer to a customer. Sometimes that answer is assured supply. So ensuring that you have supply when others may not. Sometimes it's a particular R and D solve. Sometimes it's a particular geographic region that we can use our multiple plants to get to the lowest delivered costs on a geographic basis.

Speaker 2

But expansion with new customers or acquiring new customers is kind of that second level. Longer term, but a discussion that we have with both prospective as well as existing customers is TAM expansion. Where are areas that we could help them innovate or co develop? Where are opportunities that maybe we could introduce something new? And I think if you think about it, those are the three areas that we most likely have access to new revenue growth.

Speaker 2

Again, some of that we've already contemplated in our 7% to 11% range for 2025%. But I will assure you Ryan, there isn't a business development person in SunOpta who doesn't feel the appropriate amount of pressure to do more than 7% to 11%.

Speaker 5

Got it. Thanks for taking my question.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Alex Fuhrman of Craig Hallum. Your line is open.

Speaker 7

Hey guys, thanks very much for taking my question. Looks like a number of big coffee restaurants have recently stopped charging more for plant based milks in coffee drinks. I'm curious if you can talk about what you're seeing in terms of new customer trial and just any kind of changes in demand patterns that you've seen now that some of the coffee shops out there are charging plant based and dairy milks at parity?

Speaker 2

Yes. I think I would say we're a big fan of anything that increases penetration, trial or repeat buys. And so in general, we believe those things are favorable to us. We support our customers' brands and so many of them operating in the coffee shop either as a food service provider or as a supplier to a food service chain. We're seeing a wide range of let's say influences, influences on trial, influences by foot traffic, influenced by the opportunity to try new or recipes that include new non dairy products and all of that is factored into our growth numbers.

Speaker 2

So the growth that we delivered in Q4 certainly had some of that impact. The growth that we're outlining for 2025 certainly has an impact on what our customers and we see as increases in trial, in repeat buy and in penetration. And again, I think it's one of the things that just getting back to the main theme, our categories are growing. Certainly, I would believe that that's one of the things that keeps the shelf stable plant based beverage category growing.

Speaker 7

Okay. That's really helpful. Thanks, Brian. And just a real quick follow-up. I mean, to the extent that you and your customers are seeing more first time trial in the category, is it pretty consistent with the mix of nuts and seeds and grains that your existing businesses?

Speaker 7

Curious if some of these new customers are more likely to gravitate to oat or soy or almond or any particular milk you make?

Speaker 2

I would say and we've been fairly public about this. I would say our different commodities may have better usage. So you might have better luck with soy in a protein shake that you're making at home. You might have better luck with almond in a milk category. I think it's also fair to say in general, oat performs really well in coffee products.

Speaker 2

So as we see foodservice continue to grow, we also see oat growing as part of that.

Speaker 7

That's terrific. Thanks very much, Brian.

Operator

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

Speaker 5

Hey, Jimmy. Thanks for the question. Maybe first off, I'll

Speaker 1

try to provide

Speaker 2

Thank you, John. Thanks for joining

Speaker 5

us. Yes. Good afternoon. I wanted to come back to some of the reinvestments you're making in the business. To what extent is the business mix changing where your customers may be asking for different formulations, different sizes that's introducing more complexity where you have to invest more to meet those demands.

Speaker 5

I mean, how much of a factor is that increasing, you know, complexity in the mix? And to the extent you are receiving more inbound complexity, how are you going about allocating those between which orders you fill, which ones you pass on, which ones require higher margin? How is your visibility into profit per SKU?

Speaker 2

So I think a couple of things, John, just so thanks for the question, but a couple of things to put it in perspective. If you would say relative to five or seven years ago, are we seeing a more complex mix? I would say yes, right? New packaging formats, new flavor profiles, things of that nature. I don't know and I wouldn't say that in the last one or two years.

Speaker 2

There may be some innovation that we're seeing, but I wouldn't say it's creating complexity in the supply chain. The big wins that we have are more our own controllable items, the nuts and bolts controllable items associated with improving yields, improving labor productivity, improving asset utilization and uptime, those are areas that A, allow us to produce more units with the existing capacity so we can sell more, but then B, also expand our margin as we do so. So I wouldn't say it's complexity that's been added more recently. Five, seven years ago, yes, but not more recently. As it relates to, let's call it optimization, portfolio optimization, John.

