Sunopta Inc (STKL) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the Stake Technology second-quarter 2003 earnings conference call. At this time, I would like to turn the conference over to Mr. Jeremy Kendall, Chairman and Chief Executive Officer.

Good morning, ladies and gentlemen, and welcome to the second quarter 2003 investor call for Stake Technology Limited. Before we begin, I just want to remind listeners that except for the historical information the matters discussed during this conference call may include forward-looking statements including statements related to 2003 operating results that may involve a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are detailed in the Company's filings with the Securities and Exchange Commission.

Please note that all financial results are recorded in U.S. dollars. We are very very pleased to be able to report that the company has achieved record revenues and record net earnings for the three months and six months ending June 30th, 2003.

This is the 23rd consecutive quarter of record revenue growth versus the same quarter in the prior year and the first quarter with revenues in excess of $50 million. Revenues in the quarter increased by 68 percent to 52.641 million as compared to 31.378 million in the second quarter of the previous year. These results were lead by a 7 percent increase in revenues within the Company's vertically integrated natural and organic food operations, driven by a combination combination of excellent internal growth and the acquisition completed in late 2002.

For the six months ended June 30th, 2003, revenues increased 72 percent to 94 million 052 compared to 54 million 685 in the previous year. The Company has previously announced it expects to achieve revenues of 175 million in 2003, an increase of 45 percent versus last year. Based on the first half results, the Company believes that this target will be achieved. The increase is based on a combination of continued internal growth and the impact of the food based acquisitions completed in the fourth quarter of 2002.

Net earnings in the second quarter were a record 2 million 396 or 6 cents per basic common share compared to 1 million 704 or 4 cents per basic common share in the second quarter of 2002. For the six months ended June 30th, 2003 net earnings are a record of 3 million 460 or 8 cents per basic common share, an increase of 100 percent versus 2002 results of 1727 or 4 cents per basic share.

The increase over the prior year in both quarter and the year-to-date were due to a number of factors including increased sales for bulk grains and specialty beans, increased sales of ascetically packaged soy milk products, cost reductions throughout the organization and the impact of the acquisitions in late 2002 of Opta Food ingredients, Wild West Organic Harvest and Simply Organic.

We now have seven brokerage firms maintaining research reports on the company. The two most recent research reports were issued by Orion Securities and Adams, Harkness and Hill. One year ago we had no research reports. The Company's sales and earnings results for the first six months exceeded the expectations and forecasts of all of the research reports.

For the six month period, gross margins increased by 86 percent in absolute dollars versus 2002, averaging 17.25 percent of sales versus 15.9 percent in the previous year. Gross margin in the second quarter increased 67 percent in absolute dollars, averaging 17.3 percent of sales. Gross margin as a percent of sales was somewhat diluted due to the exceptionally strong international sales of Identity Preserved grains, which inherently carried lower margins. Margins in the remainder of the business performed very very well.

The Company continues to maintain a strong balance sheet with working capital of 15.885 million and total assets of 118.1 million. The debt-to-equity ratio at June 30th, 2003 was 0.47 to 1 compared to 0.51 at the end of the first quarter and 0.74 to 1 at December 31st, 2002. Net worth per share rose to a $1.34, a 20 percent increase versus June 2002.

We have continued our program of integrating our food operations in the second half, focusing our operations on our vertically integrated business of grains and input, food ingredients and Consumer Products. During the second quarter, operations were reorganized in support of this model, and the Company continues to realize on its planned synergies. We have achieved record sales and earnings of Opta products and are very pleased with this acquisition. We expect to complete the sale of the Opta Bedford head office in the third quarter.

In May, we completed the purchase of Kettle Valley dried foods. This business is performing profitably and very well, and we are pleased to confirm that 30,000 square foot plant in western Washington state will commence production in the third quarter as planned. Revenues are growing very well with a number of new private-label accounts, as well as expanded distribution in a number of accounts. Kettle Valley is working actively with our U.S. food operations to broaden the Kettle Valley productline and expand their distribution.

