Organto Foods Inc. (OGO) Earnings Call Transcript & Summary

All right. Well, good morning. Thanks very much for joining today. I'm Steve Bromley, and I'm joined today by Rients van der Wal. We appreciate you joining our regular investor update. We're anxious to bring you up to speed on the happenings at Organto. What we'd like to do is keep the call to about 45 minutes. Rients and I will run through some prepared comments. And after that, we'll open up the call to questions. Just as a matter of fact, and we apologize ahead, Rients can only join the call for 25 minutes. That's the bad news. The good news is he has to go to an important customer call that just came up. So we'll make sure to get Rients' comments in and then take any questions that you might have. We're going to follow the chat line. So if you want to post any questions to the chat line, that would be great. We'll answer them at the end of the call. We will also open the lines up. But given the magnitude of people that are on the call, we are a little bit concerned that it may get noisy. So we'll do the best we can, though, to take those calls. So with that, I'd like to -- sorry, I'm sorry, we're just letting more people in here. So with that, I'd like to get going. Obviously, on the call today, Rients van der Wal and myself. I am the Chair and Co-CEO; and Rients is the Co-CEO and Chair and CEO of Organto Europe. On the call today, we'd like to run through our investment highlights and recent news, then spend a little bit of time on the markets, which continue to grow, talk about our business model. And then, pardon me, sorry, talk about our business model, what we're seeing in the business today, our growth strategy and then a little bit on our team capitalization. So just as a reminder, and most of this will be old news. We're in fast-growing markets, fresh organic and plant-based. These markets have continued to grow, and we've seen significant -- pardon me. And we've continued to see significant growth in the sector, and we'll talk a little bit about that. We've transitioned completely to our asset-light business model, very flexible, scalable and capital efficient, and that continues to grow nicely. And we're having good results with the model. Very exciting for 2021. We are launching -- relaunching our I AM Organic brand. Rients will talk about that, but we're making very, very good progress and are very excited about what that's going to bring. Our leadership team is in place. We've had some very exciting news recently with additions to our Board. We're going to talk about that, but we recently had Jeremy Kendall joining the Board. Jeremy is an industry pioneer in the organic food space and fabulous to have him join the Board, along with others who have joined over the last number of months. So we'll be talking about that a bit today. We've now realized 6 record quarters of record revenue growth. Since the last time we spoke, I think we've updated our guidance for Q4 to $4.9 million to $5 million. That will leave our revenues between $11.4 million and $11.5 million for 2020. That's about a 200% increase versus the prior year. What's even more exciting is we'll exit the year at a $25 million run rate. And we've guided next year to $35 million to $37 million with an exit run rate of $50 million. So again, that's a 200% lift over the records that we received -- that we achieved in 2020. We've talked about the consolidation opportunity that we see in front of us. We certainly see that, and that started to play out. We have closed the acquisition of Fresh Organic Choice. We're really excited by that addition. It adds fresh cut organic herbs to our portfolio, which is really, really exciting. And our pipeline continues to fill. So we've got a number of opportunities that are in the pipeline. Obviously, our intention is to not only grow quickly by internal growth, but also to add on these acquisitions. And so we'll talk about how the integration of Fresh Organic Choice is going, but exciting times for sure.

Steve, could you reshare your screen again with the presentation? Perfect.

