SunOpta Inc. (STKL) Earnings Call Transcript & Summary

Thank you, Jon, and good morning, everybody. We're happy to be here today to talk to you a little bit about our business. I'd say the takeaway, as you'll hear, is we have a pretty ambitious growth agenda. We're going to walk you through it. We start with the mission of the company. Our target is to develop a multibillion dollar better for you, very profitable food business will impact this in a fair amount of detail. We're really deploying the company's capabilities through 5 strategic imperatives. This will be the focus of my part of the presentation. So just to recap, transform the portfolio. The executive management team joined this company in 2019. So you'll see a few references for what's been accomplished from 2019 to present and where we go from there. Second is to fortify our competitive advantages and what you're going to hear our 3 core growth areas. Third is to leverage the existing capabilities of what we do in plant-based milks into other adjacencies or other like-minded manufacturing opportunities. Fourth, the company was founded 50 years ago as a sustainability company, and we want to continue to be and be recognized as a sustainability company. Lastly, probably the hardest to describe, I'll do a slide or 2 on this a bit later, is what really makes the company unique in our view is the culture. It's a very scrappy entrepreneurial results-oriented culture. We'll see if we can bring that to life. A little bit of history of where we've been, where we're going. Myself and Joe Ennen, our CEO, joined the company in 2019. In the current platform of the company, meaning our current business mix, we delivered about $20 million of EBITDA in 2019. You'll see the why in a moment. If you fast-forwarded 3 years' time, we've more than quadrupled that to $84 million last year. Over the last -- I guess about exactly a year, we've done a couple of investor events highlighting, with bridges, et cetera, how do we go from that $84 million result from last year to our target of $150 million of EBITDA in 2025. It's been unlocked by a series of investments that we've made. In terms of ambition, as I mentioned, we're tracking to $1 billion approximate level of revenue today. The ambition that the management team has is to double that over time past 2025, really across 3 core platforms. The first is a new platform for us or what we call nutritional beverages, some people refer to as protein shakes. It is an extension of our existing manufacturing capabilities and competencies that just started up actually in May of this year. So a very recent, a bit nascent capability, we think, will be important over time. Second, some people think of this as our fruit snacks business. We generically call it a better-for-you snacking platform. That's a business that's been on a growth tear. It grew 50%, 5-0 percent, last year. We have capacity coming online later this year to continue to drive growth in that margin advantage business. And then lastly and finally, what we consider our core business, or plant-based milks, we think we've got capacity and runway there to deliver outstanding returns over time. A little bit of the more granular history of the company, just again, put things into perspective. What I think I'll show you in a moment is what is the earnings power of the portfolio transformation journey we've been on. The metaphor I give you would be walking from a majority, commodity-driven business with a minority of value-added manufacturing to flip or invert almost exactly that relationship, and that has transformed itself on the financial statements, meaning this is not an on-the-come story. This is our realized operating history. Okay. So we'll unpack each of the 5 imperatives. So this is the answer to the question, what is the team working on to produce or have produced and to produce results out into the future? So the first is, again, transform the portfolio. We'll show you some data on that in a moment, and we'll go through a few of the details on that. I think it's a major part of the story. As I mentioned, we came here in 2019, the business was 70% commodity, 30% value-added manufacturing, broadly 2 things happened. The first is a series of divestitures. We've sold about $570 million of revenue parts of our business through 2 different steps. We had a business called Tradin, our global ingredients business, as we referred to it in our public reporting, roughly a $500 million business we sold at the end of 2020. We sold in October of 2022 a sunflower business. The aggregate of those 2 businesses, I would generally characterize is lower than our target return on invested capital. That was the catalyst for the strategic decision to divest those businesses. So that's step one. Step 2 is over that same period of time, 2019 to 2022, we delivered about $250 million of growth in our core businesses, specifically round numbers, $200 million of growth in our core plant-based business and $50 million of growth in our fruit snacks business. So when you put those 2 together, that's how we transform the portfolio at least today to 70% value-added manufacturing and 30% commodity. Our forecast over time would have that ratio of value-added manufacturing climb further as we drive growth in nutritional beverages, fruit snacks and plant-based milks. When we think about end markets or how do we select and focus on opportunities, this is the intent of this page. So the first one is what are the characteristics of the end market