STKL - NASDAQ

Greetings, and welcome to SunOpta's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host and that is Reed Anderson with ICR. Thank you. And you may begin.

Good afternoon, and thank you for joining us on SunOpta's third quarter fiscal 2023 earnings conference call. On the call today are Joe Ennen, Chief Executive Officer; and Greg Gaba, Chief Financial Officer. By now, everyone should have access to the earnings press release that was issued earlier this afternoon and is available on the Investor Relations page on SunOpta's website at www.sunopta.com. This call is being webcast, and this transcription will also be available on the company's website. As a reminder, please note that the prepared remarks which will follow contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. We refer you to all risk factors contained in SunOpta's press release issued this afternoon, the company's annual report filed on Form 10-K and other filings with the Securities and Exchange Commission for a detailed discussion of the factors that could cause actual results to differ materially from those projections in 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. Given the divestiture of a frozen fruit business in the third quarter of 2023, the company has changed reporting structures and is now reporting as a single operating segment. Also, please note in the prepared remarks that follow, unless otherwise stated, the company will be referring to the continuing operations portion of the business and all figures are in U.S. dollars occasionally rounded to the nearest million. I'd like to now turn the call over to Joe.

Good afternoon and thank you for joining us today. First, let me say welcome to the new SunOpta. With the divestiture of the frozen fruit business, we have completed the heavy lifting around our portfolio transformation that began in 2020 with the divestiture of our global ingredients business, the Sunflower business in 2022, and finally, frozen fruit last month. Over the last several years, we've been very focused on aggressively investing in our plant-based and snacks businesses. And the results of these investments are now more obvious. The new SunOpta [ph] is a focused, high growth, competitively-advantaged business operating in very attractive categories. Let me give you a few facts about the new SunOpta. On a pro forma basis, factoring in our Q4 outlook, in the last 36 months, the new SunOpta has grown revenue approximately 40% and EBITDA has grown 45%. Over this time, our EBITDA margins have consistently been in the 10% to 12% range. We have achieved this impressive growth in revenue and EBITDA in a highly efficient manner, with SG&A only up 5% in those 36 months, and SG&A has declined as a percentage of revenue every year for the last three years. Additionally, going forward, the divestiture has reduced the working capital needs of the business by over $100 million. The capital investments we made in 2021 and 2022 have been fueling this revenue and EBITDA growth, and we are excited about the future growth prospects for the new SunOpta as we further optimize the investments we have made. It is worth noting that Texas was half the investment quantum and has not yet contributed to EBITDA, thereby supporting continued EBITDA growth as Texas pivots from startup mode to delivering cash flow. I will now share our strategic priorities going forward. First, operational excellence. We are focused on sweating our assets to gain maximum value from the investments we have made to fuel growth organically. We believe there is significant opportunity to do this over the next several years. Second, capital allocation. We have come out of a large investment cycle and we are focused on demonstrating and creating strong returns for shareholders. And third, growth. We are a growth company and our focus is on share gains with existing customers, adding new customers and TAM expansion. Now let me offer some key takeaways on the Q3 results. We have solid volume growth. We have 5.5% volume growth in Q3 and importantly, Q4 is looking even stronger as momentum builds. Our growth was fueled by three things. Share gains with existing customers, new customers and TAM expansion. Fruit snacks had another strong quarter of volume field growth. And with our capacity expansion that came online at the end of Q3, we expect continued strong growth. Adjusted EBITDA increased 8% to $19 million as volume flowed through to EBITDA. At this point, all 2023 new business customers are in production and will positively impact growth in Q4 and 2024. Additionally, we have a strong pipeline of new business opportunities for the second half of '24 that we are aggressively working to close. We are reaffirming 2023 guidance, adjusting for the sale of frozen fruit, and projecting high single to double-digit volume and revenue growth in 2024. In terms of details around the Q3 results. In beverages and broth, which is all of our packaged plant-based milks, teas, broths, and protein drinks, revenue increased 9% to $123 million. This product group represents 80% of our Q3 revenue. The 9% revenue growth came from a 6% increase in volume, resulting from share gains with existing customers, new customers, and TAM expansion. We saw growth in oat milk, creamers, teas, and of course protein shakes. Our fruit snacks business continued to deliver very strong growth, with revenues up 16% to $24 million, driven