During the last quarter, the U.S. Food Group introduced a line of organic coatings and savories blended from organic milk, organic cheese and herbs and dried and packaged at the Company's facilities. We have already received our first orders, and with the new organic standards in the U.S., there is a really strong interest in this productline. We expect this to be a significant addition to our products' sales. Soy milk sales have been very strong with record production both in the manufacture of soy concentrate and aseptic packaging. We are now also brewing and aseptically packaging specialty teas.

Due to oversupply issues in the U.S. dairy market, our daily blend products have been slow in the first half, but have improved significantly in the last month and should make a positive contribution in the second half. Several new opportunities have been identified to expand production at the (inaudible) Natural Preservative Plant, which will also impact the second half positively.

Sales from our (inaudible) organic milling operation are at record levels. The snack food companies are committed to improving the nutritional content of their products. International sales of organic and non-GMO soybeans are also at record levels. Weather conditions are good this year, and crop production looks excellent so far. Our environmental group performed well in the quarter, despite soft sales at the group's Norfolk, Virginia plant.

Outlook for book balance of the year is strong due to anticipated increased activity due in part to the expected return of ships from the Middle East, which particularly impacts the Norfolk, Virginia plant. The group has launched a number of new products that are performing very well.

Our Steam Explosion Group is now managed by Murray Burke, our former Vice President of Engineering for the Group. We are actively involved in several projects in China and have recently completed testing for a Chinese account for the manufacture of newsprint from hemp with outstanding results. We are also working with several food and ethanol producers in the U.S. and Europe who are interested in using our technology for the production of high-value food ingredients and ethanol from agricultural wastes. With the new California regulations requiring 10 percent ethanol in fuel, this ethanol market is growing rapidly in North America as well as in Europe.

As you may be aware, we have recently filed the shelf prospectus in the U.S. for $100 million, unspecified as to debt, preferred shares or common shares. The prospectus is valid for two years and places us in the position to raise funds in the future should we determine that the time is appropriate. We do not require funds for our existing operations, so should you see us announce the financing, you will then know that one or more acquisitions should follow shortly.

The $100 million figure is not meant to be representative of any financing that we should do. I do want to note that there are fewer and fewer public vehicles in this natural and organic sector since companies like Horizon Dairies are purchased, incidentally at 70 times last year's earnings or 56 times projected earnings for this year.

As such, our opportunities for acquisitions within our integrated business model are increasing significantly. The key is to select companies that fit our model, maintain our culture, have management that are committed to the long-term, are profitable and growing and are within our natural and organic food sector. We continue to look at many investment opportunities both internally and by acquisition always focusing on vertically integrated business models within the natural and organic food sector.

At our shareholders meeting in June, the shareholders overwhelmingly approved the change of our corporate name to SunOpta Inc. from Stake Technology Limited. The new name combines the names of two of our core food groups, Opta Food Ingredients and the SunRich Food Group, and reflects more accurately our commitment to natural and organic food products. Besides we are rather tired trying to explain the derivation of the word Stake and to confirm that we are not selling steak dinners. We will continue to use the name Stake in association with our Steam Explosion technology where the name is recognized throughout the world. We should complete this transition by the end of fiscal 2003, and we will maintain the same symbols on NASDAQ and the Toronto Stock Exchange that we presently have. That is STKL and SOY.

Now I will be pleased to take any questions. I do want to note that the nature of our business is such that we do have a number of confidential agreements in place with certain customers, which limit what we are able to say about these relationships, other than to conform that we are a supplier and that we work closely with each of them to build their success and our own.

So I will be happy to answer any questions now.

Scott VanWinkle, Adams, Harkness & Hill.

Why not raise guidance on your revenue expectation for the year given the strength in the second quarter?

I think it is quite likely that it is something we will do within the next few weeks. But we just have not made that decision yet, but I think it is quite likely that we will.

Is there anything about the strength in the second quarter that would lead us to believe there would be a sequential decline in revenue in Q3?

Absolutely not.

The tax rate, was it 24 percent?

Excuse me. Your question?

The tax rate in the quarter?

The tax rate year-to-date is 26 percent.

What should we use going forward?

Between 26 and 30 percent.

Was there a currency gain?

There was a $254,000 currency gain before tax and 466,000 last year before tax.

And as far as acquisitions, what specific business line are you seeing the most activity in now that you currently operate?

