Greetings and welcome to SunOpta's First Quarter 2025 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 first quarter fiscal 2025 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 at www.sunopta.com. This call is being webcast, and a transcription will also be available on the company's website. The investor presentation referenced during this call and webcast is also posted on the company's investor relations 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 continuing operations portion of the business and all figures are in US dollars, occasionally rounded to the nearest million. Now, I'll turn the call over to Brian to begin. Brian?

Good afternoon, and thank you for joining us today. As noted on slide 4, Greg and I will cover the following topics today. Quickly cover our first quarter 2025 performance, visibility into our revenue growth resiliency and staying power, provide a deeper look at our four-point plan to achieve an improved gross margin, overview our plan for managing the fluid tariff situation, and reiterate our capital allocation priorities and provide you the whys behind them. At the end of the call, you will have a clearer understanding of our confidence in achieving our long-term growth, cash flow, and return on invested capital goals. After our scripted comments, we'll take your questions. As you can see on slide 6, Q1 performance exceeded our expectations with revenue increasing 9%, driven by volume growth of 12%, reflecting continued broad-based gains across segments, products, and customers. Reported gross margin improved sequentially, and we anticipate this sequential improvement continuing throughout the balance of the fiscal year. Adjusted EBITDA of $22.4 million exceeded our expectations. We are raising the bottom end of our fiscal year 2025 guidance to reflect the outperformance in Q1, and Greg will cover more financial details in his section. The takeaway from Q1 is we are ahead of our plan and marching along the path that we outlined for 2025. Looking ahead, I am excited to share additional details on some of the key factors that underpin our conviction in SunOpta's outlook and value creation potential, which are the continued strength of our categories and customers, the resilience of our solution-centric proposition, and the progress we are making on our asset optimization strategy. Starting with our category and customer strength, all of our categories are growing. Based on internal estimates, we anticipate the shelf-stable plant-based beverage category will grow high-single-digits in 2025, an increase from the mid-single-digit growth in recent quarters. Better-for-you fruit snacks and ready-to-drink protein shakes are growing at a rate exceeding 15%, while broth and tea continue to grow at mid-single digits. Furthermore, our customers and channels continue to outperform the market. Each of our top five customers delivered year-over-year growth in Q1 2025. Our foodservice customers grew in the mid-single digits, and our club channel customers grew double digits. Complementing our category and customer growth, we have a sustaining value proposition. In light of heightened market uncertainty, I think it's important to highlight how resilient our business is, given our diversification across categories, segments, and channels, a core strength of our model and a key point of differentiation. In terms of categories, in addition to being a leader in plant-based beverages, we are the manufacturing leader in better-for-you fruit-based snacks. Additionally, we have a sizable and growing presence in broth, ready-to-drink protein beverages, and tea. Within plant-based beverages, our largest category, our portfolio is diversified across oat, almond, coconut, and soy bases, serving both brands and private label customers who go to market through retail, club, e-commerce and foodservice channels. Our customer and channel diversity positions us to consistently win and grow with the overall category even as consumer preferences for plant-based milk types and purchase channels evolve over time. In fruit snacks, we continue to see very strong demand, and we have delivered double-digit revenue growth for 19 consecutive quarters. The optionality and flexibility this diversification provides is particularly relevant in periods of transition or when consumers feel cost pressure. We can adapt quickly to changes in the marketplace and are well-positioned across the entire spectrum of consumer purchase options, whether it's food at home or away, from fast casual to premium in foodservice, or from private label to branded within retail and club. All of those data points give me confidence in our revenue outlook. In addition, the status of our pipeline is a reflection of the value and relevance of our solution-centric offering and showcases the future potential. As of today, our new business pipeline stands at almost 25% of annual sales volume, which is 2 times the pipeline level we experienced over the prior 15 months and includes share and TAM expansion opportunities. For clarity, our pipeline progress is not a substitute for our revenue guidance. However, our business development efforts are accelerating and creating additional opportunities. As you can see on slide 8, our pipeline momentum coupled with category growth tailwinds give us a high degree of confidence in achieving our long-term revenue growth target of approximately 10%. While we are committed to a communication