Sunopta Inc (STKL) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the SunOpta third-quarter 2005 earnings results 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.

Thank you very much. Good morning, ladies and gentlemen, and welcome to the third-quarter 2005 investor call for SunOpta Inc. I am joined on this call today by Steve Bromley, the Company's President and Chief Operating Officer; John Dietrich, the Company's Vice President, Chief Financial Officer; and Ben Chhiba, Vice President and corporate counsel. Before I begin I would like to remind listeners that except for the historical information the matters discussed during this conference call may include forward-looking statements, including statements relating to 2005 and 2006 operating results that may involve a number of risks and uncertainties that could cause actual results to differ materially. These risk factors are detailed in the Company's filings with the Securities and Exchange Commission.

Please note that our financial results are reported in U.S. dollars in accordance with U.S. GAAP. A reconciliation to Canadian GAAP will be available in the notes to the consolidated financial statements, which will be filed with our 10-Q for the period ending September 30, 2005 by no later than November 9, 2005. All financial and related numbers addressed on this call are presented in U.S. dollars.

We are pleased to report revenues of 115 million for the third quarter. This is the highest quarterly revenue in our history and is the second consecutive quarter in which we exceeded 100 million in revenues. Our revenues for the third quarter represents an increase of 43.4% versus the same quarter last year. Revenues for the first nine months rose to 304 million, representing a 36% growth rate over the same period last year when we realize revenues of 223.6 million. We expect to equal or exceed our revenue guidance of 415 million for fiscal year 2005, which will represent an exit rate of approximately 450 to $460 million.

We will provide revenue guidance for fiscal 2006 early in the new year once all of our business planning is complete. However, I can say at this time that we anticipate stronger internal growth in 2006 as the result of the new aseptic soymilk contract which we recently announced and further internal growth initiatives, which are well underway. We will provide further insight into these in a few moments.

We continue to target a revenue exit rate for 2007 of $1 billion. We believe that this level of revenue will enable the Company to benefit from economies of scale, to leverage the impact of costs related to the Company's public status, and allow the Company to cost effectively compete in the segments within which we participate. We expect to be able to reach this target through continued expansion within our existing operating segments, by a combination of internal growth and accretive acquisitions. We expect to continue our acquisition activity within our current segments. So it's important to understand we're not expanding our current segments.

As our core business continues to grow larger each year, our acquisitions will become an increasingly smaller percentage of our total annual growth. We do not expect to enter into any new business segments. I'll say that again -- but intend to stay focused on the areas within which we are operating. Each of our operating segments are focused on key components of today's healthy eating trends and the USDAs new dietary guidelines, which call for increased consumption of fruits, vegetables, whole grains, fiber and plant oils, including soy, corn and sunflower.

Net earnings after minority interest for the second quarter were 2.1 million or $0.04 per diluted common share. Net earnings after minority interest for the nine months ended September 30, 2005 were 12 million or $0.21 per diluted common share. Year-to-date earnings include the onetime impact of the net dilution gained on the IPO of Opta Minerals in the first quarter, of 4 million or $0.07 per diluted common share.

Quarterly earnings reflect strong results in the quarter in our Packaged Products group and fruit businesses offset by the ongoing issues in our ingredients and Canadian food distribution business, which we have previously discussed. On a year-to-date basis our internal growth rate is 11.7% and excluding the decline in fiber, our internal growth rate year-to-date is 13.9%. Gross profit in the quarter declined to 15.9% of revenue. This is due to a number of factors, including the issues in the ingredients and distribution businesses, plus the product mix impact of the newly created Fruit Group, where margins inherently have run lower and the impact of our margin improvement initiatives to address this have yet to be fully realized. We expect our gross margins to show continued improvement as numerous cost reductions, better plant utilization and product mix and other activities come into fruition.

Selling, general and administrative costs as a percentage of revenues declined to 10.6%, reflecting the impact of continued cost control and the leverage created as the Company continues to grow. Our effective tax rate was 22% for the quarter and 26% year-to-date, within our normalized guidelines of 26 to 31%, which is dependent upon business mix and the impact of tax planning strategies.

And the Company's balance sheet remains strong, as of September 30, 2005 with 6.1 million in cash and sufficient financial resources to continue to fund operations, invest in capital projects and fund future growth opportunities. Shareholders equity was 158.6 million, representing a book value of $2.81 per common share, up from $2.72 at June 30, 2005.

Long-term debt increased to 53.4 million, primarily as the result of acquired debt and debt to fund acquisitions. Our long-term debt to equity ratio is 0.34 to 1 at the end of the quarter and below our operating threshold. As at the end of the quarter, our actual common shares outstanding were 56 million, 497,895 shares and our diluted weighted average number of shares were 56,870,887.

Looking ahead to 2006, we believe that the key elements are in place to realize strong operational and profit performance. Apart from energy costs, which affect our production, packaging and logistics costs, we do not expect to encounter any other significant issues in 2006. With regard to energy much of our production from our plants is sold FOB to plants thus partially reducing our exposure in this regard. Incoming freight and processing energy costs are areas where we have a companywide task force focusing on purchasing and pricing strategies, conservation and utilization with the objective of reducing our exposure to these costs wherever possible.

Our profits for the third quarter are not at a level that we deem appropriate for our business. A number of issues have impacted our bottom line results for the quarter and year-to-date, but we are confident that we have taken the required actions on these issues to the point where we believe they will not significantly impact financial results going forward. The first three quarters of 2004 were the height of the "low carb" market. A time when our oat fiber plants were essentially sold out and a period when we doubled our production capacity to meet that demand. The same period in 2005 has represented a significant decline in the "low carb" market. So the comparison year-over-year is not pretty. It is important to recognize, however, that through this entire period the demand for oat fiber has continued to grow in our core applications. Specifically, the need to add more fiber in our diets, perhaps the most important food trend today, and the functional uses of oat fiber like adding strength to reduce breakage in products such as taco shells, crackers, pretzels and pet foods, as well as moisture retention applications, such as meat extension. We have seen a steady increase throughout the year in oat fiber sales and have implemented a number of profit improvement initiatives as well. Steve will provide more detail on this in a few minutes.