Acquisitions that we are currently contemplating are all within the Food Group.

More specific like such as natural food, distribution, ingredients companies, can you be more specific?

All three. What I mean by all three, I mean distribution, food ingredients and branded products.

Trevor Li, Octagon Capital.

Great quarter. I just want to find out first of all were there any segments within the Food Group that underperformed your expectations?

Yes. I think I should tell you that in spite of achieving record earnings this year, we did experience an approximately $800,000 increase in energy costs compared to last year. We also had slow, as I have indicated here, results in the dairy blends, which we think will improve significantly over the next quarter. We had a major flood in Alexandria where we had something like 12 inches of rain in two days, and we were forced to close our packaging plant and our (inaudible) concentrate plant for two days. So that cost us a bit of money. That was at the end of June.

Virginia Materials, which I mentioned, also was slow, which we expect to be much stronger in the second half. So we absorbed all those incremental costs in spite of and still achieved record earnings.

So going forward into Q3 and Q4, you do expect the revenues to maintain around these levels or may have some sequential growth?

Yes. As you know, the fourth quarter generally is seasonally a little bit lower, but we expect the third quarter to be very strong contact. The fourth quarter should be very good, too.

Can you provide a breakdown of the revenues for the three units?

Yes. It is going to be in our 10-Q, which will be filed shortly.

Food was 45.9; environmental 6.7.

Okay. Just for the working capital, given the strong growth rate, could you comment on the working capital changes going forward, and do you have enough credit facility to support the (inaudible)?

Yes. Obviously when you are growing at 70 plus percent, you are consuming a significant amount of working capital, but you are also building working capital assets. Our base is perfectly adequate today to support that existing requirement and our future growth.

Patrick Tumelen (ph), Orion Securities.

Good morning guys. Just a few questions for you. I wanted to revisit the acquisition angle. I know you have indicated that you are looking at opportunities across each of your business lines. Is there anything in particular you would want to add?

I think the only thing I would like to add is that the business opportunities that we are looking at are within the context of our existing business and within the context context very much of our vertically integrated model. So we will be staying very clearly within those parameters. All of the companies that we are looking at are profitable companies. They all meet the criteria I outlined in my remarks.

Can you give us anymore indication on timing? I am sure that looks very difficult, but how long does the process typically to investigate these and conclude something?

I am not prepared to give you timing at this point, but I can tell you that the process will take typically six months I would say from start to finish.

How many opportunities are you looking at right now?

We are seeing lots and lots of opportunities, and we are at various stages of discussion.

In terms of the results in the quarter, can you comment on the split between any revenue growth between organic and acquisition rates of growth?

I don't know that I have that broken out at the moment, so I need to do that calculation. I will get back to you on that directly.

One last question I guess for Steve. The net debt in the quarter, do you have a number for that?

The net debt?

That is right. Your long-term debt, your debt less any cash that you had?

About 3500 to 3600.

I did have one more question. Can you comment in any way even without numbers on the capacity utilization (inaudible) in your plants?

Obviously it varies by plant, but I can say that with the growth in the soy milk business that our concentrate blends are operating very close to capacity. Our packaging plant is pretty close to capacity; it is running at record levels. Our ability to process beans has been recently expanded. Our (inaudible) operations have been recently expanded. Our (inaudible) facility will improve significantly in capacity with these new accounts that I have referenced. Our Opta facilities are typically running anywhere from 70 to 80 percent, that sort of category.

So I think we are in pretty good shape, but we will probably as we said before look at the construction of a third soy milk plant, hopefully by the end of this year.

Chris Krueger, MJSK Investment Bank.

Congratulations. It looks like a good quarter. Most of my questions have been answered, but I guess in the Food Group area, I guess soy milk and even other areas within that, can you comment on any new customers or types of customers during the quarter, privately branded soy milk, potential, things like that?

We now have I think three food chains where we are supplying the soy milk concentrate for packaging in a refrigerated packaging in both the East and in the South. We are under discussion with a number of accounts, major Food Groups, and the signing of those accounts will determine the location of the third soy milk plant. So that business is going quite nicely.