strategy that is based upon what we can see and not what we hope, based on the significant growth in our pipeline, it should be clear why I am so excited about our future. Finally, we are making good progress on our asset optimization strategy. We have demand and we have an accelerating pipeline, but we still must make the product and make the product at an acceptable gross margin. In addition to having the right assets, we are implementing more consistent processes and practices to unlock the latent capacity in our manufacturing network and deliver product at an improved margin. The progress we have made in these areas is undeniable. On slide 9, you can see that in our aseptic network, we increased Q1 volume production by over 6% from the fourth quarter of 2024, which was 6% more than in the third quarter of 2024. Our fruit snacks network produced 7% more units in Q1 2025 than in the same quarter of 2024 with exactly the same equipment. We are significantly ahead of schedule on creating capacity within our network. I do want to see and expect more to show up in gross profit. As shown on slide 10, the full benefit of our capacity expansion on gross margin will materialize as we make progress on the following four major areas of operational emphasis. First, we see fixed cost leverage positively impacting our margin profile for the balance of the year. We are making so much progress in unlocking trapped capacity that we've unlocked enough volume to achieve the midpoint of our 2025 revenue guidance. As that additional volume sells through, we anticipate approximately 150 basis points of operating leverage will flow to the bottom line between now and our Q4 reporting period. Second, optimizing manufacturing yield relative to units produced. While we have significantly ramped up production volume, we are using more raw material than anticipated. As our product yield improvement initiatives progress from the R&D stage to pilot testing to network-wide implementation over the next several quarters, our yields will increase materially. Between now and Q4 2025, product yield improvements are expected to result in approximately 100 basis points of margin expansion. Third, labor productivity. We have several active training programs throughout our manufacturing network designed to improve the efficiency and the effectiveness of our team members, but rolling this out across four shifts in seven plants that operate 24/7 takes time to fully implement and validate. We've made significant progress and are on track with year-end targets. I anticipate labor productivity improvements driving an additional 50 basis points of margin expansion between now and the end of the year. We are facing a headwind that prevents us from accelerating margin faster. We have a temporary technical limitation at Midlothian. We are out of the startup phase at Midlothian and are making good progress across output labor and yield metrics. However, a combination of a more restrictive regulatory environment and a subscale wastewater management system is creating a temporary bottleneck that limits our output volume. We will face some headwinds on maximum output volume and margins in Midlothian until our wastewater solution is installed in mid-2026 and expect to incur approximately $500,000 per quarter in excess wastewater haul-off fees until that time. Once completed, we believe the additional output unlocked at Midlothian could positively impact total company gross margins by approximately 50 basis points, again starting in the second half of 2026. Combining the capacity we have already unlocked, our plans to seize more latent capacity, and the planned improvements in yield and labor efficiencies bolster my confidence in achieving our 2025 gross margin expansion targets. If you add our initiatives together, we built the bridge from our first quarter 2025 adjusted gross margin of 15.3% to our guided fourth quarter 2025 gross margin range of 18% to 19%. For clarity, our fourth quarter is typically our highest revenue and margin rate quarter of the year due to the seasonality of our broth business. For Q1 2026, we would expect to see a 200 basis point improvement versus Q1 of 2025, and full year 2026 gross margin range of 18% to 19%. With the progress already made, additional capacity unlocks that we see over the next year, and the benefit of resolving our wastewater challenges in Midlothian, we see reaching 20% gross margin in the back half of 2026 and reaching a full year gross margin of 20% plus in 2027. In summary, the three key points I would like you to take away are, first, our customized supply chain solutions generate diverse and growing revenue streams and deepen our partnership with customers that are growing faster than the categories in which we serve. Our pipeline is strong and accelerating in spite of challenging macro dynamics. Second, our diversified product and channel portfolio creates an index fund-like exposure to the high-growth categories and customers we serve, mitigating the impact of changes in consumer preference and shopper behavior across channels, products, and brands. Third, our supply chain initiatives are making progress and ahead of our plan. I am confident in achieving sequential margin improvement for the remainder of the year, as well as expanding margins into 2026. Now, I'll turn the call over to Greg to highlight our key financial metrics and discuss our tariff response plan and capital allocation priorities.

