Sunopta Inc (STKL) 2004 Q2 法說會逐字稿

We would like to welcome you to the SunOpta Incorporated second quarter 2004 earnings conference call. As a reminder, today's call is being recorded. At this time, for opening remarks, I would like to turn the conference over to Mr. Jeremy Kendall, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to the second quarter 2004 investor call for SunOpta, Inc.. I am joined on this call today by Steve Bromley, our Executive Vice President and Chief Operating Officer, John Dietrich, Vice President and Chief Financial Officer, and Sergio Varela, our Vice President of Operations and Business Development.

Before we begin, I just want to reminder listeners, that except for the historical information, the 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.

First, please note that all financial results are reported in U.S. dollars. We will be filing our 10-Q for the period ending June 30, 2004, no later than the end of business today. We are very pleased to report record revenues and net earnings for the second quarter of 2004. This represents our 27th consecutive record quarter of revenue growth, compared to the same quarter in the previous year, and the first quarter in the Company's history with revenues in excess of $80 million. The first quarter of 2004 was the first quarter where our revenues exceeded $60 million. We are extremely pleased with this performance. Revenue for the quarter grew 54% to 80.9 million, as compared to 52.6 million in the same quarter in 2003. These results were led by a 56% increase in revenues within the Company's vertically integrated natural and organic food operations, driven by a combination of internal growth, and the acquisitions that were completed in late 2003 and the first 6 months of 2004.

For the 6 months ended June 30, 2004, revenues have increased 53%, to 143.5 million compared to 94.1 million in the first 6 months of the previous year. Our internal growth rate for the second quarter was 16%, spurred by strong growth in our oat fiber, food ingredients, and our natural and organic distribution businesses. Our acquisitions over the past year also contributed positively to our record revenue growth. We did experience some softness in sales of grains, especially soy and corn products due to the short crop in 2003, and delayed shipments, which we expect will be realized in the back half of the year. Plus, some softness in consumer package products. We expect this to be offset in the second half, as our new contracts with Vitasoy and A&P come into force, and we realize a number of private label opportunities throughout the business.

Earnings for the quarter were 6.024 million, or 11 cents per diluted common share, a 146% increase over the second quarter in 2003, when we earned 2,448,000 -- or 5 cents per diluted common share. The second quarter 2004 diluted earnings per share is based upon a weighted average of 56,314,112 common shares. I would like to point out that the 2004 second quarter results include the impact of a judgment of 1.852 million, after tax, in favor of SunOpta from the Federal court in Oregon, against the supplier for breach of contract, trade secrets, and punitive damages. This lawsuit has been ongoing since June 2002, and the judgment was rendered on June 29, 2004. We are pleased with the positive outcome. Excluding this judgment only, net earnings were 7 cents per diluted common share in the second quarter.

Net earnings for the first 6 months of 2004 increased by 121%, to 7.894 million, or 14 cents per diluted common share, compared to 3.575 million, or 8 cents per diluted common share, in the first half of 2003. While sales in the second quarter increased by 54%, gross margin increased 79%, and operating earnings increased 77% versus the same quarter last year. Of note in the quarter, is that our gross profit percentage for the quarter rose to a record level of 20.1%, an improving trend which began in fiscal 2001, when we achieved 13.8%. SG&A costs for the quarter were 11.1% of revenues, compared to 12.8% in the first quarter. We expect both of these trends to continue.

Also of note in the quarter, the Company achieved 3.919 million of cash flow from operations, after absorbing a 4.864 million increase in working capital, required to support our growing businesses. We have completed 4 acquisitions in our food operations year-to-date, all in support of our vertically integrated natural and organics food model. The acquisition of Distribue-Vie Fruits & Legumes Biologiques, Supreme Foods Limited, and Snapdragon Natural Foods, are key acquisitions for our Canadian, natural, and organic distribution model. The purchase of the General Mills Cedar Rapids, Iowa ,oat fiber facility is fundamental to our continued growth in this rapidly expanding category. I am happy to report that demand for oat fiber remains strong for the remainder of the year, and we are achieving record production levels.