completely by increases in volume and led by private label growth. Q3 marks the 13th consecutive quarter of double-digit growth for our fruit snacks business. For the total company from a go-to-market standpoint, we saw very balanced growth with positive gains in co-manufacturing, gains in private label and the fastest growing part of the business continues to be our own brands. The only go-to-market approach that was down was outside ingredients sales, resulting from the strategic shift we outlined in Q1 to prioritize internal use of oat base versus selling it externally as an ingredient. Here are a few comments on category performance for some of our major categories. From a category performance standpoint, we see a similar dynamic across plant-based milks, snacks, and broth which is track channel performance being flatter down in volume and non-track channels performing strongly. Since there have been a lot of questions about plant-based milk category performance, we have made an internal estimate of total category performance based on all the channels, and our aggregated estimate is that the total shelf-stable plant-based milk category is up low-single-digits in Q3, driven by foodservice and untracked club stores, despite track channel category volume being down. It may be surprising to know that we estimate that the foodservice coffee shop channel consumes 3x to 4x as much shelf-stable plant-based milk as all of track channel retailers combined. One track channel bright spot last quarter was health and performance beverages, aka protein shakes. This category was up 18% in units, with performance nutrition up 38%. Our major capacity expansion projects continue to show steady progress, and we are tracking largely as expected. The new capacity at our snacks production facility in Omak, Washington, came online in the third quarter as planned. Once fully ramped, this expansion will create a 40% increase in our total fruit snacks capacity. Production continues to ramp at our Midlothian, Texas facility with output on the first two lines approximately 60% of the way to ideal state. Texas production continues to meet customer expectations, and we feel good about the demand environment for utilizing the Texas capacity. The two lines we commissioned this year are now shifting to running $24.5 million and $24.7 million respectively, and the third line will come online in Q1. The focus continues to be on improving output and efficiency of these new lines to fully realize the volume potential in 2024 and 2025. Lastly, as we referenced on the Q1 2022 call, we have now completed construction of a new oat extraction capability in Modesto, and we will begin commissioning and production in the first of 2024. With the divestiture of our frozen fruit business, we are at an inflection point and think it is a good time to outline in more detail our capital allocation priorities. Historically, our approach and target metrics were heavily influenced by the capital needs of our different lines of business, which did not allow for much flexibility. That changes with the divestiture of frozen fruit. Our working capital needs are significantly reduced. This fact, combined with anticipated growth and lower internal investment needs over the medium term will result an increased free cash flow, thereby giving us more optionality for returning value to shareholders. Greg will cover this in more detail in his section, but it is a very important point and truly an inflection for SunOpta that we feel is underappreciated today. Given the new more focused portfolio, let me share a preliminary view of our outlook for 2024. In 2024, we will see steady, strong growth across the year with both volume and revenue growth in the high single-digit to double-digit range, specifically 8% to 13% volume and revenue growth. EBITDA will grow faster than revenue with adjusted EBITDA growth expected to be in the 14% to 21% range. This is our core business forecast, and in addition to this, we have a very strong pipeline of new business development opportunities for the second half of 2024, which we will be able to update during the Q4 call. I will end by commenting on previously communicated forecasts. We have previously communicated a midterm target of $150 million of adjusted EBITDA. This number would have included approximately $25 million for frozen fruit, as you can infer from the bridges presented in both 2022 and earlier this year. The $125 million for plant-based plus snacks represented full utilization of the network, and this number is still valid. As to when we see the network being fully utilized again, that is something that is informed by new business, but likely by 2025 or 2026. In summary, we continue to execute well against our strategic priorities and are well positioned to deliver significant growth and improved profitability as we leverage our flexible model and expanding capacity to fuel the future of food. In a moment, I'll turn the call over to Greg Gaba, who was appointed CFO in mid-October. Many of you know Greg and have interacted with him previously in his prior capacity as Deputy CFO. Greg has been with SunOpta for over six years and has consistently provided critical financial insights and played a pivotal role in achieving our business goals. He has a strong background and extensive knowledge of our business and I'm thrilled to have him lead our finance organization. Greg?

