SunOpta, inc (STKL) Q2 2021 Earnings Call Transcript

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SunOpta, inc (STKL -1.95%)
Q2 2021 Earnings Call
Aug 11, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to SunOpta's Second Quarter Fiscal 2021 Earnings Conference Call. By now, everyone should have access to the earnings press release that was issued this morning 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 risk factors contained in SunOpta's press release issued this morning, the company's annual report filed on Form 10-K and other filings with the Securities and Exchange Commission for a more detailed discussion, other 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 US dollars and are occasionally rounded to the nearest million.

And now I'd like to turn the conference call over to SunOpta's CEO, Joe Ennen.

Joseph D. Ennen -- Chief Executive Officer

Good morning, and thank you for joining us today. With me on the call is Scott Huckins, our Chief Financial Officer. Our second quarter results of nearly 10% revenue growth and 61% EBITDA growth demonstrates the strength of our strategy and the quality of our execution against our corporate priorities. These priorities are portfolio transformation, accelerating customer-centric innovation and doubling the plant-based business.

We continue to emphasize top line growth in our plant-based business and improving profitability in fruit based. The significant revenue increases we are realizing in plant-based beverages reflects our competitive advantages combined with continued strong consumer demand. In our fruit-based business unit, the progress we continue to make is being driven by internal effort to optimize customers, capacity, operating costs, and pricing.

Before I begin unpacking our Q2 results, let me offer three key takeaways from the quarter. First, the momentum in plant-based beverages remains strong and continues to be led by oat-based products and by our core customers. Second, based on our business development pipeline with existing and new customers, we remain optimistic about the long-term growth prospects for our plant-based portfolio. Third, though we remain very focused on co-manufacturing, our portfolio of own brands in plant-based is also performing well, delivering solid gain, helping us bring innovation to market faster and increasing in important -- in both revenue and margin.

Let me first start with a high level view of key accomplishment from the second quarter and then I'll share some of the details by segment. Overall, second quarter results were ahead of the outlook we shared with you on the Q1 call. For the second quarter, total revenue was, up 9.7% versus Q2 2020 to $202.3 million and up 17.5%, compared to Q2 2019.

Gross margin improved by 40 basis points to 13% and adjusted EBITDA advanced 60.8% to $16.1 million or 8% of revenue. Plant-based continue to be our key growth driver, while our focus in fruit-based remained on improving productivity and profitability and we demonstrated the significant leverage inherent in our model with adjusted EBITDA increasing at a much faster rate than revenue. We are pleased with the progress of our strategic initiatives, around expanding capacity in plant-based and improving productivity across the network.

Manufacturing is core to our business and the progress we have made in transforming our operation has been in process. From multiple capacity expansions in plant-base to footprint optimization and automation in fruit, we are building real competitive insulation in our business. The added production we brought online and plant-based in the fourth quarter of 2020 is performing well, giving us headroom to aggressively pursue new business opportunities.

Our Allentown project is also tracking to plan, expected to be operational in late Q4 and we are starting a similar sized project in Modesto. Automation implemented in our plant is driving solid gains in productivity and making us more nimble around core capacity utilization. We have made considerable progress in consolidating our fruit-based operation with the exit of our South Gate facility in July, and closure of our Santa Maria facility in Q1.

Finally, we've made significant progress de-risking our fruit-based operations, including sourcing three times more fruit from South America and processing over 50% more in Mexico versus a year ago. The trends around plant-based combined with our strategically advantaged capabilities has set the stage for yet another expansion of our plant-based operation. I'm pleased to announce that we are in the final stages of negotiating a lease for the construction of a new mega facility in the Dallas-Fort Worth area to support long-term growth in our plant-based business.

This greenfield 275,000 square foot facility is by far the largest capex project we have ever undertaken. Having capacity to grow is a core element of our five-pronged service offering and we are excited that this capacity will continue to allow our customers and our brands to keep pace with consumer demand. The plant is expected to be operational by late 2022 and will augment the incremental capacity we brought online at the end of 2020 along with the Allentown and Modesto expansion projects.

