Good afternoon, and welcome to SunOpta's Second Quarter 2022 Earnings Conference Call. By now, everyone should have access to the earnings press release that was issued this afternoon 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 instrument may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. We refer you to our risk factors contained in SunOpta'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 more detailed discussions 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, 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. Also, please note that otherwise -- unless otherwise stated, all figures discussed today are in U.S. dollars and are occasionally rounded to the nearest million. I'd like to now turn the conference over to the SunOpta CEO, Joe Ennen.

Good afternoon, and thank you for joining us today. With me on the call is Scott Huckins, our Chief Financial Officer. The second quarter was one of the strongest in company history with quarterly sales, gross profit and adjusted EBITDA all at or near record levels. I'm particularly pleased with the quality of the quarter as it demonstrates the potential of our strategic plan showcases the depth of our competitive advantages and highlights our culture of execution. In addition, these results reflect favorably on the actions we took in late 2021 and early 2022 to mitigate inflation and improve operational performance. It is exciting to know that we are just getting started in realizing our long-term goals. As a reminder from our Investor Day, we outlined five strategic imperatives; transforming the portfolio, fortifying our competitive advantages; leveraging our competencies to expand the total addressable market of the business; and be recognized as a sustainability company and codifying our culture. Before we begin unpacking the results in detail, let me offer some key takeaways from the quarter. On a total company basis, our 20% revenue growth was very balanced with both volume growth and pricing growth. 60% of the consolidated gain came from pricing and 40% from volume. In our Plant-based business unit, revenue grew 31%, fueled by strong gains in both volume and price. Growth in Plant-based was exceptionally broad with nearly every major customer up double digits, every channel up double digits, every product type up double digits and every go-to-market business up double digits. Gross margin rate improved 130 basis points versus last year, to 14.3% and was up 260 basis points sequentially. This gain was despite a headwind of 140 points of margin rate dilution related to the effect of pricing inflation. Gross profit improved 33% versus…

Thank you very much, Joe, and good afternoon, everyone. Second quarter revenues of $243.5 million were up 20.4% year-over-year, with continued growth in both segments. Plant-based revenue increased 31% and driven by solid volume growth of 17.3%, along with pricing actions of 13.7% to offset inflationary pressures. Fruit-based revenues increased 7.4% as we benefited from pricing actions of 10.4% to offset inflationary pressures. While volumes declined 3% as strong demand for Fruit Snacks and smoothie bowls was more than offset by lower demand and the impact of SKU and customer rationalization for frozen fruit. Gross profit was $34.9 million for the second quarter of 2022, an increase of $8.6 million or 33% and compared to the second quarter of 2021 and consolidated gross margin was up 130 basis points to 14.3%. As a reminder from the Q1 call, we pointed out that we left approximately $7 million of revenue and $2 million of profit on the table in Q1 due to the challenging logistics environment. The second quarter benefited from getting caught up and getting that volume out the door to customers. In Plant-based, segment level gross profit increased $4 million or 20.3% and to $23.9 million, driven by higher volumes and pricing for plant-based beverages and ingredients, coupled with strong production volumes. Gross margin was down 150 basis points to 16.4% versus the prior year, primarily due to the dilutive effects of pass-through pricing to recover cost inflation, representing approximately 215 basis points of headwind. In fruit-based segment level gross profit rose $4.5 million or 70.2% to $11 million, driven by pricing actions and reduced manufacturing costs in frozen fruit. -- along with a very strong volume growth in Fruit Snacks. Gross margin increased 410 basis points to 11.2% despite an approximately 70 basis point negative impact from the…

[Operator Instructions] Your first question comes from the line of Jon Andersen with William Blair.

I wanted to ask first about the guidance raise. And as you think about the step-up in sales of about $35 million at the midpoint for the year and EBITDA, about $4 million, I believe, at the midpoint, how much of that would you attribute to kind of over delivery, I guess, in the second quarter or first half? And how much would you attribute to momentum above initial plan in the second half of the year?

Yes, Jon, it's Scott. I'd say it's probably a relatively even mix of both because I think if you go back to February when we started guidance I think we expected the first half to be more challenging than the second half, but I think has improved with the release today, second quarter was really, really strong. So I think part of it is memorializing and recognizing that over delivery relative to expectations and continued strength. So I think the bottom line is it's a mix of both.

