SunOpta Inc. Q4 FY2021 Earnings Call

Good morning, and welcome to SunOpta's Fourth Quarter Fiscal and Full Fiscal Year 2021 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 to all risk factors contained in SunOpta's press release issued this morning, 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 following 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 occasionally rounded to the nearest million. And now, I'd like to turn the conference call over to SunOpta's CEO, Joe Ennen.

Good morning and thank you for joining us today. With me on the call is Scott Huckins, our Chief Financial Officer. I want to start by saying, while we are disappointed in the fourth quarter results, we are confident these results are a point in time and do not reflect the current or future earnings potential of the Company. The causes are clear and are not unique to SunOpta. The supply chain issues and labor market shortages are broadly felt and well publicized. Now let me share some key takeaways from the fourth quarter. First, Q4 consolidated gross margin was impacted by three headwinds. The most significant was higher costs in our plants without a corresponding increase in output. We were also impacted to a lesser extent by unrecovered inflation and yield-related issues in fruits. Let me share a bit more perspective on the Q4 challenges in our production facilities and provide an update on progress in Q1. First, 70% of the decline in plant-based gross margin was due to increased plant expenses and lower utilization. Higher expenses were driven by hiring and training approximately 90 new employees, fueled by the great resignation over the summer. However, this infusion of new employees did not immediately produce a step change in production output, partially as a result of significant Omicron related absences across the network. Additionally, our plant-based facilities are sophisticated and complex plants and employees require weeks and even months of training to become proficient. Additionally, we incurred costs to improve overall equipment effectiveness, which disproportionately hit us in Q4. In total, these Q4 investments are paying dividends in Q1. We have staffed our plants and ended the year up 73 employees. We are deep into training our new employees and retention of these new hires is consistent with our expectations. We have seen material improvement in our manufacturing output in the first seven weeks of Q1. We are currently forecasting Q1 production to be approximately 15% above Q4 levels and are tracking to this level of improvement halfway through the quarter. Beyond labor, let me comment on what is happening in the macro environment, which you are all very familiar with, that these factors are impacting nearly every CPG company. Raw material availability in Q4 was tight, but we saw sequential improvement. There were a couple of exceptions in the fastest-growing segments of our business, one being fruit puree from South America for our fruit snacks business and oat for our plant-based business. We still grew our oat business 120% in Q4, but we could grow even more, and the same goes for our food snacks business. In an effort to support growth, we have added incremental suppliers, have improved safety stock on both ingredients, and we are working to secure additional volume for anticipated growth in 2022. As it relates to raw material inflation, all the currently known raw material cost inflation has been presented to customers, accepted, and implemented. There is always a delay between cost increases and price increases. It is typically a 90-day process from realized cost inflation to the new price being on an invoice to the customer. Lastly, let me comment on freight. The back half of Q4 saw even more inflation than the run rate, and this impacted Q4 by approximately $2 million. Additionally, the availability of trucks was very tight. In our plant-based business unit, almost every customer, and remember, these are some of the biggest CPG companies in the world, had difficulty lining up trucks to pick up their product, which impacted our revenue. In fruit, where we are generally responsible for the freight, we also saw availability issues and cost inflation. Pricing reflecting the new freight costs will be fully passed on to customers by the end of Q1. The revenue impact of the production shortfalls and transportation availability challenges was estimated to be at least $10 million in the quarter. While Q4 was a challenging quarter, it is important to recognize the long-term core earnings power, but the plant-based business remains strong. Industry supply is still very tight. Demand is very strong, and our manufacturing network remains strategic and will further improve with the new Texas plant. Despite our temporary production challenges, we continue to win in the fastest-growing segment of the market, which is oat. We are aggressively adding capacity and we are