Sunopta Inc (STKL) 2006 Q3 法說會逐字稿

Good day, everyone. Welcome to the SunOpta Incorporated Third Quarter 2006 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 operator and good morning, ladies and gentlemen, and welcome to the third quarter 2006 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 and Chief Financial Officer; and Ben Chhiba, Vice President and General 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 our 2006 and future 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 in accordance with US GAAP. Our 10-Q for the period ending September 30, 2006 will be filed by no later than the close of business on November 6, 2006.

We want to address our sunflower issue upfront on this call. I want to tell you what happened, what we have done about it, and what our expectations are for the coming 12 months in this business. First, the issue is now behind us. We have taken our losses in this third quarter and we expect to improve operating earnings from this business by $4 million over the next 12 months, starting in this fourth quarter. This issue arose as a result of a poor selection of relatively untested sunflower seed genetics, combined with very dry weather conditions in our growing area in 2005.

Our objective had been to grow a very large, very wide sunflower, which is preferred in the snack market. The product that grew seem to have directed most of the plant energy into creating a large shell but less the inside kernel, either very small or completely non-existent. As a result, the product then had to be downgraded in value into lower price markets, with little or no gross margin and additional processing cost. At the end of the third quarter, some inventory remained, particularly low quality, and we had to mark it down to the lower [of cost to] market, generating total gross margin losses including inventory write-offs of $2.1 million or approximately $0.03 per share after tax. This remaining product will be gradually sold off with no further losses.

The new 2006 crop is now being harvested with approximately 25% received to date and the crop looks good. For this 2006 crop, we reverted back to proven genetics and increased our irrigated acreage to 70% to avoid drought conditions. So, in summary, this issue has been dealt with. I certainly regret it and this next year should return to the solid profits that we enjoyed in 2004 and 2005.

At this time, I also want to address our guidance. First, we will meet our revenue guidance for 2006 of $585 million to $600 million, which compares to $426 million in revenue in 2005. Second, we will exit 2006 at a revenue rate exceeding $650 million. Third, we expect to meet our profit guidance of $0.26 to $0.30 per share excluding the losses realized within the sunflower business, probably ending up at the lower end of the range. We are reconfirming this guidance to let you know that we expect to have a strong fourth quarter and that our overall business is performing well.

We are pleased to report record quarterly revenues of $145.5 million for the period ending September 30, 2006, representing a 26.5% increase over 2005 third quarter revenues of $115 million. These revenues of $145.5 million represent the 36th consecutive quarter of increased revenue growth versus the same quarter in the previous year. The Company's revenue growth in the third quarter included an internal growth of 15.8%, plus growth via acquisitions of 10.7% for a total of 26.5%. Internal growth within the Company's vertically integrated food operations was 18% in this quarter. Revenues for the first nine months were $434.5 million, representing a 42.9% increase over the first nine months of 2005 when revenues were $304 million. Revenues within the SunOpta Food Group increased 21.6% in the quarter to $127 million versus $104.5 million in the third quarter of 2005 and represented approximately 87.5% of total Company revenue. This increase in the Food Group was led by a 30.2% growth in the SunOpta Food Group and 31.1% growth in the Canadian Food Distribution Group.

Revenues in the quarter from the Company's 70.6% owned subsidiary, Opta Minerals increased 98.2% to 16.9%, largely as a result of its February 2006 acquisition of Magnesium Technologies Corporation.

The SunOpta BioProcess Group had a profitable third quarter due to the shipment of the first bioprocess equipments and technology to China Resources and Alcohol in China.

We continue to target a revenue run rate of $1 billion by the end of 2007 and over $2 billion by 2011, all focused on our existing business segments.

Each of our food operating groups are well positioned in their markets, they are profitable, they are growing and they are focused on the key food trends of organic and natural foods, fiber addition to food, improved nutritional content in food products, increased consumption of fruit and vegetables, and the healthy attributes of soy, corn and sunflower.

Operating earnings in the second quarter were $3.547 million or 2.4% of revenues after absorbing a $2.4 million operating loss in the quarter within the Company's sunflower business. Before this loss, the Company's operating earnings were $6 million or 4.1% of revenue and were 54.6% higher than the comparable period in the previous year.

Net earnings in the quarter were $1.5 million or $0.03 per diluted common share, as compared to $2.1 million or $0.04 per diluted common share in the previous year. However, net earnings prior to the one-time sunflower loss were $3.2 million or $0.06 per share. So, despite the impact of the losses in the sunflower business, operating earnings for the nine months ending September 30, 2006 increased 43% to $18.4 million as compared to $12.8 million in the previous year.

Net earnings for the first nine months of 2006 are $8.9 million or $0.15 per diluted common share, an 18.5% increase over 2005 earnings after deducting the net unusual gain in 2005 of $4.5 million, which was realized primarily from the Opta Minerals IPO.

Gross margin as a percentage of revenue was 16.5% in the third quarter, but was 17% prior to the sunflower gross margin losses, comparing very favorably with the 15.9% recorded in the same quarter last year. The third quarter is traditionally our lowest gross margin quarter. This clearly indicates the trend towards improving margins and we anticipate and expect to improve margins by 1% per year over the next two years to approximately 19.5% as a result of cost reduction initiatives and product mix.

Selling, general and administration expenses as a percentage of revenue were 10.4% in the third quarter and 10.2% year-to-date. These costs are expected to fall by 0.5% per year for the next two years as a result of leverage from revenue growth and cost reduction programs over the next three years.

