Sunopta Inc (STKL) 2004 Q3 法說會逐字稿

Good day, everyone. Welcome to the SunOpta, Inc. third-quarter 2004 earning conference call. Today's call is being recorded. At this time I would like to turn the conference over to Mr. Jeremy Kendall, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to the third-quarter 2004 investor call for SunOpta, Inc.. I'm joined on this call by Steve Bromley our Executive Vice President and Chief Operating Officer; John Dietrich, Vice President and Chief Finance Officer; Sergio Varela, our Vice President of Operations and Business Development; and Ben Chhiba our Vice President of Corporate Counsel.

Before we begin, I just want to remind listeners that, expect 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 reported in U.S. dollars under U.S. GAAP. We'll be filing our 10-Q for the period (technical difficulties) ending September 30, 2004 by no later than the end of business (technical difficulties) today. We are very pleased to report record revenues and net earnings for the third quarter of 2004. This represents our 28th consecutive record quarter of revenue growth compared to the same quarter in the previous year and the second consecutive quarter with revenues in excess of $80 million. The first quarter of 2004 was the first quarter when our revenues exceeded $60 million. We're very pleased with this revenue growth. Revenue for the third quarter grew 59%, to 80.1 million as compared to 50.4 million in the same quarter of 2003. These results were led by a 63% increase in revenues within the Company's vertically integrated natural and organic food operations.

Driven by a combination of internal growth and the acquisitions completed in late 2003, and in the first nine months of 2004. For the nine months ended September 30, 2004, revenues have increased 55% to 223.6 million compared to 144.4 million in the first nine months of last year. Our internal revenue growth rate was 12% in the third quarter. Excluding grain revenues which were affected by the poor crop in 2003, our internal revenue growth rate was 18% in the third quarter. Spurred by strong growth in oat fiber, food ingredients, sunflower businesses. Our grain revenues, impacted by the poor crop in 2003 decreased by 20% year-to-date. Our acquisitions completed over the past (technical difficulties) year also contributed positively to our record revenue growth. Earnings for the quarter were 2,767,000 or 5 cents per diluted common share, a 26% increase (technical difficulties) over the third quarter in 2003 when we earned 2 million 195, or 4 cents per common diluted share. These earnings reflect an increase in the effective income tax rate from 15% in 2003 to 30% in the third quarter of 2004, primarily as a result of the recognition of certain tax loss carried forward in 2003. So on a pretax basis earnings increased 52% in the third quarter.

The third quarter 2004 diluted earnings per share is based on a weighted average of 54,458,745 common shares. During the third quarter, members of the Bronfman family exercised 2,250,000 warrants to increase their combined holding held in a number of accounts to 19.8% of the issued common shares. I would like to personally acknowledge the tremendous support that we've received from this wonderful family.

Net earnings for the first nine months of 2004 increased by 85% to 10.7 million or 20 cents per diluted common share compared to 5.8 million or 12 cents per diluted common share in the first nine months of 2003. Pretax earnings increased 104% for the comparable period. On October 17.2004 we preannounced expected revenues and net earnings and identified a number of factors that had influenced the results in the third quarter. Once it was realized that these factors would have a significant impact on our third-quarter earnings, we issued an announcement to provide timely disclosure of these issues. I would like to take a moment to discuss the factors that we identified as affecting our earnings. Sarbanes Oxley. Many of you will have contact with other firms going through this process. This is an enormously time consuming and expensive exercise, requiring full documentation of all the Company's internal controls and related processes and procedures, with subsequent audits by ourselves and auditors. Direct costs are substantial with our own dedicated staff supported by outside consultants. However, indirect costs are probably more significant, as the process ties up a huge part of our financial, legal, and operations teams. It's expected that many companies will not be able to complete the (indiscernible) requirements by year end. We intend to do everything in our power and expect to meet these (technical difficulties). Hopefully this exercise will provide long-term (technical difficulties) benefits for the Company. We will continue to incur these costs in the fourth quarter but expect them to decrease significantly thereafter.

Also in the third quarter, we wrote off certain fees related to recent changes to our banking arrangements with our lenders. As a result of these revised arrangements, we have now unused lines of credit of approximately $40 million and a significant cash balance providing available funds in excess of $50 million. These funds will be used to further our growth, while at the same time maintaining a very manageable debt-to-equity ratio.

We incurred certain period costs related to the upcoming underwriting of Opta Minerals, Inc., our environmental division. These costs were largely attributable to the stand-alone audit of the historical financial statements of this group as required for the initial public offering. The banking and audit fees are essentially nonrecurring, one time cost. We also experienced very poor quality and reduced deliveries on contracts for soybean supply in the last quarter and had the source replacement soybeans at very high cost to meet our contractual obligations to our customers. Thankfully, we're now into the new crop in the fourth quarter and this crop appears to be much better than last year's in terms of higher quality end yields.

The last issue that we had in the third quarter related to integration costs within our distribution group. Quite frankly, we rushed the integration of our central Canadian operations without sufficient planning and suffered as a result. This situation has been addressed, and results are improving in the fourth quarter. I'm not excusing our shortfall here, but I do want to recognize that there are always costs when integrating; and these costs represent an investment in the future profitability of the Company. We're a growth company, and it is in our nature to move quickly, in this case a little too quickly.