from a consumer standpoint. We would try to observe 2 things: strong perpetual sustainability, or sustainable demand growth, excuse me; and ideally, a bit of undersupply that exists in that marketplace. Those are 2 fundamental raw materials for an attractive end market. Second would be that there is a case for a capabilities-based or capability-led level of competitive advantage. We are, at our core, a food manufacturing company. So we seek opportunities where there is a degree of difficulty in that food manufacturing landscape, or specifically if you're familiar, bread and butter is the capability of running aseptic manufacturing plants, which are actually quite technical and fairly complicated, which then in turn gives rise to a source of competitive advantage. Third would be where those end markets in the intersection of that capital investment and the P&L profile of those markets creates long-term sustainable margins and cash flow. So when we think about the business, those are the 3 fundamental levers of areas of attractiveness. Then the context for those 3 areas of attractiveness would be, 4, complementary with our longer-term ESG initiatives, again, 50-year company. The thread that's been consistent over 50 years has in fact been sustainability. And then number 5, we'll bring to light, I hope, in a few moments, what we think is a bit of a special sauce that's probably the hardest to articulate, which is what is the look and feel of the company if you were to sit inside the 4 walls, what's the personality, the culture, the ethos of the company. I think I'll try to share with you, there's some special things going on that have allowed this transformation of the company from $20 million of EBITDA just 3 or 4 years ago to $84 million last year. Okay. We'll talk a little bit about what have we done and what are we doing to develop further and further moats or competitive advantage across the business. This I'll spend a little time, I think this is probably one of the most important slides in the presentation because we often get asked, what are the moats, why are these the moats, how defensible might these be. So the first or the farthest on the left, what this is, is a schematic where we're looking at our 3 of our 4 existing manufacturing plants. The footnote is our fourth plant in Texas, just came online this year. So our 3 in-state plants, these are benchmarked against all of the aseptic manufacturing plants in North America from Tetra Pak, which is the provider of that equipment. So we're comparing our results of uptime and efficiency against the rest of the market. What you'd see is those 3 green bars, one, all of these are in the top quartile, including the most productive plant in North America. That's our evidence to say our ability to run these plants well, cost effectively, efficiently is very important to the value proposition of the company and to our customers. Second, we'll call it manufacturing scale. What we generally observed in particularly the plant-based milks business, aseptic manufacturing more broadly, tends to be a series of singular large plants privately owned that would be a metaphor for what we see in the landscape. The difference here is we have -- what we would refer to as a diamond-shaped network. So we've got a plant in California, Minnesota, Texas, Pennsylvania. The reason that that's important is 2 things. That creates supply redundancy for our customers. If heaven forbid, there were an issue in plant one, there are 3 other plants that can manufacture that product. That's very valuable from a customer peace of mind standpoint. From a mathematic standpoint, supply chain savings are significant. At the most simplistic level, if you're thinking about plant-based milks, for example, that's the transportation of water. It's cost. It's an expensive journey. So the proximity of production to demand is valuable to our customers because, candidly, the customers are generally paying for that delivery part of the journey. So again, the point being that national network has value on a dollars and cents basis to the customers minimizing transportation costs. Third is investment specifically to create capacity. Again, big picture point would be our customers' aspirations, not surprisingly, are to have aggressive growth. For them to unlock that growth, it is very valuable for us to have a multiyear level of capacity for which they can reliably trust SunOpta to deliver that manufactured output for them in turn to grow. That's not necessarily common from what we observe in the industry. Fourth, we refer to this as integrated solutions. This is a philosophical approach to the business where I'll try to paint a picture of what the extremes are. There are co-manufacturers that we've seen who have 0 R&D capability. They don't engage R&D professionals. It's more of a bring your product to that plant and we can run it for you. Not a criticism, it's just one way to go about it. To give you some perspective, we have about 30 full-time R&D people. We also have in our headquarters' location in Minneapolis, a pilot plant. The point of bringing that up is imagine a Fortune 100 customer, or a CPG company, who's trying to, for example, develop innovation, trying to think about what flavor profiles, alternative offerings might be attractive to their consumers. You need QA professionals, R&D professionals and the ability to quickly turn those ideas into products. That is a different way to think about what the value proposition to our customers are, and