aggressively passing on inflation through price increases. All of this leads me to the view that the future of the Company has never been brighter. In 2022, we expect strong top line growth with plant-based growing double digits, and we expect the fruit business to return to growth largely via pricing, as we have consistently stated during 2021. At a total Company level, we expect at least double-digit revenue and adjusted EBITDA growth in 2022. Our plant-based capacity expansion, capability additions such as 330ml and new business development efforts in plant-based indicate adjusted EBITDA will increase significantly in 2023 and 2024, as our new Texas plant comes online. Based on our success to-date preselling Texas capacity, we have line of sight to $100 million of adjusted EBITDA in 2023. Now, let me share some of the top line results for the total Company. Total company revenues, as reported in Q4 were nearly flat to the prior year. Adjusted for the extra week in the year earlier period, our top line growth would have been 2.5% in the fourth quarter of 2021. Full year revenue was $813 million, with full year plant-based revenue growing 13% on an as-reported basis or 14% excluding last year's 53rd week. Gross profit declined 650 basis points on a consolidated basis during the fourth quarter with both plant-based and fruit-based segments down materially. For the full year, gross profit was $98 million, down 10% versus prior year. We managed SG&A aggressively to offset a portion of the corresponding decline in gross profit, but the net result was still a 48% decline in adjusted EBITDA in the fourth quarter to $11 million. Full year adjusted EBITDA was $61 million, growing 3.4% versus 2020 with three times 2019's adjusted EBITDA. Now I'll turn to our segments, starting with plant-based. I would like to remind listeners that we have three strategic priorities in plant-based: one, strengthening and fortifying our competitive advantages; two, building a strong ingredient business focused on oat to drive growth in refrigerated beverages; and third, building a multipronged go-to-market business that includes co-manufacturing, private label, and owned brands. Plant-based revenues adjusted for the extra week last year increased 9.2% versus prior year to $125 million in the fourth quarter, another record for SunOpta. This represents our 13th consecutive quarter of revenue growth, and this was up 18% versus two years ago. Plant-based beverages were the primary driver, reflecting strong demand for oat-based offerings, which increased over 120% versus the prior year period. Oat now accounts for 22% of our plant-based milk portfolio, up from 10% a year ago. We also saw strong gains in tea stemming from growth at our two biggest tea customers. Production capacity challenges negatively impacted our broad business and partially offset growth in other plant-based beverages. However, as I mentioned, we have seen a solid improvement in output so far this year. As it relates to product category, we continue to focus on oat. Our oat sales were $80 million in 2021, and we expect continued strong acceleration of this business. Plant-based milks continue to see solid overall category growth, with the latest 13 weeks showing 5% growth and oats continuing to be the driver with 55% growth. In 2022, we expect to continue to see strong oat segment growth. The national brands we support continue to lead the market and grow faster than the oat segment overall, which in part explains why SunOpta grew two times the rate of the oat category. In addition, we see significant upside in oat at our largest customer for 2022. Based on all of these exciting developments, we expect to continue to have strong double-digit growth in oat sales in 2022. In addition, as previously communicated, we are expanding oat extraction production to keep pace with demand. This added capacity will likely come online at the end of Q2, 2023. From a go-to-market standpoint, the brands we acquired in 2021, Dream and WestSoy, contributed to growth. We will be relaunching these brands in Q2 and Q3 with new packaging, new products, and a push to rebuild distribution that has been launched over the last several years. Several of the people on this call have seen Dream oat milk in Starbucks. So I thought it would be worth confirming the go-forward approach with oat milk at Starbucks is via the Dream brand. We also launched a brand of organic oat coffee creamer last year called SOWN. Our focus has been the natural channel, and we are seeing great success with this effort. As the leading natural channel retailer, SOWN is now the number two brand in terms of sales velocity for plant-based creamers after less than 15 months in the market. Moving on to our Fruit-Based segment. Our three strategic priorities are: one, derisking the business through geographic diversification, customer pricing programs, and better grower relations; two, becoming a low-cost