Sunopta Inc

F:ZSK

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, and welcome to SunOpta's Third 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 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 the 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 security 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.

[Joseph D. Ennen, executive]

Good afternoon, and thank you for joining us today. With me on the call is Scott Huckins, our Chief Financial Officer.

Overall, we were very pleased with our Q3 results. Revenue was up 16% with plant-based revenue up 20%. Profitability also rose significantly with a 42% increase in adjusted EBITDA. These results demonstrate the durability of our competitive advantages in plant-based and the traction of our turnaround strategies in fruit.

Let me offer several key takeaways before we begin unpacking the results. Encouragingly, we continue to deliver both revenue and volume growth. We continue to cover almost all inflationary costs with customer pricing adjustments. Similar to Q2, we had approximately 95% coverage of cost inflation. We made progress in Q3 against 1 of our 5 strategic imperatives focused on portfolio evolution with the sale of our Sunflower business and an idled frozen fruit plant in California. The sale of the Sunflower business will provide investors with a clearer view of the margins in our core plant-based milk segment as sunflower was significantly margin dilutive.

Despite a choppy supply chain, we continue to service our customers at an exceptionally high level, with case fill rates in the high 90s.

Similar to last quarter, the growth in plant-based was broad based with growth across channels, product types, customers and go-to-market strategies. Growth in plant-based largely came from share gains from both new and existing customers, reflecting our competitive advantages and capacity additions we have made in 2021 and 2022.

Oat continues to fuel growth in our plant-based business unit, and we are far outpacing the oat segment growth rates. The oat milk segment growth in syndicated data for the quarter was plus 29% in dollars, our oat business grew 68%.

We saw significant improvement in fruit segment performance, both from portfolio evolution and productivity gains in frozen fruit. Fruit snacks continues a very impressive growth pace at plus 52%, most of which is volume growth.

Similar to almost all food and beverage categories, we are seeing some demand softness and what I would describe as an erratic demand signal from our customers. Recall less than 1/3 of shelf-stable plant-based milks show up and tracked retail channel data, where we continue to significantly outpace category performance and the foodservice channel remains strong.

Innovation continues to power the business. New oat-based products like chocolate oat milk, high-protein oat milk and even pumpkin oat milk, new fruit snacks, new value-added frozen fruit blends and new plant-based bowls are all examples of our commitment to lead through innovation.

Lastly, the construction and qualification of our greenfield plant in Texas remains on budget and on track for an end of year start-up.

Net-net, as a result of continuing momentum in the business, we are increasing our 2022 guidance to reflect strong year-to-date results and continued confidence in our outlook. Scott will further break out the details later in the call.

Third quarter revenues rose nearly 16% on a consolidated basis, driven largely by pricing. We continue to see solid volume gains in our key growth categories of plant-based milks and especially oat milk and also fruit snacks.

We have 3 levers that drive volume growth, category growth, share growth and TAM expansion. While we are seeing some short-term moderation in category growth, we are more than compensating for this by pulling harder on share gains via new and existing customers and TAM expansion.

Gross margin of 13.7% was up 190 basis points versus last year despite 140 basis points of pricing dilution headwind. While margins continue to benefit from broad efforts to optimize input costs and production levels, the year-over-year expansion in our fruit-based business was especially strong. This strength reflects the importance of earlier initiatives around SKU rationalization and consolidating our manufacturing footprint, coupled with robust growth in our Fruit Snacks business.

Production output in our plants and service levels continue to be strong, and all of our capacity expansion projects are complete or on track. Inflation remains a significant headwind, but we've been able to mitigate much of the impact with earlier pricing actions.

In the third quarter, we incurred approximately $25 million of increased costs. And similar to the past couple of quarters, we were able to recover the overwhelming majority of this with higher prices. At this point in time, we see some costs trending up and some trending down, which in aggregate, suggests there will not be a need for broad brush price increases in 2023.

Now I'll turn to our segment results, starting with plant-based, where we remain focused on 3 strategic priorities: number one, strengthening and fortifying our competitive advantages. Number two, winning an oat milk to capitalize on the consumer trend and increase our participation in refrigerated beverages. And third, building a balanced multipronged go-to-market business that includes co-manufacturing, private label and owned brands.