My apologies. I hate to waste everyone's time. So just -- if we take a look back at recent news, obviously, we've added in October, we added additional resources to our team, both in the EU from a commercial perspective and also in Latin America. And we expanded our ginger program with new supply from Brazil. So that was very, very positive. In November, we reported record third quarter revenues of $2.7 million and a gross profit of 10.5%. That was a record. That's only a couple of months ago, but it's long history because the records have continued from there. We did also report that we expected Q4 to be in the range of $4.4 billion to $4.6 billion. What ended up happening, though, is that we were more in the range of $4.95 billion. So that was all very positive. Also in November, 96% of the outstanding convertible debentures that had been raised in June voluntarily converted to equity. So that really improved the balance sheet, which was important to us. And we announced the expansion of our organic avocado program with tripling our supply from Morocco and that's supply that we're currently in season with. So a tripling of what we had, had versus the prior year and continuing the growth in our -- continued growth, pardon me, in our supply base. In December, we expanded our organic lines portfolio with the addition of supply from Colombia. We had our Annual General Meeting, where all matters were approved. We announced the appointment of Gert Jan van Noortwijk to our Board, another really great addition. Gert Jan is based in the Netherlands. He's got 30-plus years of global supply chain and agribusiness experience, so it was a great addition to our Board. And prior to that, we had announced the addition of Joost Verrest to our Board. And Joost is a brand marketeer. And so when you think about what we're building, we now have 2 resources from a Board point of view supporting us in Europe, one with brand-building expertise and one was supply chain expertise. So both great additions to the Board, and we're very excited by it. We also announced our revenue guidance for next year of $35 million to $37 million. And we announced in December, a convertible note offering, which originally we set out to raise $2 million. The book was extremely full. We upsized it to $4 million. And then, of course, in early of January of this year, we closed that for gross proceeds of $4.63 million. We had much more demand than that, but that was what we felt we needed to fully fund our business plan for 2021, excluding acquisitions. So those were the funds that we got. And so obviously, we're looking to do more acquisitions as we get into 2021 and we'll look for financing options at that time. We also have completed the acquisition of Fresh Organic Choice. Rients will talk about that. We're making good progress, $1.5 million of warrants, which were all in the money were exercised, and we updated our revenue guidance. And then in February, as I mentioned, we announced the appointment of Jeremy Kendall to our Board. We're thrilled to have Jeremy join the team. But what you see here is a Board that is transitioning, not that the word wasn't really good, but it's transitioning with the addition of a lot of food industry depth to support the management team as we go about the process of building out the business. So a lot going on when we touch back in a few months, the list will be longer, and we're excited by that. Real quick, the organic markets continue to grow. In the U.S., just recently, they announced the growth statistics for fresh organic produce in the U.S. for last year, and it was just a little over 14%. So right in that mid-double-digit growth rate that we're expecting. That's really being driven by the focus on health and wellness, sustainability, transparency. And as we've said before, we're in the fastest growing and largest categories within the organic sector, which is fresh fruits and vegetables. So all systems go when we take a look at the marketplace. We've often talked about 2 other tailwinds that we see, one being COVID-19. It's been a tailwind from a marketing and commercialization perspective. It hasn't been a tailwind by any way, shape or form when you look at supply chains. Supply chains have remained open and done well and they remain open and continue to do well. But it's not easy. There are always little issues that come along over and above what you normally have. There are issues that have been coming along and we're working through them all. But the bottom line is, is that COVID has driven a trend to healthier eating and that's benefiting us for sure. And we think it's a long-term habit. A habit takes 16 days to form. It takes about 66 days to become a norm and it becomes -- and after 250 days, it becomes a habit. And so we've been in lockdown for more than 250 days. And so we're really excited by the fact that healthy living is becoming more and more mainstream and looks good for us. Then Rients will talk about it some more, but the European Green Deal in Europe. In Europe, the goal is to achieve carbon neutrality by 2050. Part of that is growing the organic farming in the EU by -- to 25% by 2030. And so that's going to create more supply. It's going to create more consumer demand and that's perfect for us. So lots of good news as far as the markets are concerned, healthy living and healthy eating is here to stay. And with that, I'll turn it over to Rients, who I stole 5 minutes on. I'll let him go through and update us on our business model.

