Good afternoon, and welcome to SunOpta's First Quarter 2022 Earnings Conference Call. By now, everyone should have access to the earnings press release that we issued this morning and is available on the Investor Relations page on SunOpta's website at www.sunopta.com. This call is being webcast, and its 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 all risk factors contained in SunOpta's press release issued this afternoon, the Company's annual report filed from Form 10-K and other filings with the Securities and Exchange Commission for a 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 the forward-looking 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-GAAP financial measures during this teleconference. A reconciliation of these non-GAAP financial measures was included in the Company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in U.S. dollars and are occasionally rounded to the nearest million. And now, I'd like to turn the conference call over to SunOpta's CEO, Joe Ennen. Please go ahead.

Good afternoon. And thank you for joining us today. With me on the call in Scott Huckins, our Chief Financial Officer. We are pleased with the first quarter results which exceeded our expectations. We are especially pleased with a strong rebound in top line growth as we made solid progress working through the various constraints that negatively impacted Q4. Before we begin unpacking the Q1 result, let me offer some takeaways from the quarter. We saw significant sequential improvement versus Q4 up and down the P&L and across the business. Revenue plus 18% gross profit plus 52% and EBITDA plus 46%. Top line was strong across the portfolio fueled by pricing but also supported by volume growth. We had record production in our plant based manufacturing facilities, which drove growth margin improvement versus Q4. Production with plus 19% versus Q4 and plus 8% versus Q1 2021, which was the previous best quarter ever. This record output allowed us to improve service levels, and importantly rebuild depleted safety stock. Oatmilk sales continued to be very robust with sales plus 59% versus Q1 2021. Led by strong growth from Dream oatmilk in our largest food service customer along with our partner brands. The brands we support, in part or in full are now roughly one-third of the U.S. oatmilk market and are gaining share every week. We are firing on all cylinders and from the supply of hose to extraction to customer development. We are smelling every drop we can make. And we are producing volume above the projections from our original capital project underwriting and fruit very strong demand for fruit snacks and better alignment of costs and prices in Frozen deliver a better than expected Q1, in our fruit business units. We are on track with plant expansion projects including…

Thank you very much, Joe. And good afternoon everyone. First quarter revenues of $240.2 million were up 15.7% year over year, with solid gains in both segments. Plant-based revenue increased 13.4% driven by strong demand for our oat-based offerings and teas. Along with pricing actions and the impact of the Dream and WestSoy acquisition. Fruit based revenues increased 18.7% as we benefited from pricing actions implemented in the second half of 2021 along with strong demand for fruit snacks and smoothie bowls, and some one time orders from our largest frozen customer outside of normal distribution, which represented nearly half the revenue growth. Gross profit was $28 million for the first quarter of 2020, a decrease of 2 million compared to the first quarter of 2021. And consolidated gross margin was down 270 basis points to 11.7%. Most of the decline attributable to temporary factors in our plant-based segment. Importantly, gross margin expanded 270 basis points from Q4. In plant-based segment level gross profit decreased 3.2 million and gross margin was down 470 basis points to 14.7% versus the prior year. The 14.7% margin rate improved 300 basis points from Q4 and was consistent with what we communicated our Q4 call. We expect further sequential margin rate improvement in Q2 and significant growth in gross profit dollars. Unrecovered inflation represented $2 million, which along with $1 million of increased depreciation expense accounted for the decline in year-over-year gross profit. These factors were partially offset by higher production volumes in improved utilization at our plant-based beverage ingredient operations. In fact, Q1 production in plant based notes was up 8% over last year, and 19% sequentially from Q4 2021 exiting the quarter very strong. On a margin rate basis, we would estimate that pass through of costs created 150 basis points of…

[Operator Instructions] Your first question comes from the line of Brian Holland with Cowen and Company. Your line is open.

Yes, thanks. Good evening, gentlemen. Just looking at gross margin sequentially, considering the ongoing sources in the market some of the corrective measures in place, isn't your expectation that 1Q -- it sounds like 1Q should be the croc for fiscal 22 gross margin. But you know, you talked about bounces a year we're going to grow gross margin, I would suspect that debit still assume a pretty big jump to be a year-over-year in Q2. So maybe just frame that out is Q2 kind of higher sequentially on gross margin, but still down year over year, and then the back half is up here over here.

