Greetings, and welcome to SunOpta's Second Quarter 2024 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. Thank you. You may begin.

Good afternoon, and thank you for joining us on SunOpta's second quarter fiscal 2024 earnings conference call. On the call today are Brian Kocher, 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 SunOpta's website at www.synopta.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 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 in the prepared remarks to follow, unless otherwise stated, the company will be referring to the continued 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?

Good afternoon, and thank you for joining us today. For today's call, I'll start with the highlights of our latest quarter's performance, along with an update on business trends and key priorities. Greg will follow with a review of the financials and our outlook. Then we'll take your questions. Our second quarter headline is very simple. Both volume driven revenue growth of 21% and adjusted EBITDA of $20.6 million exceeded our guidance. And I'd like to share context on that performance, specifically focusing on our revenue and operational initiatives. With respect to our revenue performance, on our last call, we guided to revenue growth that we could see, we worked on initiatives beyond our known wins, and then we over delivered with 21% volume driven revenue growth. For the fourth in a row, our volume growth was spread broadly across customers, panels and major product categories. We are executing well across our product portfolio and continue to see significant opportunities for further growth and improvement. Remember last quarter I mentioned, we have visibility into our customers' initiatives and pipelines, which gave us confidence in our demand generation engine and confidence to increase our 2024 outlook. Let me provide a few data points to give you some perspective on the depth of our growth. We again drove double digit revenue growth from each of our top three customers. Our top five customers posted 23% average year-over-year revenue growth. Our fruit snacks business grew by over 24% and continued a streak of 16 consecutive quarters with at least double digit growth. Our foodservice segment revenue again increased at a double-digit rate and every major go-to-market channel and product category grew during the quarter. We continue to see plant-based beverages increasingly featured across new menu items and on menu boards in foodservice. Volume…

Thank you, Brian, and good afternoon, everyone. We had another strong quarter. Revenue of $171 million was up 21% compared to last year, driven by exceptional volume growth. As Brian highlighted, this growth was across the board. Gross profit increased $3.2 million or 17% to $21.8 million in the quarter and reported gross margin was 12.8%. Adjusted gross margin was 16.2% and reflects increased volume and better plant utilization offset by short term discretionary investments and future sustainable supply chain efficiencies, sub-manufacturing inefficiencies and incremental depreciation for newly launched production assets. Operating income more than doubled to $2.6 million in the second quarter as profitable volume growth was partially offset by higher variable and incentive compensation. Loss from continuing operations was $3.8 million compared to a loss of $11.7 million in the prior year period. This improvement was driven by incremental operating income in addition to reduced income tax expense. Adjusted EBITDA from continuing operations increased 12% to $20.6 million compared to $18.4 million last year. Turning to the balance sheet. At the end of the second quarter, debt was $303 million. Remember, an increase in debt was expected in the quarter due to our oat extraction capacity expansion in Modesto coming online. Net leverage was 3.5 times and we fully expect to achieve our target of being under 3 times levered by the end of the year. Year-to-date, cash provided by operating activities of continuing operations was $2 million and year to date, cash used in investing activities of continuing operations was $13.9 million. Now turning to our full year outlook. We are raising our 2024 revenue outlook for the second time this year to reflect the strong performance in Q2 and higher growth expectations in the second half. We now expect revenue in the range of $710 million to $730 million, which represents growth of 13% to 16%. From a profit perspective, with the short term investments we are making in the supply chain and the natural challenges that result when you are growing a business 3x the category run rate, we are maintaining our outlook for adjusted EBITDA of $88 million to $92 million which represents growth of 12% to 17%. From a second half pacing standpoint, we expect the third quarter to look similar to the second quarter with slight improvement and both revenue and adjusted EBITDA increasing in the fourth quarter. As Brian discussed, we are delivering exceptional top-line growth rates and are accelerating our investments in supply chain initiatives that are expected to deliver higher sustainable margins and improved profitability in the fourth quarter, provide great momentum entering 2025, and deliver significant shareholder value over the longer term. 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.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Jon Andersen with William Blair. Please go ahead.

Hey, good afternoon, everybody. Thanks for the question.

Hi, Jon. How are you?