Perfect. Thank you, Steve. Technology, it's very nice where it works and it's always difficult when it doesn't work. Anyway, our asset-light business model, we work with strategic third-party growers, processors and packagers and packaging partners. We have a branded and a nonbranded focus, that's basically how we take a new source all the way up to the highest level when we start branded distribution. It's an efficient cost structure, and we basically have 3 layers within the company where we sell distributed products. That's basically the starting point. We move into a private label concept, which is more structural. And then we move to branded distribution, which is the high value and the long-term value creation for us with the brand and towards consumers as well. The brand is really where we connect consumers to our values and what we stand for. And where we start using a retailer as more as an outlet, a distribution place to enable that connection and a value creation towards consumers. It's a very capital efficient model. Flexibility, again, is key, and it's proven to us many times over the past year already during lockdown situations. And it's a model, which is also a very working capital efficient. We require approximately $1 million to $1.5 million to drive $10 million in revenue. If you can flip the page here, Steve. If we talk about our brands, it's the easiest way top line to differentiate organic fruits and vegetables. With the acquisition of Fresh Organic Choice, you can basically say it's organic fruit, vegetables and tastemakers where we're developing. One of the biggest items that we're selling today is avocado. Still the European market is very low compared to U.S.A. consumption, and it's growing. We are very much developed on the lime side and on the soft fruit side as well. And on the side of the vegetables, we're focused. Asparagus, one of the items that we started with as well. We built it from 1 pellet to 10 pellets in distribution and beyond for the coming years. And of course, the vegetables that we have been active in already for quite a while, the snow peas, sugar snaps and fine beans. If you can flip the page, Steve. I think this is one of the key elements on how we create value. I think a lot of companies talk about sustainability. And because of COVID-19, even more companies are talking about it, and it's top of mind with a lot of people. What we are doing with I AM Organic, we are basically making sustainability a tangible and a credible proposition that consumers can understand. For a consumer, it's rather difficult to see through all of the certifications that they see in stores, who's what and what. With the brand, we make it very tangible. And how do we do that? We basically take the consumer via QR code into a digital passport of a product. And in that digital passport, it all starts with the taste and how to use the product, inspiration and then it works its way back, all the way back to receipt. And it basically gives them a whole idea and a lot of transparency, full transparency on how the supply chain operates and what basically the impact is of that supply chain. Whether it's on the carbon footprint side, whether it's on organic farming side, whether it's a social impact and all of the choices that we make together with our partners, we explain that. And we also challenge consumers to engage with us to talk about it. And I would say that this is really what sets us apart and what drives retailers, but also strategic growers to work together with us. Because the value that we create here is not -- well, it's unique. It's not being seen in the market today. You can flip the page, Steve. Our integrated supply chain, we source as local as possible when seasonality allows us, when mother nature allows us. And so when we talk about fresh herbs, they can be grown in the Netherlands. Asparagus, they can be grown in the Netherlands. But the window is always due to climate situations, rather short. So we try to make a complete offer by combining that with other geographical locations where we provide. It will always have 3 steps in it, European sourcing combined with sourcing from Latin America and sourcing from Africa, when we talk about the European distribution. With every choice and every step that we make, we try to deliver the product as green as possible to the market. There's always still a logistical component that we need to look at but we always try to outweigh what is the most ecological way of bringing that product to the market. Again, asset-light business model means that we can choose and make the right choices because of the values and what we stand for, but also in case a certain country has an issue because of climate or because in the current situation, because of lockdown, we can switch to other sources because we have contingency sourcing planning. If you can flip the page, Steve. We have a growing customer base. We are supplying our products in over 13 countries, more than 100 customers, and that number keeps on growing every day that we're doing business. When we talk about active customers, it means that we are distributing products to them every week or every 2 weeks of a month. Again, we are focused on distributing products in grower boxes. We are focused on private label concepts, and we are very much focused on driving as much product into the branded proposition, I AM Organic. We segmented the European market from an industry point of view. So we work with retailers. Normally also quite a lot of food service, but because of all of the lockdowns, that element is out of the market today, but it will return, of course, at some stage. We focus on specialty retailers. We focus on online, and we focus on trade partners. And focusing on all of those elements at the same time creates the ideal mix because our products are fresh, and we need to deliver them fresh. So the higher our rotation is and the more flexible we are able to flow the product through our markets, the better the quality is ultimately that we can deliver to consumers and our customers. You can flip the page, Steve.

Yes, I wish I could. There we go.

As Steve was mentioning, our revenues is -- are growing quarter after quarter. We have closed a very nice 2020 with a lot of growth and a cash flow breakeven in quarter 4. That's all now behind us. So we cannot sit still. Now we need to grow on and we want to grow on. And that's what we're working on very hard for 2021 as well. We are adding suppliers. We are adding customers. We are working on a lot of new concepts, new brands, new ideas on how to use our brand. And our outlook is very promising for 2021. As Steve was mentioning, COVID-19 brings a lot of difficulty in itself to a lot of businesses. For us, it has been a tailwind, more focus on healthy eating and healthy living and more understanding and belief that if we do not change what we eat and how we run our business, yes, we can't have a sustainable future. So we foresee a very interesting growth and a very nice journey in 2021 as well, of which we will keep you very much updated. Maybe the last point that I would like to spend some time on is the integration of FORC. We have closed the transaction now, and are fully busy with the integration of FORC into...