While sales in the third quarter increased by 59%, gross profit increased by 72% versus the same quarter in 2003. Gross margin as a percentage of revenues in the third quarter was 19.3% versus 17.8% in the prior year. Excluding the impact of the poor crop and integration issues, gross margins would have exceeded 20% of revenues in the quarter. Also of note in the quarter, the Company achieved 7.1 million of cash flow from operations, a significant increase versus the same period in the prior year. We completed two further acquisitions in our food operations during the third quarter, both in support of our vertically integrated natural and organic foods business. These are both exciting additions to the Company, and we'll discuss these further in a few moments.

Our balance sheet remains strong with 13.4 million in cash, 65 million in working capital, a current ratio of 2.93 to 1, and a long-term debt-to-equity ratio to 0.26 to 1. Net worth per share climbed to $2.51 per outstanding common share from $2.20 per outstanding common share in the same quarter in 2003.

I'd now like to introduce you to Steve Bromley, our Executive VP 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 Jeremy mentioned, during the quarter, we completed two acquisitions in support of our vertically integrated natural and organic foods business. In September, we acquired Kofman-Barenholtz Foods, Limited of Toronto, a major distributor of Kosher and specialty grocery products across Canada. Kofman-Barenholtz's focus and strength in these markets further strengthens SunOpta natural organic and specialty foods distribution network and makes us the largest Kosher foods distributor in Canada, distributing over 5,000 . The market for Kosher products is growing with the widening recognition of the quality of these products, many of which are also organically certified. Also during the quarter, we purchased 50.1% of Organic Ingredients, Inc. of Aptos, California. Organic Ingredients is a leader in the sourcing of organic ingredients from around the world, many on an exclusive basis, such as organic cranberries from Russia, organic pomegranate juice from Turkey, organic juices from Mexico, et cetera. Organic Ingredients both sells these ingredients directly to customers and has the ingredients further processed and cold packed for a number of private label customers. The addition of this operation significantly expands SunOpta's ability to supply integrated solutions to the organic food industry, an area where we will continue to focus and bring value from ingredients through private label. We believe that the market for private label organic products will experience significant growth and the acquisition of Organic Ingredients is a key part of our strategic expansion in this market.

A recent article published in the "Private Label Buyer" noted that the term "organic" on the label gives as much or more leverage than a nationally recognized brand name, thus driving the demand for private label organic products. We believe our vertically integrated capabilities are well positioned to meet this demand.

The new corn, soybean, and sunflower crops are average to good this fall, a significant improvement over last year. We are having a particularly good harvest for sunflowers, growing primarily in Kansas, while most of our U.S. competition is believed to experienced lower yields due to wet weather in the northern part of U.S. and Canada. An improved crop bodes well for our future.

Within our grains operations, we're in the process of completing an upgrade at our Hope, Minnesota grains processing facility to improve both our shipping and segregation capabilities; and we're also expanding our warehousing capabilities to meet increased demand at our sunflower operations in Breckenridge, Minnesota. We also have launched a joint venture in Hungary to sell seeds, contract grow and process sunflowers for sale to the European market. The first crop of this is joint venture is currently being harvested and appears to be quite good.

During the quarter, we completed staffing at the Cedar Rapids oat fiber facility that was purchased in April of 2004 and continued to focus on a series of cost reduction and process improvement opportunities at this location. In hand with our exists fiber operations in Louisville, Kentucky and Cambridge, Minnesota, we are and remain very pleased with our performance in the fiber sector and its contribution to our company as a whole. There is no question that demand for low-carb products has leveled off. During the latter part of the quarter, a number of customers using our fiber in reported low-carb applications, reported the slowing in product uptake and reduced their requirements for fiber accordingly. While an impact to our business, low-carb opportunities represent less than 20% of our fiber volume. We believe that low-carb products will remain a key option as part of the healthy living category. We further believe that fiber-enriched foods will continue to grow and, in fact, represent one of the next big trends in health of eating.

The recently released Dietary Guidelines for 2005, as presented by the USDA and the US Department of Health and Human Services, advised that efforts are warranted to promote increased dietary intakes of fiber by children and adults. As a result, we believe that fiber's role in healthy foods designed to address obesity issues cannot with understated. We believe we are well positioned as a fiber solutions provider to meet the demand that the continued addition of fiber to the diet will create.

During the quarter, we realized significant progress in addressing the expansion of our brands and germ-processing (ph) operation, which was transferred from St. Thomas, Ontario to our Cambridge, Minnesota facility. The construction and installation of equipment is now complete, and we realized steady monthly throughput gains in this plant during the quarter. We're close to resolving our order backlog and are now prepared to embark on an extensive business-building campaign. We believe our brands and germs offering also fits very well with increased fiber intake levels, and the continued trends in healthy eating.

Our organic sweetener capacity expansion was successfully completed during the third quarter, and we're now realizing projected throughput targets. The sweeteners produced are made from oat, corn, and rice which are added to soy milk and other natural and organic food products.

We have recently begun construction of facilities at our Alexandria ingredients plant that will process and dry a byproduct resulting from the production of soy concentrates. Currently, this protein-rich byproduct is either land-applied or delivered to local farms for feed purposes at a considerable cost to the Company. This investment will provide for the production a valuable organic dried product to be initially utilized for feed-grade applications, thus turning a cost into a valuable profit-generating activity. We expect this project to come online in the first quarter of 2005.

Toward the end of the quarter, we commenced processing and packaging accepted soy products under our previously announced agreement with a new customer; and volumes have now ramped to projected levels. Volume demand from one of our key customers did not reach expectation in the quarter due to a change in inventory and marketing practices and product mix. Having said that, this seems to have normalized itself; and we are currently very busy at our aseptic operations. In this regard we're finally -- we are currently finalizing the installation and commission of a third Tetra-Pak quart filler at our aseptic packaging facility in order to increase capacity to meet customer demand. We're also in the process of significantly expanding our warehousing and packaging facilities at this plant and will be installing automated palletizing equipment to improve efficiencies as part of this expansion. We expect the expansion to be completed late in the fourth quarter, early in the first quarter of 2005.

