Earnings Call Transcript - STKL Q2 2022

Operator, Operator

Good afternoon, and welcome to SunOpta's Second Quarter 2022 Earnings Conference Call. By now, everyone should have access to the earnings press release that was issued this afternoon 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. The company 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 our 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 more detailed discussions 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 that unless otherwise stated, all figures discussed today are in U.S. dollars and are occasionally rounded to the nearest million. I'd like to now turn the conference over to the SunOpta CEO, Joe Ennen.

Joe Ennen, CEO

Good afternoon, and thank you for joining us today. With me on the call is Scott Huckins, our Chief Financial Officer. The second quarter was one of the strongest in company history with quarterly sales, gross profit, and adjusted EBITDA all at or near record levels. I'm particularly pleased with the quality of the quarter as it demonstrates the potential of our strategic plan, showcases the depth of our competitive advantages, and highlights our culture of execution. In addition, these results reflect favorably on the actions we took in late 2021 and early 2022 to mitigate inflation and improve operational performance. It is exciting to know that we are just getting started in realizing our long-term goals. As a reminder from our Investor Day, we outlined five strategic imperatives: transforming the portfolio, fortifying our competitive advantages, leveraging our competencies to expand the total addressable market of the business, being recognized as a sustainability company, and codifying our culture. Before we begin unpacking the results in detail, let me offer some key takeaways from the quarter. On a total company basis, our 20% revenue growth was very balanced with both volume growth and pricing growth. 60% of the consolidated gain came from pricing and 40% from volume. In our Plant-based business unit, revenue grew 31%, fueled by strong gains in both volume and price. Growth in Plant-based was exceptionally broad with nearly every major customer experiencing double-digit growth, every channel experiencing double-digit growth, every product type experiencing double-digit growth, and every go-to-market business experiencing double-digit growth. Gross margin rate improved 130 basis points versus last year, to 14.3%, and was up 260 basis points sequentially. This gain was despite a headwind of 140 points of margin rate dilution related to the effect of pricing inflation. Gross profit improved 33% versus a year ago, driven by strong management of all the gross profit levers from revenue to production output to cost control. While the consumer landscape is always dynamic, we have not seen any abrupt changes in consumer behavior. Given how balanced our portfolio is, we feel we are well-positioned to evolve with any future changes in purchase patterns. It is worth pointing out that we have not seen a significant change in consumer behavior as it relates to trade down in our core categories. Production output in our plant-based facilities was, once again, excellent with Q2 production levels up 20% to the prior year and similar to our record set in Q1, demonstrating the strength of our operational and technical competencies. All our major manufacturing plant expansion projects are on track, and we continue to make progress lining up customers for our new capacity. In terms of the impact of inflation, similar to the first quarter, higher customer pricing helped us recover over 95% of the inflation we incurred during the second quarter. We saw $25 million of year-over-year inflation in Q2, a bit up from what we experienced in Q1. There are some indications of lower crop prices headed into 2023. However, we expect inflation to remain stubbornly high in other areas like packaging, wages, and utilities. Lastly, based on the strength of the first half, we are raising revenue and adjusted EBITDA guidance for 2022 to reflect our strong first half results, and we remain confident in the long-term growth targets we shared with you at Investor Day. At the same time, we acknowledge that there are consumer uncertainties with real pressure on consumer spending. Now I'll turn to our segments, starting with Plant-based. I would like to remind listeners that we have three strategic priorities within Plant-based. Number one, strengthening and fortifying our competitive advantages. Number two, winning with oat milk to capitalize on this consumer trend and increase our participation in refrigerated beverages; and three, building a balanced multipronged go-to-market business that includes co-manufacturing, private label, and owned brands. Plant-based revenues surged 31% to $146 million in the second quarter, marking another record in our 15th consecutive quarter of revenue growth. The quality and structure of the growth was impressive. Volume accounted