In terms of new accounts, I would say that you will see some of that in the club stores, that we see an expansion there of aseptic products that are packaged in cases if you will, so that business is growing well. But, of course, our key growth is occurring still in our core customers.

Okay. How about school lunch programs? I have read a lot lately about trying to get soy milk as option in school lunch programs. I was wondering if you've gotten anywhere with that, or if you have any comments on that?

A couple of comments. We are actively in as part of the industry in attempting to have soy milk and food in the school lunch programs. I think we are making some progress in that regard. Secondly, we are already selling a significant volume to the school lunch programs through Kettle Valley, Kettle Valley bars representing the fruit component of the food program.

And certainly we expect that in some of or at least one of our future acquisitions that we will also have products that will be complementary to that within the school food program. So what we are trying to build, in fact, is a combination of products that meet the total dietary requirements of the school funded programs. I am hoping that we will see that within the next few months.

Jumping over to the environmental group, I was writing down notes here trying to keep up. Can you repeat what your comments were as far as how the quarter went or how the current quarter is shaping up? I missed that part with the Middle Eastern ships coming back.

What we just said it is that group performed very well in the quarter, despite having soft sales at the Virginia facility. But I can amplify that to say that the level of savings has been very very strong in the last 60 days, and this is partly related to the return of chips from the Middle East. And, of course, as you know, chips have to be blasted clean and repainted every three to five years when they are operating in a salt environment and perhaps more frequently when they are operating in high saline environments like the Middle East. So we expect the second half, as it is traditionally in that business, to be very strong.

Okay. How about any comments on the potential real estate transaction within that division?

We have been looking as you may be aware at the sale of one of our facilities. We have received a substantial deposit on that sale. There are still a copy of items that are being discussed. The closing of that sale would be in early next year, but we have a detailed offer here in place with that $600 (inaudible) deposit, so we will see how that goes.

And then after that point, are you still looking into possibly selling the division?

We will consider it at that point, yes.

One last question. What is your cash balance at the end of the quarter?

2.6 million.

Martin (inaudible).

First a housekeeping question and then a second follow-up question. What was the fully diluted shares used to compute that 5 cents?

It would 48 million for three months and 45.3 for six months.

The three months was 48 what?

48 million.

Who are you taking business away from, or is it just new growth?

That is an interesting question. I think that in the soy milk business clearly the two major players being Lightwave or Silk and Haines Celestial with WestSoy (ph) are taking business away from the smaller soy milk people in the U.S., and the various (inaudible) data will confirm that. These guys are increasing their share in the market.

The rest of our food business is basically increasing through market expansion and the fact that a number of the products are new products. There is just an amazing increase in interest now in organic products and particularly coming from the major food companies who many of them have stated commitments today that within the next two to three years they must have a substantial percentage of their product with a health claim, and of course, that is extremely good for us. We produce food ingredients and products that in invariably do have a health claim.

Bill Brady, Presidio Management.

Several questions. Of the 45.9, you said that the Food Group, can you break that down between your three groups up to SunRich and the Canadian group, and then how much of that is soy product?

What I will tell you is the largest product line is in soy. We don't break those down in that fashion. We are not publicly providing that information. But I can tell you that every part of our food business is growing.

I have a copy of the slide presentation which showed SunRich's growth over a number of years in the soy part have been broken out so you could see what was organic and --

I can tell you that in our guidance this year we had 150 million of food. 25 of it was in Canada; 125 was in the U.S.. At this point in time, those ratios in terms of Canada/U.S. are still valid. What we are doing is we were changing and evolving the way that we segment our business because in the process of integrating our operations now we have merged those in so that we have an ingredient division. We have a grains and input division which is the foundation of our business, and then we have a Consumer Products and distribution division. So those will be the categories that we will be segmenting in the future.

Will those be in your Q?

No. They will be in the K.

Your 25 to 30 percent tax rate, why is that (technical difficulty) -- normal eventually other NOLs or will get back to a normal tax rate? Can you explain that to us?

We will continue in the 30 percent range for the foreseeable future for the next two to three years.

Okay. Thank you.

Michael Sproule, LOM.

Good morning guys. A quick questions for you, a couple of questions. The soy milk concentrate side of the business, approximately what percentage of revenues if you can go there is derived from the soy milk concentrate side of things?

