Sunopta Inc (STKL) 2004 Q4 法說會逐字稿

Welcome to the SunOpta Inc. fourth quarter and 2004 annual results conference call. Today's conference is being recorded. At this time I would like to turn the call over to Mr. Jeremy Kendall, Chairman and Chief Executive Officer.

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

Before I begin I would like to remind listeners that except for the historical information, these may include forward-looking statements. Including statements relating to 2004 operating results that is 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. Also please note our results are noted in U.S. dollars and in accordance with U.S. GAAP. A reconciliation to Canadian GAAP will be available in the notes to the audited consolidated financial statements, which will be filed with the 10K on March the 15th, 2005.

We are pleased to report record revenues and earnings for 2004. Revenues agree by 54 percent to 306.3 million in fiscal 2004, and by 51 percent in the fourth quarter to 82.7 million. When compared to the same period a year earlier. The fourth quarter revenues represent the Company's 29th consecutive quarter of record revenues versus the same quarter in the previous year. These results correspond to a 62 percent compounded annual growth rate over the past seven years. And exceeded our revenue guidance of 300 million which we last provided in May 2004. Fiscal 2004 results include an internal growth rate of 14.5 percent, as measured by revenue growth year-over-year. Our internal growth rate is calculated on a consistent basis, and includes revenues of acquired businesses integrated with SunOpta from the date of transaction, compared to the same period 12 months earlier. The Company's revenues exit rate in December 2004 was approximately 330 million.

Our revenue guidance for 2005 is 385 million. Excluding potential acquisitions. Representing an expected internal revenue growth rate of approximately 17 percent in 2005. As is our practice, we will review our revenue guidance mid year.

Revenue growth in the fourth quarter was spurred by the strong performance of businesses acquired in the latter half of 2004. The addition of a number of private label contracts for various healthy products across the organization, growth in our natural, organic and specialty food distribution businesses across Canada, and strong revenue growth in Opta minerals. This growth was partially offset by a general slow down in the low-carb food ingredient market which effected our oat fiber sales. And the fact that the fourth quarter is a seasonably lower quarter in a number of our business segment. Steve Bromley will provide further details on the individual operations later in this call.

Net earnings for fiscal 2004 were 11,016,000. Representing a 23 percent increase over fiscal 2003, and 198 percent increase over fiscal 2002. Diluted earnings per share in fiscal 2004 were $0.20 a share, compared to $0.18 per share in fiscal 2003, and $0.09 per share in fiscal 2002. Net earnings in the fourth quarter were $353,000. Or $0.01 per diluted share. We are not going to suggest that we are satisfied with our earnings in the fourth quarter. We are not. Steve Bromley will provide an update on the operations later in this call. It should be noted that included in the fourth quarter results are a number of one-time costs including the following.

In the fourth quarter we made the decision to focus our future soy and rice shelf stable beverage packaging efforts on supplying our existing customers, and marketing our septic packaging capabilities to the rapidly growing private label market. The private label market in North America has grown substantially in recent years as retailers recognize the benefit of generating consumer loyalty with an in-house brand. As a result of this decision, we have de-emphasized the use of our own brands in the soy and rice shelf stable beverage market , and accordingly have written off the value of these trademarks recorded on our balance sheet. This one-time writeoff in the fourth quarter was 2.25 million pretax.

Fourth quarter results were also impacted by the Sarbanes-Oxley 404 requirements, which include the documentation and testing of internal controls and subsequent independent audit of these controls. The Sarbanes-Oxley independent audit fees were approximately twice that of our quarterly and annual financial statement audit fees in 2004. A significant portion of the internal financial resources and people were tied up in the Sarbanes-Oxley effort in the latter half of the year, and especially in the fourth quarter. Consequently the Company's ability to analyze operations, react to market conditions, on a timely basis and oversee day-to-day operations were somewhat impacted. Including internal resources, consulting costs and independent audit fees, we estimate that Sarbanes-Oxley direct costs and related activities, negatively impacted our earnings in the fourth quarter by approximately $0.02 per diluted share, and the full year results by $0.03 per diluted share.

The good news is that we have identified no material weaknesses at this time, and expect to receive a clean opinion from our auditors, and we can then refocus our resources on driving operations and earnings. We are very proud to have not identified any material weaknesses where a number of companies are failing, and it is attributable to the commitment and professionalism of our people. We will file our 10K on March 15th which will include the final opinion on Sarbanes-Oxley. We believe that the majority of the Sarbanes-Oxley costs were related to the initial implementation. And thus one-time in nature, and we accordingly expect the cost in fiscal 2005 to be approximately $0.01 per diluted share.

Over the past few months we have found that the Sarbanes-Oxley requirements have gone far beyond the bounds of practicality and business common sense. We believe that although the legislation was well intended. In the end it may not undermine the effort of those senior executives who deliberately falsify information and cheat employees. At SunOpta, our culture, our value system, our integrity, and the highest standard that we hold for ourselves and employees, will continue to be the safeguard for our shareholders.

