Sunopta Inc (STKL) 2002 Q3 法說會逐字稿

Good day, everyone. Welcome to the Stake Technology third quarter earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Jeremy Kendall, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you very much and good morning, ladies and gentlemen. And welcome to the third quarter investor conference call. I'd first like to read our traditional forward-looking statement.

This presentation does contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. It can be identified by words such as believes, expects, projects and similar expressions involves numerous risks and uncertainties.

The company's actual results could differ materially from those anticipated and such forward-looking statements as a result of certain factors including those set forth in the company's filings for the Securities and Exchange Commission.

So, we are very pleased to report record sales and record earnings for both the three month quarter and the nine month period ending September 30, 2002. All figures are in U.S. dollars unless otherwise stated. This is the 20th consecutive quarter of record sales for Stake.

Sales for the quarter increased by 43 percent to 32.8 million and increased 33 percent for the nine months to 87.6 million compared to last year. Sales in the food group were up 42 percent while sales in the environmental industrial group increased 49 percent during the quarter. Eighty percent of our sales in 2002 are in food. And this should rise to close to 90 percent in 2003 particularly as the results of our acquisitions recently announced.

Net earnings for the third quarter were 1,527,000 or four cents per share compared to $156,000 last year, nearly a ten times increase in earnings. Earnings for the nine months were 3,254,000 or eight cents per share compared to 703,000 last year, a 363 percent increase. In fact these earnings came from the last two quarters since we still had start up expenses for Nordic in the first quarter and we're essentially break even.

Results from this quarter reflect the positive input of the realization of loss carry forwards relating to Nordic Aseptic of $600,000. In other words, Nordic has now reached the level of profitability where these tax losses are now available. This was offset by a write down of the company's 32 percent equity investment in Easton Minerals Limited in the amount of 300,000. And the foreign exchange loss in the quarter of 322,000.

Every division and subsidiary was profitable during the quarter other than Sunrich Valley, our organic milk business which is in the third upstage and had a small loss. In October we were very pleased to announce that we have signed an agreement with Nutrel (ph) to distribute organic milk to the mass markets in Ontario and Quebec. And volumes are now beginning to increase.

The most important development for the quarter were first and foremost the Nordic Aseptic packaging facility achieved its first full quarter and fifth consecutive month of profits. This is a critical milestone for the business. Nordic continues to form very well and we are extremely pleased with the turn around in this business. The Aseptic market in the food service area appears to be growing rapidly. And this is a market where the refrigerated or extended shelf life product is restricted by lack of refrigerated space.

Secondly, the company continued its strategy creating a major Canadian organic food company with the acquisition of certain assets in the business of Cloud Mountain and Organic Kitchen. These two companies source, blend and supply organic feeds to certify organic poultry producers and then partner with organic processors who package chicken and turkey products to the mass market under private label or under the organic kitchen trademark. The company is planning to add an organic pork product line at the beginning of next year.

Three, record earnings were achieved at the Norton (ph) food and dairy plants with strong sales of soy base as well as expanded sales for Benafiber (ph), the dietary fiber product produced for Novartis (ph) in Thailand and Japan which was introduced over the counter in the U.S. this year.

Fourth, the environmental business also had strong salesman earnings assisted by expanded sales of abrasives (ph) particularly from the ship, repair and construction markets. And also recovery and the bridge cleaning market again in New York particularly.

This unfortunately we have still not received the letter of credit from the Chinese steam explosion clients for the contract signed in April of this year. We continue to pursue this contract along with other opportunities but we have advised the Chinese client that we intend to cancel this contract if payment is not received by the end of November of this year.

The company's balance sheet remains strong with working capital increasing to 20.7 million versus 11.1 million last year. And the long term debt to equity ratio of 0.32 to one versus 0.56 to one last year.

Recently the company had announced agreements to acquire three profitable companies in the food business. As announced in October, the company has agreed to acquire 100 percent of the shares of Wild West Organic Harvest Coop and Simply Organic Limited who have combined sales of approximately 25 million Canadian.

