Sunopta Inc (STKL) 2003 Q3 法說會逐字稿

Good day, everyone. Welcome to the SunOpta third quarter 2003 third quarter earnings call. It is being recorded. I would like to turn the call over for Jeremy Kendall, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning. Welcome to the third quarter 2003 investor call for SunOpta, Inc. As usual, I'll read the script before we begin. I just want to remind listener that is except for the historical information, the matters discussed during this conference call may include forward-looking statements, including statements relating to 2003 operating result that may involve a number of risks and uncertainty that is could cause actual results to differ materially. These are detailed in the company's filings with the Securities and Exchange Commission. Please note, again, that all financial results are reported in U.S. Dollars. We are very pleased to be able to report that the company achieved record revenues and record net earnings for the three months and nine months ending September 30, 2003. This is the 24th consecutive quarter of record revenue growth versus the same quarter in the previous year, and the second consecutive quarter with revenues in excess of $50 million.

Revenues for the third quarter increased by 54% to $50.4 million as compared to $32.8 million in the third quarter last year. These results were led by a 68% increase in revenue within the company's natural and organic food operations, driven by a combination of internal growth and acquisition. For the nine months ended September 30, 2003, revenues increased 65% to $144.4 million, compared to $87.5 million in the prior year.

The company has previously provided guidance that it expects to achieve revenues of $175 million in 2003, an increase of 45% over last year. Based on the strong results of our core operations in the first nine months of 2003, and the recently announced acquisitions, the company believes that this target will be exceeded. As accordingly, it is raising its revenue guidance for 2003 to between $195 million and $200 million. This will represent a six-year compounded annual revenue growth rate of approximately 64%. Net earnings in the third quarter were a record $2.1 million or 5 cents per basic common share, compared to $1.5 million or 4 cents per basic common share in the third quarter of 2002.

For the nine months ended September 30th, net earnings are record $5.6 million, or 13 cents per basic common share, an increase of 71%, versus 2002 results of $3.3 million or 8 cents per basic common share. This increase over the prior year in both the quarter and year-to-date were due to a number of factors, including increased sales of bulk grains and specialty beans, increased sales of septic package products cost reductions throughout the organization, and the impact of acquisitions of Opta Foods Ingredients, Wild West Organic Harvest, Simply Organic and Kettle Valley. Please note the results for the third quarter of the previous year included the recognition of certain tax losses in the amount of $600,000. Excluding this recovery, net earnings in the third quarter would have increased by 127% over the same period last year. For the nine-month period, margins increased by 80% in absolute dollars versus 2002, averaging 17.4% of sales versus 16% in the previous year. Gross margins in the third quarter increased to 17.8% of revenue.

Gross margin as a percentage of revenue was diluted due to the exceptionally strong international sales of id at the preserved grains which carry a lower margin. The remainder of the business performed very well. The company continues to maintain a strong balance sheet with working capital of $66 million, total assets of $157.9 million. Our debt to equity ratio at September 30 was 0.19 to 1, compared to 0.47 to 1 at the end of the second quarter and 0.74 to 1 at the December 31, 2002. Net worth rose to $2.20 per share, a 90% increase versus September 2002.

We now have seven brokerage firms maintaining support in the company with two further reports in preparation. One year ago we had no research report. We have continued to our program of integrating our food operations in the third quarter, focusing on our vertically integrated business of grain and soy products, ingredients and consumer packaged and distributed products. Off note, our ingredients group is achieving record revenues in the sale of oat fiber products, which are benefiting from extensive marketing efforts and the very high interest in the Atkins Diet. As a result, the demand for a low carbohydrate bread, cakes, bagels, muffins, et cetera. Oat fiber replaces high-carb ingredients and reduces carbohydrates. The Cambridge plan is reaching capacity with customers on allocation. New equipment will be installed by the end of the year with increased capacity of a further 25%.

In May we completed the acquisition of Kettle Valley dried fruit. This business is performing well, and we're pleased to confirm that the 30,000 square foot plant in the state of Washington commenced production in the third quarter as planned. Revenues are growing quickly with a number of new private label accounts, as well as expanded distribution. Kettle Valley is working actively with our consumer product operations to broaden the Kettle Valley product line and expand their distribution. During the second quarter we introduced a line of organic milk, cheese, and herbs, which are dried and packaged at the company's facilities in Minnesota. We are pleased to report this new product line has been very well received and we are now supplying some of our major customers.

Soy milk sales have been very strong with record production both in the manufacture of soy concentrate and in the septic packaging. I'm pleased to confirm we provide soy milk concentrate to the private label refrigerated market, including Beyellies (ph) and Trudos (ph). We have been awarded the Private Label Business A & P which includes 776 stores, and through Hood Dairy we are supplying Publics (ph) in Florida, Shaws [inaudible] and Wegmans. We will launch a soy juice smoothie at Costco later this month and are bidding on additional opportunities.

Dairy blends, which performed well below expectation due to oversupply in the dairy market in the first half of the year have improved significantly in the last month and are expected to continue to make a positive contribution to future results. Sales from our organic milling operation, are performing at record levels as snack food companies add organic products to their product lines. International sales of organic and non-GMO soybeans are also at record levels, although at inherently lower margins, versus processed ingredients and branded products.

