11 October 2024
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SunOpta: Announces Q3 Fiscal 2016 Financial Results

Toronto / CA. (so) SunOpta Inc., a leading global company focused on organic, non-genetically modified and specialty foods, announced financial results for the third quarter ended October 01, 2016. All amounts are expressed in U.S. Dollars and results are reported in accordance with U.S. GAAP, except where specifically noted. SunOpta also highlighted its expectations to achieve previously disclosed mid-term targets, announced governance and management changes and provided an update on the value creation plan under development with assistance from its partner, Oaktree Capital Management L.P.

Third Quarter 2016 Highlights

  • Revenues of 348.7 million USD for the third quarter of 2016, versus 348.1 million USD in the second quarter of 2016 and 277.2 million USD in the third quarter of 2015, an increase of 25.8 percent versus the prior year period.
  • Loss from continuing operations of 3.4 million USD or 0.04 USD per diluted common share in the third quarter of 2016, compared to a loss from continuing operations of 0.2 million USD or 0.00 USD per diluted common share in the third quarter of 2015. Adjusted earnings per diluted common share were 6.3 million or 0.07 USD per diluted common share during the third quarter of 2016, compared to 4.7 million USD or 0.07 USD per diluted common share during the third quarter of 2015.
  • Adjusted Ebitda¹ of 26.7 million USD or 7.6 percent of revenues for the third quarter of 2016, versus 13.2 million USD or 4.8 percent of revenues in the third quarter of 2015.

Year-to-Date 2016 Highlights

  • Revenues of 1’049.2 million USD for the first three quarters of 2016, versus 828.8 million USD in the first three quarters of 2015, an increase of 26.6 percent.
  • Loss from continuing operations of 17.1 million USD or 0.20 USD per diluted common share, compared to earnings from continuing operations of 10.6 million USD or 0.15 USD per diluted common share during the same period in 2015. Adjusted earnings per diluted common share were 13.1 million USD or 0.15 USD per diluted common share for the first three quarters of 2016, compared to 16.5 million USD or 0.24 USD per diluted common share during the first three quarters of 2015.
  • Adjusted Ebitda¹ of 72.3 million USD, or 6.9 percent of revenues year to date, versus 44.0 million USD, or 5.3 percent of in the same period of 2015.

Governance and Management Transitions

President and Chief Executive Officer Rik Jacobs and Chair of the Board Alan Murray will be stepping down from their respective positions, Jacobs effective November 11, 2016 and Murray effective today. Current SunOpta Director Katrina L. Houde will serve as interim CEO and Director Dean Hollis has been appointed Chair of SunOpta’s Board of Directors. The Board has initiated a search process for a CEO.

«On behalf of the Board, I would like to thank Rik and Alan for their years of service and wish them well in their future endeavors», said Dean Hollis, Chairman of SunOpta. «The Company has gone through a significant amount of change in a relatively short period of time and they were tireless in their efforts to provide a strategic vision, keep the Company on track to meet its stated mid-term targets, while also playing key roles in a review process to produce an outcome that could benefit all of the Company’s stakeholders».

Added Hollis, «The Board would also like to thank Kathy for taking on the role of interim CEO. Her significant operating experience as well as her deep contacts with the SunOpta management from her 15 years on the Board of SunOpta provides a strong foundation for this interim role. She will be supported by the Operations Transformation Committee of the Board and the substantial resources that Oaktree has committed to SunOpta as it progresses a plan to help the Company realize its potential and create value for all shareholders».

Value Creation Plan Update

As announced on October 7, 2016, 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 strategy built on four pillars: portfolio optimization, operational excellence, go-to-market effectiveness and process sustainability.

The Company continues to believe it has the ability to achieve its mid-term targets, in the timeframe provided, as furnished in April 2016. These targets were established based on a fulsome review of the Company’s platforms and, on a consolidated basis, targeted Ebitda margin of between 8.5 percent and 10.5 percent of sales.

