SunOpta Announces Fourth Quarter Fiscal 2018 Financial Results and Additional Details on Sale of Specialty and Organic Soy and Corn Business

Fourth Quarter Revenue Growth of 9.6%

Net Proceeds from Sale of $64 million, Increased Borrowing
Capacity of $46 million

Announces CEO Transition

TORONTO–(BUSINESS WIRE)–SunOpta Inc. (“SunOpta” or the “Company”) (Nasdaq:STKL) (TSX:SOY), a
leading global company focused on organic, non-genetically modified and
specialty foods, today announced financial results for the fourth
quarter ended December 29, 2018 as well as additional details regarding
the recently announced sale of its specialty and organic soy and corn
business. In a separate news release issued today, SunOpta also
announced the termination of David J. Colo as President and CEO.
Director Katrina L. Houde has been appointed interim CEO.

“The sale of our specialty and organic soy and corn business is
consistent with our portfolio optimization strategy designed to simplify
the business, invest where structural advantages exist, and exit
businesses or product lines where the company is not effectively
positioned to drive long-term profitable growth. We are pleased with the
overall valuation of the transaction, which is a testament to the
exceptional specialty, non-GMO and organic food and feed business we
have built over the last 20 years. This decision allows us to reduce
debt and redeploy capital to further enhance our growing consumer
products and international organic sourcing platforms,” said Kathy
Houde, Interim Chief Executive Officer. “We accelerated revenue growth
during the fourth quarter, with revenue increasing 9.6% and adjusted
revenue increasing 16.0% over the fourth quarter of the prior year. We
generated double-digit revenue growth in both our Consumer Products and
Global Ingredient segments, reflecting the impacts of our enhanced
go-to-market efforts in key product categories and strengthened customer
relationships. Our sales opportunity pipeline remains robust and we are
progressing on plan with capital investment projects to both expand
capacity and improve margins in key areas of our portfolio. While we
achieved our goal of delivering $20 million of productivity savings in
2018, these productivity gains were more than offset by decreased
profitability in frozen fruit as we invested in food safety, quality,
service and price to improve our positioning and key customer
relationships. Fourth quarter profitability was additionally pressured
by growth investments and costs associated with the launch of new SKUs
across the Consumer Products segment. As a result, fourth quarter
margins were not reflective of the earnings potential of our business.
In 2019, our top priority is to maintain our top-line momentum while
driving higher profitability through our fruit margin optimization plan.”

All amounts are expressed in U.S. dollars and results are reported in
accordance with U.S. GAAP, except where specifically noted.

Fourth Quarter 2018 Highlights:

  • Revenues of $320.5 million for the fourth quarter of 2018, compared to
    $292.4 million in the fourth quarter of 2017, an increase of 9.6%.
    Adjusted for changes in foreign exchange, commodity prices, and the
    discontinuation of flexible resealable pouch and nutrition bar
    products, revenues grew 16.0% during the fourth quarter.
  • Loss attributable to common shareholders of $99.0 million or $1.13 per
    common share in the fourth quarter of 2018, compared to a loss
    attributable to common shareholders of $119.4 million or $1.38 per
    common share in the fourth quarter of 2017. The losses in the fourth
    quarter of 2018 and 2017 included non-cash goodwill impairment charges
    of $81.2 million and $115.0 million respectively associated with the
    healthy fruit platform.
  • Adjusted loss¹ of $9.3 million or $0.11 per common share during the
    fourth quarter of 2018, compared to adjusted loss of $8.8 million or
    $0.10 per common share during the fourth quarter of 2017.
  • Adjusted EBITDA¹ of $9.1 million or 2.8% of revenues for the fourth
    quarter of 2018, versus $9.4 million or 3.2% of revenues in the fourth
    quarter of 2017.
  • Loss attributable to common shareholders, Adjusted loss¹ and Adjusted
    EBITDA¹ for the fourth quarter of 2018 included a timing-related,
    pre-tax gain of $0.3 million recognized in cost of goods sold,
    relating to the net impact of foreign exchange and commodity price
    movements in the quarter, on certain contracts within the
    European-based operations of the Global Ingredients segment, compared
    to a pre-tax gain of $0.8 million in the fourth quarter of 2017.