for over half of the revenue growth, while pricing constituted the balance. As we mentioned on the Q1 call, some Q1 orders that didn't get out the door have now caught up, resulting in a first-half growth rate of 22%. From a product category standpoint, every category delivered double-digit revenue growth. Plant-based milks, which account for two-thirds of the overall Plant-based business units, saw revenue growth of more than 30%. Our tea business remained strong with growth in the mid-40% range, reflecting strong customer demand. Finally, sunflower and broth each delivered double-digit growth in the quarter, showing strength throughout our portfolio. Delving deeper into the Plant-based milks, growth was very broad-based. Every single product format grew double digits. Oat, almond, rice, coconut, and even soy generated double-digit growth. Growth was led by over 40% increases in both almond milk and oat milk, each having revenues exceeding $30 million. Almond milk growth was fueled by both our existing customers and a sizable new customer. Oat milk growth continues to benefit from category growth and the ongoing share leadership position of the brands we support, limited only by our current capacity availability. Once again, SunOpta was privileged to work with several leading oat milk brands, including the number one brand in measured channels for the last seven quarters. This is strong testimony to the excellence of our R&D and technical operations. From a channel standpoint, retail sales were up over 40%, and total Foodservice grew by 20%. Relative to our go-to-market strategies, our branded business continued to excel with year-over-year gains approaching 40%, including more than doubling of our revenue from SOWN and Dream, driven by expanded distribution with our top foodservice customer. Our co-man business increased by 31%, driven by the continued strength of oat and tea, the ramp-up of a significant new customer, and catching up on a backlog of orders with several customers. Our private label business, which primarily consists of broth, grew by 15%, benefiting principally from pricing. Our aggregate ingredients business grew 47%, driven by the continued success of selling oat base for use in refrigerated oat milk, ice cream, and yogurt. Additionally, our sunflower business grew more than 30%, driven by pricing and new customer development. As we outlined at our Investor Day, we have a keen focus on innovation and using our expanding manufacturing capacity to attract new customers and develop new products. Our growth in the quarter came from new customers and new products. I'd like to take a couple of minutes and provide an update on the overall Plant-based milks category based on what we see in retail scan data. Let me remind everybody that the Plant-based milk category is over 40 years old, dating back to the early 1980s with the introduction of soy milk. The plant-based category has grown consistently and steadily year-over-year, driven by multiple consumer dynamics. In the last 13-week period, the combined refrigerated and shelf-stable plant-based milk category saw sales grow by 9%. There has been some unit sales growth softening, but consumers continue to spend more on the Plant-based milk category. As it relates to private label, there has been no share gain in Plant-based milks. In the latest 13 weeks, the category was up 9%, while private label grew by only 1%. Even in the latest four-week period, private label is growing at half the pace of the total category. Regarding product type, the big three—almond, oat, and soy—all grew. Almond continues to dominate the category with 61% of sales and is growing in the mid-single digits. Oat has now grown to account for 20% of the plant-based milk category, reflecting a 33% increase in sales. Outside of tracked retail, we continue to see and benefit from plant-based milk growth in foodservice, e-commerce, and untracked retail channels and customers. Lastly, let me comment on the progress around some of our capacity expansion efforts. The additional line we are adding in Modesto is on schedule and will be online at the end of Q3, providing us with much-needed relief in support of our core West Coast business. We also recently began construction of a second oat extraction facility to provide additional capacity to support the growth of our current customers and to enable the development of new customers and products. This facility is strategically located on the West Coast and is expected to open in the third quarter of 2023. Turning to Texas and our new greenfield plant south of Dallas-Fort Worth, despite multiple macro challenges, including computer chip shortages, labor shortages, and equipment backlogs, we are still on track for our first saleable production run at the very end of the year. At this point, all major equipment is on-site. We have hired the entire management team, and they have spent the summer training in our other facilities to ensure a strong startup of the