Greetings, and welcome to SunOpta's Third Quarter Fiscal 2025 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 Third Quarter Fiscal 2025 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.sunopta.com. This call is being webcast and a transcription will also be available on the company's website. The investor presentation referenced during this call and webcast is also posted on the company's Investor Relations 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 continuing operations portion of the business and all figures are in U.S. dollars, occasionally rounded to the nearest million. Now I'll turn the call over to Brian to begin. Brian?

Good afternoon, and thank you for joining us today. With my prepared remarks, I want to cover 3 topics: review our third quarter performance, including some underlying trends supporting our tremendous growth, provide transparency around some near-term operational opportunities we are navigating and reinforce our confidence in our long-term growth trajectory, margin expansion initiatives and value creation potential. Greg will then cover 3Q financial results and our updated 2025 expectations and initial 2026 outlook in more detail. Following our scripted comments, we'll take your questions. Let me begin by saying that Q3 marked another quarter of exceptional commercial success. We exceeded our expectations for revenue and met our Q3 expectations for adjusted EBITDA. We continue to demonstrate our revenue diversity and ability to grow market share. Our categories and customers continue to grow at an accelerated rate compared to broader food and beverage trends. We did a fantastic job of creating capacity within our existing manufacturing network to service 17% volume growth. We have now achieved 9 successive quarters of, on average, 15% volume growth and have done so while maintaining the highest food safety and quality standards. As you can see on Slide 6, revenue increased 17%, driven entirely by customer demand, and we continue to experience broad-based gains across our portfolio. Sales volume across our top 6 customers all increased over the previous year. We continue to win with category-leading customers in high-performing categories and channels. Plant-based milk volumes increased at a high teens rate in Q3. We have exceptional momentum in the club channel as well as continued strength in foodservice, where we continue to drive both menu expansion and share gains. Broth had another solid quarter with volumes up high single digits. And tea was our fastest-growing product category in both retail and foodservice during the…

Thank you, Brian, and good afternoon, everyone. Turning to Slide 11. We had another exceptionally strong top line performance with third quarter revenue of $205 million, up 17% compared to last year, entirely driven by volume growth. Gross profit increased by $2.6 million or 11% to $25.5 million compared to $22.9 million in the prior year. Gross margin decreased by 60 basis points to 12.4% compared to 13% in the prior year. Adjusted gross margin was 13.6% compared to 16.6% in the prior year period. The decrease partially reflected incremental investments in variable labor and infrastructure to improve long-term margins, increased maintenance expense, overtime costs and higher waste as a result of certain manufacturing pressures from tremendous volume growth, together with temporary volume limitations and increased downtime resulting from the excess wastewater issue at our Midlothian, Texas facility. These factors were partially offset by higher sales and production volumes for beverages, broth and fruit snacks, driving improved plant utilization. Operating income increased $6.1 million to $6.9 million compared to $0.8 million in the prior year. The increase mainly reflected lower employee variable compensation costs based on performance, lower professional fees related to operational productivity initiatives and the $2.6 million increase in gross profit. These factors were partially offset by noncash asset impairment charges of $2.6 million in the third quarter of 2025 related to the decommissioning of the tote filling equipment and the early retirement of certain nonproductive assets. Earnings from continuing operations were $0.8 million compared to a loss of $6.2 million in the prior year period. Adjusted earnings from continuing operations were $6 million or $0.05 per diluted share compared to $1.8 million or $0.02 per diluted share in the prior year period. Adjusted EBITDA increased 13% to $23.6 million compared to $20.8 million in the prior year…

[Operator Instructions] Your first question comes from the line of Jim Salera of Stephens Inc.

I wanted to start off just with maybe helping us out with the cadence around the new investment and building out the production capacity around broth. So if my quick math is correct, it implies gross margin down like 180, 200 basis points in 4Q to get to the midpoint of the updated EBITDA guidance. Does that kind of jive with what you guys are expecting? And then if we think about 2026, if I recall correctly, 4Q of '26 was supposed to be kind of around that 20% gross margin rate. Should we think about 4Q of '26 looking like what we expected 4Q of '25 to look like? Or just any thoughts around kind of the sequencing there and any additional color you can provide on 4Q?