Sale of Specialty and Organic Soy and Corn Business

On February 22, 2019 the Company sold its specialty and organic soy and
corn business to Pipeline Foods, LLC for $66.5 million, subject to
certain post-closing adjustments. The soy and corn business formed part
of the Company’s North American-based raw material sourcing and supply
segment which is reported inside the Global Ingredients segment.

The sale of the soy and corn business was driven by the Company’s
portfolio optimization strategy which is designed to simplify the
business and exit product lines where the Company is not effectively
positioned to drive long-term profitable growth. The decision to divest
the soy and corn business should enable the Company to redeploy capital
and human resources to further enhance the Company’s growing consumer
products and international organic sourcing platforms. Originally
acquired in 1999, the soy and corn business largely operated standalone
on its own ERP system while leveraging central resources in certain
functional areas.

In 2018, the soy and corn business contributed $104.4 million of
external revenue, $8.3 million of gross profit (including $0.8 million
of depreciation), and $6.8 million of earnings before income taxes. The
sale of the soy and corn business is expected to simplify the Company’s
operations, enabling cost reductions that extend beyond the employees
and expenses that will transfer to the acquiror. As a result, the
Company expects to rationalize an additional $3.0 million of SG&A
expenses. Taking into consideration the contribution from the business
sold, as well as rationalized SG&A, Adjusted EBITDA would have decreased
by approximately $4.6 million, on a pro forma basis, if the transaction
had occurred at the beginning of the 2018 fiscal year. Please refer to
the discussion and table below under “Sale of Specialty and Organic Soy
and Corn Business – Selected Financial Information”.

As a result of available U.S. non-capital loss carryforwards, the
transaction is expected to be tax efficient with net proceeds after
fees, expenses, and taxes contributing approximately $64.0 million in
cash. The net proceeds will initially be used to lower the drawn amount
on the Company’s global credit facility, which is expected to provide
additional incremental borrowing capacity of approximately $46 million
under the global credit facility. Over time, the additional borrowing
capacity is expected to be re-deployed to support future strategic
investments. Taking into consideration the expected net proceeds and
borrowing capacity generated by the sale, total debt as at December 29,
2018 would have been approximately $445.0 million and available capacity
in our global asset-based credit facility would have been approximately
$101.0 million, on a pro forma basis.

As part of the deal, SunOpta and Pipeline have entered into a multi-year
supply agreement for certain organic and non-GMO ingredients used in
SunOpta’s beverage and snacks portfolio.

Value Creation Plan Update

As part of SunOpta’s commitment to deliver long-term value to its
shareholders, in early 2017 the Company launched its Value Creation
Plan. The Company targeted implementation of $30 million of
productivity-driven annualized enhancements to EBITDA in the first phase
of the plan, implemented over 2017 and 2018. For 2017, these EBITDA
benefits were offset by expenses associated with the Value Creation
Plan, including structural investments made in the areas of quality,
sales, marketing, operations and engineering resources, as well as
non-structural third-party consulting support, severance and recruiting
costs. For 2018, these EBITDA benefits were offset by a decline in
profitability in the frozen fruit platform as a result of sales price
reductions and higher costs, both intended to improve competitive
positioning through enhancements in sales, service and quality. The plan
also calls for increased investment in capital upgrades at several
manufacturing facilities to continue to enhance food safety, quality and
manufacturing efficiencies and capabilities.

SunOpta’s Value Creation Plan is built on four pillars which provide the
framework for all of our efforts to improve operational performance and
drive long-term sustainable growth and shareholder value. The four
pillars are Portfolio Optimization, Operational Excellence, Go-To-Market
Effectiveness, and Process Sustainability. During the fourth quarter of
2018, the Company continued to make progress against each of these four
pillars, and achieved the targeted productivity enhancements under the
first phase of the plan. Progress during the fourth quarter included the
advancement of several key expansion and enhanced capability projects in
the Company’s beverage and ingredient platforms, continued momentum in
improving food safety, quality, and employee safety scores across the
Company’s manufacturing footprint, significant revenue growth as a
result of commercializing numerous new and refreshed broth and frozen
fruit products, and the implementation of a new demand planning system
in support of the Company’s refined sales and operations planning
capabilities.