Our effective tax rate for the year-to-date is 26% and is expected to be in the range of 25% to 27% for the year.

The Company's balance sheet remained strong as of September 30, 2006, with $4.1 million in cash, and sufficient financial resources to continue to fund growth in operations, and invest in capital projects. Shareholders' equity increased to $175.9 million, representing a book value of $3.06 per common share, up from $2.81 per common share at September 30, 2005.

Diluted weighted average outstanding common shares for the quarter were 58,015,943 shares. Long-term debt increased to $75.4 million during the quarter, as a result of the acquisition of Purity Life. And our long-term debt-to-equity ratio is 0.43 to 1 at the end of the quarter, still well below our maximum targeted operating threshold.

At the end of the quarter, the Company had approximately $40 million in available financing facilities to support future growth initiatives.

As we look back at the third quarter, we can summarize the key events as follows. The continued strong growth of the oat fiber business due to the increasing addition of fiber and food products, both for human and pet consumption, our focus on developing this business internationally, where we have now established a number of new distributors, and our efforts to bring new products to market, in particular soy fiber.

All three of our facilities are now operating at capacity on a 24-hour, seven-day basis. We are currently expanding capacity as follows -- an additional 35% at Cedar Rapids, primarily focused on the addition of soy fiber, 20% at Louisville and 20% at Cambridge in oat fiber. This new capacity will continue to be phased in throughout the last quarter of 2006 and be completed in the first quarter of 2007. All of this capacity is within the current building constructions that we have.

This is however only the first step in growing our fiber business, as we expect to expand our total annual capacity by a further 40% over the next two years in order to meet growing market demand. Our new soy fiber has been a great success with approximately 10 million pounds in annualized orders placed already with many further prospects, but lower margins as we implemented this new manufacturing process have occurred.

Last quarter, we reported on the success of our new three-year $60 million aseptic soymilk contract with a major US retailer, which commenced in the first quarter of 2006. We were pleased to confirm during the third quarter that we have added a further $20 million three-year contract for a second private label SKU for this customer. And just recently, we received and announced a further $60 million three-year contract with a major retailer for a refrigerated soymilk product. Initially one SKU, it is likely to be expanded to include further products. This production commenced yesterday and will ramp up over the quarter and into 2007. This is a total of $140 million in new three-year soymilk contracts initiated so far this year.

During the third quarter, we benefited from the capital improvements at our Fruit Group plant in California designed to increase processing and packaging capacity, improve process efficiencies and automate product growth.

The SunOpta Fruit Group continues to sign new contracts and had revenue of $107.3 million for the first nine months. This is a 139.5% increase over the same period last year. Internal growth was a solid 26.6% in the quarter. Operating income increased to $6.762 million or increased by 250% for the same period, making the Fruit Group our largest profit contributor within the SunOpta Food Group. The sourcing capability of the Food Group is quickly becoming acknowledged as a key strength, as more and more customers recognize the need to work closely with SunOpta in order to ensure consistent, quality supply of fruit products.

Following the completion of a plant expansion of the Dakota Gourmet, Wahpeton, North Dakota plant, where the Company produces organic and natural snack products made from soy, corn and sunflower, Dakota Gourmet has recorded record sales and profits for the quarter.

Our other healthy snack food company, Kettle Valley, is growing very quickly, with new private label and store brand contracts signed over the past three months totaling approximately $10 million. And this has now required us to significantly expand capacity at both our Omak, Washington and Summerland, BC plants by 66%.

Next year, we are planning to build a new fruit snack facility with a new technology that will allow us to expand the current bar production capacities, plus manufactures shapes and other products made entirely from fruit. The healthy snack food market is growing at over 30% per year compared to traditional snacks, which grow at 3% to 4% per year.

During the quarter, the SunOpta BioProcess Group shipped the steam explosion technology equipment to China Resources Alcohol Corporation, which is the second largest ethanol producer in China and has their main facility in Zhaodong City. This equipment is installed today, operating and producing ethanol. This contract places SunOpta at the ground floor of an exciting program to develop ethanol plants based on cellulosic raw materials in China under an announced $5 billion ethanol program by the Chinese government.

It is CRAC's stated intention, based on the success of the first facility, to expand to 1.7 million gallons of cellulosic ethanol by the end of 2007, and to 330 million gallons by the end of 2012, which could require up to $500 million of equipment and technology from SunOpta. We are also currently manufacturing a continuous steam explosion system for Celunol Inc. of Boston, Massachusetts, for their new cellulose to ethanol facility to be built in Jennings, Louisiana. This unit is expected to be shipped early in the new year.

We were very pleased to announce that on September 21, 2006, we acquired the business and assets of Purity Life Health Products. With sales of approximately $50 million, Purity Life is Canada's leading distributor of natural health and organic health and beauty products. Purity Life was formed and led by David Chapman, who is a pioneer in this industry and who will stay on to manage and grow the company further. Purity will be integrated into the Canadian Food Distribution Group and represents a key component of SunOpta's strategy to build an integrated Canadian distribution system focused on specialty and organic food, natural health and organic health and beauty aid products. The group now has revenue of approximately $180 million and has more than tripled its operating earnings in the first nine months of 2006 over the same period in 2005.

We were also pleased to announce on October 4 that Opta Minerals had purchased a 100% of the shares of Bimac Inc., a manufacturer of industrial minerals for the steel industry and located in Michigan with sales of $8 million. Their products complement Opta's existing product line and customer base and offer opportunities to leverage their capabilities.