In hand with the acquisition of Kofman-Barenholtz, we have continued to expand and integrate our Canadian natural, organic, Kosher, and specialty foods distribution system across Canada. We now have a business within annualized revenues in the $100 million range and believe this represents the largest business of this nature in Canada. We see many continued opportunities to grow this business via expanded services to our suppliers and customers, business integration, and future accretive acquisitions. We have consolidated our Montreal warehouses and believe the bulk of these issues related to this transition have been addressed. We have also commenced construction of an expanded facility for our Toronto-based operations. The new Toronto warehouse will be a state-of-the-art, environmentally friendly facility initially encompassing 135,000 square feet, and expanding to 185,000 as demand requires. This facility is expected to be open in the first quarter of 2005 and will include a 20,000 square foot section of freezer and cooler space, which we believe will provide us with a significant advantage of over our competition and allow us to better serve the growing frozen foods market. We commenced production of a number of private label contracts within our healthy convenience foods Kettle Valley Fruit drier operations late in the quarter. These were the culmination of a great deal of focused effort, including Hassett certification at these processing and packaging facilities. We have also recently introduced a new natural and/or organic fruit smoothy bar utilizing a number of internally sourced ingredients. Based on customer feedback, we believe this could lead to an exciting product launch in 2005, and represents the start of a number of exciting innovations that we plan to bring to the market.

We are also finalizing installation of new equipment within our healthy convenience foods operations in Wahpeton, North Dakota, which will also bring an exciting new product to the market in the fourth quarter that utilizes 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.

The third quarter was yet another busy and exciting one for the Opta Minerals group. The group realized a 25% increase in revenues versus the same quarter in 2003. These results reflect increased activity levels in North America versus the prior year, in addition to the impact of a number of new product initiatives which have come to fruition. It should be noted that these results were achieved in spite of the terrible hurricane season that impacted the southeast of the United States in the last half of the quarter. While our facilities in Louisiana, South Carolina and Virginia, were not directly damaged by the storms, some customers were impacted as their operations were either closed or projects delayed. In September 2004, Opta Minerals completed construction of the abrasives processing facility located in Baltimore, Maryland. This facility is strategically located near an exclusive source of quality raw materials, thus providing low cost supply to customers in the marine, bridge cleaning and general abrasives industries. Production from this facility commenced in October, and we believe this facility will be an excellent strategic fit going forward.

Also during the quarter, Opta Minerals completed a series of planned upgrades to the abrasives facilities located in Hardeeville, South Carolina. In hand with these upgrades, the facility attained its military-qualified product (indiscernible) approval essential for key customers in the area and has now commenced supplying silica-free abrasives to this market.

The integration of Distribution A&L, a Quebec-based distributor of speciality abrasives and related products which was acquired in April, 2004, has gone very well. Systems and personnel have been consolidated and the business is performing as expected.

This was also an extremely busy quarter for the StakeTech Steam Explosion group. The group has been very active on a series of contracts with Pab-and-go (ph), a bio energy R&D, Inc., providing research and development, lab, engineering and testing services related to the development and commercialization of processes and technologies to be utilized in the conversion of bio mass for ethanol production. This work has gone very well to date, and we believe will lead to equipment contracts for two ethanol fuel facilities located in Nebraska and Spain. These contracts envision the application of steam explosion technology to process agricultural waste into a stabler (ph) enzymes and access the cellulose and hemi-cellulose components of the biomass, allowing their conversion to glucose and then conventional thermatations (ph) to ethanol.

The group is also pursuing a number of pulping and food-based applications for customers interested in use of steam technology to maximize product yield and efficiencies. We have remained active over the last quarter in testing the application of steam explosion technology for the production of various food fibers. We believe these efforts should result in significant costs in environmental improvements to our oat fiber process plus allow for the production of other fibers.

As a result of our intense focus on the completion of all the requirements of Sarbanes Oxley, we have decided to temporarily postpone our Oracle (ph) implementation, focusing all available resources on the Sarbanes Oxley efforts. Prior to this delay, the Oracle team has successfully developed the platform upon which rollout could begin. We now expect implementation to begin during the first half of 2005.

Thank you, Steve. As you can see, in spite of the extra workload related to Sarbanes Oxley, the Opta Minerals ICO (ph), Oracle and numerous expansion projects and acquisitions, there have been a lot of very positive changes in the Company. One of the more interesting developments is the proposed initial public offering of Opta Minerals, Inc. Opta Minerals is a division of SunOpta focused on the production and distribution of silica-free abrasives and industrial minerals with revenues of approximately $30 million. It has been a consistently growing and profitable business with revenues up 30% and segment net earnings up 39% in the first nine months of this year. It's our intention to divest of approximately one-third of the business to raise funds for the purpose of investing in both internal growth projects and in future acquisitions. The financing will provide Opta Minerals with their own pool of capital, recognizing that SunOpta's cash resources have been dedicated primarily to the food business. We will begin the marketing of this offering on November 15th and expect to complete the offering by the middle of December of this year. The proceeds from this offering will also be used to repay approximately 6 million in intercompany loans to SunOpta. The remaining interest-bearing intercompany loans of approximately 6.4 million will be repaid over the next two years. The issue will be sold to Canadian investors and qualified for U.S. investors. The preliminary prospectus can be downloaded from either Edgar or Cdar.