Okay. And the sales and EBITDA that you left on the table in 1Q, $7 million in sales, I think, $2 million in EBITDA, are we to kind of read your comments as that was incremental to Q2, that was fully made up during the quarter and there wouldn't be additional benefit from that as you move into the second half?

That's correct, Jon.

Okay. From a pricing perspective, where are you from a pricing standpoint in terms of fully recovering inflation? Is there additional pricing to come? Or are you largely caught up at this point?

In Q1, we indicated we have covered approximately 90% of the inflation we had incurred in Q2. We indicated we recovered 95% of the inflation incurred. Going forward, we would really see any additional pricing actions we would take as surgical and very specific to either a customer or a product type. But we do not anticipate the need for wholesale pricing on a go-forward basis.

Okay. And Scott, you kind of talked about the start-up costs, which would be specified related to the Texas facility. And any impact that reported gross margin. But as we think about the transition through the back half of this year and more so into 2023, how should we think about the margins in the plant-based business kind of progressing? I guess I'm thinking, you can correct me if I'm wrong, that through the back half of this year, you're continuing to leverage capacity in your existing facilities benefiting from incremental price, that's helping you from a margin perspective relative to Q2. And then we get into 2023 and the Texas plant comes online, and there's maybe a bit of a step back until you more fully utilize that plant. But can you kind of talk us a little bit through the cadence as you're thinking about it, so we can understand that and know surprises?

Sure. So I think the first thing just to maybe take a step back on is -- when you think about the results or the margin results in plant-based to kind of compare it to history, you got to add the exact about 215 basis points because I think we're trying to be clear that, that was the headwind in the quarter from just passing on price. Meaning 16.4 million as reported, would be, call it, 18.5% to compare to years past. I do agree with your analysis that on a sequential basis, you've got $4 million plus or minus a headwind in Q3, $6 million plus or minus in Q4. You're probably talking 200 to 250 basis points, approximately of headwind. That's part one. Then I'd say I would bet that 2023 probably improved sequentially through the year because recall that at Investor Day, we impacted pretty detailed bridge we're going to have a considerable step-up in depreciation. So as we sell through that capacity in '23 and beyond, I would expect continued improvement in margin.

Excellent. And just 1 more on fruit-based the margins obviously were terrific there, double digit, I think, for the first time in some time, at least according to my model. Is that -- are we getting to a point where the consolidation work you've done in frozen fruit the derisking efforts, the SKU rationalization, it really supports double-digit or gross margins in the teens, perhaps on a sustainable basis? -- obviously, Fruit Snacks and smoothie bowls, I would assume are contributing to that as well.

Yes. It's -- I guess what I'd say, Joe, is I would not expect teams in the very near term. I think we've been clearly been trying to get into the double digits, which I appreciate you acknowledge we did. I would say that the point estimate is very mix dependent. If you go back and you look at the year-over-year 410 basis points improvement for round numbers, about half of that is mix shift toward Fruit Snacks, which I think you know is margin accretive. The other half was just absolute improvement in frozen. And to your point about the consolidation, yes, I mean, we're seeing the results of that from last year's exiting of each of the Santa Maria and South Gate facilities, allowing a more cost-efficient operating base.

If I could just squeeze one more in. Bigger picture on plant-based milk. You said you haven't seen trade down by consumer to date. How do you think about the potential for trade down going forward? And is that a real negative for your business? I assume that you're doing maybe some private label I know that's bigger on the frozen fruit side than it is in plant-based milk. And second kind of corollary to that is all of your crop forms were up. It sounds like double digits. That sounds like a pretty unique situation. Any more color there is I think you mentioned maybe a new customer or new customers that were contributing to that, that would be helpful to understand that a little bit better. .

Yes. We brought on a significant new customer earlier this year and is definitely contributing to growth. We saw especially on the almond milk side of things. And as it relates to private label, private label is about 15% of the total category. We do make some private label business. And so if there was a shift in that direction, we would certainly benefit from that. However, we're pretty strongly branded as the category is. I mean the category is 85% branded and so not surprising a significant majority of our businesses through co-manufacturing or owned brands. And we just haven't seen the shift. I mean I know that is the consumer story that everyone thinks is happening. But as it relates to our specific categories, we're just not seeing wholesale shifts.

