Sunopta Inc (STKL) 2005 Q4 法說會逐字稿

Good day, everyone. Welcome to the SunOpta, Incorporated, fourth quarter 2005 and year-end earnings results conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Jeremy Kendall, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen, and welcome to our fourth quarter and year-end investor call for SunOpta, Inc. I’m joined on this call today by Steve Bromley, our President and Chief Operating Officer; and John Dietrich, our Vice President and Chief Financial Officer. Ben Chibba, the company’s Vice President and General Counsel, will not be joining us today due to a death in his family.

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 our 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 US dollars and are in accordance with US GAAP. A reconciliation to Canadian GAAP will be available in the notes to the consolidated financial statement, which will be filed with our 10-K for the period ending December 31, 2005, by no later than the close of business on Monday, February 27, 2006.

We’re very pleased to report record revenues of 426.1 million for the year ending December 31, 2005, representing a 39.1% increase over 2004 annual revenues of 306 million and a 114% increase over the same period in 2003. The revenues in the fourth quarter were 122.1 million, representing a 47.7% increase over the same quarter in 2004, and the highest revenue of any quarter in our company’s history. In the fourth quarter, revenues from the SunOpta Food group represented 91.2% of the total company revenues, reflecting continued growth in natural, organic, and specialty foods.

We have announced our revenue guidance of 540 to 550 million for fiscal year 2006, which will represent an increase of between 27 and 29% over 2005, excluding any potential acquisitions. We will update our revenue guidance midyear as we have traditionally done. Our 2006 forecast projects an approximately 20% internal growth rate as a result of a number of new contracts and business opportunities, including the new aseptic soy milk contract recently announced. We will provide further insight into these comments in a few moments.

We continue to target a revenue exit rate of $1 billion in 2007. We believe that this level of revenues will enable the company to benefit from economies of scale, leverage the impact of costs related to the company’s public status, and allow the company to cost-effectively compete in the core segments within which we participate. We expect to be able to reach this target through continued expansion within our existing operating segments via a combination of internal growth and accretive acquisitions.

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

Net earnings for 2005 were 13.6 million, or $0.24 per diluted common share, a 23.3% increase when compared to 11 million in net earnings in 2004, or $0.20 per diluted share. Net earnings for the fourth quarter ending December 31, 2005, were 1.6 million, or $0.03 per diluted common share, and this compared to $353,000 in earnings in 2004, representing a 342% year-over-year increase.

Net earnings before pretax unusual items of approximately 800,000 were $0.04 per share in the fourth quarter. These unusual items included our food donations for the victims of Hurricane Katrina; the impact of damage to the Opta Minerals New Orleans plant from the hurricane; banking fees related to our new financing arrangements completed during the quarter; and the reduction of legal fees recoverable from a lawsuit with a former supplier. This decision is being appealed; but in the meantime, we have expensed that reduction in amounts that might be recovered.

Our internal growth rate in the fourth quarter was 18.3% and in the full year 2005 was 13.5%. This fourth quarter internal growth rate is the highest in 2005 and signifies the momentum we are realizing in our businesses.

For the year 2005, gross profit increased by 22% to 71.5 million, and earnings before interest, tax, depreciation, and amortization, or EBITDA, increased by 23% to 28.3 million. Gross profit as a percentage of sales was 15.6% in the fourth quarter and 16.8% for fiscal ’05. The gross profit percentages reflect the impact of the increase in fruit-based products as a percentage of the company’s total product mix as the Fruit Group operates at gross margins that are inherently lower than the company average. We expect gross profit improvement through 2006 as a result of numerous cost improvements and a product mix initiative.

Selling, general, and administration expenses in 2005 as a percentage of revenues declined by 1.5% to 10.7 compared to 12.2 in 2004, reflecting the impact of cost rationalization programs, leverage generated by economies of scale, and business mix.

Operating earnings for the fourth quarter, defined as earnings before interest, tax, and unusual items, increased by 77% to 2.9 million when compared to the same quarter in 2004. This increase is largely due to strong ingredient sales as a result of the recovery in the demand for oat fiber, brans, and germs; improved results in the SunOpta Canadian Food Distribution Group reflecting the efficiencies generated from the consolidation of the Toronto distribution center; strong internal growth across the company; the impact of the cost-reduction programs implemented throughout the year; and the SunOpta Food Group’s strong fourth quarter.

All four food-based acquisitions completed in 2005 are tracking on or ahead of the revenue and profit projections forecast at the time of acquisition.

The company’s balance sheet remained strong as of December 31, 2005, with 5.5 million in cash and sufficient financial resources to continue to fund growth in operations and invest in capital projects.

Shareholders’ equity increased to 160.1 million, representing a book value of $2.83 per common share, up from $2.50 a year ago.

Long-term debt increased to 59.1 million, primarily as a result of debt acquired through acquisitions and debt employed to fund these acquisitions. Our long-term debt-to-equity ratio is 0.37 to 1 at the end of 2005, still well below our maximum targeted operating threshold.

During the fourth quarter, we revised our banking arrangements and converted $45 million of variable-rate debt to fixed-rate debt with an interest rate of 6.44% and no principal payable for 5 years. This new arrangement will improve annual cash flow by approximately 4.2 million in 2006.

Working capital increased by 36% year over year, with the majority of this increase arising from acquisitions. In addition, working capital requirements generally peak in the last half of the year due to the purchase and storage of fall grain crops, purchase of domestic frozen fruits and vegetables carried over the winter season, strategic fruit purchases from contra-seasonal regions, and the building of inventories at Opta Minerals prior to the freezing of the St. Lawrence River. It’s important to realize that the year-end working capital is supporting an exit revenue rate of in excess of $500 million.