Thank you, Brian. And good afternoon, everyone. We had another strong quarter. As shown on slide 12, revenue of $202 million was up 9% compared to last year and continued to be driven by solid volume growth. Gross profit decreased by $0.8 million to $30.3 million compared to $31.1 million in the prior year. Adjusted gross margin was 15.3% compared to 17% in the prior year. The 170 basis point decrease in adjusted gross margin reflected investments in talent and infrastructure to improve long-term margins, the inefficiencies related to the volume limitations resulting from the excess wastewater issue at our Midlothian, Texas facility, and incremental depreciation related to assets recently placed in service but not fully utilized as production ramps up. These factors are partially offset by higher sales and production volumes for beverages, broths, and fruit snacks, driving improved plant utilization. Earnings from continuing operations was $4.8 million compared to $3.8 million in the prior-year period. Adjusted earnings from continuing operations was $5.3 million or $0.04 per diluted share compared to $1.9 million or $0.02 per diluted share in the prior year period. Adjusted EBITDA from continuing operations increased from $21.9 million to $22.4 million. Turning to our balance sheet. At the end of the first quarter, debt was $261 million, down $4 million from the end of the fourth quarter, and leverage was 2.9 times versus 3 times at the end of the fourth quarter. Cash generation was strong, with $22 million of cash provided by operating activities of continuing operations in the first quarter compared to $7 million in the prior year period. Cash used in investing activities of continuing operations was $15 million in the first quarter compared to $4 million in the prior year period. Now, turning to our outlook on slide 13, we would like to be very clear on our outlook for 2025 and 2026. As such, we are providing guidance without using run rates or exit rates going forward. We are raising our outlook for the year to reflect the strong performance in Q1. We now expect revenue in the range of $788 million to $805 million, growth of 9% to 11% versus 2024, compared to our prior guidance of 7% to 11%. From a profit perspective, we now expect adjusted EBITDA of $99 million to $103 million, which represents growth of 12% to 16% compared to our prior guidance of 9% to 16%. From a pacing standpoint, we expect the pacing to remain the same as we discussed in our February call, with the Q1 outperformance being the only change. For 2025, we continue to expect adjusted EBITDA to improve sequentially throughout the year. We also continue to expect interest expense of $24 million to $26 million, capital expenditures on the cash flow statement of approximately $30 million to $35 million, and free cash flow of $25 million to $30 million. Please note essentially all of the free cash flow in 2025 is allocated for mandatory debt and notes payable repayments which is reflected in our 2.5 times leverage target that we continue to expect to achieve by the end of 2025. Slide 14 shows our long-term growth algorithm we published in our February investor presentation, which remains unchanged. We continue to target annual revenue growth of 8% to 10%, adjusted EBITDA growth of 13% to 17%, and expect to deliver approximately the midpoint of these ranges in 2026, as well as ROIC of 16% to 18% by the end of 2026. Turning to slide 16, as it relates to tariffs, this is obviously a fluid situation that we continue to monitor. While our employees, production facilities, and customers are predominantly located in the US, we source a portion of our raw material ingredients and packaging globally, and less than 8% of our total revenue is generated from the sale of fruit snack products imported into the US from our Niagara, Ontario facility. In response to these tariffs we started communications with our customers at the beginning of the year, and we intend to pass through essentially all the incremental costs to our customers, similar to our pass of pricing of raw material cost increases. While our pass mechanisms may trail some tariff costs by a month or two, we expect to recover substantially all incremental costs. As a result of the pass-through approach, we do not expect a material impact to our gross profit dollars or adjusted EBITDA in our guidance. However, there could be an increase in revenue and a decrease in gross margin and adjusted EBITDA margin simply due to the passing through of the incremental tariff costs. Turning to our capital allocation priorities on slide 17. As a supply chain solutions provider serving growing customers in growing categories, we have great conviction in our long-term growth of our categories, and our capital allocation priorities must incorporate and reflect that conviction. As such, the confidence in our growth trajectory ripples through our capital allocation decisions. In February 2024, on Brian's initial earnings call, we clarified our capital allocation priorities. At that time, we said that our first priority was to be under 3 times levered, and once we achieved that target, we would continuously evaluate the best use of free cash flow that may include share buybacks, funding high ROI capital projects and/or accretive M&A. We achieved our leverage target at the end of 2024, and that did exactly what we promised, by continuously evaluating the best use of cash going forward. The world has changed since February of 2024, and on our last call, we discussed our top priority was to reduce leverage to 2.5 times by the end of 2025. Let me expand on why we made that decision and discuss our current priorities after we achieve our leverage target. In our eyes, delevering further is critical because of our conviction in our long-term growth potential of our categories and our customers. While we currently don't need significant growth CapEx to drive our revenue and EBITDA trajectory, our more disciplined approach will allow us to continue to have a reasonable leverage level even when we eventually start to ramp growth investments again. Also, delevering our balance sheet allows us to adapt to volatility in the commercial marketplace and to take advantage of unique opportunities if they yield a disproportionately positive ROIC profile. Once we achieve our leverage target at the end of the year, our second priority is investing back in the SunOpta business through capacity expansion to meet the growth of our categories and customers. In almost every scenario we evaluate, the highest return is to invest in growth CapEx and is the best option for long-term value creation for shareholders. We are excited about our future outlook and consistently look at our capital needs two to three years out. We are constantly gauging commercial market, consumer trends, and the outlooks of our customers for growth. Investing wisely, combined with our focus on operational excellence, are the key elements of achieving our long-term growth algorithm. When it comes time for growth investment, we will always analyze relative returns between new production lines and/or acquired businesses. Delevering to 2.5 times in the near term will allow greater financial flexibility to invest in the business in the longer term. Our third capital allocation priority is returning capital to shareholders. While our immediate plans are to achieve a 2.5 times leverage target, since we currently do not envision needing growth CapEx in 2025, we would like to be positioned for opportunistic share repurchases if we are trending ahead of plan and have excess cash available while still being able to meet our leverage target. Accordingly, our board has approved a share repurchase program authorizing the purchase of up to $25 million in common shares. The size and timing of repurchases, if any, will depend on a multitude of factors, including the company's progress towards its leveraged target, financial position, capital allocation priorities, market conditions, regulatory requirements, and other considerations. We are committed to driving shareholder value. We are committed to maximizing our cash generation and ROIC opportunities as the best way to drive long-term shareholder value. We believe the best way to maximize cash generation and ROIC is to maintain a reasonable debt level while fueling and funding our growth strategy with high growth projects. We believe the capital allocation priorities outlined above will generate long-term value.