Weather conditions have been good this year for corn. However, soybean yields have suffered from the dry weather in the Mid-Western U.S. The potential crop shortfall may impact our sales of soybeans to Asia next year. However, these sales are low margin sales. The potential soybean shortage should not effect our higher value added products such as soy milk, soy powders, et cetera. Third quarter results in the Environmental Industrial Group are impacted by soft sales at the group's Norfolk, Virginia plant as a result of the extended service of the U.S. Fleet in Middle East and hurricane Isabel which halted operations for a period of time during the quarter. A group has launched innovative abrasive products that have been very well received by the marketplace.

The Steam Explosion is actively involved in projects in China and Japan. We are working with 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 agriculture waste. In August we completed a common share equity issue raising $[51.7] million net of issuance costs and commissions. Proceeds from this financing have been applied as follows. Approximately $9 million to complete the recently announced acquisitions, $16 million for temporary repayment of operating lines of credit, which can be re-borrowed as required, including lines assumed on acquisition, $5 million to repay the convertible debenture, and $3 million to repay long-term debt assumed on acquisition. The remaining $21.5 million in cash, in addition to the $16 million of availability and operating lines of credit are available for future acquisitions and internal growth projects. In the past four weeks we have announced the acquisition of three profitable companies, the total revenues of approximately $50 million.

First was pro organics, the largest distributor of organic produce in Canada with warehouse facilities in Vancouver , Toronto and Montreal. Pro organics is the next step organic National Distributor in Canada. [audio gap]Our strategy is to become the distributor of choice for organic manufacturers and become a significant distributor for our food customers in the U.S. Distributing their products in Canada, thus, building a two-way supply relationship. Including the acquisition, the Canadian organic distribution operations will have annualized revenues of over 70 million Canadian and a growth target of 150 million Canadian in the near term. We've established a transition steering committee to coordinate the achievement of identified synergies as well as build a Canadian national support program to educate the public to the advantages of organic products.

Our second announced acquisition with Citco Sunflower Products in Minnesota is expected to be finalized. They are a supplier of non-genetically modified sunflower products to market in America, Europe and Asia. Citco’s business parallels SunRich's vertically integrated soy products, integrated from field to table. The Citco facilities are located in Kansas, North Dakota and Minnesota. This is a business which is highly compatible with our existing operations, and existing management which provides an extension of our current healthy grain product offering. The sunflower crop looks good this year, particularly in Kansas where many of the Citco's grower have irrigated farms. In October, SunOpta announced an agreement to acquire the shares of Dakota Gourmet, a small company in Minnesota. It produces organic and natural snack foods using sunflower, soybean and corn products. These products are sold into the U.S. School system as well as in branded and private label markets. Dakota Gourmet and Kettle Valley will coordinate their product development and marketing program.

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. As you are aware, on October 31, we officially changed our corporate name to SunOpta, Inc. From Stake Technology. The new name combines the names of two of our historical groups Opta Food Ingredients and SunRich Food Group and reflects our commitment to environmental responsibility and to natural and organic food products. We will continue to use the same Stake and Association with our Steam Explosion technology where the name is recognized throughout the world. Please note that our symbol did not change on NASDAQ or Toronto stock change as STKL and SOI respectively.

In summary, it has been a very active quarter. We are pleased with the way the group is coming together. The business not only attracts talented people, but it also attracts people for a passion for what they do. Our company has a clear vision of the business that we are in, and the values that guide our decisions. As you can see from our increased guidance, we expect a strong fourth quarter with all business units contributing. This is an exciting and rewarding time for the 850 employees that now make up SunOpta, Inc.

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

Thank you. Today's question and answer section will be conducted electronically. If you would like to ask a question, press the star or asterisk key followed by the digit one on your touch tone telephone. Additionally, if you are on a phone that has a mute function, please make sure to disengage your mute to ensure your signal will reach our equipment. That's star one to pose your question. We will pause for just one moment to assemble our roster. We have a question from Scottvan Winchle (ph) with Adams, Harkness.

Hi. Thanks, guys. Good morning. A couple questions here. First, could you break out internal growth versus growth through acquisition?

Yes, I can. I can tell you our internal growth for the nine months was 25.4% in the food business and, overall, 22%.

How about for the quarter? Can you give us that number?

15.2% for the food business.

Any reason for the lower internal growth in Q3?

Basically, we had a huge rise in the quarter last year in the Nordic operation. This came into production. That's why you've got a relatively lower rate for the quarter. As I say, for the year-to-date, it's 25%.

Okay. The share count was a little higher than I expected. Can you talk about what we should expect going forward for both diluted and basic shares, and will you start to use diluted shares in your press release? This is the first time I can remember diluted EPS in your announcement.

Fully diluted 58.5 million shares. That's the figure to use, Scott.

Okay. What constitutes the incremental shares in the diluted? Is it warrants from previous private placement? Is it options?

There are warrants from previous private placements and some options for employees.

In the tax rate in the quarter, it was a little lower. What should we expect going forward?

