Sunopta Inc (STKL) 2003 Q4 法說會逐字稿

Good day, everyone. Welcome to the SunOpta Inc. fourth quarter 2003 earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Jeremy Kendall, President and Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen, and welcome to the 2003 year-end investor call for SunOpta Inc. Before we begin, I just want to remind listeners that except for the historical information matters discussed during this conference call may include forward-looking statements, including statements relating to 2004 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 reported in US dollars.

As requested, during the last conference calls we have provided consolidated comparative income statements for the fourth quarter and the fiscal year ending December 31, 2003, as well as a balance sheet at December 31, 2003 in our press release of last night.

We're very pleased to report record revenues and profits for fiscal 2003. The fourth quarter of 2003 represents our 25th consecutive record quarter of revenue growth compared to the same quarter of the previous year. Annualized revenues grew from 120.9 million in 2002 to 199.1 million in 2003, a 65 percent increase, and translates to a compounded annual growth rate of 63 percent over the last six years.

Of note is that although we recorded sales of 199 million for 2003, we actually exited the year at a base business run rate, excluding internal growth, of $240 million. Currently we have announced with considerable confidence revenue guidance for 2004 of 275 million, excluding announced or potential 2004 acquisitions.

The Company realized a 26 percent internal growth rate from existing operations for the year, with the remaining increase of 39 percent due to acquisitions completed in late 2002 and 2003.

Of the record sales of 199 million, 174 million were realized by the SunOpta Food Group, the Company's vertically integrated operation focused on natural and organic food products.

Revenue for the last quarter reached 54.7 million, which is our single highest quarter in the Company's history and a 63.5 percent increase over the same quarter in 2002.

Net earnings for year rose from 3.7 million or 9 cents per share in 2002 to 8.7 million or 18 cents per share in 2003 on a diluted basis. This translates into a 131 percent increase in earnings a 100 percent increase in earnings per share, confirming that earnings growth is exceeding revenue growth.

Gross profit grew to 35.7 million, an 83.2 percent increase, while SG&A -- or sales, general and administrative expenses -- grew and 80.6 percent. Gross profit as a percent of sales has continued to improve from 13.8 percent in 2001 to 16.1 percent in 2002 and 17.9 percent in 2003. The gross profit improved to 19.2 percent in the last quarter and is expected to continue to improve throughout 2004.

Included in the SG&A costs for 2003 were approximately $1 million of nonrecurring expenses because of professional fees related to specific transactions, retirement of our convertible debenture and costs related to the closure of the Hamilton Environmental Facility. Approximately one-half of these costs were incurred in the fourth quarter. In addition, we increased our general allowance for doubtful account provisions during the quarter by approximately (technical difficulty), reflecting the continued growth of our business.

Our Canadian Distribution Operations grew dramatically in the fourth quarter with the acquisition of Pro Organics. Up to this time we've included warehousing and distribution costs for these distribution operations in SG&A, but with the rapid growth of these operations these costs will be segregated for future reporting purposes. The net increase in these costs in the quarter were approximately $600,000 and they are included in our SG&A line.

You'll also notice that our effective tax rate has remained low. This can be attributed to two factors -- first, the tax strategies that we've put in place in concert with our tax advisers; and secondly, the great success of the Opta Food Ingredient acquisition and subsequent integration which has required us to recognize the benefit of loss carryforwards acquired in the transaction. We do expect that our effective tax rate will increase in the future, but will remain below statutory tax rates.

Foreign exchange gains are a reflection of the appreciation of the Canadian dollar relative to the US dollar. We do not speculate in currencies, but try to maintain our cash resources in the currency where we expect to use these resources, either in expansion projects or acquisitions.

The balance sheet at December 31, 2003 reflects approximately 22 million in cash, over double the amount we had at the end of 2002. In addition, we also have 6 million in assets held for sale which we expect to be realized in 2004 by the disposition of these assets. A further 8 million should be received during the year from our warrant holders based on warrants that are expiring this year and are currently in the money. These warrants have been included in the calculation of diluted shares in 2003.

Working capital at year-end stood at 57.3 million, an increase of 360 percent. And our net worth, or shareholders' equity, rose from just under 50 million to 120 million, a 142 percent increase.

Long-term debt declined 11.6 million to $25 million, approximately equivalent to our cash position. We have no working capital debt, so are clearly underleveraged. In fact, combining our cash, our assets held for sale, the expected warrant proceeds and targeting debt to equity and line of credit levels at normal levels would provide the Company with in excess of $100 million in available resources for internal and external investment.