As we look back at 2005, we can summarize the key events as follows.

First, the impact of the significant decline in demand for oat fiber in the first half of the year as a result of the collapse in the popularity of low carb diets. And subsequently, the strong recovery near the end of the year due to the increasing utilization of fiber in food products, both for human and pet consumption; our focus on developing international markets; and our efforts to bring new products to market such as organic oat and fiber, organic soy fiber, and organic Okara.

Two, the construction of our new state-of-art distribution center in Toronto and the subsequent integration of three organic, natural, and kosher distribution operations into the new facility. While a difficult transition, the efforts will result in $2 million in annual cost synergies and, more important, the capacity for continued growth.

Three, the signing of a new 3-year 60 million aseptic soymilk contract with a major US retailer, which effectively commenced production on January 9, 2006. This contract positively impacts every level of our vertically integrated soy model from seed right through to packaged product. As a result, we continue to invest in expanding production to support our customers and have increased volume production from approximately 115,000 cases per week at the end of ’05 to, currently, between 155,000 and 160,000 cases per week. That’s about 2 million quarts per week of soy milk. We continue to work at furthering capacity at this facility.

The acquisition of three food companies and the formation of the SunOpta Food Group, including purchasing the remaining 49% minority interest in Organic Ingredients, the purchase of Cleugh’s Frozen Foods, and Pacific Food Processors. The group has become the second-largest operating division within the company, with a targeted 2006 revenue of approximately 130 million and significant growth opportunities in front.

Five, the acquisition of Earthwise Processors in May 2005, an organic processor of specialty grains, primarily soy, extending SunOpta’s sourcing region, grower base, and product capabilities.

Six, the acquisition of Hahamovitch Kosher Imports in late December 2005, a profitable, Montreal-based distributor of kosher foods. Hahamovitch further enhances the SunOpta Canadian Food Distribution Group’s market position as the leading distributor of kosher products in Canada and provides an operating base for natural and organic grocery products in the Quebec market.

Seven, execution of cost-reduction and profit improvements in the SunOpta Ingredients Group with an expected annualized impact of $1.4 million and similar initiatives within the SunOpta Canadian Food Distribution group totaling approximately $4 million per year.

On top of these, we have introduced company-wide programs in energy reduction, energy conservation, purchasing, freight logistics, all of which will result in further synergies this year.

Eight, we’ve invested in a number of strategic capital projects such as increased soy yield, the production of dried Okara and soy fiber, upgrades to capacity in our fruit and aseptic processing operations, and increased warehousing and processing capability, all strategically focused on expanding our ability to service these fast-growing markets.

Nine, we completed the initial public offering of Opta Minerals, Inc., the company’s previously wholly owned subsidiary, initially raising net proceeds of 14.3 million US. And SunOpta retained a little over 70% ownership. These funds were used to repay debt due to SunOpta and to complete a number of strategic opportunities.

Within Opta Minerals, Inc., the company completed the acquisition and refurbishment of our roofing shingle granule facility in Attica, New York, and, on February 16, ’06, announced the acquisition of Magnesium Technologies Corporation, a profitable supplier to the steel industry with revenues of approximately 29 million in 2005. This acquisition significantly increases the company’s position in the industrial minerals market and positions it as a key supplier to the steel industry.

Ten, we signed the largest contract in the history of the steam explosion group, now known as the SunOpta BioProcess Group, for the provision of technology and equipment to the first commercial wheat straw-to-ethanol project in the world, based in Salamanca, Spain. And this was contracted with Abengoa, the largest ethanol producer in Europe. In addition, the group has supplied equipment for a pilot plant to Abengoa in York, Nebraska, for the production of ethanol from corn stover, and has positioned the business as a key supplier of pretreatment for cellulosic ethanol applications.

Eleven, we continued the implementation of improved and stronger internal controls. And once again, that’s a requirement of Sarbanes-Oxley 404 certification.

In addition, we implemented our new Oracle operating platform at 5 operating plants and our corporate office in 2005 and will roll additional facilities in in 2006. This is a very important initiative as we continue to grow our business.

Twelve, we applied for approval to move from NASDAQ Capital Markets to the NASDAQ National Market, and this transition was completed on February 8, 2006.

Thirteen, we introduced a corporate branding program across SunOpta and all of it subsidiaries, standardizing communication and marketing under the SunOpta umbrella. As a result of the increased SunOpta brand awareness, a number of opportunities have arisen as major retail, food service, and industrial customers gain an understanding of SunOpta’s full ingredient sourcing and supply and private label solutions in the natural and organic food market.

During 2005, we also greatly expanded our private label product portfolio, and we have been, and continue to work with, a number of large North American retailers as they launch or expand their healthy market segments within their stores.

These actions have formed strong, integrated, and growth-oriented operations within SunOpta which are expected to generate significant improvement in 2006 and beyond. Our key priority in 2006 is to improve earnings while, at the same time, continuing to selectively grow our healthy product portfolio. Synergies in cost reduction programs are in place and the company enters 2006 with all operating segments of the company forecasting improved results. Crops are good. Sourcing agreements are in place. Plants are moving towards capacity. Sales contracts are signed. And our markets are growing strongly.

Steve Bromley will now provide further operational details.

Thanks, Jeremy. The fourth quarter was yet another busy period where we continued to focus on positioning each of our operating segments for continued growth and improved profits in 2006. Numerous initiatives have been identified and implemented during the quarter, and we are clearly realizing the results of these activities.