What I think you should expect this year is we will do approximately 22%, and next year you should think about 25%.

Okay. Can you give us any earnings guidance or margin guidance for the fourth quarter? We can, obviously, back into the revenues from the guidance you've given us for the full year. I wonder if you expect an up tick (ph) in margin, downtick? Thanks.

As you can see, there is an improving trend in margins. It's gone from 16% to 16.8% to 17.8%. We expect that trend to continue over the next couple of years, and it's a basic part of our program that that will happen. So I think that we would expect, at men mum, to see the level of gross margin that we achieved in the third quarter and see an improvement.

Is there any seasonal difference in the fourth quarter versus Q3 that would affect margin?

In what?

Any seasonal business.

No. Some are stronger in the fourth quarter. It used to be a weaker quarter, but I think we're going to see this year that there's a much greater balance in the company with the recent acquisitions.

Jeremy, just a request. I would love to see more disclosure in your press release maybe a full P&L, particularly if you put it out the night before the conference call. Thanks.

We will hear from Michael Sproule with Loewen, Ondaatje, McCutcheon LTD.

Thank you. With regard to soybean sales to Asia, when would you expect, given the current crop, that these reduction or any sort of back fall would take place? Starting fourth quarter, or would we expect to see it sometime in the new fiscal year?

I think, Michael, that the jury is still out. It's probably going to be over the next six months before we actually know the final answer on that. Obviously, there are certain states in the U.S. Where they actually had record soybean production this year, and those were areas badly affected. This won't affect the higher value products, potentially the shipment to the far east. We're very, very actively involved in the sourcing of soy bones at this point. Our teams are out scurrying across the U.S.

And Canada and looking forth into places like Brazil and Argentina. I can't confirm that the sales will be down. I have to say there is a risk they will be. It will depend on their sourcing programs that are a huge emphasis right now.

Now, given the increase in price that's happened in the past short while, are we able to pass on the increased price to, shall we say, the soybean -- soy milk buyers and those other individuals? I know you can with the grains, for example, but can you pass that on into the chain?

As you know virtually all soy milk is made from organic soybeans. So everybody in the business faces the same issue here.

Right.

So we do expect that, for the most part, we will pass on those additional costs.

Okay. With regard to Dakota, what are your expectations of that brand, and how do you expect that to integrate with Kettle Valley on a go-forward bases? What exactly is the expectations coming from Dakota? It seems like a small purchase for a company your size.

It is a small purchase, but it's a growing company. It's got a very -- I'm [inaudible] about Dakota Gourmet. A high growth rate. So, of course, does Kettle Valley. These are the foundations for organic and natural snack food division. Our challenge to them is how do we build this up for a -- to a $50 million business in the next three years in that size. Where they fit together very well is their markets are quite similar.

Both markets, for example, to the U.S. School system, which is very interested in adding healthy -- healthier products to those subsidized school programs. When we put the management of the two companies together, we found there was very, very little overlap, maybe 15% in terms of which school districts that each of these companies was selling to. We think by combining them, they'll be able to build on each other's contacts there. The second area I think is important is SunRich has a national and international sales force and the opportunities to introduce both Kettle Valley and Dakota Gourmet on a much wider basis is there. Indeed, this is happening. We're seeing very strong growth in Kettle Valley at this point in time.

Right.

We couldn't be more pleased with that acquisition. I think the other thing that was important in terms of Dakota Gourmet is the integrated business model is an important part of our strategy. So it takes products from Citco and take products from SunRich in the form of soybeans and organic corn. I think these companies are going to work very well together. Dakota Gourmet will report to Kettle Valley. I think they'll have a coordinated product development program and a coordinated marketing program.

Okay. With regard to the oat fiber comment you made and what's happening at Opta. 25% doesn't sound like much of an increase in capacity when you look at the grand scheme of things. Just given everything is low-carb which and low-carb that. Is there enough requirement will you be able to meet additional demand beyond that without substantial capital spending.

Yeah. The return on expansion is ridiculous, how quickly it happens. This is phase one of the expansion. That's the level that we've approved so far at our board meeting and approved the capital for that. We're looking at returns in the six-month period. This is a no-brainer type of investment. Right now our orders exceed our current capacity. A quick aside. I mentioned we've begun testing of oat with, I think, some extremely encouraging results. If this program is successful, it means significant cost reductions and the ability to produce an organic and/or natural oat fiber. We are beginning testing products as a major organic say producer. We end up with huge amounts of organic soy hull (ph) when they're de-hulled (ph). We have the opportunity, potentially, to Steam Explosion who enters that business, a gain with an organic product.

Finally, with the acquisition of Citco, it produced something like 40 million pounds a year of sunflower hulls. They're currently sold for nominal value as turkey bedding, primarily F we can steam expose those and find a higher value application, which we're optimistic about, there is a nice integration occurring and good internal growth.

No application exists yet for the soy --

Actually, soy fiber. That's what you're producing is an existing market.

Okay.

It is made through a fairly highly chemical process. It can't be classified as organic or natural. With steam explosion, we hope to eliminate the chemicals and produce a product like that.

During the last conference call you were talking about potential capacity expansion at the Aseptic plants. What is the situation there?