Steve Bromley will now provide an overview of highlights for each of the operating groups.

Thank you, Jeremy. The SunOpta Grains and Food Group posted solid revenue growth during the quarter, realizing revenues of $45.7 million including internal growth of 19.8%. This growth was realized in spite of the previously discussed sunflower issues and was driven by solid growth in aseptic packaged products and continued increasing demand for organic grains and grain-based ingredients. During the quarter, we completed a number of process enhancements at our aseptic packaging facility, designed to increase throughput and improve the efficiencies. Volumes at the facility continued to increase and just last week, we set a record producing in excess of 195,000 cases of products or annualized volume of approximately 120 million quarts per year of final finished product. Our efforts will continue in this regard as we continue to expand capabilities at this facility.

Also during the quarter, we completed the expansion of our grains roasting and packaging operation and are now realizing improved throughputs and efficiencies. We have recently expanded our product offering to include a line of organic berry powders, organic whey and whey-based products focused on the fast-growing organic infant formula markets and expect to be in full production in the first quarter of 2007. Our crops so far look good. The majority of the soy and corn crops have been harvested and are in good shape.

The sunflower crop, as Jeremy mentioned, is approximately [20%] complete and with the exception of growing areas impacted by drought in the Central Dakotas, the crop is good. Our sunflower crop is diversified in many growing areas, with much under irrigation. So, we should be in good shape. With the issues previously discussed in our sunflower business now behind us, we expect the business to return to solid earnings. As Jeremy mentioned earlier, we were awarded a three-year contract for the provision of refrigerated soymilk for a major retailer and this production has now commenced.

The SunOpta Ingredients Group continues to be well positioned as the demand for its line-up of insoluble oat and soy fiber products continues to grow. The 2006 launch of our proprietary soy fiber has far exceeded our expectations. When we launched this product, we expected a slow ramp up in volumes to a run rate of 2 million pounds to 3 million pounds in 2006 and growing from there. What happened though was an almost immediate lift to annualized volumes in the 9 million pound to 10 million pound range, with more opportunities available in the market. It was our decision to grab the market share when it was presented, understanding full well that margins would be impacted as we developed and refined our processes in the manufacturing of soy fiber. This was a new proprietary process that we developed internally with [passive supply force]. As we have quickly ramped up our volume capabilities, we have had to deal with a number of inefficiencies and incremental costs, as we refine our proprietary processes and do the learning required to produce at higher volume level at each of the facilities. These initiatives had a significant impact on the quarter and reduced operating earnings by approximately $0.01 per diluted common share.

The good news is that all three plants are now regularly attaining targeted throughputs. The rapid increase in soy volume, when coupled with the continued growth in oats volume, has driven our operations to near capacity and as Jeremy has detailed, expansion plans are underway. The Group has also launched a number of new products over the past year including organic oat and organic soy fiber, grade-A acid whey, organic soy ocara and a line of dried honey and molasses. Demand for these proprietary internal ingredients is growing, as food manufacturers look to convert many conventional products to organic.

The SunOpta Fruit Group had an exceptional third quarter, realizing revenues of $36.7 million, a 30.2% increase versus the same quarter in 2005 including internal growth of 26.6%. Gross margins increased 320 basis points and operating earnings increased 124% versus the third quarter in 2005. The Group has realized continued strong demand for natural and organic individually quick frozen, private label food products, as well as strong demand for organic ingredients such as citrus, juices, berries, acai and tomatoes. As many food manufacturers want new organic product offerings, the Group's global sourcing expertise is critically important as demand for organic raw materials continues to grow and customers want assurance of supply.

The Group's Kettle Valley fruit bar operations continued to experience significant growth and launched a number of new private label products during the quarter for a variety of food manufacturers and retailers, both domestic and international. As Jeremy has mentioned, this business has many exciting opportunities ahead and we have done and will continue to expand to meet this demand.

During the quarter, we completed a strawberry processing automation and expansion project at our Buena Park, California, berry processing operations, commenced the expansion of drying processing and packaging capability upgrades at our Omak, Washington fruit bar facility and commenced a processing automation and capacity expansion at our fruit ingredients operation in South Gate, California.

The SunOpta Canadian Food Distribution Group also realized an excellent quarter, achieving revenues of $29.3 million, an increase 31.1%, of which 18.8% was driven by internal growth. Operating earnings increased 316% versus 2005, reflecting numerous market developments and cost reduction initiatives realized over the past year. The third quarter is seasonally the lowest quarter for gross margin on an annual basis in the Canadian Food Distribution Group.

The addition of Purity Life Health Products during the quarter strategically complements and expands the group's product line up and provides significant opportunities to service and grow the Canadian market as the country's largest distributor of natural and organic products.

The group has now become the natural and organic frozen category leader across Canada for Shoppers Drug Mart, has expanded its relationship with [Leblanc], the national preferred supplier of frozen organic and natural food, and has developed an official supply relationship of frozen and fresh, natural and organic kind of categories with an emerging international retailer expanding operations in Canada. The construction of the group's new 95,000 square foot distribution facility in Western Canada has commenced for planned occupancy of August 2007. A number of cost reduction and process improvement opportunities, focused on the supply chain from procurement through outbound logistics have been and continue to be implemented. These initiatives when combined with the implementation of improved software to be completed in the second quarter of 2007 will provide for continued improvements in order fill rates and operational efficiencies.