In summary, in spite the writeoff of the trademarks and the related to Sarbanes-Oxley, we at SunOpta still achieved record earnings in fiscal 2004. Excluding the impact of one-time items, including the gain on a legal award recognized in the second quarter. The writeoff of the trademarks, and the estimated costs related to Sarbanes-Oxley, net earnings in the fourth quarter would have been $0.06 per diluted share, and $0.23 per diluted share in fiscal 2004.

Note that the weighted average diluted number of shares in the fourth quarter was 56,732,000 and for fiscal 2004 it was 54,862,000. Gross profit increased by 64 percent to 58.4 million in fiscal 2004. Gross profit as a percentage of revenues increased from 17.9 percent in fiscal 2003 to 19.1 percent in fiscal 2004. A continuation of the improving margin over each the past five years. Gross profit as a percent of revenues declined in the fourth quarter, as a result of a number of operating and seasonal factors which Steve Bromley will discuss. Our effective tax rate was adjusted in the fourth quarter to reflect an effective tax rate for fiscal 2004 of 22 percent, which compares to an effective tax rate of 10 percent in fiscal 2003. In 2005 we expect our effective tax rate to be approximately 32 percent excluding the impact on the nontaxable dilution gain.

Our balance sheet at December 31, 2004 remains strong with 8.1 million in cash. 60.5 million in net working capital. Net working capital increased by 3 million, while net assets increased by 24.1 million in 2004. Book value per share increased to $2.56 per common share. Long-term debt increased by 10.8 million in 2004 to 35.8 million. Primarily to finance acquisitions completed during the year. As of December 31, 2004 the Company remains under-leveraged with a debt to equity ratio of 0.25 to 1. Providing the Company with significant financial resources to generate future internal growth and execute on our acquisition program. 2004 results also include a significant improvement in free cash flow to 6 million after approximately 4.5 million in maintenance capital, and the investment in working capital required to support our growth over the past year.

In 2004 we completed 6 acquisitions in the food group. Including 4 natural, organic and kosher distributors in Canada, the acquisition of 50.1 percent of Organic Ingredients of Aptos, California. And the purchase of a fiber facility in Cedar Rapids, Iowa. We are pleased to announced that we have agreed to acquire the remaining 49.9 percent of the Organic Ingredients and expect this transaction to close in April. Organic Ingredients is a very fast growing company, focused on sourcing organic fruits and vegetables from all over the world. The provision of organic ingredients to food manufacturers and the development of organic private label products.

In addition, the company subsidiary Opta Minerals Inc. completed one small acquisition in Quebec, and the purchase of a facility in Hardeeville South Carolina in 2004. Steve Bromley will also provide further details of these acquisitions and other capital investments later on this call. On February 17, 2005 2005 SunOpta completed an offering of its wholly owned subsidiary Opta Minerals. Raising gross proceeds of approximately 15 million. Subsequent to the offering, Sun Opta retained 72.7 percent of the outstanding shares of Opta Minerals.

We do not expect this transaction to dilute our earnings in 2005. Opta Minerals is listed on the Toronto Stock Exchange under the symbol, OPM. SunOpta received 4 million from the proceeds as partial repayment of related party loans. The remaining loans totaling approximately 8 million will be repaid over the next 4 years. The additional proceeds will be used to fund capital growth projects and acquisitions in the highly fragmented silica-free abrasives, and industrial minerals market.

This offering valued Opta Minerals at approximately 53 million including the issue. As SunOpta's in Opta Minerals is based on historical investment values and recorded below market value. SunOpta will record a significant dilution gain in the first quarter of 2005. We intend to continue our active acquisition program. While continuing to generate double-digit growth in the core food operations. Whether it is fiber addition, Whole grains, natural and organic foods, the health benefits of soy, the concern over obesity, or the new dietary food guidelines, our products are well positioned to meet consumer demands in the most important food trends of today.

I would like to now ask Steve Bromley, who became President and Chief Operating Officer at the beginning of 2005, to comment on our operations, acquisitions, and capital investments.

Thank you, Jeremy. Late in the quarter, we completed 2 acquisitions in support of our vertically integrated food business. These being Kofman-Barenholtz Foods Ltd. of Toronto, a major distributor of kosher and specialty food products in Canada, and Organic Ingredients, a leader in the sourcing of organic ingredients from around the world combined with the provision of private label products for a wide range of customers. Both of these businesses have performed well since acquisition. The operations of Kofman-Barenholtz will be integrated in to our new distribution center in Toronto in third quarter of 2005.