operator in frozen fruit through automation, footprint reengineering, and aggressive cost takeouts; and three, evolving the portfolio via innovation towards more value-added offerings. Fruit-based revenue decreased 9.4% to $79 million in the fourth quarter, reflecting ongoing efforts to rationalize SKUs and customers, along with the impact of supply constraints in certain fruit varieties, partially offset by pass-through pricing actions. Fruit snacks had another strong quarter, with growth accelerating to 23.5%. As we communicated all last year, we expect a sharp return to revenue growth in 2022 on the frozen fruit side of the business, fueled by aggressive pricing moves and confirmed distribution gains beginning in mid-Q2 at our largest frozen fruit customer. As it relates to derisking the business through geographic diversification, we are largely complete on this strategic initiative with Mexico now representing the largest source of fruit. More geographies, more fruit types, fewer customers for less complexity, all equal less risk. As we discussed last quarter, all pricing in support of the higher cost fruit has been passed on and reflects the strength of our customer relationships and our expertise in the industry. With regard to becoming a low-cost producer, the automation we have installed, combined with a simpler business and the cost advantages we have in Mexico, along with the 2021 cost takeouts point to improved performance in 2022. I'll recap the totality of the actions taken and through in 2021 to give you a sense of the breadth and depth of work completed. First, we passed on about $40 million of pricing. Second, we took out an additional $10 million of manufacturing costs, including the closure of two of our six plants in the network in 2021. Third, we took out several million dollars of people costs, creating a leaner, simpler business model. Please note that a significant amount of pricing actions will be absorbed by higher fruit costs and other forms of inflation. So these numbers are not designed to simply be added to 2021 profitability. Instead, I share these numbers to give you a sense of what we have undertaken to transform the results in this business. Lastly, on the innovation front in fruit, we've had great success in the launch of our Smoothie Bowls platform, which is part of our fruit snacks business unit. We have partnered with three major retailers who are launching private brand versions of Smoothie Bowls, and a CPG leader in frozen foods, we will be launching our Smoothie Bowls under one of their globally recognized brands. Lastly, we will continue to use our own brand, Sunrise Growers, to lead the innovation and push the edges of what we can develop. While fruit has certainly been a challenging business for SunOpta over the last five years, the transformation of the business against our three priorities gives me hope that 2022 will be the year, where you are hearing about positive surprises on fruit. Let me end by updating on the progress we are making in Texas with our new greenfield plant-based manufacturing facility. If you want to follow our progress, please follow SunOpta on LinkedIn, where we share periodic updates. We posted an updated photo on Tuesday, so you can see the scale of the plant and the tremendous progress we are making. As I shared on the last call, one of the capabilities we are putting in Texas is the 330 milliliter production equipment. For those not familiar with the term 330 ml, this is the Tetra Pak cartons most associated with on-the-go protein shakes. This is a $3 billion segment and is an industry that is short in capacity, and we currently have a zero share of this market. Based on preliminary awards to-date, we are confident we will sell out the capacity on this asset in the first year. In addition to 330 ml, we are putting in three other capabilities all in Phase I. We are installing tea extraction, which has seen huge growth in the last two years, along with two processing packaging lines to support our core business. We are similarly confident that we will have strong utilization of this tea extraction capability and one of the two processing and packaging lines in year one. However, selling the incremental capacity created by this plant is ahead of our internal expectations and the project is on track to be operational by the end of the year, generating salable product no later than December 31, 2022. In summary, our strategic growth priorities around portfolio transformation, innovation and doubling the plant-based business have not changed. We continue emphasizing growth in our plant-based business and improving profitability in fruit-based. We remain committed to our long-term growth algorithm of annual double-digit plant-based revenue and profit increases and continue to focus on improving return on invested capital. Now, I'll turn the call over to Scott to take us through the rest of the financials.