we believe creates stickiness. Because once you have successfully onboarded that customer, if that experience has gone well, we'll chase some facts in a moment, that becomes very, very difficult and potentially expensive to leave or change. Last but not least, service excellence, my proof point. This is an eye chart. I'm a finance person, so I apologize I do eye charts. What this really does is this shows you our 5 top customers month by month over 12 months and what is our case fill rate. So that would be the ratio of the cases we ship to the customer, divided by the cases they order, case fill rate, 99%. To give you some context, I've seen a few public CPG companies on earnings calls talk about, pleased to see the progression of their co-man committee getting into the 80s. So "the compared to what" is very, very important. Because, again, if you sort of think about the profile of this. Let's say, our customer is making, for example, a 30 margin. Every single miss, $0.30 on the dollar of profit that they don't generate. So what may sound like table stakes that reliable output, predictable, reliable, quality production is very valuable to the growth agenda of our customers. Okay. We've talked a little bit about -- and for those of you who follow the story, a very large investment to create a fourth plant in our plant-based network in Midlothian, Texas, that's just outside of Dallas-Fort Worth. When I think about what the value proposition of that plant is, of course, it checks against each of the 5 strategic imperatives, but I would say the takeaways would be 3. One, redundancy. So here's a fourth plant on top of the 3 we have, again, from a supply chain redundancy for customer confidence. Two would be cost. I talked a few moments ago about the importance of the prominence of transportation costs as a percentage of the retail price of these items can be considerable. So minimizing that creates stickiness from our customers' perspective because their cost and, therefore, profitability would be improved by that national network, and specifically, Texas, which in case you don't know, is the second largest state in the United States by population. Third is capacity. So again, if you think about a customer, knowing that this year, there's capacity to grow is helpful. It's really helpful if we've got a multiyear journey of having capacity for them to grow their brands. So as a made-up example, maybe this year, we're going to do 5 million cases for that customer. Maybe their plan the next year is 6 and then 7 and then 8. The point is if we've got that capacity earmarked for that customer, they have the confidence to execute their growth agenda. Okay. We'll talk a little bit about another journey we've been on, which I'll just summarize is TAM expansion with a couple of examples. The point of this page is to give you an idea of, again, from 2 states, if we go back to 2019, and we estimate what our total addressable market or TAM is, or was, we'd estimate it to be about $3 billion. With a couple of investments and capabilities, we have roughly fivefold increased that TAM, probably the most noteworthy example is the very top of the concentric circles, which is the nutritional beverage or protein shake space. We observed 2 things. We see that business as a $5 billion TAM. It is very, very co-manufacturing dependent, meaning there's very little self-manufacturing among the branded players. And for the public companies who participate in this space, you'd find pretty consistent narrative around there being a dearth of supply. So again, back to the -- when I talked a few minutes ago about what are the attractive end markets and what do we assess, strong consumer demand and perhaps inadequate supply. It's a perfect example. Okay. I mentioned a couple of minutes ago, we have really 3 core parts of our business that we're focused on growing. So this is the longer-term post 2025 targets for the team to roughly double the business from $1 billion to $2 billion. This is to try to give you a little bit of granularity. So the first is continuing to drive what we call our core plant-based milks business. We see that being north of $1 billion over time an opportunity. And again, we've seen some investments behind that. Second is a business that's probably surprised most people, our fruit snacks business going back to 2020 -- for example, 2019 was below $50 million. Run rate is $100 million. So we have capacity coming online for that business later this year in the third quarter to continue to drive margin advantage growth. And the last one we spent a few minutes talking about is nutritional beverages. We see that very much front and center as a new capability with a multiyear growth run rate ahead of us. So when you -- you saw the page about what the kind of the 5 sources of competitive advantage where we talked about investing $230 million of expansion capital, these were the recipients of the beneficiaries. These are the 3 areas that we invested to grow that we think have durable margin profile and the ability to create shareholder value. Okay. Just a little bit on -- to give you a topic on plant-based milks, one of the -- as we've talked about this is the core business, what are some of the dynamics there that we observe from a consumer-facing standpoint that we think are durable. First data point is that 74% of U.S. households consume in symmetry, plant-based milks alongside of dairy. To my personal taste, I think the next stat is even more interesting, which is 40% of