As Jeremy mentioned, we will be exercising our option to acquire the remaining 49.9 percent of Organic Ingredients in the second quarter. Organic Ingredients continues to develop new supply for organic ingredients from around the world, and has recently been awarded a number of new private label products for key retailers in the natural foods segment. This is an exciting development as we believe that private label market is a key opportunity for our Company.

During the fourth quarter, we realized improved margins in our grains and soy products group versus the third quarter as expected. Revenues were down in the quarter consistent with prior years and the seasonal nature of this business. We have recently completed an upgrade at our Hope, Minnesota grain processing facility, which expands both our shipping and grading segregation capabilities. Further, we have we have completed an expansion of our warehouse capabilities at our Breckenridge Minnesota, Sunflower location and will be implementing state-of-the-art sunflower processing capabilities during the first half of 2005. This technology will further upgrade our product quality and sorting capabilities, and will be extremely important as we expand our international sunflower business.

The soy crop for this year is significantly improved over last year, and we expect to be able to avoid some of the late season supply issues we experienced in 2004. None of our soy group in 2004 was impacted by the effects of the soy rust that has been discussed in previous calls. 2004 was another good year for the corn crop. We do not anticipate any supply issues throughout 2005. Late season. Wet weather in the northern part of the U.S. and Canada did impact the sunflower crop for 2004 from these growing areas. Having said that, we source a portion of our crops in Kansas, Colorado, Wyoming, and Texas, and these areas were not impacted by the wet northern weather conditions. We are well positioned versus many competitors in the industry, and expect to realize another good year in 2005 in the sunflower business. In late 2004,

We entered into an agreement to jointly operate a sunflower business in Hungary, and have successfully harvested our first crop in Europe. This joint venture will enable us to improve our competitiveness in the European market. As part of the agreement we have an option to acquire this business and intend to expand this business over the next several years. Our ingredients business was impacted in the fourth quarter by reduced demand for oat fiber for low-carb applications, and a weak market for custom blended dairy ingredients.

As we stated in the previous call, there is no question that demand for low-carb products has leveled off, and in some instances declined. Many of our customers reduced their demand for oat fiber utilized in low-carb applications, as had they have either suspended new low-carb product development, or continue to work through inventories built up in prior quarters. We are also experiencing significant competitive pricing pressure in this market, and are aggressively defending our market share. These factors have a significant impact on the fiber facilities, and the operating results of the ingredients group in the fourth quarter.

Having said that, there is no question that fiber enriched foods are growing, and represent a significant opportunity going forward. In hand with fiber fortification opportunities, we have recently expanded our focus on international markets for oat fiber and have added a dedicated internation sales resource to drive this business. In addition, we are assessing a number of options to establish oat fiber processing in International markets. We continue to actively develop our processes in R&D to expand our line of fiber offerings, including the development of both soluble fibers and insoluble fibers derived from sources other than oats.

During the fourth quarter, the ingredients group was also impacted by a very weak market for custom blended dairy ingredients. This business is cyclical in nature, with margins directly related to the price of raw milk components. In 2004, the ingredients group invested in new bran and germ capabilities in Cambridge, Minnesota which have increased our ability to serve this rapidly growing market. In addition we have expanded our fiber capacity, expanded our sweetener production capabilities, and in the process of installing equipment to improve soy processing yields, and drive the [Okera] by-product derived from this process.

During the fourth quarter we completed the installation and commissioning of a third [Tetra quart] filler at our facility at our aseptic packaging facility, and in January 2005, we completed a 45,000 square foot warehouse expansion and office consolidation at this facility. This expansion includes robotic powertizing equipment, which is expected to operate efficiencies and a further reduction going forward in operating costs. The efforts required to commission these two major capital expansion projects had a significant impact on the operations and margins at this facility in the fourth quarter. However we are confident that this facility is now well positioned for the future.

Also, during the quarter, we experienced a number of operating issues related to improving yields in the production of rice based aseptic beverages. This is a growing opportunity, and we are now comfortable that we have optimized our processing capabilities in this regard. While operating margins did not meet expectation in the fourth quarter, revenues at this facility are increasing, and we expect margins to follow in 2005. In just over two years, we have grown our Canadian food distribution group from zero to an exit rate in 2004 of $105 million. Distributing 7,000 natural and organic products, and 5,000 Kosher products.

Early in 2005, we completed our new state-of-the-art environmentally friendly 135,000 square foot warehouse in Toronto, and have moved the operations of Supreme Foods Limited and Snapdragon natural foods into this facility. Later this year, we will complete the consolidation of our eastern Canada grocery operations when we integrate Kofman-Barenholtz & into this facility. The development of this facility was a major focus for our operations during the fourth quarter.

Although we have seen additional competition in the market place. We continue to see many opportunities to grow our distribution business by expanded services to our customers and suppliers in the coming months, and we do expect the business to continue to grow in 2005. Our Kettle Valley fruit bar operations grew significantly in the quarter due primarily to private label contracts. Production expansions were required to meet the additional demand from these facilities in a cost effective manner. The bulk of these expansions were completed in the quarter, and we are now focused on further expanding our sales to fill our expanded capacity.