With these new acquisitions, we continue to invest our surplus cash, and we have recently complete renegotiation of our bank lines, including both our long-term debt and working capital lines with our current lenders. in order to position the Company with the resources required for continued growth. This has provided us with approximately 50 million of available capital for investment in internal expansion projects and acquisitions. Investments of these funds into profitable internal growth projects and further acquisitions should serve to accelerate earnings further. Our balance sheet remains strong with 48.1 million in working capital, and a long-term debt-to-equity ratio of 0.18 to 1. Net worth per share climbed to $2.42 per outstanding common share, compared to $1.34 per outstanding common share in the same quarter in 2003.

There has been some concern in recent months from investors over the shortage of soybeans, due to the drought conditions in parts of the U.S. last year, and the resulting price increases of soybeans. I, again, wish to confirm that SunOpta did secure its soybean requirements for 2004 for all of its U.S. and Canadian ingredient requirements. The current outlook for the corn, soybean and sunflower crops is average to good for this fall, a significant improvement over last year. Soybean prices have fallen approximately 25% on the Chicago Board of Trade as we approach the new crop.

I would now like to introduce you to Steve Bromley, our Executive Vice President and Chief Operating Officer, who is going to review key business activities, our recent acquisitions and expansions, and the underlying strategies behind these activities.

Thank you very much, Jeremy. As previously reported, our oat fiber business has realized significant growth over the past number of months, due to its healthy and functional product attributes. In order to fulfill our customers' needs, we completed a second expansion in the second quarter at our Cambridge, Minnesota, fiber facility, increasing capacity by approximately 65% at that facility, on an annualized basis. In April, 2004, we completed the acquisition of a fiber processing facility located in Cedar Rapids, Iowa, from General Mills Bakery and Foodservice, the only other known oat fiber plant in North America. Historically, this facility was operated on a part-time basis, to meet primarily internal demands, and then shut down for a period of time. Since acquisition, we have been operating this facility around the clock at capacity, and have realized significant improvements in productivity, operating costs, and product quality. As a result of this acquisition, we have increased our oat fiber processing capacity by approximately 90% versus 1 year ago.

We continue to evaluate and implement a number of opportunities to drive processing efficiencies, and expanded capacity across our 3 fiber operations. Oat fiber has found a home in many new products, due to a number of factors, including its functional capabilities when incorporated in a food product, its low level of soluble carbohydrates, and because of its high fiber content, so important to the digestive tract. Our fiber business has grown to annualized revenues of approximately $50 million. This represents significant growth, and we believe this could grow further in the coming years, as we pursue a number of process improvements and cost reduction opportunities.

During the second quarter, we closed our brands and germ processing facility, located in St. Thomas, Ontario, and transferred the operations to a new expanded operation located within our Cambridge, Minnesota, facility. The new operations have been designed to increase through-put, improve product quality, and reduce operating costs. While progress has been made, we did encounter a number of start-up delays during the second quarter. We do believe the bulk of these issues are now behind us, and the new operation should meet expectation during the third quarter. Our second-quarter earnings include planned one-time cost before tax of $216,000 related to the closure and rationalization of the St. Thomas facility, over and above the impact of the operating issues noted previously.

Approximately 21 months ago, we set out to create the first truly national natural and organic foods distributor in Canada, integrated from produce, to groceries, to dairy, dairy alternatives, and specialty foods. During the second quarter and in support of our stated objective, we acquired the outstanding shares of Supreme Foods Limited. Supreme is a leading distributor of certified organic, natural, kosher, and specialty products across Canada, headquartered in Toronto. Supreme has a number of exclusive sourcing and supply arrangements, which is its strength and focus in the grocery business.

On June 1, we acquired the business and inventory of Snapdragon Natural Foods, Inc. Snapdragon distributes natural and organic grocery and frozen products to both mass market and natural food retailers throughout Canada. The combination of these businesses, which are primarily focused in Central and Eastern Canada, with our existing operations, has created a solid, national grocery, frozen, and fresh foods platform. We have recently consolidated our Montreal warehouses and also entered into a lease for a new and expanded facility for our Toronto-based distribution operations. Our new Toronto warehouse will be a state-of-the-art, environmentally friendly facility initially encompassing 135,000 square feet, expanding to 185,000 square feet as demand requires, and is expected to open in the first quarter of 2005.

