Executive Summary / Key Takeaways

• SunOpta delivered a strong start to fiscal 2025, with Q1 revenue increasing 9.3% year-over-year driven by robust 12.2% volume/mix growth across beverages, broths, and fruit snacks, leading to raised full-year guidance.
• The company has pivoted to an operational excellence-fueled growth strategy, focusing on unlocking "trapped capacity" within its existing manufacturing network through targeted efficiency initiatives (yield, labor, fixed costs) rather than significant near-term growth CapEx.
• Management is confident in achieving substantial gross margin expansion, projecting sequential improvement throughout 2025 to reach 18-19% in Q4 2025, with targets of 18-19% for full-year 2026 and 20%+ for full-year 2027, supported by operational gains and resolving the Midlothian wastewater bottleneck by mid-2026.
• The new business pipeline is accelerating, standing at nearly 25% of annual sales volume (twice the level of the prior 15 months), reinforcing confidence in achieving the long-term 8-10% annual revenue growth target.
• SunOpta is prioritizing balance sheet strength, targeting a net leverage ratio of 2.5x by the end of 2025, supported by strong operating cash flow generation and a recently approved $25 million share repurchase authorization for opportunistic buybacks.

The Pivot to Operational Powerhouse

SunOpta Inc. (NASDAQ: STKL) operates as a key player in the evolving food and beverage landscape, providing customized supply chain solutions and innovation across high-growth categories like plant-based beverages, better-for-you fruit snacks, and broths. The company's business model centers on being a trusted co-manufacturer and private label partner to top brands, retailers, and foodservice providers, leveraging a national manufacturing footprint, diverse packaging capabilities, production redundancy, and a world-class R&D team. This strategic positioning allows SunOpta to embed itself deeply within its customers' supply chains, solving problems and capitalizing on opportunities as consumer preferences shift towards healthier, plant-based, and convenient options.

The company's recent history has been marked by a strategic transformation, including the divestiture of non-core assets like the frozen fruit business in late 2023 and the smoothie bowls product line in early 2024. These moves have sharpened SunOpta's focus on its core, higher-growth segments. Concurrent with this portfolio optimization, SunOpta completed significant capital investments, notably the buildout at its Midlothian, Texas facility. With these major capital projects largely behind it, the company has articulated a clear strategic pivot: from a capital-fueled growth strategy to one driven by operational excellence and asset optimization.

This shift is predicated on management's conviction that significant "trapped capacity" exists within the current manufacturing network. By implementing more consistent processes, improving labor productivity, optimizing manufacturing yields, and enhancing equipment reliability, SunOpta believes it can unlock substantial additional production volume without requiring major new capital expenditures in the near term. This operational focus is not merely about efficiency; it's the engine expected to fuel future volume growth, expand margins, and significantly improve Return on Invested Capital (ROIC), a metric now central to executive incentives.

SunOpta's manufacturing capabilities, particularly in aseptic processing for plant-based beverages, represent a core technological differentiator. While specific quantitative metrics comparing its technology directly against all competitors are not publicly detailed, the company's ability to handle a broad portfolio of bases (oat, almond, soy, coconut, rice, hemp) and formats (shelf-stable beverages, protein shakes, broths, teas) across multiple facilities provides operational flexibility. The focus on improving manufacturing yield, for instance, aims to reduce raw material usage relative to finished units, a direct benefit of process optimization. Initiatives in labor productivity and equipment uptime are designed to increase throughput and lower manufacturing costs per unit. The strategic intent behind these operational improvements is to enhance the competitive moat by offering reliable, high-quality supply and potentially more favorable cost structures to customers, thereby winning and retaining business against rivals like Hain Celestial (HAIN), Danone (BN), and General Mills (GIS), who operate across similar or adjacent categories with varying degrees of scale and efficiency.

Performance Reflecting Strategic Execution

The early results of this operational pivot and focused strategy are becoming evident. SunOpta commenced fiscal 2025 with a strong first quarter, reporting revenues of $201.6 million, a 9.3% increase compared to $184.4 million in Q1 2024. This growth was predominantly volume-driven, with a favorable volume/mix impact of 12.2%, partially offset by a 1.7% price reduction reflecting lower raw material pass-throughs and the exit of the smoothie bowls category. This volume expansion was broad-based, spanning beverages, broths, and fruit snacks.

