SunOpta: Q1 2017 Financial Results
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TORONTO - SunOpta Inc. (“SunOpta”) (STKL) (SOY.TO), a leading global company focused on organic, non-genetically modified and specialty foods, announced financial results for the first quarter ended April 1, 2017.
“We have made significant progress during the first quarter, executing several key strategic actions including building out our senior leadership team, improving our food safety and quality programs, driving operational efficiencies and enhancing our go-to-market capabilities,” said David Colo, Chief Executive Officer. “I am pleased with how quickly we have been able to build the senior leadership team. All key positions are now filled. The rapid success of our recruiting efforts and the high quality of talent we have attracted underscores the opportunity at SunOpta. We are now aggressively focused on executing against each of the four pillars of the Value Creation Plan. I am very encouraged by the level of engagement across the organization.”
Colo continued, “First quarter results reflected a meaningful revenue, gross profit and adjusted EBITDA recovery from the fourth quarter of 2016, after considering the significant non-structural costs incurred to lay the groundwork for our turnaround. As we previously communicated, we expect our margins to improve throughout the year as a result of our cost savings initiatives. We expect our pipeline of revenue opportunities to grow as the year progresses as a result of our go-to-market effectiveness actions. We remain confident with our targeted improvements to EBITDA this year and we are making the necessary investments now to accelerate and sustain future profit improvements. While there is significant work to do, we are making tangible progress on creating the platform necessary to deliver long term, sustainable value for our shareholders. We look forward to providing quarterly updates on our continued progress towards improving our gross profit, Adjusted EBITDA and sales pipeline expansion.”
All amounts are expressed in U.S. dollars and results are reported in accordance with U.S. GAAP, except where specifically noted.
First Quarter 2017 Highlights:
Revenues of $330.0 million for the first quarter of 2017, compared to $352.3 million in the first quarter of 2016 and $297.5 million in the fourth quarter of 2016, a decrease of 6.3% and an increase of 10.9%, respectively.
Loss from continuing operations of $11.4 million or $0.16 per diluted common share in the first quarter of 2017, compared to a net loss from continuing operations of $9.7 million or $0.11 per diluted common share in the first quarter of 2016, and $33.5 million or $0.41 per diluted common share in the fourth quarter of 2016.
Adjusted loss from continuing operations of $0.9 million or $0.01 per diluted common share in the first quarter of 2017, compared to adjusted earnings of $2.7 million or $0.03 per diluted common share in the first quarter of 2016, and an adjusted loss of $7.3 million or $0.08 per diluted common share in the fourth quarter of 2016.
Adjusted EBITDA¹ of $18.9 million or 5.7% of revenues for the first quarter of 2017, versus $22.1 million or 6.3% of revenues in the first quarter of 2016 and $9.4 million or 3.2% of revenues in the fourth quarter of 2016.
Value Creation Plan Update
As previously announced, SunOpta, with the assistance of Oaktree, is conducting a thorough review of the Company's operations, management and governance, with the objective of maximizing the Company's ability to deliver long-term value to its shareholders. Through this review, management and the Board have developed a Value Creation Plan built on four pillars: portfolio optimization, operational excellence, go-to-market effectiveness and process sustainability.
As part of the first phase of the Value Creation Plan, the Company is targeting implementation of $30 million of productivity-driven annualized enhancements of EBITDA, to be implemented over 2017 and 2018. In the near-term, these benefits are expected to be offset by structural investments made in the areas of quality, sales, marketing, operations and engineering resources. Additionally, the Company is incurring non-structural third-party consulting support, severance, and recruiting costs. The plan also calls for increased investment in capital upgrades at several manufacturing facilities to enhance food safety and manufacturing efficiencies. Over time, these investments are expected to yield additional improvement in EBITDA beyond the $30 million of initial productivity-driven savings. Recent progress on each of the four pillars of the Value Creation Plan is highlighted below:
The focus of the process sustainability pillar is to ensure the Company has the infrastructure, systems and skills to sustain the business improvements and value captured from the Value Creation Plan. Broadening the skillset and experience of SunOpta’s leadership team is a critical component to the process sustainability pillar of the Value Creation Plan. During the first quarter of 2017 a substantial amount of activity was devoted to this pillar. Recent highlights include:
Filled the positions of Chief Executive Officer, Chief Operating Officer for Consumer Products, Chief Human Resources Officer, Chief Information Officer, Chief Quality Officer, Senior Vice President of Operations & Engineering, and Senior Vice President of Supply Chain.
Additional hiring to fill other management-level positions in the areas of sales, marketing, customer service, engineering, operations, quality, and other functional support services.
S&OP process implemented in key business segments to improve customer service levels.
ERP systems pilot work in progress at two manufacturing locations.
The Company has completed the hiring of all key senior leaders.
The focus of the operational excellence pillar is to ensure food quality and safety, coupled with improved operational performance and efficiency. These efforts are expected to generate productivity improvements and cost savings in manufacturing, procurement and logistics. Recent highlights include:
Launched network-wide upgrades to worker safety and food quality programs, with the goal of becoming a leader in safety and quality across the healthy food industry. Management’s top priority remains enhancing food safety and quality.
Early success in the Company’s working capital optimization efforts led to a significant year-over-year improvement in operating cash flow. The Company remains focused on achieving the targeted goal of a $20 million in working capital efficiencies over the course of 2017.
Since the initiation of the Value Creation Plan, the Company has implemented process improvements and cost savings expected to yield $1.3 million of annualized EBITDA benefits.
