SunOpta Inc. Q2 FY2024 Earnings Call

Greetings, and welcome to SunOpta's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Reed Anderson with ICR. Thank you. You may begin.

Good afternoon, and thank you for joining us on SunOpta's second quarter fiscal 2024 earnings conference call. On the call today are Brian Kocher, Chief Executive Officer, and Greg Gaba, Chief Financial Officer. By now, everyone should have access to the earnings press release that was issued earlier this afternoon and is available on the Investor Relations page of SunOpta's website. 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 to all risk factors contained in SunOpta's press release issued this afternoon, the company's annual report filed on 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 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 with the company's press release issued earlier today. Also, please note in the prepared remarks to follow, unless otherwise stated, the company will be referring to the continued operations portion of the business and all figures are in U.S. dollars occasionally rounded to the nearest million. Now, I'll turn the call over to Brian to begin.

Good afternoon, and thank you for joining us today. For today's call, I'll start with the highlights of our latest quarter's performance, along with an update on business trends and key priorities. Greg will follow with a review of the financials and our outlook. Then we'll take your questions. Our second quarter headline is very simple. Both volume-driven revenue growth of 21% and adjusted EBITDA of $20.6 million exceeded our guidance. I'd like to share context on that performance, specifically focusing on our revenue and operational initiatives. With respect to our revenue performance, on our last call, we guided to revenue growth that we could see. We worked on initiatives beyond our known wins, and then we over-delivered with 21% volume-driven revenue growth. For the fourth quarter in a row, our volume growth was spread broadly across customers, panels, and major product categories. We are executing well across our product portfolio and continue to see significant opportunities for further growth and improvement. Remember last quarter I mentioned that we have visibility into our customers' initiatives and pipelines, which gave us confidence in our demand generation engine and confidence to increase our 2024 outlook. Let me provide a few data points to give you some perspective on the depth of our growth. We again drove double-digit revenue growth from each of our top three customers. Our top five customers posted 23% average year-over-year revenue growth. Our fruit snacks business grew by over 24% and continued a streak of 16 consecutive quarters with at least double-digit growth. Our foodservice segment revenue again increased at a double-digit rate, and every major go-to-market channel and product category grew during the quarter. We continue to see plant-based beverages increasingly featured across new menu items and on menu boards in foodservice. Volume continues to be the primary driver of growth. Unit volume growth is the most significant confirmation of our continued and differentiated value proposition in the commercial market. When customers want more of our support products and innovation and want them at a faster rate than the overall market is growing, we know we have a sustainable competitive advantage. Our volume growth is coming from several areas. We are winning with winning customers as a solution provider and an innovation partner. Specifically, the brands we support are winning and outperforming the categories where they play. Over the last 13-week measurement period, the majority of the brands we support have exceeded category volume performance by over 700 basis points. Secondly, we're gaining incremental business from new and existing customers as they seek to leverage our service capabilities, our capacity, and our innovation talent to launch new products as well as support growth in their established offerings. And thirdly, we are also benefiting from our TAM expansion into protein shakes and other plant-based beverage innovations in foodservice. The addressable markets in which we participate are also large and growing. For 2024, we estimate the U.S. shelf-stable plant-based milks market continues to grow in the mid single digits in the aggregate across all channels tracked and untracked. Remember that much of our volume is derived from untracked segments, and we continue to see growth in foodservice and club channels. Protein shakes continue to be one of the fastest-growing categories in CPG, with track channel volume up approximately 18% over the past 13 weeks, and over 60% of the performance nutrition category is comprised of the 330 ml format like we produce in Midlothian, Texas. In fruit snacks, consumer and customer demand remains very strong. The better-for-you segment is the fastest-growing subset within the fruit snacks category, up over 30% over the past 52 weeks, with our customers commanding well over 75% of the segment share. As you can see, we have significant tailwinds supporting our revenue line. Let me transition to our operational performance. In addition to the revenue growth we guided in Q2, we also committed to improving the effectiveness of our supply chain, which as you know has been a major area of focus for me and the organization over the past two quarters. As you've heard me describe many times, this is a journey of a thousand steps. We are making progress every day, and we always strive to be better. I am both pleased with our progress during the quarter and also energized by our