2003 was certainly an exciting and historic year for our company as we have realized significant growth. This was also the year we completed our change in corporate identity, introducing our new corporate name of SunOpta Inc. and bidding a fond farewell to Stake Technology, Ltd.

The major events of this past year include the acquisitions of Kettle Valley and Dakota Gourmet which form the foundation of our healthy snack foods business or as we like to call it, healthy convenience foods. Kettle Valley produces organic and natural fruit bars which are made from apples with internally sourced oat fiber utilized as a functional ingredient. This business as a growing nicely, due in most part to expanded sales in the US subsidized school meal program, as well as in private-label product offerings. Dakota Gourmet also markets soy, sunflower and corn-based products to the US school meal program, as well as to the branded and private-label markets utilizing internally sourced raw materials. We have now consolidated the sales and marketing of these two profitable and growing companies. It is our intention to use these companies as of the base for a $50 million integrated healthy convenience food division within the next two years.

In 2003 we also acquired Pro Organics, the leading organic fresh foods distributor in Canada. Pro Organics has been combined with our existing distribution companies, resulting in substantial synergies in purchasing, logistics and warehousing.

Two weeks ago we announced acquisition of Distribue-Vie Fruits and Legumes Biologiques of Montreal, Quebec, which largely completed our national distribution platform for organic fresh foods.

Our objective in the distribution business is to create the first Canadian national natural and organic distribution company, integrated from fresh foods to groceries to dairy and dairy alternative. We began this program in October 2002 and are now the largest organic distributor in Canada. Further advantages from this organization, including having a window on markets to determine trends, becoming the distributor of choice with opportunities for exclusive supply agreements with our suppliers and being a significant customer of our raw material and ingredient customer, thus building mutually supportive relationships. We continue to look for opportunities to expand the geographical reach and product offerings of our distribution group, both internally and externally.

In November 2003 we acquired SIGCO Sun products, our first entry into the sunflower market. SIGCO has a similar business model to our soy business, being integrated from the sale of non-genetically modified seed, the contracting of supply to the processing and packaging of in shell and kernel products.

Of particular interest in recent months has been the dramatic growth of our oat fiber business, spurred by the demand for increased fiber levels in food products and for the addition of oat fiber to low-carb products, resulting primarily from the popularity of the Atkins and other similar diets. When we purchased Opta Food Ingredients Inc. some 15 months ago the two oat fiber plants were operating at approximately 65 percent capacity. Today we're operating at full capacity 24/7 and have completed two further expansions at our Cambridge Facility, increasing the capacity there by 65 percent to approximately 26 million pounds per year. We're also looking at other ways to expand productions and meet the growing increase in demand.

Soy markets were strong this past year and we expect continued growth, particularly in the refrigerated and private-label beverage and ingredient markets. Soy crop yields were reduced this year due to drought conditions in certain parts of the US. However I'm happy to report that we've secured our requirements for 2004 for all of our US production needs. This is very much a result of the strong relationships that our people have built with the 1,500 organic farmers with whom we work.

Other operating developments include the successful launch of our organic coating business, the expansion of our sweeter production capacity, improvement in soy milk yields through new processes and technology, the opening of our new fruit bar plant in Omak, Washington, the launch of our organic pork business, the rationalization of our Saint Thomas Processing Facility, the sale of the Hamilton Environmental asset and many others. All of these activities support the continued development of our integrated business model in the natural and organic food market and are consistent with our publicly stated values.

Trends in the food industry include a forecasted growth of 20 percent in organic products and continued growth in soy products. There is increasing concern over the use of pesticides, herbicides, growth hormones, antibiotics and artificial fertilizers and genetic modification of food products. In addition, there are issues such as mad cow, Asian bird flu, toxins in salmon and arsenic in chicken. These trends are further amplified by concern over an obese nation and the resulting increases in costs within the health-care system. All of these factors appear to confirm that SunOpta is very well positioned with its focus in the natural and organic food sector. Virtually every major food company, producer or retailer, now has a program to improve the nutritional content of their products.