Your next question is from the line of Andrew Strelzik with BMO Capital Markets.

Great. My first one, I guess, I just wanted to go back to the EBITDA guidance. So the best that I can tell, it doesn't look like you fully flowed through the upside from the quarter. I guess maybe I was unclear on how you were answering the original question before. But I guess that's at least from my perspective, how I think I see it. I'm just curious I recognize that you're looking at passing through the strength from the first half, but what goes away, I guess, in the back half? What would be -- aside from the catch-up from 1Q to 2Q? What dynamics would be going away? Is it lapping some of the pricing? Or is there something else aside from just some of the uncertainty that you're considering for the back half of the year?

I guess the point I was trying to drive that, Andrew, to see if I can help in two topics, right? You have a revenue outlook, which we called up in part informed by first half performance and part by our outlook for CF. And obviously the same for EBITDA, I think we would all acknowledge Q2 on any metric was really, really strong. But I'm also just trying to be clear. Look, we're pretty optimistic about the second half. I think that was the take I was trying to offer just in terms of the structure of the outlook.

Okay. Okay. That makes sense. But there isn't anything -- you called out the start-up cost. But otherwise, there's no margin implications or incremental pricing you said you're still 95% plus. I mean, there isn't an for customer losses or anything like that. There's nothing that you would lose then from the momentum otherwise that you've seen so far?

No, absolutely not. I mean we're raising EBITDA guidance for the full year. If you go back to the previous guidance, if you think back to the previous guidance, what we had commented when we rolled that out was we thought the full year would flow something like 40% in the first half and 60% in the second half. We obviously recovered significantly faster in terms of the challenges that we had in the back half of last year. So we obviously have gotten the business back to grew much faster than we had originally anticipated when we rolled out that guidance. But strong consumer demand, strong business performance. Throughout the channels, across product types, across every go-to-market is really the underlying reason for the raise of the EBITDA target for the year.

Completely understood. And I guess what I'm getting at is maybe that it feels like there's still a little bit of conservatism in there, so I just wanted to make sure that I wasn't missing something. So I completely understand. My next question, and I recognize we've had so many quarters now of talking about passing through inflation and you called out that you're seeing some areas of relief, but some that are remaining elevated from a cost perspective. But can you just kind of walk us through how we should expect -- how soon you could maybe start to see some relief on the input tried if the markets continue to cooperate, and how we would see that play out through the P&L, just so we can make sure that we're watching the appropriate things there.

Yes. I don't think that we anticipate any significant cost reductions this year. As we've looked at some of the crop markets, both on the fruit side and the plant-based side, whether it's oats in particular, so like or some of the fruit types, we're seeing some softening in the price certainly versus the peak of, say, two, three months ago. And so that bodes well for the future. However, those prices won't really be realized until we're rolling into 2023. Given kind of think to September, October harvest A lot of times we're contracted for this full year anyway. So we wouldn't anticipate any impact from that if it does materialize to be felt until 2023.

Got it. And then my last 1 is on the fruit segment gross margins. And I think when we've talked about this in the past, you've taken actions that have obviously improved the margin structure, but there was still a lot of optimization. It felt like that kind of was left to be had in understanding that you said you're not going to teens margins in the near term. What remains to be done there on that side from an optimization perspective or efficiency perspective in fruit? And the capacity additions that you mentioned, how should we think about that impacting the trajectory in the segment over the next couple of quarters?

Yes. I think two questions. I'd say what's left to do on frozen fruit, I think in one word, I just said execute. We spent all last year doing footprint consolidation of two facilities taking a bunch of pricing get caught up on obviously more expensive drop last year than in 2020. So it's really executing the business plan. In terms of Fruit Snacks, I think we flagged at Investor Day a pretty sizable expansion in capacity coming online almost exactly a year from now. So getting that plant ready to take on that incremental volume because as Joe pointed out in his prepared remarks, we saw high 40s growth in Q2. So we're feeling very good about that.

Your next question is from the line of Brian Holland with Cowen and Company.