The results in our Canadian distribution business have also been difficult as we have been going through nine months of integration. We built and completed our new state-of-the-art distribution center in Toronto in the first quarter and have gradually merged in three separate organic and kosher grocery distributors over the last nine months. In the process we have had duplicate warehouse costs, extra personnel and reduced focus on building the business. With our three businesses now fully operational at the new facility, this issue is largely behind us. We have virtually eliminated duplicate warehouse costs, streamlined personnel and now have the capacity to grow. We are excited with the outlook for this business going forward. Prior to our last conference call we announced that we had received a contract to supply Steam Explosion equipment to Abengoa's plant in Salamanca, Spain, where the equipment would be used to produce ethanol from wheat straw. This contract is on schedule, and the Steam Explosion technology group reached revenues in the quarter of 1.9 million and contributed to our operating income. The equipment is expected to be delivered by the end of the first quarter of 2006 with startup by next summer.

Let me now turn the call over to Steve Bromley, our President and Chief Operating Officer, for an update on each other of our business operations.

I am pleased to provide further details on key activities within each of our operating units. The third quarter was a busy period where for the most part we focused on positioning each of our business units for improved profits in 2006. Numerous initiatives have been detailed, and many implemented during the third quarter. Let me expand. In July, we announced the acquisition of 100% of the outstanding shares of Pacific Fruit Processors Inc. located in South Gate, California. Pacific manufacturers value added fruit-based ingredients for the bakery, dairy and beverage industries. Via extensive R&D capabilities, the company offers custom formulated fruit-based ingredient solutions for a wide range of specialized applications.

As a result of this acquisition, we announced the formation of the SunOpta Fruit Group under the direction of Sergio Varela, comprising the operations of Organic Ingredients, Cleugh's Frozen Foods and Pacific Food Processors. The integration of these businesses has enabled SunOpta to become an important player in the natural and organic North American frozen fruit and ingredients market, a large and rapidly growing market driven by consumers dedicated to making nutritional choices that will improve their health and quality of life.

During the quarter the group realized revenues of 27.5 million, representing 23.9% of Fruit Group revenues. Segment earnings before interest and taxes were 1.264 million or 39.7% of total Fruit Group contribution. We are extremely pleased with the Fruit Group's performance to date and the outlook for the future. A $4 million cost reduction profit improvement plan has been identified and is in the process of being implemented. Based upon consolidated purchasing benefits across the group, reduced workers compensation insurance and employee benefit costs, and a number of specific operating efficiency improvements. The Fruit Group is also currently assessing a number of facility improvements including automation and capability expansion projects and expects to implement a number of these by the second quarter of 2006 in time for the upcoming strawberry production seasons. The Fruit Group is currently pursuing a number of new business opportunities, as well, and is forecasting internal revenue growth in 2006 of approximately 15% with solid upside potential from growth in organic products. We are extremely pleased by the group's progress to date and the exciting opportunities that lie ahead.

Within our Grains and Soy Products Group we announced the acquisition of certain assets of Earthwise Processors in May 2005. Earthwise is a vertically integrated producer of organic and identity preserved non-GMO grains with a primary focus on soy. This acquisition has provided SunOpta with an expanded and diversified grower base and product offering and has been integrated with existing grains operations.

During the quarter Earthwise felt the anticipated impact of the poor soy crop from the fall of 2004. As volumes were low, resulting in inefficiencies at the processing facility and a negative return for the quarter. This had a significant impact on the group's quarterly results; however the good news is that this year's soy crop in the Earthwise growing area is excellent, thus boding well for 2006. During the quarter the Grains and Soy Products Group realized revenues of 25.6 million versus 23.2 million in the same quarter of 2004.

Internal growth was generally flat in the quarter after accounting for the acquisition of Earthwise but up 7% year-to-date. Segment earnings for the quarter were 323,000 versus 341,000 in 2004. Revenues for the nine months ended September 2005 were 74.2 million versus 65.5 million in 2004, representing the impact of the acquisition of Earthwise and strong growth in sunflower and IP soybeans. For the nine months segment earnings increased 94% to 3.718 million.

During the third quarter the business was impacted by poor yields on the last of the 2004 IP soybean crop, along with the impact of increased freight costs. In June and July we contracted additional sunflower crop from Texas growers to ensure early supply in the short North American sunflower market. Unfortunately, this crop proved in the end to be of low quality, significantly impacting processing yields and our margins in the quarter. This crop has now been processed and sold, so this issue is now behind us.

During the quarter we also experienced some late-season product quality issues and delays in the shipment of sunflower kernel products, which we do expect to ship in the fourth quarter. Contracted volumes for 2006 are strong. While a difficult quarter to say the least in our Grains and Soy Products Group, we remain bullish on 2006, especially given the quality crops that we are currently harvesting. We have not experienced any effects of soy-rust in our growing areas, a major concern earlier this year. The soy, corn and sunflower crops in North America appear to be of good quality and yield providing a solid foundation for next year's business.

As Jeremy mentioned, the SunOpta Ingredients Group has been dealing with the year-over-year impact of the decline in the low carb market and the resulting impact on the demand for oat fiber. The third quarter of 2004 represented the last of the low carb boom and therefore the last quarter of poorer comparison. Revenues for the SunOpta Ingredients Group were 15 million for the third quarter versus 17.4 million in 2004. Segment earnings were $962,000 versus 2.537 million in 2004. The impact of the volume and margin decline is quite evident and represents a decline of approximately $0.02 per diluted common share in this quarter alone. Revenues for the nine months ended September 2005 were 45.4 million versus 49.3 million in 2004. For the nine months segment earnings were 2.931 million versus 6.634 million in 2004 or approximately $0.05 per diluted common share.