We continue to dedicate significant effort to maximizing our value to our customers and integrating our distribution operations. We are confident that numerous growth opportunities remain in this sector. With these acquisitions, and our own internal development, we now the largest natural and organic foods distributor in Canada. We have established the foundation of our national platform, and can now offer an integrated product line from operations across Canada.

We were very pleased to announce a major contract with Vitasoy during the second quarter, for the production of soy concentrate and integrated aseptic packaging. This contract will commence during the third quarter, and will add $7 million in incremental annualized revenues. We are currently completing the installation and commissioning of a third Tetra Pak quart filler at our aseptic packaging facility in order to meet contract demand. We have also commenced an expansion of warehousing facilities at this plant, and will installing automated palletizing equipment as part of this expansion. When combined with a number of processing modifications, we are confident that we will be able to produce the required volumes, via our Alexandria production facilities.

The A&P contract for private label refrigerated soymilk has now commenced, adding to our soy concentrate production. We have also been growing our shipments of soy powder, particularly to Korea, for both soymilk and baby food products. During the second quarter, we were pleased to complete HASP (ph) certification for the 3 Kettle Valley fruit bar processing and packaging facilities. Preparation for this certification had been ongoing for some time. This certification is key to realizing a number of exciting private label opportunities. Now that the certification is complete, we expect to realize a number of these opportunities in the second half of 2004. We are in the process of installing new equipment within our convenience foods operations, which will enhance our ability to bring a number of exciting products to the market, utilizing vertically integrated inputs.

With the continued focus on healthy eating, and the need to address obesity and related diseases throughout North America, we continue to believe that the opportunity exists to develop a healthy convenience foods business, with annual revenues of $50 million, utilizing vertically integrated healthy inputs, when appropriate, from across our company. Our sunflower operations, that were acquired in the fall of 2003, performed very well during the second quarter. Our forward contracting for this year's crop has been very strong, and we believe we will continue to experience solid growth in this business. The worldwide supply of sunflower is at a premium, and we will be pursuing further avenues to expand our presence in this area.

In hand with the continued growth and activity in our fiber ingredients distribution and healthy convenience food businesses, we continue to dedicate significant resource over the past quarter to a number of internal improvement projects, including our ongoing efforts to improve soy processing yields, grain shipping and segregation abilities, improved fiber processing techniques, and new product innovations. We are pleased with our progress to date. Our organic sweetener capacity expansion has experienced a number of start-up delays and processing issues over the first 6 months, but is nearing completion and should be fully commissioned by the end of the third quarter. The sweeteners produced are made from oats, corn, and rice and are added to soymilk and other natural and organic food products. Unfortunately, the installation of this equipment impacted results in the quarter, but we are confident that the bulk of these issues are now behind us.

The second-quarter was a busy one for Opta Minerals as well. The Group realized a 35% increase versus -- 35% increase in revenues, versus the same quarter in 2003. These results reflect increased activity levels in North America, versus the prior year, plus the impact of a number of new product initiatives, which have come to fruition. The Group expects to have the Baltimore, Maryland, abrasives facility commissioned during the third quarter. Build-out of this facility has been delayed pending resolution on a number of business and regulatory issues, which have now been cleared. The expansion of abrasive processing capabilities in Hardeeville, South Carolina, is progressing well, further strengthening the groups ability to service the North American shipbuilding and bridge cleaning industries.

At the start of the second quarter, the Group expanded its marketing expertise with the acquisition from operating cash flow within the Group, of Distribution A&L, a Quebec-based distributor of specialty abrasives and related products. This company focuses on smaller markets, not previously serviced by the Group, by its network of selling professionals, focused on the industrial, automotive repair, and pool filtration industries. The skills contained within this operation are key, as the Group continues to strategically expand products and sales capabilities. This business has performed above expectations since acquisition, and we are pleased with progress to date. While we acknowledge that the environmental business is not core to our primary purpose, it is a consistently profitable business with a strong management team. We continue to evaluate a number of strategic alternatives for the Group.