From the soy concentrate side?

Not to belabor the thing, it is difficult because there are soy concentrates that goes into finished product, there is soy concentrate that goes into dry product, soy concentrate that goes direct to manufacturers. So to tell you exactly what the revenue or the revenues are for soy concentrate, we have to be -- not to elude the question -- it is not an easy question to answer.

Let me put it another way. Are the vast majority, 50 percent or more of the revenues, generated from the soy concentrate side?

Let us put it this way. I think the things that are soy, which is the whole category of soy, would cover at least half our total sales food sales in the U.S..

Another question with regard to international business and the sale of the soybeans to international markets. How significant a role did that play this year or this quarter on the revenue side of the equation?

For the quarter, our grain sales were up -- I will just grab the numbers -- I believe it would have been about 3.6 million.

Increase.

3.9 million. Pardon me. 6.8 and year-to-date 10.8.

You were saying that is an increase over the previous year, or that is 10.8 absolute?

Increase.

Finally, with regard to margins, can you give me a quick idea on the margins right now for the food business and also materials business?

Yes. For the three months, the Food Group in '02 for the three months was 14.3. It has increased now to 16.7. That is with the weighing of grains.

With grain in it?

Keep in mind that those grains sell between 5 and 8 percent (inaudible). Environmental Industrial Group has margins of 20.5 percent in the quarter, and that is down versus the prior year. This is around 25 percent, and that is due to the shift of business away from Virginia Materials, which is much more profitable. (multiple speakers). We expect that to improve.

With regard to the increase in the margins on the Food business, is this an Opta phenomenon, or is this simply a case of less grains? The grains have increased substantially. What is driving the margins here?

An increase in soy, soy concentrate sales, packaged soy milk, Opta Food. Kettle Valley is very small because it was only acquired in May. And certainly cost reductions (inaudible).

And the cost reductions are coming as a result of synergies, or they are coming as a result of the businesses just improving and you are able to do more with less?

I think they are both basically because you are getting better utilization of plants now, but as well we have the synergies that we referred to before.

And things are running fine in the packaging plant and also at the concentrate side of the business with regards to plants -- I know you said they are in your capacity -- there were constraints for quite sometime and there were also operational issues, and I assuming things continue to operate well?

I think the plan is performing magnificently. It is doing extremely well.

Also, with regard to taking a look at Opta, EverFresh (ph), what is happening in that side of the business?

EverFresh (ph), I don't overplay the importance of EverFresh (ph) in terms of sales. Its sales are increasing significantly, but it is coming from a small base since it really only recently got approval in the European market. But it is coming along very nicely.

Have we found any alternative applications for it? We have been talking about a number of things we try and find that might be applicable for EverFresh (ph)?

Quite frankly, I am not aware of any new applications.

And on BeneFiber (ph), anything happening on that front?

There is a continuing major marketing program by Novartis in the U.S., and sales to Thailand PAN are good. I believe they are increasing their market share, Novartis is, and it continues to be a very profitable line for us.

It was ramping up sales at a significant rate awhile back. Has it slowed, or are we holding steady? Do we have a percentage at the current time?

The growth rate has slowed this year, but I think part of that was inventory related and part of it was they were selling the pipeline when it initially went up, so it is still continuing very well.

Keith Howlett, Desjardins Securities.

I wondered if you could just update us on how your acquisitions late in the year, the Simply Organic and Wild West and Opta, how they performed relative to your expectation?

The distribution end, which is Wild West and Simply Organic, are both running ahead of budget and ahead of our expected sales and profits. So we are very pleased with the. We have done a lot in terms of integrating purchasing, integrating management and also broadening the product line from one to the other.

The Opta Food Group is achieving record sales and profits. Their margins are up significantly over last year, well above our average margins now, so that they are having a positive effect in bringing our margins up. Their sales levels are good, their record level, and we are really pleased with the management group. We have spent considerable time on integrating an implementing the synergies that we talked about. Art McVelley (ph), who was the President of Opta, is now the President of our Food Ingredients division, so he has now taken over some of the operations that were formally part of the SunRich Food Group ingredients side. We are delighted to be working with him. It has been an excellent, excellent acquisition.