These two natural and organic food distribution companies are located in Vancouver, British Columbia and Toronto, Ontario respectively. And Wild West distributes 2,400 organic products. Both companies distribute our new organic mild product line. And both companies have been growing at over 40 percent per year in this fast growing organic and natural food market.

We intend to seek further acquisitions to create the first national organic food distribution company in Canada. With the objective of becoming the distributor of choice for the organic field providing the company with an opportunity to distribute its brand and providing a source of acquisitions in the natural organic products field.

October 28, 2002 Stake announced a tender offer for 100 percent of the outstanding common shares of Opta Food Ingredients, Inc. of Bedford, Massachusetts. Opta is the leading North American manufacturer and marketer of proprietary food ingredients that improved the nutritional content, helpfulness, texture and taste of its customer's food products.

Opta Food Ingredients are used by more than 350 food companies including 12 of the largest U.S. consumer package food companies and three of the world's largest quick service restaurant chains. Opta's two key product lines include the manufacture of proprietary oat fibers used primarily for increasing dietary fiber levels in baked goods limiting finished product breakage of snack foods such as taco shell and improving the fluid retention characteristics the process needs.

And secondly specialty starches that are used to improve texture and (ph) most feel in dairy products such as yogurt while increasing batch yields in products such as cheese. Opta has four manufacturing plants, three in the U.S. and one in Canada.

The company reported sales of 21.1 million U.S. for the first nine months of 2002 with an EBITDA of 2.8 million. Opta's balance sheet is strong with nine-and-a-half million in cash and investments and a $38 million net worth.

Stake's purchase price is 28 million. And the tender offer is conditional on purchasing a minimum of 50 percent following which a merger will be effected. Lock up agreements have been completed with the directors and management of the company representing approximately a little over 14 percent of the shares.

Opta holds 28 food patents and brings a high level of food science to the food group. We believe that the addition of Opta is integral to our strategy of continuing to build our health oriented food business. Opta has an excellent reputation for product quality, innovation and technical expertise and developing value added solutions for major food and food service companies. This acquisition will be a superb addition to our growing portfolio of food companies and having turned the corner to profitability it is expected to continue to grow in the coming years.

These acquisitions are being financed from the company's cash resources, increased bank debt and a $5 million U.S. bridge loan received from Claridge which is convertible after one year, not repaid. Claridge, of course, is our single largest shareholder. And I think that's an indication of their support. Poultry acquisitions are expected to become accretive to earnings.

Assuming that all three acquisitions are completed, sales should increase by approximately 40 percent in 2003 with earnings continuing to grow. Clearly, Stake is becoming recognized as a key participant in the natural and organic food business. Our businesses are all growing rapidly and the opportunities for further acquisitions are numerous.

At this point I would be very pleased to take any questions that you may have.

Thank you, Mr. Kendall. The question-and-answer session will be conducted electronically today. If you would like to ask a question or have a comment, please do so by pressing the star key followed by the digit one on your touch-tone telephone.

If you're using a speakerphone today, please make sure that your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Once again, please press star one on your touch-tone telephone to ask a question at this time.

And we'll pause for just one moment to assemble our roster.

And we will take our first question today from Keith Hallad (ph) with Dasier Dan Securities (ph).

Yes. Good morning. I had a question relating to the White Wave (ph) negotiations on further production outsourcing. Can you comment on where you are with that?

Sure. First of all, as you should know the White Wave's (ph) business with options (ph) increased this year over last year. And we are in the process of discussing a long term contract with them which will include the construction of additional sign note (ph) plans (ph) over a period of time. Those discussions are very much under way at the moment.

And on the Virginia Materials, can you broadly estimate what that added to the third quarter EBITDA? Or I guess it's hard to break it out now that you've integrated perhaps.

I just - do you have an answer on that, Steve?

Go ahead . . .

Keith, let me come back to that . . .

OK. Sure.

. . . question if that's OK.

Yes.

We're just looking that up but . . .

What number do you want?