Once again I want to confirm: We are a growing natural and organic food company in growing and substantial markets. We have a clear set of values which govern the way we do business, how we treat your employees and customers, and reconfirm our commitments to the environment and to our communities. We have a culture that encourages entrepreneurship, while maintaining transparent and disciplined financial controls. We have a 63% compounded annual growth rate for the past six fiscal years and will exceed 300 million in revenues this year, attaining a minimum of the 50% rate. Our exit revenue rate will, of course, be higher as the result of the acquisitions completed during the year. We are committed to improving shareholder return by focusing on higher margin products, achieving better operational utilization and leveraging our administration base.

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

(OPERATOR INSTRUCTIONS.) Mark Chekanow with Sidoti & Company

You talked about the soy milk concentrate new contract for a large customer. Are there -- when you look out into the market, what other -- or are there other large contracts similar to that that would be -- you would consider reasonable targets in the coming year?

There are additional concentrate contracts available, particularly in the private label side. So as you know, we are providing the soy concentrate and then co-packing the refrigerated product for a number of U.S. food chains, the most recent of which is A&P for 1,000 stores; and that's just beginning now. Of course, the main contract, the new contract that we referred to on the aseptic side was for Vitasoy, which just started towards the end of the third quarter and has now, as Steve mentioned, has ramped up to projected levels. It has now become a significant part of our aseptic business. Our aseptic plants will be basically at capacity now for this quarter.

Also, could you provide a little bit more detail, you mentioned some of the things on Kettle, but also with Dakota and maybe some of your other smaller branded businesses?

We had recently launched a private label product for the major food chain in Canada. And that we just started at the end of, again, of the third quarter. This is a natural food bar similar -- fairly similar to what we'd produced under the Kettle Valley brand. I believe that we had an initial order for about 1.5 million bars. And this has now -- that's been so successful that they have now ordered another 2.5 million bars for delivery this quarter. The result of that plus other businesses, other private label and our own branded sales, is that the plants for our Kettle Valley will be -- are completely basically sold out for this quarter.

On the Dakota Gourmet side, the product that Steve was referring to in terms of the new products is a coated product; and so we have helped develop some specific equipment that allows us to coat sunflowers, soybeans and corn, such that they would float in a cereal bowl or could be included for snack foods, as part of snack foods. And we have a number of contracts and people interested in this product line; and, in fact, at the recent show in Washington, this product was a significant feature. So that equipment plus the packaging part is pretty well installed now, and we'll start to see revenue from that in the fourth quarter.

Okay. And lastly, I guess with the issues with the Canadian distribution, in the integrations there, would it be safer to say that from now when you make an acquisition in Canada we should model it no more than EPS neutral, or possibly even diluted in the first year until it gets fully integrated?

I don't think you could make that assumption. I think we just need to understand in the third quarter where our margins were down in our distribution business, there are two factors to that: one was the integration costs that we referred to and which have now been dealt with; but the other one, of course, is our third quarter in the distribution business is our weakest quarter because that is the quarter when all of the local produce arrives on the market. So every Tom, Dick, and Harry is growing their own produce in their own back yards, as well as local farmers are supplying it. So our margins and our revenues tend to be less in the third quarter. We are now, of course, into the fourth quarter. All of the local produce is now behind us, and so we're back to providing product which we sell (indiscernible) all over the world. And so you will see margins return to normal in this quarter, and of course sales similar.

What would you consider normal?

Excuse me?

What would you consider the normal margin?

What our -- our margins have been averaging approximately, over 25%, between 25 and 28%.

On the gross side; what about the operating side?

About 7%, 7.2, something like that.

Kathleen Kent with BMO Nesbitt Burns

Just, can you add a bit more color on -- I know you said you had some problems with your largest customer on the packaging side; but just curious as to why the margins were off so much.

Kathleen, there's a couple of issues there. One is, you know, some of it is nothing more than throughputs through the facility and the absorption of overheads that comes with that. The second is there were some product-mix issues. And third would be the impact of some of the construction that's happening at the facility that impacts costs during the quarter.

And then just on the grain and soy division, even if I adjust for the half a million with the higher input costs, I'm sort of getting the sense that SIGCO margins may be a bit lower than what you were originally expecting.

Actually, SIGCO has performed as expected. And if there's a shining star that we would hold up for this year on the grain side, it's -- not to knock the soy and corn side -- but the sunflower operations have performed very, very well.

And I guess just a few housekeeping. What's CapEx for Q3? CapEx was -- (multiple speakers/indiscernible) was 5.6 million. And just depreciation.

1.6

1.658.

Scott Van Winkle with Adams Harkness.

First question on the ingredients. You had a pretty strong margin on the ingredients business. Was that driven by the price increase on oat fiber?

It was driven by a number of issues. First off, the price increase on oat fiber was clearly a contributor during the quarter; though, a number of expansion initiatives started to pay off. You know, I'm thinking of the brand and germs process, the sweetener room, and cost reductions that we've put into place. So it was a number of initiatives.

And you mentioned the softer low-carb sales (indiscernible) would expect for that piece of your business. Had that had any impact on the price increase?

No, I wouldn't say directly, no.

Okay. And can you be a little more specific on the actual integration costs up in Canada. You know, maybe break them out more than you have or just give us an idea of what kind of challenges you saw up there during the period besides just doing it quickly.