Just on the organic coating products that you are developing, can you give us some idea of who is looking at using them or what type of companies are looking at using them and where they will be used?

I am going to call them primarily snack food companies at the moment. Some of them are the major snack food companies in the U.S.. The initial orders are from significantly large companies. The potential is substantial, really quite substantial. It comes basically because of the change in the organic regulations in the U.S., so if you want to dedicate your product as 100 percent organic, then you need not just to have the organic corn or the organic oils, but you also need the organic coatings in order to make that designation. So the fact that we have large grind facilities, access to these organic materials, and are selling in some cases the base already, makes it a very attractive proposition.

Just on the potential for a third soy milk concentrate plant, what would be the timeframe to --

We would like to make that decision before the end of this year. As I say, it is dependent upon the contracts that are signed on the private-label side. We then want to locate that facility as close as possible to the plant that is doing the majority of the DSL or refrigerated packaging so of the product so that you reduced the transportation costs down to an absolute minimum of the soy concentrate.

Shipping liquids, as you know, is an expensive process, so one of the (inaudible) of entry that we hope to have as a company is to have these regional facilities which may cost more economic.

How long did it take to design, build and commission the plant once you have got the land?

Probably if we were to buy an existing building, it depends on if you are able to acquire a building that has some of the facilities, it is anywhere from six months to nine months. And we happen to have some of the equipment available, so it can be done reasonably quickly.

Finally, can you just update us on the amount of capital expenditures year-to-date and expectation for the year?

We spent $2.5 million to date, which is on our budget. We anticipate capital budget of about 6 million this year. About 25 percent of that is in maintenance CapEx.

Phil Fisher, Tradeput (ph).

Great quarter. What would the cost of the soy milk plant be roughly?

Approximately 3 million.

Okay. The mix of your food environmental, what was it for -- or what was the dollars for last Q2?

Do you have that information?

This year the food was 45.9. Last year it was 24.6. Environmental was 6.7 and 6.7.

Okay. And I just want to make sure I got these numbers down. The grain sales for the quarter, for this second quarter and last-second quarter, what were those again?

The increase this quarter from last quarter was $6.8 million.

And what was it in absolute terms then?

We do not disclose that.

Okay. Those margins are in the 5 to 8 percent range you said?

Right.

What was that strength due to?

I think it is just expanding soy products, particularly in Japan, but we have also started selling in Korea. We have a good supply of soybeans right now, which is good, and this year's crops are looking very good.

Was it unusually strong, or would you expect the strength to continue through the remainder of the year?

I think we expect it to continue through the remainder of the year. It is good. As I say, we recognize that it is a low margin that we are achieving, but it is certainly a significant profit contributor. It also gives us an outlet so that in the future if we need to divert beans from Japan, we can divert them to higher value applications such as soy milk or soy powder or soy flour or whatever we are doing.

What are about your fuel costs? What are they running versus last year?

In absolute dollars?

No.

In incremental costs?

In the percentage increase or decline on a unit basis. In other words, how much more are you paying now than you paid last year on a same unit basis?

I indicated it was about $800,000 across the business, $800,000 more this year over last year.

Right. But in the third quarter, will that increase --

I think energy costs are down a little bit from there, so we are hopeful that would decline in the second half. But it is significant cost, and of course, if you could tell me where energy prices are going, it would be helpful.

The environmental margins declining by 450 basis points, I know you said that some of that had to do with a weaknesses in your Virginia plant.

That is the primary purpose of the -- the Louisiana plant performed very well as did the New York facility.

So was it just deleveraging of fixed costs; is that what it was?

It is just slow sales in there for you. You've got a certain fixed overhead. But, as I said, we are bidding, we have been bidding, and we have an extremely high marketshare in that market because of our location, and the margins are very very good. Look for a much improved second half there.

And remind us what that does again, what the product does?

There are abrasive products, and they are used to blast clean, to take the paint off ships. As I mentioned, you have to take the paint off and repaint them every three to five years. Typically it will take up to 18 months to blast and repaint an aircraft carrier, which requires about $1 million of abrasive per ship.

