Good morning, and welcome to SunOpta's Fourth Quarter Fiscal and Full Fiscal Year 2021 Earnings Conference Call. By now, everyone should have access to the earnings press release that we issued this morning and is available on the Investor Relations page on SunOpta's website at www.sunopta.com. This call is being webcast, and its transcription will also be available on the Company's website. As a reminder, please note that the prepared remarks, which will follow, contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. We refer you all to risk -- all risk factors contained in SunOpta's press release issued this morning, the Company's annual report filed from Form 10-K 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 following -- 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 in the Company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in U.S. dollars and occasionally rounded to the nearest million. And now, I'd like to turn the conference call over to SunOpta's CEO, Joe Ennen.

Good morning and thank you for joining us today. With me on the call is Scott Huckins, our Chief Financial Officer. I want to start by saying, while we are disappointed in the fourth quarter results, we are confident these results are a point in time and do not reflect the current or future earnings potential of the Company. The causes are clear and are not unique to SunOpta. The supply chain issues and labor market shortages are broadly felt and well publicized. Now let me share some key takeaways from the fourth quarter. First, Q4 consolidated gross margin was impacted by three headwinds. The most significant was higher costs in our plants without a corresponding increase in output. We were also impacted to a lesser extent by unrecovered inflation and yield-related issues in fruits. Let me share a bit more perspective on the Q4 challenges in our production facilities and provide an update on progress in Q1. First, 70% of the decline in plant-based gross margin was due to increased plant expense and lower utilization. Higher expenses were driven by hiring and training approximately 90 new employees, fueled by the great resignation over the summer. However, this infusion of new employees did not immediately produce a step change in production output, partially as a result of significant Omicron related absences across the network. Additionally, our plant-based facilities are sophisticated and complex plants and employees require weeks and even months of training to become proficient. Additionally, we incurred cost to improve overall equipment effectiveness, which disproportionately hit us in Q4. In total, these Q4 investments are paying dividends in Q1. We have staffed our plants and ended the year up 73 employees. We are deep into training our new employees and retention of these new hires is consistent with our…

Thank you very much, Joe, and good morning, everyone. Fourth quarter revenues of $204.2 million were down 0.6% year-over-year on an as-reported basis, reflecting continued demand growth in plant-based, where revenues increased 5.8%, offset by a 9.4% decline in fruit-based revenues due to planned SKU rationalization along with constraints in certain fruit varieties. Adjusting for the 53rd week in 2020's fourth quarter, revenue grew 2.5% with plant-based delivering 9.2% growth. Gross profit was $18.4 million for the fourth quarter of 2021, a decrease of $13.4 million compared to the fourth quarter of 2020, and consolidated gross margin declined 650 basis points to 9%. The factors that negatively impacted consolidated gross margin during the fourth quarter were: one, plant operations, including higher plant spend and lower-than-planned production and lost absorption of 340 basis points; two, yield-related issues on raw materials of 210 basis points; and three, net unrecovered inflation of 100 basis points. In Plant-Based segment level gross profit decreased $8.4 million and gross margin was down 770 basis points to 11.7%. Let me take you through the major drivers. First, plant spend was up 380 basis points, as we hired and trained the 90 positions Joe spoke about earlier. Second, unrecovered inflation was 160 basis points, primarily comprised of freight. And third, under utilization of our plants was 140 basis points. Let me provide further detail on the 380 basis point plant spend drivers. This is comprised of 150 basis points of labor costs, 130 basis points of overhead and 100 basis points of depreciation. We expect to recover roughly 40% of the margin rate decline in Q1 and expect the business to return to a high teens margin rate on existing capacity in the second half of the year. In Fruit-Based segment level gross profit declined to $5 million…

[Operator Instructions] Your first question comes from the line of Brian Holland. Your line is open.

I appreciate all the color that you provided around the factors impacting the mix and how we think about the recovery and particularly, the color you gave around some of the gross margin dynamics. I'm curious on the top line with the Plant-Based segment, the last two years, you've grown pretty consistently at about 15%, you were -- going back to '19 and '20, you were on pace for that throughout the first three quarters of 2022. How soon -- if we think about the gross margin improvement, how soon can we get plant-based back to that level of growth? Is that -- is that something that happens in the first half of 2022? Or are we kind of back half weighted?