Opta Minerals realized strong growth in the quarter, posting revenues of $16.9 million versus $8.5 million in 2005, an increase of 98.2%. Operating earnings increased 113.3% to slightly over $2 million. This increase was driven by the February 2006 acquisition of Magnesium Technologies, which has performed very well to date, plus continued strong internal growth. The Company continues to effectively grow its platform as one of the dominant providers of industrial minerals in North America, and as Jeremy mentioned earlier, recently completed the acquisition of Bimac Corp. of Milan, Michigan, a supplier of proprietary industrial minerals products to the steel industry.

The SunOpta BioProcess Group had a solid quarter, realizing revenues of approximately $1.6 million and posting a profitable quarter. During the quarter, the group delivered steam explosion equipment and technology to their Chinese client and as previously mentioned, continues to work on cellulosic ethanol projects with Abengoa and Celunol. The group is on ground floor of exciting projects in cellulosic ethanol around the world and continues to pursue many exciting opportunities focused on creating recurring revenue streams through a combination of royalties and equity ownership in cellulosic ethanol facilities.

This week, Murray Burke, the Vice President and General Manager of the group, spoke at the Platts Conference in Chicago and confirmed that the group's efforts have progressed to the point where he could confidently confirm the commercial viability of cellulosic ethanol.

Jeremy?

Thanks, Steve. So as we look forward to the last quarter of 2006, we expect to see each of our business units grow in both revenue and profitability, resulting in a strong fourth quarter in 2006. I want to repeat one more time, the sunflower issue is behind us and we expect a $4 million improvement in profit in that business over the next 12 months. We will meet our revenue guidance in 2006 and our profit guidance less this one-time occurrings in sunflower.

The outlook for 2007 is excellent, with good revenue growth, but particularly strong profit growth. We will provide guidance for revenue and profit early in the new year and would now be happy to answer any questions that you might have.

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from Scott Van Winkle with Canaccord Adams.

Hi guys, a few questions. First, Jeremy, I think I missed some of the -- you were talking about indications from customers on the cellulosic ethanol activities, I think, particularly your China customer. Can you tell those numbers out again?

Sure. The program that CARC has and CARC is part of the China Oil and Foodstuff Company, which I think the 456th largest company in the world. That program envisages going from this pilot plant which is now installed and the facilities they are producing ethanol today -- and the reason I know that is that we had one of our people there for the last month helping them start up the facility and he will be going back again there tomorrow. And so, their plan is then to move to 1.7 million gallons for 2007 and then up to 330 million gallons by 2012. Translating that back to our equipment would require approximately $500 million of our equipment and there is a schedule laid out with CARC of so many units per year between now and 2011 in order to meet that target.

And what's the bogie for all this coming to fruition?

What is the likelihood of it happening?

Yes.

The Chinese government has already mentioned, has approved $5 billion. We shipped this equipment in September and imagine that it is installed and running, and it is not just our equipment but all of the subsequent tankage -- they have signed a long-term agreement with Novozyme, a six-year agreement with Novozyme on the enzyme side. There is a very big commitment to this program. So, as far as I am concerned, there is a very good probability this program will evolve as laid out.

There is any other technology that would replicate what you are doing that they are testing today?

There is no other technology. I mean we have a very strong patent position and of course, we are also produced units that are scale up to much, much larger than the equipment that we have shipped there already. So, nobody else is able to do this. The only alternative way that I am aware of is to process this material with acid and the problem -- there are twofold problem with that. The first is that when you are cooking materials with acid in high temperature, you require extremely exotic metals to withstand the acid. And therefore, the capital cost rises significantly. In addition, you then develop a waste stream that has that acid and which you have to handle. So, those two factors in our opinion mean that acid-based processes are not likely to be economic.

Okay. Just one other question on the year before. The success of soy fiber, has it at all come at the expense of oat fiber?

Well, yes, David, it has because I think given the strong demand for oat fiber, if we had not taken that 10 million pounds of soy fiber or had taken what we had originally expected, which was 2 million pounds to 3 million pounds, we would have had an additional, approximately 8 million pounds of capacity for oat fiber. And at this point in time, we have customers on allocation on oat fiber. Oat fiber is, of course, a product that we have been producing for years and so we know and understand the process intimately, and our margins are secure and we understand the business. Soy fiber was an entirely new technology, which as Steve mentioned, we have developed ourselves with a patent applied. But whenever you introduce a new technology, you can expect that it takes a little time before you optimize the processing condition. So, yes, we would have made more money if we had taken on less soy fiber, and I think that was really the point that Steve was trying to make.

Okay, thank you.

You are welcome.

Thanks.

And our next question comes from Chris Krueger with Miller Johnson.

Hi, good morning guys.

Good morning.

Good morning.

Hi, I think I know the answer to this, but I am going to ask it anyway. For your sunflower inventory write-down, is there any potential that there could be one more write-down to come yet, writing it down all the way to zero?

There is no potential for that.

Okay. Can you explain just a little bit exactly what market it goes into again at this point?

Yes.

Sure. The lower quality product goes into products like bird food. There is very little processing done and you have the smaller sizes, goes into bird food. And then, below that, it can go into channels for liner boarding or bedding, very, very low value markets.

And the inventory has been written down to those values?

Yes, written down to those. That stuff also will end up in sunflower oil. If it is crushable, it will be crushed and go into the oil market. So, really three markets, oil is the number one place, bird food number two, and then beddings and fiberboard type things number three, which is really, really low value.