In December 2005, we announced the acquisition of 100% of the outstanding shares of Les Importations Cacheres Hahamovitch, Inc. Hahamovitch is a Montreal-based distributor of kosher and specialty foods with a long-term track record of profitability. The Hahamovitch operations have been integrated as part of the SunOpta Canadian Food Distribution group, expanding our dominant position in kosher foods distribution and creating a platform for further development of SunOpta’s organic, natural, and specialty food distribution business in the province of Quebec.

When combined with the previously announced 2005 SunOpta Food Group acquisitions of 49.9% of Organic Ingredients and 100% of Earthwise Processors, Cleugh’s Frozen Foods, and Pacific Fruit Processors, we have achieved our objective of acquiring profitable and accretive operations with annualized revenues in excess of 100 million, all supporting the development of our healthy products portfolio.

You will note that our reporting segments reflect our new operating structure, with the SunOpta Grains and Food Group representing the former Grains and Soy Products Group plus our aseptic packaging and dry-roasting operations that were previously part of the packaged products group. The SunOpta Fruit Group now includes the operations of our Kettle Valley dried fruit business, which previously were also part of the packaged products group.

As mentioned, within the SunOpta Grains and Foods group we announced the acquisition of Earthwise Processors in May of 2005. Earthwise is a vertically integrated producer of organic and identity [ph] preserves, non-GMO grains, grains with a primary focus on soy. This acquisition has provided SunOpta with an expanded and diversified grower base and product offering. It has been integrated with existing grains operations. Earthwise has performed to expectations since the acquisition.

During the fourth quarter, the Grains and Foods Group announced they had been awarded a 3-year exclusive contract for the supply of shelf-stable accepted packaged soy milk for a major global retailer. This contract commenced in early January 2006 and is expected to generate annualized revenues of approximately $20 million. We are extremely pleased with this contract as it utilizes our vertically integrated field-to-table expertise and has provided a number of other product opportunities with this major global retailer.

In the fourth quarter, the Grains and Foods Group realized revenues of 39.8 million versus 29.3 million in the same quarter of 2004, an increase of 35.9%. Internal growth was 29% in the quarter excluding revenues from the acquisition of Earthwise, and 19.6% for fiscal 2005.

Segment operating earnings for the fourth quarter were 2.1 million versus 668,000 in 2004. Revenues for fiscal 2005 were 148.1 million versus 120.7 million in 2004, representing the impact of the acquisition of Earthwise and strong growth in sunflower, IP soybeans, aseptic and ESL soy milk, and dry roasted products. For the year, segmented earnings increased 84% to $8 million versus $4.4 million in 2004.

Demand for aseptic and extended shelf-life soy products remains strong and we are optimistic that we will experience continued growth in 2006 as we pursue a number of private-label opportunities with a number of retailers.

Our dry roasting and packaging facility, which utilizes internally sourced soy, corn, and sunflower products, had a good 2005 and is now reaching capacity. We will be commencing an expansion of this facility in the spring of 2006 in order to meet the growing demands of customers looking for value-added healthy ingredients in packaged products. Based upon the strong crop realized in 2005 and continued demand for vertically integrated products provided by this group, this business is well positioned for 2006.

As we have previously mentioned, the SunOpta Ingredients Group has been dealing with the negative year-over-year impact of the decline in the low carb market and the resulting impact on the demand for oat fiber. For the first time in 2005 -- and during the fourth quarter -- the group realized increased sales of fiber products versus the same quarter in the prior year. This is an important step and is a result of numerous business-building initiatives executed throughout 2005.

Revenues for the SunOpta Ingredients Group were 16.3 million for the fourth quarter versus 15.5 million in 2004. Segment earnings were 1.1 million versus 598,000 in 2004. Internal growth was 4.4% in the fourth quarter versus -11.3% in the third quarter, thus reducing the impact of the year-over-year internal growth decline to -3.7%; very positive.

Revenues for the year ended December 2005 were 64 million versus 66.3 million in 2004. For the 12-month period, segment earnings were 3.8 million versus 6.6 million in 2004, a decline representing approximately $0.04 per diluted common share.

Over the past year, we have implemented an extensive series of cost reductions within the Ingredients Group to offset the drop in fiber volumes, contributing pretax improvement of approximately $1.3 million. As we develop this business in the future, our rationalized cost base will be key to driving improved financial performance.

We have previously mentioned our four-base plan to restore our fiber business -- specifically, international development; new products -- in particular, pet foods and meat products; whole grains product development; and the broadening of our fiber portfolio.

Let me update. We have and continue to make significant progress in this regard.

On the international front, we have reestablished our presence in a number of key markets, including strategic partnerships with a number of new distributors, all centered on improving product representation in their global areas. We continue to work diligently to expand and improve our global network and have recently renewed our contract for 2006 with our largest international fiber customer.

We have realized a number of new pet food and meat-based applications, and are leveraging these successes with other potential customers.

We have launched our organic oat and organic soy fibers and have recently launched our organic Okara, a fiber produced from a byproduct of soy milk production and sold to both the animal feed and food ingredient markets. Interest has been very high, and we expect to realize the benefit of these initiatives more fully in 2006.

We are in the final stages of development of a new proprietary soy fiber, and look forward to bringing this to market in 2006 as well.

A number of customers are also utilizing our whole grain blends to service this fast-growing market and we expect continued growth in this area as well.

The outlook for 2006 in our fiber, brans, and germs business is very positive. Our projections suggest internal growth in fiber volume of approximately 20% and brans and germs growth of approximately 35%. We’re really pleased with the progress we have and continue to realize in this group.

