Toronto / CA. (so) SunOpta Inc., a leading global company focused on organic, non-genetically modified and specialty foods, announced financial results for the second quarter ended June 29, 2019. «In the second quarter, we delivered consolidated revenue growth, adjusted for changes in our business, of 2.4 percent, led by accelerated growth rates in both our Healthy Beverage and Healthy Snack platforms, which increased 9.3 percent and 21.2 percent respectively,» said Joe Ennen, Chief Executive Officer at SunOpta. «Additionally, our Global Ingredients platform delivered adjusted revenue growth of 1.4 percent, as strength in Tradin Organic more than offset pressure in the domestic sunflower market.»
«In our Healthy Fruit business, we made progress on the first phase of our fruit margin optimization plan, and encouragingly, we are on plan with our efforts to lower variable labor costs through our investments in automation, increase our finished good production in Mexico, and reduce our processing yield loss, while also focusing commercial efforts to address pricing and contractual terms with customers. However, the weather-related shortfall of strawberry supply in 2019 from both Mexico and California is having a significant impact on gross profit. California freezer volume is down approximately 20 percent compared to 2018. We are experiencing similar shortfalls compared to our pack plan which is resulting in reduced production volumes and therefore lower overhead absorption and higher rework costs to fill orders, and is further compounded by higher fruit purchase prices, substitution, and labor as we take steps to produce more product in California to compensate for the Mexican strawberry shortfall. These supply issues weighed on profitability during the second quarter and are expected to continue in the near term as we sell through this season’s inventory and take actions to limit future revenue pressure due to the shortage of raw materials. Despite these weather-related crop issues, I am pleased with our fast and flexible response to service customers and our efforts to limit the overall impact to the Company. Our fruit operations were able to flex production schedules, and our sales team has been working with customers to establish service expectations and build sustainable pricing positions where we were misaligned. While our progress against the plan is being more than offset by significant strawberry sourcing challenges, we believe the structural improvements made are sustainable. As a result, we expect to drive improved profitability in Healthy Fruit as supply dynamics return to historical norms.»
«As we look forward to the second half of 2019, we anticipate accelerated growth in both Healthy Beverage and Tradin Organic. In Healthy Beverage, consumer demand for plant-based beverages continues to be robust. The expansion of our Allentown aseptic facility, which added approximately 20 percent system-wide incremental processing and filling capacity, was completed on time, and we are currently producing and shipping product run on the new lines in the third quarter. At Tradin Organic, we anticipate accelerated growth in the second half of the year, driven by improved throughput at our recently expanded organic cocoa operations and the smooth integration of Sanmark.»
«While the crop-related challenges we are experiencing in Health Fruit are disappointing, we are encouraged by the strong results and growing pipeline we see across the balance of our business. We remain focused on strengthening our product portfolio, accelerating customer-centric, margin accretive innovation, and executing our fruit margin optimization plan to drive growth, margin and long-term shareholder value.»
Second Quarter 2019 Highlights
All amounts are expressed in U.S. Dollars and results are reported in accordance with U.S. GAAP, except where specifically noted.
- Revenues of USD 293.0 million for the second quarter of 2019, compared to USD 319.3 million in the second quarter of 2018, a decrease of 8.2 percent. Adjusted for disposed operations, foreign exchange, commodity prices, a new contract manufacturing arrangement and the acquisition of Sanmark, revenues grew 2.4 percent during the second quarter.
- Loss attributable to common shareholders of USD 11.1 million or USD 0.13 per common share in the second quarter of 2019, compared to a loss attributable to common shareholders of USD 5.1 million or USD 0.06 per common share in the second quarter of 2018.
- Adjusted loss¹ of USD 9.0 million or USD 0.10 per common share during the second quarter of 2019, compared to an adjusted loss of USD 5.0 million or USD 0.06 per common share during the second quarter of 2018.
- Adjusted Ebitda¹ excluding disposed operations of USD 10.1 million or 3.5 percent of revenues for the second quarter of 2019, versus USD 12.7 million or 4.4 percent of adjusted revenues in the second quarter of 2018.
Second Quarter 2019 Results
Revenues for the second quarter of 2019 were USD 293.0 million, a decrease of 8.2 percent compared to USD 319.3 million in the second quarter of 2018. Excluding the impact on reported revenues of disposed business, including the soy and corn business (sold in February 2019) and exit from flexible resealable pouch product lines (exited in fiscal 2018), changes in commodity-related pricing and foreign exchange rates, a profit-neutral change to a co-manufacturing agreement, and excluding the impact of the acquisition of Sanmark in April 2019, revenues in the second quarter of 2019 increased by 2.4 percent compared with the second quarter of 2018.
The Consumer Products segment generated revenues of USD 176.0 million during the second quarter of 2019, an increase of 2.0 percent compared to USD 172.6 million in the second quarter of 2018. Excluding the impact of commodity-related pricing, sales of resealable pouch products in the second quarter of 2018, and a profit-neutral change to a co-manufacturing agreement, Consumer Products revenue in the second quarter increased by 3.1 percent. The growth primarily reflects a 9.3 percent increase in the Healthy Beverage platform consisting of favorable customer product mix and higher sales of aseptic plant-based beverages and favorable extraction volumes combined with a 21.2 percent revenue increase in the Healthy Snack platform driven by favorable volumes, partially offset by a 4.9 percent decline in the Healthy Fruit platform as a result of reduced demand for fruit ingredients and modest declines in volumes and pricing for frozen fruit.