prospects for substantial improvement in the future. From an output perspective, during the second quarter, we increased unit output in our aseptic facilities by over 24% versus the prior year, and output in our fruit snacks facilities increased by more than 33%. Importantly, these increases were driven by both greater efficiency from our established lines as well as new capacity. If you exclude new capacity, we increased unit output of those assets by greater than 10% versus the year-ago quarter, which is the equivalent of adding roughly an entire manufacturing line to the network. Our team is making significant progress on creating capacity via operating improvements. Our oat extraction expansion in Modesto came online during the quarter, as many of you know, and we are both aggressively ramping volume as well as selling future capacity. In Midlothian, we are progressing various efficiencies throughout the plant. Our third line started producing commercially sellable product at the end of Q1 ‘24, is ramping as anticipated and is expected to make a solid contribution to our second half ‘24 results. Output in Midlothian is increasing, and we see opportunities to drive further improvement with targeted investments now to accelerate sustainable growth and margin achievement later this year and into 2025. As I look at the progress we've made in our supply chain throughout the quarter, the increase in output was satisfying, but ultimately uncovered and highlighted further areas for improvement in investment. As we continue identifying opportunities for operational efficiency, we are taking advantage of exceptional revenue growth to accelerate short-term investments, which in turn will accelerate sustainable process improvements. Our supply chain initiatives are detailed by plant, by product line, and by hour of the day. Each of these projects is making progress, and the pace of the progress varies by project and location. In some lines and/or functions, we may need to take a step back to take two steps forward. In Q2, we had the benefit of incremental growth, so we purposely invested to either shore up project plans or accelerate sustainable results. The quantum and magnitude of improvement plans we have in place across our network help to fuel our 27% volume growth in Q2. Rarely are increases in output not simultaneously accompanied by some growing pain. In the quarter, we discovered areas for short-term investment, which will continue into the third quarter. However, we see significant opportunity for sustainable margin improvement commencing in Q4 and carrying us through 2025. Once again, I'm proud of our quarterly results, and I continue to be excited about our long-term revenue and profit growth outlook. Our expectations for the future continue to be based on what we see, not on what we hope, and we are confident in raising our 2024 revenue outlook for the second time this year. Our priorities, actions, and initiatives to deliver against these expectations remain the same. First, grow volume through expanding our current customer relationships, acquiring new customers, and expanding our TAM. Our co-development and innovation network on behalf of our customers provides great excitement about the demand side of our business. Most importantly, it fills our capacity with products and categories that significantly over-index towards growth. Secondly, we want to drive operational improvements to both increase output and expand sustainable margins. We have multiple efficiency projects at each facility and are gaining momentum every day. We increased output by 27% in the second quarter, and our newest capacity is still ramping up in the second half. With the support of our short-term investments, we expect to see sustainable margin expansion starting in the fourth quarter through better fixed cost absorption as well as variable cost reduction. Lastly, we will maintain our disciplined financial approach and continue deleveraging to under 3 times EBITDA, our stated goal, by the end of this year. Every aspect of our business is closely linked, and through our disciplined relentless focus on operational execution, we continue delivering strong results. We are a growth company operating in growing categories with growing customers. As a private label and co-manufacturing solutions provider, we solve problems and create wins for our customers. As we create wins and solve problems for our customers, we grow share and revenue. We also grow share and revenue by improving operational efficiency. As we increase output through efficiency gains, we extend the capacity of our deployed investments in deferred growth CapEx, which leads to higher returns on invested capital and drives incremental value for shareholders. In summary, we delivered strong results in the first half and believe we are well positioned for the balance of 2024 and beyond. We are delivering top-line growth rates that are several times faster than peer averages and propelled by robust volume gains. We're demonstrating the necessary operational resilience that business needs to service growth, while simultaneously overcoming challenges and improving our operational efficiency. As a result, we are poised for higher sustainable margins and improving profitability as our supply chain initiatives gain traction and accelerate, all of which helps to drive free cash flow. I'm confident in the direction of our business and increased revenue outlook for 2024, along with our significant potential for driving growth, cash flow, and shareholder value over the longer term. Now I'll turn the call over to Greg to cover the second quarter and full year outlook in more detail.