In order to support our efforts to meet or exceed the mid-term targets, the Company, together with Oaktree, has continued to make progress on its value creation plan. Key updates include:

Portfolio Optimization

  • SunOpta continues to review its product offerings and is focused on simplifying the portfolio. The Company will invest in areas where it has a structural advantage and will assess the impact of exiting product lines where SunOpta is not effectively positioned.
  • The Company has announced the intention to close its juice processing and packaging facility in San Bernardino, CA. The closure is expected to generate at least 4.0 million USD of Ebitda improvement annually, which should start to be realized in the first quarter of 2017.

Operational Excellence

  • SunOpta is committed to ensure quality performance and improve operational excellence and has also identified significant savings opportunities in procurement and logistics.
  • The Company plans to engage third party support in manufacturing, procurement and logistics to enhance quality and capture savings.

Go-to-Market Effectiveness

  • The Company is working to optimize the customer and product mix in existing channels and is also exploring opportunities across new channels to identify unmet market demand.
  • The foodservice channel offers a substantial opportunity for the Company and additional resources will be deployed to develop this area.
  • SunOpta’s sales efforts will be reorganized by channel, rather than geography.

Process Sustainability

  • The Company is focused on simplifying and strengthening the organization, improving plant operating levers, augmenting asset flexibility and capacities, investing in systems that can provide detailed data on supply chain and manufacturing processes to support commercial strategies and optimize working capital.
  • SunOpta will develop and incentivize a culture rooted in accountability, results and continuous improvement.
  • SunOpta has created a Project Management Office to manage all critical activities and work streams.

«The strategic investment by Oaktree was a first step in the positive changes this Board and management intend to bring to SunOpta», said Katrina L. Houde, interim-CEO. «The due diligence that Oaktree undertook was extensive and allowed them to immediately bring forward recommendations for a value creation framework that will drive more reliable results, reshape our operating platform to focus our product portfolio and marketing support resources, and allow us to truly instill a system and culture of operational excellence that is achievable and sustainable over the long-term».

Added Houde, «There is broad recognition that SunOpta is a unique company with quality products and a number of competitive advantages that can be fully developed. While we have known that focus and execution were paramount to success, working with Oaktree has allowed the Company to immediately address several legacy issues, identify opportunities to drive margin expansion, invest in ways that augment revenue growth, all while continuing to innovate and pursue the highest of quality control standards».

Third Quarter 2016 Results

Revenues for the third quarter of 2016 were 348.7 million USD, essentially flat with the second quarter of 2016 and up 25.8 percent compared to the third quarter of 2015 mainly due to the 2015 acquisition of Sunrise. Revenue was negatively impacted by approximately 5.0 million USD during the third quarter due to the recall of certain sunflower products and a fire at a third party contract manufacturing facility. Excluding the impact on revenues in the third quarter of 2016 of business acquisitions and associated product rationalizations, the estimated impact of the revenue shortfall due to the sunflower kernel and the fire at a third-party facility, and changes in commodity-related pricing and foreign exchange rates, revenues decreased 0.9 percent, compared with the third quarter of 2015. This decrease in revenues reflected lower volumes of specialty raw materials driven by a planned reduction in contracted acres and lower sales of frozen fruit due to timing of sales into the food service channel, offset by increased demand for organic ingredients and growth in aseptic beverage volumes.

The Consumer Products segment generated revenues from external customers of 211.6 million USD during the third quarter of 2016, an increase of 11.6 percent compared to 189.6 million USD in the second quarter of 2016, and an increase of 67.0 percent compared to the prior year due to acquired businesses. The sequential growth compared to the second quarter of 2016 was driven by increased sales of both IQF fruit and beverages. Excluding the impact of business acquisitions and associated product rationalizations and the fire at a third-party facility, revenues in Consumer Products increased 0.6 percent compared to the third quarter of 2015 reflecting a 5.0 percent decline in sales of frozen fruit, offset by 15.5 percent growth in beverages.