In 2005, we will be introducing a new packaging design in a number of new products, to meet the needs of health conscious consumers. The fourth quarter was yet another busy and exciting one for the Opta Minerals Group, the group realized an 18 percent increase in revenues versus the same quarter in 2004, reflecting new product initiatives in a strong North American abrasives market. Both the Baltimore and Hardeeville, South Carolina facilities were commissioned in the fourth quarter. Start up costs related to these facilities were expensed in 2004 and impacted fourth quarter earnings. However, these operations will form the basis for group's rapid growth in 2005.

This is an exciting time for Opta Minerals, as it embarks on its new life as a public company. A significant number of growth opportunities lay ahead, and given the resources provided by the ideal, the company is well positioned to play a lead role in the consolidation of the silica-free abrasives and industrial minerals markets.

This was also an extremely busy quarter for the StakeTech Steam Explosion Group, as work continues on a series of contracts with [Abengol bioEnergy] related to the development and commercialization of processes to be utilized in the production of ethanol. In addition, the group has actively pursued a number of food based opportunities, including the development of this technology in the production of our own fibers. The potential ethanol, and food and pulping applications, presents significant opportunities for the future of this technology.

Thank you, Steve. I am regularly asked about rust. And its potential effect on the soy crop. Rust has existed for many years in South America and fluctuates in intensity, based on weather conditions effecting soy yields. Soy acres continue to be expanded in places such as Brazil and Argentina. Including acres for soybeans which cannot be sprayed with convention chemical herbicides, potentially further spreading this disease. Rust appears to have blown into the U.S. fields from South America for the first time last year, effecting several southern states. Our research confirms rust cannot survive cold weather climates. I.e., the mid-west and northern states, where we sourced the majority of our soybeans. Natural sprays are also under development to fight this disease. We do not expect our 2004 crop or our 2005 results to be implicated or impacted by rust. Nevertheless it is only prudent to broaden our knowledge of soybeans and other grains, and we are actively expanding our sourcing capabilities to other regions in the world. Including Europe, South America and Asia. To ensure consistent quality and quantity for our customers, and our own value added products. As Steve Bromley mentioned earlier, we continue to actively pursue our acquisition program, and make substantial capital investments to improve efficiencies and yields, and to develop new products. All of which are intended to improve profitability in the future. We have also put in place additional processes and resources to identify and implement synergies and take full advantage of our unique vertically integrated model. As we continue to implement our acquisition program. The economies of scale and centralization of processes, such as banking, insurance programs and others, will enable us to generate energies and reduce our cost base even further.

In the past year. We have also continued to build our management team with a focus on the effective balance between entrepreneurial spirit, and the increasing demands from a public organization, as well as our desire to maintain a cost conscious flexible and effective head office. Our values will remain our constant guide through the exciting challenges that lie ahead.

Since I also get asked about this frequently, I would like to comment briefly on the share holdings. Our major shareholders remain the Bronfman family, With combined holdings of approximately 20 percent. We are extremely fortunate to have this highly supportive family as our shareholder, and to have Stephen Bronfman as a director.

Our most recent shareholder information from NASDAQ, indicates we have approximately 90 institutional investors, up from 73 last year. Holding approximately 45 percent of the outstanding shares. Since 2003 we estimate, based on information received from ADP investor communication services, that our retail shareholders have increased from 6,000 to approximately 11,000. Excluding management and director's holdings, the float is approximately 85 percent of outstanding shares. Over the past year, our average trading volume was approximately 420,000 shares per day.

As we stated earlier, we are very pleased with our continued revenue growth over the past several years, which is fundamental in building our business and shareholder value over the long term. Growing our business at a compounded annual growth rate of 62 percent, over the past seven years, inevitably will result in bumps along the road.

But once again I want to emphasize and end by emphasizing our record revenues and our record earnings for 2004. So I would now be pleased to answer any questions that you may have for any of us at this table. Please keep in mind we maybe limited in certain answers for confidentiality reasons.

Thank you, sir. The question-and-answer session will be conducted electronically today. [OPERATOR INSTRUCTIONS] We will pause for just a moment. First question will come from Michael [Glenn], RBC Capital Markets.

Hi guys. I am filling in for Sarah O'Brien. Just a question on the organic growth rate of 17 percent you see going into 2005. I am wondering how you see that breaking out among the various divisions?

We have food at about is it 14.5, John? 14 to 15 percent. Minerals at -- 26 percent, and steam is quite high. But very small in the overall mix.

Okay. You mentioned the increased competition in the oat fiber business. I am just wondering if that competition is coming from [Ratenmeyer] and I am wondering if you can give an update on the Ratenmeyer oat fiber facility construction project.