I'm good. Thank you. Hope you are too. So the sales were, as you pointed out, very strong in the quarter and volume driven. I'm wondering if you could talk a little bit more about the upside. Presumably, the sales exceeded your own expectations. They clearly exceeded The Street's expectations in the quarter. But, I'd like to get a little better sense for, was that more in the existing customer base? Was it new additions ramping more quickly? Or was it kind of the TAM part of the growth story that drove that?

Jon, thanks a lot for the question. I really appreciate it. I think we were really excited this quarter by the fact that it was a little bit of everything. If we had some new product launches that came out and did well in quarter on behalf of our customers, certainly we saw growth in of our TAM expansion initiatives with either protein shakes and some of our plant based beverage initiatives. We also continue to see a category that overall and when you include untracked channels is growing. And I think one of the more important things is the brands that we support are winning. As a co-manufacturer and a private label provider solutions provider, we work with brands and they are every day out there trying to grow their own brand. If you look at the brands we support, they are all performing better than the category at a whole. And so as you think about all the areas we can grow, it was really across all of the areas that we provided strength, and we were very happy with the volume growth in particular. That's always a great sign.

Absolutely. So you have a large customer, I mean, many customers, but there is a large customer and there's been some noise about -- around, broadly traffic trends in foodservice establishment. I mean, what can you tell us about your business that makes it different? Because it sounds like that hasn't, put any material pressure on your business to date and you don't expect it to on a full year basis, obviously, as you lift your overall revenue outlook for the year.

Well, I think there's a couple of things to remember with respect to our customer base. We have diversity of channels. So we've got foodservice channel, we have club channel, we have retail support in both private label and co-manufacturing. So there's a lot of diversity there. Again, I think if you think about the growth, it was broad based. Our top three customers grew double digits. Our foodservice customers in aggregate grew double digits. Our top five customers grew 23%. Now that comes with some where the category is growing, somewhere TAM expansion is happening, somewhere innovation and development is happening. I think we talked a little bit about this last quarter. The opportunity that we have to work with our customers on either innovation or co-development really gives us a unique position to potentially participate in limited time offers, in menu items and things of that nature. And those often grow at an index that is different than the overall revenue stream of some of the channels or some of the categories. And that's probably the best way to describe it.

Makes sense. I'm going to squeeze the third one in, if I can. I know I'll get a lot of questions. So volumes were extremely strong. You're ramping production in Midlothian. The fruit snacks business is on fire and volumes are strong there. And yet we saw kind of margin some margin gross margin degradation year-over-year. Could you just explain a little bit more talk a little bit more about some of these short term investments that you're making, maybe some of the inefficiencies that you surfaced? And how to get us confident that that inflection that you're kind of pointing to in the fourth quarter is your visibility is really good in terms of delivering on that? Thank you.

No problem, John. Look, love the question. Couple of things to think about. Let’s talk about it in terms of gross margin and the outlook for gross margin. First of all, there is all good news in this story. Our gross margin story starts with volume. We posted a quarter with big volume growth and when that big volume growth came in, our network supplied it. I mean, that's one very positive thing that happened in here. We took share and you take share when it's available, not when it's convenient. So the first bit of good news that's in that margin story I would tell you is that we had to produce the volume to deliver the volume growth and we did it. In fact, one on some of our existing assets, let's exclude Midlothian and some of the newer capacity we've put in place. In our existing assets, we increased output enough to be the equivalent of a full manufacturing line, essentially out of sweat equity and Ingenuity, a full manufacturing line. So we were really excited about that. The second bit of good news, and I'm going to call this good news, is volume growth like this routinely and expectedly test your supply chain. And when you grow as fast as we're growing and you take some share when it's available as opposed to convenient, you certainly identify opportunities in your supply chain where you could be more efficient. The good news is we're identifying that now as opposed to two quarters from now or three quarters from now. So we’re investing in areas to just to give you some specificity, we’re investing in areas around downline efficiencies. Why is that important? Because if we can pack out more, we can run systems more fluidly and continuously.…

Thanks a lot.

Your next question comes from the line of Jim Salera with Stephens. Please go ahead.