Over the past year we have implemented an extensive series of cost reductions within the SunOpta Ingredients Group to offset the drop in fiber volumes. Year-to-date we have realized profit improvement from these initiatives of over $1 million. As we develop our business going forward, this rationalized cost base will be the key to driving improved financial performance. Growth in fiber volumes is crucial to improving earnings as our three highly automated capital intensive fiber facilities have a high component of fixed costs. As volumes improve, we experience these efficiencies.

We have previously mentioned our four phase plan to restore our fiber business. International development, new markets, specifically pet foods and meat products, whole grains product development and finally the broadening of our fiber portfolio. We are making significant progress. On the international front we have now re-established our presence in a number of key markets including implementing strategic partnerships with new distributors in South America and Israel. In the third quarter these initiatives spawned a number of new accounts in Israel, representing over 600,000 pounds of fiber annually.

Our business in Mexico as a major producer of baked goods is robust and growing nicely. We continue to work diligently to expand and improve our global network. We have realized a number of new pet foods and meat-based applications, which will show their benefits over the coming quarters.

We launched our organic oat and organic soy fibers early in the third quarter. Interest has been high, and we expect to realize the benefits of this initiative in 2006. A number of customers are utilizing our whole grain blends to service this fast-growing market. The outlook for 2006 in our fiber, brands and germ business is very positive. Our current projections suggest internal growth in fiber of oat fiber volumes of approximately 20 to 25%, and internal growth in brands and germs of approximately 30 to 40%. This is exciting and proof of the efforts of the past year.

Packaged Products group revenues in the third quarter increased by 35% to $14 million, while segment earnings increased by 102% to $847,000. In the nine months ended September 2005 revenues increased 32% and segment earnings by 93%. The increase in revenues and earnings is primarily attributable to the impact of numerous process and equipment upgrades at our facilities and the continued strong demand for aseptically packaged soy and soy beverage and roasted soy, corn and sunflower products.

Our aseptic packaging facility continues to produce in excess of 100,000 cases of finished products per week and continues to upgrade processing and packaging capabilities to meet demand. In addition, our roasting facilities are nearing capacity, and we will need to expand capacity in the coming months to service new business opportunities.

Last week we announced that we had signed a three-year exclusive contract for the supply of shelf stable, aseptic packaged soy milk for a major global retailer. This contract is expected to commence in mid December of this year and generate approximately $20 million of annualized revenues. We are extremely pleased with this contract as this further utilizes our field-to-table soy foods expertise and presents further opportunities to grow our organic foods business with this major global retailer.

The Canadian Foods Distribution Group realized revenues in the third quarter of 22.3 million, a 15% increase versus 2004. Segment earnings declined $812,000 to a lot of $216,000. As mentioned in previous quarters the distribution group has been dealing with a number of integration related issues. Revenues for the nine months ended September 2005 were 74.5 million versus 52.8 million in 2004, representing the impact of acquisitions completed in 2004 plus internal growth of 6.6%. Internal growth for the third quarter was approximately 9%, signifying the positive momentum of our national listing objectives.

A series of initiatives have been implemented and significant progress has been made in this group. During the quarter we completed the transfer of three natural organic and specialty food distributors into our new 135,000 square foot warehouse in Toronto. This initiative will generate annualized savings of approximately $2 million. In addition, the distribution group continues to pursue and expand its national grocery listing base with the objective of adding $7 million in annualized revenues. A good portion of this objective is now committed. The group has also embarked upon a $1.4 million cost reduction profit improvement plan on the fresh produce and fruit side of the business with targeted spoilage reduction, reduced labor costs and business growth initiatives. The bulk of these initiatives have now been implemented. As part of this plan, we recently announced the Western Canada warehouse operations will be streamlined with all fresh produce and fruit distribution consolidated in a single facility, effective November 6, 2005. This will streamline customer service, reduce spoilage and improve the use of our facilities by providing much-needed warehouse space to accommodate continued growth in grocery products. The outlook for the business is very positive as the expansion of national listings and cost reductions implemented this year position the distribution group for a strong 2006.

Today we are announcing our new name for the Steam Explosion group. This name be the SunOpta Bioprocess Group which more accurately reflects our business purpose. As Jeremy mentioned earlier, we are working hard in our bioprocess group on our initial equipment contract with Abengoa. We are confident that this project will be delivered on time and on budget. In addition, the Company is also supplying the Steam Explosion technology and equipment to the second Abengoa project in York, Nebraska and is discussing the provisions of additional plant equipment for that plant. These projects are providing increased credibility in our technology.

There is continued and growing interest in our Steam Explosion technology from the U.S., Europe and China fueled by the high price of oil and the announced commitment by the U.S. and Chinese governments for the development of ethanol from biomass plants. We are increasing our marketing efforts now that the Spanish contract is well under way.

Opta Minerals has had a profitable quarter in year to date, but growth was relatively flat. This was largely a result of slower sales in the foundry and chromite sand markets offset by the emerging growth in the new roofing granules and specialty abrasives plants. The new plants in Baltimore, Maryland and Attica, New York are only now coming into full production and both appear likely to operate near capacity as a result of heavy demands for roofing shingles and the abrasives used therein.

Similarly, the Hardeeville plant in South Carolina is also increasing its abrasive sales and with minor capital investment will be able to supply roofing shingles, as well. In addition to blasting abrasives, with the increased utilization of these facilities and the introduction of a number of new abrasives and mineral products, the outlook for 2006 is very positive. Sales from our Louisiana facility were impacted by Hurricane Katrina. Our facility is now accessible by truck and repairs to the plant are underway. The facility should be returned to operational status no later than year end, and we expect business will be brisk in this area as the repairs commence.

Thanks, Steve. During the quarter we implemented our new Oracle operating platform at the SunOpta aseptic operation, four SunOpta ingredients facilities and also our corporate office. This was an exciting step for the Company following approximately 18 months of extensive development and process re-engineering. These implementations have gone as planned, and we are in the process of refining activities and the related processes. We are funding the next phase of our implementation for March 2006 in order to ensure that we stay in compliance with the requirements of S-Ox 404 where it strongly advises that companies do not do conversions during the last quarter of the fiscal year.