The situation is we're running at 100,000 cases a week. We probably have business for at least another 30 to 40,000 cases a week. We are going now immediately to a Saturday sift. We work 24/5. We're going to 24/6. Sunday is, essentially, the day that you do maintenance and setup and cleaning and so forth. I expect that we'll be able to potentially reach an additional 20 to 30,000 cases a week in the very near term, and then with additional changes in equipment, we will be able to expand that further.

Okay. So capital on this is going to be a requirement or not?

The first stage is -- of going to Saturday is not.

Right. But beyond that, if the capacity requirement is there, it comes back to a capital plan?

Correct.

Okay. Great. Thanks.

From Desjardins Securities we will hear from Keith Howlett.

I had a question on the SG&A rate. It went up quite a bit in this quarter. What is the outlook going forward on SG&A?

Steve, why don't you answer that question.

It reflect itself the full quarterly impact of Kettle Valley, which last quarter was there. We did have costs relating to the financing in the ballpark of 100,000. If you use the rate in total dollars that's there, that's there before we exclude any acquisitions.

Sorry. Is that the percentage rate or absolute dollars in this quarter?

The absolute dollars.

Absolute dollars in Q3.

The percentage will go down.

As we lay in the acquisition, that number will go up. Not as a percentage of total revenue.

Right. We've got the acquisitions just recently completed, I guess.

The dollar won't hold.

Right. On the Opta business, how is it sort of running 2003 year-to-date versus 2002 in revenues?

It's up 14% for the year-to-date. It was up 1% in the last month. This is reflective, I think, of this huge increase in demand for low-carb products. This is a phenomena that began to appear nine months as we look at the weekly sales reports. Suddenly it is a rush by everyone in that business. So we're seeing escalating sales growth relative to the refuse years. As we add this capacity, I would expect to see that continue.

It's got the two businesses, the corn-based starches and oat. Oat would be growing faster even than the 21, I guess?

Yes. Absolutely.

Is the -- does it reflect a lot of new customers, or is there a lot of demand from the prior?

It reflects a number of new customers. In this business it takes a while to develop new customers. There's a fairly long lead time because people want to be very careful about how they change their formulations of products. So there is a certain amount of testing that takes place. Some of what's happening is a result of marketing efforts that occurred 12 to 18 months ago, but this is, certainly, augmented by -- the lead time is shortened by the demand for low carb products.

Just on the soy concentrate business. There had been some reduction in the first half in soy concentrate business. It's clear from your comments that soy concentrate production is strongly up year-over-year in Q3. Is that right?

Yes, it is. Very much so.

Great. And just, finally, I would agree with the Adams, Harkness fellow it would be helpful if we had more disclosure before the call, just to add that. My question is, when is the 10-Q coming out?

Friday.

Great. Thanks very much.

Okay, Keith. Thank you.

Our next question will come from Jack O Hara from CWH Associates.

Hi. Good morning.

Good morning, Jack.

What percentage -- when you talk about the bean sales international or grain sales international to seed, what percentage of your business is that?

Total beans are about 10% of our business.

Okay.

But not all of that goes -- that includes also the beans that we're purchasing for our own production. It's about $20 million.

Okay. That's the low margin business, single digits gross margin?

Right.

Now, if we go into next year and you layer on acquisitions and there's internal growth in your businesses, which -- all of which have higher margins than that, and the grain sales themselves on a dollar basis are let's say, flat. On a mixed basis, the gross margin ought to go up considerably, unless there's some other mitigating factors?

You would certainly expect that to happen, yes.

You would expect it to be north of 20% on a companywide basis, or is that too dramatic?

The answer is we're planning for that kind of growth. We're in the middle of our planning right now for next year with our initial assets come in from other companies. I will reserve comment until we've put the full package of information together. As a corporate objective, yes, we expect to build our margins over 20% over the next period of time.

Okay. Thank you.

Chris Krueger with Emmett JSK has our next question.

Good morning.

How did you ever forecast so accurately?

I don't know. Most of my questions have been answered. What was your actual cash balance? I'm not sure if you stated that?

I did. $39 million at the end of the quarter.

Okay. I got the notes on where some of the cash has been used.

Yeah. That's, of course, after we've paid off all the operating lines and so forth.

Right, right. Your environmental division, you commented on how that's been going. How about the plan of selling the piece of real estate as well as the plan for the overall division and time frame and all that?

Real estate is on schedule for closing on January the 16th. As far as further sales, we're not doing anything until we've completed the real estate sale.

Okay. Last quick question. You've made three acquisitions in the last month. Anything you see in the near term coming up?

Any further acquisitions?

Yeah.

No. We're seeing an increasing flow of opportunity as become better known in the sector. So we're looking at lots of things. It takes time. As you know, we're not a high-priced buyer. So -- we're also very, very clear about, as I said in my talk, about the business that we're in. It's easy to get seduced into buying businesses that are outside your core mission. So we're turning down a lot of things. But, yeah, we're looking at lots of stuff right now, Chris.

I guess my point is, we can get through a quarter where there won't be a lot of things impacting what our numbers will be for the fourth quarter once we get our numbers out.