Sure, and I can't break it down into specific dollars; but we've carried two extra leases, two extra warehousing leases for an extended period of time. There's been a great deal of training that took place over and above -- so the leases would be -- I am looking at the guys here. We will provide you with further to that; but clearly, the leases were an issue, management consolidation was an issue; there was a great deal of training and travel that took place in order to integrate the systems; there were systems costs that were involved. Those are all on the admin side. And then, of course, there was the impact of loss margin and sales, as well as we went through the sales portion of the consolidation. Essentially 300 of the 600 would SG&A related, and 300 would be margin and sales related.

Also, that's on the Montreal side. In Toronto, we're still carrying an extra warehouse as well and went through some sales integration issues there as well. So it was still Toronto and Montreal.

The costs were probably more than any lost revenues from disruption (ph)?

Yes.

Okay. And just a housekeeping item. How large is Supreme Foods, that's the one I don't have a revenue figure for?

In US dollars, it would have been about 20 million US, or 18 million, 18 to 20 million US.

18 to 20 million annual run rate?

About $20 million US.

Okay. And, Jeremy, thanks for the revenue guidance. Any comments on earnings guidance coming out of a little disappointing Q3 here?

No, Scott, other than to say that we are expecting things to, as we've stated, to return to normal in the fourth quarter. And other than we will still have the continuing Sarbanes Oxley costs in the fourth quarter.

Okay. And one other question. Sorry. You mentioned the change of promotion timing at Hayne (ph). They also mentioned that a very strong October order month. Did you see that same impact?

Yeah, the orders are very strong from them and, frankly, from all of our customers; and that's why I have indicated that our aseptic side is absolutely chock full.

Andrew Dansek with Stadium Capital Management.

I'm assuming that the General Mills facility is included in internal growth. I was wondering what that 12% number is excluding the General Mills facility.

We have no idea.

Can't measure it. It's all mixed around.

I guess how much did it contribute in the quarter?

Well, we don't provide revenue from each individual plant, Andrew. I mean, that's starting to get down into greater detail than we would normally provide. But I can tell you that all three plants are running essential on 24/7 operation. And we do now have a little bit of surplus capacity. We've done a great deal of rationalization within the three plants; and, as Steve mentioned, significant cost reductions.

I guess I mean I can do the math. It was $10 million in annualized revenues, so if you took 2.5, that would lead to sort of a 7% internal growth rate, excluding that acquisition. And I know that there was disagreement last quarter between what's internal and what is acquired growth. Was curious what the rationale is for including the General Mills facility as internal growth and it's included in the acquisition (multiple speakers).

Very simple. We bought a facility that basically supplied one customer at a very, very small percentage of their total capacity. The business that we're doing in that operation is business that we have generated subsequent to the acquisition; it's also business that we had transferred in from other operations which were oversold or didn't have the capacity to reach it. So this is clearly internal growth, Andrew.

Right. But I guess, then, why include it in the business acquisition section of the cash flow statement?

Andrew, I think we've explained what we did. I mean, we could debate it all day.

Well, I guess, turning to the soybean crop yield. During the last conference call on August 9th, you had mention that your soybean crop requirements were locked up or were secured for the rest of the year. Now assuming the next day, on August 10th, that the shortfall didn't happen, it looks like for the rest of the quarter until the quarter ended on September 30th that you lost basically to $100,000 to $150,000 a week. Now, is this something that just turns off on September 30 or is this something now that continues into Q4?

Obviously, it's -- the situation was such that we had contracted our requirements. When the final product arrived in the third quarter it was of such poor quality that we had customers rejecting it. It was essentially the dregs at the end of the market. You must understand that this is a poor crop, but there was huge demand for product. And although we had contracted, farmers weren't able to fully deliver. What they did deliver at that period of time was very, very poor quality. We were then forced to go out and on the stock market at very high prices to replace it. So that's what happened. We're now into the new crop that began to come in in September; and so we would expect to see normalized margins and good revenue in the fourth quarter and beyond.

Okay. So, then, the requirements were locked up but the quality just wasn't high enough? Is that --

Exactly correct . And then they also short-shipped in some cases. When you contract with a farmer and he doesn't produce it you're not going to sue him. The bottom line is he's delivering you what he's got and he's done his best. We have long-term relationships with these, I think, 1800 farmers now; and those -- they are very honorable people.

So then in Q4 this is not an issue anymore?

That is correct.

(OPERATOR INSTRUCTIONS.) Keith Hallett with (indiscernible) Securities.

Yes. I just had a question on the grain and soy products group. Does the fact that you had to go out and buy these soybeans in the quarter, is that why the revenue is so high in that division?

Well, it's also a function basically of price. It's price and it's also the fact that we have included SIGCO's results in that division now, which were not in the previous year. SIGCO being the sunflower business.

So, I guess, can I assume then that SIGCO made a profit, the rest of the business had a loss sort of idea?

Well, we don't break that out, but you can definitely assume they SIGCO made a profit, right on budget they were.

Great. And just on the oat fiber business. Does the sort of downtick in the low-carb related demand -- have you got any information or intelligence that that will affect this new plant that Rettenmeier (ph) was talking by?

We don't have any information about that . And we would suspect that that might go into their thinking. We would also suspect that the plant that they are building may be involved in producing other products, other than Oat-Carb (ph); and that might be the primary reason that they're building it. But you know, at this point in time, they have a very small share of the market, and I think we're actively soliciting every account.

So is the oat-fiber plant operating at lower capacity -- I mean the three plants operating at lower capacity utilization now than they were?