Speaker 2

We're in the business of optimizing our portfolio every day. So we're working with customers on helping them achieve their goals, but also helping us achieve ours. And so as I think about new customer acquisition or new share gain, we want to do that in a way that's smart with the supply chain that we're managing and trying to improve. I think last year or 2024, I'd say we took on a ton of business and it really pressured the supply chain. This year, we again have demand that's pacing our engine and the supply chain is keeping up, But we're also fairly measured and prudent in terms of what business we can take on, how can we satisfy our customer without disappointing them.

Speaker 2

And that continues to ripple through our outlook for revenue growth, gross margin target, EBITDA growth and then return on invested capital. So we've tried to bake those decisions in already into the outlook we provided.

Speaker 5

Okay. Okay. Thanks for that. And then Greg, on the CapEx guide for 2025, the $30,000,000 to $35,000,000 I think that's above your maintenance CapEx levels. And I know you're not making significant capital investments, but presumably there's some growth investments in that number for this year.

Speaker 5

Is there anything notable that you can call out in terms of product categories or initiatives in that CapEx?

Speaker 3

Yes. I would say the main difference would be maintenanceproductivity. Some of those assets that we're putting in place to help us to unlock our trapped capacity in our network. One thing that we want to be clear on is a go forward run rate will always be less than our depreciation and amortization every year. So that will be the case this year.

Speaker 3

D and A will be a little bit higher than that and we expect CapEx to come in between $30,000,000 and $35,000,000

Speaker 5

Okay. Thanks for your time.

Operator

Your next question comes from the line of Daniel Biolli of Hedgehog Risk Management. Your line is open.

Speaker 8

Brian and Greg, I know you're working hard at this, but I think you're in an enviable position to be supply constrained.

Speaker 2

Yes, exactly. We're trying not to be, Daniel. We're trying not to be. How long can you

Speaker 8

especially on the fruit based side keep up with the demand without needing additional capacity? And how does that compare to the plant based side?

Speaker 2

I'd say that we're tighter on the fruit side than we are the plant based side. I think we've mentioned in the past to the extent that there might be some growth CapEx sooner than the end of twenty twenty six, it'd probably be in the fruit snacks area first. But also remember that investment in the fruit snacks production line is significantly less than an aseptic line. Right now we see growth again even with existing assets we increased fruit snacks production 8% in Q4. There is opportunity to continue making our lines more efficient, making our labor more efficient and eking out more units than we currently do today.

Speaker 2

But I'd say if you were waiting we're constrained on the aseptic side, I'd say we're probably a little tighter on the fruit snacks side.

Speaker 3

Even with that tightness we are confident that we can still grow that business 10% plus in 2025.

Speaker 8

Thanks. And if I could squeeze one more in. For plant based customers, what are we expecting for inflation or pricing in 2025?

Speaker 3

I'd say on the inflation side there has been some commodity costs that has increased. But as part of most of our contract structures we do have pass through pricing and we've had those conversations with our customers. I wouldn't expect any material impact to our bottom line.

Speaker 8

So the 7% to 11% revenue growth is pretty much just volume growth?

Speaker 3

Definitely volume driven growth. Okay. Thank you.

Operator

That concludes our Q and A session. I will now turn the conference back over to Brian Kooker for closing remarks.

Speaker 2

Thank you, JL. Thanks to everyone for listening and for your questions. As always, I'd really like to summarize the messaging from our call. If you are only going to remember three things from today, please remember the following. We closed the books on 2024.

Speaker 2

We grew revenue, grew adjusted EBITDA, finalized the Midlothian startup, invested in our supply chain to improve output and delevered the balance sheet. Summarized, we did exactly what we said we were going to do. So that's one item. The second thing and we started messaging this in the third quarter and we wanted to continue here. We've pivoted.

Speaker 2

Instead of a CapEx enabled strategy, we have now outlined an operational efficiency enabled growth strategy. One, we're confident that we can leverage our existing asset base in categories and with customers that are growing to increase our revenues, our margin, our adjusted EBITDA and our returns on invested capital. We are so committed to a capital efficient growth plan that we change the performance metrics of the key executives to ensure that we only win big when we both drive increasing rates of return on invested capital and when the shareholder wins big. That's when management wins. And then based upon what we see and I mean that in terms of revenue and revenue growth, but also in terms of the progress we're making in our supply chain.

Speaker 2

Based upon what we see but not what we hope, we are right on pace to exit 2025 at a $125,000,000 annual adjusted EBITDA run rate. And that's a milestone that Greg and I have affirmed multiple times over the last fifteen months. So if you can remember those three things, remember those from this call. Thanks for your time. Thanks for your questions.

Speaker 2

To everyone, thanks for your support. And we really look forward to updating you on our continued progress when we announce our first quarter results. Thank you all.

Operator

This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
SunOpta Q4 2024
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