plant. As a reminder, we broke ground in mid-September of last year, and we expect to have our certificate of occupancy in early October. I'm very proud of the team and how far we have come. This is SunOpta at its best, executing in the face of adversity. We are fortunate to have a dedicated team that is long on solutions and short on excuses. As mentioned, we are pleased with the business development efforts surrounding our added capacity and are excited to begin working with several new customers once Texas is operational. Moving on to our fruit-based segment. Recall, our three strategic priorities are: one, derisking the business through geographic diversification, customer pricing programs, and better grower relations; two, becoming the low-cost operator in frozen fruit through automation, footprint re-engineering, and aggressive cost reductions; and three, evolving the portfolio via mix shift and innovation toward more value-added offerings. In the second quarter, fruit-based revenues increased by 7.4% to $98 million, all of which came from growth in our margin-advantage Fruit Snacks business. This growth reflects our third strategy focused on evolving the portfolio. Revenue from Fruit Snacks increased by 48% versus last year, with the vast majority of this growth driven by volume. Sales in Fruit Snacks reached $24 million, generating a nearly $100 million run rate. By comparison, 24 months ago, Q2 sales were $10 million. Strong demand for our Fruit Snacks, combined with our new smoothie bowls, contributed to this impressive growth. By customer category, growth was broad-based, with both large CPG co-man customers and private label showing strong double-digit increases. In Q1, we added capacity in our Ontario Fruit Snacks plant, which has supported this growth. Our growth in Fruit Snacks continues to significantly outpace broader category trends. Nielsen data for the 13 weeks overlapping with our second quarter shows total Fruit Snacks up 9.5% in dollars but down 11% in units. We are also pleased with the early success of our smoothie bowl innovation, which is part of our Fruit Snacks business unit. We have commercialized 12 SKUs so far, and early consumer takeaways are encouraging. We approached this launch very entrepreneurially, meaning we didn't invest heavily in automation as we wanted to gauge consumer response first. As we build confidence in the long-term success of this product, we will have significant opportunities to improve output and profitability. Additionally, we began a significant expansion project in Washington State, which will come online in a year to further drive growth in Fruit Snacks. In summary, the outlook for our Fruit Snacks business is very encouraging. Frozen fruit sales were marginally lower versus a year ago, reflecting higher pricing and lower volumes. Revenue from our top five frozen customers increased by 13% and represented over three-quarters of our total revenues. Large mass and club customers also saw substantial double-digit increases, partially offset by lower revenues from SKU rationalization efforts in 2021. From a category standpoint, frozen fruit sales grew by 3.4% in the quarter, with private label growing by 4.1% and unit volume down by 6.5%. As a reminder, 70% of the category is private label. Retail customers are taking different approaches to passing on pricing, resulting in buying shifting away from premium retailers to more value-oriented options. We have wrapped up the California and Mexico strawberry processing season. We procured the necessary pounds, and pricing was favorable. We operated efficiently, as Mexico's food quality was good, while California's quality was just average. Overall, we emerged from the season in a solid position. Our multiyear efforts to reduce risk in this business are taking hold. California-sourced fruit now represents less than 10% of our total pounds, with Mexico functioning as the center of our food operations, further derisking the business. Mexico provides us with lower costs and greater access to more fruit types, supported by a strong management team in Mexico. We have substantial momentum across our business, and our passionate team continues to execute effectively against our strategic growth priorities. While the macro environment remains challenging, we have managed to offset the vast majority of inflation with pricing, and our productivity initiatives are gaining traction. Customer demand for our high-quality, unique products remains very strong, reflecting our leadership position in the fastest-growing plant-based and fruit-based categories. Our model is competitively advantaged regarding capacity and capability, and we expect to continue leveraging the power of our platform to rapidly scale. We remain committed to our long-term growth algorithm of annual double-digit plant-based revenue and profit increases, as well as increasing returns on invested capital. Now I'll turn the call over to Scott to take us through the rest of the financials.