Hey, Rients, sorry to interrupt you. FORC is Fresh Organic Choice.

Yes, absolutely, Fresh Organic Choice. And we're fully busy now with the integration. Integration starting point for us means is first to make sure that 1 and 1 equals 3 on a commercial level. So that's what we are very busy on. We're looking on how we can take the Fresh Organic Choice herbs to our markets, into the 3 markets that we were discussing. We are looking on how our products can go to the Fresh Organic Choice markets. And of course, we are looking also from an administrative and from a sourcing point of view on how we can basically maximize benefits by putting the 2 businesses together and creating more efficiency. With that, I have to apologize and leave you, but it's for, I think, a greater good, and that's to create more and more business for our great company. I would like to thank you for your time, and I leave you in the very capable and well hands of Mr. Steven Bromley.

Rients, you don't have to apologize. When one of the largest retailers in Europe calls you out of the blue, you get on the phone. So...

At your service. Thank you very much.

Just to step back into our growth strategy a little bit and then we'll wrap this up and turn it over to questions. I know we have a number in the questions in the chat room. Our growth strategy is to build a one-stop shop in fresh organic and specialty fruits and vegetables. And that's really based on -- and that's what the start of Fresh Organic Choice was, and that's what our growth has been on over the last number of years. And that's based on what we see in the market trends. The market has continued to grow and the competitive landscape in Europe is fragmented, and so we see an opportunity. There really isn't today, in our mind, a value-added branded one-stop shop in organics in today's environment. And so we see a real opportunity to do that. And we're going to do that via both internal growth and acquisition. So we talked about the numbers that we achieved. We achieved a revenue exit rate of about $25 million in 2020. Our target is to exit '21 at a $50 million run rate, and our target is to exit '22 at a $100 million run rate. So that's continued significant internal growth in the business, doing that by adding products, adding new customers, and really expanding our retail branded product offering. And on top of that, we are going to execute on our roll-up strategy, leveraging the platform that we have in place. And in acquisitions, we'll take a number of different reasons for why we will do them. We'll be looking to expand our product portfolio, expand the customers that we're serving, expand the geographies that we're serving. We showed -- Rients showed you the map where we're doing 13 countries in the European market, 11 countries in the EU. And then, obviously, the U.K. and Russia. So we want to continue to expand geographically. We want to expand through value-added product expansion and we want to expand sectors. Today, we don't do much in food service. Well, food service will be back, and we want to be there. Today, we have 5 really substantial acquisitions that we're looking at in our pipeline. One of the things about acquisitions is you have to have lots in the pipeline because they all don't come to fruition for whatever the reason might be. But we have 5 that fit our criteria that we're in discussions with. Companies all the way from $5 million in revenue to $50 million. And so we continue to work, but they all fit what we're after, which is a cultural alignment, business model alignment and a belief that building out a one-stop shop makes sense. And a belief that by taking stock in SunOpta, they can share a -- pardon me, in Organto, they can share in our collective opportunity to grow the value within the business. A little bit on the EU market opportunity that's out there. The organic fresh fruit and vegetable business in Europe today is over a $10 billion business. We're less than 1% of the specialty category. But just in sheer size alone, a 5% market share in this business is an CAD 800 million revenue opportunity. And so we're always asked, "Well, when are you coming to North America or when are you going outside of the European market?" And our answer has refined itself to be, the opportunity is huge in Europe. We will be very careful and look for opportunities in other markets, and the time will come, but our immediate focus is on Europe. And then, of course, we did talk about the acquisition of Fresh Organic Choice. I won't get more into it. There's a lot of work going on. This is a wonderful business that we believe we can double, triple and continue to grow for some time to come. The reality is herbs are healthy, and we're all cooking more, and we're looking for taste and that's the role that herbs play. So very, very excited about what's happening there. And Wilco Heemskerk and his team are awesome. And Wilco, who was the owner, is now leading up our herb portfolio within the company, and we're really excited about what we can do with that business. And Rients mentioned the winning formula, the 1 plus 1 equals 3. So when we acquire a business, we want to share the platform that we have in place. And there's really 2 angles to the growth of the business. One is base growth. We will get cost synergies and efficiencies, and we will grow the base business that's in place. And so when you think about Fresh Organic Choice, the administration gets consolidated. That creates a great deal of efficiency and synergy across the business. And we're out there today with a team of 6 on top of the team that he had selling those fresh organic herbs. And so we're going to get growth in the base business. And then also what's really important is that's a feed source for the I AM Organic brand. And so every business that we acquire, we are looking for feed sources, i.e., products that we can brand under our global I AM Organic brand, which is really, really important. So businesses that we acquire will bring different reasons. Some will bring more synergies and base sales growth. Others will be more of a contributor to products for the I AM Organic brand. But those are the 2 key fundamentals that help us make the combination of 1 and 1 come to 3. And growing the I AM Organic brand and the number of products is really, really important to us. So real quick. We've talked about the additions to the Board. That's the real message here. The Board is transitioning. I am mega impressed with the team that we have in place from a management point of view. I've been in this business a while, and I'm happy to put the team that's in place here up against the other teams that I've been involved with in organic foods. So really, really positive. Lastly, on our market cap, we're now up in the $80 million range. And I would point out that insiders continue to own just under 40% of the outstanding shares. And so that's very important. Last point as well, that in the fundraising that we did at the start of the year, that's the funds that we require to fund the business through 2021, does not include any large acquisitions that we might do. But it will be a pleasure to have to come and talk to everyone when we have some of those agreements. So that's it. I'm going to take a pause there. And just get a look at the chat room here. I do have a few questions. Beth, if you would just go ahead and take everyone off pause -- pardon me, off from mute. Beth, can you get people off mute, please?