The Global Ingredients segment generated revenues from external customers of 137.2 million USD, a decline of 13.5 percent compared to 158.5 million USD in the second quarter of 2016 and a decline of 8.9 percent compared to 150.5 million USD in the prior year. The sequential decline was driven primarily by lower crop input sales which are mostly sold in the second quarter as well as normal seasonality in internationally sourced organic ingredients. Excluding the impact on revenues of changes in commodity-related pricing and foreign exchange rates, Global Ingredients revenue decreased 3.1 percent in the third quarter of 2016, compared with the third quarter of 2015 reflecting a 24.2 percent decline in domestic sourcing from lower volumes of specialty raw materials driven by a planned reduction in contracted acres and lower sales, partially offset by 16.0 percent growth in internationally sourced organic ingredients.

Gross profit was 41.0 million USD for the third quarter of 2016, compared with 36.0 million USD in the second quarter of 2016 and 26.3 million USD for the third quarter of 2015. As a percentage of revenues, gross profit for the third quarter of 2016 was 11.8 percent compared to 10.3 percent in the second quarter of 2016 and 9.5 percent in the third quarter of 2015. Excluding the impact of an acquisition accounting adjustment related to the sale of Sunrise inventory and losses caused by the interruption of production in our roasting operations, the gross profit percentage for the third quarter of 2016 would have been approximately 12.3 percent, compared to 11.5 percent in the second quarter of 2016. The sequential improvement in gross profit reflects increased volumes of IQF fruit and improved production efficiencies within our frozen fruit operations as some losses from early season crop shortages were recovered.

Operating income¹ was 13.2 million USD, or 3.8 percent of revenues, compared to operating income of 8.8 million USD or 2.5 percent of revenues in the second quarter of 2016, and operating income of 4.1 million USD, or 1.5 percent of revenues in the third quarter of 2015. The increase in operating income year-over-year is attributable to higher gross profit, offset by a 2.9 million USD increase in selling, general and administrative expenses and an increase of 2.0 million USD in intangible asset amortization, mainly reflecting incremental expenses from acquired businesses. The operating income percentage for the third quarter of 2016 would have been approximately 4.8 percent, excluding the items mentioned above that impacted gross profit, and the impact of legal costs mainly related to the Plum dispute, which totaled 0.3 million USD for the quarter, and the strategic review.

Other expense includes an impairment charge of 10.3 million USD, reflecting a write-down of the carrying value of fixed assets in conjunction with the Company’s decision to exit the San Bernardino juice facility. The Company expects to incur additional charges associated with the facility closure over the next one to two quarters.

Adjusted Ebitda¹ was 26.7 million USD or 7.6 percent of revenues in the third quarter of 2016, compared to 13.2 million USD or 4.8 percent of revenues in the third quarter of 2015.

The Company reported a loss from continuing operations for the third quarter of 2016 of 3.4 million USD, or 0.04 USD per common share, compared to a loss from continuing operations of 0.2 million USD, or 0.00 USD per diluted common share during the third quarter of 2015. Adjusted earnings¹ in the third quarter were 6.3 million USD or 0.07 USD per diluted common share, compared to Adjusted earnings¹ of 4.7 million USD or 0.07 USD per diluted common share in the third quarter of 2015. Please refer to the discussion and table below under «Non-GAAP Measures – Adjusted Earning».

Year-to date 2016 Results

Revenues for the first three quarters of 2016 were 1’049.2 million USD, up 26.6 percent compared to the first three quarters of 2015 mainly due to the acquisition of Sunrise. Revenue was negatively impacted by approximately 8.0 million USD during the first three quarters due to the recall of certain sunflower products and a fire at a third party contract manufacturing facility. Excluding the impact on revenues in the first three quarters of 2016 of business acquisitions and associated product rationalizations, the estimated impact of the revenue shortfall due to the sunflower kernel and the fire at a third-party facility, and changes in commodity-related pricing and foreign exchange rates, revenues increased 1.7 percent, compared to the prior year.

Gross profit was 108.9 million USD for the first three quarters of 2016, compared with 85.1 million USD for the first three quarters of 2015. As a percentage of revenues, gross profit for the first three quarters of 2016 was 10.4 percent compared to 10.3 percent in the third quarter of 2015. The gross profit percentage for the first three quarters of 2016 would have been approximately 11.8 percent, excluding the impact of an acquisition accounting adjustment related to Sunrise’s inventory sold in the first three quarters of 2016, start-up costs related to the ramp-up of production at our Allentown aseptic facility, and losses caused by the interruption of production in our roasting operations.