Hey, Brian, this is Scott. So I think you've got to generally right, if we would expect as we work our way through 2022, sequential improvement and margin, again, sequential from four to one in Q1 and Q2 etcetera. So that's the core of your question answer that Yes.

Okay, got it. I wanted to eco more broadly about elasticity on both clearly great performance in fruit know that they're selling benefit or district distribution benefit 1Q, but obviously took drastic pricing their pricing there, but also on the inflation obviously [multiple speakers]. So, we also have exposure across the pricing tiers. So just kind of curious the interplay you're seeing there on plant based, but any thoughts on the fruit side as well? It'd be helpful.

Yes, Brian, it’s Joe. We're certainly keenly watching elasticity, as we look at volume growth as a lever, obviously, we have two ways for volume to grow aggregating or growing share within existing or new customers. And you certainly heard us reference that as a volume growth driver as well as our core underlying category growth. So, we did we did see certainly dollar sales growth in plant based unit growth was lightly down but as I mentioned on a two-year basis, and any longer timeframe in in plant based you continue to see pretty strong upward momentum we reference plus nine on snacks, which is fantastic. And then on frozen, it's holding its own in the face of some pretty significant pricing drop in the category.

Appreciate the color, Joe. Last one for me, I'll get back into queue. You mentioned several more customer updates here on the second slide. Just stepping back, can you talk about what's driving, you don't want to talk about specific customers, etcetera. But can you talk about what's driving the winds right now in this environment? I mean, conceptually, we understand it, you're adding capacity plus provider with a broad manufacturing network, etcetera, et cetera. But, what's happening right now, is that all just coming to fruition is this demand outstripping supply. And people are just looking anywhere they can just help break for us? What's bringing in this new business right now?

Yes, Brian, either the one I referenced specifically, which will end up being a very significant customer for us has been in development for a considerable period of time, it wasn't an emergency rush to SunOpta, because we happen to have production output. Unfortunately, our business doesn't fit it that quickly. So this is really long-term customer development, as we shared many, many times. I mean, in this category in this industry, customer development is 12 to 24 months cycle. And so, really, we feel we felt like it was worth referencing today, simply because the efforts are starting to pay dividends in terms of revenue growth and was worth highlighting, but this is something we candidly have been working on since probably the end of 2020.

Understood, I'll leave it there. Congrats.

Your next question comes from the line of Andrew Strelzik with BMO Capital Markets, your line is open.

Hey, good afternoon. Thanks for taking the questions. I guess I wanted to tack onto the question about elasticity and just talk generally about plant based demand. I guess, what's your sense for how the category would holds up in a softer spending environment? I guess that the customer for that category probably skews more higher income. I don't know if there's an interplay with food service to think about, I'm just I'm just curious how you think about generally speaking the plant based category, in the event that we get into a type of consumer environment?

Yes, Andrew, I think there's a couple things to consider; one, the category does skew higher income. Second is, this is a category where many people are in the category for either health reasons, meaning they believe that these are healthier products to consume versus the alternative, or they have a dairy allergy and the alternative isn't available to them. So typically, what I've seen in 30 years in food is, consumers are loath to trade off a product that they're purchasing for a health reason and make an unhealthier choice just to save $0.50, that’ll cut something else in their overall spending budget before they'll sacrifice their own personal health.

Okay, that makes sense. And then, on the operational side, some of the strides that you made this quarter really kind of tighten down the execution, some of those things, and the productivity. Can you just talk about what drove that? I mean, was that really getting over the hump from a training perspective and a staffing perspective? Or was there just curious kind of how you think about what drove those dynamics?

Yes, I think, as we referenced on the Q4 call, we were slightly frustrated with our Q4 production simply because we had hired, the majority of the people that that we needed, and we just weren't getting the output. And to say that the team rose to the challenge and started knocking the ball out of the park, that understatement. I mean, almost 20% production growth in Q1 versus Q4. And it’s worth pointing out, I mean, Q1 was not without headwinds. And so to post those numbers, record quarter, flat 8%, versus our best quarter ever, in the history of the company, I think really speaks to us as an operations manufacturing driven company who knows how to run these plants. And, I think you see that in the numbers. I mean, we're an operations company, we're not a marketing company, we're not just a brand, we're operators is what we do, and it was great to get our mojo back.