Our environmental business, while not a core business, has performed well this past year and is forecasted to grow in 2004, particularly in the silica-free abrasive market now that many of the ships are returning from the conflicts in the Mideast. In addition, we expect to realize the benefits of the rationalization of our Hamilton facility, as previously mentioned, and will complete the build out of our Baltimore abrasives plant facility in the third quarter. Given the growth prospects for this business and the current level of liquidity on our balance sheet, selling this division at this time would likely be dilutive earnings, and therefore we're not actively pursuing this disposition at this time.

I am pleased to announce today that we're in the process of signing a number of contracts with Abengoa Bioenergy R&D Inc. of St. Louis Missouri to provide engineering, lab and development services leading to development of process and equipment contracts to process agricultural residues into a substrate for the ultimate production of ethanol. The US government has indicated their desire to double US ethanol production, which is currently produced from corn and wheat. It is believed that this level of increase would stress commodity prices of corn and wheat, and that a solution to processing biomass will be needed. We're very pleased to be partnering with Abengoa, the second-largest ethanol producer in Europe and a major US ethanol producer, to develop this technology and supply equipment for plants in Nebraska and Spain.

We're also actively investigating the use of steam explosion technology in the production of various functional food fibers and are most encouraged with our initial results. We continue to develop pulping projects in China, but have not realized any revenue at this time. We expect the steam explosion division to contribute positively to our financial results this year.

In summary, we're very pleased with our progress over this past year. We continued to grow our revenues and earnings rapidly, while at the same time leveraging and integrating our operations. We continue to gather momentum, and we look forward continued prosperous growth in the coming year.

Thank you very much, and I would be pleased to take some questions.

(OPERATOR INSTRUCTIONS) Scott Van Winkle, Adams, Harkness.

First, in oat fiber business, can you tell us what the sales were of oat fiber in 2003? And should we assume that the 65 percent increase in capacity, at least at the Cambridge Plant, is an indication of what type of growth you would see in '04?

Yes, I think we could say that when we bought the business in December of 2002 the oat fiber business was running at approximately $14 million. And I think today with the expansions we're probably looking at double? (multiple speakers) It's probably running around 25 million.

What type of plans do you have for further capacity expansion there?

We've announced to the first two expansions. We're very close to proceeding with an expansion at our Louisville plant. And we have some other ideas which we're not able to talk about at this moment.

Moving onto the SIGCO, it seems like sunflower seeds are everywhere now and growing. What type of growth do you look for that business? And that was what, about 20 million of trailing revenue, if I remember correctly?

I think we're looking at minimum 20 percent growth this year. and it's quite true that sunflowers are really being recognized for their nutritional value, which is very, very high. I think the sunflower industry hasn't done a particularly good job in the past at promoting the nutritional value of their products which is superior to many other products, for example like almonds. I think we expect to see the business continue to grow.

At the same time, one of the major suppliers is China. China's had a relatively poor crop this year. And there's also beginning to be stress in terms of supplying their own food requirements, and so are moving more of their lands from sunflowers into grains. So I think this should be good from our point of view.

I know that Flowers Foods is about the launch a new low-carb bread that includes soy. What of your products are you seeing being benefited by the low-carb trend beyond oat fiber?

The main one of course is oat fiber at this point in time, but also soy and some of the resistant starches from the Galesburg facility.

I know you mentioned that the tax rate expected to increase in the future; any good guess on what it would be in 2004?

I think it's just a little the early in the year to determine that because there's quite a number of factors that affect that. So I'd really like to hold on the answer to that question for a little while.

Thank you.

Chris Krueger, MJSK.

Good morning. Back on the oat fiber issue, are there any potential acquisition candidates out there or do you see growth coming more from internal expansion in that area?

There are only two other people producing oat fiber. One is a firm called Rettonmeyer (ph) and they have a plant in East Germany. They're shipping some product now into the US. In the past they dominate the market in Europe and we dominating the market in North America, but because it's a fairly light product and the cost of shipping it over, but because our plants are completely sold out now that is at the moment opening up some opportunities for them, just because of the demand. There is one other plant in the US which is owned by someone who was using it for their own production.

On the snack bar, both fruit as well as the recently acquired sunflower snack products, any initial progress on cross-selling in the school lunch programs?

Yes, we've integrated the sales force now, and so both of those companies were selling into the US school program. Kettle Valley has been somewhat limited due to their lack of a US plant, which is why we opened the plant in Omak, Washington, so we now have a made in the US label. So we've consolidated the sales at Dakota Gourmet who have an inside sales force, as well and a group of agents across the US. And that's going extremely well. By being able to offer a broader range of products, that's being well-received. And we're also expanding our product line now into the school. We're also seeing significant growth in the private-label markets. We're very happy -- both companies are performing very well.

