Greetings, and welcome to SunOpta's First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Reed Anderson with ICR. Thank you. You may begin.

Good afternoon, and thank you for joining us on SunOpta's First Quarter Fiscal 2023 Earnings Conference Call. On the call today are Joe Ennen, Chief Executive Officer; and Scott Huckins, Chief Financial Officer. By now, everyone should have access to the earnings press release that was issued earlier this afternoon and is available on the Investor Relations page of SunOpta's website at www.sunopta.com. This call is being webcast, and a 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 to all 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 a more detailed discussion of the factors that could cause actual results to differ materially from those projections and any forward-looking statements. The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances, except as may be required under applicable securities laws. Finally, 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 unless otherwise stated, all figures discussed today are in U.S. dollars and are occasionally rounded to the nearest million. Please note in the prepared remarks that follow, the company will generally exclude the impact of the divested Sunflower business. I'd like to now turn the call over to Joe.

Good afternoon, and thank you for joining us today. If I was to summarize the quarter in 2 words, those words would be continued strength. We delivered a significant improvement in profitability with the last 12 months adjusted EBITDA now over $90 million. We continue to execute well against our 5 strategic imperatives, and we continue to see strong underlying trends in our core businesses, giving us a high degree of confidence in our outlook for 2023 and beyond. Let me offer some key takeaways before we begin unpacking the quarterly results. Our focused efforts to drive profitability across the company delivered a record level of adjusted EBITDA. Q1 adjusted EBITDA increased 50% to $23.6 million. Our core strategic growth areas, including plant-based milk products and fruit snacks continued to drive strong growth in Q1. In Plant-Based, revenue growth remains broad-based with our plant-based milk products growing 25%. The ramp-up of production in our Texas plant is progressing and will materially contribute to growth in the second half. Thank you again to the 30-plus guests who came to Texas on April 11 to see our new 285,000 square foot greenfield plant up and running. Our business development pipeline has never been stronger, supporting our long-term growth algorithm of doubling the Plant-Based business off of the 2020 base. We continue to see strong demand and growth in our fruit snacks business, which on an LTM basis is now almost $100 million in revenue, up from $50 million in 2020. Execution in our manufacturing plants continues to be strong, and execution in general, continues to be a defining factor in our performance and gives us a high degree of confidence in our outlook for 2023. Lastly, oat milk and foodservice continues to more than double quarter-on-quarter. This success is creating some reprioritization…

Thank you very much, Joe, and good afternoon, everyone. First quarter revenues of $224 million were up slightly versus last year. Plant-based revenue increased 9%, with pricing up 10% and volume 1% lower. Fruit-Based revenues were down 10% as growth in fruit snacks was more than offset by lower volumes in frozen. It's important to remember that we called out in the first quarter of 2022, a significant onetime order from a major frozen fruit customer that was not repeated, so the comparison is somewhat skewed. Gross profit, as reported, was $28 million, removing the $6 million of start-up expenses, gross profit was $34 million, up 18%. Consolidated gross margin was up 80 basis points to 12.6% as reported, despite the impact of 260 basis points of start-up costs. On an adjusted basis, removing the impact of start-up costs, gross margin improved 320 basis points to 15.2%. In Plant-Based, segment level gross margin was up 60 basis points to 15.6% and would have been 470 basis points higher or 20% excluding start-up costs for Texas. The increase in gross margin reflected approximately 170 basis points of benefit from the divestiture of our low-margin sunflower commodity business, combined with operational efficiencies and the positive gross profit and margin impact of a favorable mix shift. In Fruit-Based, segment level gross margin increased 80 basis points to 8.5%, mainly driven by strong revenue growth in fruit snacks, partially offset by a higher mix of lower margin bulk frozen fruit sales. Earnings from continuing operations were $1.4 million compared to $1 million in the prior year period. Adjusted EBITDA increased over 50% to $23.6 million and was up 400 basis points as a percent of consolidated revenues to 10.5%. Turning to the balance sheet and cash flow. As of Q1, total debt was $326…

[Operator Instructions] Your first question is from the line of Andrew Strelzik with BMO.