Thank you very much, Joe, and good morning, everyone. Fourth quarter revenues of $204.2 million were down 0.6% year-over-year on an as-reported basis, reflecting continued demand growth in plant-based, where revenues increased 5.8%, offset by a 9.4% decline in fruit-based revenues due to planned SKU rationalization along with constraints in certain fruit varieties. Adjusting for the 53rd week in 2020's fourth quarter, revenue grew 2.5% with plant-based delivering 9.2% growth. Gross profit was $18.4 million for the fourth quarter of 2021, a decrease of $13.4 million compared to the fourth quarter of 2020, and consolidated gross margin declined 650 basis points to 9%. The factors that negatively impacted consolidated gross margin during the fourth quarter were: one, plant operations, including higher plant spend and lower-than-planned production and lost absorption of 340 basis points; two, yield-related issues on raw materials of 210 basis points; and three, net unrecovered inflation of 100 basis points. In Plant-Based segment level gross profit decreased $8.4 million and gross margin was down 770 basis points to 11.7%. Let me take you through the major drivers. First, plant spend was up 380 basis points, as we hired and trained the 90 positions Joe spoke about earlier. Second, unrecovered inflation was 160 basis points, primarily comprised of freight. And third, underutilization of our plants was 140 basis points. Let me provide further detail on the 380 basis point plant spend drivers. This is comprised of 150 basis points of labor costs, 130 basis points of overhead and 100 basis points of depreciation. We expect to recover roughly 40% of the margin rate decline in Q1 and expect the business to return to a high teens margin rate on existing capacity in the second half of the year. In Fruit-Based segment level gross profit declined to $5 million and gross margin decreased 530 basis points to 4.8%. The decline in fruit-based gross margin reflected poor raw material yields, as a result of excess spoilage of 350 basis points, with plant variances representing on a net basis, the remaining 180 basis points. The yield issues became known, as we pulled work in process to produce finished goods. The vast majority of these costs are now behind us. Segment operating loss was $1.6 million in the fourth quarter compared to operating income of $6.8 million in the year earlier period, reflecting lower gross profit of $3.4 million, the adverse foreign exchange result and $0.5 million of incremental amortization expense related to Dream and WestSoy. These factors were partially offset by a reduction in SG&A expense, which was down $8.8 million versus a year ago, largely due to lower variable compensation. Loss from continuing operations attributable to common shareholders for the fourth quarter was $2.6 million or $0.02 per diluted share compared to a loss of $37.2 million or $0.41 per diluted share during the fourth quarter of 2020. On an adjusted basis, fourth quarter 2021 loss was $1 million or $0.01 per diluted share versus an adjusted loss of $2.5 million or $0.03 per diluted share in the prior year period. In the fourth quarter, adjusted EBITDA was $10.7 million compared to $20.6 million in the prior year. In addition to the $8.4 million decline in segment operating income, depreciation and amortization increased $1.4 million versus a year ago, reflecting our capacity expansion initiatives in plant-based. Partially offsetting this increase was a $4.7 million reduction in stock-based compensation expense. Finally, adjusted EBITDA included a net increase of $1.8 million in EBITDA adjustments related to business development and startup costs. I'd like to remind listeners that adjusted EBITDA and adjusted earnings are non-GAAP measures, and a reconciliation of these measures to GAAP can be found towards the back of the press release issued earlier this morning. Turning to the balance sheet and cash flow. As of January 1, 2022, total debt was $225 million and reflects $165 million drawn on our asset-based credit facility, $53 million of capital leases, with the balance representing smaller credit facilities. Leverage stood at 3.7x at the end of the fourth quarter. From a cash flow perspective, cash provided by operating activities during the fourth quarter of 2021 was $19.7 million compared to $19.8 million of cash provided by operating activities during the fourth quarter of 2020. Cash used in investing activities was $23.3 million compared with the $11.2 million in last year's fourth quarter, primarily reflecting investments in capacity expansion projects. Let me close by providing our outlook for 2022, recognizing the environment is very fluid, as it relates to inflation, supply chain, labor and raw materials. On the top line, we expect revenue in the range of $890 million to $930 million, which translates into growth rates of approximately 10% to over 14% compared with 2021. Revenue growth will be led by plant-based, but we do expect fruit to return to growth in 2022, as we have been communicating. We generally expect that first half of 2022 to be more challenging than the second half of the year. As such, we would expect margins to be stronger in the second half of the year than the first on our existing capacity. I'd also like to offer commentary around the new plant-based facility in Midlothian, Texas and how this is likely to affect 2022 gross margin. As we have previously stated, we expect commercial production to start at the very end of the year. In order to be ready for year-end production, we expect to incur approximately $10 million of startup costs, primarily in the second half of the year, roughly evenly distributed between Q3 and Q4. While these startup costs are added back to adjusted EBITDA, they will affect gross profit and gross margin rate as reported. From a profitability standpoint, we expect adjusted EBITDA in the $67 million to $75 million range for 2022. This represents 10% to 25% growth over 2021. From a capital standpoint, we expect capital expenditures to be in the $110 million to $115 million range as reported on the cash flow statement driven primarily by the new greenfield plant in Texas. As we have previously communicated, these expenditures are largely financed through the Company's credit and lease facilities. We have no reason to believe that we have the need for equity capital to support these investments. Finally, while we are a ways away from 2023, we are currently forecasting adjusted EBITDA of $100 million, benefiting from the capacity expansion projects we have across the network. Two final items to mention. First, we are planning to host an Investor Day during the second quarter, likely in the May, June timeframe. We intend for this to be both an in-person event and a webcast available to all investors. This event will be held at our new headquarters and innovation center in Eden Prairie, Minnesota, where we can showcase our full range of products in our pilot plant, provide a deeper understanding of our business, introduce you to the broader management team and map out the financial impacts of the significant progress we've made over the last two years, increasing our capacity and capabilities, as a plant-based milks manufacturer. More details will be provided as we get closer to this event, and we hope you can join us. The second item is really housekeeping. Beginning with the first quarter of fiscal 2022, we intend to move our earnings release time to aftermarket close based on the feedback we've received from several of you. Before opening the call for questions, just a reminder that for competitive reasons, we do not provide detailed commentary regarding customer or SKU level activity.