Thank you, Brian, and good afternoon, everyone. We had another strong quarter. Revenue of $171 million was up 21% compared to last year, driven by exceptional volume growth. As Brian highlighted, this growth was across the board. Gross profit increased $3.2 million or 17% to $21.8 million in the quarter, and reported gross margin was 12.8%. Adjusted gross margin was 16.2% and reflects increased volume and better plant utilization offset by short-term discretionary investments and future sustainable supply chain efficiencies, sub-manufacturing inefficiencies, and incremental depreciation for newly launched production assets. Operating income more than doubled to $2.6 million in the second quarter as profitable volume growth was partially offset by higher variable and incentive compensation. Loss from continuing operations was $3.8 million compared to a loss of $11.7 million in the prior year period. This improvement was driven by incremental operating income in addition to reduced income tax expense. Adjusted EBITDA from continuing operations increased 12% to $20.6 million compared to $18.4 million last year. Turning to the balance sheet. At the end of the second quarter, debt was $303 million. Remember, an increase in debt was expected in the quarter due to our oat extraction capacity expansion in Modesto coming online. Net leverage was 3.5 times, and we fully expect to achieve our target of being under 3 times levered by the end of the year. Year-to-date, cash provided by operating activities of continuing operations was $2 million, and year-to-date, cash used in investing activities of continuing operations was $13.9 million. Now turning to our full year outlook. We are raising our 2024 revenue outlook for the second time this year to reflect the strong performance in Q2 and higher growth expectations in the second half. We now expect revenue in the range of $710 million to $730 million, which represents growth of 13% to 16%. From a profit perspective, with the short-term investments we are making in the supply chain and the natural challenges that result when you are growing a business 3 times the category run rate, we are maintaining our outlook for adjusted EBITDA of $88 million to $92 million, which represents growth of 12% to 17%. From a second half pacing standpoint, we expect the third quarter to look similar to the second quarter with slight improvement, and both revenue and adjusted EBITDA increasing in the fourth quarter. As Brian discussed, we are delivering exceptional top-line growth rates and are accelerating our investments in supply chain initiatives that are expected to deliver higher sustainable margins and improved profitability in the fourth quarter, provide great momentum entering 2025, and deliver significant shareholder value over the longer term. 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.

Thank you. We will now start the question-and-answer session. Your first question comes from Jon Andersen with William Blair. Please proceed.

Hey, good afternoon, everybody. Thanks for the question.

Hi, Jon. How are you?

I'm good. Thank you. Hope you are too. So the sales were, as you pointed out, very strong in the quarter and volume-driven. I'm wondering if you could talk a little bit more about the upside. Presumably, the sales exceeded your own expectations. They clearly exceeded expectations in the quarter. But, I'd like to get a little better sense for, was that more in the existing customer base? Was it new additions ramping more quickly? Or was it kind of the TAM part of the growth story that drove that?

Jon, thanks a lot for the question. I really appreciate it. I think we were really excited this quarter by the fact that it was a little bit of everything. If we had some new product launches that came out and did well in the quarter on behalf of our customers, certainly we saw growth in our TAM expansion initiatives with either protein shakes and some of our plant-based beverage initiatives. We also continue to see a category that overall, when you include untracked channels, is growing. And I think one of the more important things is the brands that we support are winning. As a co-manufacturer and a private label solutions provider, we work with brands, and they are every day out there trying to grow their own brand. If you look at the brands we support, they are all performing better than the category as a whole. And so, as you think about all the areas we can grow, it was really across all of the areas that we provided strength, and we were very happy with the volume growth in particular. That's always a great sign.