In our plant-based business unit, revenues were up 20% to $138 million in the third quarter, our 16th consecutive quarter of revenue growth and very similar to the plus 22% we delivered in the first half. On a TTM basis, we have grown this business 50% in the last 24 months. These results benefit from our unique agnostic approach to winning in the category. We have balance across foodservice and retail. We have our own brands to bring innovation to market, we co-manufacture for major national brands, we manufacture products for private label and we sell ingredients. We aren't an almond milk company or an oat milk company, we manufacture almost every type of plant-based milk from oat and almond to soy to cashew milk. This approach, combined with our competitive advantages continues to fuel growth.

When we look at the core plant-based milks product group, stripping out tea, broth and sunflower, revenues increased 25%, and this part of the portfolio represents approximately 70% of our plant-based business unit.

Our tea business also remained strong with growth of 50%, an acceleration from Q2, reflecting strong customer demand. We saw a single-digit decline in broth as we prioritized profitability and overlapped some non-repeating business from 2021.

This 25% growth in plant-based milks was broad based with 4 of our 5 product types experiencing growth. Oat was once again the largest contributor to growth, with revenue from all oat products up 68%. Oat is now the #1 product type in our portfolio, passing almond milk for the top spot. Most of this increase was volume driven, reflecting consumer growth and our strong partnerships with the biggest, fastest-growing brands in the category.

Our Oat Barista products in foodservice contributed significantly to the 68% growth. The growth of these Barista products is a testimony to our R&D capabilities as we have quantitatively demonstrated for customers that our Oat Barista products are functionally superior to other products in the market.

Coconut milk was up mid-30% versus last year, again fueled by food service, with roughly half of the increase stemming from volume.

Almond and soy grew low to mid-single digits as higher price realization more than offset moderation in volume.

Looking at the results by customer channel. Retail was up 16%, reflecting strong growth in mass and club. Food service was especially strong in Q3, with revenues up 30%, driven, as I mentioned, by oat-based offerings.

Looking at the business from a go-to-market standpoint, the fastest growth continued to be in our branded business, where revenues were up 41% versus a year ago, including volume gains of 33%. This growth was fueled by doubling of our Dream brand, which benefited from distribution gains from our top customers.

The largest part of our business, our co-man business, grew a solid 16% in Q3.

Innovation continues to be a key factor in our growth, and new products or new customers accounted for approximately 15% of our revenue increase in the third quarter, led by large CPGs.

Next, I'll provide some context on the plant-based milk category and its recent performance based on retail scan data.

We continue to see solid growth in plant-based milk category. In the latest 13 weeks, total plant-based milk dollar sales grew 12% while units declined 2%.

Private label units are flat and dollars are growing plus 7%, representing a 15% share of the category. Category growth continues to be driven by oat milk with units growing 12% and dollars growing 29%. Oat milk is now 21% of the plant-based milks category. Almond milk remains the dominant market share leader in the category with a 61% share and saw dollar sales grow 8%.

We remain confident in the long-term growth potential of plant-based milks. Plant-based milks is a $3 billion category in the U.S. with a 10-year CAGR of approximately 8% and the underlying drivers of the sustained growth are incredibly durable. First, people who drink plant-based milks prefer the taste versus cow milk and won't switch back to cow milk if they don't like the taste just to save $0.10 a glass. It's far more likely that these consumers will switch within the plant-based milk category for value.

Second, for the 1/3 of Americans who are lactose intolerance, switching from plant-based milks to milk from a cow will make them uncomfortable or sick. So that isn't an option for them.

Third, plant-based milk consumers understand and value the health benefits of these products. When you think about these 3 category drivers from a consumer's point of view, you can understand the durability of the consumer demand drivers. While consumers will certainly find ways to save money, like changing where they shop, how often they eat out or trading down to less expensive private label products, they are less likely to leave the plant-based milk category.

Consistent with most food and beverage categories, we have seen consumers destocking their pantries as a result of the current economic environment, but we believe this is short term, and we are seeing unit trends improve in the latest data.

New capacity projects continue to be on track with expectations relative to timing and budget. As we have outlined many times, there are 6 capital projects that produce the doubling of our capacity from 2020. 5 of the 6 are complete and contributing to growth. The most recent of the 5 being an expansion in Modesto, which came online a month ago as expected.