We're looking for the EBITDA contribution of Virginia Materials for the quarter. Is that correct?

Right. Correct.

And . . .

. . . percentage of the environmental (ph) . . .

Yes. We'll give this as a percentage. The environmental group is having a very strong year. EBITDA is very good . . .

Forty six percent.

And it looks like about a . . .

Forty five.

. . . 45 percent increase in EBITDA as a result of that acquisition.

Great. And just one . . .

Just in the environmental group I'm talking about it.

Just in - right. Great. Thanks. And just one question on this Simply Organic and Wild West, do you have an outlook now on when they will close?

Yes. The Wild West is closed as of the end of October and Simply Organic at the end of November. And just for your information, the tender offer for Opta would expire on December 3rd. So that's when we would expect to have a - we would know exactly where we stand at that time.

And then just finally on the taxes, what will be the accounting treatment of - on taxes going forward? Will you continue to utilize the losses each quarter or do you anticipate the same tax effect going forward as in this quarter?

I'm going to ask Steve Bromley, our CFO, to answer that question.

Keith (ph), the locks carried forward would - there was a lot carried forward - booked in the quarter related to Nordic Aseptic now that the business is profitable the benefit of the tax losses were booked to the tax (ph) law (ph) line.

As Jeremy indicated in his address that was a $600,000 positive impact offset by the negative issues that Jeremy mentioned. Going forward that was a one time issue going forward. We'll be back to our normal effective tax rates of between 33 and 36 percent.

So that will be the fourth quarter rate as well?

Right.

Right. Right. And just wondering (ph) on the Easton Minerals, what did - I wasn't quite - there was a $300,000 relating to a write down of your 32 percent interest. Was that correct?

That's from our carrying value on that. We still have what amounts to the control box because that small private company. Effectively, it's a shell at this point in time to be written down to the value of the shell.

OK. I see.

My intention to sell that.

Great. OK. Thanks very much.

It's insignificant in the picture.

Right. OK. Thank you.

And our next question will come from Alec Sobbo (ph) with Wachovia Securities.

Good morning, Jeremy. Al Sobbo (ph). How you doing today?

Very well. Thanks. Al and you?

Pretty good. A quick question for you. You said you had issued a - you got a $5 million convertible note with Claridge. What are the terms of that note on convertibility.

Sure. The terms of the note are as follows. It's effectively a bridge loan that for the first year - it's a two year term. And it becomes convertible. It's not repaid. It becomes convertible after one year. It's - at the time into this the terms are that it's convertible after one year at $3 a share and with it it bears interest of five-and-a-half percent. And it comes with 250,000 wants (ph) of three $3.25 per share.

If I understand you if you pay your note off the dilution doesn't come into effect then.

That is correct and it's certainly our intention and prior to you know certainly understand this (ph) it's our intention to repay it as quickly as possible.

Very good. Thank you.

We'll take our next question from a private investor. This is Karen Winter (ph).

Hi Jeremy. I have two questions. First of all, if the finalization of the purchase of Simply Organic, Wild West and Opta all fall within that fourth quarter, what is it going to do to the earnings per share bottom line in the fourth quarter?

It's fairly minimal in this because you're picking up potentially less than one month on Opta, one month on Simply Organic and you know two months on - and this is a you know a lower time of the year on the distribution side. It will add but it will be marginal . . .

OK.

. . . that period of time.

And my second question is . . .

Significant next year.

Pardon me?

Significant next year you know.

Significant next year. OK. My next question is in last calls you've referred to these analyst reports and really haven't seen anything come out. Where are we on that?

One of the difficulties you know for the poor analysts has been that every time they get their research report ready we announce something new. And you know if the analysts don't like to put a research report out and then have it become obsolete the next day.

So we have now completed these three acquisitions and you'll know that they're fully effective I expect by the end of this month. And at that point I think the analysts will finally be able to assimilate that into their report and start issuing them. And there are about three or four that are in process at the moment.

OK. Thank you.

It's frankly it's been our fault that's created these problems for them.

Too busy buying companies?

And other things. Right.