Your first question comes from the line of Brian Holland. Your line is open.

I appreciate the insights you provided about the factors affecting the mix and our thoughts on the recovery, especially regarding the gross margin dynamics. I'm interested in the Plant-Based segment, which has consistently grown around 15% over the past two years. Looking back to 2019 and 2020, you were on track for that growth in the first three quarters of 2022. How soon do you think we can return to that level of growth for plant-based products in relation to gross margin improvement? Will this happen in the first half of 2022, or are we expecting a stronger performance in the latter half?

Yes, Brian. We anticipate continued acceleration throughout the year. I believe we will maintain that pace in the first half and potentially see an increase in the second half. However, Q4 was affected. We mentioned a $10 million loss in revenue, primarily related to the plant-based business. You can consider that as an addition for Q4, even though it didn't manifest that way. From a demand perspective, we are still experiencing very strong demand. If we had been operating at a higher capacity, we would have certainly delivered larger numbers.

I understand you may have some limitations on what you can share, but since you've mentioned it, I'll ask about the $100 million of EBITDA in fiscal '23. What prompts you to announce this figure now, especially considering the challenges in the current supply chain? This number is more than 15% above consensus, so I'm curious about its basis. How much of this is due to revenue flow-through from the new facility and its contributions, as opposed to other margin-related factors we should consider?

Yes. The simple reason, Brian, for putting it out now is to underline our confidence in the number. When we look at the build of the 2023 number, especially relative to Texas and obviously, there are material costs and capital investments coming with that. We wanted to frame up for investors the benefits of that investment and our progress in realizing the potential of that investment. And so when we look at '23, there is a combination of both pretty significant EBITDA contribution from the Texas plant, but certainly, we see additional growth in our core business that isn't directly linked to new capabilities in Texas. So it's a combination of new business in Texas and continued core business growth.

Taking a step back strategically on some of the new verticals you are exploring and building capacity for, it’s clear that anyone observing the competitive landscape and comments from public companies, particularly in the on-the-go protein nutrition segment, can identify certain shortages. The need for capacity is fairly obvious at a high level. However, I would like to understand better where this supply is coming from. Is it driven by customer requests? It appears that by expanding into these new categories, you may be introducing some execution risk, which could be concerning given the current unprecedented challenges facing manufacturers. Could you clarify why you are choosing to divert capacity towards these other categories instead of concentrating on the plant-based beverage opportunity?

Yes. First of all, we are very optimistic about plant-based products. Two-thirds of our growth in 2022 will come from core plant-based products like oat and others. We see strong growth in this area. The introduction of protein shakes is a natural extension of our technical and operational capabilities. Although the end consumer experience may appear different, producing a vanilla protein shake in a tetra carton is not significantly different from making almond milk. We view this as a logical evolution of our skills, and we are confident that we can implement this with minimal disruption. We have already been working on these products in our new pilot plant and innovation center, which has allowed us to start formulating and developing expertise in their production.

Your next question comes from the line of Andrew Strelzik. Your line is open.

This is Amanda Morley on for Andrew. Can you just discuss further your expectation for sales growth progression for each segment throughout the year?