Your first question comes from the line of Andrew Strelzik with BMO Capital Markets.

My first one is about the commentary you made about the accelerating category growth and your accelerating pipeline. And I just find it interesting that that's happening amid what is a pretty choppy consumer environment, with a lot of consumer companies talking about incremental slowdown. So, why do you think those two things are happening now? Do you think they're related? Or with respect to the pipeline, is it more internal or external kind of push? I'm just trying to wrap my head around why those things are happening now, because it's great to see.

I want to highlight a couple of key points regarding our long-term growth. First, looking at our categories, particularly plant-based beverages, these products are often seen as lifestyle choices rather than discretionary purchases. They serve medicinal purposes and satisfy taste preferences, leading to sustained growth in these areas. Additionally, categories like better-for-you products and nutritional proteins, including fruit snacks, are also experiencing growth. Another important factor is that most of our products are either not considered luxury items or are seen as affordable small luxuries, making them accessible even during challenging economic times. This plays a role in the ongoing growth of our categories. Moreover, our customer base is performing better than the broader categories they operate in, which gives us an additional boost. Lastly, our demand generation engine has been a consistent strength over the years and is currently driving our business forward. This engine allows us to leverage our increasing capacity to meet the needs of what I believe is an underserved market in terms of capacity, consistent supply, innovation, and high-quality products. This is how I see the connection between our growth and the current market dynamics.

I'll ask on the tariff side. It's great to hear that you've been so proactive on passing that through. I guess I just would like to get a better sense for kind of what that looks like from a cost bucket if you able to frame that based on what we know today and how much pricing that implies that you need to pass through. And even maybe some color on how those conversations with your customers have gone.