How do we interpret your fiscal '23 outlook of $100 million in light of your updated view of '22? I guess are you just snapping back? It sounds like faster than anticipated and ultimately expect to be in the same place at the end of next year as you thought when you initially gave that guidance, -- or can we start thinking about a real inflection in earnings power that would convey to upside to that number?

Brian, thanks for the question. I guess my reaction would be we're obviously increasingly confident about delivering what we laid out on June 2. I think as we're halfway through this year, we do an EBITDA guidance for this year. But we're obviously increasingly and increasingly confident about what we'll deliver in '23, 4 and 5. So to come as we get to the end of the year, we closed out 2022. And as we promised we would on June 2, we'll deliver formal '23 guidance as we're sitting here today, feeling very good about what we laid out on June 2.

Got it. And then I wanted to ask, Joe, you made some reference to private label and sort of called that out. Kind of interesting I guess Plant-based seems like it's fairly mature or private label seems like it's fairly mature in the other Plant-based categories kind of in that high teens, low 20 range that's been fairly steady, at underpenetrated. When we just kind of look at where -- at the interplay between branded and private label, is that problematic? Or is that an opportunity for you as you think about kind of the positioning there?

I think about it as we fairly agnostic response to it. We obviously have very strong branded partners. We also have private label business. And one of the things that we really like about the business model we built is we have a lot of ways to win. We can win with our own brands, we can win with national brands or we can win with private label. And I think we are not rooting for any particular outcome. And we stand to benefit from whatever shifts in consumer behavior are ultimately in front of us.

And Joe, forgive me, I could have asked that question better. I guess what I'm getting at is Oak still looks fairly underpenetrated. What are you hearing from retailers as far as their approach to the category? Because it seems like that should be a source -- as you play kind of like you said, all tiers, all form factors, that seems like it should be an opportunity, i.e., private label share should grow, at least in oat milk, from where it is today, probably materially. And you would seem to stand to benefit from that, but I'm just curious why that isn't happening faster. And again, I'm not talking about you guys necessarily, but at the segment level, why private label is not taking share faster in oat milk?

Yes. Simple answer is oat capacity, it's just not out there. At the oat extraction side of it as well as the packaging side of it. So you are absolutely correct, there is a future opportunity for private label growth in oat that we think ultimately will materialize. However, there's just capacity constraints around the system.

Okay. I appreciate that.

And I'm not specifically referencing our system, I'm just saying the whole market.

Of course. Understood. Last one for me. I think you spent a fair amount of time going through consumer behavior and how -- what you're seeing in the U.S.? Obviously, that question arises because of what has been said about Europe over the past couple of weeks from some of the suppliers there. So I'll focus on a different area here. Oat milk repatriated volume and demand is slowing a little bit. This is Europe specific. As this happens, the supply-demand equation shift a little bit in Europe, even if temporarily? And I bring this up because it's one of the questions I hear most often from investors. What happens when supply catches up to demand in the U.S., what happens to SunOpta? So I'd appreciate that you've discussed this in the past, but it would be great to have you just remind us why the supply dynamics today in the U.S. might be different than what people are hearing and seeing in Europe? And what you're actually hearing and seeing in the U.S.?

Yes. I think there's a couple of dynamics at play. One is the category continues to do well, plus 9% on revenue. Number two is we all understand just how challenging the environment is to do greenfield -- whether you're doing a greenfield plant or just any kind of manufacturing expansion, costs are going up, cost of capital is going up, equipment delays, et cetera, et cetera. And so when we have queried what is going on in the industry more broadly with our competitors, et cetera, we are hearing a lot of discussion around projects being delayed, pushed out, et cetera. And I think one of the things we're most excited about is us executing Texas in a fairly highly challenged environment, we should be rewarded for that because there are not a lot of capacity expansion projects going on around the industry.

Your next question comes from the line of Mark Smith with Lake Street Capital Markets.

Most of my questions have been asked already, but I did want to just look into new products, impact that the new products had on the quarter and then how you feel about your pipeline for new products?

Really, really good. 25% of the growth in Plant-based came from new products or new customers. we continue to be encouraged about the business development efforts going on around our Texas capacity additions. And as you heard us talk about on the fruit business, certainly, the contribution of bowls and customer expansion on Fruit Snacks contributed significantly to the growth, just to remind 48% growth in Fruit Snacks and certainly some of that being innovation and new product fueled.