Well, a couple of things, Jim. First of all, let's make sure we're -- we want to be clear in what's impacting the fourth quarter of '25 and what would be impacting later. Look, we had an opportunity to take advantage of some customer allocation decisions that originally were in our pipeline for 2026. And we had the chance to take advantage of those in 2027. We believe and still believe in the long term, those are accretive to our long-term algorithm. It was a good opportunity for us to take this now to onboard the volume. And the other option was potentially foregoing that volume for years and years and years. So we're excited and believe in 10 times out of 10, that was the right decision to do. It did have -- and just to be open and transparent, I am disappointed in how difficult it's been to absorb this volume. And that's where Greg went through and said, look, there are some impacts in the fourth quarter, impacts from accelerated equipment maintenance spend, impact from the fact that a lot of this volume we had to push towards Midlothian, which you know is constrained now and is our least efficient plant, but we had to do it for the customer service and for the optimization efforts between all of our plants. So that was another aspect of it. And then I'd say the last aspect is because this volume came on, we really reallocated the resources that otherwise would have been working on yield improvement and direct labor improvements, our margin expansion plans, they would have been working on that, and therefore they can't because we reallocated those to deliver and meet customers' expectations with respect to our standards for service, quality and food safety. So there are portions of the -- there are large portions of the reconciliation between previous guidance and existing guidance in the fourth quarter of '25. We do anticipate that it's a time-bound plan. We've got concrete fixed plans on equipment reliability on the wastewater in Midlothian, which we've mentioned several times on previous calls. We have fixed definitive plans that will allow us to absorb this volume and then get back towards our margin expansion targets and plans at the second half of 2026 and into 2027. The whole reason we were trying to give a little bit of outlook on 2026 was to further reinforce the time-bound nature of some of these short-term operational challenges. So again, we'll be able at the next call to give more definitive cadence around first quarter, second quarter, third quarter, fourth quarter in 2026. But we wanted to make sure we passed along 2026 outlook so the investment community could realize these are short term in nature. We've got a plan. We have a finite time where we can turn that around, and then we'll be right back on our margin expansion and opportunities for long-term growth.

Got it. That's helpful. And then I guess kind of building off that, is it safe to say that given you had all of these customers, it sounds like from kind of different end markets come to you at once that the capabilities that you have are either don't exist outside of your network or are not scaled in a meaningful way outside your network, and that's why everyone came to you at the same time? Or is there something unique about what these customers are experiencing that caused them all to kind of come to you at the same time?

The way I would look at it, Jim, is it certainly reinforces what we believe is our value proposition in the market, a nationwide network to supply accounts, the R&D resources to bring items to market quickly, the packaging sizes and formats that resonate in the market. So I think what it does for me is it reinforced our value proposition. The interesting thing about this, and we've talked for a couple of quarters about our pipeline, 9 times out of 10, a customer pushes their pipeline backwards, defers the launch. This was really an interesting situation where several customers brought us an opportunity that was faster than we were anticipating. And again, 10 times out of 10, I'll take that. This volume is with marquee customers in great channels in areas -- in product areas that we want to over-index because of the long-term trends. And I believe this will give us a chance to outperform our long-term algorithm late in '26 and into '27. But it did cause some challenges. And look, I'm frustrated that we didn't see more of this volume drop through to the bottom line, but I'm confident we know the root causes. I'm confident we have complete and time-bound plans. And I'm confident that in the second half of 2026 we'll be right back on the trajectory that we laid out before.

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

And I appreciate all the color you gave on the profit bridge and the components that are driving some of the pressures there. But I -- and maybe I just missed it, but I'm not fully understanding why the top line is coming up short in the fourth quarter and next year, I saw on the slide, you talked about the downtime. I guess, at the end of the day, why is all of this demand not flowing through in subsequent quarters at the same rate from a top line perspective? I'd just like to better understand that.

Yes, sure, Andrew. So one of the things is with the pull-through from the pipeline from 2026 into Q3 of 2024, we expected some of that volume to come in '26. We also expected some of that to come in '24 -- in Q4, sorry. So you'll notice that Q4 is a slight call down versus the prior number. But for the full year, we're right on where we thought we'd be, but slightly ahead. At the beginning of the year, we thought we were going to grow 9% revenue. We're now projecting to grow 12%. So quite a big increase. If you recall, at the beginning of the year, we said we have the capacity in our current network to grow 20% over the next 2 years. So really, next year's revenue guide is due to the capacity limitations until we get the new equipment installed for both our beverage and broth and for our fruit snacks lines at the end of the year, which will support growth going forward. But we're still achieving the 2-year 20% growth that we anticipated based on the capacity of our network.

Okay. Okay. I guess I understand that. I guess on the flip side, from a demand perspective, pretty much all the consumer commentary that we hear from other CPG companies is pretty poor. Yet you're seeing the stronger-than-expected new business, category dynamics that you referenced as well. I guess how do you square what your business is seeing from a demand perspective and what the category is experiencing versus the broader consumer backdrop?