The fruit -- the Kettle Valley fruit bar company, I think initially when you bought it I think you were looking for sales of roughly $10 million in '04. Do you have an update on what you think you would look for from that in '04 now?

No, we haven't changed our estimates at this point in time. But there are huge opportunities in the private-label area. And it takes a little while because you've got to develop a particular product for each one, develop the packaging and so forth. It's clearly a market that is growing quickly and I think it will grow substantially from here.

One last question -- in the first quarter, which is about two weeks away from being wrapped up, as far as your SG&A expenses, can you give a dollar amount of expenses you would sort of classify as one time that might be lumped into that?

For the first quarter?

Yes, so we're not taken by surprise here.

Just that we've got some of the closure costs for Hamilton and some for St. Thomas that will be in the first quarter. And then of course from that point on we also begin to generate the savings that come from both operations. You're looking at 3 to $400,000 of closure costs.

Okay.

The savings on both of those operations are significantly more than that, of course, as we've already announced.

That's all I've got. Thanks.

John Bross (ph), Kansas City Capital.

Could you go through again the one time costs in the SG&A in the fourth quarter for me again?

What we said was -- let me get my notes here -- we had $500,000 in the last quarter, and these were made up of nonrecurring expenses related to professional fees that were essentially from financing. There were three of those and $300,000 in total. There were one time costs for the retiring of the convertible debenture that we had. That convertible debenture was convertible at a little over $3.00 a share and was not going to be -- that was in the third quarter. That was also part of the $1 million. But that was not going to be advantageous to our shareholders to convert, so we repaid that. And the total amount on that was about $200,000. And cost of closure of the Hamilton Environmental Facility, that was about another $200,000.

In addition to that, we talked about the fact that we had increased the (indiscernible) allowance for doubtful accounts by approximately $400,000, just recognizing that our business was growing. And we talked about the increase within the SG&A category of the cost for warehousing and shipping within our distribution business. Up until the fourth quarter these costs had not been so significant, but as that division has grown so substantially those costs became quite significant when we added the Pro operations. So what we've decided to do in the future is to segment those cost out on the income statement because they're not reflective of your general SG&A costs.

So if I add it up without looking at the warehousing costs -- about $1 million in the fourth quarter? 900,000? Okay. Now, for the 400,000 and bad debts, is that related in general to the business or more specific to a certain piece of a company you've acquired?

It's nothing to do -- it's not a specific debt that we've written off (multiple speakers) just an a general allowance and it is a general increase in allowance. It's not specific to any one business.

So your allowances is what versus what in terms of percentage? I'm trying to get an idea how much it's gone up.

I don't think I've got that number right away. I'll see if I can find it for you.

Secondly, obviously the good news in the quarter was the improvement in the gross margin. Would you expect as the business continues to unfold and grow sequential improvement through 2004 in terms of gross margins or more --?

The answer is we expect a sequential growth in gross margins for the next -- well, for the next hopefully several years, but certainly in the next two years that we can see.

Thank you.

Travor Li, Octagon Capital.

Again on that SG&A, so your current run rate is about $8 million a quarter. Is that right?

Yes. Well, in the fourth quarter it was $8.5 million, and so if we take out the 500,000 non-recurring then it's $8 million, and if we subtract the shipping and warehousing then it's down to $7.4 million.

And is that expected to grow in line with your organic growth rate or is that going to -- in line with the --?

We expect that SG&A costs will begin to decline as a percentage of revenue when we -- also recognizing that we will be segmenting out the warehousing and shipping costs in our next statements because our distribution business in Canada is continuing to grow. It's doing extremely well, and we're very happy with the results that we're getting, but it's going to be a bigger part of our business and so it's important that we segment those expenses.

Could you also break out the internal versus growth by acquisition rate for Q4?

I don't think I've got that in front of me. I would have to work that out. We have just done it for the year as a whole. As I said, it was 26 percent internal growth rate.

What was the revenue for your environmental business for the quarter?

I'll just get to that in the second here. We're looking for approximately a 20 percent growth in the environmental business this year in revenue. We believe for the year it's about US$24.8 million, so we're looking to something in the order of 29 million in the current year.

And finally, could you give us a bit more color on your steam explosion business? I know that you have talked about the potential partnership with Abengoa. What would the financial impact be?