I'd like to start on the exit of the broth business and also the transition with the ingredient customer. I guess what I'm trying to figure out is how much that impacted your 1Q and maybe how you're thinking about 2Q, whether from a sales or an EBITDA perspective? Like was there a mismatch on broth? It sounds like there was maybe an ingredient and how long some of that last quarter?

Sure. So to summarize, simply, it will be a first half headwind second half tailwind. The impetus for the change and the thing that we are executing is we have the opportunity to increase our market share to deliver long-term growth with our largest customer in oat milk. And in order to do that, we needed to free up both oat base and half gallon packaging to be able to serve our largest customer. And so we need to make those pivots. So we didn't exit broth completely. We just exited 1 of the 2 sizes of broth that we do in that category. So we do a 32-ounce and a 48 ounce, we exited the 48 ounce because it shares the packaging line time with the half gallon. Maybe more detail than you want but it's -- the details are important there.

That was exactly what I needed. And then I guess the other question, you continue to have really strong growth among your top customers. I think you said 3 out of 4 growing 40% plus this quarter. I guess -- and I think at the event down in Texas, you said you had 100 customers, and I think I might have asked this, but I'll ask you again. I mean how is that impacting you or how you're managing your customer base? Are you having to reprioritize even more? Is there more of this on the horizon? Obviously, you have a lot more capacity coming online. But again, I'm just curious how you're thinking about managing the customer base.

Yes. So the $100 million was a reference to all customers, which includes frozen fruit, fruit snacks, Plant-Based the whole business. And there are quite a few customers. It's a fairly long tail on the oat base, the ingredient sales side of things. So in core plant-based milks, it's a more concentrated list, and we would not expect to have to make a pivot like this, especially with Texas capacity coming online, we don't anticipate the needs to make any kind of big shifts other than the one I just described. And again, that is our largest customer, and we're simply prioritizing the most strategic stickiest business that we have.

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

So I was just curious, was mid-low seen as that ramps. And you talked about a more meaningful contribution in the second half. Can you maybe just give us a sense for what the dollar growth contribution might be of that facility to your overall Plant-Based revenue in the second half?

Bobby, it's Scott. We refrain from sharing too much in the way of plant level or line level economics. Probably the easiest way to think about it would be if you think about 2022 stripping out Sunflower, Plant-Based business was around a $500 million business. And we've pretty consistently said we would expect, on average, circa 15% growth per year. Obviously, Texas, then to your core question, would be a meaningful part of that journey, but it's not all of the journey because recall, we had a handful of other projects we've executed.

Okay. And then clearly, your customers are outgrowing growth in the plant-based milk category that we're seeing out there. And you, as a result, are also outgrowing that growth. Maybe characterize like where that share gain is coming from? Is it simply the outperformance within oat? Or is there something more nuanced happening maybe across other formats?

I think there's a couple things to appreciate, Bobby. #1 is we're seeing significantly higher growth rates in non-tracked channels than tracked channels. And as it relates to our business model, we would estimate roughly 2/3 of the business flows through non-tracked channels. Second, we've been very public about communicating that we want to win without. We've taken that business from circa $1 million of sales in 2019 to $120 million last year. So we are certainly winning in the winning segments. We're winning in non-track channels. And the third piece, which is hard to report out on, but we are gaining share within the supply base. So we have customers who have more than one supplier, so they would use SunOpta and someone else. And as we've added capacity as we've consistently demonstrated great customer service, product quality, cost containment, et cetera, that is affording us the opportunity to win a larger percentage of their business.

Your next question is from the line of Ryan Meyers with Lake Street Capital Markets.

First one for me. I'm curious what kind of feedback you guys have gotten from your existing customers so far as you guys have begun to ramp the 330 ml production line? I mean, does it seem like they're pretty excited to see that getting kicked off and kind of how they're thinking about the demand for that product.