Scott Huckins, CFO

Thank you very much, Joe, and good afternoon, everyone. Second quarter revenues of $243.5 million were up 20.4% year-over-year, with continued growth in both segments. Plant-based revenue increased by 31%, driven by solid volume growth of 17.3%, alongside pricing actions of 13.7% to offset inflationary pressures. Fruit-based revenues increased by 7.4% as we benefited from pricing actions of 10.4% to offset inflationary pressures. While volumes declined by 3%, strong demand for Fruit Snacks and smoothie bowls more than offset lower demand and the impact of SKU and customer rationalization for frozen fruit. Gross profit was $34.9 million for the second quarter of 2022, an increase of $8.6 million or 33% compared to the second quarter of 2021, and consolidated gross margin was up 130 basis points to 14.3%. As a reminder from the Q1 call, we pointed out that we left approximately $7 million of revenue and $2 million of profit on the table in Q1 due to the challenging logistics environment. The second quarter benefited from getting caught up and getting that volume out the door to customers. In Plant-based, segment-level gross profit increased by $4 million or 20.3% to $23.9 million, driven by higher volumes and pricing for plant-based beverages and ingredients, coupled with strong production volumes. Gross margin reduced by 150 basis points to 16.4% versus the prior year, primarily due to the dilutive effects of pass-through pricing to recover cost inflation, representing approximately 215 basis points of headwind. In fruit-based segment-level gross profit rose by $4.5 million or 70.2% to $11 million, driven by pricing actions and reduced manufacturing costs in frozen fruit, along with very strong volume growth in Fruit Snacks. Gross margin increased by 410 basis points to 11.2% despite an approximately 70 basis point negative impact from the dilutive effect of pass-through pricing to offset commodity cost inflation. Segment operating income was $8.1 million in the second quarter compared to $1.7 million in the year-ago period. The year-over-year growth was attributable to the previously mentioned $8.6 million of higher gross profit on a consolidated basis, partially offset by a $1.6 million increase in SG&A due to higher incentive compensation costs, which were partially offset by reduced employee costs related to headcount reductions in frozen fruit operations and lower business development expenses. Finally, we experienced an unfavorable $0.5 million foreign exchange impact year-over-year related to Mexico operations. Earnings from operations attributable to common shareholders for the second quarter were $0.9 million or $0.01 per diluted share compared to a loss of $1.7 million or a loss of $0.02 per diluted share in the prior year's period. On an adjusted basis, we had earnings of $3.5 million or $0.03 per diluted share in the quarter of 2022 versus adjusted earnings of $0.1 million or $0.00 per diluted share in the prior year's period. In the second quarter, adjusted EBITDA was $22.3 million or 38% higher than $16.1 million in the prior year. The sharp increase in adjusted EBITDA was driven by the $8.6 million increase in gross profit, partially offset by an increase of $1.6 million in SG&A. 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 toward the back of the press release issued earlier this afternoon. Turning to the balance sheet and cash flow. As of July 2, 2022, total debt stood at $296.5 million and reflects $176.7 million drawn on our asset-based credit facility, $95.9 million of capital leases, and the balance representing smaller credit facilities. Leverage stood at 4.6x at the end of the second quarter. As we communicated at our Investor Day on June 2, we target leverage of 2x to 4x and expect to be just above that range in 2022, returning to within the range in 2023. It is important to point out that our current leverage position is largely reflective of the timing and scale of our significant and planned investments in capacity expansion over the last two years. As we have said for many quarters, these investments are necessary to double the capacity, revenue, and profits of our plant-based business. We continue to believe we will be rewarded over the next several years for executing these investments in such a challenging environment. From a cash flow perspective, cash used by operating activities during the second quarter of 2022 was $2.5 million compared to cash used of $39.1 million during the second quarter of 2021. Cash used in investing activities of continuing operations was $34.1 million compared to $32.4 million in last year's second quarter, reflecting investments in capacity expansion projects. Let me close with comments on our outlook for the balance of 2022, recognizing the environment is very fluid regarding inflation, supply chain, labor, raw materials, and the state of the consumer. We are increasing our 2022 guidance to reflect strong first half results and continued confidence in our second half outlook. We are raising our revenue guidance to a range of $930 million to $960 million, up from $890 million to $930 million previously, representing growth of 14% to 18% versus 2021. Our adjusted EBITDA guidance is increasing to a range of $72 million to $78 million, up from $67 million to $75 million previously, representing growth of 18% to 28% versus 2021. I'd also like to remind listeners about how we see the new plant-based facility in Midlothian, Texas, affecting 2022 gross profit and 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 start-up costs in the second half of 2022. Now that we are partway through Q3, our refined estimate for the second half of 2022 is that we expect approximately $4 million of these costs in Q3 and $6 million in Q4. While these start-up costs are added back to adjusted EBITDA, they will affect gross profit and gross margin rate as reported. 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. And with that, operator, please open the call for questions.

