*NEW* We are providing this transcript version in a raw, machine-assisted format and it is unaudited. Please reference the audio for any questions on the content. A standard transcript will be available later on the site per our normal procedure. Please enjoy this timely version in the interim.:

[00:00:05] Good morning and welcome to SunOpta Third Quarter Fiscal 2014 earnings conference call. By now, everyone should have access to the earnings press release that was issued this morning and is available on the Investor Relations page, on Synopsize website at the views of the CNN dot com. This call is being webcast and this transcription will also be available on the company's website. As a reminder, please note that the prepared remarks, which will follow, contain forward looking statements and management, may make additional forward looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. We refer you to all of is contained in some of this press release issued this morning. The company's annual report filed on Form Bank and other filings with the Securities and Exchange Commission for more detailed discussion of the factors that could cause actual results. To differ materially from those projections and any forward looking statements, the company undertakes no obligation to publicly correct or update before reporting statements made during the presentation to reflect future events or circumstances, except as may be required under applicable securities laws. Finally, we would like to remind listeners that the company may refer to certain non-cash financial measures during this teleconference. A reconciliation of these non-cash financial measures was included with the company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in U.S. dollars under our occasionally around seven a.m.. And now I'd like to turn the call over to CNN Joe Ennen. Good morning.

[00:01:45] Thank you for joining us today. With me on the call is Scott Hawkins, our Chief Financial Officer. Before we begin unpacking the Q3 results, there are three key takeaways that I would like to offer. First, from execution of our core strategy continues to deliver consistent, strong performance across all three business segments. Second are prioritized, investments in plant based foods and beverages is paying dividends. We are playing offense. We are winning and we expect to continue to win as our expansion projects come online in the fourth quarter. Further strengthening an already strong position. And third, we are optimistic about our future ability to deliver consistent, sustainable, above average IBNR growth. As anticipated, the third quarter results were strong, delivering our fourth consecutive quarter of more than doubling year over year adjusted EPS. And the third consecutive quarter in which each of our segment generated both revenue and margin growth. Trailing 12 month, adjusted either at the end of Q3, 2019, was 40 million today or trailing 12 month, adjusted even in 84 million, with four consecutive quarters of more than doubling adjusted evena combined with the momentum and plans we have. It is safe to say that Sonoita is no longer a turnaround story. We are quite simply a well positioned, sustainability minded growth company with a clear vision to fuel the future of food. Our performance reflects strong execution of our core strategy, along with investment and focus on our core strength. We have now fully transitioned from our turnaround successes to driving profitability and growth across each of our business segments. [00:03:47] I'm pleased with our positioning and the performance across our entire organization. For the third quarter, we delivered five point four percent revenue growth, adjusted for changes in commodity related pricing…

[00:14:28] Thank you very much, Joe, and good morning, everyone. Let me walk through gross profit and the rest of the income statement given Joe's discussion of the commercial activities and revenue during the quarter. I will also cover our balance sheet and cash flow results. We're very pleased to report another strong quarter, as Joe discussed, we saw six point four percent revenue growth and more than doubled adjusted EBITDA for the fourth consecutive quarter. Gross profit was forty one point nine million for the third quarter of Twenty twenty, an increase of fifteen point six million, or 59 percent, compared to twenty six point three million during the third quarter of 2013. The prepaid segment was responsible for nine point one million of the gross profit improvement for perspective, that brings year to date gross profit in four to nineteen point eight million or nearly five times the prior year results. The improvement in freight came from improved revenue pricing, a favorable mix of higher margin retail versus food service revenue, and the benefits from increased automation and productivity initiatives implemented in our plants. The plant based segment accounted for three point four million of the increase in gross profit, mainly reflecting revenue growth of ten point eight percent in the plant based beverage and extraction businesses, offset in part by a reduction in revenue in the sunflower business. In addition to revenue growth, increased production volumes, as well as strong execution of our productivity plan in higher capacity utilization drove improved margins. [00:16:13] This was partially offset by lower revenue production volumes in plant utilization in a sunflower operation. Global ingredients contributed three point one million of improvement, primarily due to solid execution of our portfolio optimization efforts that resulted in increased pricing spreads and higher margin…

[00:21:45] Thank you. It this time I would like to remind everyone, in order to ask a question, a star, then the number one on your telephone keypad. Our first question comes from Brian Holland of D.A. Davidson. Your line is open.

[00:22:01] Maybe first question, they're just kind of near term focused on the ramp of the new plant based capacity. I know we've talked about 100 million over two years. We just think about maybe the next couple of quarters, though, as you ramp that up, the impact to the sales and also gross margin, if there's anything we should be mindful of as we're forecasting out.