The Global Ingredients segment generated revenues of USD 117.0 million, a decrease of 20.2 percent compared to USD 146.7 million in the second quarter of 2018. Excluding the impact on revenues from the divested soy and corn business, changes in commodity-related pricing and foreign exchange rates, and the acquisition of Sanmark, Global Ingredients revenue in the second quarter increased 1.4 percent. Adjusting for the items noted above, sales of internationally sourced organic ingredients grew 2.3 percent during the quarter, driven mainly by increased volumes of oils, nuts, coffee and cocoa, offset by lower volumes of grains, fruits and vegetables, sugars and liquid sweeteners. Sales of domestically sourced ingredients declined 5.5 percent during the quarter, primarily reflecting lower sunflower volumes, partially offset by higher roasted snack and ingredient volumes.
Gross profit was USD 27.3 million for the quarter ended June 29, 2019, a decrease of USD 7.0 million compared to USD 34.3 million for the quarter ended June 30, 2018. Consumer Products accounted for USD 5.3 million of the decrease in gross profit, mainly reflecting the impact of a substantial shortfall in strawberries from central Mexico and California due to poor weather conditions, which resulted in commodity price inflation and unfavorable production variances within the frozen fruit operations due to lower plant utilization and rework of bulk inventories to meet customer demand. The negative impact to gross profit from the strawberry shortage during the second quarter of 2019 was approximately USD 3.6 million. The unfavorability in Healthy Fruit was partially offset by favorable impacts within the Healthy Beverage and Snacks platforms from improved plant utilization due to higher production volumes to meet demand, and productivity-driven cost savings for aseptic beverages and fruit snacks. Global Ingredients accounted for USD 1.7 million of the decrease in gross profit primarily due to the sale of the soy and corn business, partially offset by higher sales volumes of organic ingredients.
As a percentage of revenues, gross profit for the quarter ended June 29, 2019 was 9.3 percent compared to 10.8 percent for the quarter ended June 30, 2018, a decrease of 1.5 percent. On a pro forma basis, which excludes the gross profit from disposed businesses, as well as USD 0.5 million of plant expansion and contract manufacturing transition costs in the second quarter of 2019, and in the second quarter of 2018 a claim recovery from a supplier for USD 1.2 million, less equipment start-up costs of USD 0.7 million, the gross profit percentage for the second quarter of 2019 would have been approximately 9.5 percent, compared with 10.7 percent for the second quarter of 2018.
Segment operating loss¹ was USD 2.5 million, or 0.9 percent of revenues in the second quarter of 2019, compared to operating income of USD 4.6 million, or 1.5 percent of revenues in the second quarter of 2018. The decrease in operating income year-over-year was primarily attributable to USD 7.0 million lower gross profit and a USD 0.3 million increase in SG+A due to higher employee-related compensation costs, partially offset by the sale of the soy and corn business and rationalized overhead, together with other cost reduction measures. Excluding the operating results of disposed businesses, as well as SG+A expenses related to employee retention and transition costs, our segment operating loss would have been USD 1.1 million for the second quarter of 2019, compared with income of USD 2.8 million for the second quarter of 2018.
Other expense for the second quarter of 2019 reflected employee termination costs of USD 0.7 million associated with the Value Creation Plan, and USD 0.2 million of legal fees associated with the sale of the soy and corn business, offset by a USD 0.5 gain related to a project cancellation.
Adjusted Ebitda¹ was USD 10.1 million or 3.5 percent of revenues in the second quarter of 2019, compared to USD 14.8 million or 4.6 percent of revenues in the second quarter of 2018. Excluding disposed operations, adjusted Ebitda for the quarter ended June 29, 2019 was USD 10.1 million, compared with USD 12.7 million for the quarter ended June 30, 2018.
The Company reported a loss attributable to common shareholders for the second quarter of 2019 of USD 11.1 million, or USD 0.13 per diluted common share, compared to a loss of USD 5.1 million, or USD 0.06 per diluted common share during the second quarter of 2018. Adjusted loss¹ in the second quarter of 2019 was USD 9.0 million or USD 0.10 per common share, compared to USD 5.0 million or USD 0.06 per common share in the second quarter of 2018. Please refer to the discussion and table below under «Non-GAAP Measures – Adjusted Earnings/Loss».
Balance Sheet and Cash Flow
At June 29, 2019, SunOpta’s balance sheet reflected total assets of USD 971.7 million and total debt of USD 498.5 million. During the second quarter of 2019, cash used in operating activities was USD 31.7 million, compared to cash used of USD 34.2 million during the second quarter of 2018. The USD 2.5 million decrease in cash used in operating activities reflects lower cash used to fund working capital, partially offset by decreased consolidated earnings primarily due to lower profitability in the Company’s Healthy Fruit platform. Cash used in investing activities was USD 12.9 million in the second quarter of 2019, compared with USD 10.0 million in the second quarter of 2018, an increase in cash used of USD 2.9 million due mainly to cash used to finance the acquisition of Sanmark in April 2019.