Yes, it's Scott. As we mentioned earlier, we expect the core growth driver to be followed by fruit. Throughout 2021, we focused on rationalizing customers and SKUs, resetting the manufacturing base, and positioning the fruit business for growth. Joe highlighted the pricing adjustments we've made in 2021 that will benefit us in 2022. It's important to note that as we move through 2022, we'll be comparing quarters where we had rationalized SKUs in fruit. The advantage will come from the pricing, while the downside will be related to the SKU rationalization overlap. That's the insight regarding our revenue outlook for 2022.

Your next question comes from the line of Bobby Burleson. Your line is open.

Curious about your supply agreements, what kind of visibility you get there in terms of allocation and costs going forward?

Good morning, Bobby. When you referenced supply agreements, obviously, we have a...

What raw materials are you procuring?

Yes. On the raw material front, we have covered 100% of our current known raw material exposure through pricing that has all been fully implemented. That's true on both the plant-based business unit, as well as the fruit-based business unit. So we do not have any unrecovered inflation on raw materials as it relates to both business units. The dynamics of kind of the contract agreements are quite varied. But some of them are straight, contracted, pass-throughs, others are negotiated agreements, whereby we will present to them, hey, here's the raw materials literally down to invoices if they want to see them to outline what's happened with the raw material costs. And I can confidently share that we've had some lively discussions, but no material pushbacks on fact-based raw material pricing changes and getting those passed through to invoiced prices.

It seems you mentioned some significant labor disruptions that appear to be resolved. Are there any long-term plans to explore automation in areas where it wasn't previously utilized? I know you've discussed the fruit-based business, but could you provide more insight into how you might address these types of disruptions in the future?

Yes. On the plant-based side of the business, our plants are already highly automated, with only around 35 to 40 people required per shift to operate machinery worth about $100 million. These are very sophisticated facilities. The key automation touches occur at the start and end of the production process. While there are always opportunities for further automation, such as in case packaging and palletizing, our operations are already much less labor-intensive compared to other manufacturing environments I've experienced, which often require hundreds or even thousands of workers on a production line. We have just a few dozen employees. While we'll continue to seek efficiency improvements through automation, significant changes aren't anticipated since we're already operating at a high level of automation.

And then just last one on the SOWN line, I think you talked about being number two in velocity after, I guess, just not that long, obviously, but being in the market. Are there additional launches that you're going to contemplate here this year to kind of build on that success?

Yes. We are looking at additional flavors to fill out the product line, as well as potentially some small-scale opportunities to extend the brand outside of the core plant-based milks category into other dairy alternative categories. So we're excited about the consumer response. We're really the only organic player in the category, and we've seen great enthusiasm for our organic offering. That is the core competency of SunOpta is organic-based foods and beverages. And so we're going to take that kind of oat organic platform and see what else we can do with it. But I want to kind of underscore, I want to underscore we're a little bit of the little engine that could, if you will, in terms of how we will approach expanding distribution. We fully respect and understand and are focused on our core business, which is co-manufacturing. And the degree to which this helps us advance our technical capabilities and understanding as well as kind of push the boundaries of innovation, we love it. But we're not going to be spending tens of millions of dollars on advertising to try to grow these brands. We're really making sure we get the product propositions right, and see if they can seed and forge new ground for us.

Your next question comes from the line of Alex Fuhrman. Your line is open.

The $100 million target for EBITDA in 2023, that's obviously a pretty big number. Can you help us bridge the gap of how you get there from your 2022 guidance? How much of that is coming from the new Texas facility as opposed to other growth elsewhere in the Company or just the expectation that supply chain costs are going to get back closer to normalized levels next year?

Yes, it's Scott. Good morning, Alex. Thank you for the question. The main factor driving the additional EBITDA profitability is from capacity and revenue growth. As mentioned in the prepared remarks, we are seeing a recovery compared to Q4, particularly in margins. Remember that alongside Texas, there are several other capacity projects that we mentioned throughout 2021 that are coming online. The overall network, including Texas, plays a significant role in unlocking capacity, which in turn drives revenue growth that impacts EBITDA.

For 2022, your EBITDA guidance appears to have a wide range, especially since you seem to have strong visibility into your demand for the year. Could you clarify the difference between the high end and the low end of your guidance? Is this variation primarily due to uncertainty from the volatility of certain costs in your model? Any insights on what might drive you to achieve either the high end or the low end of that range would be appreciated.