[00:22:24] Yeah, good morning, Brian. Still here. So first of all, just in terms of our expectations on ramping that production utilization, you know, we put a marker out there that we expect it to be fully utilized by the end of Q4 twenty twenty to you know, at this juncture, we don't have perfect insight into how that's going to flow. We are making good progress in terms of working with significant new customers in and adding business to that capacity as it relates to gross margin impact. There are kind of three components. Certainly the added capacity would be a bit of a headwind to gross margin. However, as we look forward to 2021, we think both customer mix as well as our productivity efforts will both be tailwinds and that those two tailwinds should net or mitigate any kind of negative impact from the added capacity. So we would expect 20 21 gross profit margin to look broadly like Twenty twenty.

[00:23:36] Appreciate the color there, and it's not another question of. You know, you've been asked several times since your expansion announcement about whether you had the demand to fill that capacity and you know it. Mindful specifically of the significant growth within the GOP segment, you know, as well as the potential harm given the value proposition of the Almanzo. I'm curious whether you think you've added enough capacity and if not, and given the lead time required to stand up that incremental capacity. Are there plans in place for further investment? How you're thinking about that?

[00:24:10] You know, on some levels, I hope we didn't have enough capacity, but that would be a good problem to have. [00:24:17] You know, we we are certainly encouraged by the consumer excuse me, the customer outreach that we had on that and customers interest in space. You know, at this juncture, our focus is on, you know, getting that new facility fully up and running and utilized. [00:24:38] And, you know, if we find that, you know, in kind of at some point in Twenty twenty one that we feel like, you know, we've got a 12 month view out of the business where we think we're going to sell that out, we're certainly willing and able to make further investments in that in that space.

[00:24:57] Got it. Fair enough to switching over to food service, you know, a bit of a headwind or an offset to the growth this quarter. Not surprising, but just curious if you could maybe kind of give us a little bit of incremental color on sort of the pace of recovery in that channel? I think high level, what we're seeing is obviously a trough first half of the year, you know, immediately following locked down. And then we saw some steady progression, moderating declines that seemed to have sort of peaked, you know, depending on what channel you're talking about, maybe in the high single low double digit range. So I'm curious if specific to your business that that's kind of mirrors what we're seeing high level. And then secondly, with the concerns about, you know, second wave and new cases and maybe maybe new measures being implemented, how you're kind of thinking about the plan going forward here and the pace of recovery in that channel is as it pertains to your business.

[00:25:55] Yeah, so, you know, yes, we're seeing a consistent pattern to what you articulated in aggregate, food service was neither a headwind or a tailwind for the quarter. It looked broadly similar to 2019 as it relates to the impact of a second wave of covid. [00:26:16] We're all certainly concerned about that at multiple levels, you know, first and foremost for our associates and and the operations of our facilities. [00:26:26] But, you know, we're going to continue to monitor and monitor it and work with our customers and and respond to their forecast. And, you know, today we have not seen any significant adjustment in their forecast as they think about a potential second wave. But we'll certainly be ready to respond to that.

[00:26:46] And last one for me. I really appreciate the color and the clarity provided with respect to the food segment this quarter. But just to confirm, you are lapping pricing that you took, I believe, this time last year. So just curious, have you taken or will you need to take more pricing this quarter? And if so, how those discussions progressed?

[00:27:13] So, yes, we are in a position where we have been able to pass through the majority of the impact of higher cost route from this season, and many of those prices will go into effect here in the fourth quarter. You know, that's the result of a lot of great work by our sales team over the last 12 months to get better relations with our customers, as well as different pricing mechanisms in place, and certainly has aided our efforts in mitigating the impact of the higher cost for.

[00:27:56] Appreciate all the color. Best of luck once again.

[00:28:00] Thanks for your next question comes from Ryan Meyers of Lake Street Capital. Your line is open.

[00:28:08] Thanks for taking my questions first, just a clarification, there's some commentary on the fourth quarter for revenue, gross profit adjusted, but I just want to make sure this is year over year growth, correct?

[00:28:19] Correct.

[00:28:20] Ok, and then can you discuss potential headwind that you guys might see in the plant based beverage, including food service that you could potentially see going forward, that maybe slow the growth a little bit?

[00:28:35] Yeah, I mean, I say I certainly think a second, you know, wave of covid could have an impact. I mean, all I will remind that we now have, you know, several quarters of what a covert environment looks like. And so I don't really have any material Forward-Looking insight that would suggest it would look different than our Q2 and Q3 results from this year. You know, I think there's obviously an offset with retail growth and we see very, very strong growth on the retail segment. And I would, I guess, to expect the Twenty twenty one to look like Twenty twenty if if we were to kind of go back into a very deep kind of covid shutdown.

[00:29:23] Ok, that's helpful. And then now that you're through sort of a transition phase, what's your outlook for, you know, gross margins on a plant based business? You know, they're pretty strong this quarter. Just kind of how are you thinking about that going forward as it kind of going to be what it's been reported this quarter? Is there room for improvement?