Yes. Good afternoon. Thanks for taking our questions. Brian, I really wanted to drill down on the kind of sustainability of what seems to be pretty meaningful gains -- in kind of the share among your customers. Because and I can appreciate the untracked channels and the foodservice channels represent a much larger piece of the business, especially for your customers than maybe some other categories. But your outperformance relative to what is visible in the tracked channels continues to be very stark. And so should we expect to see some of the strength in these untracked channels eventually filter into tracked channels? Or is it just that the way that the end market is structured, investors really shouldn't worry about tracked channels and it's really all about kind of the growth that's unseen, so to speak?

Okay. A couple of themes in there, Jim, and let me try to break those apart. First of all, I think it's important to remember from our perspective, tracked channels is less than a fifth of the market that we serve. So of course, we pay attention to it. But when you look at foodservice, when you look at club, that's the opportunity and other untracked channels, that's the opportunity that we really address and certainly is more meaningful to us. So that is one thing. On the track channel side, we actually are starting to see a little bit of turn or let's call it a deceleration of the softness in shelf stable. So we're starting to see some of that. But I will get back to our, let's call it philosophy on guidance and expectation setting. We communicate what we see, where we understand and work with our customers every week, every month on their innovation efforts. I think innovation is also an area that the investment community can't see in tracked channels because it happens in foodservice and in clubs. So there's another area with which it might be a very positive divergence from the track channel data that's publicly available. All of those things go in and factor into the poor performance. So I would never say, it's inconsequential, but our world is absolutely more heavily weighted to solving opportunities and challenges for our customer and growing share that way.

Okay. On volumes. And then -- yeah, that's helpful. On the foodservice side in particular, I guess I'm obviously positively surprised by the strength you guys continue to see there given the overall kind of consumer softness that we see in foodservice. And so I wonder if you could just give us some color on what's driving your subsegment in foodservice that it sees such a higher degree of success relative to kind of the broader slowdown, let's say, that we see in foodservice?

Yeah. Two things that I would say really contribute to that. Remember, we're wired in tight with our top 15 customers. We're in their supply planning meetings. We're talking to their innovation team and that's happening on a weekly and a monthly basis. So, there's two things that I would say think about that. One, just as I mentioned with track channels, the brands that we support are outperforming the overall category. Think of the menu items that you see in foodservice and where plant based or the products that we support are either over indexed or ingredients in promotional items, limited time offers, real volume growth or focus points for our customers, you can see that. And so, it can be true that our products grow at potentially a faster pace than the rest of the product portfolio or are over indexed versus the rest of the product portfolio of some of our foodservice customers. That can be true. The other thing is remember we innovate. So we have several new product launches that we co-developed and launched with our customers, and that is also showing up in the foodservice channel.

Okay, great. I appreciate all the color. I'll hop back in the queue.

Thank you.

Your next question comes from the line of Brian Holland with D.A. Davidson. Please go ahead.

Yeah, thanks. Good afternoon. So I just wanted to ask about some of the supply chain investments. And maybe in the context of kind of rolling this forward, if I've got it right, I know there's a lot of moving parts with the divestitures and portfolio reshaping, but last I have it, it's kind of like a 20% gross margin target. You can correct me kind of -- long term. You can correct me if I'm wrong there. But I guess what I maybe another way of asking this supply chain question would be, is what you're discovering that it's more expensive to get to that 20% gross margin? Or with the volume that's coming through your network, are these investments maybe intended to ultimately drive upside to that target? If it would be possible to address it in that way, that would be great to hear.

Yeah, Brian. Absolutely would not characterize them as simply costing more. Think of it this way. We're growing faster than we had outlined previously. I mean, heck, this is the second quarter in a row that we're raising guidance. So we're growing faster. When you grow faster, you also test your supply chain a little bit and we're identifying some of these areas that we would have identified in the next quarter or the following quarter or three quarters from now. We're identifying them sooner. So we're addressing them sooner, which has the opportunity we believe to kind of accelerate our margin enhancement. We make some short term investments and then we drive to that 20% long term target for -- midterm target for margin. I think Greg and I have both been very public in saying the 20% margin was derived from the last time our network was full. If we look at our -- the next time our network will be full and or close to full and thinking about that margin, that 20% is achievable. However, with some of the investments we make, I think we would be -- we really want to hold ourselves and push ourselves to get something north of 20%. But that would be upside, I think, right now.