Jon Andersen, Analyst

I wanted to ask first about the guidance raise. And as you think about the step-up in sales of about $35 million at the midpoint for the year and EBITDA, about $4 million, how much of that would you attribute to kind of over-delivery in the second quarter or first half? And how much would you attribute to momentum above initial plan in the second half of the year?

Scott Huckins, CFO

Yes, Jon, it's Scott. I'd say it's probably a relatively even mix of both because I think if you go back to February when we started guidance, we expected the first half to be more challenging than the second half, but I think it has improved with the release today. The second quarter was really strong. So I think part of it is memorializing and recognizing that over-delivery relative to expectations and continued strength. So I think the bottom line is it's a mix of both.

Jon Andersen, Analyst

Okay. And the sales and EBITDA that you left on the table in Q1, $7 million in sales, I think, $2 million in EBITDA, are we to kind of read your comments as that was incremental to Q2, that was fully made up during the quarter and there wouldn't be additional benefit from that as you move into the second half?

Joe Ennen, CEO

That's correct, Jon.

Jon Andersen, Analyst

Okay. From a pricing perspective, where are you from a pricing standpoint in terms of fully recovering inflation? Is there additional pricing to come? Or are you largely caught up at this point?

Joe Ennen, CEO

In Q1, we indicated we had covered approximately 90% of the inflation we had incurred in Q2. We indicated we recovered 95% of the inflation incurred. Going forward, we would really see any additional pricing actions we would take as surgical and very specific to either a customer or a product type. But we do not anticipate the need for wholesale pricing on a go-forward basis.

Jon Andersen, Analyst

Okay. And Scott, you kind of talked about the start-up costs, which would be specific to the Texas facility, and any impact that has reported gross margin. But as we think about the transition through the back half of this year and more so into 2023, how should we think about the margins in the plant-based business kind of progressing? I guess I'm thinking, you can correct me if I'm wrong, that through the back half of this year, you're continuing to leverage capacity in your existing facilities benefiting from incremental price, that's helping you from a margin perspective relative to Q2. And then we get into 2023 and the Texas plant comes online, and there's maybe a bit of a step back until you more fully utilize that plant. But can you talk us a little bit through the cadence as you're thinking about it, so we can understand that and know surprises?

Scott Huckins, CFO

Sure. So I think the first thing just to maybe take a step back on is when you think about the results or the margin results in plant-based compared to history, you got to add back approximately 215 basis points because we're trying to be clear that this was the headwind in the quarter from just passing on price. Meaning 16.4% as reported would be, call it, 18.5% to compare to years past. I do agree with your analysis that on a sequential basis, you've got $4 million, plus or minus a headwind in Q3, $6 million plus or minus in Q4. You're probably talking 200 to 250 basis points, approximately of headwind. That's part one. Then I'd say I would bet that 2023 will likely improve sequentially through the year because recall that at Investor Day, we provided pretty detailed bridges for our anticipated substantial step-up in depreciation. Therefore, as we sell through that capacity in '23 and beyond, I would expect continued improvement in margin.

Jon Andersen, Analyst

Excellent. And just one more on fruit-based. The margins obviously were terrific there, double digit for the first time in some time, at least according to my model. Are we getting to a point where the consolidation work you've done in frozen fruit, the derisking efforts, the SKU rationalization, really supports double-digit gross margins in the teens, perhaps on a sustainable basis? Obviously, Fruit Snacks and smoothie bowls, I assume, are contributing to that as well.

Scott Huckins, CFO

Yes. I guess what I'd say, Jon, is I would not expect gross margins in the teens in the very near term. We've clearly been trying to get into the double digits, which I appreciate you acknowledging we did. The point estimate is very mix-dependent. If you go back and look at the year-over-year 410 basis points improvement, around half of that is due to mix shifts toward Fruit Snacks, which you know is margin accretive. The other half was just absolute improvement in frozen. And to your point about the consolidation, yes, I mean, we're seeing the results of that from last year's exit of the Santa Maria and South Gate facilities, allowing for a more cost-efficient operating base.

