Mr. Joe Ennen reports

SUNOPTA ANNOUNCES SECOND QUARTER FISCAL 2023 FINANCIAL RESULTS

SunOpta Inc. has released its financial results for the second quarter ended July 1, 2023.

All amounts are expressed in U.S. dollars and results are reported in accordance with U.S. GAAP (generally accepted accounting principles), except where specifically noted.

Second quarter 2023 highlights:

• Revenues of $207.8-million compared with $222.2-million (excluding the divested sunflower business) in the year-earlier period, or $243.5-million including sunflower. Excluding the impact of the sunflower business, which was divested in October, 2022, total revenues were down 6.5 per cent, reflecting an 8.1-per-cent decline in plant based and a 4.4-per-cent decline in fruit based.
• Gross profit margin was 7.9 per cent on a reported basis. Excluding start-up and product recall costs, gross margin was 12.1 per cent, down 230 basis points from 14.4 per cent as 90 basis points of margin expansion in plant based was more than offset by a decline in fruit-based margin, including a 320-basis decline for direct costs related to the frozen fruit recall.
• Loss from continuing operations, including tax expense of $8.8-million, mainly due to the recognition of a full valuation allowance for deferred tax assets and $2.5-million of net expense related to the frozen fruit recall, was $18.8-million, compared with earnings from continuing operations of $2.3-million in the prior-year period.
• Adjusted loss (1) attributable to common shareholders was $3.0-million or three cents per diluted common share, compared with adjusted earnings of $3.3-million or three cents per diluted common share in the prior-year period.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) (1) of $20.2-million or 9.7 per cent of revenues compared with $22.3-million and 9.2 per cent of revenues in the prior-year period. The prior-year period included a $2.4-million contribution from the divested Sunflower business.

"While we were certainly not pleased with the quarter, the resiliency of our model to deliver high rates of profitability despite a more challenging environment was a key takeaway from our latest results," said Joe Ennen, chief executive officer. "Due to frozen fruit customer losses, slower ramp-up of new business and current category softness, we are tempering our outlook for 2023. Demand for our oat-based offerings remains exceptionally strong, as volume growth drove a 59-per-cent increase in oat milk sales during the second quarter. Our fruit snack business also delivered another quarter of double-digit increases. In addition, we continue to make steady progress on our strategic growth initiatives, including starting up our new ready-to-drink protein shake line in Midlothian, Tex., and our capacity expansion project in Omak, Wash. Despite the short-term results, we remain committed to our long-term growth algorithm and are well positioned for significant growth in our plant-based segment as we leverage our operational expertise and innovation across our expanding capabilities and production capacity to fuel the future of food."

Second quarter 2023 results

Revenues of $207.8-million for the second quarter of 2023 decreased 6.5 per cent, excluding the divested sunflower business. This was driven by an 8.1-per-cent decline in plant-based foods and beverages, excluding sunflower, and a 4.4-per-cent decline in fruit-based foods and beverages. The decline, including sunflower, was 14.7 per cent compared with the second quarter of 2022.

The plant-based foods and beverages segment generated revenues of $114.5-million, a decrease of 8.1 per cent, excluding the impact of the sunflower business, which was divested in October, 2022. Including the sunflower business, the decline was 21.5 per cent compared with the second quarter of 2022. Pricing increased 3.2 per cent, reflecting the wrap-around benefit of actions in 2022, partially offset by an unfavourable volume/mix, which was down 10.2 per cent. Volume/mix reflected lower external sales of plant-based ingredients due to increased internal demand for oat base, lower demand for almond beverages, lower sales volumes of everyday broths and lower tea volumes due to a customer's inability to supply the company with their raw material. Partially offsetting these factors was volume growth from oat milks and creamers, as well as the newly introduced 330-millilitre protein shakes.

The fruit-based foods and beverages segment generated revenues of $93.3-million, a decrease of 4.4 per cent compared with $97.6-million in the second quarter of 2022, reflecting an unfavourable volume/mix impact of 4.5 per cent, partially offset by a 0.3-per-cent increase in pricing. The volume/mix impact was driven by lower volumes of frozen fruit, due to decreased retail consumption trends, constraints on certain fruit varieties impacting blends and lost food service volumes, partially offset by increased volumes of fruit snacks and smoothie bowls.

Gross profit was $16.4-million for the second quarter, compared with $34.9-million in the prior-year period, as reported. As a percentage of revenues, gross profit margin was 7.9 per cent, compared with 14.3 per cent in the second quarter of 2022, a decrease of 640 basis points, as reported.

Gross profit in the plant-based foods and beverages segment decreased 39.8 per cent to $14.4-million, while gross margin decreased 380 basis points to 12.6 per cent. Excluding the impact of start-up costs related to the new plant in Midlothian, Tex., adjusted gross margin for the plant-based foods and beverages segment was 17.5 per cent in the second quarter of 2023, compared with 16.6 per cent in the second quarter of 2022. The 90-basis-point increase in adjusted gross margin reflected the benefit of pricing actions taken in 2022 to combat inflationary pressures, positive margin impacts resulting from the divestiture of the lower-margin sunflower commodity business, and a mix shift in the company's plant-based ingredient operations. These factors were partially offset by incremental depreciation of new production equipment for capital expansion projects, together with the negative impacts of higher input costs and lower production volumes, and plant utilization within the plant-based operations.