Looking ahead to 2019, the Company will continue focusing its efforts to
deliver sustained profitable growth across the four pillars of its Value
Creation Plan. These pillars provide the framework that guides all of
the Company’s enterprise-wide objectives. In 2019 the Company intends to
intensify its focus in two key areas:

Operational Efficiency and Expansion

  • Continued execution of critical efficiency and expansion projects,
    including:

    • The Company’s fruit margin optimization plan, which includes the
      installation and commissioning of new automation and quality
      improvement equipment in the Company’s California fruit facilities
      ahead of the 2019 and 2020 strawberry pack seasons, and
      construction of a new third-party owned public cold storage
      facility adjacent to the Company’s Santa Maria facility, all
      designed to drive margin improvement over the 2019 and 2020 crop
      seasons through lower labor and conversion costs, improved yield,
      and lower overall storage and freight costs.
    • The addition of new filling and processing capacity and
      capabilities at the Company’s Allentown beverage facility by the
      third quarter of 2019
    • The opening of a new organic avocado oil facility located in
      Ethiopia during the second half of 2019
  • Through the SunOpta 360 continuous improvement initiative, in 2019 the
    Company is targeting $10 million of in-year productivity-driven margin
    enhancement in the areas of manufacturing, purchasing and supply
    chain, with a significant portion of this target coming from the fruit
    margin optimization plan

Revenue Growth and Margin Accretive Innovation

  • Relentless focus on food safety, quality, and service including
    continued enhancements to our sales and operations planning processes
    and capacity planning capabilities
  • Continued growth across the Healthy Fruit, Beverage, and Snack
    consumer products categories, with a focus on bringing margin
    accretive innovation to market to increase the number of value-added
    products we offer to our customers, and targeting approximately 80%
    capacity utilization inside the aseptic network by the end of 2019,
    which includes new capacity expected to come online in the third
    quarter of 2019
  • Targeted growth in our Global Ingredients segment, driving our mix of
    certified organic ingredients to represent over 80% of the sales in
    the portfolio, and achieving 85% capacity utilization in the recently
    expanded organic cocoa processing facility by the end of the 2019

Fourth Quarter 2018 Results

Revenues for the fourth quarter of 2018 were $320.5 million, an increase
of 9.6% compared to $292.4 million in the fourth quarter of 2017.
Excluding the impact on revenues for the fourth quarter of 2018 of
changes in commodity-related pricing, foreign exchange rates and the
impact of discontinued flexible resealable pouch and nutrition bar
products, revenues in the fourth quarter of 2018 increased by 16.0%
compared with the fourth quarter of 2017.

The Global Ingredients segment generated revenues from external
customers of $139.9 million, an increase of 10.3% compared to $126.9
million in the fourth quarter of 2017. Excluding the impact on revenues
of changes in commodity-related pricing and foreign exchange rates,
Global Ingredients revenue in the fourth quarter increased 15.5%.
Excluding the effect of commodity prices and foreign exchange, sales of
internationally-sourced organic ingredients grew 17.1% during the
quarter, mainly driven by increased demand for cocoa, fruits, oils and
coffee and sales of domestically-sourced ingredients grew 11.3% during
the quarter, reflecting increased sales of organic feed, and specialty
corn and soy, offset by continued soft market conditions for sunflower.

The Consumer Products segment generated revenues of $180.6 million
during the fourth quarter of 2018, an increase of 9.1% compared to
$165.5 million in the fourth quarter of 2017. Excluding the impact of
commodity-related pricing and sales of resealable pouch and nutrition
bar products, Consumer Products revenue in the fourth quarter increased
by 16.3%. The growth primarily reflects a 17.8% increase in the Healthy
Beverage platform consisting of higher sales of aseptic non-dairy
products and the expansion of broth products, combined with a 17.3%
revenue increase in the Healthy Fruit platform due to distribution gains
with key retail customers and timing of deliveries to a large food
service customer.