Okay. On the soy fiber, I know you have indicated that margins continue to improve as you get a handle on it, I guess, so to speak. Soy fiber by itself, would that be profitable yet the fourth quarter?

Yes, it will.

Yes, it's profitable. And yes, the margins increase each month.

Okay.

What happened Chris was that when we initially went in, we put one decanter into the facility to do that low level of volume. And during the second quarter, we lined out that decanter and that took some time. Realizing that the volumes went up, we put another decanter in. And when we put the second decanter in, there is a process disruption, etcetera, that you go through first in installing it and then starting it up. And the start-up was a difficult start-up. That then got combined with the stress from other parts of the system. I won't get into all the detailed lineup, but we had a warehouse fire that significantly reduced our volume throughput that we could put through and that was both in oat fiber and soy fiber that we do at the facility. So, our volumes were down. We were lining up the system. We had the unfortunate problem at our facility. We then transferred volume of oat fiber to keep it going over to our Cambridge facility and that created issues. So, it was a tough quarter, but I believe we have the bulk of those issues now behind us and as I had mentioned, we are hitting our daily throughput targets. So, that's good news and we are profitable in soy fiber at this stage.

Okay. [Moving] over to the fruit and maybe the Canadian distribution, how much like operating margin expansion do you think we could see from that in the next couple of years, if you want to look at each -- the fruit and the Canadian separately?

Our target on the operating margin line in the Fruit Group is 8% to 10%. And in the third quarter, which is a seasonally low quarter, it's -- the second quarter is the seasonally highest throughput. In the third quarter, we were at 6.5% and in the second quarter, we ran at 7.3%. That decline of 0.8% compares to the decline of 1.1% last year. So, --

And it is seasonal.

Yes, it is seasonal. Basically what happens is, the plants, our berry processing plants run full out in the second quarter. And during the third quarter when some of the berries start to drop off, they don't run the [charts]. There is less overhead coverage. It's totally expected. And so, we see the ability -- we expect that our overall operating margins will be 7% next year and then moving to 8% the year after.

In our distribution business, our operating income was 1.5% in 2005. It's now at 3.9% and we expect that that will rise to 4.3% next year. This is well above, I might say, the operating income rate of our trends in 2005 and that's just a reflection of the lack of customer concentration in this distribution business. Also, I would point out the margins in the Purity Life acquisition are higher than our overall business. So, I will talk about it at the gross margin level. And so, we do expect that to be pulled up also.

Okay. Last question. Other production or margin-related issues, maybe that are not as significant as ones you have talked about, are there other ones out there that need to be resolved or anything else you can talk about there?

Off the top, I don't think Steve is there -- I don't really see any issues at all at this point.

Okay, thank you.

Thank you.

And we will now go to Bob Gibson with Octagon.

Good morning.

Good morning.

Just an observation. Cash flow statement is always helpful for guys like me. You are growing like topsy next year. Could you give us a ballpark CapEx number?

Sure, I can. We are probably looking at something in the $15 million to $16 million range. That would not include for example building a new fruit plant. That would be a highly separate kind of issue. This year, our CapEx is going to run --

Between $11 million and $12 million.

$11 million and $12 million. And I think two years ago, we were probably up at about $16 million to $19 million. So, the three plant expansions in our fiber business as I said are within the current buildings, the payback on those is something under a year. So, there are fairly minor modifications that get us this kind of capacity expansion. Once you start building beyond the current walls, then obviously the cost -- per head our cost will rise. So, that would be the way to look at it I think today.

Okay. And --

Information that we could give you off the cash flow statement today, are there any particular measures?

Just a general comment that I would just like to look at it and --

Okay.

Sure.

And where the money is going, etcetera, etcetera, that kind of stuff.

Okay, understood.

Could you flush out the Celunol contract for us a bit and sort of where you see those monies falling sort of --?

Sure. I can and I can. I think as we've said before, we combine our BioProcess division with our corporate cost and the reason for that is that for the most part, our contracts are subject to NDAs, non-disclosure agreements, and also because of the relatively small number of customers at this point, we did not really want to disclose the details of those contracts and uncertainty, the profit margins that are inexistent. So, I am sorry that I can't tell you too much about that. I can tell you that we do expect it to be a profitable contract and that --

And they have a great program.

I know. And this is just the first of a whole program that they will have.

[inaudible] organization.

I can [tell] you that we are being contacted by somewhere between sales three to four times per day from potential interest all over the world and at this point in time, we can't really even answer the phone. There is tremendous interest in the whole area of cellulosic ethanol and I think we have a pretty key part of the puzzle here.

Okay. Maybe you can give me your thoughts on just being a seller of equipment versus some sort of joint venture partner?

I am sorry, would you repeat the question?

Well, when we are talking about ethanol, right now, you are just a seller of equipment, right?

That is correct. And so, at this point in time, as we move into larger facilities or larger equipment sales, we expect to add royalties. So, that will create some recurring revenue. But, our major program is going to be participating on a joint basis with the partners in building and owning and operating ethanol facilities. And as such, we have a number of those discussions under way at the moment.

Great. Thank you very much.

Thank you.

Our next question will be from [William Gidal with Gaucho Group].

Jeremy, Steve, good morning.

Good morning William.

Good morning.