Jon Andersen, Analyst

If I could just squeeze one more in. Bigger picture on plant-based milk. You said you haven't seen trade down by consumers to date. How do you view the potential for trade down going forward? Is that a real negative for your business? I assume that you're doing some private label, I know that's bigger on the frozen fruit side than it is in plant-based milk. And second, kind of a corollary to that is all of your crop forms were up. It sounds like a pretty unique situation. Any more color there is I think you mentioned maybe a new customer or new customers that were contributing to that, that would be helpful to understand that a little bit better.

Scott Huckins, CFO

Yes. We brought on a significant new customer earlier this year, and that is definitely contributing to growth. We saw especially on the almond milk side of things. And as for private label, it accounts for about 15% of the total category. We do make some private label business. So if there were a shift in that direction, we would benefit from that. However, we're pretty strongly branded as the category is, which is 85% branded. Not surprisingly, a significant majority of our business is through co-manufacturing or owned brands. We just haven't seen the wholesale shifts. I know that is the consumer trend that everyone thinks is happening, but in our specific categories, we're just not seeing those shifts.

Andrew Strelzik, Analyst

My first question is about the EBITDA guidance. From what I understand, it seems like you haven't fully accounted for the positive performance from the recent quarter. I might not have grasped your earlier response clearly. I'm interested in your thoughts on this. While I see that you're planning to incorporate the strength from the first half, I wonder what factors might diminish in the second half. Aside from the adjustments from Q1 to Q2, what influences do you anticipate fading away? Is it related to past pricing changes, or are there other uncertainties you're factoring in for the latter part of the year?

Scott Huckins, CFO

I guess the point I was trying to drive at, Andrew, to see if I can help on two topics, right? You have a revenue outlook, which we called up in part informed by first half performance and part by our outlook for the second half. Obviously, the same for EBITDA. I think we would all acknowledge Q2 was really, really strong on any metric. But I'm also just trying to be clear. Look, we're pretty optimistic about the second half. I think that was the takeaway I was trying to offer concerning the structure of the outlook.

Andrew Strelzik, Analyst

Okay. That makes sense. But there isn't anything related to the start-up costs you mentioned. Otherwise, there are no margin implications or incremental pricing; you said you're still at over 95%. I mean, there aren't any customer losses or anything like that. So, there’s nothing that you would lose from the momentum you’ve experienced so far?

Joe Ennen, CEO

No, absolutely not. I mean, we're raising EBITDA guidance for the full year. If you go back to the previous guidance, what we had noted when we rolled that out was we thought the full year would flow something like 40% in the first half and 60% in the second half. We obviously recovered significantly faster than we had originally anticipated when we rolled out that guidance due to strong consumer demand and strong business performance throughout the channels, across product types, across every go-to-market, which is really the underlying reason for the raise of the EBITDA target for the year.

Andrew Strelzik, Analyst

Completely understood. And I guess what I'm getting at is maybe that there’s still a little bit of conservatism in there, so I just wanted to make sure that I wasn't missing something. So I completely understand. My next question, and I recognize we've had quite a few quarters discussing passing through inflation, and you called out that you're seeing some areas of relief, but some remain elevated from a cost perspective. But can you walk us through how soon you could maybe start to see some relief on the input side if the markets continue to cooperate, and how we would see that play out through the P&L, just so we can make sure that we're watching the appropriate things there?

Joe Ennen, CEO

Yes. I don't think that we anticipate any significant cost reductions this year. As we've looked at some of the crop markets, both on the fruit side and the plant-based side—oats in particular, for instance—we're seeing some softening in the prices certainly compared to the peak two to three months ago. That bodes well for the future, but we wouldn't expect any impact until we're rolling into 2023, given that we typically contract for this full year anyway.

Andrew Strelzik, Analyst

Got it. And then my last one is on the fruit segment gross margins. I think when we've talked about this in the past, you've taken actions that have obviously improved the margin structure, but there was still a lot of optimization left to achieve. Understanding that you said you're not going to reach teens margins in the near term, what remains to be done from an optimization or efficiency perspective in fruit? How should we think about that impacting the trajectory in the segment over the next couple of quarters?