As we continue to grow our Company, the importance of a consolidated reporting and operating platform cannot be understated. We have also been very active in the last six months in the development of a corporate branding initiative designed to further internally integrate and leverage the SunOpta corporate umbrella. This will drive a number of strategic and cost benefits, but more importantly will raise the profile of the SunOpta corporate banner.

Finally in an effort to improve our overall cost base we have implemented a number of cross organization cost reduction teams focused on a number of key areas. These areas of focus include further integration of our corporate purchasing, which leverages the economies of scale from our larger organizations, a task force on energy utilization and a task force on freight and logistics. These teams are extremely active in this time and are expected to generate annualized pretax savings of approximately 4 to 6 million over the next 18 months.

We should also remember that last year was the first year in which we had to comply with Sarbanes-Oxley. We passed that audit, but in the process this huge undertaking diverted focus from our operations and was costly. This year our audit costs are down by more than 50% from 1,350,000 to 625,000. We are in good shape for this year's audit and have gained significant efficiencies over last year's implementation. We have now reached the stage where we believe it may be beneficial to list our stock on the NASDAQ national market system. We have avoided it in the past due to the extra cost, but NASDAQ has applied to the SEC to reduce the fee for transferring to national listings. That decision should be received by year end, and we will apply before the end of this year.

As we look forward to 2006 approximately 50% of our food business is in the organic market and 50% is in the healthy eating category. The organic market continues to grow in the 17 to 20% range per year with the latest estimate reaching a 15 billion market in 2005. We see that the growing awareness of the benefits of organic food is manifesting in a greater commitment by the retail sector to offer more and more organic products. Many of which now carry a private label. At least one-third of our business today is now in the production of private-label products, and we wouldn't be surprised to see this figure reach 50% over the next several years.

As one of the largest organic food manufacturers we are well-positioned to participate in this trend and particularly in product categories such as frozen fruits and vegetables, fruit juices and nondairy beverages, sauces, salsas and condiments, soy products, fruit bars and healthy snack foods. Let me say one more time our two primary issues in distribution and the falloff of the low carb are now largely history, and we have the capacity, the products and the commitment to grow our profits substantially from this space. All in all we look forward to completing 2005 on a positive note and are very optimistic about 2006.

With that I would like to open the call for questions.

(OPERATOR INSTRUCTIONS) Sara O'Brien, RBC Capital Markets.

Quick question just about acquisitions. Jeremy, you alluded to the fact that acquisitions will play a I guess a less important part going forward as your revenue base is higher. Can you just quantify it maybe how much debt room you have now to make further acquisitions at this point?

Probably we have at this point in time in terms of arranged lines of credit, about 20 million, probably today. But in terms of actual capacity on our balance sheet should we wish it would probably be -- if we wish to take the debt equity ratio up its probably more like 50 million.

Okay, great. And just wanted to circle into the Ingredients Group. The fall off in the EBIT margin was that all due to the oat fiber and if so was that all a volume issue or where there other issues in the plants as well?

There was volume and pricing. The competition in the market we matched up to maintain our volume, so was a combination of volume and (inaudible).

I want to emphasize again, Sara, that these plants, as Steve said, are highly automated facilities and they run 24/7 and so they have a very low raw material cost that starts with. So most of the costs here are fixed with perhaps the exception of energy. So once you've gone past the breakeven point, which we are well past of course in these plants, any incremental sales have a huge effect on gross margins. And so that is the space that we are at now where we are seeing -- we've seen steady growth in gross margins all the way through the year. And we are seeing steady growth as Steve has said in our revenue side. So we will see much, much better results now from these facilities.

So volumes like right starting in Q4 are picking up substantially with these new initiatives you have?

Yes, they have been picking up steadily now each month. I expect October probably will be our strongest month, and as Steve mentioned we've landed a number of new accounts, significant new accounts. And so we are really pleased with the progress here. We are at the point now we are even beginning to discuss having to expand the capacity at our Louisville facility. So it is virtually at capacity. The other two plants are more in the 60 to 70% range but are rapidly improving. So we are very optimistic here.

And you made reference to growth in pounds of oat fiber. Can you tell us what your capacity is right now?

About 50 million pounds.

And just wondered in the distribution group we saw a revenue fall-off quarter-over-quarter. I just wondered if there is seasonality or some other explanation for that.

It is seasonality. In the third quarter the fresh produce side falls off substantially as there's a lot of local markets that open up, so the demand for our product is lowest on the produce and fruit side in the third quarter.

Okay, and maybe if you can just talk a little bit about accounting for Steam Explosion contract. Is that something that's going to be recognized sort of evenly throughout '06, or is it sort of a percentage of completion?

We account for it on percentage completion and I can tell you that approximately 30% of the Spanish contract has been recognized in the third quarter. So that is very carefully assessed, and we expect to ship the equipment, as I said in the second quarter but most of it will go by the middle of January.

Maybe just John if you can give us a breakdown of gross margin per division within the Food Group of grains, ingredients, food package and distribution.

Grains group was at -- for the quarter 8.1%.

Can you repeat that?

8.1 for the Grains Group. Ingredients was at 18.8; Fruit Group at 12.9; distribution at 24.5 and Packaged Products at 13.9.

Okay.

For a weighted average on the Food Group of 15.2.

And just wondered if I could also get detail on cash flows, so GAAP cash flow from operations.

While John is looking at that I just want to point out that approximately 1.5% of our decline in the gross margin is the result of including the Fruit Group, which runs at lower margins. When you look at the comparison. But then their operating income was very attractive in the quarter.

Perfect.

Cash flow from operations if you start with earnings of 2 million, and add back amortization of 2.2 million, some other minor adjustments with the gross minority interests and some gains on sales and then changes in nonworking capital of 7.2 million negative for a negative of 3.5 for the quarter. The big change in the quarter is on payables. Essentially we have a lot of capital projects up through the end of June and a lot of those are behind us and paid off, as well as just the seasonality of how grains are paid for as well as how Opta Minerals price their inventories and from overseas and buys up front.