Andrew, six of our seven plants are located in the US. 98% of our revenue in 2024 was to US-based customers. We do have a small portion of raw material and packaging that is sourced globally. In addition, we do have a portion of a fruit snacks product that is imported into the US from our Niagara, Canada facility. But we view the tariff increases, Andrew, no different than our other raw material increases. We have the business model to pass through those changes in raw materials to our customers as a normal process. We do that all the time. We're very transparent. If the cost goes up, we increase the price. If the cost goes down, we decrease the price. And we view this exactly the same way. Our goal is to make a fair margin on producing our products. And when the raw materials increase or decrease, we pass those on. We started our conversations with our customers back in January, and we do expect to substantially pass on all the incremental costs to our customers.

Your next question comes from the line of Jim Salera with Stephens, Inc.

Brian, I wanted to start off on your comments on the wastewater treatment in Midlothian. Maybe two parts on that. One, is there any way to pull forward because it sounds like we're still over a year out on having that up and running. Is that just an equipment availability issue or is there anything that you guys could do to kind of accelerate that and pull that forward and get it installed? Secondly, are there other plants in the network that you can lean on in the interim to shoulder some of the volume that you could run through Midlothian that you can't right now or should we view that as there's just a cap on certain products until you get that wastewater up and running.

Here is the way that I would think about that. There isn't a day go by that Greg and I don't try to figure out how to accelerate that solution. The fact of the matter is it's a capital solution. So the plan is designed. The equipment is designed. The capital outlay is already included in our guidance for our maintenance CapEx. So, this isn't incremental. It's already included in our guidance for maintenance CapEx. And we are leaning on our engineers, fabricators, and everyone involved in that process as fast as we can. I do still see some incremental advances in Midlothian between now and when the solution is implemented in mid-2026. But I think it's also fair to say this is a limitation that we didn't foresee six months ago or nine months ago. We were ramping up Midlothian. We have some problems. But, boy, as we continue to make increases in output, it finally came to the head that we were going to have some limitations on our maximum output at Midlothian until such time as we could get a more permanent solution for that. We are already leaning on other plants. I think the good news underlying a lot of our communication is we've made a lot of progress on capacity creation. If you remember going back in time, one of the risks that potentially we had in 2025 on our revenue guidance was timing with respect to output creation and capacity creation. We freed up enough capacity in the first quarter that we feel confident we could deliver the midpoint of our revenue guide for 2025. We continue to have more work to do. We continue to drive our other facilities and plants. But, in fact, we are relying on other plants to help us continue servicing the demand that we face.

Second question just on the demand side. With retailers, I think, trying to diversify their supply sourcing into the extent that they can source more products domestically, have you guys been having more conversations with retail partners that aren't currently utilizing your network that maybe source from Canada or Mexico that in order to sidestep some of the tariffs would consider switching? And do you guys have a latent capacity that you can allocate to new business? Or is it really just all being absorbed with what you have in the existing customer pipeline?

I just think realistically in our market, US sales are being sourced by US providers. So I don't really see that as an opportunity. I would remind you that our pipeline continues to accelerate. In fact, it's twice as much as it was the day that I walked into the place. So I'm excited about that. We are trying to create latent capacity every single day. And the faster that we create it, I think the faster that we'll be able to sell it, but it's really the more traditional demand generation tools that you see. Innovation, share expansion with existing customers, expansion with new customers. And that's how you should probably think about our revenue growth.

Your next question comes from the line of Jon Andersen with William Blair.

I wanted to stick with the pipeline for a minute. Brian, you mentioned it's twice as large as it was maybe a year ago or so. What does that mean? The sales potential, the sales volume associated with that pipeline is 2x what it's averaged over time. Trying to understand the definition of that a little bit. Could you give us some sense of the composition of the pipeline, maybe by product type, whether it's more on the plant-based beverage side or protein shake or fruit snacks, and whether there are any maybe incremental investments required if it tilts toward fruit snacks. I'm not sure where you stand with your capacity in Omak, et cetera.