As it relates to Texas, we hosted our Board of Directors 3 weeks ago at our new plant, and everything is looking great. I will share a comment from one of our directors, and I quote, "I've been in hundreds of food plants in my 30-plus years in the business, and this is the most impressive plant I've ever seen."

All of the equipment for the first line is installed and we are in the process of running the equipment for qualification and validation. At this point, the second line is on or maybe even a bit ahead of schedule.

As it relates to business development, we continue to feel good about 2023 utilization with more than 50% of the capacity planned. Obviously, this will benefit the back half of 2023, more than the front half.

As a reminder, we will expand our TAM with the addition of the 330-milliliter production line that gets us into the protein shake category. This TAM expansion is one of our 5 strategic imperatives, and we are now under contract for 5 years with one of the leading brands in the category. The plant management team is in place, training of new employees is underway, and we anticipate the first production run in the next 7 weeks.

Given a very challenging environment, going from a dirt field to fully operational in roughly 15 months is an incredible achievement, something which we are all very proud of.

Moving on to our fruit-based segment, recall our 3 strategic priorities are: one, de-risking the business through geographic diversification, customer pricing programs and better grower relations. Two, becoming the low-cost operator in frozen fruit through automation, footprint reengineering and aggressive cost takeouts. And three, evolving the portfolio via mix shift and innovation towards more value-added offerings.

In the third quarter, fruit-based revenues increased 10% to $92 million, led by the continued strength of our margin advantaged fruit snacks business as frozen was essentially flat with higher price realizations offsetting anticipated volume declines. We were very pleased with the Q3 gross margin of 12.3% as the strategies we have been focused on for the last several years are manifesting in the numbers.

The year-over-year revenue growth rate of our fruit snacks business was an impressive 52%, and the overwhelming majority of the revenue increase was driven by higher volumes. In roughly 3 years, we've grown our fruit snacks business, which includes our smoothie bowls by 125% to around $100 million of annual revenue.

We remain very positive on the outlook for 2023 and beyond, and we continue to leverage our innovation capabilities and expand capacity. Growth in snacks is very reflective of our balanced customer portfolio, and we continue to see solid gains across large CPGs as well as large retail customers.

In our frozen business, revenue was up fractionally versus a year ago as higher price realization served to offset the volume declines we had expected.

A significant portion of the overall fruit segment gross profit margin improvement came from frozen. This is a strong indication of the power of our profit recovery strategies. Our efforts to build a low-cost business model focused on top customers, de-risking the business and, building pricing credibility with our customers are paying dividends. 12.3% gross margin in fruit is the highest margin we've seen in 5 years, and we are confident these strategies have created a more stable, profitable business unit.

In summary, our passionate team continues to execute extremely well against our core strategic priorities and deliver solid results despite a challenging macro environment.

Underlying demand remains solid, and we are well positioned to continue driving revenue growth, improving profitability and capturing additional share by 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 and increasing returns on invested capital.

Now I'll turn the call over to Scott to take us through the rest of the financials. Scott?

[Scott Huckins, executive]

Thank you very much, Joe, and good afternoon, everyone. As Joe mentioned, third quarter revenues of $230 million were up 15.7% year-over-year, reflecting continued growth in both segments.

In the Plant-Based segment, revenue increased 19.9% with pricing up 16.2%, driven by earlier actions to offset inflation and volume growth was 3.7%. Importantly, within the segment, the product category of plant-based milks delivered 7% volume growth in the quarter.

Fruit-based revenues increased 10% at a 10.6% increase in pricing was partially offset by fractionally lower volumes.

Gross profit was $31.4 million for the third quarter of 2022, an increase of $8 million or 34% compared to the third quarter of 2021. Consolidated gross margin was up 190 basis points to 13.7% despite approximately 140 basis points of headwind from the dilutive effect of passing-through higher input costs to customers and 30 basis points of increased depreciation expense.

In plant-based, segment level gross profit increased $1.4 million to $20.1 million, while gross margin was down 170 basis points to 14.6%. The year-over-year decline in gross margin reflects a 225 basis point impact from the dilutive effect of pass-through pricing to recover cost inflation along with 60 basis points of incremental depreciation expense and 40 basis points of start-up costs in Texas. Combining these 3 factors, our comparable gross margin would have been 17.8%, up 150 basis points compared to last year, reflecting improved plant efficiencies.