Don't expect to see any major acquisitions in this quarter. We're into November now.

On that same note, I think I've heard a number of something around $7 million was expected from the current acquisitions for the fourth quarter. Is that a number that's good to use in our modeling?

It is actually -- the acquisitions should contribute a little under ten.

During the fourth quarter?

Yeah.

That's all I've got. Thank you.

Before we move to our next question, I would like to remind our audience members, it is star one to ask a question. With RMC Group we will hear from Ronald Emnerman.

Hello?

Hello.

Hi, Jeremy. How you doing?

Fine, thank you.

Your acquisitions have been relatively small to your operations. Is that by design and indicative of future acquisitions?

No. I don't think so. From our point of view we've bought -- Citco and Pro are in the $20 to $25 million range. They were the equivalent of 10% -- 10% to 15% of our total revenue. For us, those are fairly significant acquisitions. I guess the biggest acquisition we have done is Opta, which was under $30 million at the time. Hopefully, yes, we will do larger acquisitions, but I do want to say that this industry as such is characterized by a lot of small, fast-growing above-average profit companies and generally private. I'm sure I said this before. So there aren't a huge number of large companies. Of course, generally with larger companies, one would expect that the multiples will increase as they will if we were purchasing branded companies. You were contending to look at companies. They do have a range. My guess is we would like to focus on companies in the $25 million to $75 million revenue base in terms of our acquisition strategy. You know, maybe the odd little tuck-in, so to speak, that fits with an existing company. For the most part, $25 million to $75 million range.

Do you find those size companies provide a lot of synergy to your base?

If they don't, they're not going to be part of us. It's really -- we have some very defined criteria for our acquisition program, and they must fit the natural and organic food sector. They must fit our integrated model. Yes, they will.

All right. Thank you. Continued good luck.

Thank you very much.

We will take a follow-up question from Scottvan Winchle.

I assume that Pro Organics is the largest contributor to that $10 million contribution in Q4. Can you give us the idea where the gross margin and EBIT margin is? Would it be right to assume it is 20% gross margin, maybe 4% operating margin?

No. I think, actually, Scott, the margins are somewhat better than this, closer to 25%.

Okay.

I will say that their gross margins are higher than our two existing organic distributors. We certainly hope -- part of our synergy plan will be that we may be able to improve the margins of our existing companies through consolidated purchasing, combining logistics and marketing programs. At the same time, hopefully, be able to provide a better value to our customers. It is a well-run company and doing well. It is about $6 million of revenue for the last quarter of that incremental revenue.

Interest expense in the third quarter just reported. What was that number?

680, Scott.

The major reason for the up tick sequentially?

Yes. When we paid off the convertible debenture, when you value the debenture on your financial statement, you have to value the right -- you have to discount the value for the right one. When you pay it back, you have to pay out the full $5 million and accrete it back up for the value for the warrants. There was $183,000 one-time.

In the quarter, Scott, there were approximately $500,000 of one-time costs. These were the convertible debenture that Steve has just talked about to the tune of $183,000. We had about $175,000 paper loss on currency, which is subsequently recovered the next month in October. You have to calculate that at a point in time. Even though on the year-to-date basis we're positive, we had 175 in this third quarter. We had certain financing costs associated with the financing we wrote off. So those three added up to about $500,000 of earnings of one-time earning costs for this quarter.

Okay. Thank you.

Trevor Lee with Octagon Capital has the next question.

Hi, guys. One question here. Could you comment on the construction of your third soy milk plant and the possibility of acquiring the smaller semi-producers out there?

I think we're considering the possibility of building a third soy milk plant. That process involves developing a detailed business plan, a detailed business model for the facility to confirm that the capital makes sense, and we're in deep conversation with the people that we would expect to be supplying from that facility, and I would anticipate that we will take a final decision on this within the next three months, pretty well by the end of the year.

Any chance of you going out and buying these smaller soy milk producers?

I think it is highly unlikely. We cannot go into competition with our customers. If we were to buy a small brand, we would automatically be competing against our key customers,.

Thank you.

With Meridian (ph) Money Management , Peter Martin has our next question.

Yeah. I wanted to ask for an update on the sale of non-core assets and where that progress is.

The non-core asset at some point we are prepared to consider selling is the environmental division. As we have stated, we wanted to complete the sale of this plant in Hamilton, which is now scheduled to close on January 16th. So we will then begin to review that situation after the close. I would also comment on the sale of the Bedford head office, which we have we have completed. Not completed. We have done a transaction where we agreed to sell the building for $4.85 million. What we've done is an option. We've received a $550,000 nonrefundable deposit on that sale, and each month we receive a further $50,000, which is nonrefundable deposit, $20,000 of that goes against the $4.85 million or the purchase price. The other $30,000 is retained by us.

So -- then in December the proposed purchaser must put down a further $750,000, again, nonrefundable. All of this, if he continues the program, ends up with him owns the building in a year. During that time we will be receiving that $30,000 a month, which goes into our income. That, plus the fact that we're able to stay -- maintain our office there in a part of the plant, we calculate that this is returning us approximately 15% on our investment there. Since we're currently in a positive -- strong cash position and don't require those funds, this is a useful use, if you will, of funds during this year. I hope that's clear.