Gross profit was $21.3 million for the quarter ended December 29, 2018,
a decrease of $7.0 million compared to $28.3 million for the quarter
ended December 30, 2017. Consumer Products accounted for $5.0 million of
the decrease in gross profit, primarily as a result of strategic price
reductions and unfavorable product mix for frozen fruit, combined with
$3.1 million of inventory write-downs due in part to a change in
expected use of aged stock, and $2.0 million of costs related to the
commercialization of new beverage products. These factors were partially
offset by increased sales volume and productivity-driven cost savings
for aseptic beverages, and operational savings from the discontinuance
of flexible resealable pouch and nutrition bar products. Global
Ingredients accounted for $1.9 million of the decrease in gross profit,
which was largely due to $0.7 million of start-up costs associated with
new roasting equipment and second organic cocoa processing line, a $0.5
million net reduction in commodity and foreign exchange gains related to
organic cocoa hedging activities and marked-to-market measurements on
certain contracts within the European-based operations of the
international organic ingredient platform, and decreased pricing spreads
and higher storage costs for certain internationally sourced organic
ingredients.

As a percentage of revenues, gross profit for the quarter ended December
29, 2018 was 6.6% compared to 9.7% for the quarter ended December 30,
2017, a decrease of 3.1%. The gross profit percentage for the fourth
quarter of 2018 would have been approximately 8.5%, excluding $3.1
million of inventory write-downs in frozen fruit, $2.0 million of costs
related to the commercialization of new beverage products, and start-up
costs of $0.7 million inside the Global Ingredients segment. The gross
margin percentage for the fourth quarter of 2017 would have been
approximately 10.1%, excluding the impact of $1.3 million in inventory
write-downs and facility closure costs associated with the exit from the
flexible resealable pouch and nutrition bar operations.

Segment operating loss¹ was $6.9 million, or 2.2% of revenues in the
fourth quarter of 2018, compared to $3.9 million, or 1.3% of revenues in
the fourth quarter of 2017. The increase in operating loss
year-over-year was primarily attributable to $7.0 million lower gross
profit, partially offset by a $2.3 million reduction in SG&A due to a
reduction in consulting and employee related costs, as well as a $1.6
million decrease in foreign exchange losses. Operating loss would have
been $0.9 million, or 0.3% of revenues, excluding the same items
impacting gross margin as well as $0.4 million of SG&A costs associated
with new product commercialization and a $0.2 million gain from the
reversal of previously recognized stock-based compensation for cancelled
performance share units. Operating loss would have been $1.1 million in
the fourth quarter of 2017 excluding the item impacting gross margin as
well as $2.1 million of SG&A costs associated with consulting fees,
temporary labor, recruitment, relocation and retention costs all related
to the Value Creation Plan and a $0.5 million gain from the reversal of
previously recognized stock-based compensation for cancelled performance
share units.

Adjusted EBITDA¹ was $9.1 million or 2.8% of revenues in the fourth
quarter of 2018, compared to $9.4 million or 3.2% of revenues in the
fourth quarter of 2017. Excluding flexible resealable pouch and
nutrition bar operations, adjusted EBITDA for the quarter ended December
29, 2018 was $9.1 million, compared with $10.1 million for the quarter
ended December 30, 2017.

During the fourth quarter of 2018, the Company recognized a non-cash
goodwill impairment charge of $81.2 million to write-off the remaining
goodwill balance related to the healthy fruit platform, compared to a
$115.0 million non-cash goodwill impairment charge recognized in the
fourth quarter of 2017, as a result of lower than expected sales and
operating performance in frozen fruit.

The Company reported a loss attributable to common shareholders for the
fourth quarter of 2018 of $99.0 million, or $1.13 per common share,
compared to $119.4 million, or $1.38 per common share during the fourth
quarter of 2017. Adjusted loss¹ in the fourth quarter of 2018 was $9.3
million or $0.11 per common share, compared to $8.8 million or $0.10 per
common share in the fourth quarter of 2017. Please refer to the
discussion and table below under “Non-GAAP Measures – Adjusted
Earnings/Loss”.