In fruit-based, segment level gross profit rose $6.6 million to $11.3 million, and gross margin increased 670 basis points to 12.3% despite an approximately 50 basis point headwind, stemming from the impact of pass-through pricing to recover commodity inflation. The year-over-year improvement in fruit-based gross margin was driven primarily in frozen by rationalizing our SKU portfolio and consolidating our processing facilities to lower manufacturing costs.

The significant volume growth and plant efficiencies in our food snack operations also contributed to higher gross margins in fruit-based during the third quarter.

Segment operating income was $7.6 million in the third quarter compared to $3.9 million last year. The year-over-year growth was attributable to higher gross profit, partially offset by a $4.2 million increase in SG&A due to higher employee compensation costs, the majority of which was stock-based compensation, reflecting our strong performance in 2022.

Loss from operations attributable to common shareholders for the third quarter was $13.4 million or $0.12 per diluted share compared to a loss of $3.8 million or $0.04 per diluted share in the prior year period. The loss was inclusive of the $16.9 million loss on the Sunflower business and a $2.7 million gain on the sale of 1 of our 2 Oxnard facilities.

On an adjusted basis, we had earnings of $2 million or $0.02 per diluted share in the third quarter of 2022 versus adjusted earnings of $1.1 million or $0.01 per diluted share in the prior year period.

In the third quarter, adjusted EBITDA was $22.1 million or 42% higher than $15.6 million in the prior year. 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 October 1, 2022, total debt was $306 million and reflects $191 million drawn on our asset-based credit facility, $112 million of capital leases with the balance representing smaller credit facilities.

Leverage stood at 4.3x at the end of the third quarter, just above our targeted range, reflecting the timing and scale of our planned investments in capacity expansion. Given the volatility in the capital markets, it's worth reminding that our debt doesn't mature until the end of 2025. As the new capacity ramps and generates revenue and cash flow, we expect our leverage to return within our target range in 2023.

From a cash flow perspective, cash provided by operating activities during the third quarter of 2022 was $20 million compared to cash provided of $5 million during the third quarter of 2021.

Cash used in investing activities of continuing operations was $22 million compared with $17 million in last year's third quarter primarily reflecting investments in capacity expansion projects, partially offset by proceeds from the recent sales of noncore assets. As a reminder, we expect material improvement in free cash flow in 2023 as we monetize the capacity expansion projects we invested in during 2021 and 2022.

I'd also like to recap the 2 divestitures completed in the third quarter. First, we sold an idled frozen fruit plant in Oxford, California for $16 million. We did not run this plant in 2022 and monetized this noncore asset. As a reminder, we continue to run a second plant in Oxford, California.

Second, we sold our Sunflower business for $16 million. As we discussed at Investor Day on June 2, Sunflower was a noncore business. For perspective, in the last 12 months, the Sunflower business delivered $70 million of revenue with only a 4% gross margin. Let me share the impact on gross margin from removing Sunflower from our business.

Third quarter consolidated gross margin would improve by 110 basis points to 14.8%, and plant-based margins would improve by 210 basis points to 16.7%. On a full year basis, the divestiture adds 150 to 200 basis points to plant-based gross margins. In summary, we are following our strategic plan to shape the portfolio to more value-added manufacturing.

Let me close with comments on our outlook for the balance of 2022, recognizing the environment is very fluid as it relates to inflation, supply chain, labor, raw materials and the state of the consumer. We are increasing our 2022 guidance to reflect strong year-to-date Q3 results and continued confidence in our outlook.

Given the Sunflower divestiture, I'll do this in 3 steps to ensure clarity. First, a recap of the outlook as shared on the second quarter call. Second, our improved outlook without considering the Sunflower sale. And third, the outlook as adjusted for the sunflower sale.

On the Q2 call, we shared estimated revenue in a range of $930 million to $960 million, with adjusted EBITDA estimated in a range of $72 million to $78 million. On an apples-to-apples basis, we are increasing our full year outlook to revenue in a range of $940 million to $960 million, with adjusted EBITDA in a range of $76 million to $80 million.