Absolutely. So you have a large customer, I mean, many customers, but there is a large customer and there's been some noise about broadly traffic trends in foodservice establishments. I mean, what can you tell us about your business that makes it different? Because it sounds like that hasn't put any material pressure on your business to date, and you don't expect it to on a full-year basis, obviously, as you lift your overall revenue outlook for the year.

Well, I think there's a couple of things to remember with respect to our customer base. We have a diversity of channels. So we've got foodservice, club, and retail support in both private label and co-manufacturing. So there's a lot of diversity there. Again, I think if you think about the growth, it was broad-based. Our top three customers grew double digits. Our foodservice customers in aggregate grew double digits. Our top five customers grew 23%. Now that comes with some where the category is growing, somewhere TAM expansion is happening, somewhere innovation and development is happening. I think we talked a little bit about this last quarter. The opportunity that we have to work with our customers on either innovation or co-development really gives us a unique position to potentially participate in limited time offers, in menu items and things of that nature. And that's probably the best way to describe it.

Makes sense. I'm going to squeeze the third one in, if I can. I know I'll get a lot of questions. So volumes were extremely strong. You're ramping production in Midlothian. The fruit snacks business is on fire, and volumes are strong there. And yet we saw some gross margin degradation year-over-year. Could you just explain a little bit more, talk a little bit more about some of these short-term investments that you're making, maybe some of the inefficiencies that you surfaced? And how to get us confident that that inflection that you're kind of pointing to in the fourth quarter is your visibility is really good in terms of delivering on that? Thank you.

No problem, John. I appreciate your question. There are a few key points to consider regarding our gross margin and its outlook. Firstly, we have positive news to share. Our gross margin performance is closely tied to our volume. This past quarter, we experienced significant volume growth, and our network was able to support that growth. This is a very encouraging aspect of our performance. We gained market share, doing so when the opportunity arose rather than waiting for convenience. The first piece of good news in our margin story is that we were able to produce enough volume to meet the demand, which we accomplished. Specifically, when looking at our existing assets—and setting aside Midlothian and recent capacity additions—we increased output significantly, akin to adding a full manufacturing line through hard work and creativity. We are very pleased with this achievement. The second positive aspect, which I consider good news, is that such significant volume growth typically places demands on your supply chain. When your growth is as rapid as ours and you take market share opportunistically, you are likely to discover areas for improvement in your supply chain efficiency. Fortunately, we are identifying these areas now rather than in two or three quarters. We are channeling our investments into specific areas to enhance downline efficiencies because greater packing capabilities allow us to operate our systems more smoothly and continuously. Additionally, we are investing in equipment maintenance to maximize uptime, short-term labor improvements, and optimizing our procurement and inventory management to ensure a seamless flow throughout our supply chain. The important takeaway is that we have both the volume and the output. We cannot optimize the efficiency of volume we fail to capture, and we successfully secured that volume. We see opportunities for investment. These investments can be seen as temporary, focusing on labor, possibly some additional resources for efficiency initiatives, and minor improvements in shop floor metrics and reporting systems. We are confident in our ability to generate volume and, as we do so, to enhance our efficiency. Some data points show that our overall cost per unit and labor unit produced have improved compared to the second quarter of 2023. While we faced challenges in other areas, I am excited about our supply chain initiatives and the growth potential ahead.

Thanks a lot.

Your next question comes from the line of Jim Salera with Stephens. Please go ahead.

Yes. Good afternoon. Thanks for taking our questions. Brian, I really wanted to drill down on the kind of sustainability of what seems to be pretty meaningful gains in kind of the share among your customers. Because, and I can appreciate the untracked channels and the foodservice channels represent a much larger piece of the business, especially for your customers than maybe some other categories. But your outperformance relative to what is visible in the tracked channels continues to be very stark. And so, should we expect to see some of the strength in these untracked channels eventually filter into tracked channels? Or is it just that the way that the end market is structured, investors really shouldn't worry about tracked channels, and it's really all about the growth that's unseen?