So you would expect those margins to return to last year's levels for the remainder of this year?

Yes. We hope so.

Jack O'Hara, CWH Associates.

Good morning. One, can you strip things away and tell us what the organic growth was or maybe by product area versus the acquired growth in the quarter if that is possible?

I answered that question earlier.

I am sorry. I missed it then.

I did not have that number right off the top, but I will give it and I will inform you about it. I just don't have it with me. I may be able to give it to you before the end of this call.

I missed the first round of question-and-answer. Also, cash flow from operations, do you have that number?

Cash flow from operations? After working capital?

Net of working capital changes.

1.8 million.

And that is for the quarter?

That is for the quarter.

Michael Sproule, LOM.

One quick question. You are talking about the need for all products to ultimately have health claim statements on them. Can you expand a little further?

I think one of the companies that has announced it is PepsiCo with Frito-Lay who said that I think within three years they would like half of their products to have some form of health claim on them. So it may be an Opta oat fiber that is good for intestinal purposes. It may be an organic claim that avoids herbicides, pesticides, etc.. It may be a non-GMO claim, those types of things.

Is PepsiCo driving this, or are there others that are following --

There are lots of others that are following. Virtually any major food company is now (inaudible) McDonalds, Wendy's, Kraft, Burger King. Taco Bell. You name it.

One final thing. With regard to the Europe non-GMO, GMO stuff that is going on with the United States right now, how are things following up for you guys? Are you just getting more attention or is the industry getting more attention as a result of the GMO situation? Or is it --

As far as we know, GMO is not a huge issue in North America, but it's a paramount issue outside of North America,and that is why we test every load of beans before they come in in order that we can assure its 100 percent non-GMO going to Japan. The argument, as you probably know, the European Parliament is enacting some legislation to further restrict the importation of genetically modified product.

At this point in time, I would not say this is having a huge increase in our sales. It is having some increase in awareness of the genetically modified issue in North America. It is my personal perception that the whole awareness of organic food, organic and natural food, is expanding significantly now in North America. You are seeing late forecasts that organic groceries will reach 10 percent of all groceries in France and Germany within the next five years. They are somewhat ahead of us in North America. In other words, the expectation is that these markets are going to continue to grow rapidly. Organic products, of course, have been growing at over 20 percent per year as have all soy products and soy milk substantially higher.

Has the increased awareness brought increased awareness to Stake?

I think the increasing awareness is certainly -- there are so few public companies as I mentioned that are actually in this sector. So to the extent that the investment community wants to participate in this market, we are one of the few vehicles that are available and are of any size. When you take a company like Horizon Dairy, for example, out of the public market and the institutional funds that were there and if they still want to maintain a position in the sector, I think it makes a company like ours more attractive.

That is it for now.

Scott VanWinkle.

You mentioned new business in soy. What type of products -- international grains, pardon me -- what type of products applications in soy do you see that are incremental?

In terms of the international business?

I guess it could be international or here in North America.

For us in North America, we have a significant interest in oils. This is one area that we would expect to see an increase. Obviously again, I say our cores businesses of soy milk are continuing to grow as our soy flour and soy powder as a food ingredient. It is very hard to pick up a product these days that does not have some form of soy in it. So all these areas are growing significantly. I don't know that I can really comment much on the international market.

I was thinking of end products. If you see a certain class of food, a certain type a package food product, that soy is being more readily used in?

I think the two growth areas particularly for us are in the bar business and in the soy milk side.

You probably said this and I missed it. What was depreciation and amortization in the quarter?

Depreciation and amortization in total was 1.3 million.

What is the driver of Opta's margins being higher?

It is the inherent product mix and (inaudible) utilization.

And your answering that is relative to Opta's margins a year ago?

That is correct. Before I take the next question, maybe I can answer the question in regard to internal organic growth versus acquisition growth. In the food business, the sales grew for the year, for the six month period, sales grew from 42.6 to 81.7 million, an increase of 92 percent. Of the 92 percent, 32 percent is internal growth, and 60 percent is through acquisitions.

I will put that on the record for those that were asking that question, and we will take the next question.

(inaudible), a private investor.