That was clear. In the end, let's just say 12 months out, the sale of the environmental business and the sale of the building would net you what in total cash?

$4.85 million on the building. That's clear. The -- generally, the estimates that we had originally were in the $30 million range, $28 million to $32 million range for the environmental business.

With the acquisitions that you've made recently and also in the last 12 months, are there other opportunities to sell or eliminate from expenses offices, head offices of these companies that you've acquired?

Yes. Just to give you a quick example in the case of the recent acquisition of Pro Organics we have duplicate operations in Toronto and duplicate warehousing. By the end of November, it is our intention to amalgamate the two. That will eliminate some significance costs there. We are currently looking at the possibility of selling our office buildings in Alexandria and constructing a new office as part of a new warehouse at the Nordic plant. That frees up some cash for the construction of the warehouse. The integration teams we've had both for Opta and for the Canadian distribution group are both very active and working very well. We do have some other things that we're looking at but which we haven't announced yet.

One last final question. Some of the management teams that -- the acquisitions you've made recently, are they receiving stock in these deals, or are they able to purchase stock to tie themselves to the business long term?

These have all been cash transactions, number one. In each case, as part of the compensation, a small part has been put an earn out. The earn out is based upon -- percentage of incremental profits over the base year. Those generally extend over a three-year period. There is a lock-in, if you will, in that sense. In addition to that, it's our practice to provide stock options in the corporation as a whole in SunOpta to the senior people in all of the companies. By senior, maybe that's too strong a word. We go down fairly far into the organization. Not the shop floor, but all people above that.

Thank you very much.

Once again, I would like to remind our audience members it is star one to ask your question. We will hear from a private investor, Karen Winter.

Hi, Jeremy. I have two questions. If you could comment on your philosophy of GMO products versus non GMO products.

We don't use GMO, period.

Okay. Could you comment, even though it is a small part of the company, where Steam Explosion is now.

Yes. We've been focusing on the application of Steam Explosion to producing pulp from annually regenerative crops or crop residues such as straw, gas, bamboo and doing it without the use of chemicals. We have three projects in China and another three or four under discussion. We are still awaiting the issue of letters of correct. We are promised on a regular basis these are forth coming. We are expecting that before the end of the year we will have one of these projects in active state. In the meantime, we are very actively involved in the application of Steam Explosion into ethanol production and, specifically, ethanol production from corn stalk. Traditionally ethanol comes from corn, the cob. The stalk is not used. It requires a pretreatment system in order to render that material accessible by enzymes for conversion into glucose and, ultimately, to ethanol. I expect to be under contract by the end of this year for two projects, one in the U.S. And one in Spain. We are working now with a number of U.S.

Food manufacturers and a Japanese food manufacturer on projects that are in the early stage of testing. It is, again, recovery of high value food ingredients from various agriculture waste. I'm expecting -- well, we'll see by the end of the year where this stands. If it goes as planned, we would expect Steam Explosion to make a significant contribution next year. I talked earlier, of course, about Steam Explosion and oat fiber. These are also projects that are under development in our labs at the moment. We are just pleating the construction here now of a new lab at our facilities to be able to accommodate these projects.

Thank you.

We have another private investor, Peter Lubbenhine (ph).

Good morning. I'm here in Rochester, New York the headquarters of Wegmans. I'm glad to hear you are possibly supplying soy milk to the company. I have a macro question. My understanding the company's competition on the soy milk is large companies like Cargill.

That's not correct. Neither ConAgra’s (ph) or Cargill is in the business. They are focused on genetically modified grains. Soy milk is made from organic soy products. The same goes for rice products, rice milks that we're involved in.

Can you indicate who the company's major competitors are in that field?

Our major customers are Hain (ph) with the product [inaudible] and, of course, White Wave with the product silk. In addition to that, we supply a whole bunch of other people in that business. The major competitors in terms of supply of soy concentrate would be -- there are several smaller people, Pacific Soy, American Soy, Vita Soy I think those are the main ones. There is a group called Jasper that do soy concentrate, mostly in the eighth continent product, which is produced from a soy isolate and is a chemical process. It is not classified as organic.

I'm trying to understand what gives the company the competitive edge with some of the larger or, perhaps, better known --

As a largest producer of soy concentrate in the United States number one. We do provide soy concentrate to most of the major brands. We've been in the business probably longer than virtually anybody else in the business. We are, I think, no doubt, in our opinion and in our customers' pen the high quality producer in the U.S. It is certainly our objective to be the lowest cost highest quality producer in the market. We do have two plants at the moment.

As you probably heard earlier we're thinking about a third plant. That creates some additional competitive advantage because distribution costs makes up a huge part of the ultimate soy milk price. In addition, we are the only people that are integrated all the way through from providing the seed to probably 1500 organic farmers contracting the soybean, de-hulling, cleaning, transferring to the soy milk plants, making the soy milk concentrate and packaging and shipping it. That is an important factor from the point of view of quality control. We know exactly where the bean came from. It's important from the point of view from certification so that every one of our farmers is recertified every year. Every one of our plants is recertified. Management certification and control of quality and value-added margins throughout the process is a key part of our business model.