You know, Keith, for a while we had a situation where we were so oversold that we weren't making some customers happy. Customers are now -- who were quite overstocked in fiber based on what they thought the demand for some of the products would be, are now obviously working through their inventories. I would suspect that when we normalize income through this, that we will probably -- well, we'll have all three plants going 24/7; and on a combined basis, they'd be over 85% in total capacity and that's without any other new products that we have and new opportunities that we have in the pipeline.

We see weekly sales reports from our sales people across the US. And it's clear that some companies are doing very well in low-carb and some are not. But we also see an increasing demand now for fiber, just for the purpose of adding fiber to products. And we think this is a fundmental trend that's going to be extremely important (indiscernible). We're seeing this with major companies. So we're really very optimistic about the fiber business.

And just on the packaged good business, which it seemed a little disappointing, but I take it, perhaps, the Vitasoy contract it took a bit longer to get it going.

It started towards the end of August, and then they had to gear up. So it goes -- it wasn't into full production at all until this quarter; and so I think there's no question that the aseptic business was, I think as Steve has mentioned, was a bit down in the third quarter. It is now running flat out.

Just finally on the aseptic. Hayne talks about doing this full -- not with you, but generally with all of its suppliers -- sort of one-cost pricing. Does--will this put for soybean risk onto you in terms of the pricing, or won't affect how you do business with them?

It shouldn't affect it, Keith. We have existing arrangements and existing protocol on how we deal with that. (Multiple speakers.) We've been a turnkey operator for them. It's not new for us. I mean, we've operated that way since we've started packing (indiscernible).

So, say in the last crop year, the bad one where the prices escalated, are you able to pass that onto them or is there adjustment mechanism in unusual circumstances?

Yeah, there's an adjustment mechanism.

Just on the -- still on the packaged goods. Is the Kettle Valley -- I realize you've just got this huge contract at retail here in Canada; but before that contract, was the business sort of running with -- sort of flat out with much growth?

No, it wasn't running flat out at all. And I think we've talked before that there were certain accounts that we couldn't initiate programs with until we had received Hassett approval. So Hassett approval, as you know, is a quality standard and the plant needed to be Hassett-approved before we could move on into contracts. So beyond what we talked today, we have some very, very interesting potential projects and new product that are coming out of that division. Those are now starting to move into test marketing and so forth, but we were not able to advance these programs until Hassett was in place.

Just so I've got it correct. The Hassett, you got that approval in -- was it early August?

Late July, early August; that's right.

And then just finally on the Avengoia (ph) and time frame, is the time frame still before the end of year as to whether they will firmly --

Avengoia would like to place the equipment orders before the end of the year. And we have been asked to discuss, or provide proposals for turnkey construction and supply of the equipment for two plants. Avengoia is a very large company, so I will say I'm cautiously optimistic that they'll get signed by the end of this year. But my real guess is that it will be January. But there are a lot of reasons why they would really like to do it in December, and we're working hard with them to achieve that. In the meantime, we have still got substantial portions of our existing contracts to complete, and they will take us well through next year. As you were (indiscernible), we are modestly profitable in the third quarter and will be profitable again in the fourth quarter.

Actually I have just got one question back on the packaged goods, or maybe it relates to the yields in the grain areas as well. To meet the commitments, was it your export commitments on the grain side?

Yes.

And then just when you have a crop like that, does it affect your margin in the aseptic business? Like, does it affect the amount of soy milk you get out of the bean or not really?

Not really, Keith, although the quality of the bean has a direct impact on your ability to process and generate quality product and the yield that you'll get. It's been a tough year. I mean, everybody has experienced it. So, yeah, the bean does have an impact on your ability to process, but it's not the biggest -- biggest issue that you deal with.

And then, sorry, just one last question on the private label here in Canada. Is it in the stores now?

Yes, it is it.

And is it -- do you sort of envision there could be line extensions or how do you see it going forward?

We hope so.

Absolutely.

Michael Sproule with Octagon Capital.

Just one -- most of them have been answered. One quick question surrounding delay in the Oracle implementation. Will there be or are there any business risks to having this done -- being half done and half not done, shall we say?

It's not half done. We haven't started the rollout,. So we've got to the point where -- I think we may have mentioned the last call or we've been quite open about it -- we wanted to put some of the operations on before the end of the year. Because of Sarbanes Oxley, then we were advised that you shouldn't put any on at the end of the year because you have to be able to audit those systems and have tested all the controls before the end of the year. We're weren't able to do that. Still having said that, we continued to work on a number of rollout issues around training and development, et cetera. But we've suspended that as well because all of those people that were train and developing need to be 100% focused on (multiple speakers) controls and Sarbanes Oxley. And the systems guys who are working on specific systems are now working on specific systems controls with the existing systems that we have. So we've been able to take it to a point in time and sort of nicely suspend that until we want to start it up again; but we haven't lost what we developed, and we'll rededicate those resources at a point in time.

What sort of time frame do you -- I mean SOX is going to take how much longer and when do you see Oracle's coming back up?

Well, SOX is done by the end of the year. So our auditors are in review this week. We're saying some companies have got 200 people working on the SOX implementation. We've got a significant dedicated staff, and we are confident that we're going to get there, so.

What will happen, Mike, is as soon as we're sort of over this hump what we'll do then is go back and start back in on the execution.

All right. So that means -- and today it's really just a very short time situation?

Yeah, we hope it's about three, six, max-type thing. We'll see where we go.

On the fiber enrichment side of the business, we know that the low-carb is starting to fall off and fiber enrichment, as we talked about previously, should find its way back into the market. Has there been any specific contracts that you've received that have been -- where the actual vendor sat there and said, hey, we're going to use fiber-enriched products? Or is this starting to come in now?