Okay. A couple of themes in there, Jim, and let me try to break those apart. First of all, I think it's important to remember from our perspective, tracked channels are less than a fifth of the market that we serve. So, of course, we pay attention to it. But when you look at foodservice, club, and other untracked channels, that's the opportunity that we really address and certainly is more meaningful to us. So that is one thing. On the track channel side, we actually are starting to see a little bit of a turn or let's call it a deceleration of the softness in shelf stable. So we're starting to see some of that. But I will get back to our, let's call it philosophy on guidance and expectation setting. We communicate what we see, where we understand and work with our customers every week, every month on their innovation efforts. I think innovation is also an area that the investment community can't see in tracked channels because it happens in foodservice and in clubs. So there's another area with which it might be a very positive divergence from the track channel data that's publicly available. All of those things factor into the poor performance. So I would never say it's inconsequential, but our world is absolutely more heavily weighted to solving opportunities and challenges for our customer and growing share that way.

Okay. On volumes. And then, yeah, that's helpful. On the foodservice side in particular, I guess I'm obviously positively surprised by the strength you guys continue to see there given the overall kind of consumer softness that we see in foodservice. And so I wonder if you could just give us some color on what's driving your subsegment in foodservice that sees such a higher degree of success relative to the broader slowdown?

Yeah. Two things that I would say really contribute to that. Remember, we're wired in tight with our top 15 customers. We're in their supply planning meetings. We're talking to their innovation team on a weekly and a monthly basis. So, there's two things that I would say think about that. One, just as I mentioned with track channels, the brands that we support are outperforming the overall category. Think of the menu items that you see in foodservice and where plant-based or the products that we support are either over-indexed or ingredients in promotional items, limited-time offers, real volume growth or focus points for our customers, you can see that. And so, it can be true that our products grow at potentially a faster pace than the rest of the product portfolio or are over-indexed versus the rest of the product portfolio of some of our foodservice customers. That can be true. The other thing is, remember we innovate. So we have several new product launches that we co-developed and launched with our customers, and that is also showing up in the foodservice channel.

Okay, great. I appreciate all the color. I'll hop back in the queue.

Thank you.

Your next question comes from the line of Brian Holland with D.A. Davidson. Please go ahead.

Yeah, thanks. Good afternoon. So I just wanted to ask about some of the supply chain investments. And maybe in the context of kind of rolling this forward, if I've got it right, I know there's a lot of moving parts with the divestitures and portfolio reshaping, but last I have it, it's kind of like a 20% gross margin target. You can correct me if I'm wrong there. But I guess what I maybe another way of asking this supply chain question would be, is what you're discovering that it's more expensive to get to that 20% gross margin? Or with the volume that's coming through your network, are these investments maybe intended to ultimately drive upside to that target?

Absolutely, I would not describe these as merely increasing costs. Consider this: we're experiencing growth that exceeds our earlier projections. In fact, this marks the second consecutive quarter in which we're raising our guidance. As we grow faster, we also put more pressure on our supply chain, and we're uncovering some issues that we might have identified later on. By recognizing these challenges sooner, we can address them earlier, which we believe could help accelerate our margin improvement. We're making some short-term investments aimed at achieving our long-term margin target of 20%. Greg and I have publicly stated that this 20% margin was based on the last time our network reached full capacity. We believe that the next time our network is full or nearly full, achieving that 20% margin is feasible. However, with the investments we're making, we aim to push ourselves toward exceeding that 20%. But for now, that would represent potential upside.

Understood. That's great color. And then the other question, if we think in Midlothian about the opportunity for expansion, I think, like, lines 4 out to potentially 8 as it was outlined 18 or so months ago. I suspect we're getting close if we're not already at the point where we need to decide what those lines are going to be allocated for or dedicated to. So I'm curious if you can provide any assessment there because, certainly, we've talked a lot about the plant-based beverage and shelf-stable category, but, obviously, as well now, you have the 330 milliliter capability and you obviously have discussed what we're seeing on the protein shake category. So just maybe a sense of how that capacity or that infrastructure gets filled out at a category level as we look out over the next, I don't know, 12-24 months?