In aggregate, the projects we have in motion now effectively give us the ability to double the business. We have intentionally designed that project to be developed in phases as customer demand rises. In addition to supporting continued growth in our core business, this new facility broadens our geographic footprint, add new capabilities, and further strengthened our competitive position as a partner for our customers. With this new plant, we will have facilities in the East, the West, the Midwest and now the South, allowing us to offer very competitive cost, an improved environmental footprint and redundant manufacturing capability to lower risk for our customers. The added scale will improve our margin profile over time as we expect to realize further supply chain savings by having a more efficient national network.

Now, let me turn to our segment results. Starting with our plant-based segment, we have three strategic priorities. First, build a competitively advantaged business model around quality, capacity, cost, customer service, and R&D. Second, build a robust ingredient business to enable further participation in refrigerated plant based milk. And third, build a multi-pronged go-to-market business that includes co-manufacturing, private label and owned brands. Results in the second quarter showed significant progress on all measures, including a 21.4% increase in plant-based revenue, which was on top of an 11.9% increase in the second quarter of 2020, generating a two year stack of 33.3%.

Now, let me share a bit of retail sales category data to help frame our results. The plant-based beverage category in retail continues growing despite overlapping the COVID frenzy of Q2 2020. For the 13-week period, that aligns with our Q2. Plant-based milks increased 3.7% overall, due to continued strong sales of oat milk. From a foodservice standpoint plant-based milks are an ingredient in coffee beverages, and therefore, we don't have syndicated data for foodservice. But based on our sales results, it is safe to say there were robust sales of plant-based coffee drinks in foodservice.

There are three primary drivers of our growth in the quarter. From a product standpoint, it was oat milk. From a channel standpoint, it was foodservice. And from a go-to-market standpoint, it was both our core co-manufacturing customers and our own brands.

Oat milk accounted for half our growth in Q2, which is similar to what we experienced in Q1. Importantly, the gains we are realizing in oat milk are coming from both existing customers like Starbucks, as well as winning new business. In addition to strong foodservice new business, we signed a multi-year extension to continue supplying oat milk to a large CPG company, who is currently the market share leader in retail oat milk. Their sales success along with strong results from other customers provide authentic marketplace testimony to the quality of our oat milk and the proprietary manufacturing process we have built to help our customers differentiate their product offerings.

It is quite likely that the demand we are seeing for our industry-leading oat milk will necessitate the construction of yet another oat processing system in the not-too-distant future and would be in addition to the Texas project. As I mentioned, we will face these project in as good capital stewards.

From a go-to-market standpoint, we saw very strong growth in our top five customers with sales growth of 49% in the quarter. As it relates to our own brand, the addition of Dream and WestSoy, which we acquired in mid-April, were additive to plant-based revenues in the second quarter, accounting for approximately 4 percentage points of our segment growth.

In addition to this, our recently launched brand of organic oat milk creamer, SOWN, is seeing strong sales velocities in both retail and e-commerce and is gaining distribution with a line of sight to being in over 3,500 stores by year-end. From a channel perspective, our growth in plant-based during the second quarter was more concentrated in foodservice, which has been experiencing a rebound versus last year when COVID was significantly pressuring this channel.

Moving to our fruit-based segment. Our three strategic priorities are: number one, de-risking the business through geographic diversification, customer pricing program and better grower relation; number two is a focus on becoming the low-cost operator in frozen fruit through automation and footprint reengineering; and number three is to evolve the portfolio via innovation toward more value-added offerings. We made solid progress against all three of these in the quarter. We have been focused on supply chain reengineering to lower costs and improve margins, which is expected to enable us to deliver sharply higher earnings when revenue growth returns to a consistent, upward trajectory.

Second quarter results in fruit-based were illustrative of these effort. Despite revenue being down 1.9%, we showed improvement in both segment level gross margin, as well as segment level operating margin. Similar to plant-based, the normalization of at-home consumption trends contributed to lower retail sales volume of frozen fruit, partially offset by increased foodservice volume. For the 13-week period that coincided with our results, retail frozen fruit category sales were down 1.7%, due to lapping significant COVID-driven growth in the prior year period. It's a much different story in fruit snacks, with the category experiencing strong growth of 10.4%. Our initiatives around rationalizing marginally profitable customers and products were another factor pressuring fruit-based revenues in the second quarter.