U.S. households consume 2 or more units of plant-based milks. Because if you go back behind that, this is a business that's been around for about 40 years. In the early '80s, you'd see the first branded CPG-launched, plant-based milks. This is not an overnight sensation. This has been a long, long time of development, but there's a couple of drivers at the consumer level that we observe to be very permanent. The first would be lactose intolerant. About 1/3 of the U.S. population is lactose intolerant; globally, that number is 2/3. Simply put, it would be unusual to consume something that made you feel ill to save money, for example. So we think that there is a multiyear runway that supports at the consumer level, what we've seen now is a roughly 40-year trend of the growth in plant-based milks. We often get asked about the customer portfolio, like what does it look like? And I think when we reflect on it, just looking at a sample, some of the customers, we have a fairly blue chip portfolio candidly. And what you'll see is we've got breadth and depth, meaning food service customers, retail branded customers, private label customers. We also have a few of our own brands that we use more to develop innovation and bring innovation to market. But I think for a roughly $1 billion company, I think we're very pleased with and grateful for the customer partnerships that we have that have been with this company for a long, long time. Probably the last comment I'd make on this is I get asked quite a bit -- Greg is asked quite a bit, do we see a lot of churn in the portfolio? Does this behave analogist to maybe a pure private label business? It does not. What we've seen is most of these customers have been around for 10, 20 years. Our largest customer has been around us for 20 years. And so back to the importance of I was talking about service, or specifically case fill rates, we would point to that as an example of why we think that we have such durable relationships with our customer base. Okay. Next to last, talk just very briefly about sustainability, where we've been, where we're going. I'd say just as a reminder, if it's of interest to you, on our website is our most recent sustainability report we published it in April. And I would say, candidly, our facts are probably ahead of, which is a positive, our narrative and our storytelling around this. I frankly think it's an opportunity for us. And I want to give one example because I think sometimes it sounds like an amorphous concept of sustainability. I want to give an example that kind of crosses sustainability with kind of commercial and shareholder returns. In our Texas plant, what we observed was our time scale would have been ahead of the municipal water authorities time scale. We would have stalled the project or delayed the project have we not had an ability to act on that. So what we did is we invested in our own wastewater treatment facility within that Texas plant, so that the facts are we literally return cleaner water to the water authority than the water we received. So from a sustainability standpoint, that's the obvious part of it. What may not be as obvious is it kept the project on time, and our absolute water costs went down, meaning there was ROI in the project, putting aside sustainability. So I think that's part of the ethos of the company is being genuine and organic about it. And stay tuned. I think you'll see a lot of progress from us as we work our way through this. Last data point, just on sustainability, we run 10 manufacturing plants across our plant-based plants and our fruit plants, 7 of them are now certified 0 waste. So we're on a journey. We have room to grow and room to go for sure, but I thought we'd spend at least a moment on that. Last, hardest to describe, as I've said a few times, is to codify our vibrant culture. What is that? Little context, we have about 1,400 employees. And what we do is 3 times a year, we survey all of our employees. Think in your mind of a set of questions, there's roughly 20 questions that get at what is the definition of a high-performing team. And that's the lens with which we're asking those questions. The first data point is we had 92% participation. That's across all 1,400 employees in this engagement survey. As we've looked at it over time, we've seen roughly a 12% improvement in 2019 to 2022. And if you look at the -- if you look at the 4 examples in my mind, what they're really about is the employees' engagement and connectivity to the company. So we do this 3 times a year, and that's our way as a leadership team to get feedback from is the message clear, is the strategy clear, are the priorities clear? Does each and every employee understand their purpose, they're fit with the longer-term agenda. And so the example I'd offer is if you go back in time, we broke ground on our Texas plant inside of 2 years ago. We think about the environment, supply chain meltdown, rampant inflation, I mean, a challenging economic environment to be sure. That project had delivered on time and on budget. And I'm the first to say, it was an absolute team effort that I think is a good way to demonstrate what this culture mean. Can you get 1,400 people to rally to the ball, so to speak, and stand up a $125 million plant on time and on budget. So I think it's a major part of our story that for those of you who have been around and seen the transformation, hopefully can appreciate. With that, I'll bring Greg up to close us out on the financial algorithm and outlook.