You bet. I think what we're trying to do, both in terms of revenue and EBITDA, is consider several factors, including the potential for price elasticity. Joe mentioned the extent of pricing we've implemented in fruit. There aren't many historical comparisons in the last 30 years for how such pricing might influence consumer demand. This is likely the most significant aspect in the fruit business. Additionally, regarding plant-based products, it's about the progression over the year since we're trying to forecast for the entire year. It's challenging to predict on a quarter-by-quarter basis. So, I would say these are the considerations we had in mind when forming our expectations for revenue and EBITDA.

The next question comes from the line of Brian Myers. Your line is open.

This is my first question. You mentioned this briefly during the call, but I would like to know how much of the labor pressures you are experiencing is solely due to inflation. Additionally, how do these pressures compare to what you experienced in the fourth quarter?

Yes. So on the labor front, there's really a simple way to think about it, which is over the summer, I think everybody experienced a significant amount of employee turnover. And I commented on the Q3 call that we were seeing sequential improvement in labor availability and that, in fact, turned out to be true for us. We onboarded a significant number of new employees and actually ended the year net positive 73 employees versus the beginning of the year. So we did a great job of bringing people on board. What surprised us, candidly was the productivity of those new employees lagged our expectations. And specifically, our ability to get our overall production levels, think of it as the weekly number of cases produced, we did not see those levels snap back or return as quickly as we thought they would with the infusion of new people. And so that is what I referenced on several occasions in the prepared remarks was we are seeing a significant step change in Q1 versus Q4, as all of our new employees become much more proficient. We did some much-needed catch-up on maintenance in the fourth quarter as well. And so those two investments in new people and taking downtime on our production lines to do maintenance is paying dividends for us in Q1. So we expect, and I think we've said consistently that we would expect some first half headwinds. So I want to make sure I frame my comments as we're seeing material progress, but the skies are completely blue and tulips are blooming, et cetera. We still have some wood to chop relative to getting everything lined up. But we're excited and encouraged by the progress we're making in Q1.

And then can you give us some color on the foodservice business? I know you guys called that out in the press release there, just kind of looking at where the demand is coming from?

Yes. When we look at 2022, just based on the customer mix and where we see new business, we see a bit more sales growth on the retail side than the foodservice side, call it 60/40. We expect significant growth of oat milk sales in the foodservice channel in 2022, as we continue to find productivity efforts and raising our output in our oat extraction facility, we're able to serve more and more of the foodservice channel. And we expect really significant growth in oat both in foodservice and retail.

And then last one for me. On the fruit-based business, when do you guys feel like they will be in a good spot on the kind of SKU counts and customer count, where we won't see this planned reduction in volumes anymore? Is that something that's going to kind of continuously be ongoing?

I would say that probably the shortest answer is thematically, we're done with that. We spent a lot of time in 2021, align or realigning customer profile, customer profitability with plant capacity because remember, we took two of our six plants out of our network. So I would say that is materially behind us. We always are looking for profit opportunities in the fruit. So I don't want to suggest that we never look at it because, of course, we do, but materially, it's behind us.

Your next question comes from the line of Jon Andersen. Your line is open.

I wanted to ask just about raw materials first? Are there any materials like whether it be oats or another main input, where availability, just the ability to kind of get enough of it, if you will, has been or maybe an issue that you're kind of watching closely? And if you could help us understand that, which is separate from kind of the cost-related matters, I guess?

Yes, Jon, I can share the challenges we've faced, which I previously mentioned during the Q3 call. These challenges are particularly evident in the fastest-growing areas of our business. For instance, in Q4, our oat business grew by 120%, indicating that we were able to secure enough oats to support that growth. However, we could have achieved an even higher growth rate if oats had been more readily available. The same situation applies to fruit puree, much of which we source from South America. Unfortunately, we encountered production disruptions due to shipping delays and port congestion affecting our raw materials from that region. It makes sense that these two rapidly growing parts of our business are where we experienced challenges, as we are trying to significantly increase our intake of raw materials compared to the previous year. We have established additional suppliers and made progress in Q4 compared to Q3 in securing more raw materials. Looking ahead to Q1, while it's difficult to forecast due to global circumstances, we have observed a sequential improvement in the availability of raw materials moving from Q4 to Q1. Thus, Q4 was better than Q3, and Q1 is better than Q4.