Finally, supply constraints, with certain fruit varieties negatively affected revenue from blended fruit offerings. This was also a headwind in Q1, so not a surprise. Partially offsetting these factors was a strong performance in our innovation-driven fruit snacks business, reflecting volume growth from new business development and very strong consumer demand. Finally, increased commodity pricing for raw fruit provided a 3% lift to second quarter fruit-based revenue as we pass along higher cost to customers.

From a customer standpoint, lower distribution from large retail customers, coupled with supply challenges, negatively affected our frozen fruit business in Q2. Conversely, significant growth especially from large CPG customers in snacks drove revenue and margin increases. Our top five strategic customers in snacks collectively grew 76% in Q2 versus the same time in 2020.

As part of our effort to evolve the portfolio through innovation, to more value added, we are launching a line of value-added fruit based breakfast bowls. This is a rapidly growing segment with brands like Tattooed Chef. And we are excited about the innovation we are bringing to this segment. Some of the bowls we are launching will have a fruit smoothie-based whole fruit and toppings like quinoa crisps and granola. We are also launching Cheese Balls, which feature a tasty [Phonetic] base and whole blueberries.

Consistent with our agnostic go-to-market approach, this product innovation will launch in some retailers under our brand Sunrise Growers. It will launch as a private label offering in other retailers and we are also in development to co-manufacturer this product for a large CPG company. We are currently in test with the major club store chain under the Sunrise Growers brand and we have authorization from several customers starting in Q4 of 2021 and rolling into 2022.

In summary, we continue executing at a very high level across the organization. Through the first half of 2021, we've delivered on our plan of aggressive plant-based growth, higher margins, and substantial growth, and adjusted EBITDA. We've been winning business with new customers, capturing additional business from existing customers, adding capacity, and expanding our portfolio of products. Coupled with our strong balance sheet, SunOpta remains well positioned for substantial long-term growth in some of the fastest growing CPG categories, all of which support my continued optimism for the future. We remain committed to the previous 2021 outlook and believe our strategies and our team will continue to deliver as we seek to fuel the future of food.

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

Scott Huckins -- Chief Financial Officer

Thank you very much, Joe and good morning everyone. We're excited to report another solid quarter. As Joe mentioned, second quarter revenues of $202.3 million were, up 9.7% year-over-year as strong volume gains lead to a 21.4% increase in plant-based, while fruit-based had a modest decline of 1.9% as we continue to focus on rationalizing marginally profitable business.

Adjusted EBITDA increased 60.8% to $16.1 million as our strategic focus on growing plant-based and optimizing fruit created significant leverage across our business.

Gross profit was $26.3 million for the second quarter of 2021, an increase of $3.1 million or 13.2%, compared to $23.3 million during the second quarter of 2020. The plant-based segment accounted for $3.2 million of the increase in gross profit, due to higher volumes, the addition of the Dream and WestSoy brands, and productivity improvements within our plant-based beverage, and ingredient operations.

Gross profit in the fruit-based segment was basically flat as lower volumes of retail frozen fruit, higher strawberry and transportation costs, and unfavorable foreign exchange impacts from a stronger Mexican Peso, were largely offset by volume growth in fruit snacks and fruit-based toppings along with productivity gains in the plants.

As a percentage of revenues, second quarter gross margin was 13%, compared to 12.6% a year ago, a 40 basis points increase. The plant-based segment gross margin was 17.9%, down only 30 basis points from last year. This is a very strong result considering plant-based absorbed 110 basis points of depreciation expense, associated with the capacity expansions we added in the fourth quarter and 40 basis points of increased transportation costs.

These headwinds were almost entirely offset by increased revenue in productivity gains, reflecting our investments to drive scale and efficiency. Raw material pricing did not have a material impact on plant-based gross margins, because of the weighting toward co-manufacturing customers, which tend to operate on their pass-through pricing arrangements for our raw material inputs.

Gross margin in the fruit-based segment was 7.1%, compared to 7% last year, an increase of 10 basis points. Our near-term focus in fruit-based continues to be optimizing profitability through a combination of rationalizing marginal business, improving productivity, taking costs out of the business, and focusing the business around our large retail customers.

Operating income was $1.7 million in the second quarter, compared to a loss of $0.4 million in the prior year. SG&A increased $0.8 million or 3.8% to $22.7 million as integration expenses, related to the Dream and WestSoy acquisition, were partially offset by lower variable compensation costs.