The Stake Tech Steam Explosion Group continues to gather momentum and, as previously announced, have entered into a series of contracts with Abengoa BioEnergy R&D, Inc., to provide research and development, lab services, engineering and testing related to the development and commercialization of processes and technologies to be utilized in the conversion of bio-mass for ethanol production. Upon completion, this process should result in Stake Tech Steam Explosion equipment being provided for 2 ethanol fuel facilities, located in Nebraska and Spain. These contracts envision the application of steam explosion technology to process agricultural waste into a state where enzymes can access the components of cellulose and hemi-cellulose, allowing their conversion to glucose and then conventionally fermenting to ethanol. We are pleased to be part of this novel solution.

We have also been quite active over the last quarter in testing the application of Steam Explosion technology, for the production of various food fibers, including oat fiber. We believe these efforts may very well result in significant cost and environmental improvements to our fiber process and other alternative fibers. We are currently in the process of implementing an Oracle ERP System company wide, which will improve access to timely information, and facilitate the addition of new acquisitions on to our integrated platform. Our rollout of the first phase of the financials is proceeding, and we remain focused on this activity.

We are also in the process of documenting and testing all of our internal controls, as required by the ever-growing Sarbanes-Oxley requirements. This is a significant undertaking, but we remain committed and are confident we are taking the necessary steps to meet the requirements of the upcoming SOX 404 certification.

Thank you, Steve. I must admit that I have been concerned with the price of our shares. However, when I compare our performance with other companies in our sector, our price change is quite average. I spend a reasonable amount of time visiting existing and prospective shareholders to bring them up to date, and to introduce them to the Company. I find shareholders very supportive of our vision, and of our performance to date. I am sure that if we continue to achieve our projected growth rate, in both revenue and net earnings, that our stock price will reflect these results.

We continue to review many acquisition opportunities, and have developed a thorough and sophisticated approach to due diligence, and the subsequent integration processes. We remain focused on integrating the acquisitions to date, with an eye on process efficiency and shareholder value. We have adopted a clear statement of our values which govern the way that we run our business, treat our customers, employees, suppliers, and support our community. I know, too, that we are privileged to manage a company whose values are aligned with our own.

We would now be very pleased to answer any questions that you may have.

Thank you, gentlemen. The question-and-answer session will be conducted electronically. If you would like to ask a question, please press the star key, followed by the digit 1, on your telephone. Please make sure if you are using a speakerphone, to turn off your mute function to allow your signal to reach our equipment. Once again, if you would like to ask a question, please press star, 1, now. First question coming from Peter Brueger with Global Investment Capital.

Good morning, gentlemen. Congratulations on an excellent quarter.

thank you very much, Peter.

I am just curious. The delays in start-up cost in the sweetener business, how much did that cost you in earnings per share, please?

It was approximately $300,000 --

Pretax.

Pretax that -- that was an expense on that project.

Okay. Thank you.

You are welcome.

Next up, with Sidoti, is Mark Chekanow.

Good morning. Oat fiber seems to be performing very well as you indicated, but in the media, there's obviously lots of different opinions of where low carb products, and I know that is a piece of that, is headed. Can you talk a little bit about the percentage of your oat fiber sales that are really to, kind of, pure low carb customers.

I don't know that I can give you an exact figure on that, Mark, but I guess probably somewhere in the order of 25% to 30%. And, of course, remember that, although it is also being added as an ingredient for the purpose of reducing carbohydrates, at the same time it is also adding fiber, which is so key to diets today, as well as a number of other functional advantages that it brings to the -- to the product. So it is a bit hard to segment exactly what -- what that is, but I think the other side of the equation is that, as the low carb market begins to slow, in terms of its growth rate, we believe that oat fiber will stay in these products, because of these other product advantages.

Okay. And looking at the internal growth rate, 16%. Would it be correct to assume that, I guess, as -- in the second half of the year, as some of your recent acquisitions and some of the higher growth areas, especially in Canada, as those become internal, would we see a resumption in the 20% core growth rate?