Sure. You are right, the competition is coming from Ratenmeyer, and we have been in a position where we are aggressively defending our position in that regard. With regard to their facility, in Cedar Rapids, you will recall that they announced last year, they were building the facility, and I believe they indicated they would have it operational, sort of mid year to third quarter. From what we can tell, there has been some site preparation happening at that location. The building from latest information I had which was about a week ago, is that it really hasn't started. I would suspect they are behind schedule. I can't comment on where they are at, but they certainly don't seem to be on the schedule that they initially indicated they would be on. If it takes 12 to 18 months to get a facility up and running. You just have to extrapolate where they might be.

I would like to emphasize with the falling U.S. dollar, vis-a-vis the Euro, the opportunities for us to export around the world are usually increasing. It's a dramatic change in cost structure, of course, it also makes it very expensive for them to ship from Germany. But as Steve mentioned, we have now brought in a new person to head up our international sales development in Europe and Asia, in the oat fiber side, so we expect to generate significant improvement in the international markets.

Okay. And I have seen this number in the past. Can you give a run rate for the oat fiber business, an exit run rate, revenues?

About 45 million.

45 million, okay. Just wondering too, in your various Food Group divisions, I was looking at the distribution group. I was just wondering what the gross margin was in that division, and if there are any factors that might have impacted it?

The gross margin for that business in 2004 was 27-point sorry, 27.8 percent for the year. We have you know, budgeted it to be a little bit lower in 2005, but at the same time, we are expecting, their sales of course tripled in 2004 over 2003, to 75 million, but as noted, their exit rate was 105 million in that business. So we expect to see significant growth occurring, and they are also of course some acquisition opportunities in completing our full national picture. But we are now national, and able to supply the country. And this of course is particularly -- We should see some significant cost reductions coming from our new facility that we just opened in Toronto, the

Okay.

Three groups together.

Okay. And just wondering on the, you mentioned a dilution gain coming from the Opta Minerals transaction in the first quarter of '05. Are you able to quantify how that might impact Q1 or --?

I don't think I want to give a number yet. It does depend on the [green shoe], green shoe being the overall government provision that will expire on March 17th. At this point in in time, the Opta Minerals stock has traded above issue price since it was first issued, and that the underwriters have not had to use any of their green shoe to provide stabilization to the market. At this point I would expect the over allotment provision will be exercised next week.

Just.

Have a better feeling for what the total dilution gain would be.

Just a few housekeeping questions. Just wondering your cash flow from operations before working capital changes?

The cash, free cash flow, you know, we look at free cash flow in this way, that it is our net cash generation, minus the additions to working capital and the maintenance CapEx.

It is about 21 million.

Is that on the quarter or on the year?

For the year. About $21 million cash generation.

In the fourth quarter?

I don't have that.

I don't think I have that right here. We can get back to you on that one.

Okay. Thanks a lot.

You're welcome.

We will hear from Chris Krueger, MJSK.

First your Opta Minerals division, I am doing the math here and I see it grew 28 percent , but I thought you said 18 percent in the call on the fourth quarter, what is the correct number?

Are we talking sales growth rate.

I am --. -- yes. Yes.

Internal growth was 18 and there was an acquisition as well.

Internal growth was 18.

And the rest was acquisition.

In your segmented earnings, that you reported, where does the, does the one-time writeoff, is that excluded from those, or where does it fall if it isn't?

It is in the package group. And is the law suit gain from June quarter.

All right. Okay. Gross margin, I know you talked about various product lines but it looks like it came in about 17.5 percent for the quarter. Down from 19 last year. What does it really boil down to?

Chris, there is really, there is two or three key issues I tried to highlight when I was going through. Clearly, a fair amount of price pressure currently on the fiber business. While we defend our position and because of the dramatic falloff that we experienced in the fourth quarter, and are now seeing return back to levels. We had a lot of plant overhead that wasn't absorbed in the group. We couldn't react quick enough to address that. So, that was a significant issue versus the prior year.

Let's be clear of course. It was still a record revenue and earnings growth in that business. It was an outstanding year.

Yes. We just couldn't adjust the pipe fast enough to reduce some of the overhead which we subsequently have done and we will build back up as the volumes come back up. The second issue I tried to note was that at the, in the aseptic packaging facility, we had a tough fourth quarter with the expansions that were taking place, and the issues we had on the production of rice-based products that significantly impacted our margins in that facility, those issues are for all intents and purposes, behind us. That's the good news.

Clearly it was an issue in the fourth quarter and some of the private label business that we do bring on is a little bit lower margin, and it is kind of a product mix issue. And the last item, and I don't want to be any longer than it needs to be here, is we were commissioning two facilities in the Opta Minerals group. Both Baltimore, Maryland and Hardeeville., these facilities were opened up, and in the ramp-up process and in getting them effectively. We lost money in the fourth quarter. The margins were very low in both facilities. You know, but just to give you some perspective on that.

