Transformation plans laid out (STKL)
SunOpta reported adjusted continuing operations loss per share of $.03 compared to -$.08 in the prior year. Adjusted EBITDA from continuing operations was $20.6M compared to $11.2M in the prior year. Consensus estimates were not comparable as they included the Global Ingredients business that was sold. Our estimates were a little higher for the Plant-based segment and lowered for the Fruit-based segment, but overall in line.
Sales grew 10.4% in the quarter, accelerating 400bps sequentially. The Fruit-based segment sales grew 3.9%, while Plant-based grew 6.6%. That is an acceleration for Fruit-based from +1% in Q3 and flat sequentially for Plant-based.
Industry growth in plant-based milk has been robust and steady at 20% in recent weeks and months. Plant-based milk sales have been driven by oat and almond milk, while soy milk has lagged (+219%, +17%, and -1% respectively in the year ended Jan. 24, 2021). SunOpta’s capacity can adjust to changing preferences.
The outlook for margin expansion is the best in years.
Gross margins expanded 70bps in Q4, driven by higher volumes and productivity gains. The Plant-based segment gross margins expanded 70bs while the Fruit-based segment gross margins expanded 720bps. In Q3 gross margins expanded 210bps and 990bps, respectively. This is in contrast to the company’s history of negative Q3 and Q4 margin surprises. Management’s focus on margins over the top-line for the Fruit-based segment provides visibility in 2021. For the Plant-based business, margins remain steady with the underlying commodity costs largely passed on to the customers, providing fantastic visibility. Margins in the segment will expand modestly with sales leverage.
New initiatives provide visibility for future revenue growth.
SunOpta completed the expansion of $100M of Plant-based capacity at its Minnesota facility in the quarter. Management remains confident that the capacity will be fully utilized by the end of 2022. That ramp-up is due to production staging as well as the timing of customer programs. We believe management is confident in full utilization because it is already spoken for.
The company also expanded filling capacity at its Allentown facility. In addition to the $100M of run-rate growth, management has guided to for the division. Management said they were considering adding another facility. With equipment lead times and construction, another facility could be operational 18 to 24 months from being given the go-ahead. Industry growth trends and completing its coverage nationally leads us to believe SunOpta will add another facility just as the new capacity is full.
SunOpta recently launched SOWN, its own organic oat coffee creamer. Management was careful to describe the new brand’s goal to lead innovation for their customers rather than competing with customers. We are therefore only modeling a small contribution for the new brand soon.
In the Fruit-based segment, management’s decision to pass on the commodity price increase will see an MSD% revenue decline for the year. Higher commodity prices were driven by increased demand from consumers purchasing more for at-home consumption.
Solid and beatable outlook
Management expects the Plant-based revenue growth to be close to 10% in Q1 despite the difficult +30% comparison in the prior year. For the remainder of the year, management expects Plant-based revenue to be low to mid-teens%. The new capacity entirely drives the growth in Plant-based. For the Fruit-based segment, management expects an HSD% decline in Q1 followed by a low to mid-single digits decline for the remainder of the year. Management is passing on low-margin Fruit-based revenues to raise profitability in 2021. The pandemic led to strong demand for fresh fruits limiting the supply in the industry.
Transformation continues
The deleveraging of the balance sheet over the past year took leverage from 10x to 1.2x at year-end. The Global Ingredients segment's sale reduced debt, working capital and increased the mix of the company’s sales and profits from the Plant-based segment. The Plant-based segment will see increased market attention when Oatly and potentially Chobani IPO later this year. Investors now have increased visibility into the company’s top-line growth and margins. SunOpta now has the combination of an HSD% organic growth rate and steady margins. We see 100% upside in the shares from current levels as management executes on their plan and the market recognizes the transformation.