We have signed or are in the process of signing a series of contract and these including engineering contracts to build facilities in both Spain and Nebraska; they include a substantial development contract that is going into our new lab here that's going to -- will probably stretch over at least the next year and into the second year; it includes a contract which defines who owns what technology and the basis of which we would sell that to third parties in the future, how we would share royalties and so forth. And ultimately it will also include two contracts for the supply of equipment. Since the process uses certain chemicals we have -- part of the engineering work involves determining the metallurgy that we would use in this equipment in order to deal with the process parameters. So the engineering contracts should be completed by early summer, and then will be into discussions on equipment.

As I said before, the current production, I believe, of ethanol in the US is around 3 billion gallons. The desire is to see that increase to approximately six. And our understanding is that when you start to get up towards 4.5 to 5 you begin to stress of the prices, the commodity prices of corn and wheat. So at that point in time in many ways it becomes less desirable or acceptable to be producing ethanol. So a method of producing ethanol from biomass is what is required in order to meet that demand. And in order to do that you needed technology which can take various forms of biomass and render it into a state where in can then be processed into ethanol because in its natural form it cannot be. This is probably going to be a first in the world. And ethanol, of course, is an environmentally friendly fuel, and it's also a fuel that doesn't have to be imported. It's quite an interesting area.

So we should expect to see revenue for that business starting to ramp up probably in the current quarter, right?

There has been already revenue in this quarter, and there will be an increase in revenue throughout the year.

Just one final question, again about the rising prices on soybeans and perhaps a potential shortage. How would that impact your bulk grain sales in 2004?

Would you repeat the question?

The rising prices of soybeans and perhaps a potential shortage.

As said, we have been able to source all of our soybeans for our own use, so that's good news. Certainly the price of soybeans has gone up and those cost increases will be passed on to customers. I think the only place that the shortage can affect us to any degree is in our shipments to Japan, and in that particular case that is the lowest margin part of our business so we're not particularly concerned. Interestingly enough, while the soybean crop was affected, the environmental conditions were actually favorable for corn. So that part of our business has increased. So one tends to offset the other to a fairly large extent.

Thanks very much.

One other thing, just to give you the sales in the last quarter for the environmental division, they were 6.3 million.

Thank you.

Keith Howlett, Desjardins Securities.

I wonder if you could update us on the soy milk business and your capacity utilization in that business and your plans for additional capacity.

We're fine on the supply of beans, and so that's our first stage. Certainly we're fine on the supply of seeds to farmers. When we get into the manufacture of concentrate we're okay at this particular point in time as -- and we do have some service equipment available that we can put into our plans to expand our capacity. We have been operating at capacity in our packaging plant. That is very much a function. It tends to vary up and down a little bit obviously with orders. But we're looking at the possibility of expanding that facility in the current year. So right now we're operating adequately. We have adequate capacity to handle our current business.

Was there any negative impact of the California strike? Were you seeing any uptick after that grocery strike is over or --?

Not really, not materially on us I don't think.

I wonder if you could also just explain, just so I understand, why some low-carb products choose soy versus a oat versus another fiber?

I think it's really a function of texture and taste and what the product is that they're producing. Oat fiber does seem to be a really favorite kind of product. I think right now if you see people moving to other products it's only because of the inability or our lack of ability to supply. But oat fiber, we've heard of major accounts recently that are looking at switching for example from cottonseed fiber, which is another fiber used in food products, to oat fiber. And they see significant advantages in terms of texture and taste and the ability to absorb water and the fiber content and so forth. So I think it's more a question of supply right now to what people are selecting.

Is there any alternative way to produce and an oat fiber to your method? In other words, could you take the oats themselves or is that just too expensive?

You're starting with an hull, which is essentially a waste product. So it's a very cheap raw to start with. And so I think there is certainly an abundance of oat hulls available, so it's not a supply issue at that end; it's just the fact that our two plants are very substantial facilities. In our expansions, what we've been doing is balancing those, finding the bottlenecks in the plants so that you take the bottlenecks out and you ultimately reach the ultimate capacity when everything is balanced. And so we're approaching that. So the next step has to be to somehow acquire or build a new facility.

Maybe on the snack business -- sorry, on the coatings for snack business, the organic coatings; can you just update us where that is?

It's a small business that we started off this year, but it's growing nicely. Of course with the new organic regulations in the US, if you want to have 100 percent organic designation then you must have your coatings, as well as your raw materials and the oils in which you might cook your product. Oil has to be certified organic. So it's growing nicely.