Thank you.

As a reminder to all participants, if you do have a question or comment, please signal at this time by pressing star one on your touch-tone phone.

We'll go to our next questioner. This is Dana Merver (ph) with Griffith Asserting (ph).

Hey guys. Most of my questions have been answered already but you mentioned the accretion I guess is going to be coming on next year for these acquisitions. Is there anything I guess going into the fourth quarter that might significantly contribute to earnings other than these acquisitions?

No. I think that last year we had the September 11 effect in the last quarter in the environmental business and we're hopefully not expecting that this year. And our food sales are very strong. Our Aseptic plant is very very busy as are our soy based plants and our grain business. So I expect that we will have a strong fourth quarter.

OK. And just on the Nordic Aseptic side, can you quantify I guess some of the improvements that are continuing there? I mean what kind of volumes you have coming in or going out I should say and what we can look for for next year also?

I think that I can say that you know two weeks ago we reached our highest volume yet which is 110,000 cases a week. What does that translate into? Approximately $1 million a week in revenue.

So, on an annualized basis of course that's approximately 52 million in revenue from that facility if you were to look at last year. And probably you know probably wouldn't have added, wouldn't have - five or six million for the year as a whole?

Yes. Yes.

You know it's a significant increase. The real volume increase didn't start until the second quarter. And so you - and continued in the third quarter. And our target is to increase our capacity here to approximately 150,000 cases a week or you know roughly $15 million in revenue, a little bit less.

I'm sorry, nine-and-a-half in revenue per week. And you know we - there are some things that we need to do in the plant in order to achieve that. Amongst them is moving to a six-and-a-half day working week. This is a sophisticated plant and so it requires a certain amount of training of personnel with additional personnel and it takes a few weeks to achieve that.

Plus there are some modifications in equipment that are not major in terms of capital but the net effect should be quite positive for the earnings. Suffice it to say that this company is now turning a very nice profit.

Great. Thanks guys.

Our next question today will come from Mr. Jim Grim (ph) with Grim Organic Dairy (ph).

Yes, Jeremy.

Hi Jim. How are you?

Fine. Jeremy, October the national organic standards were passed here in the United States. Are Canada's similar? And will that help increase sales with the standards passing in the United States?

Jim, I think the answer to Canada's are not similar although Canada has you know strict organic guidelines. We're very pleased to see national guidelines being developed in the U.S. I do believe that over the immediate term that this will help clarify with organic because there has been I think a fair amount of confusion between organic and natural particularly.

And you'll find a lot of people claiming their products are natural. But exactly what that means is not very clear. So these standards now go up to three levels of organic I think will be quite helpful in the marketplace.

OK. Thank you.

And I would like to remind our participants at this time that if you do have a question or comment, you may signal by pressing star one. We do have a follow-up question from Mr. Keith Hallad (ph) with Dasier Dan Securities (ph).

OK.

Yes. I just had a question on the Nordic Septic plant. To increase the capacity, does that relate to just changing the existing - I think there are two fillers there, two packaging machines or does that ...

... we have five packaging lines there, four tetra (ph) pipelines, and one half-gallon combee (ph). And so, you know, the changes that relate are extending the work schedule. There are things like , you know, work scheduling so that you have longer production runs. There maybe a processor that we may want to upgrade. Yes there is an opportunity to put in faster tetra (ph) lines now that there are new product lines that they have. These lines are essentially leased.

And so what you have is the cost of taking out then installing the new lines, but not the cost of the equipment. And that is not a major item in terms of capital cost. And there are a whole series of other sort of what I will call fine tuning that would lead us to achieving that capacity.

I guess that capacity would predominately continue to be for Hane (ph) is that correct, or?

Well, Hane (ph) is certainly our most important customer at that facility. And I expect that will continue to be true.

And then, just one question on the commodity prices. There have been large escalations of particularly grain-based commodities, but has there been any impact on you positively or negative?

In terms of slice bean pricing?

Right.

No.

And then just lastly on the Canadian distribution platform. How far along do you think you are to getting to what you need to sort of build the fund?