Let's talk a little just to get the definition right, and we included this in our prepared remarks. We're looking at a pipeline that right now is approximately a quarter of our annual revenue, 25% of our 2025 guided revenue. So, in terms of overall dollars, that's about twice as big as it was a year ago or 15 months ago at this time. So, again, I never want anyone to confuse pipeline with our guidance. They're not the same, but we are trying to dimensionalize for you the strength and the size of our pipeline. So, hopefully, that helped do that. If I look at the composition of the pipeline, it is a wide range of channel opportunities. When you think about club, food service, it's a wide range of, what I'll call, product lines. Yes, we see heavy plant-based beverage opportunities. We also see fruit snack opportunities. We see some opportunities in the ready-to-drink protein shake. Probably, just realistically less there because we do have a theoretical limit at Midlothian right now. But one area that we don't talk about as much about, Jon, is our broth business. Remember, we've kind of said broth, I don't know that it's strategic, but it's for strategic customers. And we've really seen more recently, let's say over the last year, an opportunity to really create value by solving problems in some of our broth customers' networks. And so, we see that pipeline as being very strong. I'm not trying to give you overall numbers here, but I'd say it's probably more heavily weighted to plant-based beverages followed by broth, followed by fruit snacks is a good way to think of it. I would also say it's probably more heavily weighted towards growth with existing customers than with new customers. But the new customer component and the new product line component of the pipeline is also substantial as well. So I hope that's a little bit of color for you.

Obviously, if you're growing with existing customers, they like what you're doing. So it's a good sign of your success on the solution front.

I'm so glad you brought that out. Just one point. I'm a firm believer that the absolute best indicator that your value proposition resonates in the commercial marketplace is when your volume grows. And if you think about our growth over the last couple of years, our growth over the first quarter, it is volume-based growth. And I think that's the best indication that our value proposition in the commercial market resonates because that means customers are voting.

Two-part question that more I guess just around some of the financial or volume and margin implications of what you talked about. With respect to the wastewater program, how would you articulate your visibility into getting that done by the middle of next year? And are the volume limitations that you talked about that are associated with that upgrade, until you make that upgrade, are those in this year's guidance? Are they incorporated into the first half of 2026 when you talked about 2026 growth being kind of at the midpoint of the long-term algo? I guess I'll start with that. I have one quick follow-up.

Let's answer the second question first. Yes, incorporated into our 2025 guidance. Yes, incorporated into our comfort level with the midpoint of our long-term algorithm for 2026. Yes to both of those. Think of the wastewater challenge that we have, the limitation on output. At this point, we're very clear. We've got the equipment designed. We got purchase orders that are going out for the equipment. Remember, just to be perfectly clear, this is an expenditure that we can manage within the confines of our maintenance and CapEx. So not additional CapEx, but it would be included in that maintenance CapEx that you can think about in our long-term algorithm. We are literally trying to get fabricators to work as fast as they can. Jon, we had one analyst ask, Greg and I are doing math and trying to figure out if air freighting things faster works or if it's worth it. We're really trying to drive that solution faster. But it is to the point where the solution's designed. We've got the equipment that's ordered. We need to get it fabricated. And then, obviously, you have an installation that goes along with that. So I think mid-2026 gives us plenty of room. A, we're farther along the path in terms of design, but I think that also gives us some room for any what you would consider normal contingencies.

Thank you for the detail around the four-point plan and how that unlocks capacity and helps drive productivity. The gross margin pacing that you've outlined, I guess, does that incorporate your best effort view of tariffs at present? Or is the tariff thing just too early to walk into that? Because as you point out in your press release that it could have an impact on your margin rate, even if you're fully recovering dollar costs. So just trying to get clarity on whether that's baked into the gross margin cadence at this point or not.

Jon, it is not baked in. As you mentioned, it is a fluid situation. We continue to evaluate and we continue to expect to substantially pass on all of our costs. I wouldn't view it as a material impact, a significant impact, either due to our revenue or our increasing costs. And our goal is to protect our gross profit dollars, not have an impact on adjusted EBITDA. But as we called out in our press release, there could be an impact on increase in revenue and an increase in cost.

Your next question comes from the line of Ryan Meyers with Lake Street Capital Markets.