Well, let me -- I'm going to give you one quick answer, Andrew, and I don't want it to sound flippant, but I'm not going to apologize for being in growing categories when maybe some others aren't, right? That's one thing. But also think about it. We tried to give a little bit more detail on the foodservice category this time. Coffee shops are in fact expanding. They have been expanding since COVID. And some of the data would say there are more -- there were 8%, 9% more coffee shops now than there were pre-COVID. And if you look out over the next 4 or 5 years, just from public data that large coffee chains disclose, we can see up to 20% growth in coffee chains, in coffee cafe shops. That's powering a foodservice business that we are very embedded in. 8 of the top 10 coffee chains, our products are featured. 4 of the fastest growing we're featured. And so the benefit of that growth enures to us. So I think that's one area. The other area that I would mention is we are in areas where there are hotspots for the consumer, we're in those areas. If you think about fruit snacks as an example, better-for-you fruit snacks, that category is growing 20-plus percent. We grew double digits. That category is growing 20-plus percent. And as you know, we've got an oversubscribed CapEx equipment that if I could weld myself, I'd hurry up and get it installed. So there is tremendous category growth based upon some of the underlying actions that we see. I also think if you look at our products, and ultimately what a consumer pays on the shelf, there's not -- they're not considered luxury items. Many of our fruit snacks are retailing for…

Your next question comes from the line of Jonathan Anderson of William Blair.

I wasn't sure if you mentioned or if you could mention what the new line, what kind of product or end market is that going to supply? And in terms of lining that up with the work you're doing on the wastewater, how does that kind of come together? Because as I understand it, the wastewater limitation is something that you're having to work around now with a couple of lines. And if you add another, that issue could become worse.

Jon, great question. A couple of things. We mentioned it's an aseptic line that we're adding. And I would think of it to support our beverage and broth business, the large package size beverage and broth. About 50% of that line is already subscribed. We're roughly a little less than a year away from go-live. So we'll continue to work on that. But we went where the customers and the dollars and where we thought the margin would be, and that was in the larger-sized beverage and broth format on the aseptic line. I think you asked a great question. We tried to articulate this and maybe didn't do a good enough job, but we are actually timing the aseptic launch with the wastewater launch. So the wastewater has to come first. You're 100% on. The wastewater processing has to come first. After that, we will have more than enough wastewater management capacity to not only unlock the efficiencies in the lines that we have now, but also the additional CapEx growth that we're planning for Midlothian. Also remember, we've had Midlothian for 3 years and really have never been able to unlock the full power. We've had start-up the first couple of years and then wastewater limitations. I am really excited to see what Midlothian looks like when, a, we've got the ability to run the existing lines at full bore, we get another one in there. And oh, by the way, you get all that volume to dilute the fixed cost or absorb the fixed cost. I think that's going to be a really powerful leverage point in our margin.

Okay. I guess a question on -- I get your point, Brian, on wanting to accommodate customers and service volume that comes your way. But I guess, at some point it becomes a bit of an issue because it keeps pushing out kind of some of your targets. And I guess one question would be, have you considered or are you able and maybe you just can't, I mean, price for kind of overload volume in a way that values your manufacturing capabilities that you've talked about so that you can kind of maintain a margin while you're helping accommodate customers. There's kind of got to be a give and take, I would think, in there, particularly with your value proposition.

Jon, I think it's a great question. We have, over the course of the last year or so, been able to take some price where we thought that there was an opportunity. I would also tell you, it gets a little muddled, particularly in our P&L because you've got raw product prices that are going up and down. This year, we also had tariffs that were in the mix. And although we've been able to pass along tariff costs so that from a P&L standpoint we've more or less been able to offset that and be whole. But don't forget that, that tariff increase has gone right to the consumer. And although I think we've got enduring trends in our category that have helped us, and I mentioned that on a previous answer, Jon, don't discount the impact that passing along those tariff costs have had on our customers and their ability and potentially concern about passing those along to the end consumer. So it is a little muddy. We are 100% aligned with taking price where we can. I think the other area, Jon, that we don't talk much about, but you notice it in this quarter's results, where there's an opportunity to either deemphasize or rationalize either products or potentially some relationships, we've done that, too. And this quarter was a good example. We did some aseptic tote filling of products for certain customers, and it just wasn't going to give us the return that we wanted. It was going to also take capacity from some of the customers that we really wanted to grow with. So we managed to work our way through that customer relationship and then exit that in favor of the new volume that we brought on. So it's a little bit about all of those things. But a really good question, Jon. Thanks for bringing it up.

And I guess just one more. I think you mentioned, Brian, that the investments that you're making and I guess the incremental volume you've taken on or incremental business, what's the -- is this kind of short-term business? Are there long-term commitments from customers as you take this additional volume on? How does that work so that you can kind of think about the longer-term value of taking this volume on and having it disrupt some of your internal efficiency work?