As mentioned during the third quarter, 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, Pacific Fruit Processors, and Kettle Valley Dried Fruit. The integration of these businesses has enabled SunOpta to become an important player in the natural and organic frozen fruit 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 fourth quarter, the group realized revenues of $29.8 million, representing 26.7% of total Food Group revenues. Segment earnings before interest and taxes were 1.2 million, or 26.4% of total Food 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 being implemented, including 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 currently implementing a number of facility improvements, including automation and capability expansion projects, and expects to complete a number of these by the second quarter of 2006 in time for the strawberry production season.

The Fruit Group has won a number of new contracts, including new opportunities in both fast food and major retail private label, and is currently pursuing a number of other, similar opportunities. The group continues to expand its domestic and international sourcing expertise and [inaudible] with upgrades to processing and product development and is forecasting revenue in 2006 of over $130 million with solid upside potential growth in organic products.

The group is currently sourcing fruits and fruit-based ingredients from over 40 countries around the world, including organic citrus from Mexico and South America, organic cranberries from Russia, and organic pomegranates from Turkey, to mention just a few. In November 2005, the group signed an exclusive contract with Sambizon [ph] acai for the bulk distribution of organic acai pulp to food and beverage manufacturers in North America. Acai is a berry that is rich in nutrients and antioxidants as well as generous amounts of protein, fiber, omega-6 and omega-9 fatty acids. Demand for this product has been very strong.

All in all, we are extremely pleased by the Fruit Group’s progress to date and the exciting opportunities that lie ahead.

The SunOpta Canadian Food Distribution Group realized revenues in the fourth quarter of 25.4 million, a 9.5% increase versus 2004. Segment earnings were $205,000 versus $440,000 in 2004. As mentioned in previous quarters, this group has been dealing with a number of integration and supply-related issues, with the bulk of these now behind them.

Revenues for the 12 months ended December of 2005 were 99.9 million versus 75.9 million in 2004, representing the impact of acquisitions completed in 2004 plus internal growth of 7.3%. Internal growth for the fourth quarter was approximately 9.4%, signifying the positive momentum of our national listing and sales objectives.

A series of initiatives have been implemented and significant progress has been made. During the year, 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.

During the fourth quarter, we also completed the consolidation of Western Canada warehouse operations, with all fresh produce and fruit distribution consolidated into a single facility effective November 6, 2005. This has streamlined customer service, reduced spoilage, and improved the use of our facilities by providing much-needed warehouse space to accommodate continued growth in grocery products. When combined with further cost-reduction initiatives implemented in the fresh produce side of our distribution business, we expect to realize savings of a further 1.4 million from these initiatives.

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.

The outlook for the business is very positive as the expansion of national listings and cost reductions implemented throughout this year position the Distribution Group for a strong 2006.

From a standing start in late 2002, we have developed Canada’s largest natural, organic, and specialty foods distributor with projected 2006 revenues of approximately $120 million.

As Jeremy mentioned earlier, we are working hard on our BioProcess Group in our initial equipment contract with Abengoa, and we are confident that this project will be delivered on time and on budget. We are currently discussing additional opportunities on this project. In addition, the company has supplied steam explosion technology and equipment to the second Abengoa project in York, Nebraska. These projects are providing increased credibility in our technology.

There is a continued and growing interest in our technology from North America, Europe, and China fueled by the high price of oil and the announcement by the US and Chinese governments for the development of ethanol from biomass plants. We are increasing our marketing efforts now that the Spanish project is well under way and we are very excited by the opportunities that lie ahead.

The Opta Minerals Group realized revenues in the fourth quarter of 8.6 million versus 8.1 million in 2004. Operating earnings were 402,000 versus 498,000 in 2004. Operating earnings in the quarter were significantly impacted by the increased cost of freight, which reduced margins to a number of customers, plus the impact of the loss of operations in New Orleans due to Hurricane Katrina.

Revised pricing has been implemented effective February 1st to address the high freight cost issues, and we expect to have electrical power returned to the New Orleans facility within the next week. Demand for roofing shingle granules and silica-free blasting abrasives are very strong and, when combined with the recent acquisition of Magnesium Technologies, we expect 2006 will be a great year for Opta Minerals.

Thanks, Steve. For the first time in the company’s history, we have made the decision to provide earnings guidance for the upcoming year. In the past, we’ve been reluctant to do so due to our high growth rate from a small base. We now feel that we’ve reached a size where guidance can be provided with better reliability.

Consequently, we’ve established a range of $0.26 to $0.30 per share before any special items or acquisitions that might be completed in 2006. This estimate assumes an effective tax rate of 31%. This guidance falls within the current consensus of analysts who follow SunOpta, whose average estimate is $0.28 per share.

In looking forward to 2006, some of the key trends that we see are as follows.

First, a very strong soy ingredient and finished package products market -- in particular, for soy milk and soy powders -- both domestically and internationally. We continue to expand our packaging operations and will need to subcontract or further expand these operations in order to meet current customers’ requirements.

Two, we see a very strong market for oat fiber driven by our focus over the past year, with additional demand coming from our new organic oat and soy fibers, organic Okara, and particularly from our newly developed conventional soy fiber. In addition, brans and germs are growing significant in hand with the demand for whole grain solutions.

Third, the demand for frozen fruit and fruit ingredients, and particularly strawberries, where we will process approximately 60 million pounds this year, and, along with other fruits, will take us near our processing capacity in our two production facilities in California and encourage us to build or acquire further production capacity.

Along with the demand for frozen fruit, we see exciting opportunities in the provision of a wide range of organic fruit ingredients sourced domestically and internationally processed at our facilities and sold as food ingredients or further processed into private label products. Managing this sourcing capability is rapidly becoming a key asset of the company.