Yeah, sure, Brian. Great question. So as you recall, we just had our third line at Midlothian come online in Q2, right? So there is quite a bit of run-rate at Midlothian for future growth. We've said before and we still believe that by the end of 2025, early 2026 is when we see our network to be full. But our first priority continues to be deleverage, right? So our goal is to be under 3 times levered. We fully expect to be there by the end of this year, and that will be our focus here in the short term.

Brian, just one other item. I don't want to gloss over the fact that by increasing output, you create non-CapEx capacity. Effectively, we created out of thin air the equivalent of an additional manufacturing line. Now that was spread out through our network, but you get the feeling. You understand the analogy. There is tremendous opportunity for us to continue improving efficiency and output and creating non-CapEx capital. And that's where our focus is on the short term.

Your next question comes from the line of Andrew Strelzik with BMO Capital Markets. Please go ahead.

Hey, good afternoon. Thanks for taking the questions. My first one, I want to, I guess, revisit the answer to a prior question. I'm trying to think about the implications of faster revenue growth, and you're talking about accelerating the margin improvements and what that means for the EBITDA you pointed to kind of run-rate exiting ‘25 into ‘26. Is the timeline should we think about the timeline around that changing at all given those dynamics? Or is the net with the investments that the timeline stays the same? I guess it feels like it's pulling forward, but I guess I was just a little unclear based on the answer.

Yeah. Andrew, I'll be blatant and bluntly clear with you. We're really focused on communicating what we can see and not what we hope right now. We can see through the end of the year. We can see the short-term investments that we need to make and want to make in the supply chain. We can see the opportunity for margin expansion. We're excited about our demand generation engine, and we have more confidence. I think the best way to say it is we have more confidence in that midterm guidance now than we did this time last quarter, which was more confident than the quarter before. So each time we have revenue acceleration or potentially capacity creation, I would look at that as giving us more confidence in that midterm target than worrying about changing a timing or magnitude.

Okay. That makes sense. And then my other question, obviously, there's a lot of concern about the consumer environment. We've seen slowdowns across food and beverage categories in a number of places, none of which you're really seeing for a variety of reasons. But I guess I'm just curious about the tone of your customer conversations broadly. Are you sensing any change in the way that they're approaching their businesses? Are they getting more aggressive or less aggressive in this environment? Just kind of curious under the hood how those conversations are progressing. Thanks.

No problem, Andrew. But let's break down the categories in which we play. Shelf-stable, plant-based beverages, we believe is growing in the mid single digits across tracked and untracked, right? So those are our customers that we're talking with, that we understand, that we see have visibility to. We believe that that category is growing in the mid single digits. Ready to drink protein shakes, growing fruit snacks, growing, heck, even our less mainstream products, broth and tea, growing. So the categories in which we service and in particular the ones in which we're helping our customers win, those are all growing. And I think that's one thing to keep in mind as we think about how you look at the consumer in the category. Now we are also helping customers grow with innovation. Not always is that innovation a new flavor or product or unit size. It could be a new pack size. It could be a more efficient configuration. It could be a better transportation methodology or mode. So those are things that all go into solutions providing and innovating for our customers when you're a solutions provider. So I think it's a little narrow at least as you look at our revenue stream to just say, hey, there's some pressure on the consumer, therefore the categories aren't growing. Every category we play in is growing. And I would remember that as you think about our prospects for growth.

Great. Thank you very much.

Your next question comes from the line of Ryan Myers with Lake Street Capital Markets. Please go ahead.

Hi, guys. Just one question for me. Just curious how we should think about the potential for adding any new business into the pipeline. I mean, I know you talked about really communicating what you guys have visibility to, but as we think about potential areas for upside or additional opportunities that could come in, maybe how should we be thinking about that for this year and then maybe the potential for next year as well?