Well, Jon, let me be 100% clear then. We took this business on because we thought it would benefit us in '26, '27, '28 and beyond. And there's really 2 reasons for that. One, when we get customers, we service the heck out of them. And we don't have a lot of customer churn. In fact, I don't even know of a customer that we have churn on. So one is we get them, we know we have an opportunity to keep them in the long term. And that was the idea. We wouldn't have done this for a half a year relationship or a promotional relationship. It was because we've got a long-term outlook and on a path to create long-term upside to our algorithm. So first things first, that's one of them. I think the -- so the relationships and how we service them. And then on top of that, as you know, many of our customers have multiple year agreements. We layer those out. They have different -- some 3 to 5 you would see. We don't go into any specific customer details. But the point that I want you to get away is I would take this business 10 times out of 10 times, if it was offered to me again, because it's longer term in nature, and it gives us a chance to outperform where we thought we were going to be in back half of '26, '27, '28 and beyond.

Your next question comes from the line of Daniel Biolsi with Hedgeye.

Brian and Greg, on Slide 15, I was wondering if you could help me think about the $10 million headwind in Q4 for 2026, is that a per quarter amount? It sounds like each one of those continues except the Midlothian operations downtime?

Yes, Daniel. So we said that this will impact us in the first half of 2026, not in the second half. We anticipate to have all these issues resolved by them. You're correct, the downtime is onetime in October here in Q4. That will not have an impact. The fix for Midlothian wastewater, as Brian discussed, is getting the new CapEx in place, which is on schedule by the end of the second quarter, and that will go away after that as we won't have that limitation anymore. And then when it comes to the impact related to the accelerated volume and having the additional maintenance costs and labor costs as we work through that, again, we expect that to lower each quarter, Q1 and Q2, and get that all resolved by the end of Q2 as well. And then, of course, by focusing there and handling this volume and bringing that into our network, we haven't been able to spend the focus on the margin optimization plan. We fully expect to get back on that work and start to see some benefits here in the second half of the year. So no, it is definitely not a $10 million per quarter impact going forward. We will have, compared to prior expectations, a little bit lower Q1 and Q2, but we expect to be back on track by the second half of 2026.

Okay. And then like once these are all sorted out, if we could sort of see the incremental margins from this new business, would we see that the higher margins in this, would we be able to see that in terms of dropping some lower-margin customer or being able to raise price? Would that be evident once we get through all this?

I mean we do have some pretty ambitious margin targets. We do feel there's a path to this, the margin improvement plan, and we think there's tremendous opportunity. Brian talked earlier, when we get that wastewater in Midlothian, the limitations that, that has created with the wastewater, it was actually more than our expectation. Once that gets fixed, once we get the new line in there with the fixed cost leverage, we expect to see some huge margin improvement. But yes, it will definitely be evident. Brian mentioned, once we get to 2027, we still expect to be fully on target and even potentially above the target before. And if you recall, we said we expect to get up to 20% margin in 2027, and we still expect to get there.

There are no further questions at this time. And with that, I will turn the call back over to Brian Kocher, CEO, for closing remarks. Please go ahead.

Thank you, Kelvin. Look, thanks so much for joining us today. Really appreciate your questions and your interest. Before we wrap up, I would just really like to summarize 3 key messages to take away from the call. First of all, I am energized by the fundamentals of our business. We continue to deliver best-in-class growth based on the strength of our customers, our channels and the categories we serve and the value of our solutions-led proposition. So I'm really energized by that. In this quarter, we intentionally chose a path by accelerating some of this volume. We intentionally chose a path that prioritize long-term value creation and gives us the opportunity with marquee customers in important channels and categories gives us a pathway to overdeliver our long-term algorithm in '27 and beyond. So I'm energized by that. Secondly, I am really proud of the employees and how they responded to the volume challenge and how they met the expectation of the customers while maintaining our standards for service, quality and food safety. We are never going to negotiate or bargain with that. That being said, I am also not satisfied at all with the progress we're making on gross margin. While taking the accelerated volume was the right strategic decision, I'm dissatisfied that we didn't realize the profitability and have that flow through. However, we've got a clear and finite plan on how to address that. We know what we need to do in the fourth quarter of '25 in the first quarter of '26 and the second quarter of '26. And we know by delivering against those clear definitive plans we'll have the margin improvement initiatives, and we'll have the profitability back on track to our original outlook. So I'm confident in that. And then lastly, what I would tell you as a takeaway, I am convinced the actions that we're taking now and the decisions we're making now are for the sustained success of SunOpta, and that's what creates a path to outperform our revenue and profit targets in '27 and beyond. So those would be the 3 things that I would take away. Thanks so much for your support. Thanks for being on the call. Thanks for your questions. And Greg and I look forward to updating you during the next quarter.

Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect your lines.