What is sort of the outlook? Is that business growing at 30 percent, or --?

It's growing from such a small base that probably the percentages are far higher than that. It just began in the second quarter of this past year. So it's much greater than that.

Finally on the housekeeping, when do you intend to file the 10-K?

Monday.

Great. Thanks very much.

Alex Sever (ph), Stadium Capital.

Congratulations on your quarter. I just wanted to understand a little bit better -- I know there are a lot of moving pieces; that's part of your strategy here. Above the -- I guess it looks sort of $78 million of growth year-over-year. It looks like about 60 percent of that from what you're telling us is through acquisition, which I guess are the four acquisitions you did in late 2002. Is that correct?

Yes. They also include Kettle Valley, which was acquired in May, and then SIGCO, Dakota Gourmet and Pro Organics, which were acquired in the last quarter.

So just some of that '03 number?

Yes.

Okay.

How of it came from those four acquisitions in 2003? About $10 million.

So 10 million came from '03 and --

In the 200 -- the 199.1 million -- was about -- sorry, 12 million. Excuse me -- about $12 million came from the four acquisitions that we made during the year.

Okay. So that would mean -- if I just get this math right here -- about 35 million came from the acquisitions that were done in '02. Does that sound about right?

No. I don't think I have got that figure right in front of me. I'll work that one out for you.

So 46 and 12 would be 58 -- I'm trying to get handle on kind of pro forma, if you will, growth.

As I said, our exit rate is about 240 million. So that means that the four companies that we acquired, particularly the last three, are doing approximately 50 million in revenue and about $12 million was included in the end of last year.

Just a couple quick follow-up questions to earlier questions. I want to make sure I understood -- just trying to get a handle on growth rates here. It sounds as though you said that you expected SIGCO to do about 20 percent growth this year. Did I hear that right?

We said we had a 26 percent internal growth rate last year and we have given guidance of 275. Last year we gave guidance at 175 and then raised the sales forecast during the year -- the guidance during the year. So I hope that's what we will do again this year.

I was specifically asking about SIGCO. I thought someone had that question --

SIGCO? Yes, about 20 percent.

I think there was an earlier questions on Opta which I thought was asking whether your capacity expansion of 65 percent had some bearing on your expectations for -- direct bearing on the 2004 growth expectations for Opta. I wasn't sure I understood whether that was exactly right or not.

The question I think was how much did the increase in capacity add to our revenue. I think that was the essence of what we were talking about. We talked about going from $14 million when we bought the business I think in oat fiber to approximate $25 million with the current expansion, not including this next expansion that we are thinking about at the Louisville plant.

Thank you.

Kathleen Kent, BMO Nesbitt Burns.

Can you give us -- actually I have a few things. Can you give us the sales that Nordic did during the quarter?

I don't know that we break out publicly. I don't think we do.

You had been as it was ramping up and getting to more normalized level. Okay, that's fine. What about if you can give us a breakdown in terms of the profitability between the two divisions, food and environmental?

Sure. It would certainly be in the K on Monday, Kathleen, in significant detail. I could give you the gross profit -- so the segmented net earnings before interest and income tax would be approximately 10.5 million for the food group; 2.5 million for the Opta Minerals Group. And then we have our corporate expenses and interest and taxes and so forth.

Just with respect to the 600,000 in expenses on the distribution side, especially considering that's going to be an area of growth for you guys, what do you expect ongoing expenses on a quarterly basis to be as you ramp up your focus in distribution?

Right know we're running this year I guess an approximately -- in Canadian dollars it is about C$75 million and our target is to get to C$150 million. So I would anticipate those expenses are fairly proportional to sales, so I would expect you'll see them -- as revenue doubles we would expect warehousing and shipping costs to more or less double, a little bit less than that.

Thank you.

Michael McCormick (ph), CGHC.

Good morning. I just want to get a little bit further clarification on the receivables allowance. Your receivables year-over-year grew 45 percent and you said the allowance increased by $400,000. I don't know if that's sequentially or year-over-year.

Year-over-year.

So then what is the allowance? Did the allowance grow 45 percent or did it grow much faster as a percentage?

Last year and was 3.9 percent of receivables and this year 4.6 percent of receivables.