The focus of the go-to-market effectiveness pillar is to optimize customer and product mix in existing sales channels, and identify and penetrate new high-potential sales channels. The Company expects efforts under this pillar to improve revenue growth and profitability over time. Recent highlights include:
Implemented a revamped go-to-market approach emphasizing proactive engagement with current and prospective customers.
New business wins with existing and new customers, in existing and new categories, across frozen fruit, healthy beverage, and global ingredients.
Continued the build out of the food service and retail sales and marketing organization capabilities
Adjusted pricing of certain consumer product offerings driving expanded margins.
Since the initiation of the Value Creation Plan, the Company has implemented go-to-market improvements expected to yield $2.0 million of annualized EBITDA benefits.
The focus of the portfolio optimization pillar is to simplify the business, investing where structural advantages exist, while exiting businesses or product lines where the Company is not effectively positioned. Recent highlights include:
Appointed John Ruelle as Senior Vice President of Corporate Development
Continued evaluation of product rationalization opportunities to enhance margins
Since the initiation of the Value Creation Plan, the Company has implemented portfolio changes expected to yield $4.2 million of annualized EBITDA benefits.
First Quarter 2017 Results
Revenues for the first quarter of 2017 were $330.0 million, a decrease of 6.3% compared to $352.3 million in the first quarter of 2016. Excluding the impact on revenues for the first quarter of 2017 of changes in commodity-related pricing and foreign exchange rates, estimated impact of the recall of certain sunflower kernel products based on shortfall against anticipated volumes, and the estimated impact on west coast pouch operations as a result of a fire at a third-party facility, revenues in the first quarter of 2017 decreased by 3.1% compared with the first quarter of 2016. This decrease in revenues reflected lower volumes of specialty raw materials driven by a reduction in contracted acres, lower volumes of internationally sourced raw materials due in part to weather related delays, and a continued decline in retail market demand for frozen fruit products; partially offset by higher sales of aseptic and shelf-stable beverage products.
The Global Ingredients segment generated revenues from external customers of $130.3 million, a decline of 10.8% compared to $146.0 million in the first quarter of 2016. Excluding the impact on revenues of changes in commodity-related pricing and foreign exchange rates, and the estimated impact of the recall of certain sunflower kernel products based on shortfall against anticipated volumes, Global Ingredients revenue decreased 5.2% in the first quarter of 2017, compared with the first quarter of 2016, reflecting lower volumes of specialty raw materials driven by a reduction in contracted acres and lower volumes in internationally sourced raw materials.
The Consumer Products segment generated revenues from external customers of $199.7 million during the first quarter of 2017, a decrease of 3.2% compared to $206.3 million in the first quarter of 2016. Excluding the impact of a fire at a third-party facility, revenues in Consumer Products decreased 1.6% compared to the first quarter of 2016 largely reflecting a 12% decline in frozen fruit products.
Gross profit was $38.7 million for the first quarter of 2017, compared to $31.9 million for the first quarter of 2016. As a percentage of revenues, gross profit for the first quarter of 2017 was 11.7% compared to 9.1% in the first quarter of 2016. The gross profit percentage for the first quarter of 2017 would have been approximately 11.9%, excluding the impact of the lost margin caused by the sunflower recall as well as costs incurred to wind-down the San Bernardino facility.
Operating loss¹ was $3.0 million, or 0.9% of revenues, compared to operating income of $2.6 million, or 0.7% of revenues in the first quarter of 2016. The decrease in operating income year-over-year is due primarily to incremental SG&A expenses attributable to the Value Creation Plan. During the first quarter the Company incurred $11.4 million of non-structural costs relating to consulting fees, temporary labor, employee recruitment and retention costs. The operating income percentage for the first quarter of 2017 would have been approximately 2.7%, excluding the non-structural SG&A expenses and costs incurred to wind-down the San Bernardino juice facility that were included in costs of sales.
Adjusted EBITDA¹ was $18.9 million or 5.7% of revenues in the first quarter of 2017, compared to $22.1 million or 6.3% of revenues in the first quarter of 2016.
The Company reported a loss from continuing operations for the first quarter of 2017 of $11.4 million, or $0.16 per common share, compared to a loss from continuing operations of $9.7 million, or $0.11 per common share during the first quarter of 2016. Adjusted loss¹ from continuing operations in the first quarter of 2017 was $0.9 million or $0.01 per diluted common share, compared to Adjusted earnings¹ of $2.7 million or $0.03 per diluted common share in the first quarter of 2016. Please refer to the discussion and table below under “Non-GAAP Measures - Adjusted Earnings”.
Balance Sheet and Cash Flow
At April 1, 2017 SunOpta’s balance sheet reflected total assets of $1,123.9 million and total debt of $425.9 million. Total debt declined approximately $6.7 million from the end of fiscal 2016. Cash provided by operating activities was $19.5 million in the first quarter of 2017, compared to cash used in operating activities of $17.9 million in the first quarter of 2016. The increase in cash provided by operating activities was driven by reduced working capital, due in part to liquidity optimization efforts undertaken as part of the Value Creation Plan. Working capital requirements are seasonal, and the Company expects to use cash to fund working capital in the second quarter due primarily to the timing of the fruit harvest. At April 1, 2017 leverage was approximately 5.3 times Adjusted EBITDA¹ on a trailing four quarter adjusted basis, after eliminating the negative impact on EBITDA from the San Bernardino juice facility.
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.