Four, the SunOpta Canadian Food Distribution Group will add a number of new organic natural products, many on an exclusive basis, and will extend its dominant share in the kosher market. We are now looking to enter new ethnic distribution markets, plus potentially expanding horizontally into nutraceuticals and health and beauty aids.

Five, the signing of a number of long-term contracts with major roofing single manufactures which, when combined with the recent acquisition of Magnesium Technologies, will propel Opta Minerals into a doubling of their revenue and profit base in 2006.

With a huge interest in cellulosic ethanol, particularly after President Bush’s State of the Union address, the SunOpta BioProcess Group is actively quoting on projects in Europe and North America. It’s the intention of management to find ways to participate through its technology in projects which will provide a future recurring income base.

In view of the interest in this technology, we thought it worthwhile to restate the role of steam explosion in the production of ethanol from lignocellulosics. Lignocellulosics are materials such as cereal straws, sugar cane begass [ph], corn stover, certain grasses, and fast-growing hardwoods such as aspen. These raw materials all contain varying degrees of lignin, which is a polymer, and cellulose and hemicellulose, which are sugars.

In nature, the lignin creates a physical and chemical bond which ties these three components together and restricts enzymes from converting the cellulose and hemicellulose into sugar for subsequent fermentation into ethanol. The patented steam explosion process is a pretreatment process which effectively separates these materials so that enzymatic conversion to sugar can then take place.

The company holds patents on its process and equipment for the continuous high-pressure cooking of these materials, and we believe that the technology has an important role to play in this market. It’s well recognized that there will be insufficient corn or grains to meet the growing demand for ethanol, and that lignocellulosics must fill this gap.

In summary, the fourth quarter showed a 77% increase in operating earnings and a 342% improvement in net income, even after absorbing pretax special costs of $800,000, or $0.01 per diluted common share.

Our guidance for 2006 has been provided, with revenues between 540 and 550 million and $0.26 to $0.30 earnings per diluted common share.

As we look forward to 2006, approximately 50% of our food business is in the organic market and 50% in the healthy eating category. The organic market continues to grow in the 15 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 are manifesting in a greater commitment by the retail sector to offer more and more organic products, many of which now carry a private label. Approximately one-third of our business 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, non-dairy beverages, soy products, fruit bars, and healthy snack foods.

2005 was certainly a busy year, and 2006 is shaping up to be an exciting one -- focused on continued growth and much improved earnings.

With that, we’d really like to open the call for questions.

Thank you. [Instructions] And we’ll take our first question from Susan [sic] O’Brien from RBC Capital Markets.

Sara O’Brien: Hi, it’s Sara calling. Just a question about the guidance that was given for ’06. I just wondered if that includes -- the $0.26 to $0.30. Does that include the acquisition by Opta Minerals? And if so, by how much?

No, it does not.

Sara O’Brien: Okay. And why would you not increase your revenue guidance on the back of the 30 million that that acquisition brings?

What we have traditionally done is given our guidance for revenue at the beginning of the year. We announce whatever acquisitions are occurring; in mid-year, we will revise the guidance. So rather than revising the guidance-- because we have been fairly active in acquisitions, so rather than revising it each time, we do it once a year.

Sara O’Brien: Okay. And I wondered-- just in terms of grains and soy products, we saw a pretty nice increase both in sales and EBIT. Just wondered if you can give a little bit of more explanation about that, and where you think it can go.

Well, Sara, the key drivers in the improvements were improved crops with improved yields on the crops; that was clearly one. Some product mix to higher valued products. The sunflower business-- strong demand for kernel products was a key driver. Clearly as the aseptic -- the vertically integrated end as the volumes go up both on the packaging side both in fluid products and also dry roasted products, that they have a higher value add so they drive improved margins as well. We see those trends continuing into 2006 at this time as the volumes go up in both of the packaging facilities. We expect the grain market will be fairly consistent at this stage of the game; there’s lots of supply of grain. So we’ll watch that closely as the year goes on.

Sara O’Brien: Okay. Does that mean that you-- I mean, could you see some pricing pressure given the abundance of supply?

Well, you don’t see pricing pressure now, but depending on how the crops flow through the year and how the demand versus the supply plays closer to next year’s harvest, that’s when you may see some movement.

Sara O’Brien: Okay, great. And oat fiber. In the Ingredients Group, looking at-- you talked about some pretty nice improvement in volumes. Is there a lot more room there to improve margins? I think I understood from Jeremy that basically the input costs are pretty low. So how high can you take these ingredients margins?

Well, clearly it’s-- where the margins improve are through more effective utilization of the facility. The input costs are low-- and I think you’ve been to a couple of those facilities where the overheads are pretty much fixed.

Sara O’Brien: Yes.

So that the key here is to add more volume to those facilities and, as well, shift the mix to the higher-value products. Currently, we have three facilities. One of those facilities is pretty much at capacity, although it can be expanded; and the other two would be in the 70 to 75% range. So the key to driving the margins is to fill up that other 25% on both.

Sara O’Brien: Okay. And have you heard anything about the [Rettonmeyer] facility being under production? I think we’ve heard it is producing now, but just wondered if you’d felt any impact or if you expected--

We have seen no evidence of it being in production. In a recent drive-by, there were virtually no cars at the facility at all.

But it is built, Sara?

Sara O’Brien: Yes.

There is a facility there, but what’s inside it we don’t know. And we certainly haven’t seen much evidence of activity.

I think the other thing I would just add on fiber side, of course, is as we said in our presentation, we’re about to launch our new soy fiber. And that’s a significant market in North America which will add to our capacity utilizations.

Sara O’Brien: Okay. And also, Jeremy, I think we spoke before, but just-- Rettonmeyer had put some pricing pressure in the past, and I think you said there’s no further pricing pressure now. But are prices still low, or have they rebounded a little bit?