Yes, Brian. We would expect continued acceleration through the year. I think we will be on that pace in the first half and potentially accelerating past that in the second half. But certainly, Q4 was impacted. I think we called out $10 million of lost revenue or opportunity loss that was nearly 100% on the plant-based business. So to some extent, you can think about that as an add to Q4. It obviously didn't show up that way. But we -- from a demand standpoint, we continued to experience very strong demand. And if we had been operating at a higher level, we certainly would have punched out a larger number.

And then, I appreciate, you may be somewhat limited on what you're willing to say, but you put it out there, so I'll ask about it. This $100 million of EBITDA in fiscal '23, your -- the reason for doing that now, given the issues that are inherent in the supply chain here right now, why go out with that number, which is obviously over 15% ahead of consensus and really, what's the construct of that? How much of that is just revenue flow-through from the new facility and contribution there versus anything else on the margins that we should be thinking about?

Yes. The simple reason, Brian, for putting it out now is to underline our confidence in the number. When we look at the build of the 2023 number, especially relative to Texas and obviously, there are material costs and capital investments coming with that. We wanted to frame up for investors the benefits of that investment and our progress in realizing the potential of that investment. And so when we look at '23, there is a combination of both pretty significant EBITDA contribution from the Texas plant, but certainly, we see additional growth in our core business that isn't directly linked to new capabilities in Texas. So it's a combination of new business in Texas and continued core business growth.

And then maybe just taking a step back strategically on some of the new verticals that you're exploring and building capacity towards, I think, certainly, anyone that's looking at the competitive landscape and some of the commentary from public companies, especially in the on-the-go protein nutrition shape sort of segment, there are certain shortages there. So on the one hand, frankly, the logic is fairly obvious and straightforward as far as the need for that capacity at a high level. But the fact that you are supplying that and where does that coming from? Is that coming from customer request? And I guess what I'm getting at is you're -- presumably, you're adding some layer of execution risk by adding your category exposure, so good to be diversifying, but also adding some execution risk at a time of unprecedented challenges for manufacturers such as yourself. So help us understand why divert capacity towards some of these other categories, as opposed to just staying focused on the plant-based beverage opportunity?

Yes. So first of all, we are and remain incredibly bullish and optimistic about plant-based. I mean 2/3 of our growth in 2022 will come from plant-based, core plant-based products oat and others. So we continue to see very, very strong growth in plant-based. The protein shake entry is really a logical extension of our technical capabilities, as well as our operational capabilities. While the end consumer experience might seem quite different in practice producing a vanilla protein shake in a tetra carton is not dramatically different than, say, making almond milk. So we think it's a very, very logical extension of our technical and operating capabilities, and we're confident that we can stand this up with very little interruption. And we've already been -- we've already been working with these products here in our new pilot plant and innovation center. It's given us a head start in terms of starting to formulate and gain expertise in the production of those products.

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

This is Amanda Morley on for Andrew. Can you just discuss further your expectation for sales growth progression for each segment throughout the year?

Yes. It's Scott. I think as we said in the commentary, we would certainly expect the core growth driver to be followed by fruit. All throughout 2021, we commented on rationalizing customers and SKUs and resetting the manufacturing base and putting the fruit business in a position to grow. And I know Joe his commentary outlined the quantum of pricing we've taken in 2021, that will benefit 2022. I think the only call out there is just remember, we will be lapping quarters, as we go through 2022 in fruit that had what is today rationalized SKUs. So there's -- the benefit would be the pricing, the takeaway would be the SKU rationalization overlap. But I mean, I think that's the -- that's the color in terms of the outlook that you saw in the range of revenue for 2022.

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

Curious about your supply agreements, what kind of visibility you get there in terms of allocation and costs going forward?

Good morning, Bobby. When you referenced supply agreement, obviously, we have a...

Raw materials that you guys are -- that you guys are procuring?

Yes. On the raw material front, we have covered 100% of our current known raw material exposure through pricing that has all been fully implemented. That's true on both the plant-based business unit, as well as the fruit-based business unit. So we do not have any unrecovered inflation on raw materials as it relates to both business units. The dynamics of kind of the contract agreements are quite varied. But some of them are straight, contracted, pass-throughs, others are negotiated agreements, whereby we will present to them, hey, here's the raw materials literally down to invoices if they want to see them to outline what's happened with the raw material costs. And I can confidently share that we've had some lively discussions, but no material pushbacks on fact-based raw material pricing changes and getting those passed through to invoiced prices.

