SunOpta Q2 results: Counting the cost of sunflower kernel recall

Announcing its financial results for the three months to July 2, the company added that its revenue for the quarter had taken a $3.5m hit from the recall of sunflower kernel products earlier this year over fears they may have been contaminated with Listeria monocytogenes.

SunOpta’s recall had a knock-on effect on its customers, with businesses including Treehouse Foods, Clif, PepsiCo and General Mills consequently recalling products containing the potentially contaminated kernels.

Revenues for the second quarter were also impacted by a temporary shutdown and lower post-startup production at the facility in Crookston, Minnesota, that had produced the kernels, said SunOpta CEO Rik Jacobs.

'Build back confidence'

He added that SunOpta was continuing to supply its customers on a positive release basis “to build back confidence in our product quality”.

“At the same time we're also working with our customers and insurance carriers to handle their claims in accordance with our contractual obligations,” said Jacobs, adding that the business remained “very comfortable with our insurance coverage”.

SunOpta CFO Rob McKeracher said the $16m losses recorded for the first half reflected the estimated costs of replacing affected sunflower kernel products and reimbursing customers, subject to SunOpta’s contractual obligations.

The company carries general liability and product recall insurance, and said it expects to claim back recall-related costs through these policies, less “applicable deductibles”. As a result, SunOpta recorded estimated insurance recoveries of $15.4 million for the losses recognized to-date.

Clearer picture of scale in Q3

The business expects to have a clearer picture of the scale of cost and related insurance recoveries in the third quarter as it continues to work through the recall with customers and insurance providers.

“Our estimate of recall-related losses are provisional based on information we have to-date,” he said. “We may need to revise our estimates in subsequent periods as we continue to work with our customers to substantiate their claims.”

The business reported total revenues for the second quarter of $348.1m, up 25.4% on the same period a year ago. Excluding the impact on revenues of acquired businesses, the sunflower kernel recall and changes in commodity pricing and foreign exchange rates, revenues rose 0.3% year on year.

Crop shortages

SunOpta said it had benefited from higher demand for organic ingredients and growth in aseptic beverage volumes, offset by lower volumes of specialty raw materials and a drop in sales of frozen fruit due to strawberry crop shortages and softness in retail demand.

The company recorded a $4.1m loss from continuing operations in Q2, versus $4.8m profits a year ago; while adjusted EBITDA was $23.5m versus $15m last year.

"We faced some unanticipated challenges during the second quarter, including the recall of certain sunflower products and temporary supply issues in frozen fruit that impacted our financial results," said Rik Jacobs.

 "These specific challenges masked good progress against our 2016 operational goals, including strong aseptic volume growth, new business wins, considerable innovation success and continued robust demand in our international sourcing operations."