Was some portion of the $10 million of lost sales or opportunity sales in the fourth quarter related to the lack of availability of certain raw materials rather than internal production constraints or lower yield with the new labor that you've onboarded?

Yes. I would say it's three things, Jon. And the $10 million, I would say, was a conservative estimate, to be honest. There was a portion of that lost revenue that was related to freight and just the inability to get both our customers, who often pick up their inventory, their inability to line up trucks and arrive at our warehouse to pick up their orders. There was a portion attributed to the labor challenges that I referenced, specifically having orders in excess of our ability to produce. And then the third piece would just be the raw material input component, where we had orders in the system, and we would be delayed a few days on, say, receipt of a raw material. And obviously, it's tough to make up those days once you lose them in the production schedule. So really, those three factors contributed to what we would loosely articulate at least $10 million of missed opportunity.

I want to clarify the discussion about pricing. Given the commodity inflation, potential internal wage inflation, and increased freight costs, has the pricing you communicated been accepted by customers to address these inflationary pressures? Additionally, when do you expect to fully benefit from that pricing?

From a raw material pricing perspective, we have significantly passed through those costs. To clarify, we provided the amount of fruit pricing, which reflects all known raw fruit cost inflation. Currently, our main focus is on transportation costs. Joe mentioned in his remarks that diesel fuel prices in Q4 of 2021 were up 50% compared to Q4 of 2020, and they worsened sequentially from Q3. We are addressing any gaps in freight recovery, and Joe indicated that we expect those efforts to be completed by the end of the first quarter. This is how you should consider the pricing impact and the associated drivers.

I wanted to ask because you're seeing such strong growth in oat milk and I'm assuming a good portion of that is driven by the extraction capacity that you put in place at the end of 2021. Where do you sit? I think there's another piece of extraction capacity coming on, I think you said mid-2023, that's still kind of a ways off. So I mean are you constrained in any way at this point from a capacity standpoint on your ability to serve the demand that's out there for oat milk, whether that be co-pack or private label or extraction or finished goods? And I'm not talking from a labor standpoint necessarily, just kind of like assuming the labor is in place and operating at a high level. Are you just limited for the time being? And how much demand you can satisfy until that extraction capacity comes online in mid-2023?

Jon, we reported $80 million in oat revenue in 2021. We can potentially grow that by about 50% in 2022 through a number of productivity projects the team has identified to enhance our oat extraction output. We are making every effort to increase our oat base production, and we foresee a potential 50% growth in 2022. After that, our growth might be somewhat limited until our new system becomes operational, unless we can source oat base elsewhere in the market to package. However, we do see potential for growing oat milk in 2022. Regarding demand, if I could activate the facility I mentioned that is expected to come online by the end of Q2 2023 right now, I believe we could sell a significant amount of it.

And then last one I had was on fruit. It sounds like the combination of pricing and I think you mentioned confirmed distribution wins, it gives you confidence that the business can grow in 2022. Can you talk a little bit about these distribution wins? And are they fully confirmed? And what part of the fruit business those may be in, whether it be the snack side or the frozen, et cetera?

You bet, Jon. Maybe two different thoughts, I mean, we saw very, very strong demand, really accelerating throughout 2021 in our fruit snacks business. We posted a 23% plus or minus level of growth in the fourth quarter, and I think we've seen that continue. In the frozen business, your question around true distribution wins. I think you mentioned that with our largest frozen customer. What we've generally seen is kind of a whipsaw, where in the last year or two, customers seeking to add a greater variety of suppliers. And in a supply chain challenged environment that probably didn't work as well as maybe they would have hoped. And so I think there's maybe a view going the other way, which is to consolidate supply. And as I think you know, we're one of the largest frozen processors in the United States. And I think our improved cost position and, frankly, credibility with customers around pricing we spoke about was helping us. So I'd say direct answer is, yes. We have seen firm volume awards, including that largest customer in frozen back to the core about our level of confidence about growth, it's very high.

There are no further questions at this time. Mr. Ennen, I turn the call back over to you.

Great. Well, thank you for your time today and look forward to speaking to you again soon. Thank you.