And it looks like you guys alluded to some pretty significant labor disruptions that, that -- look like they're resolved. But are there kind of longer-term plans to maybe explore implementing automation in places that maybe previously you weren't using automation. I know you've talked about the fruit-based business, but just maybe more broadly the kind of offset these types of disruptions in the future?

Yes. On the plant-based side of the business, I mean, they are already incredibly automated plants. I mean we might only have 35, 40 people on a shift of production operating what could be $100 million worth of machinery. So these are incredibly sophisticated plants that are highly automated. I mean the touch points are at the very beginning of the process and at the very end of the process. So there's always opportunities for small additional automation, case packaging, automated palletizing, et cetera. But we're not operating and relative to some of the manufacturing environments that I've been involved in throughout my career, where you have literally 100s and sometimes 1,000 people on a production line or on a shop floor, we have a couple of dozen. And so we do have -- I'll never say never, and we always look for ways to improve efficiency through automation, but there isn't a big step change for us on automation because we're already highly automated.

And then just last one on the SOWN line, I think you talked about being number two in velocity after, I guess, just not that long, obviously, but being in the market. Are there additional launches that you're going to contemplate here this year to kind of build on that success?

Yes. We are looking at additional flavors to fill out the product line, as well as potentially some small-scale opportunities to extend the brand outside of the core plant-based milks category into other dairy alternative category. So we're excited about the consumer response. We're really the only organic player in the category, and we've seen great enthusiasm for our organic offering. That is the core competency of SunOpta is organic-based foods and beverages. And so we're going to take that kind of oat organic platform and see what else we can do with it. But I want to kind of underscore, I want to underscore we're a little bit of the little engine that could, if you will, in terms of how we will approach expanding distribution. We fully respect and understand and are focused on our core business, which is co-manufacturing. And the degree to which this helps us advance our technical capabilities and understanding as well as kind of push the boundaries of innovation, we love it. But we're not going to be spending tens of millions of dollars on advertising to try to grow these brands. We're really making sure we get the product propositions right, and see if they can seed and forge new ground for us.

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

The $100 million target for EBITDA in 2023, that's obviously a pretty big number. Can you help us bridge the gap of how you get there from your 2022 guidance? How much of that is coming from the new Texas facility as opposed to other growth elsewhere in the Company or just the expectation that supply chain costs are going to get back closer to normalized levels next year?

Yes. It's Scott. Good morning, Alex. I appreciate the question. I think the main driver of that incremental EBITDA profitability is from capacity and top line growth. And obviously, as we talked about through the prepared remarks, recovery certainly relative to Q4 and margin because just remember that in addition to Texas, we have -- we have few other capacity projects that we've commented on throughout 2021 coming online. And so I think the way to think about it is that the network, collectively, including Texas, big contributor is responsible for unlocking capacity and in turn top line growth that flows through to EBITDA.

And then just for 2022, your EBITDA guidance is -- you have a fairly wide range considering, it sounds like you have pretty strong visibility into your demand for the year. Can you give us a sense of what the difference is between the high end and the low end of your guidance? Is that just uncertainty, given the volatility of some of the costs that go into your model? Just any color on kind of what would cause you to hit the high end or low end of that range, would be helpful?

You bet. I think what we're trying to do, both -- frankly, both on the top line and on EBITDA is consider a number of factors, including just the potential for price elasticity. Joe talked about the quantum, for example, of pricing we've taken in fruit. And there's not a lot of comps, at least in the last 30 years of -- with that level of pricing might manifest itself in terms of consumer demand. So it's probably the biggest when it comes to my mind in the fruit business. And then, I think on plant-based, it's just the progression over the course of the year recognizing we're trying to call a year. It's tough to call or tough here to call the quarter-by-quarter sequential development. So I would say, Alex, those are the things that went through our minds in trying to form the top line and the bottom line.

The next question comes from the line of Brian Myers. Your line is open.

First one for me. So when -- and I know you talked about this a little bit on the call, but when we think about some of the labor pressures that you guys are seeing, how much of this was just purely inflationary? And then, where are these pressures sitting today in relation to the fourth quarter?