Just one for me here, just kind of following up on the new business pipeline. So just to get a good understanding of it, what's the typical timeline for converting this, let's call it, new business, into actual sales and revenue? I know you said it was 25% of what the numbers in 2025 could be. But just curious the nuances of that and when we would potentially see that actually come through on the revenue side.

I would consider this driving confidence in our ability to hit our long-term growth algorithm. I don't want to get too far ahead of ourselves in figuring out what percentage gets baked into 2025, 2026, 2027. But it is a very common approach. The bigger your pipeline, the more that ultimately you convert and close into revenue. So I'm excited that we have a bigger pipeline. The way that I would try to think about it is our pipeline has somewhere between 6 months and 18 months in a closed cycle. There are certain things that are faster and other things that are slower. We just tried to give you an order of magnitude so you can understand what the potential is. We have projects along all those stages of the pipeline. And, again, we guide to what we see, not what we hope. As those things become more clear, as those things convert from pipeline to actual, we will update our guidance, and you guys will be the first to know. But right now, I wanted to give you a perspective that our categories are growing, our customers are growing even faster than the categories in which we participate. And oh, by the way, our demand generation is clicking, and that provides me and Greg great confidence in our 2025 outlook as well as our long-term algorithm for the future.

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

I wanted to ask about the upside delivery on revenue in 1Q, which, Brian, as you mentioned in your prepared remarks, came in ahead of expectations. I guess as we had conversations in the second half of the fall of 2024, thinking about distribution gains at your largest customer, thinking about the removal of the plant-based surcharge that we started to see at several coffee chains, many of whom are customers of yours, what I inferred from your comments was that that's kind of baked into expectations at the time. So I'm just curious, the source of the upside, are we seeing incremental benefits from above and beyond what was planned for things like the plant-based surcharge? Or is there any other dynamic that you would speak to that was specifically coming in ahead of expectations?

Clearly, we guided to what we see, not what we hope in 2025. But if you think about it, and we mentioned this in our prepared comments, our top five customers delivered year-over-year growth. Our food service customers grew in the mid-single digits. Our club channel customers grew double digits. And frankly, the outperformance was probably more on the capacity creation side than it really was on the demand side. I think we had the demand already and just weren't sure that we could produce enough units to fulfill it. And like I said, on our supply chain, I’d say overall we're ahead on capacity creation. And I'm excited about that. We still have some work to do in those four areas that I mentioned in the prepared remarks.

Quickly on the pipeline, obviously the 2027 revenue target includes the assumption of a less than 20% success rate of converting that pipeline. Seems low, but I don't have a lot of context there. Forgive me if you mentioned this already, but is there a bogey that you can provide for, like, historically, we convert 50% of this or 10% of this? I don't even know if that's a fair question, but figured it was worth a stab.

It's absolutely worth a stab. I will not give you a target on what we convert our pipeline. But I will say this, Brian. Again, transparently, a bigger pipeline translates to more volume growth. In general, a bigger pipeline translates to more volume growth. And as I mentioned to one of the other questions, I would think of a bigger pipeline also providing us more confidence in our long-term revenue growth target of approximately 10%.

Last question for me. One of your customers in the protein shake category talked about some inventory destocking. I'm just curious whether or to what extent that might have flowed through to you, and maybe just any broader commentary about your positioning within that protein shake space, which I know just amounts to, I believe, one line today, but any updated thoughts from there?

We won't discuss any particular customer or the impact of any particular customer. I will tell you this. We're excited about the category. We still see consumption in the ready-to-drink protein shake category growing dramatically. We have an opportunity, I think, even though Midlothian has some limitations in terms of its ultimate output, I still think we can eke out some more units that eventually we could sell. So, overall, we continue to be excited about the ready-to-drink protein shake category.

Your next question comes from the line of John Baumgartner with Mizuho Securities.

First off, Brian, if I see the detail on the gross margin bridge, very helpful, but I want to focus on the middle of the P&L. There was some nice leverage on OpEx and Q1. And I'm curious to what extent was that timing-related? And if there are more sort of ongoing factors in there, are there any notable callouts you have on SG&A, the benefits there, similar to what you laid out for gross margin?