Now adjusting this outlook for the effect of the Sunflower divestiture. We are removing $17 million of revenue in the fourth quarter and making no adjustment for adjusted EBITDA. This results in a full year outlook of revenue in a range of $923 million to $943 million and adjusted EBITDA in a range of $76 million to $80 million. This new range results in annual revenue growth of 14% to 16% and adjusted EBITDA growth of 25% to 32%. To assist with year-over-year analysis, Q4 2021 Sunflower revenue was $15 million. Let me note that for clarity, the Sunflower business is too small on its own to be removed from the financial statements, so we will see the historical results show up in the comps for 2022 and 2023.

I'd also like to remind listeners about how we see the new plant-based facility in Midlothian, Texas, affecting Q4 2022 gross profit and gross margin. As we have previously stated, we expect production to start at the very end of the year. We expect to incur approximately $5 million of start-up costs in the fourth quarter of 2022. 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 up the call for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Brian Holland with Cowen & Company.

[Brian Holland, analyst]

If I could just start with maybe parsing the guidance a little bit. I think the original expectation was that you'd have about $10 million of start-up costs in 2022. I think you've only had about -- you only had about $600,000 this quarter. So are those start-up costs -- is something changing there or getting pushed out in the time line? I'm just trying to understand if maybe the higher revised guide just reflects timing of start-up cost hitting.

[Scott Huckins, executive]

Brian, it's Scott. Thanks for the question. Two pieces. In retrospect, our estimate of start-up costs in Q3 was too conservative, mainly centered around the timing of a bunch of the occupancy costs. Then part 2 would be because those costs are added back to EBITDA, those start-up costs in no way affect the updated range.

[Brian Holland, analyst]

Okay. Got it. That's helpful. Joe, you described in your prepared remarks, I think, erratic customer behavior. Just curious how that impacts your near and long-term visibility.

[Joseph D. Ennen, executive]

Yes. From a long-term standpoint, as I outlined, we're incredibly confident in the durability of the consumer demand. In the short term, what that looks like, Brian, and I'll just give you an example. I mean, in Q2, customers were saying, give us as much as you can, we'll take everything you can make. Then it's well, well, well, our warehouse is full, hit the brakes, hit the brakes and then 2 weeks later, it's like, well, we may have over course corrected, let's get back on our normal pattern. So I think everybody is working through, the consumer is de-stocking their pantry. We see that across many, many food categories. I'm sure you've heard that as other CPG companies have reported. But don't forget, not only does the consumer have inventory, but the retailer has inventory on the shelf. They have inventory in their warehouses. And then our customers also have inventory, and we have inventory.

So I think this is just the process of getting back to normal working through how the consumer is responding. And as we mentioned, I mean, category was up 12%. On a comparable basis, our business was up 25%. And on a volume basis, category was down 2%, we were up 7%. So 900 to 1,300 basis points better performance versus the scan data. We are proud of the brands that we're partnered with. They continue to win in the marketplace, and foodservice was also particularly strong.

[Brian Holland, analyst]

Got it. And then you also talked about, I think you were pretty clear that your expectation that -- we're not expecting, I guess, rotation out of the plant-based beverage category, we could see some switching within the category trade down, et cetera. Just thinking about your channel customer mix, does trade down within plant-based beverages having from brands to private label, does that have an adverse impact on your business?

[Joseph D. Ennen, executive]

It does not, Brian. As you know, we're a manufacturer of private label products. And so assuming the consumer trades down in a retailer where we're the manufacturer of that private label product, we would stand to be kind of a net neutral recipient of that volume. It's also worth noting, we don't have material differences in our margin structure between co-manufacturing and private label. So there's not really a gross profit trade down to worry about if that were to happen.

[Operator]

Your next question is from the line of Andrew Strelzik with BMO.

[Andrew Strelzik, analyst]

My first question is on the cost backdrop. And you noted you're not expecting any broad price increases in 2023. There are some good guys and bad guys. Could you just elaborate a little bit on the puts and takes there, where you see maybe the most risk or concern just as we watch that unfold?

[Joseph D. Ennen, executive]

Yes. We're seeing packaging continue to trend up, some of the energy inputs like natural gas and then on the downside on some of the core agricultural inputs, oats, for example, we're definitely seeing the market come back to where it was in 2020. So that's why we -- Andrew, that's why we kind of said, "Hey, we don't see broad brush pricing changes." But obviously, the -- where those are impacting a particular product for a particular customer, we may need to take pricing, but we don't see the aggregation of all of those input costs being something that we're going to need to make wholesale pricing changes on.