Ryan, I hate to give you an incredibly boring answer, but I'm going to continue to tell you. Look, we communicate what we see, not what we hope for. Don't let that be confused with we don't work on anything else. You don't grow a business 21% this quarter, 18% the quarter before, 14% the quarter before without focusing on a lot of different initiatives and opportunities. So we're going to continue working on a wide range of initiatives from growing share with customers to acquiring new customers to innovating with our portfolio to TAM expansion. We'll continue all of those, but we'll also continue communicating what we see, not what we hope.

Got it. Makes sense. Thanks for taking my questions.

Okay. Thank you.

Your next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Please go ahead.

Hey, guys. Thanks for taking my question and congratulations on another really strong quarter. Brian, I was hoping you could unpack something a little bit more that you talked about in your prepared remarks. It sounds like you said something to the effect of your customers growing faster than their categories by a pretty significant margin. What's been driving that? Is that just plant-based taking share from dairy or your customers having more consistent access to supply and fewer stock outs? We'd love to just get a sense of what that common theme has been there.

Yeah. I think it's more traditional category management tools. Certainly, availability and consistency of supply is a piece of it. Innovation is a piece of it. Line extensions and brand extensions, distribution gains. And remember, our customers are also taking share. The category is never equal for all participants. You have some winners and you have others that are not winning. And I think that's a component where we're helping our customers be successful. And again, I can't reiterate this enough. We are a solutions provider for our customer. They also have a team that is out there every day working to grow their brand. We support them, but we also benefit as they grow their brand.

That's terrific. Thank you very much.

Your next question comes from the line of Daniel Biolsi with Hedgeye Risk Management. Please go ahead.

Brian and Greg, it's really nice to see revenue expectations going higher. Your growth sounds very diversified by customer and channel. I was hoping you could share a little how it looks by type of plant-based milk. Are there any changes there in the market? Or is it still sort of the same secular trends going?

I would say they're the same secular trends that we've seen. Again, an advantage with SunOpta and our model is that we participate across the spectrum. And there's usage occasions differ across the spectrum of plant-based beverages. So I'm excited that when you work with us as a solutions provider, you've got the full spectrum of plant-based beverages to deploy at your disposal.

And so I have to follow up with the results you put today. When you hit 3 times leverage, how are you going to compare new CapEx investments with the share price being where it is?

Well, let's stay really focused. Right now, Daniel, we're worried about executing, growing with our customers, solving their problems and deleveraging, and getting that 3 times lever. When we do, I think there's a ton of evaluations to do. First and foremost, returning capital to shareholders. That's absolutely one that is first on our list. And then there's a whole host of other relative investments. But I don't want to put the cart before the horse. Let's focus on delivering the third quarter, then the fourth quarter deleverage, and then we've got a lot of opportunities after that.

Sounds good.

And that concludes our question and answer session. I will now turn the conference over to Brian Kocher for closing remarks.

Thank you all for being here today. We appreciate the chance to share our model and results. If you remember just three things from this call, let it be these. At SunOpta, we are successfully serving winning customers across all significant channels and categories we engage in. A strong indicator of a sustainable value proposition is volume growth, and we are seeing this increase with our largest customers across all channels and major product segments. That’s point one. Secondly, our supply chain is prepared for accelerated growth. We have boosted our output by over 25% year-to-date through a mix of new capacity and maximizing our existing resources. I am proud of the progress we've made in the first half of the year, particularly in the second quarter. However, I am proud but not satisfied. Our impressive growth has revealed areas where we can invest further in the short term to enhance operating efficiencies. We are committing to investments now aimed at improving margins in Q4 and beyond. Finally, we are thrilled about our demand generation, the co-development opportunities with our customers that lie ahead, and our potential to increase market share with current customers and attract new ones. We are extremely optimistic about this. Given our confidence, we are again raising our revenue guidance. Remember, we base our guidance on what we observe, not what we wish for, and we work diligently to seize every opportunity available. Thank you once more for joining us today. We look forward to providing updates in the next quarter, and thank you for your continued support.

This concludes today's conference call. Thank you for your participation and you may now disconnect.