Yes. We hosted the entire management team of the principal customer that we'll be partnering with on 330 I think, 3 weeks ago. Super pleased with the progress. It's been very collaborative and very supportive. As I mentioned, we started the very first saleable production on Monday. So this is definitely going to ramp over time. So -- but we're excited to get going so far, so good. And we have a lot to learn in this space. So we're approaching it with a fair amount of humility and understanding that we're going to learn, but the partnership has been really incredible. They've been incredibly supportive.

Got it. And then as you've ramped the 330 ml and maybe some other adjacent product categories, have you seen any inbounds from new customers that are interested in what you guys have going and the fact that you can sort of fill the demand and the capacity there?

Yes. It is -- sorry, the second part of your question, I didn't really touch on your first question. So we continue to see very, very strong growth rates in tracked channels for protein shakes and protein beverages. And it is a supply-constrained category. So not surprising as the knowledge of us putting 330 ml and getting into that space has gone out into the market. We have received a large number of inbound calls of people interested in working with us. So at the moment, that 330 ml production line, all of the volume is spoken for. But if and when we were to put in a second system, we feel like there is certainly robust demand in the marketplace to fill that.

[Operator Instructions] Your next question is from Jon Anderson with William Blair.

I wanted to ask on the Texas, I think it's Line 2 or the second line to come up, which is part of the TAM expansion into 330 milliliter. From an industry perspective, it's a supply-constrained industry right now. Is this Texas location unique or geographically advantaged from an industry perspective? I guess does it put production in a place where there hasn't been production historically? Yes, I'm just trying to get a sense for that whether there's kind of a bigger value proposition here to this particular customer that you're partnering with and maybe others down the road.

Yes, Jon. Texas is and was a very strategic choice in that regard. As it relates to 330 milliliter production, there are other co-manufacturers around the U.S. I believe the nearest one to Texas is in the kind of southern Midwest. But Texas being the second largest state in the union and one of the fastest growing, as you might expect, all of the brands have pretty big and robust businesses in Texas. It is a heavy product to ship. And so having production and manufacturing in Texas certainly represent supply chain savings for our customers and also additional capacity. So it's a double win in that regard. It's capacity to fulfill the unmet demand that they have as well as it should afford them some supply chain cost savings, not having to ship the product from several states away.

I think there was -- I think Scott may have mentioned during the prepared remarks on guidance that we should expect the Q2 sales comparable to Q1. I'm assuming that was in dollar terms, and that would kind of imply an upper single-digit revenue decline year-over-year in Q2. Is that -- am I reading that right? And what are some of the puts and takes there that would cause that?

Jon, it's Scott. So you heard the statement correct. So what we're trying to point out is we would expect on a dollar revenue basis, Q2 total company to look a lot like Q1. So to make the statement. A couple of puts and takes. The headwinds, as I think Joe laid out, was we'd have the continuing diminution from the broth and ingredients business as we make that pivot. We also will have, like we do every year, a sequential Q1 to Q2 decline just in the absolute consumption of broth, not very popular in the summer, as you know. When you were talking about percentages though, don't forget we've got a back out Sunflower from the last year numbers. So as you're calculating growth rates, we think about the comp being last year's number x of Sunflower compared to this year's number x of Sunflower, just as a reminder.

So if I was to kind of boil down the transition that's going on, I mean you're essentially kind of your capacity constrained right now. You're making some decisions around how to allocate that capacity to the highest value, biggest opportunity customers and then those capacity constraints get released in the second half of the year has been broth in scales, and we kind of -- there's a step change in the revenue run rate in the back half of the year. Is that fair?

Yes, very fair. And as Midlothian ramps, but also, Jon, don't forget, we also have oat extraction or extraction coming online in Modesto at the end of Q3, which will also bring a relief valve to some of the oat base constraints.

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

Great. Well, thank you, everyone, for your interest and attention this afternoon. Look forward to hearing and connecting with all of you again soon. And again, thank you, and have a good evening.

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.