Gross profit in the fruit-based foods and beverages segment was $2.0-million, compared with $11.0-million in the prior-year period, and gross margin decreased 910 basis points to 2.1 per cent. In the second quarter of 2023, the company recorded a reserve for unsaleable inventory associated with the frozen fruit product recall of $3.0-million (3.2-per-cent gross margin impact) and $200,000 of start-up costs related to a new high-speed fruit snacks packaging line. Excluding the impact of these costs, adjusted gross margin for the fruit-based foods and beverages segment was 5.6 per cent in the second quarter of 2023, compared with 11.2 per cent in the second quarter of 2022, a decrease of 560 basis points. The decrease reflected higher manufacturing costs, unfavourable plant utilization driven by reduced volumes, a higher mix of lower-margin bulk fruit sales to right-size inventories and improve working capital efficiency, and a higher cost of inventory from Mexico due to the impact of a strengthening Mexican peso (approximately $2.4-million or 2.6-per-cent gross margin impact).

Segment operating loss (1) was $3.3-million or 1.6 per cent of revenues in the second quarter of 2023, compared with segment operating income of $8.1-million or 3.3 per cent of revenues in the second quarter of 2022. The decrease in segment operating income was driven by lower gross profit, partially offset by a favourable $2.3-million foreign exchange impact and a $4.7-million decrease in SG&A (selling, general and administrative) expenses, as a result of lower employee incentive compensation accruals and lower stock-based compensation expense related to timing, partially offset by higher business development costs.

Loss attributable to common shareholders for the second quarter of 2023 was $19.3-million, or 17 cents per diluted common share, compared with income of $700,000, or one cent per diluted common share, during the second quarter of 2022. Loss attributable to common shareholders included tax expense of $8.8-million mainly due to the recognition of a full valuation allowance for deferred tax assets and $2.5-million of net expense related to the frozen fruit recall.

Adjusted loss (1) in the second quarter of 2023 was $3.0-million or three cents per common share, compared with adjusted earnings of $3.3-million or three cents per common share in the second quarter of 2022.

Adjusted EBITDA (1) was $20.2-million or 9.7 per cent of revenue in the second quarter of 2023, compared with $22.3-million or 9.2 per cent of revenue in the second quarter of 2022.

Balance sheet and cash flow

As of July 1, 2023, SunOpta had total assets of $887.1-million and total debt of $316.1-million, compared with total assets of $855.9-million and total debt of $308.5-million at year-end 2022. During the second quarter of 2023, cash provided by operating activities was $15.9-million, compared with cash used in operating activities of $2.5-million during the second quarter of 2022. Investing activities of continuing operations consumed $8.1-million of cash during the second quarter of 2023, versus $34.1-million in the prior year. The year-over-year decrease reflected the completion of certain major capital projects, including the construction of the company's new plant-based beverage facility in Midlothian, Tex.

Frozen fruit recall

On June 21, 2023, the company announced that its subsidiary, Sunrise Growers Inc., had issued a voluntary recall of specific frozen fruit products linked to pineapple provided by a third party supplier due to possible contamination by Listeria monocytogenes. In July, 2023, the company began restocking each of the affected retail customers with replacement products produced with fruit sourced from a different supplier.

For the quarter ended July 1, 2023, the company recognized net expenses of $2.5-million related to this recall, equal to the self-insured retention amount under its insurance policies, which included a reduction to revenues of $200,000 for customer returns and a $3.0-million charge to cost of goods sold for unsaleable inventory, partially offset by estimated insurance recoveries of $700,000, recorded in other income. The company expects to incur additional recall-related costs during the second half of 2023, which it expects will be generally covered under its insurance policies.

2023 outlook (2)

For fiscal 2023, the company revised its outlook, as shown in the attached table.

Conference call

SunOpta plans to host a conference call at 5:30 p.m. Eastern Time on Wednesday, Aug. 9, 2023, to discuss the second quarter financial results. After opening remarks, there will be a question-and-answer period. Investors interested in listening to the live webcast can access a link on SunOpta's website under the investor relations section. A replay of the webcast will be archived and can be accessed for approximately 90 days on the company's website. This call may be accessed with the toll-free dial-in number 888-440-4182 or international dial-in number 646-960-0653, using conference ID No. 8338433.

(1) Non-GAAP measures.

(2) The company has included certain forward-looking statements about the future financial performance that include non-GAAP financial measures, including adjusted EBITDA. These non-GAAP financial measures are derived by excluding certain amounts, expenses or income, from the corresponding financial measures determined in accordance with GAAP. The determination of the amounts that are excluded from these non-GAAP financial measures is a matter of management judgment and depends upon, among other factors, the nature of the underlying expense or income amounts recognized in a given period. The company is unable to present a quantitative reconciliation of the aforementioned forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measures because management cannot reliably predict all of the necessary components of such GAAP measures. Historically, management has excluded the following items from certain of these non-GAAP measures and such items may also be excluded in future periods and could be significant amounts:

• Expenses related to the acquisition or divestiture of a business, including business development costs, impairment of assets, integration costs, severance, retention costs and transaction costs;
• Start-up costs of new facilities and equipment;
• Costs related to the frozen fruit product recall, net of insurance recoveries;
• Charges associated with restructuring and cost-saving initiatives, including, but not limited to, asset impairments, accelerated depreciation, severance costs and lease abandonment charges;
• Asset impairment charges and facility closure costs;
• Legal settlements or awards;
• The tax effect of the above items.

About SunOpta Inc.

SunOpta is a United States-based, global pioneer fuelling the future of sustainable, plant-based and fruit-based food and beverages. Founded nearly 50 years ago, SunOpta manufactures natural, organic and specialty products sold through retail and food service channels. SunOpta operates as a manufacturer for leading natural and private-label brands, and also proudly produces its own brands, including Sown, Dream, West Life and Sunrise Growers.

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