I don't mean to diminish the quarter because it was excellent, but relative to last year when you earned 4 cents in the quarter and 6 this year, with all these synergies and acquisitions, I was a bit surprised it was only a 2 cent increase. Is that directly related to the incremental costs you mentioned, or are there other issues as well?

Okay. So we have increased -- our earnings doubled obviously by 100 percent for the first six months. We did have, of course, a increase in the share base that occurred as people exercised options and warrants and so forth. It has obviously some dilutive effect to that. So the increase was achieved in spite of that. I don't know what else I could say.

Can you total those incremental costs you mentioned earlier? You mentioned 800,000 for fuel.

$800,000 for fuel. What else? The closing of the two plants probably cost us a couple of hundred thousand dollars? I think something in that order.

(inaudible) we are starting to generate through our synergy program. (multiple speakers)

But I think probably without those things, you have seen an additional $1 million of earnings.

Can you talk a little bit about the meat operations? The meat operations? That is a company called Organic Kitchen, and Organic Kitchen is an integrated vehicle in that we source all our organic grains particularly from the U.S. through our food operations there. We transfer these organic ingredients to an organically certified blender who blends them and forward the blended product to an organic grower who grows them, and then the chickens are then processed at an organically certified processor and packaged.

We have grown our first chickens recently in the U.S. and have had just our first (inaudible). (inaudible) will be marketed for the first time in the U.S.. This is a small company at this point in time, so I don't want to over-emphasize it. This is really a beginning operation, but we are supplying all of the President's Choice brand, which is the organic chicken for the (inaudible) group, which is the main retail firm in Canada. So at this point in time, all of our sales are in Canada. We are just beginning to start initial sales in the U.S.. And it is profitable?

Yes. It has been profitable this year.

Could you talk a little bit about the Steam Explosion business? I have got a different sense that there might be something different going on there?

In our guidance, we have $300,000 of revenue this year. $300,000 is an annual license fee that we received from our Chinese agents who has the right to market this equipment in China. We have now signed three contracts in China. These are in the $3 to $4 million per contract range. We are working on another two or three projects. All of them are dependent on 100 percent letters of credit, and we are regularly informed that the letter of credit will be arriving next month. We have not seen it yet, although they seem to be and we know that one project is now funded. So I do expect that we will receive that letter of credit within the relatively near future.

The second area that we have been working on particularly is the application of the technology to convert agricultural waste, particularly to ethanol. We are working now with one of the major, one of the largest ethanol producers in the world, who was extremely interested in using our technology in two new facilities that would take agricultural waste, particularly corn (inaudible), and render that into a state where it would be accessible by enzymes to enzymatically convert into sugars and then into ethanol. So we are not under contract at this point in time, but I do expect that we will have some news on this in the relatively near future. This could be an extremely interesting area for us.

We are also doing some testing now under contract with a couple of U.S. food companies who are interested in recovering high-value food ingredients from agricultural waste. We are also looking actually in our own facilities where we might have some application of the technology. At this point in time, we have $300,000 in our guidance, and we are not changing that. But there are some interesting prospects.

Thank you.

Trevor Li.

Just one more question on the Steam Explosion business. Can you elaborate a little bit more on the business development activity that your quarter is doing in China?

Yes. Our partner is a company called (inaudible), who represents Halliburton in China, so they do a significant business in China and also have offices in Beijing and in Dallas. So they have been working with a number of local groups to develop projects. Some of these are private and some are quasi-private in partnership with governments. So two of them are using -- proposing to employ a high bread (inaudible) tree that was originally imported into Italy. It is a very fast-growing tree that is suitable for pulp.

A third one is proposing to use hemp, and that I referred to as we have recently done testing in our pilot plant here at (inaudible) with very very good results. And the other three that we are talking about are using straw, which is the most readily available material in China. And which, of course, is a material that has essentially been banned from use pending the identification of a technology that is environmentally safe, which, of course, ours is I think the candidate.

There are no more questions. I will turn the call over to you for any additional or closing remarks.

Once again I would like to thank you all for attending this call. I again invite you to contact us at any time if you have any further questions or visit our facilities then. We would be glad to have you. Thank you very much.

That concludes today's conference call. We thank you for your participation and have a nice day.