Thank you very much, Joe, and good afternoon everyone. It's a privilege to speak with you today. I'm excited about my new role and look forward to regular dialog with all of you in the future. Before discussing the quarterly results, let me start with the divestiture of our frozen fruit business on October 12th. Frozen fruit at the health for sale criteria and together with sunflower qualifies for reporting as discontinued operations beginning in the third quarter of 2023. As a result, the assets and liabilities of the frozen fruit disposal group have been reclassified and reported as held for sale on the balance sheet. The estimated aggregate purchase price of $141 million comprised cash consideration of $95 million. A short-term note receivable of $10.5 million, secured seller promissory notes due in three years with a stated principal amount of $20 million in the aggregate, and the assumption by the purchasers of $16 million of accounts payable and accrued liabilities of frozen fruit. At the closing date, $21 million of the cash consideration was used to make required repayments of certain bank loans in other liabilities of frozen fruit not assumed by the purchasers. We utilized the remaining cash consideration of $75 million to repay a portion of the outstanding borrowings under our revolving credit facilities. Note that unless stated otherwise, my commentary regarding our third quarter performance will be in regard to results from continuing operations. Third quarter revenues of $153 million were up 6% versus last year, driven mostly by a volume growth of 5.5%. Adjusted gross profit for moving startup costs was $25 million, or 16.4% of revenue, which includes 150 basis points impact of incremental depreciation from new production equipment. Adjusted earnings from continuing operations was $500,000 compared to $2.4 million in the prior year period. Adjusted EBITDA from continuing operations increased 8% to $19 million and was up 25 basis points as a percentage of consolidated revenue to 12.5%. Turning to the balance sheet and cash flow, at the end of Q3, debt was $315 million. Adjusting for the $75 million of immediate paydown of debt related to the divestiture of frozen fruit, debt is $240 million and corresponding leverage is 3.2x. Cash used in our operating activities of continuing operations during the third quarter was $26 million, reflecting the impact of startup costs related to our Midlothian, Texas facility, higher cash interest expense, together with increases in working capital. Cash used in investing activities for continuing operations was $5 million, reflecting the wind down of CapEx associated with Midlothian. As Joe commented earlier, the divestiture of our frozen fruit business had a significant positive impact on our balance sheet with a paydown of debt and with a significant reduction to our working capital levels going from approximately 20% of annual revenue to half that amount at around 10%. Given the significant working capital reduction, our current ABL arrangement, which was supplemented with third-party extended payable facilities and finance leases, is suboptimal for our new operating company. We are moving to a term loan and revolve structure with limited finance leases. We have great banking partners who have been very supportive and we anticipate completing the refinancing with a five year maturity by the end of the year. Over the next several years, we expect this refinancing to lower our cost of capital and provide greater flexibility around capital allocation. In recent years, our focus has been on internal investment opportunities to add new capabilities and capacity. As a reminder, we've invested $230 million, since 2020 to expand and improve existing facilities along with building our new Greenfield plant in Texas. These investments will continue to deliver significant growth in revenues, profits, and cash flow over the next several years simply by monetizing this incremental capacity as we have been doing since 2021. As a result of this investment cycle, our CapEx needs will decrease significantly in the medium term, which will generate meaningful free cash flow. In 2024, we expect to generate free cash flow in the range of $35 million to $45 million. Given our expected soon to be significant cash flow, I feel it is an appropriate time to outline our capital allocation priorities. The first use of cash will be to further pay down debt until we are under 3x levered. Given current interest rates being sub 3x levered is our leverage goal. We expect to be there in the second half of 2024 as that will increase slightly in the first half of the year, resulting from the Modesto Extraction Project, Joe referenced coming online and the payment of other current liabilities. Once we are under 3x levered, our priority is to use free cash flow to buy back shares, assuming the stock price is still undervalued. We have had preliminary discussions with our board and they are aligned. It is management's intention to formally propose a share buyback at our year-end Board meeting. While we believe there are many attractive organic investment options, none compare to the values SunOpta represents. As we believe our stock is significantly undervalued and trading at a material discount to other similarly positioned companies. While the specific quantum and boundaries of a buyback are yet to be agreed, we would expect to be roughly equivalent to one year's cash flow. After these priorities, we will either fund organic growth through attractive ROI projects or acquisition. Let me close with comments on our outlook. From a guidance standpoint, we are maintaining our 2023 estimates that were provided on our previous call, adjusting for the sale of the frozen fruit business. The midpoint of the guidance for continuing operations would result in high single-digit revenue growth and single-digit adjusted EBITDA growth in the fourth quarter. For 2024, we expect revenue in the range of $670 million to $700 million, which represents growth of 8% to 13% from the midpoint of the range of our 2023 outlook. From a profit perspective, we expect adjusted EBITDA of $87 million to $92 million, which represents growth of 14% to 21% from the midpoint of the 2023 range. From a pacing standpoint, as you would expect, we see the back half of the year to be somewhat stronger than the first half. From a balance sheet and cash flow standpoint, we continue to expect capital expenditures on a cash flow statement of approximately $45 million in 2023 and approximately $25 million to $30 million in 2024. 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.