The decrease in SG&A, $3.1 million, that was basically all related to timing with stock compensation. So there are a couple of things. One is we had some forfeitures in Q1 and some employees left in Q1 2025. In addition, in Q1 2024, with the retirement of our prior CEO, there was certain vesting of certain awards that accelerated, which made the Q1 2024 number larger. So really, your delta is all stock comp. I wouldn't expect the number to be this low going forward. To go slightly higher as we wouldn't anticipate to have forfeitures. But that's really our driver year-over-year.

My second question is, can you speak a little bit more to the raw materials, the yield improvement that you're expecting in that forthcoming gross margin benefit? I guess, what does that entail? Are there any specific raw materials where you anticipate the greatest benefit and any, I guess, related costs to achieve that?

John, it's a great question and thanks for asking it. Look, I think you might be overthinking it. We're right now just using a little more product than we had planned based upon our standards. Now, that comes from a couple of different reasons. Could be recipe compliance. So, we've got training programs in place to try to ensure recipe compliance is in the same area. It might be ingredient substitutes that can help us get more productive, which is why I said sometimes raw product and raw material yield, we first have to test it out in the R&D center, make sure we've identified it, then we go to a pilot plant, then we roll it across the network. So it could be compliance-related or recipe compliance-related. It could be raw product substitution. It could be the right mixture. It could be the right processing time for product. So it's a little bit of all those things. I wouldn't say there's one silver bullet in there that would solve all of this. We've made some progress, but that's an area where I'd say, look, if some initiatives we have are pacing faster than we expected, like capacity creation, the improvements we expected in raw product yields are probably pacing a little bit behind. So we need to catch up on that and do better.

Your next question comes from the line of Daniel Biolsi with Hedgeye.

I know it's not a driver of your margins, but I'm just curious what your outlook is for the raw material costs and what level of pricing we should expect for the year.

Dan, you're just talking raw material in general, tariff? Could you clarify your question?

In general, just for the top line, between volume and price.

Excluding tariff, I don't see a major increase or decrease this year. If you see in Q1 here, we had a giveback on price, which we're very transparent on. We had pass-through giveback, mainly oat-related in Q1, but it was less than 2%. It's probably fair to think of that similar type range, plus or minus, in each quarter for the rest of the year.

I was encouraged by the share repurchase authorization announcement. When you adjust your plans for risk or probability for free cash flow, it seems difficult to me to have a better ROI on free cash flow than buying back stock below $5 for example. I'm wondering are you thinking about share purchases opportunistically or is it just after all those other factors that you're thinking about share repurchase?

We tried to be clear on this one. So our top priority is to de-lever, right? To de-lever to get under 2.5 times by the end of 2025. We don't envision needing growth CapEx in 2025. So we wanted to get this authorization in place if we're achieving that plan. If we're on track and we're ahead of that plan to de-lever, we think there's an opportunistic area here to allow us to go buy back some shares, and that's why we have that plan in place.

I think it's a great tool to have in our toolbox to continue trying to drive shareholder value, and that's the way we look at it.

I will turn the call back over to Brian Kocher for closing remarks.

Thank you, Kate. Thanks to everyone who joined today for your questions and for supporting us. I'd really like to summarize just a couple of key things. If you only remember four things from the call today, please remember these four. First, Q1 results beat expectations, and we raised guidance accordingly. Beyond 2025, the combination of sustained multi-category growth and an accelerating sales pipeline gives us confidence in delivering our 2025 revenue and long-term growth algorithm. So that's a key point to remember. Secondly, we've made real progress on our operational priorities, particularly in unlocking trapped capacity. There is more progress to come. We identified and quantified supply chain projects for you, and those will drive significant and sustained improvement in gross margin throughout the balance of 2025, into 2026, and then continuing into 2027 as well. Although the tariff situation is fluid, we have a plan in place to mitigate substantially all of the direct impact on SunOpta's financials and outlook. Finally, we have a disciplined capital allocation process in place. And our $25 million share repurchase authorization gives management another tool in the toolbox for the pursuit of shareholder value creation. Thank you for your time. Thanks for your questions. We look forward to updating you on our continued progress and we'll talk to you soon. Thank you all.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.