Loss attributable to common shareholders from continuing operations for the second quarter was $1.7 million or $0.02 per diluted share, compared to a loss of $7.7 million or $0.09 per diluted share during the second quarter of 2020.

Note that this quarter's loss is after giving effect to $4.7 million of other expense charges, primarily related to the exit of our South Gate fruit processing facility, compared with other income of $0.8 million last year.

On an adjusted basis, second quarter 2021 earnings were $0.1 million or $0.00 per diluted share versus an adjusted loss of $7.9 million or $0.09 per diluted share in the prior year period.

As Joe mentioned, adjusted EBITDA was $16.1 million, compared to $10 million in the prior year, a 60.8% increase. 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 morning.

Turning to the balance sheet and cash flow. As of July 3, 2021, total debt was $206 million, down approximately $243 million from the second quarter of 2020 and up $69 million from $137 million at the end of the first quarter, due to the seasonal build of fruit inventory along with the acquisition of the Dream and WestSoy brands. Total debt reflects $159 million drawn on our asset-based credit facility with the balance representing smaller credit facilities, lease and other financing arrangements. Leverage stood at 3 times at the end of the second quarter versus 6.3 times a year earlier.

From a cash flow perspective, cash used in operating activities during the second quarter of 2021 was $39.1 million, compared to cash generated of $2.7 million during the second quarter of 2020.

The change in operating cash flow versus last year was due to a stronger seasonal build of fruit inventory and more expensive inventory, compared to this time last year. Cash used in investing activities was $32.4 million, compared with $6.3 million in last year's second quarter reflecting the acquisition of Dream and WestSoy.

Prior to providing our outlook, I'd like to spend a few minutes on inflation as this remains a major area of discussion across all industries. The potential impact of inflation on our business varies across three categories, which are one, raw materials; two, operating costs; and three, supply chain costs. These three categories have different impacts based on how we go-to-market, which are one, private label; two, co-manufacturing; and three, branded products.

For example, in our plant-based business, a significant amount of our revenue is through co-manufacturing arrangements where our customers typically bear most of the risk of price variation in raw material costs. In contrast, our fruit-based business is more concentrated in private label product where price pass-through timing tends to lag and where we are largely, but not fully insulated from increases this in raw material prices.

In branded products, we did not experience any material inflationary headwinds in the quarter, but the changes in commodity prices were needed to be offset by pricing and/or productivity gains. When we look at plant operating costs, we bear those costs entirely, so any inflation must be offset by plant productivity initiatives.

Finally, when we look at supply chain costs or more specifically freight, there is limited risk with our co-manufactured products, because it's largely picked up by customers. So they bear the impact of changing freight rates. It's the opposite with our private label business where we are typically delivering the product to the customer noting there in some opportunity to pass along cost increases, but again, it's more limited and often lags in timing. Lastly, in branded products we are exposed to changes in freight costs and need to offset those with productivity gains.

In summary, like everyone, we are facing rise in costs in many areas. But the most meaningful areas to us today are more associated with our fruit-based and branded businesses, because of the delivered nature of the product and we must absorb much of the outbound transport. Our plant-based business is largely insulated.

In total, given our increase in overall margin, we have demonstrated our ability to grow gross profit and EBITDA, despite an inflationary environment. At this time, we don't see any inflationary trends in our business that would dramatically impact this progress as we go into the second half 2021.

Let me close by providing some commentary around the outlook for the second half of 2021. Obviously, there is uncertainty surrounding the impact of COVID-19 and the potential changes in consumer behavior as a result, but based on our current expectations, we offer the following outlook. On the topline, we forecast plant based to look similar to Q2 in terms of year-over-year growth. In the fruit, we similarly think revenue will look like Q2 with single-digit declines. From a margin standpoint, it is very much the same story, with plant-based remaining in the high teens and fruit being similar to last year's margin levels, recognizing we have more challenging comps in the back half.

Finally, from an EBITDA standpoint, we forecast strong year-over-year improvements, again recognizing our comps get tougher in the second half where last year's second half represented 60% of 2020 EBITDA.

Before opening up the call for questions just a reminder, that for competitive reasons, we do not provide detailed commentary regarding customer or SKU level activity.