Thank you. [Operator Instructions]. Okay. And our first question today comes from the line of Jim Salera with Stephens. Jim, go ahead.

Hi, guys. Thanks for taking our question. And thanks for all the detail on the transaction as we're getting our bearings with the new look, SunOpta. If I could maybe ask a question, if my notes served me correctly, in 2Q, you guys said that there was 10 new business opportunities at the time that you had kind of baked into the 2023 guide. I think two were on pace, two had gone by the wayside and then six were delayed. Can you just give us an update on kind of how far along we are with those six and maybe any contribution from them that's factored into your numbers for 2024?

Hi, Jim. So all six are now in production and would have contributed to growth in the third quarter. And certainly, we expect them to be key contributors to growth in Q4 in the first half of 2024 before we then start overlapping them.

Okay, great. That's helpful. And then I found the data that you guys offered on kind of the total plant-based consumption very interesting because, as you know, obviously we only have kind of visibility into those track channels. Can you give us any thoughts around why there's such a divergence between the consumption trends at foodservice and club versus what we can see in the retail channel?

Yes, I think foodservice and especially in a coffee shop environment, you have a consumer who's in a very routinized behavior pattern. They have their favorite drink. They go to the drive-through or up to the counter and they order their usual. I think when the consumer is in a retail shopping environment, they're much more budget-conscious because they have a certain amount of dollars for the week for groceries for themselves or their family. And I think they're much more in a trade-off orientation to try to fill the basket and put food on the table for the week. And so I think you just see the consumer with two very different elasticity frameworks depending upon what they're shopping for.

That's helpful. And maybe if I can sneak in one more as it relates to the 2024 outlook, how much of that outlook is just kind of your core business with existing customers? Or is there some of those new opportunities baked into that as well?

Yes, so one of the things, Jim, that we tried to learn for our '24 guidance was we baked in a certain quantum in 2023 of what we thought was new business. And as we talked on the Q2 call, just calling the timing and the quantum of those nine months out is very challenging. So what you would have heard us share relative to the '24 numbers is just core business. It's customers we serve today. It's SKUs we manufacture today. It is as certain as certain can get from our vantage point.