Baltimore, we initially built the facility out for 10,000-tons. We are going to expand that facility to 35,000-tons. We have a customer contracted to take the 35,000 tons of product. So we are going to realize nicely, but in the we were in the growing pains in the fourth quarter, and Hardeeville, SC was a building we bought in the late second quarter. We made capital improvements to that facility and started operating it actively, starting from a low sales base. But we have put sales people into the area and it is ramping up quite nicely, and may be sold out within a few months itself. But again, caused us to have lower margins.

I would sort of draw attention to, fiber and some of the pricing issues and adjustment issues that we went through. The aseptic packaging facility and our product mix a little bit, and the Opta Minerals new plant.

You think if we looked at the first quarter, throughout the current and fiscal '05 on a year-over-year basis, we will see gross margin exceed the prior year periods, or first quarter might still be a little bit down?

In terms of the year as a whole. We do expect gross margins to improve, and we are budgeting for growth in every single one of our divisions.

It is not acceptable where they are in the fourth quarter and we will be the first people to tell you that.

I am trying to get my model together. If it is improved or going to be back to ahead of last year's first quarter, or don't you want to go, comment on that --?

First of all, I don't think we know the answer to that yet. The month isn't over and we wouldn't want to comment on it right now.

Okay. Which, the private label or your own brands that have been written off, what are those brands?

The two brands were Rice-um and Soy-um, and just to be clear about that, that was a decision we took, and we are still producing for that customer. But with under somebody else's brand. So this is not. It is not a net lost of business here. Simply a change of brand, from one that we own, to one that somebody else owns.

Okay. I wasn't sure if there is more than those two or what they were.

Just those two.

And the last Sarbanes-Oxley, did you give a dollar amount in the fourth quarter what what you think Sarbanes cost you?

It is about 600,000 to 650,000 for the fourth quarter. That's the audit fees. Just the direct costs.

That doesn't include the consultants that we had on board. The directive, although we've had, -- Plus, of course, the complete commitment of the entire financial staff throughout every single one of the divisions. Let me emphasize again. This is an extraordinarily complex and difficult process, and the fact that we have come through now without any material deficiencies and expect to have a full clean opinion, is an outstanding effort on the part of our team. We are really proud of it, although I am fairly upset about the whole process.

You commented on the soybean supply, it appears to be in much better shape than a year ago?

Yes.

Yes.

Thanks.

Thank you.

Up next we will here from Mark Chekanow, Sidoti.

Back to the fiber issue, what I want to get at in these next few questions, what of the issues that hit you in the fourth quarter, should we really look to go into 2005 and certainly oat fiber pricing, seems to be something that would continue into next year, as you would expect?

We are going to defend our territory here. And continue to build. But you know, it is an impact.

I do want you to remember we put a 12 percent increase in in August, and certainly on the competitive pressures, we have had to give a portion of that back. But the price increase was there.

Now that business. It says will be seasonably lower any way in the fourth quarter.

As you get the food manufacturers who take their supply in prior to Christmas. It is a little bit lower. It doesn't have the same seasonality as the grains business.

It seems a lot of the issues you discussed were growing pain issues if you will. Some people are going to be somewhat forgiving, but the growth has no intention of stopping, so while these were the issues in the third and fourth quarter, you expect to continue to grow and integrate next year. What is to stop you guys from facing another year of more growing pains issues, that wouldn't be incorporated into the things we are modeling right now?

There are several things. We did invest very heavily in capital expenditures, as Steve mentioned, a number of those, from the 135,000 square foot warehouse, the consolidation of those here in Toronto, the consolidation of the two Montreal warehouses in the distribution business. The building of new warehousing in [Citco] and the new building and warehouses, and Opta Minerals, the transfer of the St. Thomas -- all of these moves are made for cost reduction and efficiencies. Those are all completed. We expect to see a significantly lower capital investment this year. When you do go through that many changes. Inevitably, you know, they take focus from people and so, I expect to see that, As I say, largely behind us now and we should start seeing the benefits of these capital investments in the coming year.

Two other points I make. A number of the issues were manufacturing related. We brought in a very seasoned Vice President to help us in that area of the business. He started in early this year. We clearly identified that as an issue that we needed to focus on. We have also redeveloped our integration team that goes out after and we've supported that and realigned that, to make sure we get out these issues and I think Jeremy makes a very good point as well. It was a heavy year of capital expenditure to meet the demands that we saw there.

Just aside from the capital requirement. Because of the magnitude of the projects, the efficiencies, and the indirect costs I guess, as you get ramped up with these, was mostly to blame for what, obviously a disappointing second half of the year from a profit basis?

Yes, I think that's a fair comment.

Any carryover from the Canada issue in the integration in the first quarter.