Scott Huckins, CFO

Yes. I think two questions. I'd say what's left to do in frozen fruit, in one word, is execute. We spent all last year consolidating two facilities, taking on pricing, and getting caught up on obviously more expensive drops than in 2020. So it's really executing the business plan. In terms of Fruit Snacks, I think we flagged at Investor Day a sizable capacity expansion coming online almost exactly a year from now. We need to get that plant ready to handle that incremental volume because, as Joe pointed out in his prepared remarks, we saw high 40% growth in Q2. So we're feeling very optimistic about that.

Brian Holland, Analyst

How do we interpret your fiscal '23 outlook of $100 million in light of your updated view of '22? Are you just snapping back? It sounds like faster than anticipated and ultimately expect to be in the same place at the end of next year as you thought when you initially gave that guidance, or can we start thinking about a real inflection in earnings power that would convey to upside to that number?

Scott Huckins, CFO

Brian, thanks for the question. My reaction would be we're obviously increasingly confident about delivering what we laid out on June 2. As we're halfway through this year, we are providing EBITDA guidance for this year and are feeling increasingly confident about what we will deliver in 2023, 2024, and 2025. As we approach the end of the year, we will provide formal '23 guidance, and we're sitting here today feeling very good about what we laid out on June 2.

Brian Holland, Analyst

Got it. And then I wanted to ask, Joe, you made some references to private label and kind of called that out. It seems like plant-based retail is fairly mature, or private label seems like it's in that high teens, low 20 range which has been fairly steady. When we look at where at the interplay between branded and private label, is that problematic? Or is that an opportunity for you as you think about the positioning there?

Joe Ennen, CEO

I think about it as fairly agnostic. We obviously have very strong branded partners. We also have private label business. One of the things we like about our business model is we have multiple avenues to success. We can win with our own brands, with national brands, or private label. We aren't rooting for any particular outcome. We can benefit from whatever shifts in consumer behavior.

Brian Holland, Analyst

And Joe, forgive me, I could have asked that question better. I guess what I'm getting at is oat milk still looks fairly underpenetrated. What are you hearing from retailers regarding their approach to this category? It seems like that should be a source of growth. As you said, with all tiers and all form factors, that ought to represent an opportunity, i.e., private label share should grow, at least in oat milk, from where it is today, probably materially. You would seem to stand to benefit from that, but I'm just curious why that isn't happening faster. And again, I'm not talking about your business necessarily, but at the segment level, why private label is not taking share faster in oat milk?

Joe Ennen, CEO

Yes. The simple answer is capacity; there is just not enough of it out there. This is true for the oat extraction side of it as well as the packaging side of it. You are absolutely correct that there is a future opportunity for private label growth in oat that we believe will ultimately materialize. However, there are capacity constraints within the system.

Brian Holland, Analyst

Okay. I appreciate that.

Joe Ennen, CEO

And I'm not specifically referencing our system; I'm just saying the market as a whole.

Brian Holland, Analyst

Of course. Understood. Last one for me, I think you spent a fair amount of time going through consumer behavior and how what you're seeing in the U.S. Obviously, that question arises because of what has been said about Europe over the past couple of weeks from some of the suppliers there. So I'll focus on a different area here. Demand for oat milk has slowed a little bit in Europe. As that happens, does the supply-demand equation shift a bit in Europe, even if temporarily? I bring this up because this is one of the questions I hear from investors. What happens when supply catches up to demand in the U.S., what happens to SunOpta? So it would be great to remind us why the supply dynamics today in the U.S. might differ from what people are hearing and seeing in Europe and what you're actually witnessing in the U.S.?

Joe Ennen, CEO

Yes. There are a couple of dynamics at play. One is the category continues to do well, with revenue growing by 9%. Number two, we understand just how challenging the environment is for greenfield expansion—whether it’s constructing a new plant or any manufacturing growth in general, costs are rising, cost of capital is increasing, and equipment delays persist. When we have queried what's going on in the industry with our competitors, we hear a lot of discussions about projects being delayed and pushed out. We are most excited about our ability to execute in Texas during such a challenging environment; we believe we should be rewarded for that because there are not a lot of capacity expansion projects happening in the industry.

Mark Smith, Analyst

Most of my questions have been asked already, but I did want to just inquire into new products and the impact those new products had on the quarter. How do you feel about your pipeline for new products?