We do expect the internal growth rate to improve. You know, you've got the -- the big expansion in oat fibers coming even further in the second half. We have got the Vitasoy contracts, the A&P contracts, that we've talked about. We have the steam explosion, we've got results of St. Thomas, and the expanded brand operation, we have got the contracts that we referred to in the healthy convenience area. So all of those are internal projects, which should serve to improve that growth rate.

Is there any update to your -- do you want to comment on revenue guidance and --

No, we are leaving revenue guidance there. Obviously if we are to achieve our -- our 300 million guidance, we must achieve, you know, 80 million per quarter for the next 2 quarters. So I guess, you should expect that.

Okay. Thank you.

Next up is Daniel Ferris with Federated Investors.

Good morning, gentlemen.

Good morning.

Congratulations on a very good quarter. Two questions. In addition to the top line guidance, and I may have missed this, is there guidance further down the P&L, or for cash flow for the year.

We don't provide any guidance on earnings.

Okay. Yeah, I -- the second question is, as -- sort of a 30,000-foot question. As better for you, and organic continues to gain traction, both in Canada and particularly in the United States, what is the risk of the distribution of those products moving from a specialized channel to the main stream, perhaps segregated but within the mainstream channel, and getting into more and more stores, and not taking some of the the wind from your sails in that business.

I will have Steve Bromley answer that question.

Dan, it's Steve. Essentially there is a continual pendulum, if you will, as some of these products get to a size, often retailers will want to go direct on the product. There is always a continued flow of new products coming through the market that we're instrumental in distributing and bringing to the market. Obviously we try and, you know, be as much value as we can to mass retailers, but at some point in time, the fact of the matter is, they do go direct with a few of these things. Where we can continue to grow is in -- is in, you know, be sure that the new products get focus, and come to the market, and we leverage the national platform that we have to take them. So there is always a bit of a -- I'll call it a swing, where, you know, some products, you know, go direct to mass, and others that were going direct, come back us to because we are better off dealing with them. It is always moving around.

A lot of these good few products, of course, we can produce them and go direct ourselves. So it can go through our distribution or alternatively, it can be a private-label program into a number of the direct to the retailers.

Do you currently doing that with -- you know --

A & P would be an example of one, right now. Publix in Florida would be an example of another where we produce the soymilk for them, and there are a number of other chains in the healthy convenience side, you know, we produced for Amway, for example, a fruit bar line, that is now just -- this half is now going into Japan where it has been going only in North America. And so there are numerous examples.

Is there -- just back to circle back to the original question, though, is there sort -- you used the metaphor of a pendulum, is there -- is it perhaps to suggest also there is a life cycle to specialty distribution, before it becomes absorbed into mainstream? Or is that not right? And if it is, though, are you looking forward to that -- to that challenge when -- when some of your best things --

I don't think that we need to be concerned about that. The advantage from us, in terms of our distribution is that we do carry a very, very large number of organic and natural products, and so -- and we also provide a complete range, so that it is a one-stop shopping kind of thing. I mean, even if I was doing very nicely, and forecasting 2 billion in revenue in this sector. I think we have a long way to go in terms of our growth.

Thank you, gentlemen.

You are welcome.

Take care.

With MJSK, Chris Krueger.

Good morning, guys.

Hi, Chris.

I just have a couple of questions. Last quarter, you indicated that a large customer for -- for your soymilk, had inventory issues that resulted in low activity there. How did that do in the second quarter?

That's been worked through, and things have picked up nicely.

Okay. I've heard of talk about soy fiber as an emerging market. Can you comment on that?

We have been -- as Steve mentioned, we have been testing and researching the use of steam explosion to produce oat fiber and other fibers. Soy fiber is one of those. The objective of the exercise is to be able to substantially reduce the cost of producing these fibers, and do it in a much more environmentally positive way. To -- at this point in time we have been able, in our labs now, to match the product qualities of both the oat fiber and soy fiber, to mention 2, the fibers we are looking at. And we are now in the process of installing some surplus equipment which we had around our various facilities, so that we can produce reasonable quantities of this product to put out into the field for actual product testing in different products, and in our own kitchens and labs throughout the U.S.

Okay. Last week, news came out in Iowa, that there is a competitor that potentially wants to construct an oat fiber facility in Cedar Rapids. Any initial comments on that issue?

I will let Steve answer that one.