Thanks, Scott, and good morning. One of the stated goals that we've had is to double our plant-based revenue from 2020 to 2025. As Scott mentioned earlier, we spent $230 million of capital investment to accomplish this. So one thing that we did last year when we had our Investor Day in June was we presented a financial model going out to 2025 that would show what the return of these investments would be. So to keep things simple, we kept everything consistent from a commodity standpoint, foreign exchange standpoint, assuming no leverage or changes to our business portfolio. This model here that we're showing today is consistent with what we showed last year. Key takeaway here is in 2020, we did $60 million of EBITDA. We've now invested $230 million, and the output in 2025 is to get to $150 million EBITDA. We've also been asked, what do we see after 2025? So in April this year, when we invited folks to our new Texas facility, we presented this slide here to how to think about our business after 2025. So revenue growth, plus 10%, consistent with the 10-year CAGR. Gross margin of 18% to 20%, up a little bit from where we are today, but with the growth in plant-based and our fruit snacks, some of our higher-margin businesses, we do see that as a very achievable goal. And adjusted EBITDA at 13% to 15%. Continued run rate for CapEx, approximately 5% of total revenue going forward. To give you an idea of where we see ourself going in the future. I'm just going to conclude by saying we're excited for the future growth. We're excited to achieve these goals that we have. Thank you all for your time today, and thank you for supporting SunOpta. I hope you enjoy the rest of the conference.

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So I think to paraphrase your question to be sure I have it right is sort of in a tough economic climate with a stressed consumer, how do we deliver a superior algorithm? Would that be a fair summary?

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Okay. So I think there's probably a couple of points. What we observe is that track channel data, so U.S. retail scanner data, represents about 1/3 of plant-based milks, just to start with the context. What we have found, to give you a comparison, is these are Q1 numbers to be sure. But in Q1, I think track channel delivered about 8% growth, top line growth. Our plant-based milk business in Q1 did 25%. Why would it be different? What we've seen is we saw significant growth in foodservice, for example, so that those trends that you were citing, we did not see in food service, almost the opposite. We had significant growth there. We also have significant growth in club. And I think the last piece to try to tie it together is at the most basic level, there's 3 drivers. There's market growth, which you were asking about, but there's also share gains. So new customers and incremental share of existing customers. There's also TAM expansion. And I'd just go back to I think the proofs in the pudding, looking at Q1 as an example.

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I guess if absolute demand is down, certainly would present a challenge to that near-term top line growth. But I would just point out again that I think 1 of the reasons we've been on the journey of both TAM expansion and having that incremental capacity that has allowed us very much to unlock a greater share of our existing customers' business, because I was mentioning, I think, from 2019 to 2022, we had $200 million of growth. A lot of that came from existing customers and capturing additional share.

The only thing I'll add to that is we're very happy with our current pipeline, right? It's never been stronger. We see a lot of opportunities, and look forward to commercializing that.

I think we'll wrap there. Let's go to the breakout room. Thank you.