Joe Ennen, CEO

Really, really good. 25% of the growth in Plant-based came from new products or new customers. We continue to be encouraged about the business development efforts related to our Texas capacity additions. As you heard us discuss in the fruit business, certainly, the contribution of smoothies and customer expansion on Fruit Snacks significantly contributed to the growth, specifically the 48% growth in Fruit Snacks.

Mark Smith, Analyst

The expansion that's coming online next year in Fruit Snacks. I think you mentioned it’s in Washington. Is much of that related to newer products? Or is that more traditional fruit snack products?

Joe Ennen, CEO

It is an expansion of our existing capability, and those products are mainly sold through the club channel, which is why you see a significant disconnect between our results and overall scanner data at retail that I referenced. We offer very clean label, organic products. Many of our products are no sugar added, organic, and very on-trend with consumers. We're dedicated to producing incredibly high-quality Fruit Snacks while maintaining a clean ingredient deck. For years now, we've observed a strong interest among parents in providing their children with healthy snacks, leading to a notable preference for organic options.

Alex Fuhrman, Analyst

Congratulations on the really strong results in the quarter. I wanted to ask about the new capacity you have coming online. It sounds like there's a lot of demand for that, and that most of that capacity has already been sold. Can you walk us through just your thought process regarding pre-selling that capacity? Clearly, in the second quarter, you raised prices on the Plant-based side of your business and likely have opportunities to continue to do so as the year progresses. Can you discuss the balance between the stability of having visibility into selling all of your capacity now versus potential upside opportunities as you get closer, especially if the pricing environment continues to rise for you?

Joe Ennen, CEO

Yes, good question. The capacity we’re adding in Texas is fundamentally tied to our long-term strategic ambition to double the size of that business. Having that capacity is integral to that goal, which we laid out and aim to achieve by the end of 2025. We sold through roughly around 50%, closer to that number than completely sold out, that's for sure. One of the exciting aspects is to have available capacity in Texas to bring on new customers and enhance distribution with existing clients. So we anticipate some business development opportunities in front of us in Texas, which is a part of our long-term plan. We don’t expect it to be completely sold out by the end of the first year.

Jon Andersen, Analyst

The follow-up guys. A question on protein shakes. I've heard you mention this previously; it's a larger category than plant-based milk. Can you confirm if the supply-demand situation in that category is as tight as it is in Plant-based milk? Additionally, when you talk about doubling your plant-based business by 2025, what role does the protein shake business play? How big of a contribution could that make to that doubling?

Joe Ennen, CEO

Yes, our protein shake business is included in that doubling target. We continue to hear a persistent need for additional supply in that category. Several publicly traded companies in that space have discussed the demand for more supply to their investors over the last few calls. Hence, we are keen to establish that project in the first half of 2023.

Jon Andersen, Analyst

Okay, two more model-related questions. I know you haven't guided these lines, but you saw a nice sequential gross margin improvement in Q2. Given all the factors you've mentioned, is it fair to assume additional sequential gross margin improvement from Q2 to Q3, and from Q3 to Q4, excluding the start-up costs that you talked about in Texas?

Scott Huckins, CFO

Yes, Jon, I would say Q2 is just really solid performance. I wouldn't be projecting additional improvement. If you hit it on the head, I think the numbers printed show a 200 basis points to 250 basis points headwind coming. Thus, excluding the impact of start-up costs, I wouldn't be calling that up; rather, the focus should remain on growing the business and driving adjusted EBITDA improvement through growth.

Joe Ennen, CEO

Yes, just to reiterate what Scott said. We've been clear that our overall strategy revolves around driving EBITDA dollar expansion, and we aim to achieve that through revenue expansion.

Jon Andersen, Analyst

Right. Understood. And then lastly, in terms of the SG&A run rate, is Q2 pretty representative of where you expect things to be in the second half of the year?

Scott Huckins, CFO

No, good question. I think it really is. I would assume that Q2 is a very representative number.

Operator, Operator

There are no further questions at this time. I will now turn the call back over to the CEO, Mr. Joe Ennen.

Joe Ennen, CEO

Well, thank you, everyone, for participating in our second quarter call. I appreciate all the questions and continued interest in SunOpta, and I look forward to speaking to all of you again soon. Thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's call. You may now disconnect.