Expansion that's coming online next year in Fruit Snacks. I think you said in Washington. Is a lot of that kind of newer products? Or is that kind of traditional fruit snack products like we maybe think of today?

It is an expansion of our existing capability and really, those products are principally sold through the club channel, which is why you see a pretty big disconnect between our results and the overall scanner data at retail that I referenced. Very clean label, organic products. Many of the products we make are no sugar added, organic, clean label and very on trend with consumers. We're not in the business. We make incredibly high-quality Fruit Snacks, and we try to keep the ingredient deck as clean as possible. And as we've seen for years now, parents are interested in feeding their kids healthy snacks and a strong bias towards organic.

Your next question comes from the line of Alex Fuhrman with Craig-Hallum Capital Group.

Congratulations on the really strong results in the quarter. I wanted to ask about the new capacity that you have coming online, and it sounds like there's a lot of demand for that, and most of that capacity has been already sold. Can you walk us through just your thought process a little bit about pre-selling that capacity. I mean, clearly, you can see in the second quarter, you took very substantial price on the Plant-based side of your business and imagine there's opportunities to continue to do that as the year goes on. Can you kind of walk us through a little bit of the push and pull of the stability of having the visibility and selling all of your capacity now versus potentially upside opportunities as you get closer if maybe the pricing environment continues to rise for you. Just how are you thinking about the urgency to sell your new capacity?

Yes. good question. I mean the capacity we're adding in Texas is really part and parcel to our long-term strategic ambition to double the size of the business in Texas. Capacity is a cornerstone to that doubling. We outlined and we'll deliver that doubling by the end of 2025. as we've communicated extensively. One of the things we outlined at Investor Day was we sold through roughly north of 50%, but closer to 50 than completely sold out, for sure. I mean, one of the things we're excited about is having available capacity in Texas to be able to go out bring on new customers, drive distribution expansion with existing customers, et cetera. So we certainly hope that we have some business development runway in front of us in Texas, and it's part of our long-term plan. We do not expect to have it completely sold out by the end of the first year.

Your next question comes from the line of Jon Andersen with William Blair.

The follow-up guys. A question on protein shakes. I think you've said on the path that's a larger category than plant-based milk. And you are bringing capacity on in Texas to serve that market. Could you -- is the supply-demand situation in that category as tight as it is in Plant-based milk? And -- when you talk about doubling your plant-based business by 2025, what role does the protein shake business play? I mean, how big -- is that part of that doubling? And probably a contribution could that make to that doubling?

Yes, our Protein shake business is part of that doubling. And yes, we continue to hear repeatedly that there is a need for additional supply in that category. There are a couple of publicly traded companies in that space who have talked extensively on their last couple of calls about the need for additional supply and constraints in the co-manufacturing ecosystem. So we are excited to get that project up and running in the first half of 2023.

Okay. Two quick more model-related questions. And I know you haven't guided these lines, but you saw a nice sequential gross margin improvement in Q2. Given all the puts and takes you've talked about, is it fair to assume additional -- you're kind of looking for additional sequential gross margin improvement Q2 to Q3, Q3 to Q4. Putting aside the start-up costs that you talked about in Texas.

Yes, Jon, I would say Q2 is just really, really solid performance. I certainly wouldn't be calling that up. If you hit on the head, I think the as printed you got 200 basis points to 250 basis points of headwind coming. So I think if you exclude the effect of the start-up costs, I wouldn't be calling it up, I think the name of the game here is continuing to grow the business. And drive adjusted EBITDA improvement with growth. .

Yes. And just to underline what Scott said, I mean, we've been pretty clear that our overall strategy is driving EBITDA dollar expansion, and that we intend to do that revenue expansion.

Right. Understood. And then last, I promise. In terms of the SG&A run rate, is Q2 pretty representative of where you expect things to be second half of the year?

No, good question. I think it really is, Jon. I would assume that Q2 is a very, very representativity.

There are no further questions at this time. I will now turn the call back over to the CEO, Mr. Joe Ennen.

Well, thank you, everyone, for participating in our second quarter call. Appreciate all the questions and continued interest in SunOpta and look forward to speaking to all of you again soon. Thank you.

Ladies and gentlemen, this concludes today's call. You may now disconnect.