First of all, it's 50% of our sales in fiber, in oat fiber are for fiber enrichments to start with. And as I mentioned, as we rate these weekly sales reports, there are numbers of companies now that are starting to add fiber for fiber-enrichment purposes. We're talking some significant companies here, so.

(Indiscernible) meets domestic customers versus international?

Both.

Both, okay.

Sara O'Brien with RBC Capital Markets.

You were talking about soybean crops being better this year than they were last year. Just was wondered about pricing and how you think that is going to compare with last year.

Sure, the commodity soybean crop, because of the good crop that we've had, is down in value. The organic side of the crop is not experiencing as grade A decline, and the reason for that is that the demand is so high. So we don't expect that the pricing on the organic soy for this year will track to the conventional roundup-ready crop. We've held a number of -- we're in the position of not having priced some contracts on the hopes that this will track down; the time will tell, the crop's just coming up now.

When you do get a pricing in mind or fixed with some of your farmers, how far forward do you lock in?

Can you just repeat that? I want to be sure and answer it properly.

Sure. I just meant once you determine pricing with your farmers, how far forward is your usage of beans locked in? Is it for the next quarter, the next two quarters, the next three quarters?

It really depends, we try and carry it over the whole crop season.

In general -- I mean, at this point, are you optimistic that your margins in grain and soy products will go up next year, or do you think it's still kind of a risk factor?

We think it's going to return to the margins levels that we have experienced in the past.

Actually, we expect to see the sales of soybeans to be very strong here; and the demand, as Steve said, is very, very, strong which is reason why the prices have not come down as much this year as your conventional ones. So we're going to be able to sell everything that we can secure.

Okay. So that will offset -- some of your own higher pricing you can pass through at that higher level?

Absolutely.

Scott Van Winkle with Adams Harkness.

General Mills is talking about converting all of their major cereals to whole grain. Do you get to play any part in that with oat fiber or any other product line?

Yeah, we do and right now a number of the products that -- basically what they're saying is that there isn't a whole grain, they're going to put a whole grain in. In the products that we're in, there are already whole grains in there. We don't expect that the formulations are going to change and potentially push us out. And we believe at the end of the day that the whole grain and the fiber side of things is going to continue to grow, and we should increase our position in a number of products.

And on the nondairy aseptic business, I saw the first private label rice milk, then I saw an almond beverage out there. Do you do anything other than soy in this aseptic, nondairy category?

Yeah, we do rice as well.

Have you picked up any recent rice milk private label deals?

Well, we do rice milk for one of our largest customers. And we also picked up a company in Canada with their label on rice.

One of the issues, Scott, that I'll tell you, when I talked about product mixes, our rice is fairly new to us and our margins aren't as strong in that category because we're still refining our internal processing capabilities. And we've dedicated a fair amount of time to that and we are making improvements that they are very important to us. But, no, rice is a very significant category. We've also had a look at almond and potentially being able to produce some of the basis for almond milk; and it's not near as sort of vital a category as rice, but it's an interesting beverage category.

We also have a growing business, of course, in brewing and aseptically packaging tea.

Organic tea.

Traditional tea or chai tea?

Both.

One other question. What's been the pricing trend of sunflowers, either your wholesale selling price or at the commodity level?

It's up, is the word. And it was up last year. And this year, our US competitions, who grow primarily in the north, have experienced significant wet whether and disease and low yields. And we are very fortunate to have grown most of our crop in Kansas, where we have irrigated lands and, therefore, high quality and high yield. And I -- we are starting to look at growing sunflowers in other parts of the US and other parts of the world. Our business was well up this year and will be up again this year, was hugely up in profitability this year, and we expect that to continue this year. So this is an exciting year for us in sunflowers.

Guy Gordon with Loewen, Ondaatje and McCutcheon.

Just one question. I notice in the food group segment distribution is now 27% of the revenue of that segment by my calculations, up substantially from last year during -- due to the acquisition growth in that segment. Is that at a critical mass now or do you expect to continue to grow that particular segment of the food group?

We do have a national presence. Our -- some fill-in areas that we're still looking at, and we do expect that to continue to grow, but we have achieved our primary objectives here of being the first national organic distributor.

So there's no target as to what you want food group to get up to?

Well, I think we would, internally, like to see it get to $200 million. That's sort of where we're going. Part of that, of course, would be -- a debt would be acquisition (ph). A lot of that would be internal growth. You've got the core (ph) growth in the market. In addition to that, we're adding substantial numbers of skews as we go on from here. So I think we've currently distributed about 9,000 different organic products.

(OPERATOR INSTRUCTIONS.) Keith Hallett with (indiscernible) Securities.

Should that be -- just want to know, the 200 million is a U.S. dollar target? In Canadian distribution?

Yeah,.

And just on the link between the Chicago board soybean price and the organic price, if the ratio doesn't sort of -- if the ratio year-to-year is not consistent, just trying to determine, like I said, how much risk there is on your hedging activity.

Steve, this is John. Yeah, those don't correlate exactly, so we do note that there is all these -- you know, we hedge as best we can using the soy market. There is no commodity market for organic soybeans. So it is something that we -- our grain experts monitor pretty well daily; but there is risk that those bases change between the value of the commodity soy and the organic soybeans.

Thanks very much.

Alex Siever with Stadium Capital.

We have had some questions I know in past quarterly calls regarding the differences between internal growth rates and acquisitions growth rates.