Yes. So on the labor front, there's really a simple way to think about it, which is over the summer, I think everybody experienced a significant amount of employee turnover. And I commented on the Q3 call that we were seeing sequential improvement in labor availability and that, in fact, turned out to be true for us. We onboarded a significant number of new employees and actually ended the year net positive 73 employees versus the beginning of the year. So we did a great job of bringing people onboard. What surprised us, candidly was the productivity of those new employees lagged our expectations. And specifically our ability to get our overall production levels, think of it as weekly number of cases produced, we did not see those levels snap back or return as quickly as we thought they would with the infusion of new people. And so that is what I referenced on several occasions in the prepared remarks was we are seeing a significant step change in Q1 versus Q4, as all of our new employees become much more proficient. We did some much-needed catch-up on maintenance in the fourth quarter as well. And so those two investments in new people and taking downtime on our production lines to do maintenance is paying dividends for us in Q1. So we expect, and I think we've said consistently that we would expect some first half headwinds. So I want to make sure I frame my comments as we're seeing material progress, but the skies are completely blue and tulips are blooming, et cetera. We still have some wood to chop relative to getting everything lined up. But we're excited and encouraged by the progress we're making in Q1.

And then can you give us some color on the foodservice business? I know you guys called that out in the press release there, just kind of looking where the demand is coming from?

Yes. When we look at 2022, just based on the customer mix and where we see new business, we see a bit more sales growth on the retail side than the foodservice side, call it 60/40. We expect significant growth of oatmilk sales in the foodservice channel in 2022, as we continue to find productivity efforts and raising our output in our oat extraction facility, we're able to serve more and more of the foodservice channel. And we expect really significant growth in oat both in foodservice and retail.

And then last one for me. On the fruit-based business, when do you guys feel like they will be in a good spot on the kind of SKU counts and customer count, where we won't see this planned reduction in volumes anymore? Is that something that's going to kind of continuously be ongoing?

I would say that probably the shortest answer is thematically, we're done with that. We spent a lot of time in 2021, align or realigning customer profile, customer profitability with plant capacity because remember, we took two of our six plants out of our network. So I would say that is materially behind us. We always are looking for profit opportunities in the fruit. So I don't want to suggest that we never look at it because, of course, we do, but materially, it's behind us.

Your next question comes from the line of Jon Andersen. Your line is open.

I wanted to ask just about raw materials first? Are there any materials like whether it be oats or another main input, where availability, just the ability to kind of get enough of it, if you will, has been or maybe an issue that you're kind of watching closely? And if you could help us understand that, which is separate from kind of the cost-related matters, I guess?

Yes. Jon, I would tell you the pain points, and I talked about this similarly on the Q3 call. The pain points are really in the areas of the fastest-growing parts of the business, which if you think about it, isn't super surprising when -- if you take Q4, for example, we grew our oat business 120%. So obviously, we were able to secure enough oats to grow 120%. But we also could have punched out an even higher number, have there been unlimited and easy availability of oats. Same on fruit puree, many of those for us come up from South America. And obviously, with all of the log jam in the ports, et cetera, we experienced some production disruptions related to shipping delays with raw materials coming up from South America. But those two, and I think it's not surprising, two of the fastest-growing parts of the business were the two places, where we had some pain points just because you're trying to ramp up in -- the receipt of materially larger quantities of a raw material than, say, the prior year. So we've stood up additional suppliers. We definitely made progress in Q4 versus Q3, as it relates to getting more raw materials in. And as we look at Q1, I would say sequentially, now obviously, with what is going on in the world, it's obviously impossible for anyone to predict what the world looks like on a go forward. But at least as we stand here today, in Q1, we've seen sequential easing of the constraints around raw materials the Q4. So Q4 was better than Q3 and Q1 is better than Q4.

So is the -- the $10 million of lost sales or opportunity sales in the fourth quarter, was some portion of that related to just the lack of availability of certain raw materials versus say, internal production constraints or less yield, as you pointed out earlier, with respect to new, new labor that you've onboarded?