Scott Van Winkle, Adams Harkness & Hill.

I will start with the easy question first. Does the Steam Explosion name change and this is probably kind of an old question, but does this imply that you have really kind of given up on the pulping industry as an opportunity there?

No, not at all. The process really does also apply -- it is a process of converting biomass hence the bioconversion name. So no, it doesn't affect that. It is -- we are continuing to market in and we just had our agent from China here two days ago. Then looking at various projects in China we have also broadened out his activities now to represent us on ethanol, because China produces more ethanol from corn than the U.S. does in total. Has a huge commitment there because they have to import so much of their fuel. And have also announced a really large commitment bigger than the whole of the ethanol production in the U.S. for new facilities to produce ethanol from biomass. So our technology has a very, very important role here. And so we are pretty excited about that. So we will continue to market both pulping and ethanol in China but our focus of course is in North America now where there are numbers of projects that we are talking about.

And on the oat fiber, what level of utilization are you at currently with your global manufacturing?

I'll break it down by facility a bit for you. Cambridge would be 60 to 70%. Cedar Rapids would be 50 to 60. Louisville would be in the 90 plus range.

And is that a reflection of better margins in Louisville than the other two?

No. We do different fibers at different facilities. The fiber that Louisville is producing has been really growing quite nicely.

Okay, and if we could step back on the sunflower issue in the quarter, do you not have any recourse when you go out and buy product on the market? I assume it was not to the quality you expected, but what kind of recourse do you have and when do you know it? Do you know when it comes in? Do they tell you it is a lower grade or do you just start running the processing and you say, oh oh?

Well, you buy -- there is some recourse but the fact of the matter is you buy by weights, and the weight was there. The quality wasn't as good for the applications that we had intended this product to be used for. And so we couldn't sell it into the applications that we wanted to use it for, and which was a higher margin obligation so we had to sell it into lower applications. So it is fairly late in the harvest process when you really get a feel on the size versus where you wanted to go with the product. So this is later in the process. There is some recourse; we have taken that recourse but it is not sort of 100% recourse.

And let me just put this in perspective again is the reason that we went to Texas last year which is the first time we had grown there was because there was a shortage of sunflowers in the U.S. as a result of very poor crops in the North. We were fortunate enough for the most part to grow our crops in the irrigated lands in Kansas and achieved very good crops. So we had a very good year overall. This year the crop results, as Steve mentioned, are extremely good, they are both, high-quality, the yields are good and what Steve has mentioned the size of the seed is a very important part of our business is also good. So this bodes very well for us for the upcoming year. So what we had to do in the fourth quarter was essentially to sell out this Texas product, which was smaller seeds and therefore they went down into a lower category in terms of value. We have pulled that out and put in -- in the process kept our plants running which was important. Now we are into the new crop and God bless it, it's great.

Can you quantify a little better how the crop looks this year relative to last year and do the same thing for soy?

We can say unequivocally that this is the best year in our history of being involved in soy, corn and sunflower. The quality throughout our growing area is absolutely great. The yields are great. Steve talked about Earthwise, for example. It is right across the board. And the important thing about that is that it gives you guaranteed supply, excellent quality, stable yields. It provides you a really firm foundation for our business, which is very much centered around these products, a firm foundation to grow for the next year. So we are delighted that that's the case.

And on the distribution integration this quarter, what types of specific disruptions did you expect? And I guess when I think about it, I think about one -- you might have had some onetime costs for moving equipment product from one facility to the next. You certainly had disruption with higher expenses as you're trying to duplicate efforts and then some lost sales as maybe the truck couldn't be there at the right time or something of that nature. Am I thinking about it right?

Yes, and you have duplicate warehouse costs; in fact the last warehouse lease doesn't run out until November. As Steve said, these changes are virtually all behind us, and they are other than that one cost. We had ended up with significant reduction in personnel in the process. But of course, you got the severance costs to go with that.

And extra people that you carry through your transition.

And also you're of course so focused in terms of moving the business in and completing the construction of the facility and putting the new software in. So you just don't have the same amount of time and energy left to focus on growing the business for that period. We are past that now, and Steve said, we have already landed almost $7 million of new annual contracts, recently landed Celestial Seasonings for example from Hain Pure Foods and a variety of other New York Flat Bread, a whole bunch of different products.

Those are all exclusives I understand with the vendors?

Most of the agreements that we sign now are exclusive. (multiple speakers) as an example is a national exclusive.

Jeremy, but walking through that facility about a month ago and I would guess there was probably an opportunity to expand your products in there 30 or 40% given the extra space you had. How long do you think it will take you to fill up that Toronto facility with expanded productlines?

Probably 3 -- (inaudible) 6 to 12 months.

Its going to take a year probably and something in that range. So we got some really good growth in front of us now. And it likes the oat fiber plants, it is the same thing, as you got a lot of fixed costs and so as you fill these facilities up a good deal of the margin goes through to your bottom line, and that is the situation that exists. The same applies to our aseptic plant with a new soymilk contract. That plant will now be running at virtual capacity. And so it does certainly help your margins.

And do you have room in that plant to throw some more equipment in there if you win another couple of easy accounts?

Yes, we do have some room to do that, and we will be moving now from a six-day, 24-hour, to seven-day 24-hour operation. And we will be making some minor modifications to expand on the equipment side. We believe our existing warehousing is adequate to handle this increased growth. But this is a big, big increase in our business.

Is resin a good chunk of that Tetra Pak packaging and do you see any costs go up there?

I didn't hear.

Is resin a component of Tetra Pak packaging?

It is, not substantial.

And last question, you guys always give revenue guidance (indiscernible) earnings guidance, I'm just looking at the consensus estimate here for Q4 and you know it looks pretty aggressive. There's no reason why your normal seasonal flow from Q3 to Q4 where earnings are flat to slightly down just from the nature of seasonality that is not going to change this year. I mean, I would assume expectations seem to come in here on the Q4.