I think they’re basically around the same level at this point.

Sara O’Brien: Okay. And then, just going into distribution. It looks like warehousing charges are a little bit higher as a percentage of revenue. I just wondered if that’s something that’s going to continue, or-- like, have we seen the benefits of yet of consolidating the warehouses in that particular line on the profit and loss statement?

Well, we started to see the benefits in the fourth quarter, but we did have things like separation pay; it’s a seasonal issue as well here. We now are into the strong-- the next two quarters are the two strongest quarters of the year. So we will see the full benefits beginning in January.

Sara O’Brien: Okay. And just-- tax rate. You talked about 31% projected for ’06 -- it was 16% in ’05. Can you just remind us of the reason for that difference?

The biggest issue in 2005 was the dilution gain we realized in the first quarter that was not taxable; that was about 12% there. About 12%.

Sara O’Brien: Okay. And capital expenditures. Just wondered if you could give us what the full amount was for ’05 and what you’re expecting for ’06. It sounds like you’ve got some expansions to do.

In fact, most of the expansions that we have for ’06 are not millions and millions of dollars. In 2005, we had capital expenditures of 14.2 million.

Sara O’Brien: Thirteen point two?

Fourteen -- 1-4.2

Sara O’Brien: Okay.

That compares to something over 18 in the previous year.

Yes, the prior year was almost 20 million -- 19.8 million. And we would not expect our capital spending to much exceed this year’s level.

Sara O’Brien: Okay, thanks.

And that’s with all the additional facilities. So a lot of the facilities and programs that we’ve invested in are in place now, so our expansion projects are much more specific.

Sara O’Brien: Okay. And Jeremy, you talked about getting to a $1 billion -- I think it’s an exit rate in ’07 of revenues. Just-- can you give us a little bit more explanation on sort of where you see that coming? Because it looks to me like even with a pretty substantial organic growth rate, you’d need to tack on, say, 200 million-plus of revenue. So where, specifically, would you be focusing on acquisitions and when should we be able to see some of those?

We will only focus in acquisitions within the four food segments, in terms of the food business -- in the four food segments that we currently have. As Steve mentioned, we did acquire something over 100 million in 2005 and we would expect that acquisition rate to continue.

So the kinds of areas that we might consider acquisitions-- maybe there are some small additions in filling out our national platform in the distribution business.

As I think Steve mentioned also, our two fruit plants are moving towards capacity now; we’re processing about 80 million pounds of fruit. So we may look-- we will probably need to look at expanding that facility, either through construction or acquisition.

We’re very interested in the sourcing side of our business from, like, organic ingredients, and so we may look to expand that area around the world.

We may-- on the soy side, we will continue to add value-added operations so those would-- in other words, taking our inputs of soy, corn, and processing those for higher-value applications. We will probably need to look at additional aseptic soy milk capacity at some point and possibly even soy concentrate manufacturing. So these are--

Sara O’Brien: So it’s easier to buy those than it is to build them?

I think those are decisions that we have to make as we go along here. And we may look at co-packing facilities in the US in order to do more of our private-label fruit projects -- juices and sauces and so forth -- that we currently make.

Sara O’Brien: Okay, great. And--

And I think Opta Minerals will also continue to look at some possible areas of acquisition.

Sara O’Brien: So could Opta Minerals be a significant chunk of that or is it mainly the Food Group?

No, I don’t think-- not beyond what it’s announced. I mean, it could do one more acquisition, perhaps. Our objective has been to get Opta Minerals up to the $100 million category, and so with this current one they’re going to be running about 70-odd million. I’m talking US, again. So with one more, we might be able to reach that 100-million target.

Sara O’Brien: Okay, great. And just a last question -- on the Bioprocess Group. What kind of revenues are you expecting to book in ’06?

The way that we are budgeting that is essentially that we’ve only budgeted in our guidance contracts which we currently have in house. So we’re -- in terms of budgeting, because it’s a project-related business, we are-- at this particular point we’ve only put in those that are currently in place. We’re working on a number of others, so we definitely hope to see that grow. And as I mentioned, I think the real objective here is to find a way for us to participate, through our technology, in projects so we can generate recurring revenue.

Sara O’Brien: Okay. Can you give us some kind of a sense, though, of the BioProcess Group revenues that you’re looking for in ’06? Like, a dollar number?

It’s around 5.5 million, I think. Is that correct?

Yes, around there.

I think it’s around that range; yes.

Sara O’Brien: Okay, great. Thank you.

Thanks.

You’re welcome.

You will go next to Chris Krueger of MJSK.

Good morning, guys.

Good morning.

Just a few quick questions. First, I know throughout 2005 your gross margin gradually came down, and I know that that was largely due to the Fruit Group being a lower-margin business. Looking ahead to the first quarter, and throughout ’06, do you see that turning positive-- or, improving, I guess, beginning in the first quarter?

Yes, you will definitely see an improvement in gross margin in the first quarter over the last quarter in ’05.

Right. Okay, sunflower business -- I didn’t hear too many comments about that. How did that play out this quarter?

The sunflower business was good, Chris. I mentioned that there was great demand for high oleic kernel products and in-shell products as well. The crop was good this year, so there’s ample supply in the market now to serve the market. So the sunflower business is doing just fine.

Okay. Back to oat fiber. Can you provide what your growth rate was year over year in the fourth quarter?

I think I did. Well--

I missed it if you did.

In the Ingredients Group, our growth rate in the fourth quarter was-- I’m going to just-- 4.4% in the fourth quarter. In the third quarter, it was -11.2%. And year to date, we were down just slightly under 4%.