Great. That's awesome. Thank you guys. I'll pass it on.

Great. Thanks, Jim. And our next question comes from the line of Ryan Meyers with Lake Street Capital Markets. Ryan, please go ahead.

Hey guys, thanks for taking my questions. Just kind of as a follow-up as the last question, the overall category softness obviously sounds like that continued. I'm just kind of curious what kind of visibility you guys have there into a potential improvement. And if we do see some sort of improvement into next year, if that could be some sort of an upside to the overall guidance that you gave?

Yes, so Ryan, as we said, total shelf-stable plant-based milks, we would call the category up mid-single-digits, low to mid-single digits, not down. So as it relates to the subset, meaning the track channel, certainly if that were to recover, we would see that as an upside for 2024, as it would appear that many of our customers have forecasted further declines in 2024, as it relates to the SKUs that they sell into the retail channel. But again, just to underline the point, we saw total category growth, not decline. Because again, the foodservice channel is 4x larger than track channel.

Got it.

That's not even county club stores. That's just foodservice.

Okay. And then as we just think about this sort of new SunOpta, as you call it, how should we be thinking about sort of where the current gross margin of the business is and ultimately where you guys feel like you can take the gross margin to?

Yes, thanks, Ryan. Our current gross margin has been pretty consistent. When you look at the historicals that were published as well, I would say our goal hasn't changed. We've said for the last couple of years that we view the gross margin around 20%. Excluding our frozen fruit business that was divested. And we still feel pretty strong that our long-term goal will be 20%.

Great. Thanks for taking my questions.

Thanks, Ryan. And our next question comes from the line of Andrew Strelzik with BMO Capital Markets. Andrew, please go ahead.

Hey, good afternoon. Thanks for taking the questions. My first one is just around the '24 guidance. And I guess I'm curious when you think about the kind of underlying operating environment that you assumed, are you just assuming similar to what you did for this year that kind of current category level trends, I guess, both foodservice club, et cetera that does continue, have you baked in any? I mean, I think you talked about kind of the outlook from some of your customers. How did that all roll up into the guide, just some texture there would be great.

Sure. So our forecasts start with our customers' assumptions as opposed to a category forecast, meaning the customers will give us their forecast for 2024. And that is our starting point or our working point from which we build our forecast. And it would appear that our customers are continuing to plan growth in the foodservice and club channel, and they are planning or expect to see continued declines in the track channel category. So they don't break it out, but we can infer based on that, the SKUs and the forecasts by SKU, kind of what products are going in what direction. But overall, I would say we are seeing positive growth being planned, as you would have seen in our numbers. And again, as you know Ryan asked, we would see recovery in track channels as upside, but clearly what happens in the foodservice coffee shop channel is by far the most important driver of volume for SunOpta.

Got it. Okay. That's helpful. And then in terms of the capital allocation of potential share buybacks, I guess I'm curious how you're thinking about that from the cadence perspective in relation to capacity needs, I know some of that has been pushed out, obviously, but it sounds like based on when you expect to hit your leverage targets and things like that, eventually we're going to get to a situation where you're going to be spending a given capacity expansion. So I guess just comment here on how you or your ability to kind of balance those two things?

Yes, I would say, I mean from a prioritization standpoint, we absolutely feel like the best value and the best use of cash flow at this point in time is a share buyback. As it relates to future capital needs, as you heard in our discussion around what our core priorities are, operational excellence and squeezing more out of our existing manufacturing base and infrastructure is a massive priority for us. And I certainly believe that we can continue to drive strong volume growth for the next several years with the assets we currently own.

Okay. And then if I could just squeeze one more in here about the comments you made with respect to the $125 million being in '25 or '26, can you maybe elaborate on the swing factor there. I think what you were talking about was timing of onboarding and things like that. There'd obviously be a big leap in EBITDA from the '24 guide to that in '25. So I guess, I mean, does it seem like '26 is more realistic? Do you think that's possible in '25, just a little more color there would be great. And thank you.