With that, I'd ask the operator to please open up the call to questions.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from Andrew Strelzik with BMO.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Hi, good morning. Thanks for taking the question. My first one is about your commentary around the competitive mode and competitive dynamics. And it certainly sounds from the data points that you provided like everything is in a good place and you've mentioned some ways that you're building your competitive insulation. But, you know, can you talk about what drives your competitive mode? What you're doing to build that competitive insulation and if you've seen any changes in competitive dynamics, kind of, over the last several months or quarters?

Joseph D. Ennen -- Chief Executive Officer

Thanks, Andrew and good morning. In terms of changes in the competitive landscape, we have not seen anything material so far this year. In terms of how we view our competitive differentiation in the marketplace, we were particularly proud of the strength of our R&D organization and our ability to partner with big CPG companies to drive innovation and deliver the quality that they expect day-in and day-out.

Second is we have very deep long relationships with our customers. And third, we believe we have a very advantage supply chain and certainly, the project that we referenced in Texas is a major strategic unlock for us against our priority of doubling the plant-based business. The supply chain advantages that affords us along with adding capabilities, as well as cost and sustainability differentiators is going to be just a further strengthening of our business model. This gives us plants in or within a 100 miles of four of the five biggest states in the US with Texas, of course, being the second biggest state in the US, and so we're excited about that as a further insulator for the business.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Okay, that's helpful. And then, on the outlook for the fruit-based segment, is the change from a top-line perspective relative to what you've communicated prior. Is that really related to the pricing that you mentioned? Or are you seeing some underlying improvements, whether it's in the fruit snacks that you mentioned or otherwise that the outlook underlying is actually improved?

Joseph D. Ennen -- Chief Executive Officer

Yes, we -- as referenced, we're optimistic and have great momentum in the fruit snacks business. The frozen fruit in 2020 had some pretty major volatility from COVID standpoint and so we're seeing some return to normalization, if you will, in the retail landscape. And so, we think those two factors combined afford us the opportunity to deliver a pretty solid back half number relative to the SKU and customer rationalization that we've done.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Sure. That makes sense. And then just lastly from me, is there any other detail you can provide on the, kind of, mega facility that you're talking about with respect to either costs or products. I know you're expanding your R&D capabilities with the new facility, excuse me, the new headquarter. So I'm not sure if that plays into it, but any kind of color around that would be helpful. Thank you.

Joseph D. Ennen -- Chief Executive Officer

Yes, I think we'll get into unpacking that as we get kind of closer. I mean, we're at that stage now, I mean, we're on the doorstep, hopefully of signing a lease here. And we've done site selection, we have broad understanding around capabilities that we're going to put in, but this facility is really an unlock for growth in 2023 and beyond. And so, I think it's probably more appropriate for us to kind of hold on specifics there until we get closer. So hopefully that makes sense.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Yes, absolutely. Thank you very much.

Operator

Your next question comes from Jon Andersen with William Blair.

Jon Andersen -- William Blair -- Analyst

Hey, good morning, Joe and Scott.

Joseph D. Ennen -- Chief Executive Officer

Good morning, Jon.

Scott Huckins -- Chief Financial Officer

Good morning.

Jon Andersen -- William Blair -- Analyst

Okay. A lot of areas we could go into. Let me start by asking a little bit about foodservice, which was a strong channel for you in the quarter, obviously you're getting help from the kind of the rebound in that channel. You did call out a customer in the prepared comments, I think your largest customer and referenced both oat-based products, I think you explained oat-based products for them. Is that new and is that durable?

Joseph D. Ennen -- Chief Executive Officer

Yes, that is new with oats. We started shipping oat to Starbucks in the middle of the second quarter. We're playing a secondary supplier role there. We were pleased that we were able to step in and help our largest customer with one of our SunOpta branded products. I know, some of the folks on the call have seen that product in stores and have asked us about it. So we were -- we felt fortunate that we were able to step in and help them. In terms of durability, we would fully expect that we will be in a position to continue to help them well into 2022.

Jon Andersen -- William Blair -- Analyst

Okay, thanks. That's super helpful. And then, you mentioned that -- I thought it was interesting you kind of called out brands -- your own brands in the -- a little bit more, I think than you have in the past, even noting that they're playing an increasingly important role in the portfolio from a contribution perspective. Could you talk a little bit more about that? And how you kind of do that in a way that allows you to remain, kind of, customer agnostic as well?