I think that we all certainly need to acquire an additional distributor in Ontario. We will need to acquire one in Quebec. Right now we've got distribution from Vancouver into Ontario, but there are parts of the product line and things that need to be filled in here.

So you know, my target is to create a distribution company with revenue in the $75 million to $100 million in the distribution side in the next couple of years. On top of that in our Canadian group we would have certain food processing like the chicken business and like our organic milk business. And we would expect to add to that. We would hope that , you know, that on many of the companies that are supplying products to these distributors - a number of those could be interesting acquisitions for us upstream.

And this platform does provide us with an exposure to those companies. Many small fast growing and profitable companies in the organic field characterize the industry as you know. And I think there is a real opportunity here for Sumnola (ph).

And just finally, was the organic kitchen cloud mountain sort of neutral to the quarter, or ...

... no the organic kitchen, cloud mountain achieved a profit in its first quarter of ownership.

Great.

Added to our earnings statement.

Added to. Great thank you.

We will proceed next to Mr. Ronald Emmermen (ph), a private investor.

Hi, Jeremy.

Good morning Ron.

Jeremy, stepping back from some of the detail, what challenges / and or problems you see within the food industry that you are in -- or with the company - either problems that presently exists or that you foresee down the road?

I think that I see two important issues in the coming year. The single most important challenge to us will be to integrate our food operations in the U.S. with the Opta (ph) acquisition and assuming that is completed. And we have a very detailed integration plan worked out. But obviously that can't be initiated until the acquisition is completed.

But the synergies that we have identified and which will work , you know, as a team to implement is significant. You know, are one of the basis of the acquisition of Opta (ph). And so I'm anticipating that to be the major challenge over the next six months.

I think the second aspect that's important to this company is that over the next year we need to move closer to a pure play. And so there will be divestitures. Certain assets, which will lead us to a pure, play in the food business.

Within the food industry, do you see any challenges via competition or anything else?

Well of course there is always competition in every product line that we are producing. And I think our - in the slight nail (ph) business our objective is to remain to the high quality, low cost producer in that business. And we do not intend to enter into the brand business at this point in Soymilk side.

In other products, in other soy products and source, we will gradually and are gradually beginning to build grandes (ph) in that business. And I think over the next few years, looking at it a bit longer, the building of brands in our company is going to become important. And even having this distribution system in Canada is one way that we will have access to the markets for brands that get developed. So in the long run, I'm sure as you are aware, those two companies that have their own brands have greater value. And that's something that we will be working towards.

Thank you.

You are welcome.

And Mr. Jim Linley (ph) with Creative Business Forms will have next question.

Yes, good morning, Jeremy.

Good morning.

My question was partially answered previously, but looking forward as an individual investor, what might we expect in terms of the rate of earnings growth for next year and maybe acquisition expectations and this kind of thing?

I think twofolds (ph). We as you will see are in the last several quarters our earnings have been growing more quickly than our sales. Our sales have been growing very strongly, but our earnings have been growing more strongly. And I would expect that trend to continue next year.

As far as acquisitions are concerned, I think it is very important that we integrate what we have acquired to date. The opportunities are numerous and they continue to come in, but I think we are going to focus on integrating what we have now before we move to any further acquisitions. I wouldn't expect too much activity in that area for the next six months.

Very good. Thank you very much.

And as final reminder to all participants, if do have a question, please signal now, but pressing star one on your touch tone phone. We will pause for just one moment.

And Mr. Kendall, at this time there appears to be no additional questions. I would like to return the conference to you for any additional or closing remarks sir.

Thank you very much. We are pleased with our quarter. WE are really pleased with our year so far. And we are really pleased with the state that the company is in. Our strong balance sheet , our really support of shareholders, we are pretty excited about the future. And I guess I have to say we are having quite a lot of fun. And that's good news. And look forward to talking with you at the year end quarter.

And as always, you are welcome to visit our plants. You are welcome to call us and talk with us and we thank you for your support. Bye-bye.