In regards to the acai, our research is showing that there are 75 unidentified pytochemicals in that product and the University of Florida has had some pretty results, where about 85% of all leukemia cells were destroyed in preliminary tests. Is SunOpta working with any pharmaceutical companies in conjunction with that product?

In regard to acai, no. I think basically all of our acai sales are in the food chain. So, I don't think we are working with any pharmaceutical companies. As you probably know, from the time that you pick the acai off the very tall palm trees, you must process them within 24 hours or the value of the anti-oxidant properties decline significantly. And so, we are working with, particularly with Sambazon here who have built a new facility in Brazil and have excellent people and excellent facility.

One of our issues to this stage has been supply because we can sell every pound that we receive. So, as capacity expands on the supply side, that will open up opportunities for us.

Okay. Jeremy, can you give us an update on the oat fiber facilities and self-production of cellulosic ethanol there?

Yes. We have been, as I have indicated, extremely busy in the BioProcess Group. We have been working on the ethylene that comes out of those facilities with a view to seeing if we could recover some of that and convert that into ethanol. And the work has been going on in our labs, but it has been going on at the same time, as all of these other programs have been going on. So, I have to say that we are probably behind, William, in this development but the latest information that I have which we would be about a week ago, I think I have talked to them about it is that they were starting to get some encouraging results. So, I do not want to tell you that this is a definite go at this point. But, it is of definite possibility.

Okay, that's great. Can you give us the number on the -- maybe the total number of food and bioprocess contracts under serious negotiation and can you possibly quantify those in a dollar amount? I know you already gave us some information on the CRAC, but anything else?

The way the world works I think is the initial facilities are in the sort of 1.5 million gallon range. That's what we would define as commercial demonstration. And so, that sort of characterizes the existing contracts. The next stage, I think, would be 10 million gallons and then, the next stage after that will be 50 million gallons. So, as I said, we have a number of conversations going that are in those ranges. I would like to be able to jump immediately to 50 million gallons, but I think we probably have to go in step. We may go in a way, William, where we put a 10 million gallon facility in with the ability to then expand that to 50 million. So, you go in these steps. So, again, we are under NDA agreements with the people that we are talking to, but let's sort of -- I would hope we would be able to announce some things about this sometime by midyear, probably earlier than that in 2007.

Okay.

I know that's a bit frustrating. We were talking this just for fun but we were talking to Virgin Atlantic last week and they are getting 100 enquiries per day. So, it is just an amazing level of interest at the moment.

Okay. Yes, we are definitely seeing a huge surge in cellulosics right now. Given the recent consolidation among global steel producers, would lower foreign steel terrace in United States encourage SunOpta to be more aggressive in bio-refinery construction?

With a lower price of steel, would that affect this? Probably not because it is sort of in specialty metals. I don't think I can answer that question truthfully.

Okay, okay. Well, congratulations on the next phase of growth. You guys are doing really well. We've got a price target and you guys are of about $15 and we have you pecked at about $616 million in revenues for the fiscal year. So, congratulations.

Thank you very much.

And thank you very much gentlemen.

Our next question will be from Keith Howlett with Desjardins Securities.

Yes. Just wanted to ask a few questions, first on the food business. In the ingredients business, I am just trying to understand the numbers. The revenue was down in ingredients division year-over-year and the EBIT margin was down about, say 55% of EBIT dollars generated. I just wanted to get a sense of what was going on there?

A couple of things. One is fiber business was up about 16% year-over-year. As we spoke about a couple of quarters ago, one of our customers that we were producing a soluble fiber for lost their customer, so we lost a piece of contract manufacturing business on the soluble fiber side, which left some open capacity in the operations and we are in the process of pursuing new contracts, fill up that extra capacity. So, that was one of the issues that drove down the revenues. The other, you will recall last year, we were exiting our chicken and pork business in Canada and there were revenues in that business last year and none this year. So, that contributes to those areas.

On the EBIT side, the key drivers were the inefficiencies in the -- the major driver was the inefficiency on the fiber side and there was also, of a much lesser extent, the under-absorption on the soluble fiber contract.

Okay, thanks. And then just on the Grains and Foods division, when I take the one-time write-down on the sunflowers out of the EBIT line, I sort of EBIT being flat and given the increased volume in aseptic business, I would have thought there would be some improvement in the number there in the Grains and Food division?

The number did improve. I will just get the numbers. You are talking of quarter or year-to-date, Keith?

I was looking at the quarter.

And you are talking about the percentage?

I guess, last year the EBIT was about 1.34 and then it went down to a loss of 6.16, which is about $2 million and the one-time soy business was 2.1.

Actually, no, it was 2.4; 2.1 was at the gross margin level. So, 2.4 at the operating level.

Okay, so say you got about 300,000 of uplift on $7 million higher revenue?

[inaudible] operating margins, which was 3.7 last year. So, the rate has improved.

Yes. And the issue there is great strength on aseptic and packaged grain products. Some weakness in the quarter on the timing of shipments on contracted soy volumes, not a long-term problem, but because the volumes are contracted, but in the quarter there was some weakness there.

But don't forget that last year, we had a significant profit in sunflower. So, the $2.4 million was just about what we have recorded in the loss. So, on top of that last year, we had a profit when you compare it. So --

Okay. And then, just on the food distribution business, is the seasonality reflected this year. Is that sort of typical in that the EBIT margin is low relative to the other quarters? Is it sort of what we had expected pre the Purity acquisition?