[Andrew Strelzik, analyst]

Okay. Great. And last quarter, you gave a fair amount of detail on productivity and capacity increases, just given kind of the evolution of the labor environment. Can you give us a little bit of an update there as well, please?

[Joseph D. Ennen, executive]

Yes. So capacity, we're in great shape. Texas will come online at the very end of this year, which we're excited about. Huge accomplishment for the entire organization. The other capital expansion projects that we've been executing in 2021 and earlier this year, those are all complete online and contributing to growth. So overall, we're feeling very good about that. And we look forward to bringing on new customers and new business.

[Andrew Strelzik, analyst]

Okay. And the last one for me. I know when we talked about the fruit-based segment margins, you noted some of the mix benefits and kind of maybe kind of wait to see approach. Now that we've got couple of quarters in a row of these stronger margins, I guess I'm just curious how you're thinking about the trajectory here moving forward or the margin potential of that business? Does it change the way you're thinking about it at all? Or is this kind of more in line with you what you would have anticipated?

[Scott Huckins, executive]

Yes. Thanks, Andrew, it's Scott. So one, I think we're pretty pleased with the performance of both the fruit businesses, both the frozen fruit business on an absolute basis. expanding margin; and two, really, really nice growth in fruit snacks.

I think Q2, Q3, if you'll recall, get us in the sphere of with our intermediate term margin target are. So I think the takeaway would be, that's what we're capable of delivering. I don't know that I'd say you're penciling that number for every single quarter because at the heart of it, as you point out, there's certainly a considerable mix benefit from fruit snacks, but doesn't really change the way we're thinking about it. I think it gives us confidence that we're on the right track.

[Operator]

Your next question comes from the line of Bobby Burleson with Canaccord.

[Bobby Burleson, analyst]

So I guess just trying to understand maybe some of your expansion categories and plant-based, refrigerated milk, ice cream and yogurt. Are there synergies there? Like do you guys anticipate margin benefits or some additional structural benefit as you fan out into additional categories that may use some of the same bases that you produce?

[Joseph D. Ennen, executive]

Yes, absolutely. So there are 2 steps to manufacturing plant-based -- anything plant-based milk, plant-based yogurt, plan-based ice cream. The first step is converting that ingredient into a liquid or a powder. That step is called extraction. And so it is a very transferable end product. In terms of that end product, the oat base, if you will, that comes out of the extraction process is very usable in a yogurt environment, in an ice cream environment and for plant-based milks or creamers, et cetera. So it definitely opens the aperture for us to be an ingredient supplier of value-added premium bespoke ingredient supplier into those categories, opens up the TAM for us and leverages our fixed asset investments around extraction and specifically oat extraction.

[Bobby Burleson, analyst]

Great. And you've managed to do a pretty fantastic job in terms of picking your partners and how you've kind of aligned yourself with certain customers that are taking share. And I'm wondering, are there best practices there that you're looking at as you figure out who you're partnering with in these expansion categories? Are you taking some learnings there to help you kind of place your bets? Are there any -- is there any overlap in your customer base with those product categories?

[Joseph D. Ennen, executive]

There are tons of -- there's some overlap at kind of the highest corporate level, but not necessarily at a brand level, if that makes sense. When you're talking about customers who are $20 billion, $30 billion, sometimes there are opportunities to serve multiple brands in that environment. So definitely something we're looking to leverage and continue to build on.

[Bobby Burleson, analyst]

Okay. Great. And then maybe the last one. It seems like everybody is kind of capitulating to plant-based milk and kind of -- it's getting much greater adoption than what we're seeing in plant-based meat. And I'm wondering, does that extend maybe into younger demographics like people that are younger than 18? Is this becoming potentially a substitute at the breakfast table for -- in the cereal of kids, like, how far can we expand the category, just demographically in your minds?

[Joseph D. Ennen, executive]

Yes, great question. I mean we definitely see that there is a significant bias to younger consumers and younger households for plant-based milks. And I think it's one of the most powerful cohort effects in plant-based milks. And recall, this category has been around 30, 40 years. So you have consumers who -- that's what they grew up drinking their whole life, whether it was in breakfast cereal, whether that's what get -- got used in baking applications, et cetera, et cetera. And so for them, it's just a very natural continuation of what they grew up eating and drinking. So demographics are definitely a huge propellent here.