Balance Sheet and Cash Flow

At December 29, 2018, SunOpta’s balance sheet reflected total assets of
$896.7 million and total debt of $509.2 million. During the fourth
quarter of 2018, cash provided by operating activities was $5.1 million,
compared to $48.9 million during the fourth quarter of 2017. The $43.8
million decrease in cash provided by operating activities reflects an
increase in accounts receivable as a result of higher sales, higher
inventory levels, primarily of organic ingredients to support expected
2019 sales volume and a decrease in operating performance. Cash used in
investing activities during the fourth quarter of 2018 was $6.7 million,
compared to $16.8 million in the prior year period. The decrease in cash
used reflected a lower net level of capital expenditures as the fourth
quarter 2017 spend included cash used to buyout leases associated with
exited lines of business.

Conference Call

SunOpta plans to host a conference call at 9:00 A.M. Eastern time on
Tuesday, February 26, 2019, to discuss the fourth quarter financial
results. After opening remarks, there will be a question and answer
period. This conference call can be accessed via a link on SunOpta’s
website at www.sunopta.com
under the “Investors” section. To listen to the live call over the
Internet, please go to SunOpta’s website at least 15 minutes early to
register, download and install any necessary audio software.
Additionally, the call may be accessed with the toll-free dial-in number
1 (877) 312-9198 or International dial-in number 1 (631) 291-4622. If
you are unable to listen live, the conference call will be archived and
can be accessed for approximately 90 days on the Company’s website.

¹ See discussion of non-GAAP measures

About SunOpta Inc.

SunOpta Inc. is a leading global company focused on organic,
non-genetically modified (“non-GMO”) and specialty foods. SunOpta
specializes in the sourcing, processing and packaging of organic and
non-GMO food products, integrated from seed through packaged products;
with a focus on strategic vertically integrated business models.
SunOpta’s organic and non-GMO food operations revolve around value-added
grain, seed, fruit and vegetable-based product offerings, supported by a
global sourcing and supply infrastructure.

Forward-Looking Statements

Certain statements included in this press release may be considered
“forward-looking statements” within the meaning of the United States
Private Securities Litigation Reform Act of 1995 and applicable Canadian
securities legislation, which are based on information available to us
on the date of this release. These forward-looking statements include,
but are not limited to, the anticipated benefits of the Company’s Value
Creation Plan, including the estimated amount and timing of EBITDA
enhancements; the Company’s intention to exit businesses or product
lines where it is not effectively positioned; the expected increased
capacity resulting from the Company’s aseptic capacity expansion plan
and the associated cost and timing; the expected completion date of
commissioning and increased capacity from the Company’s new roasting
equipment at Crookston, MN; proposed construction of new cold storage
facility at Santa Maria, CA; improved revenue growth and profitability
as a result of the Company’s customer and product mix optimization
efforts; expected enhancements resulting from and timing of
implementation of the Company’s new demand planning system; and the
Company’s ability to rationalize certain expenses and enhance its focus
on growing its consumer products and international organic sourcing
platforms following the sale of its soy and corn business. Generally,
forward-looking statements do not relate strictly to historical or
current facts and are typically accompanied by words such as “expect”,
“will”. “continue”, “believe”, “targeting”, “anticipates”, “should”,
“would”, “plans”, “becoming”, “estimated”, “intend”, “confident”, “can”,
“may”, “project”, “potential”, “intention”, “might”, “predict”,
“budget”, “forecast” or other similar terms and phrases intended to
identify these forward-looking statements. Forward-looking statements
are based on information available to the Company on the date of this
release and are based on estimates and assumptions made by the Company
in light of its experience and its perception of historical trends,
current conditions and expected future developments including, but not
limited to, the Company’s planned expansion initiatives, portfolio
optimization and productivity efforts, the Company’s expectations
regarding commodity pricing, margins and hedging results, improved
availability and field prices for fruit, procurement and logistics
savings, freight lane cost reductions, yield and throughput
enhancements, and labor cost reductions, as well as other factors the
Company believes are appropriate in the circumstances including, but not
limited to, general economic conditions, continued consumer interest in
health and wellness, ability to maintain product pricing levels, current
customer demand, planned facility and operational expansions, closures
and divestitures, competitive intensity, cost rationalization, product
development initiatives, and alternative potential uses for the
Company’s capital resources.

Contacts

Scott Van Winkle
ICR
617-956-6736
scott.vanwinkle@icrinc.com

Read full story here

error: Content is protected !!