Absolutely. And then, just my last one, if I could, I guess I'm just trying to understand how to think about the food segment going forward, and you're talking about sequential margin improvement, generally, there was the note of the one-time volume contribution, maybe you can frame how big that was. But knowing the context of that, and what was for us a better performance in that segment than we were anticipating, how should we think about the sustainability of that throughout the rest of the year? Thanks,

Andrew, this is Scott. So yes, the reason we called out the so called one-time distribution was just from a go forward standpoint, by definition, we didn't assume that's going to repeat. So, the 18% 19% growth in the quarter, roughly half of that or approaching half of that was driven by that outside of normal distribution revenue. So, again, I think we're pleased with the results in Q1. I'm generally bullish about seeing it continued solid progress and fruit really for the balance the years. So yes, I think it's consistent the narrative of the company.

Good. Okay. Thanks. I'll pass it on.

Your next question is from the line of John Anderson with William Blair. Your line is open.

Good afternoon, everybody. Thanks for the questions. Maybe just kind of tagging on to that last question. The piece of the fruit based food and beverage growth in the quarter, it was related to that order one-time order from a large customer, does that come out of Q2? Or was that kind of a pipeline filler or something? Just trying to understand if that's going to have to come out of the Q2 revs as we think about modeling that?

Yes, good question, John. No, it doesn't come out of Q2, it was that customer they had a shortfall from another supplier. And they asked us if we could step in and fill in, while they were scrambling, and we happen to have the inventory available to help them out. And so we did, but it was outside of kind of the core divisions for that particular customer that we cover.

Got it. That's super helpful. And as you think about the fruit based business for the balance of the year, let's say it grew, 9% or 10% x that order? I mean, are you seeing a similar kind of level of growth through the balance of the year? Or is it not that simple given maybe some comparison issues or other factors?

As I understand, I think it's a good representation of what I would see from Qs two to four is keep in mind, it's nuanced, because we have a bunch of SKU wrap that we're copying year over year. But put that aside, I think it's representative of what we would expect to see even balanced view.

Okay, super helpful. Shifting over to the -- well, let me actually stay with fruit. Could you talk a little bit about the harvest sourcing, fruit availability, food costs, and how that may? What kind of implications that may have on margins for that particular segment?

Yes, John. So, the core of our food operations is now based in Mexico as we've closed a significant number, and taken almost 8% of the square footage out of California. And so Mexico has really become kind of the cornerstone of our fruit business. We had a very successful very season availability and pricing and quality were all good that berry season is wrapping up. So almost threw it in Mexico that California season is just starting. So very early days, but no major reports, either kind of good or bad, just it's early days there. So nothing hitting us from a negative standpoint at that point. But, as you know, for it's a dynamic business.

Right, but it's good to hear because we've had kind of three seasons that have been let's call it less than normal, right?

Yes. So volumes and availabilities were add or, maybe even exceeded our expectations a bit in terms of availability of fruit. And again, pricing was in line with, where we we’re expecting it, so no surprises.

Okay. So the next thing I want to do is dig into the plant based business and talk about capacity because your plan is to double that business 2020 to 2025. It was a $415 million business in 2020. So, implies a 30 doesn't take a rocket science to get there even I can do that. But you talked a little bit about your capacity expansion programs, and you had some capacity that you added in 2021. You have more capacity that you're adding in 2022 and then some more in 2023. So can you kind of walk us through, where you are today, in terms of total capacity to serve as the business and then, with the addition of Midlothian at the end of the year, how does that step up your capacity? And then with the ingredients, I guess, another extraction facility in the third quarter out west? Where that takes you? I mean, does that get you the capacity you need to aggregate to do north of $800 million? Or is there more on the come? I know there's a lot there. But I'm really just trying to understand the sequence here and how that builds your capability and capacity to hit that target?