And I would also underscore and we saw some data recently. I mean, plant-based milks has a 53% household penetration. So again, this isn't just a niche set of consumers who could wake up tomorrow and decide they're enthusiastic about something else. I mean you have virtually 50% of American households having plant-based milk in them at some point during the year. So again, it speaks to the durability, the breadth of adoption and I think the power of that cohort in pulling their consumer behaviors along with them as they age and start their own households.

[Operator]

Your next question is from Mark Smith with Lake Street Capital Markets.

[Mark Smith, analyst]

First, certainly like the consumer behavior data that you gave us early on. Can you just speak to foodservice? It certainly doesn't look like from the growth that you put off, but have you historically seen any pullback there in tough economic times?

[Joseph D. Ennen, executive]

Good question, Mark, and I'll sort of pull a little bit on 30-plus years of my ancient time in the category. What you tend to see is you might see consumers in broadly in foodservice trading out of kind of fine dining. But if my memory serves me correctly from the last economic downturn, experiences like stopping for my morning latte and that $6 expense is something that consumers are loathed to give up. So you may be in a position financially where you're deferring buying a new car, going on vacation, or taking on a remodeling project because those are significant expenses, but consumers are very disinclined to giving up those small treats that things like a delicious oat milk or soy milk cappuccino represents for them.

[Mark Smith, analyst]

Okay. And then within food snack, certainly like the growth that we're seeing there, I'm curious as we look at the margins within fruit snack and a lot of this is kind of newer products. Are there opportunities to expand the gross profit margin on that kind of family of products as we move 12-plus months down the road?

[Joseph D. Ennen, executive]

I think with the expansion project that we have coming in the third quarter of next year, it definitely gives us an opportunity to better leverage the fixed cost structure of our plants. And so all things being equal, more volume through the same 4 walls definitely should contribute a bit to -- a bit of margin leverage.

[Mark Smith, analyst]

And then the last one, just kind of a modeling question. As we look at the -- I think you said $5 million in kind of plant expansion expense here in Q4 with Midlothian. Is that all going to go in cost of goods sold? Or will we see some of that over in SG&A?

[Scott Huckins, executive]

It will really be driven, Mark, in COGS. So the modeling would be all other factors being equal and extra, if you will, $5 million in COGS. So that affects gross profit and gross margin as reported. However, from an EBITDA standpoint, we add those costs back to have the effect on the P&L be net neutral. But again, the watch out is just that those flow through COGS.

[Operator]

Your next question is from Alex Fuhrman with Craig-Hallum.

[Alex Fuhrman, analyst]

Congratulations on a really strong quarter here. I wanted to ask about oat milk, up 86% year-over-year and now your biggest plant-based milk even though almond remains the biggest plant-based milk in the category here. Just curious how you've been able to grow your oat milk business so much faster than the overall market? And do you expect your oat milk business to continue to be your biggest plant-based milk going forward considering almond is still the biggest in the category for now?

[Joseph D. Ennen, executive]

Yes, Alex, we saw the 68% growth that we outlined was really driven both by foodservice and retail, and I think speaks to several things. One is the product quality that we're delivering. It speaks to our ability to continue to serve that category and produce and fill orders and fill cases at exceptionally high rates. I mean I'm talking 98%, 99% case fill rate for almost every one of our customers. So that then allows the retail customer the confidence to put that brand on the shelf knowing they're going to be able to supply, and they're going to be able to keep the product on the shelf. So I think we've identified and are working with some great partners.

And I would not underestimate the other component that I talked about on the call, which is we have a functionally outstanding product. It makes an amazing latte. The structure of the foam. The way, again, we formulate specific for foodservice, coffee applications and our oat milk is outstanding as a latte or a cappuccino, it foams amazingly, it holds. We measure that over time. If you'll recall, when you had a chance to visit us, we showed you some of the technology and equipment we use to do that analysis, and it's certainly paying dividends for us.

[Alex Fuhrman, analyst]

Great. That's really helpful. And then if I could ask just one question on the Midlothian project. You mentioned the second line. It sounds like that is now tracking perhaps a little bit ahead of schedule. Do you have an update on when you expect the second line of production to be operational?