Yes. It is seasonally the lowest one. It's the time when you have most local production, local products available. So, you are importing any of the organic products here. And so --- the [closure] side is also seasonally low because there are not many of major events occurring during that quarter. So, in spite of that, I mean last year, we had minus 1% operating income and this year plus 1.6%. So, it has significantly improved. Of course, on the year-to-date basis, that's gone from operating income of $1.86 million to $3.5 million, so significant improvement. Distribution, their weakest quarter by far is the third quarter.

So that would sort of the third quarter reflects what you would have expected for the --

Only what we have expected. The fourth quarter and the first quarter will be the strongest quarters.

Sorry, first and fourth?

First and fourth.

Yes, great. And just some questions on the cellulosic ethanol business. When do you think the Chinese Alcohol Corporation would make its decision on its 2007 commitment?

Probably in -- the target was that if they were moving on, they would take that decision in February-March with a view of being able to deliver the equipment towards the end of next year or the very beginning of the following year. Right now, they have got about large delegations coming next week from the government to see the facility. The facility is substantial and it has got multiple buildings; the buildings are already laid out for the next stage of expansion. It's a significant investment that they are making. I have some great pictures of it.

And then on the US timeframe, I think they are trying to -- the US --

I think they want to start up in May.

In May?

That's their target start-up, yes.

And the US government is trying to encourage some additional ethanol -- cellulosic ethanol facilities. What is the timeframe around that?

I am not absolutely sure. I believe it is March.

March?

According to the last two or three projects.

And then just finally on the Spanish side, where -- they are up and going with your facility -- you commercial pilot facility.

Up and building.

Up and building, okay. And when will they be up and going certainly?

It will be early next year.

Early 2007?

Yes.

And then just finally on, will you be constructing a new pilot plant by your head office or what's your plan there?

It's a --

We still have a lot of pilot plants.

The topic is under discussion at the moment and we are just -- part of the issue, we are just not quite sure whether we got construct that pilot plant at our head office or in another location in Canada. But that's a very much topic on the agenda today.

Thanks very much.

Thank you.

Okay. But we will need one for sure.

And our next question will be from [Arch Fastum] with Oppenheimer Capital.

Good morning guys. Jeremy, can you help me think through the fact that you have guys have a lot of balls up in the air across all your businesses. You are holding to some degree to weather, crop yield, etcetera. How can investors get confidence that we are not going to see a sunflower-like issue on a somewhat regular basis going forward? Is it simply looking at a potential occurrence likely just being smaller, smaller pieces of your overall business, as you continue to add contracts or how do I want to think about that?

I think, for example, in soy, we now grow soybeans or have them grown in 20 different states and two provinces, so that really spreads your weather risk. We have also identified offshore sourcing in Brazil and Argentina. So, we believe that we have spread the weather risk significantly. I want to be really clear, okay, about sunflower. This was not entirely a weather issue. This was a poor selection of genetics on our part, for which, I take responsibility and not that I did the actual selection of genetics because that would be ridiculous, but in the ultimate sense it's my responsibility. And so, this was partly management and partly weather. The issue here anyhow is that we are never going to go and grow products that haven't been fully tested in advance. So, I think we are not going to have that issue again. And I believe, certainly weather remains an issue for us and sometimes it's the positive, and sometimes it's the negative. I mean it could be a positive in the Fruit Group in the sense that where our offshore sourcing capability can augment local supply. But, I think it's becoming a smaller and smaller risk in the overall Company.

Okay. And just to be clear, I wasn't expecting another sunflower specific event. But, given with everything that goes on across all of your businesses, an equivalent to a genetic mishap, let's say, just given how much is going on in your Company?

There is very, very confident people out there that are looking at these things. They have learned a huge lesson in this case and this isn't going to happen again. It's written in blood.

Okay.

And at this time, we have one question remaining in the queue. [OPERATOR INSTRUCTIONS] And our question is from [Mitchell Hastenheim] with Oppenheimer.

Hey, Jeremy. Hey guys. How are you?

Very well, thank you.

Hey, great quarter. Jeremy, could you just tell me a little bit more, I mean, I got on a little bit late, did you discuss a little bit about your private -- the fruit bars and your private labeling? I know you guys are pretty excited about that.

We mentioned that we have signed another $10 million of contracts for this private label and health brand fruits products. And these are for major retailers in the US and major food manufacturers that would be adding a fruit bar to their product line. So, we are talking millions and millions of bars here.

Okay.

So, in the US and Canada and in the UK. We also mentioned that we are going to be building, while we have expanded the capacity of our existing plants by two-thirds, that we are going to be building a new plant that has some very exciting new technologies that we have identified in Europe that will allow us to make fruit shapes, everything from the sort of equivalent of your old licker stick to alphabet letters, whatever, and these would be in 100% fruit and it could be also 100% organic. And so, we have mentioned that this organic and natural fruit market is growing at 30% plus per year compared to traditional snacks growing at 3% to 4%.

Okay. Are you going to be targeting maybe the GNCs of the world, the certain luxury, home foods, wild oats of the world to get penetration or how are you going to I guess work on more distribution of it?

The answer is, yes, we do produce some for home foods and for wild oats. And the number -- now getting a number of bars that would add -- high anti-oxidant bars that sort of thing for people in that business. So, we have got two or three clients in that area -- two where you have fruit plus additional benefits added.

Right. One other question I guess. It's been kind of [popped here] on the cellulosic side. With obviously, if things go as well as we think they can go in China, I guess going into 2007 with potentially $500 million plus revenue being there, I know somebody would have talked to you about now, but there is some pretty good potential for that. Would we ever --

[inaudible] next five years.