Yes, so six projects, equal doubling of the revenue potential of the business. So sick, six projects, add circa $400 million, four of the six are already done. They're already producing cases are already in our run rate. I mean, as a reminder, we grew revenue $100 million from 2019 2021. So, we're already realizing the value of the capacity additions, this isn't all a, just hold your breath and wait for it. It's coming. So four of the six projects are completed. Those four projects in aggregate, are equal to let's call it $150 million is what I've referenced. So those four projects give us $150 million. Then we've got another project coming on in Modesto. We haven't quantified that. But between that project in Modesto plus Texas, that is the balance, call it the remaining 250. And as you would expect, John, the Texas project is a significant majority of the remaining 250 to go.

Sure.

And then as it relates to the second extraction facility that is over and above the doubling.

Okay. And you mentioned, is that attack on to Modesto? Or is that a wholly new location?

Good question. We are doing that inside of Modesto, so much easier to execute. As you know, as you would suspect there are a lot of supply chain challenges doing construction right now. And we found a way to do it inside of Modesto. So that is expediting that project for us. And we're excited about as I referenced to me, we're selling every drop of milk we can make right now. So we're excited to get that project moving.

Okay. And I think if I heard you right, you said that you're basically sold out of your existing extraction capacity. And that's where I think much of the growth I mean, you have broad base gross and plant based I think it's been higher within that ingredient portion. Does that slow you down? Is that a limiter here on the plant base growth until you can get the second facility up in 2023? How does that work into the goal of delivering double digit or mid teen plant based growth?

Yes, I thought you might ask that question. So we -- so just to anchor in 2021, we did 80 million in revenue in OBS products. And on the Q4 call we said we did $80 million about and we could grow 50% off of that number. So we can grow 50% in 2022. So we can we can put up these are estimate numbers, John, but we can grow out sales $40 million in 2022. And what I what we are communicating is we're kind of at that pace, meaning at that $120 million pace in Q1. But if we do that same number in Q2, Q3 Q4, obviously on a year over year overlap basis, that represents pretty significant growth. Because we can grow 50% for the full year.

Okay.

And then as it relates to and your next question might be, what about Q1 and Q2 of 2023? Are you going to be stuck until Modesto comes online? We are aggressively working to find other sources of base from other suppliers to help us bridge we've got obviously almost a year to figure that out. But we're working on that now to identify additional sources of oat-based and how to squeeze more productivity out of our existing facility which we try to do every single day.

Yes. Okay. And then with your largest customer are you seeing mix shifting your business with your largest customer? I mean, are some forms or crop forms declining in favor of oat? And do you still fully expect to be kind of a permanent factor in their oat-based business?

Absolutely. To the second part of your question. Yes, we're definitely seeing some mix shift. Again, we're seeing category growing, plant based milks within foodservice growing and oat milk doing well, both growing total kind of category, if you will, but also sourcing some volume from the other formats, but you know, there's some promotional impact there. So really, it needs to be a kind of longer time based answer to the question. But the old milk isn't 100% incremental, that we've not seen it be 100% incremental in food service. And, we continue to service all our old customers that are very, very high level. And, we expect to be in business for a long, long time.

Okay, I've got so many here, I got to stop, let someone else ask? I think I'm going to do a couple more. So you're seeing you covered? It sounds like on the inflation side, you covered everything that $2 million, is that right, in the quarter. So do you only need or do you plan another $2 million in pricing? Or have other commodities moved? Higher? Such that, what kind of price I guess, are you thinking, just generically speaking, which businesses? What kind of magnitude? And when does it go in?

It's a customer by customer answer to your question, John. So I don't want to kind of go down to that granular level. But yes, we -- as you might expect, I mean, we certainly have pricing in the market that will cover that $2 million, and then any other inflationary factors that we've seen subsequently.

But when you say in the market, you mean, you've communicated it? If we don't, we'll be effective at some date in the future?

Yes, I mean, that's what I was saying. I mean, we just went through this yesterday with the team, I mean, some are effective. 51, some 516, some 616. I mean, there's, it wasn't just one blast of a price increase to everyone. These are handled customer by customer product by product, plant by plant.

Okay, cool. And then to click on so I just want to confirm this that I heard this right. Gross Margin rate, and EBITDA margin rate will improve sequentially throughout the year. Ours is Q1?

Correct. You heard that right. John.

Okay. And last one, I promised the acquisition contribution in the quarter in dollars.

It’s around 5 million John.