[Joseph D. Ennen, executive]

What we had outlined at Investor Day was by the end of Q2, I believe, and we're certainly pressing as hard as we can to pull that forward. At this juncture, we're feeling good about it. And again, I think it speaks to team's ability to execute in a complex environment. And if we can pull that forward, even 30 days, that's fantastic for us because every dollar of revenue is 100% incremental to the business because we're not in that category. That's our 330-ml line, that it's the protein shake capability. And so the faster we can get that stood up and contributing that is just completely incremental to the business. So as you might expect, we as a team are very focused on getting that production line up and contributing as fast as possible.

[Operator]

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

[Jon Andersen, analyst]

What is the annualized impact of the sunflower divestiture on sales and EBITDA?

[Scott Huckins, executive]

Yes, Jon, two things. If you looked at the last 12 months, the revenue was about $70 million, 7-0, call EBITDA on a stand-alone basis, roughly $3 million. What happens is for clarity is we won't discontinue the reporting of the business. So as we see, for example, here in Q4 '22, we'll be comping a Q4 '21, let's call it, $15 million of revenue for modeling purposes.

And then part 2, as we go to 2023, we'll have the 3 quarters of 2022 comp to compare against. So hopefully, that's clear.

[Jon Andersen, analyst]

Yes. That's helpful. So with the strength in the oat milk business and obviously strength in foodservice, which I think is somewhat driven by a large customer you have in foodservice, I was kind of fascinated by your comments that you've done quantitative test on the performance of your product, proven it at parity or better to competing offerings in the market. I guess what I'm trying to figure out is, does all of this suggest that -- the oat milk business that you secured in foodservice with a large customer's business that you expect to retain on a long-term basis?

[Joseph D. Ennen, executive]

We would -- we certainly expect to retain that. I mean, I think the product is performing exceptionally well. It is a superior product in their applications. We are servicing that business at an exceptionally high rate, and our partnerships with our top customers are in a great place, as you might expect with those kind of service levels. So it's something we work at every day. We don't take it for granted. We are incredibly focused on serving our customers. And all indications we've received from them is they're very happy with us as a supplier.

[Jon Andersen, analyst]

Okay. And then protein shakes, that's a large category, right, at retail, every bit as big as plant-based milks. So with your entry, and I think you sold out your first line already, is that TAM expansion -- should we think about perhaps protein shakes being as big as plant-based milks a few years down the road for you? Is there any reason kind of structurally or competitively why you couldn't kind of replicate to some extent your position in protein shakes?

[Joseph D. Ennen, executive]

So from a TAM standpoint, Jon, the protein shake category is actually twice as big as plant-based milks. The protein shake category is roughly $6 billion at retail, and plant-based milks is roughly $3 billion. So certainly a dramatic increase in our TAM.

We're excited about the opportunity, and we certainly would anticipate and hope that we can demonstrate where a great competitor and a great supplier in that space and continue to add capacity to serve our customers. So I think it would take quite a bit of work for it to be as big as our plant-based milks business in the short term. But certainly, we see it as a significant growth driver for the kind of planning horizon of 5 to 10 years. I mean, we absolutely are very bullish about this and think it's a great logical extension of our capabilities and competencies as a company. And so we're excited to get into it, and we absolutely think it's a future growth lever.

[Jon Andersen, analyst]

How -- as you continue to grow plant-based at a double-digit clip going forward, how important is Texas in allowing you to achieve that growth specifically like in 2023? And reason I'm asking that, I'm trying to understand how hard you're running your plants now to deliver the kind of growth you're delivering in plant-based? And how kind of Texas phases in and contributes to that sales growth during the course of 2023 and into 2024?

[Joseph D. Ennen, executive]

Yes. So at our Investor Day, we outlined a target for 2023 of $100 million of EBITDA. We need Texas to contribute, I would say, modestly to that number, but the core business, meaning the core asset base that we have right now, can pretty much deliver that with revenue growth and customer expansion, et cetera. So said a different way, 2023 is not completely dependent on Texas. Texas will contribute mightily to 2024 and 2025 and will certainly be a part of the growth algorithm for the back half of 2023, but we're just starting the plant up. And so all of these production lines have a start-up ramp-up curve. And so Q1, for example, will be largely dependent upon the asset base that we have today.

[Operator]

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

[Joseph D. Ennen, executive]

Great. Thank you, everyone, for your interest and your time this evening. We appreciate it and look forward to speaking to all of you again soon.

[Operator]

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.