Joseph D. Ennen -- Chief Executive Officer

Yes, obviously, with the acquisition in mid-April, the revenue that we realized was 100% incremental and so brand delivered -- just the acquisition delivered 5 points of the 21 points of growth that you would have seen, and so we felt it was appropriate to call that out. I would tell you to-date the -- our brand initiatives have been additive with no subtraction. The integration is going well, the sales volume is coming in exactly as we've expected. We're very focused on non-cannibalistic growth levers and trying to push on non-cannibalistic activities with respect to our large co-manufacturing customers. And really what I can tell you is, since the acquisition, all of the activities with our major co-manufacturing customers have all been around deepening and lengthening our partnership.

Jon Andersen -- William Blair -- Analyst

Okay, thank you on that. I did also want to ask -- sorry I'm circling back around too. You made a comment on a multi-year extension with the -- to co-man for the largest, I think, oat milk brand in the US. Did I hear that one right and is that a -- how new is that and what kind of duration or visibility does that new arrangement, kind of, provide you? And is that kind of part of the calculus for the greenfield facility in Texas, you're just seeing in aggregate, you know, more demand longer relationship durations from big customers in plant-based?

Joseph D. Ennen -- Chief Executive Officer

That is not a new relationship for us. That has been a long-standing relationship with the company that is currently running the leading national brand in oat milk in the US and it was a multi-year extension.

Jon Andersen -- William Blair -- Analyst

Okay. I guess the last question, I'll pass it on -- is around just outlook. I think last quarter -- I may be a little of on this, but last quarter, you may have said that you expected strong double-digit EBITDA growth in 2021. I think today, you said EBITDA growth without the double-digit. I might just be parsing words. But has the outlook changed at all in terms of EBITDA in the second half or for the full-year relative to, kind of, your initial expectations or expectations as of last quarter? Thank you.

Scott Huckins -- Chief Financial Officer

Hey, John. It's Scott, good morning. [Technical Issues] outlook has not changed. I think what we want to recognize is that the comps obviously get a lot tougher in the back half. I think I pointed out that 60% of last year's EBITDA was in the second half. So no change in outlook, just on a comparative basis, the tougher set of comps, that's really the takeaway.

Jon Andersen -- William Blair -- Analyst

Okay, thanks very much.

Operator

Your next question comes from Alex Fuhrman with Craig-Hallum Capital.

Alex Fuhrman -- Craig-Hallum Capital -- Analyst

Great. Thanks very much for taking my question. I wanted to talk a little bit more about oat milk. I think that's pretty amazing that it's driving half of your revenue growth in plant-based bidder and it's still a relatively small category. Can you talk about where that growth is coming from? Is that in more grocery or foodservice? And as we think about the capacity you have coming online over the next year or two, both the new Texas projects that you alluded to today, as well as into the other previously announced projects that haven't come online yet. How much of that new capacity is going to be related to oat?

Joseph D. Ennen -- Chief Executive Officer

So the first part of your question, foodservice or retail. The answer is yes. We're seeing strong oat growth in both retail sales, co-manufacturer brands is that predominantly sell into retail. So that was a strong growth lever, as well as significant growth in our foodservice sales of oat milk. So, both channels were strong drivers of oat. Certainly relative to the capacity additions, that is a network answer in that, yes those projects will absolutely enable further growth in oat milk.

Alex Fuhrman -- Craig-Hallum Capital -- Analyst

Okay, great, that's really helpful. And then just thinking about your different customers and channels, it sounds like retail grocery store business continues to be strong even as you're lapping tough comps related to the pandemic last year. What does that look like as you, kind of, move into the third and fourth quarter presumably foodservice is going to continue to recover on the other end of the pandemic. Are you expecting maybe some choppiness as, kind of, the push and pull between retail and foodservice plays out? Or has it been pretty much smooth sailing so far as the channel shift?

Joseph D. Ennen -- Chief Executive Officer

You know, Q2 -- the Q2 overlap in foodservice was by far the biggest overlap anomaly that we experienced last year. And so, we would see it returning to, kind of, more historical levels than more traditional overlaps. And that's why we've shared some of the 2019 numbers as we've gone through this as well is, obviously it's a little bit easier to compare to the pre-COVID dynamics of the business than always trying to explain the crazy overlaps from last year.