Operating income¹ in the first three quarters of 2016 was 24.7 million USD, or 2.4 percent of revenues, compared to 23.0 million USD, or 2.8 percent of revenues in the first three quarters of 2015. The operating income percentage for the first three quarters of 2016 would have been approximately 4.1 percent, excluding the items mentioned above that impacted gross profit, and the impact of legal costs mainly related to the Plum dispute, which totaled 1.6 million USD year to date, and the strategic review.

Other expense includes an impairment charge of 10.3 million USD, reflecting a write-down of the carrying value of fixed assets in conjunction with the Company’s decision to exit the San Bernardino juice facility and 1.7 million USD related to the closure of the Buena Park, CA facility. The Company expects to incur additional charges associated with the facility closure over the next one to two quarters.

Adjusted Ebitda¹ was 72.3 million USD or 6.9 percent of revenues in the first three quarters of 2016, compared to 44.0 million USD or 5.3 percent of revenues in the first three quarters of 2015.

The Company reported a loss from continuing operations for the first three quarters of 2016 of 17.1 million USD, or 0.20 USD per diluted common share, compared to earnings from continuing operations of 10.6 million USD, or 0.15 USD per diluted common share during the first three quarters of 2015. Adjusted earnings were 13.1 million USD or 0.15 USD per diluted common share for the first three quarters of 2016, compared to 16.5 million USD or 0.24 USD per diluted common share during the first three quarters of 2015. Please refer to the discussion and table below under «Non-GAAP Measures – Adjusted Earnings».

Balance Sheet

At October 1, 2016 SunOpta’s balance sheet reflected total assets of 1’204.2 million USD and total debt of 546.3 million USD. Total debt declined approximately 12 million USD from the end of the second quarter of 2016. At October 1, 2016 leverage was approximately 5.8 times Adjusted Ebitda¹ on a trailing four quarter adjusted basis, after eliminating the negative impact on Ebitda from the San Bernardino juice facility.

Subsequent to the end of the third quarter, the Company announced a strategic partnership with Oaktree Capital Management LP. On October 7, 2016, Oaktree invested 85.0 million USD in cumulative, non-participating Series A Preferred Stock of the Company’s subsidiary, SunOpta Foods Inc., that are exchangeable into common shares of SunOpta Inc. in accordance with the terms and conditions of the preferred stock. The net proceeds from the issuance of the preferred stock were used to repay 79.0 million USD of borrowings under the Company’s second lien loan, reducing the aggregate principal amount of the second lien loan to 231.0 million USD. On a pro forma basis, giving effect to the reduction in the Company’s second lien loan, leverage at October 1, 2016 would be approximately 5.0 times. Based on reduced seasonal working capital demands, the Company expects a further decline in its debt and leverage during the fourth quarter of 2016.

On October 9, 2016, the remaining 231.0 million USD aggregate principal amount of second lien loans matured and automatically converted into a like principal amount of term loans, bearing interest at 9.5 percent, with a maturity date of October 9, 2022. On October 20, 2016, all of the outstanding term loans were exchanged for a corresponding amount of 9.5 percent senior secured second lien notes due 2022.

During the second quarter of 2016, the Company announced a voluntary recall of certain roasted sunflower kernel products produced at its Crookston, Minnesota facility. For the first three quarters of 2016, estimated losses of 28.0 million USD were recognized in relation to the recall. The Company carries general liability and product recall insurance, and it expects to recover recall-related costs through these policies, less applicable deductibles and subject to coverage limits. As a result, during the first three quarters of 2016 the Company recorded estimated insurance recoveries of 27.4 million USD for the losses recognized to-date. These estimates reflect the amount of losses that have been determined to be both probable and reasonably estimable. As the Company continues to work with its customers and insurance providers to substantiate claims received, it may need to revise its estimates in subsequent periods.


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