Chris, the competitor is Rettenmayer, who are the -- sort of largest players in Europe in this type of oat fiber. They have competed in the North American market for a number of years, both shipping from Europe, and in processing, and they do have a powdered cellulose plant, which is their head office here in the U.S., which is in Michigan. We were aware that they were looking at facilities in -- in the Iowa area. You know, they have indicated they are going to build 150,000-square-foot facility for $23 million. We really can't reconcile those numbers, and they have also indicated that they are proceeding -- and this is only from press releases. We haven't spoken with them.

Their willingness to proceed is based on receiving federal, state, and local funding, depending on where you read, anywhere from 4 to $8 million. We've also been talking to those same local authorities for potential funding to support training, and that sort of thing. At the end of the day, if they do build the plant, our take would be that it's probably 18 months at the earliest, before they would be into the market. We believe that we will be the low-cost producer. We believe that most of the customers will be very aware, and utilizing our fiber. We are also continuing to work on reducing our costs, both with our own internal processes and also with our steam explosion technology. So, while we don't, ever -- you don't ever welcome more people into the market. The market is growing. We are still looking at expansion opportunities. We will continue to do that. We may want to go overseas, as well. So, we think that we will have a -- you know, we'll have a good position here, and, you know, with the barriers to entry that are up, we will be able to compete very well against them, and we will continue to dedicate time and resources to making sure that we are most cost effective.

All right. That's all I've got. Thanks.

Thanks, Chris

Now with Kansas City Capital, Jon Braatz.

Good morning, guys. A couple of questions. Could you refresh, Jeremy, refresh my memory as to the potential, let's say near-term contribution from steam technology and the facilities in -- in Europe, Nebraska and Spain, and so on?

The current contracts that we are working on today, include a $1.3 million contract in our labs, which includes a purchase and construction, or building of some small-scale equipment, as well as a significant amount of testing. On top of that, there are 2 engineering contracts, 1 for a plant in Spain, which we have now completed that engineering, and 1 for a plant in Nebraska, which will be completed by the end of September. Following that, I expect that if they then proceed on, which we are hopeful, and expect that they will, there will then be equipment contracts in Spain and -- and/or in Nebraska. And each of those will probably be in the order of $10 million each.

Okay. So $20 million.

Yeah. And it is possible that they may proceed with one at a time, or they may do both. You know, we don't know the answer to that until they -- but they both -- both projects involve, in the case of the U.S., a significant grant from the DOE. And in the case of Spain, some significant tax concessions from the European Common Market. So, there is a major commitment here to proceed, and significant incentive.

Okay. Is -- at the earliest then, when might some of that begin hitting the P&L?

Well, of course, the contracts -- the first contracts are --

Right, right.

Those are hitting --

I mean the equipment contract.

The equipment contracts would start hitting -- assuming they come in the last quarter, they will start in the last quarter. It will take approximately 10 months to produce and deliver the project in Spain, and 12 months to deliver the contract in Spain -- and York, York is about 10 months, Spain is 12 months.

Just curious, when you give out your revenue guidance, are you making any assumption with regard to that piece of business?

No.

Okay. Okay. Secondly, were there any bulk -- what was bulk grain sales revenue like in the quarter? You know, the commodity piece of your soybean sales to Japan, and so on?

I was just trying -- I am not sure we provide that information.

How about relative to last year then?

Okay, relative to last year, it was down a little bit. You know what we have done this time, as you will note -- or you will see in the 10-Q, is that we have further segmented our sales, and separated out the distribution business. So you will get a better picture of our overall business.

Okay. Okay. All right, Jeremy.

They were --

Thank you.

Prices would have been up, but volumes down.

Thank you.

Okay

Next up is Scott Van Winkle with Adams Harkness.

Hi, guys. Can you help me out, here. I am looking at the numbers, and for some reason, I am coming up with you earning 8 cents before the one-time gain.

I think we can explain that.

John, I think you -- or sorry, Scott, I apologize. I think you are backing out the entire "other income" line, getting to 8 cents, is that correct?

Yes.

Okay. The "other income" line includes 2 things. It includes the gain on the lawsuit, and it also includes the $216,000 one-time hit on St. Thomas.