The company's customer relationships continue to be a significant growth driver. In Q1 2025, each of SunOpta's top five customers delivered year-over-year growth, with foodservice customers growing mid-single digits and club channel customers achieving double-digit growth. This performance underscores management's assertion that their key customers are outperforming the broader categories. The new business pipeline further validates the strength of SunOpta's value proposition, standing at nearly 25% of annual sales volume, double the level seen over the prior 15 months. This pipeline includes opportunities for share expansion with existing customers and growth with new partners, providing confidence in the company's ability to sustain its growth trajectory.

While top-line growth was robust, Q1 2025 gross profit saw a slight decrease of 2.4% to $30.3 million, resulting in a gross margin of 15.0%, down from 16.8% in Q1 2024. Adjusted gross margin was 15.3%, a 170 basis point decrease year-over-year. This margin pressure reflected temporary factors, including investments in labor and infrastructure aimed at long-term margin improvement, inefficiencies related to temporary volume limitations at the Midlothian facility due to a wastewater issue, and incremental depreciation from recently commissioned assets not yet fully utilized. These headwinds partially offset the benefits of higher volumes and improved plant utilization.

Operating income increased 3.6% to $10.5 million in Q1 2025, benefiting from a significant decrease in stock-based compensation expense compared to the prior year, which included accelerated vesting for a former executive. This gain was partially offset by the lower gross profit and the absence of a non-recurring gain from the smoothie bowls sale in Q1 2024. Net earnings for Q1 2025 were $4.8 million, compared to $2.9 million in Q1 2024 (which included a loss from discontinued operations). Earnings from continuing operations attributable to common shareholders were $4.7 million, or $0.04 per diluted share, up from $2.4 million, or $0.02 per diluted share, in Q1 2024.

Looking back at full-year 2024, SunOpta delivered strong volume-driven revenue growth (9% in Q4, 16% in Q3, 21% in Q2), demonstrating its ability to capture market share. Adjusted EBITDA also saw significant growth, increasing 20% in Q4 2024, with adjusted EBITDA margin improving 130 basis points to 13.4%. This performance, despite temporary operational investments and startup costs (like the Midlothian electrical switch gear installation in Q4), validated the initial progress on the operational efficiency front.

Strengthening the Balance Sheet and Future Outlook

SunOpta has made significant strides in strengthening its financial position. The company achieved its target of being under 3.0x net leverage by the end of 2024, reaching 3.0x, down from 3.3x in Q3 2024 and 3.5x in Q2 2024. This deleveraging continued into Q1 2025, with debt decreasing by $4 million from year-end 2024, bringing the net leverage ratio down to 2.9x as of March 29, 2025.

Cash flow generation from continuing operations has been robust. Q1 2025 saw $22.3 million in cash provided by operating activities, a substantial increase from $7.4 million in Q1 2024. This improvement was primarily driven by enhanced working capital efficiency, including the strategic use of the Receivables Sales Program and customer Supply Chain Finance programs, along with the receipt of a tax refund. These programs allow SunOpta to accelerate cash collection on trade receivables at a lower cost than traditional borrowings, improving liquidity and working capital metrics. The company also utilizes extended payables facilities to manage supplier payments, reporting these as financing cash flows.

Capital expenditures in Q1 2025 were $12.7 million, including payments for accrued 2024 CapEx. For fiscal 2025, total capital expenditures are estimated at $30 million to $35 million, primarily focused on productivity and maintenance projects rather than large-scale growth initiatives, aligning with the operational excellence strategy. These investments are expected to be funded through operating cash flows, the Revolving Credit Facility, and finance leases.

Management has provided clear guidance for fiscal year 2025, raising both the top and bottom ends of their previous outlook. They now expect revenue between $788 million and $805 million, representing 9% to 11% growth over 2024. Adjusted EBITDA is projected to be between $99 million and $103 million, a 12% to 16% increase. Adjusted EBITDA is expected to improve sequentially throughout the year, with approximately 44% in the first half and 56% in the second half, culminating in a targeted $125 million annual adjusted EBITDA run rate by late fiscal 2025 or early fiscal 2026. Free cash flow for 2025 is guided at $25 million to $30 million, largely allocated to mandatory debt repayments. The company has set a new, more aggressive leverage target of 2.5x by the end of 2025, underscoring its commitment to balance sheet strength.