We really have the bulk of those issues behind us. This is the Montreal location. That you were talking about. It did trickle into the fourth quarter. But we have made significant process there. The much bigger issue in the fourth quarter is of course, rolling out and completing our Toronto warehouse and consolidating three operations into there. For all intents and purposes, there was some impact in the fourth quarter but not near, we made significant progress in our integration there versus what we expected in the third quarter.

Again, you haven't given EPS guidance. You won't even take a stab at range of EBIT margins?

We had our quarterly board meeting yesterday and we had a major discussion on do we provide, now, we are intending to provide revenue guidance and we will update the guidance mid year, as we did last year. The big discussion yesterday was, should we start on this path of providing you know, profit guidance. And in the end, we decided that we were not going to get on to that path, and it it wasn't. I guess it wasn't an easy decision. We do know that it would be very helpful to you and the other analysts to have some guidance here, but we still think we are on a very rapidly growing growth trend and it is, I don't know. We just decided we weren't going to get on to that path yet. We may do so in the future, but not yet.

When you look at the grains and soy product group, that you broke out. Margins were up year-over-year, am I reading this right? I show them almost towards a breakeven or was that 70,000 of EBIT -- ?

Our margin percentage as percentage of sales was up quarter over quarter. On a total dollar basis, the margins would be the total margin dollars, quite frankly they are even up versus the third quarter, which had higher sales. I was referring to the third quarter of this year not to last year.

Okay. All right. That's it for me, thank you.

We will take the next question from Andrew Dansek, Stadium Capital Management.

Yes, the two acquisitions that closed. K-B and the Organic Ingredients, how much did they add in terms of revenue in Q4?

We don't provide those details.

Looking at the press releases in aggregate. They were about $23 million in revenue annualized so, they would have had to add anywhere from 4 to 6 million, I would assume, in Q4. Therefore, if you look at the Food Group for the last 3 quarters, it has been basically sequentially flat, at around 71 million. I was curious with the 15 to 17 percent internal growth rate next year, what changes in terms of you know, a business that looks like it has flattened out, all of a sudden, growing 15 to 17 percent next year.

First off, you are not taking into account any of the seasonality quarter over quarter. So, to look at it and assume it is flat. Versus the prior quarter, doesn't account for any of the seasonality, which I suppose you may want to do in your assessment and analysis, but in fact, there is seasonality in the businesses, as we have explained on a number of occasions.

Can I ask a question, is Stadium Capital a shareholder in our Company?

No, we are not.

Then, we will not take any further questions from you. Thank you.

Sorry.

We take no further questions from you.

We will take the next question from Sara O'Brien RBC Capital Markets.

Hi guys. Just wondering, you talked about price competitiveness coming in from Ratenmeyer, do they have any American facilities right now? And if now, And how are they competing with the higher euro?

It is a really good question and we don't know the answer to that. They are a private company. They do have some cellulose operations, they don't actually produce the oat fiber here in North America, which is what they have indicated they wanted to do.

What they are doing, Sarah, is they are importing, essentially an initially partially processed product from Germany into their facility into Michigan, and then they are finishing it off in that facility, and that is essentially the last stage of processing, which is a grinding process. But you know, given the low density of this product, it is hard to imagine that it is a very profitable exercise for them particularly with the rise of the Euro.

So, you think they are trying to grab market share before they build up their facility?

We think that is probably right. That's why we are meeting them absolutely head-on at every occasion.

Is that why you are going to Europe? [laughter]

Definitely why we are going to Europe.

Okay. Fair enough. Thank you.

You're welcome.

Up next. We will hear from Keith Howlett, Desjardins.

Question on aseptic soy milk business, it looks like it is down on the year, maybe you can just comment where it is, and what the prospect is?

It was down on the year because we had a slow first half which we reported in previous calls. Much stronger second half in terms of volume, this is a result of increasing volumes, not just of soy milk, but the rice drink, that Steve referred to, and of course the signing of the Vitasoy contract in the last --, or last part of the third quarter really, and in addition to that, we have got you know, some private label contracts that have come in. We are expecting a good year in the aseptic. Soy milk, aseptic products in 2005. The plant is very busy.

And on the soy concentrate business, what is the, how are the trends there?

Well, of course it is soy concentrate business is a partly function of how busy the aseptic plant. So that is a significant part of our volume is concerned. Everyone is aware we also have been supplying soy concentrate for the Whitewave business, the Dean foods, but Dean foods has been constructing a significant number of their own facilities. We have a contract with Whitewave. That is a take-or-pay contract that goes through the end of 2005. So that's where that stands at the moment.

And of course, we are also building and really focusing on building private label soy milk contracts, I think we have announced that we are doing the contract for Publix and A&P, we've recently added a couple of other smaller accounts. We are hopeful there will be some significant new ones in the future. That is one of the key strategies now.