Yes. I would say it's three things, Jon. And the $10 million, I would say, was a conservative estimate, to be honest. There was a portion of that lost revenue that was related to freight and just the inability to get both our customers, who often pick up their inventory, their inability to line up trucks and arrive at our warehouse to pick up their orders. There was a portion attributed to the labor challenges that I referenced specifically having orders in excess of our ability to produce. And then the third piece would just be the raw material input component, where we had orders in the system, and we would be delayed a few days on, say, receipt of a raw material. And obviously, it's tough to make up those days once you lose them in the production schedule. So really, those three factors contributed to what we would loosely articulated at least $10 million of missed opportunity.

And then on the pricing side, I just wanted to make sure I understood the commentary there. You have commodity inflation, you have may be internal wage inflation, the freight costs, et cetera, is the pricing that you have communicated and has been accepted by customers, has that been put in place or accepted to offset all of these elements of inflation? And at what point will that be -- will you be fully realizing the benefit of that pricing?

Yes. Jon, I would say, from a raw material pricing standpoint, that has been materially passed through, I mean and probably it's easiest just to break it down. So we gave the number of the quantum of fruit pricing. I mean that -- that is every penny of all known raw fruit cost inflation. I would say the focus today, literally today, would be really on the transportation side. I think Joe mentioned a little bit in his prepared remarks that we obviously saw data point, diesel fuel, Q4, '21 v Q4, '20, up 50%, 5-0% and it got -- it got sequentially worse from Q3. So where we've got any leaky buckets on freight recovery, those efforts are underway. And I think Joe had pointed out, those are probably done by the end of the quarter, meaning the end of the first quarter. That's probably the way to think about the quantum of pricing and the drivers.

I wanted to ask because you're seeing such strong growth in oatmilk and I'm assuming a good portion of that is driven by the extraction capacity that you put in place at the end of 2021. Where do you sit? I think there's another piece of extraction capacity coming on, I think you said mid-2023, that's still kind of a ways off. So I mean are you constrained in any way at this point from a capacity standpoint on your ability to serve the demand that's out there for oatmilk, whether that be co-pack or private label or extraction or finished goods. And I'm not talking from a labor standpoint necessarily, just kind of like assuming the labor is in place and operating at a high level. Are you just limited for the time being? And how much demand you can satisfy until that, that extraction capacity comes online in mid-2023?

Jon, we shared the number that we had revenue of $80 million in oat in 2021. We can grow up to probably 50% on top of that number in 2022 through additional -- I think the team has identified eight productivity projects to increase the output of our oat extraction. So we are trying to move heaven and earth to make more oat base. And right now, we have line of sight to 50% -- potential 50% oat growth in 2022. After that, we will be somewhat constrained to grow beyond that until the new system comes online, unless we're able to find the oat base somewhere else in the marketplace to -- for us to bring in and package. But we definitely have headroom in front of us in terms of our ability to grow oatmilk in 2022. And the -- and the second part of your question was just around demand. I mean, if I could wave a one and stand up that facility that I referenced coming online at the end of Q2, 2023, if I had it today, could I sell a good chunk of it? Yes.

And then last one I had was on fruit. It sounds like the combination of pricing and I think you mentioned confirmed distribution wins, it gives you confidence that the business can grow in 2022. Can you talk a little bit about these distribution wins? And are they fully confirmed? And what part of the fruit business, those may be in, whether it be the snack side or the frozen, et cetera?

You bet, Jon. Maybe two different thoughts, I mean, we saw very, very strong demand, really accelerating throughout 2021 in our fruit snacks business. We posted a 23% plus or minus level of growth in the fourth quarter, and I think we've seen that continue. In the frozen business, your question around true distribution wins. I think you mentioned that with our largest frozen customer. What we've generally seen is kind of a whipsaw, where in the last year or two, customers seeking to add a greater variety of suppliers. And in a supply chain challenged environment that probably didn't work as well as maybe they would have hoped. And so I think there's maybe a view going the other way, which is to consolidate supply. And as I think you know, we're one of the largest frozen processors in the United States. And I think our improved cost position and, frankly, credibility with customers around pricing we spoke about was helping us. So I'd say direct answer is, yes. We have seen firm volume awards, including that largest customer in frozen back to the core about our level of confidence about growth, it's very high.

There are no further questions at this time. Mr. Ennen, I turn the call back over to you.

Great. Well, thank you for your time today and look forward to speaking to you again soon. Thank you.