And the fourth quarter improvement is largely due to oat fiber, then, right?

Correct.

Right. And we’ll continue to see growth in that segment for sure.

Right. That was the first quarter that it got into positive territory.

Okay. With your recent refinancing of your debt, what do you expect your interest expense to be starting in the first quarter and then maybe-- without new acquisitions and other things, what would you expect it to be per quarter in ’06?

Are you looking for whole dollars or a percent?

Yes, US dollars.

As we mentioned, it’s a 6.44% interest, and we do operate cross-border banking structures, which have the effect of reducing the effective tax rate-- or, effective tax rate or effective interest rate, whichever way you want to look at it. But pre that, I’m just about to give you a figure, I think. Are you? -- one-- how much? 1.3 million in the first quarter, Chris.

Okay; all right. And what was your depreciation in the fourth quarter?

It was -- in the quarter it was 2.4 million.

All right, that’s all I’ve got. Thanks a lot.

Thanks very much, Chris. Goodbye.

Thank you. We’ll take our next question from Russell Stanley of LOM Investments.

Good morning.

Good morning.

A question on the soy milk retail contract. Do you expect that to be more or less a steady revenue stream throughout the year or throughout the 3-year period?

Yes, but there are new products beyond that Steve referenced that that particular account is interested in us producing. But at this point in time, with the current contracts that we’ve got, we expect that to continue.

And on those potential contracts, what would be your threshold for press releasing additional contract wins such as that?

I would think probably we wouldn’t do anything unless it was in the 10 million range, approximately.

Was there anything further, Mr. Stanley?

Yes, just one more question -- or, two more, rather. On the Fruit Group, there was-- did you mention a $4 million cost-saving plan there?

Yes. We put that in place shortly after we acquired the businesses; it’s a combination of a number of cost reductions and efficiency improvements and product-mix strategies.

And how much of that have you already accomplished, do you think?

Well, many of the initiatives are in place. I would suggest that the majority of those are in place, and once the plant upgrades are completed in the second quarter, the bulk of those will be being realized.

Those are annualized savings, of course, so they-- by the end of the second quarter, they should be cooking into full force, I think.

Great. Just one last question. I’m sorry, you mentioned it earlier, but what was the EBITDA total for the year?

28.6 million, I believe.

Yes, I’ll just verify that.

Twenty-eight something. 28.3

28.3.

Yes.

Great; thank you.

You’re welcome.

Okay.

Thank you. We’ll move next to Scott Van Winkle with Canaccord Adams.

Following up on that last question about progress toward your fruit savings plans -- did you give your-- when you talked in your presentation about all your cost-savings plans, did you give a percentage of completion along those plans?

Which one?

On the fruit side, do you mean?

No, I’m thinking of the larger cost-saving plans you put in place probably 6 months ago.

Well, the ingredients plan is in place; the distribution plans are essentially all in place at this stage of the game. And fruit, we just commented on, Scott, are well on the way.

Okay.

In addition to that, we have a focus on consolidated purchasing, energy -- those kinds -- and those are ongoing programs. And so we’ve just hired, I think, a very strong new vice president of supply chain management who will be really focused on that area. So we’re excited about that.

Okay. I apologize -- I missed part of your comment about guidance. I don’t know if you said anything beyond earnings, but did you give an indication about what you thought EBITDA would be this year -- in ’06? And I’m wondering if you expect to have any positive free cash flow this year.

The answer is that we did not give any guidance on EBITDA. And do we expect positive cash flow this year? Yes.

Free cash flow after taxes?

Free cash flow, yes.

Okay. And how much of the strength you expect in your grains margins -- grains and soy margins -- is driven by a favorable crop this year? And is it something we should replicate in years down the road if we want to forecast the profitability level for that business?

Not at all. We tend to make the same basic-- in terms of the commodity grains side, we tend to make the same absolute margins. The growth in the-- growth improvement in margins is all being driven in the value added part of the business. In other words, taking the crops and converting them into soy milk, into soy powders, into Okara, into ingredients, into snack products.

Okay. And on the oat fiber business -- obviously, you’re positive this quarter with it having fallen off last year in the fourth quarter. Did you see any change in the sequential run rate of that business? You were seeing improvements throughout the year -- did you see that tick up incrementally in Q4 or is it just tracking along but you had--

No, this was the highest quarter.

I realize the highest dollar quarter, but did the growth from Q3 to Q4 accelerate from what you saw in, say, Q2 to Q3?

Yes, it did.

We have signed a number of major new contracts. It’s really going well.

Okay, thank you very much.

You’re welcome.

Thank you. [Operator Instructions] We’ll move now to Keith Howlett of Desjardins Securities.

Yes, I had a question on the ethanol processing. In terms of establishing a recurring revenue stream, can you just speak conceptually -- what that might entail?

Yes. A very simple one would be a royalty stream, but I think we’re really thinking beyond that and trying to determine how we might actually participate. So this could involve the development of plants producing ethanol from lignocelluosics. So this is a process that’s going to go on over the next couple of years. There are major financial incentives and programs -- loans and grants and things -- available at a state level, at the federal level.

The next level of facilities are now being proposed. We saw the York, Nebraska, one at a pilot-plant level; now we’ll see them moving into a small commercial scale. Our Spanish project produces, or will produce, 5 million liters per year. The next step there would obviously be to go to much larger levels. In general, Europeans are more advanced in this area, perhaps, than the US.

And so we see-- key to this is our pretreatment process, we believe; but equally important is the development of the enzymes and yeasts and that the costs of these go down and that the ability to-- the time required to convert to a glucose source gets down in Europe, we’re seeing simultaneous treatment of-- to sugar and to ethanol in the same tanks. This is a new development.