Okay.

That's a net number on that line. So if you added 200 to the pretax value of the gain.

Okay.

I think you will round just under 7 and a half.

I am just trying to help you out. I thought it was a great quarter.

We appreciate your help, but we've got to be honest, too. [ LAUGHTER ]

Okay. And are you willing to -- and granted I know it is not done yet, are you willing to give a forecast for what you think the organic soybean market is going to look like this year? I am seeing people saying, you know, soybeans in general, availability up 20, 25% over last year. Is that the same type of thing you are talking about on the organic side?

Yes, roughly that's correct. But you know, the soybean business, or crop, always depends on August. And so it is important that there be reasonable amount of heat in the areas where these soybeans are growing. There is lots of moisture this year, which was not the case last year. If we get decent heat in August, then we will get extremely good crops.

Okay, well most of my questions have been answered. Thank you very much.

You are welcome, Scott. Thank you.

Kathleen Kent with BMO Nesbitt Burns.

Good morning.

Good morning.

Could you tell me the -- you gave us the after-tax, the 1.85 million for the settlement. What is the pretax?

30%.

We are using a 30% tax rate for -- on our earnings.

Oh, okay. So then can you just give us a bit more detail on decline on package side, and what happened there, the decline in margins? Because did you allocate that gain to that division? When you broke up the segmented results?

That is correct, Kathleen, because that's where it occurred.

Okay. So if I back that out, then we saw a decline in margins. I was wondering what that was attributable to.

Just basically -- go ahead, John.

Yeah, it is based on, just the mix of our business primarily, and we are down a little bit on some of our higher-margin soy-based, and higher margin consumer packaged products.

Not real material, but it is down.

Okay. Also, can you give me your depreciation and amortization for the quarter?

Yep.

You can expect to see the package things -- margins improve, Kathleen, as these new contracts come into force in the second half.

It's 1.8 million.

1.8 million.

Okay.

Amortization?

Yes, for the 3 months.

That's for the quarter, right?

1.8 million?

1.824 for the quarter.

And can you tell me the number of shares that you ended the quarter with?

Yeah, I sure can.

53 million 481.

Okay. And also you sold $5 million in assets. Was there a gain on the sale of those assets?

$50,000.

But, it was offset by a number -- essentially there was a $50,000 gain, offset by costs of about $50,000 for us to move and ready the facility. So it was a wash.

Oh, okay.

Kathleen, that was the Bedford, the -- the former Opta Foods office in Bedford, Massachusetts, that we had the option agreement on.

Oh, okay. Can you tell me -- I know we will see without the cash flow statement, what your CapEx for the quarter was?

Yep. I am going to say 9 million 200. -- oh, pardon me.

For the quarter.

5,400,000. 9-2 for the year.

What was the total you spent on acquisition?

21 million, 192.

Lastly, just clarification. The 16% growth, organic growth, is that total sales or food sales?

Just so how we do that -- I will give you an example, using Supreme. We use actuals for this year, and then we build into our 2003 base, the Supreme's actual sales for May and June. They are comparable there.

Okay. That also includes the non-food?

Yes, it does. Yes, it does. On the whole base.

Okay. That's all I have, thank you.

You are welcome. Thank you.

Next up is Keith Howlett with Desjardin Securities.

Yes, I just want to confirm a few things. The tax rate for the year, is 30% still the number?

Correct.

What are you expecting for a CapEx for the full year?

18 million.

Yeah, 18 million to 18 and a half.

Great. And just on the package food segments, it would be correct that the convenience foods is up, but there are other things that are down, is that correct?

Correct.

Yes, that would be correct.

Okay. And the other things, is the soymilk -- but the packaged soymilk, aseptic soymilk, was also up?

With certain customers it was up, and others, it was down.

So would that be --

As we've said earlier, Keith, I think that is where we expect to see the pickup in the second half.

With soy coming up.

I see. Okay. Great, thanks.

You are welcome.

Next up with LOM, Russell Stanley.

Hi, thanks. Most of my questions have been answered, but just one relating to the judgment award in your favor. Has the other party filed an appeal? Is that still ongoing, or is that resolved, as far as you see?