[00:29:42] Yeah, as I mentioned to Brian, you know, we think that the Twenty twenty one gross margin will look broadly like Twenty twenty. You know, there is a bit of a headwind with just some added capacity, which, you know, will be a kind of short term headwind to our gross margin rate. But there are two strong tailwinds, you know, our productivity initiatives certainly being one of them. So and we also think mix, both product mix as well as customer mix will be a tailwind in 2021. So, you know, Twenty twenty one will look broadly similar to Twenty twenty.

[00:30:23] Ok. And then last one for me. Any update on new product performance such as the hard rubab?

[00:30:29] Yeah, I mean, we continue to monitor and look for additional customers to roll it out. We're happy with the product and are actively engaged in putting, you know, promotional efforts against it to drive trial. And, you know, we're encouraged by the repeat that we're seeing on the product. But, you know, we're looking for additional ways to drive trial.

[00:30:52] That's it for me. Thank you.

[00:30:56] Thanks. Your next question comes from Jon Anderson of William Blair. Your line is.

[00:31:03] Morning, everybody. Thank you. Good morning, John. Nice to have some fellow fellow questioners on the call. I want to ask you about the old extraction of the extraction process. Can you talk about the. Quality of your process in producing the base and is there, you know, the equivalent? You know, player in the market that does this, my understanding is there are some differences in the way OTC milks are formulated and it can have a difference on kind of the quality and the functionality of the products themselves.

[00:31:52] Yeah, without without getting too technical here, where I might need some diagrams and schematics, there's two ways of making out. One is you start with OK, flour and add water. The result of that process is you get a very gritty, better tasting product. The other way to do it is you start with raw oats, you soak them and you add enzymes that basically break the whole down into soluble and insoluble components. Obviously, the soluble components are turned into oatmeal. You get a much cleaner tasting product, none of that gritty texture that consumers complain about. And we think it's a superior process to the way many of the people are manufacturing it. You know, I certainly don't have detailed information into how everyone does it. But what we are aware that one of the leading oat milk manufacturers that we don't make products for also does it in a similar process to the way that we do it.

[00:33:01] That's great. It's tough to. Go technical and do it in terms that layman like I can understand. So I appreciate that. Your plant based beverage business is interesting. I thought it was great that you provided some of that consumption data, syndicated consumption data that showed both aseptic and refrigerated. Growing at very healthy rates, you know, which is which segment is more important to you, and I assume that that might be changing a little bit with your base capabilities, because that may allow you to serve the refrigerated market, perhaps making that assumption in the way you haven't in the past. But if you could just talk a little bit about your outlook for aseptic versus refrigerated like base growth and your exposure and ability to serve both of those and markets makes it so.

[00:34:10] You're exactly right. Our added extraction capability opens us up to being a supplier on the refrigerated side where, you know, both of them are important to us. Obviously, we have significant aseptic manufacturing assets and that is the core business for us. [00:34:29] But the extraction project and capability certainly affords us the opportunity to start to work with customers in the refrigerated space who aren't current customers. Today, on the shelf depot, shelf, stable, aseptic side.

[00:34:49] Ok, thanks on that. Fruit in terms of fruit. What led you to upgrade, be willing to kind of upgrade your outlook for gross profit in 2021? Some of the specifics may be in your priorities, you know, form.

[00:35:13] Yeah, our success in working with customers to pass through the increased costs of. Our clarity around the customer commitments that we have for Twenty twenty one would be probably the to the two biggest ones that that gave us confidence to suggest that Twenty twenty one is going to be better than previously forecasted. [00:35:47] And given that you're through the season and the harvest this year, the Twenty twenty harvest. Does that provide you foster visibility through the bulk of Twenty twenty million at this point? [00:36:05] Typically, it would provide insight, certainly into kind of Q1 and Q2 and then as it relates to our overall cost structure for the balance of 2021, while the root input cost is still a variable. We certainly understand the overall cost structure of our supply chain, network labor, et cetera, et cetera.

[00:36:33] Ok, that's helpful. Last one just on the debt, Scott, comments on the debt refinancing. So my understanding, the Abdelhalim process and the second line is, is soon to come. And I think he expressed confidence around the second line. Is your expectation on the second line there would be an ability to get, you know, better pricing.

[00:37:02] Yes, good morning, John. So the comments I was offering was really focused around here in the home stretch, you know, and getting the bill done, recognizing it that has the March 22 maturity date and the Stephen Mayne that two honors for knew about two years from now and in October of Twenty twenty two. So we're working on them sequentially. So I would expect that, you know, if all else were equal in the capital markets, you know, like our chances to have some rate reduction on the two on notes. But that'll follow the work on the.

[00:37:39] Ok, thanks so much, congrats on a great, great stretch here.

[00:37:48] There are no further questions at this time. I will now return the call to our calls for closing remarks.

[00:37:55] Ok, thank you, operator, and thank you all for participating in our third quarter conference call. I look forward to speaking to you in the future and appreciate your interest and support. So not a great day.

[00:38:08] This concludes today's conference call. Thank you for your participation, you may now disconnect.