Okay. Finally, I'm not aware that Wegmans has branded products at this point.

It's just starting. We're not in the packaging, to be clear. We are in the Aseptic packaging but not re-fridge rated packaging. We can sell a program to somebody like A & P, for example, and then what we do is we will ship the concentrated soy milk to a dairy who will package it because the re-fridge rated package is a dairy package known as ESL or extended shelf life. Hood Dairy is the company we will be doing that through.

Thank you very much.

Pleasure.

We will now hear from Kenneth Olden from Gagman (ph) Securities.

Do you have minimums to ship there?

Yes.

Are those prices fixed or variable?

They are normally -- the margin is fixed.

So quasi variable. What's the inventory of old crop like compared to new crop?

We don't carry over anything over old crop.

You'll be available to ship new crop before the river freezes?

Yeah. We do some in the last quarter, yeah.

Okay. I'm trying to get a handle on what kind of margin impact we may have if; indeed, the sales of raw bean drops.

We don't really know at this point in time, until we have completed our sourcing for next year. It's not going to affect this year, just to be clear. So as we get information, probably in our next investor call, we'll be in a better position to tell you exactly. It's not going to be a massive hit. I want to be clear about that.

Right, right. Okay. Thank you very much.

Welcome.

We do have a follow-up question from Keith Howlett.

Yes. I was wondering if you could update how the Bennefiber (ph) product is going and if there are other products, soy milk blends or snack coatings or anything else…?

Two or three things, Keith. The Bennefiber is going well. No problems there. Business is growing and so forth. The dairy blends have been very well received. We are now shipping out some significant quantities and talking with other customers about some really interesting contracts. Also want to bring up the fact that dairy blends go in sort of a five-year cycle. We hit in the last quarter of last year sort of the beginning of the bottom of the cycle. This continued through the last quarter in the first half of this year for dairy blends. The year-to-date basis we were $650,000 below in terms of gross margin over last year. We've had a huge turnaround in the last two months, particularly the last month, to the point we were running 1 or 2% margin three months ago.

Now it is running up over 20. So this makes a huge difference in terms of what's going to happen. It is a big improvement for this quarter and next year. That's good. We are also discussing some new opportunities, additional capacity opportunity for our Boston plant for the coming year. I think those are -- in terms of other products, those are the main things I would comment on.

Great. Thanks.

We have another follow-up question from Scottvan Winchle.

What percentage of sales are the dairy blends?

2.5%.

Okay. Jeremy, I don't know if you can mention this with your confidentiality agreements. White Wave, sounding like they're going to move their production in-house faster. That's what came out of the dean foods call. Any comment?

I can comment on this extent. That white wave's current purchases from us are way over. There are minimums included in their contract. They expect that level of purchasing to continue unabatedly until the middle of next year. Then I think how it continues beyond that is a function of how fast their core business is growing, which is growing quickly at this point in time. At worst case, it would fall down to the minimum number of loads per quarter and under our current arrangements those men mum loads increase each quarter. And I can't really comment other than if I had to guess -- it is a guess. Their purchases after next June will still be considerably higher than the minimum.

Okay. And as far as management in your corporate offices, congratulations to the recent promotions. Did you feel like you have enough people? Are you out there looking for more corporate leadership to integrate all the acquisitions?

I think there are a couple positions we will probably look at in terms of our corporate structure. One is we're looking right now at bringing in in-house legal counsel. This is necessarily to save money. We do spend a lot of money on legal expenses because we're active in the acquisition side as well as contractual side. I think it will improve our efficiency significantly and I'm hoping that the person would save their actual costs. More important in this environment of compliance and regulatory measurements, it becomes increasingly important to maintain your records and that.

The second area we may look at is an internal audit function. On the new Sarbanes Oxley Act, the requirements for internal controls and measurements and reporting on that is becoming very, very stringent. We've got, essentially, until the end of next year to implement those. We do have excellent controls, but you need to document what those controls are and go in and verify them. We have launched a program to implement a companywide system. We have selected Oracle as our supplier for software. We've reviewed something like 55 different types of software over the last few months. We have a team of people that have been involved in that assessment. We like Oracle because it is a modular approach and we can run things in parallel and put -- implement the system in sequence. It is our objective to have one system throughout the company. We will have to maintain certain software that's specific to grain, but for the roast of the company our target is to have a single platform. That will make it easier than to additional companies as they come in as part of our acquisition. That's going to take a year to implement. We have a very detailed program in our board just to prove the investment in this package yesterday.

Thank you.

With Turner Investment Partners we will hear from Tom Dabbella (ph).

Hello. I had a question on your comments about the Steam Explosion. You had a couple things you were working on. You said it could be significant. Was that significant to the total company? I know you have -- you upped your estimates for revenues for this year to the -- more than $200 million level. I don't recall if you have given some guidance for next year, but I would imagine it would be 250 or something on that lien. Would that amount -- if these deals work out, would it be significant to that total of 250?