I think that's right. It is of course on a bigger base than last year in the fourth quarter, I mean we will obviously will be running higher.

The seasonality is still inherent in the business, Scott.

Thank you, guys.

(OPERATOR INSTRUCTIONS) Mark Chekanow, Sidoti & Co.

When you look at the packaged foods group right now how much do Dakota and Kettle comprise of that versus the aseptic packaging business? I guess roughly like on an annual basis excluding the new contract.

Percentage of revenue -- let me just think quickly here.

You can give me round dollar numbers. I'm just trying to get an idea what the composition of the packaged group.

15 to 20% in that range. We will dig that out for you, Mark.

15 to 20% is Kettle and Dakota?

About 30%, Mark.

Okay, within that group Dakota Gourmet is running 24/7 right now with large amounts of roasting business and that is doing very, very well. Kettle Valley went through a bit of a slower quarter this year -- this past quarter because their largest account is the Wesson group or lob los (ph) in Canada, and they were changing their packaging. That packaging and creating a new display case that is now been done and so this quarter well this and ongoing from here should be much stronger. We've also recently added a couple of other major retail accounts in that business. So we'll see improvements and of course, the third part and the biggest part is the aseptic packaging plant; we are right across the border, customers are increasing their purchasing. And we are certainly, we're seeing growth in the aseptic soymilk but we are certainly seeing on our part a significant increase in market share.

So if we look at your package business kind of give me maybe a $50 million annual business. You're saying that 30% is the kind of Kettle, Dakota and 70% or so is aseptic packaging, a rough breakdown? And so that would imply aseptic packaging about a $35 million business. You are saying you have a 20 million dollar contract that is more than 50% growth. Is that kind of the numbers we are looking at?

Just verifying that now. That's fair, Mark.

You might have to take out your pencil for this one but now that we have steam generating a little bit more, generating some real revenue, can you give us an internal growth rate for the Food Group?

For this year?

For the quarter, 3Q internal growth on the Food Group.

While we are digging that out, Mark, do you have another question?

The Fruit Group, now that we have it all the pieces in place you got 100 million plus business, on an annual EBIT margin, once you get some of these integrations in, is that still kind of a 5 to 6% EBIT margin business or do you see potential even beyond that, once you get some of these synergies from everything kind of working together?

I think that there is significant upside, we are targeting operating margins in the 5 to 6 range. We would hope that there are some real opportunities to expand beyond that.

And you can comment on the oat fiber competition if you're still working on that internal growth number.

The internal growth for the quarter in food was 9 year-to-date, 10.

For the quarter or for the year?

9 for the quarter, 10 for the year.

Okay, and can we talk about rettenmeyer (ph)?

I don't really have very much new to say about that. Their facility hasn't opened. We are still not very clear as to what exactly they are going to be producing in that facility. We know that oat fiber isn't the main production but how much they are going to produce or if they are going to produce we still don't know. We believe it is still a number of months away, possibly a year away before that happens. So I can't say any more than that. Just don't know.

Maybe six or nine months ago on a Call I thought you guys had mentioned that there are things you can work on as far as maybe trying to lock up or I don't want to say corner the -- but kind of lock up the supply of the raw material that comes there to limit other peoples' access. Are you working on just buying as much of this up as possible to make it difficult for anyone else to come in and buy the raw materials there?

(multiple speakers) there is an abundant supply of raw material in the US and its just not really possible to lock up the supply other than perhaps in a general area, specific area I mean. What we are doing of course is being very aggressive in the marketing side and we have won a number of accounts from rettenmeyer. We are the dominant supplier in the U.S. We probably have 80 to 85% of the market today.

How is progress in Europe coming? (multiple speakers) sales guy over there.

One of our great strengths, mark, is that we have a national sales team that is backed up by a national team of technical specialists. And we have extensive kitchens across the U.S. So we can do a lot of product testing and I think one of the ways that we are trying to differentiate ourselves from the competition is through that ability to help customers define how they can change their products and actually produce products in our kitchen for their testings. As far as Europe is concerned, as Steve mentioned we have landed a number of accounts; we've recently appointed an excellent distributor in Brazil. And the initial results are starting there. We are starting to sell into Argentina, Australia, New Zealand. We are appointing agents in North Korea and Russia and various other places. So that process is very active under our new director of international marketing for that group.

Great. Thank you.

I picked up the wrong number off the spreadsheet, the year-to-date Food Group revenue is 11.5, 9, not 10. The growth rate.

And the 9% for the quarter was the right one?

Yes.

Okay. Thank you.

Chris Krueger, MJSK.

A lot of my questions have been answered, but for the internal growth for the Food Group for the quarter was 9%, and I guess we can back out the overall Company but do you have that offhand?

Overall Company was 9.8. If you adjust for the decline in oat fiber it is 12.1.

In the fruit business I think you gave the gross margin as it was roughly 12.9%. Did you say that that was 1.5% of your decline, is that from the second quarter was due to the Fruit Group?

That's right exactly, the overall gross margin, yes. At the operating income level the Fruit Group is very strong.

If you're looking at it in the fourth quarter with some of the moves you've made do you think gross margin would have stayed steady with the third or actually increase a bit?

In the Fruit Group or overall?

Overall gross margin.

We would expect improvement in the fourth quarter.

Okay, and the CapEx expense for the quarter?

It was about 2 million, (multiple speakers) I just want to get that figure.

Your savings from the -- the moves you've made in the distribution group, I kind of missed part of that in the call. When I see 3.4 million in the press release, is that US dollars?

About 2 million on the grocery side, 1.4 million on the fresh and produce side. CapEx was 2.7.

1.4 on fresh and produce. And one last question within the sunflower products, what was the growth rate year-over-year?

We calculate it by the group, sorry we don't have that.

(indiscernible)

Just a question regarding your $20 million private-label soymilk contract. Just regarding the timing of that revenue and will there be a significant ramp up period to that?