Thank you very much. And the other is on the financing, the nonrecurring expenses in the SG&A, you had said in the comments it was about $0.5 million in the fourth quarter, but then in your detail you got up to about 900,000. So I just wanted to be clear. How much dollars in Q4 were nonrecurring kind of onetime charges?

All those expenses that I have talked about. In the last quarter it was 500,000 nonrecurring.

It was 500,000?

Yes.

Thank you very much.

Scott Van Winkle, Adams, Harkness.

With regard to your distribution business in Canada, what percentage of it is packaged foods versus perishable and organic produce and such?

I think it's probably about 60 percent perishable at the moment and 40 percent grocery. What we have said here is that we have essentially -- I'm sorry, 40 percent grocery. What we've said is that we've largely completed the perishable side of the business and we still have a couple moves here to make before we complete the grocery side. I anticipate ultimately the grocery side will be larger than the perishable side.

Is there a meaningful margin difference between the two?

There's not a huge difference. We're probably doing a little bit better right now on the fresh products. We're doing very well on both.

Thank you.

Well above our average margin rate.

Also a follow-up to make sure I got those numbers right that you gave on distribution. What percentage of sales is the distribution business currently?

We don't have a breakout specifically of that, but I can give you a rough idea. It's probably going to be on the order of between 15 and 20 percent this year.

Thank you.

Probably, I might add, that our segmentation includes packaged and distributed products. I can foresee in the relatively near future that we will be splitting that segmentation into those two categories.

(OPERATOR INSTRUCTIONS) John Fox (ph), Kansas City Capital.

With regard to Opta Foods, you have some tax loss carry tax loss carryforwards. If the business continues to grow the way it is how long before they are used up, do you think?

They are scheduled -- as you probably know, when you acquire a company in the US you can use those tax rates on a prescribed term and it takes probably -- we could use them more quickly if we were allowed to, but you have to spread it over ten years -- twelve years, sorry. We could use them far more quickly if we were allowed to.

Getting back to the tax rate for next year, effectively you had a tax rate of nine percent in 2003 with the big tax credit in the fourth quarter. If the business grew proportionally the way it did in 2003 and income coming from the various businesses, is it -- I'm trying to get a little bit of clarity or guidance. Are we looking at a nine percent effective tax rate again for next year?

No, definitely not. I would think it would not be less than 25.

Thank you very much.

(OPERATOR INSTRUCTIONS) Randy Stevens (ph).

Gentlemen, I have been listening to all the comments and I'm just a private investor and I just have a general question in hopes that you can give me an answer. Does management plan on adding or increasing their personal holdings of the stock?

If you look back over the last year, management has consistently increased their position their position. And I can't speak for any of the other members. I can tell you the other problem. Our problem is we're blacked out for virtually the whole year. Because we're so active in terms of doing stuff it's really hard to do anything to sell or by.

I'm excited about your company and I've made the move for you if you haven't.

Thank you very much.

Ronald Perelman, Renco Group.

Congratulations on a terrific year. You mentioned some warrants were going to be exercised because they are in the money. Approximately how many additional shares will be issued?

They're in the fully diluted number that's coming in, but I think we're at about 3.1 million warrants that are currently unexercised. Is that right? Yes. That brings in, as I said, something around $8 million.

So 3.1 million will be exercised --?

We assume that they will because they (multiple speakers) some of them come due at the end of this month and most of them at the end of September.

However, you also said I believe -- I just need confirmation -- that the figures that came in for the year 2003 included these on a fully diluted basis.

Correct.

Terrific. Thanks. Great job.

Keith Howlett, Desjardins Securities.

I wanted to know if the capital expenditure budget has been finalized for next year.

Yes it has.

What's the amount that you're anticipating?

Approximately $12 million. Approximately three of that is in maintenance CapEx.

Do you have the actual shares outstanding at quarter end?

Which quarter?

The fourth quarter.

Yes, 52.705096 (ph).

I won't forget that 96. And then just finally, and I will get the 10-K on Monday --

Yes you will.

So maybe I won't belabor this. Did you say the EBIT break down was roughly 10.5 and 2.5 between environmental and --?

That is exactly what we said, yes.

Great. Thanks.

(OPERATOR INSTRUCTIONS) It appears there are no further questions at this time. Mr. Kendall, I would like to turn the conference back over to you for any additional or closing remarks.

Again, thank you very much for attending our call. And as always, please feel free to call us and we always welcome you to any of our facilities. Thank you very much.

That does conclude today's teleconference. Thank you for your participation.