The answer, first of all, in terms of this year is the revenue implication of Steam Explosion this year is very, very, very minor. Quite frankly, Steam Explosion is more important to the bottom line than the top line because there are a small group of people involved. The margins in that business are quite high. We will provide guidance on revenue once we've completed the plans process. We will do that the beginning of next year. So we've not provided guidance for next year. With just $200 million and $50 million of recent acquisitions, your $250 million figure is obviously a men mum level. On top of that you've got to shove our internal growth rate in whatever else we expect to acquire. We'll provide some guidance on that the beginning of next year.

Okay. So if you did the shipments, you would expect them to be fairly profitable if this worked out on the Steam Explosion side?

Yes, very much so.

Thank you.

As another reminder to our audience members, it is star one to ask a question. We'll pause for just one moment. It does look like we have a question from Spiro Theros, private investor.

Good morning. Can you hear me?

Yes, I can. Thank you.

Earlier somebody asked a question about gross margins. I cut out for a second. You said you expected them to improve to what level?

Again, we haven't provided guidance on that. It is a core part of our business planning. Margins will improve. I think the reason for that is we expect our existing businesses outside of the grain business to grow quite rapidly. These are higher margin businesses, number one. Number two, the companies we are acquiring are higher margin businesses. Number three, as we become larger, the general efficiencies throughout our organization are such that we will see improvements in margins. We have internally got very specific objectives here, not just for gross margins but for internal growth rates and growth rates as a whole in the company in the return on investments and so forth.

There was a number mentioned. What was that number?

He suggested would our gross margin be at 20% next year. I said we're in the milt of our planning process right now. So I don't have a number yet for next year. I did say I expected it would improve over this year, as the trend has been from last year to this year to this quarter. In each case it's been improving.

Also someone asked a question about synergies and personnel and things of that nature. Is that presenting a problem for you bringing some of the top line growth down to the bottom line currently?

When we make an acquisition, we do not take the synergies into consideration in the acquisition equation. Although we do identify them. We have traditionally what we've done is set up an integration committee that's focused on the synergies. We did this with the Opta acquisition successfully. We met with a team of people from SunRich, from Opta, from Stake on a weekly basis for five months.

We focused on 12 to 14 different areas of synergy. For the most part, these have been achieved successfully. We are doing the same thing with our Canadian organic distribution group. There is a committee there focused on achieving those synergies. It includes people from the distribution group and people from Stake. I have to say that it's going extraordinarily well and are ahead of the timetable that we had set internally for achieves those synergies. We are pleased with the attitude that people are bringing to this and the work they're doing.

Let me ask the question more directly. Do you feel your bottom-line growth will be more reflective of your top line growth over the next 12 to 18 months?

Well, you know, for -- to be clear, our revenue grew 65% in the first nine months. Our earnings before tax grew 81%. Our net earnings grew 71%. Our earnings are growing faster last year. This is true that earnings were growing faster than sales. That's part of our plan to see that continue. I think you will see that next year.

Thank you.

Mr. Kendall, it appears we have no further questions in the -- I apologize. We have Ronald Emnerman has re-cued.

Hi, Jeremy. Many questions have been posed to you trying to figure out where there's soft spots. Rather than us asking smart questions, can you provide anything that may not be working well with Stake, SunOpta, if you will, or what operations or procedures aren't working as you wished or desired?

I mentioned two or three things. One was that Virginia, the operation -- the abrasive operation in Virginia has been slow in the first half compared to last year. This is a particularly high margin business. It really contributes when it's doing well. It is not that it's not making money. It is. If it was busier, it -- as it was last year at this time, it would be producing considerably higher return. We expect that. Based upon the level of quotations going out today and the level of businesses forecast it appears that that business is going to return to that higher level of activity. That has certainly been a factor. I mentioned, of course, the dairy blend business, which was weak in the first half is and is now returning. We clearly have had delays that are completely beyond our control in gaining these letters of credit from China. This doesn't affect our earnings at least in the negative sense because our annual license fee covers the cost of the people in that division. It several doesn't provide an upside when the contracts don't come in.

Our organic chicken business in Canada, which is very, very small has gone very slowly in the last six months. It's now beginning to pick up. We are beginning shipments of this month of our first organic pork. We have contracted now for the next 15 minutes 100% of our organic pork production. So we expect that division, which has not been contributing, to contribute in the coming year. Starting probably this next month. So I think those are the main areas of weakness.

My impression is stepping back from the detail, the thrust is working in a positive way and these are normal business issues that you seem to be overcoming?

Yeah. I think to be absolutely fair, Ron, we have concluded we are not necessarily very good at starting businesses. We're probably not going to do that in the future. We'll focus more in growing our existing businesses and acquiring company that is have been through that initial stage of difficulties.

Thank you. Very informative conference call. Thank you very much, Jeremy.

Mr. Kendall, I will now turn the call back to you for any closing or additional comments.

Again, I would like to thank you very much. I hope you recognize that this is -- this company is in a very high growth mode. As such, it is always difficult to forecast exactly how the business is going to turn out, but as long as we can keep our earnings growing at this rate and our revenue growing at this rate, I think things will go very well. Thank you very much. Appreciate your support.

Thank you, everyone. That does conclude today's conference. We do thank you for your participation. You may disconnect your line.