It will ramp up and it will start late in the fourth quarter. Minor impact in the fourth, that is really next year.

But it will go up to level (multiple speakers) very quickly because you've got to fill the inventory pipeline. But it is 2 SKUs which means 2 products. And of course you get huge efficiencies, in being able to run your plant for long periods of time. Every time you change a SKU you essentially have to wash out and reset your equipment and it sort of shuts you down for five to six hours. And so all that time will be gained when you're running a single product.

And one last question in regards to you spoke recently about your corporate branding initiatives. I was just wondering is this going to be primarily through marketing and if so do you have an idea of any costs associated with that?

This has been an internally driven project. It is being driven by a cross functional work team within the company. Essentially what you're going to see is all of our groups standardizing their look, standardizing their logo treatment. Over time you'll see us move away from referring to operating -- the historical operating company names up into the group names via the SunOpta Fruit Group, the SunOpta Ingredients Group, consistent look, consistent looks on our website, consistent looks in our trade advertising where SunOpta will have a position in a consistent area. Those types of initiatives. It is primarily a process more so than a lump sum cost. Our overall costs on this are very small and we have done that intentionally in order to reduce costs. So we will transition this, and we haven't used any substantial outside service at all.

Keith Howlett, Desjardins Securities.

I had a question on the Abengoa relationship. It is a percentage of completion I think on the contract, how does that breakout over Q4, Q1, Q2 of next year?

Basically it gets spread over -- we have -- we will have been paid 90% of the contract by the time the equipment is delivered in Spain. The last 10% is paid as the equipment is installed but no later than 90 days, I think after that if I remember correctly. We do not have responsibility to install the equipment, but they have asked us to quote an additional contract to oversee that. So we're just in the process of doing that. So basically it is 90% by the time the equipment arrives in Spain.

And that would be in Q1?

Yes, that is in Q1.

And on the York facility, are you doing the engineering work now and you would expect the contract to follow or is there a contract?

Well, our contract is -- we've done a lot of the engineering. We are contracted to supply the Steam Explosion equipment, the core part of the technology. And we are quoting the supply of additional equipment, both in front and behind the equipment. They are also, they've gone out now based on our engineering and also sourcing some of that equipment, which is a lot of it is pretty basic stuff. So we are -- so that is where we are at right now.

So would the size of the York contract be slightly smaller than Spain?

Smaller than the Spanish contract because we are not doing all of it at this point in time but we are doing the important parts (indiscernible) is the part of our technology. And we are talking to a number of other prospective people in the U.S. It is obviously very strong interest today in ethanol. And there has to be a way to make it from biomass. It just isn't going to be enough corn anywhere near to supply the kind of increased demand that is out there.

And is the York contract likely to be pretty much completed in 2006?

Yes.

And just a question on the energy costs. You mentioned the freight in and the processing costs within your plants is the biggest costs. What sort of magnitude are those costs either in terms of dollars or percentage or revenues or just how large is your energy bill, I guess?

You really have to look at the energy bill, Keith, by group. The operating group that is the largest energy component is the Ingredients Group. And the largest energy component is the gas that is used for drying products. I don't have the number overall, but it is a significant number in the production of dried products. And we are working very seriously on strategies to price our energy on a long-term basis, reduce our utilization and all of those types of efforts. Jeremy did mention that we have a companywide workgroup on that at this time. It did impact us in the quarter. It will continue to impact us, and we are working as diligently as possible to reduce the impact on a long-term basis.

The majority of our grain is delivered by farmers to our plants, so that is their cost. Our cost would be moving having processed those grains would be moving it say from our plant in Hope, Minnesota to barges going down the Mississippi. That kind of thing, or you would have contracts and the problem sometimes is that you signed a contract three or four months ago to supply products at a fixed cost and now your energy costs have gone up. So obviously on new contracts you're building in this increased cost. Most of our product that processed products are picked up FOB the plant, so that that energy cost goes -- the biggest cost as Steve said is in processing. In our distribution business the incoming freight costs are built into the new quarterly issued catalog for product. And so you build your margin on top of that. But your outgoing costs, we are implementing, have implemented for some time now freight surcharges wherever possible. So it is a process that is receiving a lot of attention at the moment, and it is one of the areas that we mention where we have a companywide task force. One of the first things that we're doing is collecting the extensive data on every form of energy that we use throughout the Company. And then seeing where we go from there.

Just a housekeeping question. I apologize if I've asked this before. The soy concentrate business is in the Grain and Soy Product segment?

Yes, it is.

And I realize it is sort of rear view mirror at this point, but on the distribution business, why did it get more difficult as the year went on? Because you started the consolidation of the warehouses in Q1, so it doesn't really matter anymore what the answer is but just trying to figure out why Q3 was such a hard quarter.

Like Steve said first of all it is the lowest quarter from a seasonal point of view because so much of the products are produced locally. So you can go to your local farmers market instead of having to buy from us. So that is a seasonal issue partly. And I think the second thing in the first and second quarter you are still operating a couple of those entities separately so they didn't have the disruption costs that were involved with moving them. So we don't get through that process really until the end of the third quarter, until the third quarter. But at this point on you will see improvements in this business; we expect to see dramatic improvements in '06.

Thanks very much.

Russell Stanley, LOM.

It is actually Michael McGuinn (ph) calling. Firstly, couple of housekeeping things. When are you expecting to file your 10-Q?

It will be next Tuesday or Wednesday.

With regard to depreciation amortization, could you just give me that for the quarter again?

2.2 million.

Now with regard to gross margin, you had mentioned previously that 18 to 19% is likely for the near term. Obviously there has been a deviation from that. Is 18 to 19% still achievable in the short term?

We would think that by the end of next year absolutely.

Okay and this one actually is long-winded, and you may need a pencil for it but I was just doing a little math, and if we look at the $3.4 million that you're implying that you could save, we are probably looking around 850,000 per quarter, which would have made this quarter around 650,000 in EBIT, which would have allowed for a margin of around 3%. Now what other initiatives are underway that sort of drive EBIT improvement to get to the 7% range?