5 million. Great. I apologize for all the questions, but thank you for the time and see you in June 2. Is that it?

Yes. Correct.

Your next question is from the line of Mark Smith with Lake Street Capital Markets. Your line is open. Mark Smith, your line is open.

Yes. Hey, can you guys hear me?

Yes.

Perfect. Hey, guys. Just wanted to ask first on the kind of the Delta in oat milk, share, kind of where it's gone from maybe over the last 12 months and kind of where you think that share goes as well as kind of any industry growth trends that you can give us on milk would be great?

So just so I'm clear, would you say where has the within the category where has all males taken share from other formats?

No, I guess it's more so your share of oatmilk where that's at today? And where that's kind of come from maybe 12 months ago?

Yes, I mean, we have been partnered with two of the big players in the oat milk category two of the top five brands, and they continue to rip in the marketplace, both of them growing faster than the market. And so, we've really roll the momentum that they have in the marketplace. And, we're certainly appreciative and humbled by the consumers’ response to our oat-based, which obviously is winning in the marketplace.

Okay.

So that has not us winning business away from somebody else. These are existing customers that we've worked with for several years now.

Okay, and then just catch us up on kind of maybe the growth in food service, and how that is today maybe versus pre pandemic.

Q1 was we saw solid growth in foodservice in total. And, oatmilk is obviously a key driver of that food service gain, it is a great product and coffee applications. And consumers are discovering that. And we continue to see oatmilk driving good growth in the foodservice channel.

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I guess it's just general improvement in the business. It's not a call, per se on inflation, I think that's the spirit, I think that the environment remains pretty choppy. So I think it's just the continuation mark of what we've seen in Q1 continuing to strengthen Q2. Mark, I would just, I would remind to you that, raw material inflation is margin -- gross profit margin rate destroying, because if you have $20 million of ingredient inflation, and you pass on $20 million, the cost increases, that reduces gross margin by enough in the case of our business, roughly 100 basis points. No change to gross profit dollars. But the rate goes down.

Perfect. Thank you guys.

Your next question is from line of Alex Furman with Craig Hallum, your line is open.

Great, thanks very much for taking my question. I wanted to ask about the new rebranded West life. What kind of a response have you been getting from consumers and retailers from the rebrand? And given that this brand has such a strong and consistent supply? Do you think that this could potentially become a major brand in the category over time?

Yes, so that branding, and that product innovation that we showcase that expo West will start to go in in the second half of Q3. So we use Expo West as the forum to kind of launch that to the marketplace, but it has not started shipping yet. As it relates to the customer response. It's been really good, they're excited, there hasn't been a lot of innovation and shelf stable plant based milk. And so they're excited to see somebody like SunOpta step up with some truly consumer grounded insight driven product innovation. And, we would expect distribution gains on both of the brands, both Dream and Westlife.

Okay, that's really helpful. Thank you.

Your next question comes from the line of Brian Holland, with Cowen. Your line is open.

Can't get rid of me that fast. One last follow up if I could a bit of a nuanced question, I'd say beating down this capacity. But, obviously talked about the capacity project to double you out to 2025. But aside from just from a volume standpoint, you've taken significant pricing in response. I'm just curious, does the value of the capacity go up as well as you think that out? Because 10% on 800 plus millions, another 80 million? Or are you just kind of working off the assumption that just given the nature of your business that you would be that pricing would roll back in a more normalized environment?

Brian, we have not adjusted the capacity we're adding for current pricing. When we've looked at that we're really aggregating our internal capital project underwriting. And then making sure that takes some time, but we've not gone back and readjusted all those capacity numbers for -- what might be a perpetual new normal pricing environment. But you're correct in that, if the pricing we have today stays where it is, some of those capabilities, those assets, that'd we’ve added, it would produce more revenue certainly.

Understood. I can leave it there. Thanks again for that.

There are no further questions at this time. I will now turn the call back over to Mr. Joe Ennen for closing remarks.

Great, thank you, operator and thank you for everyone for participating in our first quarter conference call. Look forward to speaking and seeing some of you in person soon and appreciate your interest in SunOpta. Have a great evening.

Ladies and gentlemen, thank you for participating. This concludes today's call. You may now disconnect.