Understood. That's great color. And then the other question, if we think in Midlothian about the opportunity for expansion, I think, like, lines 4 out to potentially 8 as it was outlined 18 or so months ago. I suspect we're getting close if we're not already at the point where, we need to decide what those lines are going to be allocated for or dedicated to. So I'm curious if you can provide any, assessment there because, certainly, we we've talked a lot about the plant based beverage and shelf stable category, but, obviously, as well now, you have the 330 milliliter capability and you obviously have discussed what we're seeing on the protein shake category. So just maybe a sense of how that capacity or that infrastructure gets filled out at a category level as we look out over the next, I don't know, 12-24 months?

Yeah, sure, Brian. Great question. So as you recall, we just had our third line at Midlothian come online in Q2, right? So there is quite a bit of run-rate at Midlothian for future growth. We've said before and we still believe by the end of 2025, early 2026 is when we see our network to be full. But our first priority continues to be to deleverage, right? So our goal is to be under 3 times levered. We fully expect to be there by the end of this year, and that will be our focus here in the short term.

Okay. Fair enough.

Brian, just one other item. I don't want to gloss over the fact that by increasing output, you create non-CapEx capacity. Effectively, we created out of thin air the equivalent of an additional manufacturing line. Now that was spread out through our network, but you get the feeling. You understand the analogy. There is tremendous opportunity for us to continue improving efficiency and output and creating non-CapEx capital. And that's where our focus is on the short term.

Your next question comes from the line of Andrew Strelzik with BMO Capital Markets. Please go ahead.

Hey, good afternoon. Thanks for taking the questions. My first one, I want to, I guess, revisit the answer to a prior question. I'm trying to think about the implications of faster revenue growth, and you're talking about accelerating the margin improvements and what that means for the EBITDA you pointed to kind of run-rate exiting ‘25 into ‘26. Is the timeline should we think about the timeline around that changing at all given those dynamics? Or is the net with the investments that the timeline stays the same? I guess it feels like it's pulling forward, but I guess I was just a little unclear based on the answer.

Yeah. Andrew, I'll be blatant and bluntly clear with you. We're really focused on communicating what we can see and not what we hope right now. We can see through the end of the year. We can see the short term investments that we need to make and want to make in the supply chain. We can see the opportunity for margin expansion. We're excited about our demand generation engine and we have more confidence. I think the best way to say it is we have more confidence in that midterm guidance now than we did this time last quarter, which was more confident than the quarter before. So each time we have revenue acceleration or potentially capacity creation, I would look at that as giving us more confidence in that midterm target than worrying about changing a timing or magnitude.

Okay. Okay. That makes sense. And then my other question, obviously, there's a lot of concern about the consumer environment. We've seen slowdowns across food and beverage categories in a number of places, none of which you're really seeing for a variety of reasons. But I guess I'm just curious about the tone of your customer conversations broadly. Are you sensing any change in the way that they're approaching their businesses? Are they getting more aggressive or less aggressive in this environment? Just kind of curious under the hood how those conversations are progressing. Thanks.

No problem, No problem, Andrew. But let's break down the categories in which we play. Shelf stable, plant based beverages, we believe is growing in the mid single-digits across tracked and untracked, right? So those are our customers that we're talking with that we understand, that we see have visibility to. We believe that that category is growing in the mid single-digits. Ready to drink protein shakes, growing fruit snacks, growing heck, even our less mainstream products, broth and tea, growing. So the categories in which we service and in particular the ones in which we're helping our customers win, those are all growing. And I think that's one thing to keep in mind as we think about how you look at the consumer in the category. Now we are also helping customers grow with innovation. Not always is that innovation a new flavor or product or unit size. It could be a new pack size. It could be a more efficient configuration. It could be a better transportation methodology or mode. So those are things that all go into solutions providing and innovating for our customers when you're a solutions provider. So I think it's a little narrow at least as you look at our revenue stream to just say, hey, there's some pressure on the consumer, therefore the categories aren't growing. Every category we play in is growing. And I would remember that as you think about our prospects for growth.

Great. Thank you very much.

Your next question comes from the line of Ryan Myers with Lake Street Capital Markets. Please go ahead.

Hi, guys. Just one question for me. Just curious how we should think about the potential for adding any new business into the pipeline. I mean, I know you talked about really communicating what you guys have visibility to, but as we think about potential areas for upside or additional opportunities that could come in, maybe how should we be thinking about that for this year and then maybe the potential for next year as well?