Yes, yes. Would we ever consider possibly a spin-off since this would end up becoming such a huge part of the model and such a change from I guess from the past, I guess to maximize shareholder value or I think --

The answer is that we would consider that at some point.

Okay. Thank you, Jeremy.

You are most welcome.

Good job guys, thanks.

And our next question will from [Brian Fillepper] with Safeway Financial.

Yes, Jeremy, thank you. A great quarter, by the way. I am a private investor; I have a financial background in my 20s and in my 40s. My question is nowhere near sophisticated as all the folks on the call. Mine is more of a client, if you will, with virtually no knowledge. I am very frustrated and concerned about the fact that your story has not been told to my satisfaction to the marketplace. I bought a lot of shares in your Company for me, $0.5 million worth or more and I don't know why you are not on 60 minutes with your cellulosic ethanol program. [inaudible] As an example, you can elaborate why you are not negotiating with Wal-Mart on something more on the cellulosic side. The amount of gas stations they have, I am probably ignorant, but I know that your Company has a story and as I understand it, I don't see the story being told around the country to get more folks, basic folks to get involved in the stock to increase the value of the stock than just the fund institutions and so on. Could you elaborate on what you are marketing?

I will do that. It's important to understand the stage that we are at in the development of cellulosic ethanol. So, as I had mentioned earlier, the first plants are, what we call, commercial demonstration at about 1.5 million gallons. You then have to move to 10 million, what you know are defined as commercial and then to 50 million and 100 million type of facilities. You have to go through those stages. I mean, otherwise, you don't get the financing support for projects and that sort of thing. So, we are sort of at stage two and involved in all of the -- at this point in time, the three major projects in the world in this business. So, we can't go to Wal-Mart today and offer them ethanol because we don't have it at this point. So, we are not yet at that stage. We could be at a conference, a technical conference, every week in every month all over the world. I mean we are invited to England to China to Japan to South America, all over the US and Canada to give conferences and to get talks and Murray Burke who runs that division was at the Platts Conference in Chicago two days ago.

You have to decide how much of your efforts you are going to put into versus trying to run and build the business. And so, we are selectively making these presentations. I believe that the profile of the BioProcess division has been significantly raised over the last two years. At the same time, we have been trying to be very careful not to over promote this thing. There has been too much promotion in the ethanol area, particularly of companies that are in the start-up phase. And so, we want to be fair to shareholders and realistic about their expectations in this area. I do think we have a very interesting technology here and I think a lot of people are beginning to recognize that. But, there is still a significant step to go before you build a 50 million gallon plant.

You could look at Murray's presentation by the way on our Web site; it's in the BioProcess section here. Personally, I go out and talk with the shareholders and institutions approximately once a quarter for approximately two days, two to three days. I also talk with shareholders. I am open and available to people. I don't spend a huge amount of effort talking about the Company and trying to raise the awareness of the Company. We have recently redone our Web site significantly. We do have a Vice President now of Public Relations. So, we are working to expand the whole area of awareness of organic products. We work in the development of standards in the US and Canada. So, we are doing a lot.

But at the same time, sometimes it's never quite enough. But, we do what we can. At the same time, you have to remember we are running the Company that's growing quickly. And it's a wonderful, wonderful Company to work in. I mean I have to tell you, the people are awesome and we are just so fortune to be in a business where we are focused on all of the major food trends out there and to have the benefit of this very, very interesting technology with our business. So, we are lucky to be there and we will continue to get out there and talk to people as much as we can and we are available. Shortly, we are going to be doing an analyst tour around our facilities. We do that every year. It's a lot of effort that goes into it.

I understand. Just one little quick follow-up comment, a question, organic food and health and energy are probably the two hottest commodities in this country right now.

[We would like to be].

With all due respect, Middle East, and ethanol versus oil, and this whole political fight the government has put in, I think $150 million in the Bush Administration, are you tied anywhere into the politics and/or the money in the funding of the grant money to -- that you can also promote to increase shareholder value and stock value from all the hype, obviously the Iraq War and so on, you've such a potential solution to the average consumer. Are you tied into the government at all?

Some of our clients have specific proposals for this government funding in the US. Some of our clients in Canada are extremely tied in. Canada is a country that's going 5% ethanol right across the nation and the other parts of it are going up to 10% as many states are in the US. So, yes, I think when you get to -- particularly when you get to a point of building large facilities, there will be and are significant government support available on both sides of the border.

Well, I certainly have hundreds of thousands of clients I would love to spend more time, maybe possibly get involved with your Company, I mean [not the side of the] business. But, wish you all the best with your Company 100%.

Thank you so much.

For both standpoints and whatever I can do to promote your Company, I'll try to.

Good, thank you so much. I appreciate it.

And our final question is from Keith Howlett with Desjardins Securities.

Actually, I think the last fellow covered off my question, thanks.

Okay, thank you. Take care.

And at this time, there are no further questions. I would like to turn the call back over to Mr. Kendall.

Again, thank you very much for listening to us. I deeply regret this issue that we have had this quarter and I am absolutely, as we are all determined that we are not ever going to have to address this again. So, it is behind us. We look forward to a great fourth quarter and a really, really strong 2007. As always, I am available, please don't hesitate to call me. Take care. Bye-bye.

That concludes today's conference. Thank you for your participation. Have a wonderful day.