The confidence in achieving these targets is rooted in the expected benefits from the operational improvement initiatives. Management anticipates approximately 150 basis points of fixed cost leverage flowing to the bottom line between Q1 and Q4 2025 as production volumes increase. Yield improvements are expected to contribute another 100 basis points, and labor productivity initiatives around 50 basis points to margin expansion by year-end. While the temporary wastewater issue at Midlothian is a headwind, costing about $500,000 per quarter in haul-off fees until mid-2026, resolving this is expected to provide a potential 50 basis point positive impact on total company gross margins starting in the second half of 2026. This operational roadmap supports the projected sequential gross margin improvement throughout 2025, targeting 18-19% in Q4 2025, 18-19% for full-year 2026, and 20%+ for full-year 2027.

SunOpta's long-term growth algorithm remains robust, targeting 8% to 10% annual revenue growth and 13% to 17% adjusted EBITDA growth, with expectations to deliver around the midpoint of these ranges in 2026. The ROIC target is 16% to 18% by the end of 2026, reflecting the focus on capital-efficient growth.

Competitive Landscape and Risks

SunOpta operates in a competitive environment alongside larger, diversified food companies and more specialized plant-based players. While direct, granular comparisons across all metrics are challenging, particularly with private competitors, SunOpta positions itself as a flexible, innovative, and reliable supply chain partner. Its national footprint and diverse capabilities offer advantages over smaller co-manufacturers. Compared to larger players like Danone or General Mills (snacks), SunOpta's focus allows for potentially faster innovation cycles in specific plant-based niches, although these larger companies benefit from immense scale, broader distribution, and often higher profitability margins (e.g., Danone's gross margins are significantly higher). Hain Celestial competes across several similar categories (plant-based beverages, snacks, teas) and generally exhibits higher gross margins than SunOpta, though its recent revenue growth has been slower. Beyond Meat (BYND) competes in plant-based proteins, a category SunOpta participates in via ready-to-drink shakes, but Beyond Meat's focus is primarily on meat alternatives with different technological requirements and financial profiles (e.g., negative net margins).

SunOpta's competitive advantages stem from its integrated solution model, co-development capabilities with customers, and the operational flexibility afforded by its network. The strategic emphasis on unlocking existing capacity aims to improve cost competitiveness and supply reliability, directly addressing potential weaknesses like historical manufacturing inefficiencies compared to larger, more established players. The strong share commanded by SunOpta's customers in segments like better-for-you fruit snacks (over 75% segment share) indicates successful partnerships and market positioning.

However, the company faces several risks. External factors like new or increased U.S. tariffs, particularly on goods sourced from or produced in Canada and Mexico, could increase costs. While SunOpta intends to pass these costs through via pricing actions, this carries the risk of reduced competitiveness or consumption for certain products, and timing lags could impact margins. The voluntary disclosure regarding past underpayment of duties on fruit snacks imported from Canada, resulting in a $7.8 million accrual as of Q1 2025, highlights this exposure, with potential for different outcomes or penalties from CBP review.

Operational risks include the temporary wastewater limitation at Midlothian, which constrains volume and incurs additional costs until the planned solution is installed in mid-2026. While management is confident in the timeline, any delays could prolong this headwind. The Q2 2024 product withdrawal, though not reaching consumers and largely covered by insurance ($7.7 million expected recovery recognized), demonstrates the inherent risks in food manufacturing quality control. General litigation in the ordinary course of business is also a potential, though currently not expected to be material, risk.

Conclusion

SunOpta has successfully navigated a period of strategic portfolio refinement and significant capital investment, emerging with a sharpened focus and a clear operational roadmap. The strong volume-driven revenue growth in Q1 2025 and recent quarters, coupled with an accelerating new business pipeline, provides compelling evidence that its customer-centric, solution-oriented model is resonating in growing categories. The strategic pivot to unlocking trapped capacity through operational excellence is a critical element of the investment thesis, promising not only to fuel future growth without heavy capital outlays but also to drive substantial margin expansion over the next several years.

While temporary operational inefficiencies and external factors like tariffs present challenges, management has articulated clear plans to address them, backed by specific margin improvement targets and a commitment to strengthening the balance sheet through deleveraging. The confidence in achieving the $125 million adjusted EBITDA run rate target and the long-term growth algorithm appears well-supported by the visible pipeline and the tangible progress in operational efficiency. For investors, the story of SunOpta is now centered on the execution of this operational strategy, the continued capture of growth in attractive markets, and the realization of the projected margin and ROIC expansion, positioning the company for enhanced profitability and shareholder value creation.