Then, just on the Canadian distribution business, I was trying to look at the fourth quarter, and subtracting the third quarter EBIT from the fourth quarter EBIT. I don't come up with any EBIT. I was wondering if something happened particularly in the Canadian distribution business?

Hold on one second. Let me grab some documents.

You know, we need to look at this to get more details. But our margins were fine. So I don't think so your conclusion is correct.

I may be in error. On the [Ebongola] contracts, where do we stand on that?

Sure. We have been, you know, we have an initial R&D contract that is ongoing with them, and our facilities, and we're doing the preliminary engineering and moving into the final engineering contracts, following which comes the equipment contracts. We are now ordering long delivery parts you know, as under contract for the first project in the United States. And as the detailed engineering, as it gets completed for the Spanish project. Then we are expecting that we will be a participant in providing equipment for that facility.

So, I think you will see, you will see some moving, we we have already started doing parts for the New York and Nebraska contract now. Like to see that moving fairly quickly from now. Also signed a preliminary engineering contract with another U.S. firm for another ethanol project and we've been doing some very interesting research and testing for other U.S. food companies, in different areas. They have been extremely busy. It's a very small division. There are only 8 people there, and they are covering their costs nicely with these contracts. I think we are going to hope to have a much bigger year this year.

When would we, I guess will we see it in a large equipment contract?

Exactly, Keith. I would hope that you will see that in the next you know, quarter or so.

Great. And just finally in the the consumer package segment, there is the aseptic soy milk and the Kettle Valley, and the other snack business. Dakota, I guess it is. What else is in there?

If you recall the [Lodge and Sods] retail package, that we produce in the U.S. And a small lineup of veggie burgers, very immaterial.

Does the move out of Rice-um and Soy-um, reflect anything about those other businesses, like the Edamame and other veggie burgers.

No, it doesn't.

We supply that particular retail chain, with a lot of other products. You know, from different parts of our business. So. It is, it is not an issue with the chain, nor with the company.

Okay. I get confused, the Rice-um and Soy-um, I can't remember if that is Trader Joe's or Costco.

Trader Joe's. You will now package it under Trader Joe's? Or alternatively other people.

Keith?

Yes.

Before you get off, I think John has got your answer.

We are showing profit for the fourth quarter, so just go back and check your numbers. You might be mixing it up from the distribution group.

So your assumption on distribution is incorrect.

Okay.

Thanks, Keith, bye.

Our next question will come from Michael Sproule, Octagon Capital

Question about SOX costs, Taking a look at other organizations and trying to under what their costs for implementing SOX was, it was difficult, but we were able to ascertain that their costs on a per capita basis or per revenue basis, were lower than yours. Is part of that as a result of having so many divisions, and second to that also is, you are going to do more acquisitions. How much cost can one assume it is going to continue to add for ongoing operating costs?

So, you know, first of all the information that we are receiving from our auditors, it is Price Waterhouse, plus others, as we talked about. It is typically people are spending 2 to th3 ree times their audit fee for the financial audit, and so we think that we are right in the ballpark at 2, and maybe even a little bit under. Yes, we have a more complex operation than someone doing a single business. No question about that. But there are also a number of companies that have just said. No, you are not going to make it. They just dropped them in that case.

When we acquire a new company right now, it doesn't have to be audited under SOX until a year later. Anything that we acquire in 2005, would not come under the SOX audit for 2005. What I indicated earlier. We anticipate it would cost us about $0.01 per share in 2005.

But that's as a result of just wrapping up the entire SOX audit this year --?

Obviously what you have got is your controls in place and the documentation of the controls but every year now, these controls and your use of these controls, have to be audited completely separate from your financial audit, and a separate financial opinion provided. It doesn't go away entirely. Clearly. You hope you are going to get some benefit from the process. But it does go to you know, extremes. So.

As you mentioned, there is little or no management information coming from this process that you have gone through.

I wouldn't say that. What I was saying is, because of the fact that our financial people were so consumed by achieving and putting this whole process in place. They were diverted from some of the activities they ought to be doing, all of us ought to be doing, which is in terms of managing our business. It has taken some focus off that, and I'm sure other people report the same thing. I think we will get some benefit from the future. It just goes to extremes.

Any other one-time costs you see on the horizon?

No.

Anything you can think of guys?

Nothing at this point, in time. No.

Okay. Thanks, guys.

Gentlemen, there are no further questions. I will turn the conference back over to you for any additional or closing remarks.

Again, I would like to thank you, and again emphasize that revenue growth is primary to us. We are continuing on our three year plan here, and you know, we are totally conscious of the profits. We are not satisfactory in the fourth quarter, but I believe that the investments we have made, and the acquisitions we've made, and the growth in our core business, will see us with much improved results in the coming year. Thank you once again.

We would like to thank you for participating in today's conference. Have a great day .