No, the other party has not yet filed an appeal. It has probably about 45 days, I think, to do that.

If they choose to do so.

If they choose to do so. And so it's -- it begins to get rather expensive, to do that from this point on, and there -- so we will see what happens. We don't know whether that's going to happen or whether, you know, we will just enter into discussions.

Great, thank you.

You are welcome.

There are 2 questions remaining. Once again, if you would like to ask a question, please press star, 1, now. Andrew Danzig with Stadium Capital Management.

Hey, guys. Just wondering, on the 16% internal growth, the facility that you guys bought from General Mills, I know you were looking at how to account for that internal and external growth. Is that included in internal growth for the quarter?

Yes, it is.

Okay. So,16% includes the General Mills facilities, internal?

Yeah, but remember, it was only for part of the quarter.

And how much did that contribute in the quarter then?

We don't disclose that.

Okay, but it had annual revenues of basically about 10 million, I guess?

Yeah, but the start up at the time, I mean, this operation has -- was at much lower levels at that point.

Is there any seasonality in that -- in that facility?

No, none to speak of, no.

Okay, gotcha. And with the other income, the 200 -- or the 2.6 million dollar gain on settlement basically, on a pretax basis, that's included in the Food Group. The $216,000, you know, charges from the St. Thomas facility, are those also allocated to the Food Group, or are those allocated to corporate?

They're in the Ingredients Group.

They're in the Ingredients Group? Okay, great, thanks a lot guys.

Also with Stadium Capital, Alex Sever.

Hi, good morning. I was just trying to understand the EPS growth a little bit better. In 2003, in the fourth quarter, I think you did 3 acquisitions, Sigco, Pro Organics, and Dakota Gourmet, which I believe had an aggregate run rate, in revenues, of about 45 million or so. Is that correct, plus or minus?

In that ballpark, yeah.

Okay. So the -- obviously those were not in the Q2 '03 numbers.

Correct.

Is there a way for us to pro forma the EPS of 5 cents for those acquisitions? Because they are included in Q2 '04.

He is wondering how he can pro forma those numbers, and I think [inaudible] -- and the best way to do it is -- tonight when the 10-Q comes out, the pro forma is in there, Alan.

Yeah, they'll be in the pro formas. I think that the best way --

So would it be safe to say that the -- effectively the pro forma EPS for the second quarter of '03, would be higher than 5 cents, if you pro forma'd that back into '03?

I don't know if --

If those were profitable businesses, which I think they were?

We are just referencing a file here. Excuse us for a second. Yes, that would be safe to say.

Okay. And then I would compare that to, -- whatever that number is, to effectively 7 cents for this quarter, absent the litigation settlement?

Yes.

Okay. And will we be able to derive that from the 10-Q?

I believe you will. There is a pro forma note in the Q.

Okay. Okay. Great.

You are welcome.

Thank you.

And a follow-up question from Sidoti's Mark Chekanow.

Is there any way for you to quantify, or maybe give a little bit more detail on the private label contracts you expect for Kettle Valley in the second half of the year. Can you talk about the customers, or the relative size here?

Mark, we are not at liberty to give you the names of the people, but there are some contracts for both fruit bars, similar to what we produce today, and also utilizing our technology to produce other healthy fruit-based snack-type products, that aren't really in bars.

The customers are all household names.

They are fairly large customers and we are bound by confidentiality.

Any way you can comment on the size vis a vis the agreements?

Well, some of them are of a decent size, 5 to 10 million bars per year type orders, that can be anywhere from 20 to 30 cents a bar, so significant revenues for those sizes of operations. A couple of the other products are, you know, will be tested in the fall in retail and depending on how those tests go, could be, you know quite large if fully rolled out across the country.

Much larger.

Thank you.

You are welcome.

Gentlemen, there are no further questions in our queue at this time. I will turn the conference back over to you for any additional or closing remarks.

Thank you very much, and I appreciate everyone for attending. And as always, I would like to mention that you are welcome to visit our facilities, and we will try to keep you as informed as we can. Again, thank you very much. Bye-bye.

That concludes today's conference call. Thank you everyone for your participation.