Jeremy had mentioned asset utilization. We have a warehouse, we still have capacity. Our capabilities are now in place to take national listings on, fully utilize our operation. That is the first point. Second point would be our opportunity to continue to drive costs there. We've identified and are executing on 3.4 million. There is more opportunity, but in the past we maybe have gone too fast. But we will absorb what we have in front of us before we move forward. But clearly top line business growth given the consolidation that we've through the organization the we will be (inaudible).

Now you had mentioned the duplicate costs, the incurred due to the transition over the new -- with the new facility. Is there -- how much was this? Was it substantially material? And what would the costs be?

Let me give you some idea on what they were. Yes, they were fairly material. We carried -- the last facility that we integrated again had sort of an annualized warehouse cost of $600,000. We carried that for a large portion of this year. So that was certainly material. There was another one that has just left my mind.

The other one was when we bought Snapdragon Foods out of Montreal, we entered into an arrangement whereby they would do much of the administration for a period of time and transition to our system. They did that on a fee basis, and we now have gotten to the end of that agreement and essentially have taken those services in-house and in with our own existing infrastructure.

They also operated a frozen warehouse with a number of employees and that has now been moved in, so the cost of that was quite significant.

They were significant, (multiple speakers) whole number of people that are, became redundant folks up here.

So are we anticipating 7% EBIT range? Is that fair over that's where we are going to start seeing maybe Q1 2006?

We're targeting 5% operating.

This year we are running at 1.

A general question with regard to the soy food category. Some have said that it is maturing in recent years. And are you seeing this, or do you still see significant growth in this category?

First of all the refrigerated side is certainly been continuing to grow and growing more strongly than the aseptic side but we are really starting -- last year the aseptic did grow, I think around 10%. But we are really seeing a lot of growth this year in our with our core accounts. And for us of course is we've also been picking up some new accounts. And so we're increasing our market share. We are obviously believe that we are the highest quality and lowest cost producer. And I think that is the reason we're doing well here.

Another general question with regard to the organic foods production act. There is some argue that there's going to be changes and they're going to weaken organic standards. Do you think these changes, how are they going to impact your business going forward?

As you know, that has been reversed recently by the U.S. government, (multiple speakers) support the organic trade association's position here on that they've taken with the government. We think for the moment anyway the situation has stabilized.

Acquisition plans in the near-term, can you maybe comment on to which divisions you're focusing on or is it more opportunistic across your enterprise?

Well, I would at this point I would doubt that we will do anything in the food area for a while since we've just done a number of things and we are implementing all the changes that Steve has talked about. Beyond that, we are looking at and continue to look at opportunities in all of the other divisions. But I do want to say that in some ways we are down playing our acquisition program right now and focusing on our bottom line. That is the key thing. It is our total commitment throughout this Company.

Just a couple more questions for you. Your toughest competition, are you starting to see it from specialized producers, or is it more coming from traditional food makers such as Kraft or General Mills?

I would say it comes from both. We are in niche markets. Understand although it is our objective to be a minimum of $100 million in any of the markets that we are in and to be a major or dominant player. As we are in distribution and we are in soy and in oat fiber. So there tend to be specific competitors in each of these categories. Example in distribution there are a number of regional players across the country. But I think our competition comes more from specific guys within each of those segments than any of the majors as such.

Now the final question for you guys, with regard to the recent contract announcement, do you anticipate this product will be in all of the retail locations of this global retail player?

We would certainly expect so. The majority of their locations are in North America, but they do operate in a number of other countries in I think a relatively small way. And this is a global contract, whether we will be shipping product the long way away is -- I'm not sure because generally it is pretty expensive to ship liquids. We might set out to local arrangements in offshore but that is not a critical part of this contract.

Is this a brand-new product for the customer?

No.

So did you have to displace a current supplier or they carrying both products?

We will be exclusive. Oh, we are the exclusive supplier, yes.

Now do you anticipate contract wins of similar magnitude with other retailers?

There is the possibility of additional contracts, and we certainly have to look at our capacity issues if we do. And there are possibilities of contracts on the refrigerated side, as well. And similarly our soy powder business is growing very quickly. And that is also an area of interest for us.

Now when you are dealing with a global retailer like this, where the margins that you received on this product sort of consistent with what you've always received or was there a little crunching on the margins to get the product and get some shelf space for it?

We can't answer that.

Sara O'Brien.

Just wanted to know because of the great crop yield this year expected, just wondered when do you negotiate your resale contracts? And do you expect margins will decrease because everyone knows the crops have been so great?

What happens first of all on crops is that the margins tend to be absolute as opposed to percentages. And so as the price falls, our margins actually increase. So this is particularly true of products that let's say w are shipping overseas, like soybean contracts. So if you're selling it for $1 and you are making $5 let's say you're making 5%, you're selling it for $0.50 you're still getting $5 so you would be making 10%. That is just what I mean by an example.

So you are doing cost plus basically on these contracts?

We sell on a basis which is $1, and then the actual selling price moves. So if the Chicago Board is up or down, it is up or down. Example, let me go back again, if we have a say we were going to make 10%, we are going to make $1 on that bushel. We don't we would love to make that (indiscernible) on a bushel but anyway, if it is $1, we are going to make $1 whether the bushel finally sells at 10 or $12.

Okay, so you're expecting then similar dollar margins going forward?

That's right.

With better percentages.

(OPERATOR INSTRUCTIONS) There appear to be no further questions at this time. Mr. Kendall, I will turn the call back to you.

Thank you very much for tuning in to listening to us. I hope you've got the flavor of our enthusiasm for the coming year and for our commitment to substantially improving our bottom line. I do want you to know that we are not satisfied with our results in this quarter and that this entire Company is focused on significantly improving those over the next year or so. Thanks again, and as always, we are happy to call and speak with you if you have any other questions.

That does conclude today's conference -- thank you for your participation.