Generally from you.

Yeah. Well, and actually, there's a lot of people I know have the same questions because I know we've had, for example, in the first quarter the pro forma that you had provided in the --

What would you like to know, sir?

Well, I was just about to ask my question. My question was this: We had talked about the confusing nature of the pro forma you had provided in the 10-K and the difference between what it said and what your comments were regarding internal growth. And in that conversation, you had suggested, I think, quite helpfully, that the Company would provide more detailed standard pro forma analyses. Do you plan to do that, in fact?

As you know, we are following the regular original request, and we did increase our segmentation by putting out the distribution group and that, of course, has not become a significant part of our business. Steve, do you have anything else?

I was really more commenting on acquisition pro forma analysis --

We will do -- we are doing in very defining, exactly how we calculate internal growth so that you understand the formula that you're using.

And John can you comment? The pro forma documentation that's provided is according to GAAP.

Yeah, I think, you know, we do so many acquisitions and some of them are so small. If we do a very large acquisition that's a substantial percentage of your business, I think we will provide for pro forma with regard to that acquisition. But when we are doing acquisitions that are in the 10, 15, 20 million dollar range, you're taking companies that are private, you're running (ph) work through financial statements in the past that may or may not be in accordance with GAAP. Trying to build those up into a much more detailed pro forma is an exercise that we're not ready to undertake right now.

I see, so it would probably, therefore, be hard for investors like us to actually do a bottoms-up (ph) analysis to understand internal growth versus acquisition growth, et cetera?

I think that there's a lot of detail out there, and we provide information that's according to GAAP. And as always, we'd encourage you to call John Dietrich or myself, and we'll try and provide as much light into what we have done as we can possibly do without being selective in our disclosure.

Sure. Well, that would be helpful.

Andrew Dansek with Stadium Capital.

Just had a quick followup, guys, kind of a housekeeping question here. In the packaged and -- in the packaged products group for the three months ended June -- excuse me -- for the three months ended September 2004, there was $424,000 earnings number. I guess for the three months ended June, the number of 3-point -- of June 2004, the number was 3.4 million; that would imply a loss in the first quarter, but now still there's a positive number for the third quarter. Was some of this loss reallocated to the first quarter then? It seems like there was a pretty big loss in the first quarter in that segment.

No, we didn't reallocate anything, Andrew.

Was there just a big loss that I'm missing here?

Well, we did have fairly low volumes within the (indiscernible) through Q1.

Right, but I mean I guess, you know, for the three months ended June -- excuse me -- the six months ended June 2004, that number was 3.151 million for the packaged products group.

Why don't you -- we don't actually have that information right here in front of us.

I mean, I have it right in front of me. It was 3.151 million -- (multiple speakers.) into June for the three months ended September, it was 424,000 -- (multiple speakers.) Yet for the nine months ended December, it was only 928,000. I'm wondering where my math is off here.

Well, why don't you give us a call afterwards, so when we have a moment to pull out this information and we'll go through it with you? Raleigh Pitt.

Is Kellogg, Brown and Root (ph) still representing the Company in China.

No. Kellogg, Brown and Root actually never represented the Company in China. It's Kellogg, Brown and Root's agent, who is the company called PassaTech (ph) out of Dallas and Beijing that represents the Company in China. It's a completely independence company. And I think they represent their oil equipment that are in China.

Is somebody connected with that still trying to sell in China?

Yes, they are.

They are. Okay. And they're still making the payments?

Yeah, they have so far and they have a payment due this year. So once -- we'll see if that comes in. It's not a huge amount of money, so it's not going to make much difference one way or another.

Ronald Emmerman (ph) with RMC Group

I'm listening to all of these astute questions and people are trying to, obviously, assess what's going to happen in the near future, what you see, as well as long term. I'm sitting back from all of this detail and I'm not hearing any real negative things. The Sarbanes Oxley, you know, step back, that all companies are experiencing. But in particular, are there any issues that you're concerned with? And I'm also including knowing the car business is down, but it seems like you've sufficiently added that with other business. Is there anything that would be concerning from an investor's point of view?

No, I don't think so. I think we've tried to explain, as we have several issues in the third quarter, which were largely of an unusual nature or nonrecurring nature. We wanted to be right up front with those and deal with them, which we have done. We have said that we expect the fourth quarter to return to normal in -- as we looked across our business today, the outlook, I feel for every division and subsidiary is really positive for next year. But it's clear that we would have achieved the consensus of the analysts in the third quarter had it not been for these issues. And we wanted to let people know as early as possible.

And I, actually, one that appreciated that, notwithstanding that it came as a surprise. But it sure sounds like most of those problems are behind you, and you're not anticipating anything certainly in this quarter or perhaps the first quarter or half of '05.

Yeah, I mean we also dealt with the doubling of our tax rate in the quarter compared to last year. And I do want to point out our earnings are up over 100% for the year, and our sales are up 50-odd%. I'm obviously disappointed in the issues that arose in the third quarter; but in spite of that, we're achieving record sales and profits, and I expect that to continue.

Well, I, for one, every time I listen to these calls and listen to your quarterly results, am duly impressed and likewise for this quarter, and I wish you continued good luck.

Thank you very much.

And no further questions at this time. I'll turn the conference over to Mr. Kendall for any additional closing remarks.

Thank you very much. Again, I appreciate it and appreciate the confidence that the shareholders have given us, and we are striving very hard to achieve some excellent results from here on. And again, we invite you to talk with us, to visit our facilities, and look forward to talking with you next quarter. Thank you.

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