I'm doing it, Steve. It's just taking a second.

Yes. Okay. Thanks. I have a few questions that I'll just take. The first question that I have here is on gross margin evolution, how does that play out over the next few years? So yes, so if we talk about gross margin. Rients referred to -- pardon me, I'm just going to go back to the slide. Rients talked to the 3 product segments that we participate in, distributed, private label and branded. Obviously, growing the branded is critically important to us. Distributed product offerings are what you should consider as bulk. So picture organic avocado on a bulk display at a retailer. If we're providing that product, our gross margins are 8% to 12%. If we add some value to that and put those avocados into a -- put those avocados into a sleeve or something, our margins will be in the 15% range and branded in the 20% range -- 20%-plus, pardon me, on branded product offering. So obviously, the goal here is to shift to the value add over time. I think as I've told many people before, you've got to be very good at distributed and private label in order to be good at branded because you need sufficient quantities of product in order to be able to fuel your brand. So our margins have been in the 10%, 10.5% range on a year-to-date basis. That's a combination. They're distributed in private label. As we roll out the brand, the gross margins continue to increase. And so I would look to see the margins continually progress beyond the 10% range as we add branded and private label products to the mix. We haven't given guidance on what we believe that -- what that will look like over the next number of years. But obviously, we'd like the branded portion to grow to those larger piece of our portfolio as possible. The next question I have, and I may have already answered this one was, what are the size of some of the M&A targets that we have within the pipeline? I think I mentioned it earlier. Everything from $5 million to $50 million is in the pipeline today. And so we'll see how many of those we land. We're also adding new opportunities to the pipeline on a regular basis. So that's exciting. Next question is, do you track QR code scans? And can you share any metrics? Yes. With our new brand, we will be tracking QR code scans, and we will have metrics. Obviously, those aren't in the market yet. The interesting thing about the QR code scans is the proprietary portfolio that you're developing, once the consumer has clicked on that QR code, we can then communicate with that particular consumer and remind them where the product is, update them on new products, et cetera. So you do develop quite a proprietary list of metrics and data that you can leverage as you go forward. So I hope that answers that. Beth, have you been able to get everyone off of mute?