Yes, so the answer to the question is it's highly informed by new business. And as I indicated, we'll be in a much better position to comment on the quantum of new business that we see for the back half of '24 and into 2025. So we have several big opportunities that we're enthusiastic about and are pursuing. But until those are certain, it'd be premature to kind of peg the date. But consistent with what we've said, when we first rolled out the $150 million or $125 million target that represented kind of full network utilization and we're absolutely pursuing that. So I would say, can give you probably a better reference point on that -- on the Q4 call.

Great. Thank you very much.

Thanks, Andrew. And our next question comes from the line of Alex Fuhrman with Craig-Hallam Capital Group. Alex, please go ahead.

Hey guys, thanks very much for taking my question and congratulations on the sale of the frozen fruit business. Obviously, foodservice restaurants, that sounds like the most important channel for you guys, of course, by a pretty good margin. Do you have any insight into what you think has really been driving what's been a pretty huge divergence in trends for plant-based milks between grocery stores, club, and restaurants? Curious what you really attribute that to, and if you expect tracked channels to continue to underperform for the foreseeable future. And then I'd be curious also, just given your dominant share in shelf stable plant-based milks, if you've noticed any sort of a divergence in the broader category across all channels between refrigerated and shelf-stable plant-based milk?

Yes, working backwards, we haven't seen a big divergence between shelf-stable and refrigerated. They've tracked incredibly closely together in terms of performance. In terms of why we think there's been such a divergence, again, I think you're seeing a number of things and happening in the foodservice coffee shop channel one is that routinized behavior that I mentioned prior. Second is, I think as you get more and more people returning to work, the Starbucks or whatever coffee shop drive through continues to be then a popular destination, you would have seen same-store comps being reported recently from one of the large coffee shop chains last week, which saw both revenue growth on a per drink basis as well as store traffic gains. So I think they are in aggregate the channel, meaning the coffee shop channel is doing a great job around product innovation and keeping their customers engaged.

Okay, that's really helpful, Joe. Thank you very much.

Thank you. [Operator Instructions]. And with that, we will take our next question from the line of Jon Anderson with William Blair. Jon, please go ahead.

Hey, thank you very much. Hi, Joe. Hi, Greg.

Hi, Jon.

Let's see, so where to start? Why don't we begin on the '24 sales outlook? I'm wondering if it may not be possible at this point, but I'll ask if you could kind of add some dimension to the high single-digit to low double-digit growth rate across the three buckets that you use to describe the growth opportunity, that being -- those being share their gains with existing customers, new customers in TAM expansion. I'd love to get a better sense for the relative size of each of those in driving that growth in '24 if possible? Thanks.

I think it's pretty split, John, between share gains, new customers in TAM expansion. We see real positive, as we kind of talked throughout 2023, a lot of activity around gaining share from existing customers as well as onboarding new customers. And certainly, Texas opened a lot of doors for us in that regard. And then, of course, TAM expansion with the protein shake. So all three of them will deliver and contribute to that growth algorithm.

Good. Okay, so balance there. Good. And then you mentioned that the two lines that are producing in Midlothian now are running at about 60% of where you'd like them to be ultimately. Is that kind of where you had hope to be at this point and maybe more importantly, what are the steps that are necessary to get that to I guess 100% from here? And do you have kind of good line of sight, do you feel at this point in time to that?

Yes, I would say we have very good line of sight to the continued progression of the startup curve. So, yes, we're feeling very good about our ability to continue to progress and push that up.

And the third line, Joe, is going to be focused on which area of the business?

It would be core plant-based milks. Probably a heavy skew to oat.

Okay. And the Modesto extraction capability, can you -- you may have mentioned that this already, but when will that start contributing in earnest, do you think to sales? And is that product that you will use internally to support the plant-based the finished goods business or will the portion of that be dedicated to external ingredient sales?