Ryan, I hate to give you an incredibly boring answer, but I'm going to continue to tell you. Look, we communicate what we see, not what we hope for. Don't let that be confused with, we don't work on anything else. You don't grow a business 21% this quarter, 2018% the quarter before, 14% the quarter before without focusing on a lot of different initiatives and opportunities. So we're going to continue working on a wide range of initiatives from growing share with customers to acquiring new customers to innovating with our portfolio to TAM expansion. We'll continue all of those, but we'll also continue communicating what we see, not what we hope.

Got it. Makes sense. Thanks for taking my questions.

Okay. Thank you.

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

Hey, guys. Thanks for taking my question and congratulations on another really strong quarter. Brian, I was hoping you could unpack something a little bit more that you talked about in your prepared remarks. It sounds like you said something to the effect of your customers growing faster than their categories by a pretty significant margin. What's been driving that? Is that just plant based taking share from dairy or your customers having more consistent access to supply and fewer stock out? We'd love to just get a sense of what that common theme has been there.

Yeah. I think it's more traditional category management tools. Certainly, availability and consistency of supply is a piece of it. Innovation is a piece of it. Line extensions and brand extensions, distribution gains. And remember, our customers are also taking share. The category is never equal for all participants. You have some winners and you have others that are not winning. And I think that's a component where we're helping our customers be successful. And again, I can't reiterate this enough. We are a solutions provider for our customer. They also have a team that is out there every day working to grow their brand. We support them, but we also benefit as they grow their brand.

That's terrific. Thank you very much.

Thank you.

Your next question comes from the line of Daniel Biolsi with Hedgeye Risk Management. Please go ahead.

Brian and Greg, it's really nice to see revenue expectations going higher. Your growth sounds very diversified by customer and channel. I was hoping you could share a little how it looks by type of plant based milk. Are there any changes there in the market? Or is it still sort of the same secular trends going?

I would say they're the same secular trends that we've seen. Again, an advantage with SunOpta and our model is that we participate across the spectrum. And there's usage occasions differ across the spectrum of plant based beverages. So I'm excited to the fact that when you work with us as a solutions provider, you've got the full spectrum of plant based beverages to deploy at your disposal.

And so I have to follow-up with the results you put today. When you hit 3 times leverage, how are you going to compare new CapEx investments with the share price being where it is?

Well, let's stay really focused. Right now, Daniel, we're worried about executing, growing with our customers, solving their problems and deleveraging, and getting that 3 times lever. When we do, I think there's a ton of evaluations to do. First and foremost, returning capital to shareholders. That's absolutely one that is first on our list. And then there's a whole host of other relative investments. But I don't want to put the cart before the horse. Let's focus on delivering the third quarter, then the fourth quarter deleverage and then we've got a lot of opportunities after that.

Sounds good.

And that concludes our question and answer session. I will now turn the conference over to Brian Kocher for closing remarks.

Thanks to everyone for joining us today. We really appreciate the opportunity to explain our model and our results. If you take away only three things for this call, please remember these three things. At SunOpta, we are winning with winning customers across every significant channel and category in which we play. The best sign of a sustainable value proposition in the market is volume growth, and we are growing volume with our largest customers across all channels and across all major product segments. So that's one thing. Secondly, our supply chain is up to the challenge of accelerated growth. We have increased output by over 25% year-to-date through a combination of new capacity, but also stretching our existing assets. I'm proud of the progress we made in the first half and specifically during the second quarter. I'm proud but not satisfied. Our tremendous growth has identified and highlighted some areas where we can further invest in the short term and we will and we'll invest to drive operating efficiencies. Investing now with the goal of accelerating margin enhancement in 4Q and beyond. And then lastly, we are really excited about our demand generation, about the co-development opportunities with our customers that we have on the horizon, about our opportunities to grow share with existing customers and potentially acquire new customers, we're extremely excited about that. As a result of that confidence, we are again raising our revenue guidance. Remember, we guide to what we see, not what we hope, and then we relentlessly work every opportunity we can find to deliver. Thank you again for participating today. We look forward to updating you during -- at the next quarter. And again, thanks so much for your support.

This concludes today's conference call. Thank you for your participation and you may now disconnect.