Alex Fuhrman -- Craig-Hallum Capital -- Analyst

Great, that's really helpful. Thank you.

Operator

Your next question comes from Mark Smith with Lake Street Capital.

Mark Smith -- Lake Street Capital -- Analyst

Hi guys, a couple of questions from me. First off, you talked about inflationary pressures that you're seeing come across the Board. Can you talk about your ability to take price in your branded products?

Joseph D. Ennen -- Chief Executive Officer

Yes, you know, as Scott referenced, we have not experienced any major inflationary pressures on the branded side of things. What I would say is obviously, the US retailers are certainly on the receiving end of significant price increases from many, many, many brands. So I don't think it would be an odd conversation if we found ourselves in -- call it six months time having to go into the grocery retail environment and take a price increase. But as Scott referenced, as we sit today, we do not foresee any material inflationary pressures on our branded products that would require us to take a price increase.

Mark Smith -- Lake Street Capital -- Analyst

Okay, great. And then as we look at the fruit business, you guys talked about some of the headwinds, which you face there. And if you can give us kind of your outlook and what it would take to turn this business profitable again.

Joseph D. Ennen -- Chief Executive Officer

Yes, I mean, I'll offer, kind of, a summary of the season. I mean, we met our pack plant [Phonetic], so we process as much fruit as we need for the next 12 months. The plants ran better than prior year, but the cost of the fruit, meaning the price that we paid to the growers was significantly higher than previous years, really as a result of just the really skinny inventory positions that everybody in the industry had, produced a bit of a pricing frenzy, if you will, that lasted for the entire season. We obviously feel like over time, we can get that pricing moved through to our customers, but we pay for the fruit all upfront and then we realize the pricing over 12 months. So -- but in total, I mean, we feel like we can get the majority -- the vast majority of that higher cost fruit passed on to our customers. It's just not an overnight overnight activity.

So Scott, anything to add there?

Scott Huckins -- Chief Financial Officer

Yes, I would say your perspective is helpful. I think the two headwinds, right are -- as Joe just I think accurately summarized food pricing, but also the peso strengthening is also a bit of headwind. Because remember, we've got a large facility, we just run 50% more fruit through down in Mexico. I think when I reflect on it, I'm pleased that I think we hold the right strategic levers. Yes, three times more sourcing of fruit in South America; 50% more processing in Mexico, that's obviously cost advantaged relative to our US footprint and then automation running through those plants, the footprint consolidation at the SKU rat work we've done, I think we've pulled the appropriate levers. I think the key will be just the time scale of the development of this price increases.

Mark Smith -- Lake Street Capital -- Analyst

And looking at the fruit snack business, it's doing well. Is there just not enough to really drive that business higher to make up for some of the headwinds that you're facing in other places. And then if you can talk about the new fruit bowl business, is that just timing that's going to take a couple of quarters before we see any impact from those new products?

Joseph D. Ennen -- Chief Executive Officer

Yes. I mean, we -- the fruit snacks business is a small, but mighty growth lever for the business right now that we are looking to continue to invest in and drive expansion and we're incredibly bullish about the innovation potential in that business and the customer relationships that we have. So it is kind of full steam ahead on the fruit snacks business. It's not as large as our frozen business and therefore just the levering effect will take some time.

In terms of the bowls products, we share that in the context of one of our three strategic priorities in fruit is moving toward more value-added portfolio of products. And so, yes, I mean, we have the product in distribution right now, but it certainly takes, I would say, north of four quarters for retailers to do reset authorizations, etc. So, unfortunately, they are not aligned in their timing as to when they do resets, but we've had great reception for the product so far.

Mark Smith -- Lake Street Capital -- Analyst

Thanks a lot. Thank you, guys.

Operator

At this time there are no further questions. I will now hand the call back for closing remarks.

Joseph D. Ennen -- Chief Executive Officer

Great, well thank you everyone for your interest in SunOpta. We appreciate it and wish everyone a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Joseph D. Ennen -- Chief Executive Officer

Scott Huckins -- Chief Financial Officer

Andrew Strelzik -- BMO Capital Markets -- Analyst

Jon Andersen -- William Blair -- Analyst

Alex Fuhrman -- Craig-Hallum Capital -- Analyst

Mark Smith -- Lake Street Capital -- Analyst

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