There will be some external ingredient sales, but a significant portion of the oat base that is produced out of Modesto will be consumed internally. In terms of when we see that, really Q1 will be in startup mode. So really Q2 is when we would expect that to be contributing materially.

Okay, great. A question perhaps for Greg here. During the prepared comments mentioned that in 2024 you expect to generate free cash flow of $35 million to $45 million. Is that unlevered free cash flow or free cash flow after interest expense and capital expenditures? Just want to make sure I have the definition of that, right?

Yes, no problem, John. It is free cash flow, including interest, so not the unlevered free cash flow we referenced in the past.

Excellent. Excellent. And then the last one, I think you talked about this as well. You're working towards kind of restructuring, I guess of the ABL to a term and revolver facility. Do you have any thoughts on the timing of that and how that could impact your interest rate and kind of annual expense, or is it just too early to call that? Thanks.

Great question, Jon. We're expecting to get that done by the end of the year. Our bank partners have been extremely supportive. We've started the process, and we don't see any reason why that won't be completed by the end of the year. I would say from an interest rate perspective, it will be relatively similar to where we are now. It just creates a lot of flexibility for us with the new structure.

Great. Congrats on the new SunOpta. We look forward to strong performance going forward. So, good luck.

Thanks, Jon.

Thanks Jon.

Thank you, Jon. And our final question today comes from the line of John Baumgartner with Mizuho Securities. John, please go ahead.

Maybe first off on the plant-based side, Joe, given the volume declines we're seeing, you mentioned the expectations for continued declines in 2024 in the track channels. And I think last quarter there was some discussion around retailers maybe cooling to the idea of adding new brands, but we're still seeing modest growth in GDPs for the category through October, and I'm curious what the outlook for declines there? Do you sense there's any desire for retailers to address the tail in the category, the lower velocity brands and pair back some of the underperformers and declutter the shelf a bit? I'm just curious how you think about changes in retailer merchandising for this category in line with the volume softness?

Yes, what I would say, I would expect to see in 2024 is probably less assortment changes and more of a focus on promotional activity from the brands. I think as the collective brand owners have experienced some volume softness in track channels. I would expect that the promotional activity in 2024 will intensify. I think that is a pretty consistent message we're hearing across all categories in the grocery store as a kind of thematic for 2024. And I would expect that that would play out in our category as well. But we have not seen any kind of material movement from retailers to trim the bottom end of the category at this juncture. But certainly as resets occur typically in the middle of the year, call it middle Q2, Q3 we will certainly be watching out for that.

Okay. And then pertaining to fruit snacks, the category volume there has also been soft the last few months in the scanner data, but you sound very bullish on growth for next year as well. And think about the impact we saw in the back half of this year from softness and plant-based beverages sort of hitting orders in the back half. How do you see the visibility into order staying on track for snacks in 2024? Is there a difference in the customer retailer mix for fruit that better allows you to buck the trend if the overall take will remain soft? How do you think about that and the risks to the outlook for fruit in 2024?

Yes, good question. So with 13 consecutive quarters of double-digit growth and a significant capacity expansion coming online, we are very bullish about our growth. It is a -- our business is very, very driven by club stores and specifically both tracked and untracked club. And so, when you look at the trends in those -- with those retailers, we see very, very strong growth. It's also worth noting, I mean, we've had several customers on allocation for what might be approaching multiple years. And so, those customers are also incredibly anxious to come off allocation and be able to drive this business. So just even in the first month and I referenced strength in the fourth quarter that we're seeing, certainly the added fruit snacks capacity is one of the things or one of the areas of the business where we're seeing, certainly very strong early trends here in Q4 as this product continues to just perform and perform and perform.

Okay. Thank you.

Thanks, John. And with that, I would like to turn the call back over to Joe Ennen for closing remarks. Joe, the floor is yours.

Great. Thank you. I just want to thank everybody for joining us on the call today and look forward to speaking to many of you in the future. Thanks again.