So there’s a huge amount of technical development going on in this area. We believe that our technology is extremely important in the pretreatment side, as I described, I think, in my talk. It’s through, I think, hopefully facility ownership project development that we may end up ending up with ongoing revenue.

And in the Salamanca, Spain, project I know you’ve been delivering equipment. When will that-- the pretreatment part of it be up and sort of running?

Basically this summer. We start shipping equipment next month, and I think we’ll probably finish by about the end of April or early May so that the facility will be there. Just for reference, it’s 7 stories high. So it’s not a lab piece of equipment.

Great; thank you.

You’re welcome.

Thanks, Keith.

Thank you. We do have a follow-up question from Sara O’Brien of RBC Capital Markets.

Sara O’Brien: Hi. Just wondered, in your guidance for revenues for ’06, how much of the 20% organic growth is already booked contracts such as the aseptic soy milk one?

That’s a tough question to answer. We have so much business that just goes on day in, day out and [cross-talk]

I can pretty much say half [inaudible]

Would you? Okay.

Sara O’Brien: Okay, so half is already basically in the bag; good. And the EBITDA number you just provided -- that’s including nonrecurring-- is it not including the $4 million from the IPO?

Yes.

Sara O’Brien: Okay. And I just wondered-- given Opta Minerals’ recent acquisition, can you give us the debt-to-total-cap pro forma closing that acquisition?

Within Opta Minerals itself, you mean?

Sara O’Brien: No, for SunOpta Consolidated.

Do we have that handy?

I don’t have that handy.

We don’t have that handy.

We’ll get that for you, Sara; don’t have that right here.

Sara O’Brien: Okay, great. And maybe you could just tell us-- you mentioned that the SunOpta acquisition was going to be accretive to earnings. Can you give us a sense of-- sort of cents per share you’re looking for from that acquisition?

Opta?

Are you talking about the Opta acquisition?

Sara O’Brien: That’s right -- to the consolidated results.

Approximately $0.02 per share to us, with our 70% ownership.

Sara O’Brien: Okay -- $0.02 US for you.

Yes.

Sara O’Brien: Okay, thank you.

Thank you. [Instructions] And we’ll take our next question from Ed Irvin [ph] of Wachovia Securities.

Good morning.

Good morning, Ed.

My question is with everything we hear about now with our president down here is talking about ethanol, ethanol. I was wondering -- your process breaks down almost anything-- almost like a waste product, instead of using valuable corn?

The primary difference between lignocellulosics and corn, which is used for ethanol in the US primarily, and wheat -- either barley or wheat kernels in Europe-- The primary different here is that there is no lignin or effective-- virtually no lignin in corn. And therefore you do not get that bonding of the components together. So that you can treat corn directly into sugar, whereas with lignocellulosics, you need to find a way to access the cellulose and hemicellulose, and we believe that’s where our technology comes in.

Will it reduce the cost of ethanol versus what we’re producing ethanol right now, with corn?

I think the jury is still out. We think that ultimately here, that ethanol from lignocelluosics can be competitive when the price of oil in the sort of $60 range. But there are many other considerations, of course. What government funding is available for projects; the issue of security in terms of supply and funding to farmers and things like that. And also the sale of byproducts that come from the process. So I think there are a number of factors, and as we’re going to see a lot of development in this area there-- Obviously with this kind of funding and this kind of awareness in ethanol, there’s a huge amount of effort going to go into product development over the next several years. And we think it can become commercial on an economic basis within the next couple of years, and that may be a little bit ahead of what other people think.

Well, I was listening to the president of Cargill speak the other day on TV and he just said that he thinks there’ll be a war between the food usage of corn and ethanol uses of corn and would drive the price structure of corn.

Well, I think last year-- I mean, 15% of the corn crop in the US went to ethanol. There’s now at least a doubling of ethanol capacity going on, which suggests that it’ll get to 30%. Generally it’s viewed at that point that you begin to affect the commodity prices of corn, and then the price of food, and then you get exactly the issue he’s talking about here. And so it’s not acceptable to drive the price of food up, so you’ve got to find a way to access lignocellulosic materials. And there are some amazing materials around the world that could be used here. But there’s work to do, there’s research to do, and particularly, I think, in the enzyme and yeast area.

What is this pilot plant going to be doing here in the states?

It is a pilot plant. It is processing corn stalk or corn stover, or it will be. And it’s located beside a corn-to-ethanol plant. So the idea is to be able to use the whole of the plant. Same thing, of course, in Spain -- the Spanish one is a much larger project where you use wheat straw beside a plant that’s producing ethanol from the wheat kernel.

Would you use silage? I mean, just chop the whole thing up, or would you just take the leftover stalks and--?

You just take the leftover stalks. You’d probably bale them in the field. You’d bring them in, then there would be some prep where you would cut them into a certain size and probably add some water and then process them through steam explosion.

Will they try other things while they’re there with the pilot plant, or just--?

I would suspect so.

Okay. What about buying an enzyme company?

Generally, these-- the major players are Genencore [ph] and Novazyme [ph], and these are huge companies.

Oh, okay.

So probably beyond our capability.

Thank you very much.

You’re most welcome.

Thank you. At this time, there are no further questions. I would like to turn the call back over to Mr. Jeremy Kendall for any additional or closing remarks.

Okay. Once again, it’s been a pleasure to talk with you. We’re really excited about 2006 and I really look forward to talking with you at the end of the first quarter. So thanks very much for tuning in today. Bye-bye.

That does conclude today’s teleconference. We do thank you for your participation. Have a wonderful day.