SunOpta reported a $0.9M operating loss in Q2 in line with expectations. Plant-based revenue grew 21.4%, accelerating from 11.9% sequentially. Oat milk represented half the growth in Q2, similar to Q1. For Q2, the plant-based milk category grew 3.7% in the retail channel driven by oat milk. Oat milk still had robust growth despite the pandemic comparisons in 2020, but the other plant-based categories were down.
Starbucks’ recovery driving Plant-based
As the retail channel slowed, the foodservice channel recovered. Starbucks is SunOpta’s largest customer. In calendar Q2, Starbuck's growth in the Americas was 92.5% compared to 7.7% in calendar Q1. SunOpta announced that it was named as a secondary supplier of oat milk by Starbucks. Oatly’s supply challenges are seen to continue at least until 2022. SunOpta will supply certain Starbucks regions with oat milk. Customers can often order oat milk at a Starbucks café, but it is not an option currently on the app – reflecting the tight supply. Gross margins in the division contracted 30bps, from 110bps of depreciation expense and 40bps from higher transportation costs. Higher raw material costs were a small impact because co-manufacturing customer contracts have pass-through pricing. Oat milk private label remains a sizable future opportunity for SunOpta’s customers. SunOpta is somewhat dependent on its co-manufacturing partners to drive demand growth. With grocery category resets largely on hold during the pandemic and oat milk capacity tight, Costco was one of the few retailers to launch private-label oat milk. All the large food retailers will eventually have their own.
Fruit-based improvements
Fruit-based revenue decreased 1.9% in the quarter. Higher prices to offset the commodity inflation added 3% to revenue. The fruit-based business is a mostly private label that passes through pricing on a lag. Private label business is also exposed to higher transportation costs while co-manufacturing customers generally pick up the freight. The retail frozen fruit category was down 1.7% in the quarter as the pandemic boost was lapped. Gross margins in the division expanded 10bps. Management made several changes to the sourcing and processing of the fruit, but strawberry prices up by a third, and a stronger Peso offset much of the structural improvements to the business in the quarter.
Visibility in margins
Overall gross margins expanded 40bps due to the mix benefit of faster growth in plant-based sales. SG&A grew 3.8% due to integration costs of the Dream and WestSoy acquisitions. Overall adjusted EBITDA grew by 60.8%.
Guidance
Management guided the 2H revenue growth rate to be similar in both divisions as it was in Q2. As a result, EBITDA margins are expected to remain in the high-teens% in plant-based and similar YOY in fruit-based.
New Texas plant
The three expansion projects the company completed in 2020 are supplying the capacity for growth in 2021. The expansions in Allentown and Modesto currently will supply the capacity for growth in 2022. The company also formally announced a new plant in Texas that would round out its regional network. The construction would be expected to be completed late in 2022, driving revenue growth in 2023 and years beyond. The Texas plant construction will create network capacity by freeing up supply in other areas. The expansion projects from 2020 through 2022 will drive plant-based revenue growth to double in 2025 from 2020. SunOpta has not greenlit dedicated oat extraction in the Texas plant yet.
Best Idea Long
SunOpta remains the best idea long. The company remains well-positioned to gain from the secular growth in plant-based milk. Although oat milk is still in the early innings, we think it will be the leader in plant-based milk in a few years. The market continues to miss SunOpta’s multi-year visibility in sales and margins.
