Sunopta Inc (STKL) 2007 Q2 法說會逐字稿

Good day, everyone. Welcome to the SunOpta Inc. Second Quarter Earnings 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 Mr. Steve Bromley, President and Chief Executive Officer. Please go ahead.

Thank you, very much. Good morning, ladies and gentlemen, and welcome to the Second Quarter 2007 Investor Call for SunOpta Inc. I'm joined on this call today by Steve Bromley, the Company's President and Chief Executive Officer; John Dietrich, the Company's Vice President and Chief Financial Officer; and Joe Riz, the Company's Executive Vice President. Ben Chhiba, the Company's Vice President and General Counsel will not be joining us today, as he is on vacation.

Before I begin, I would like to remind listeners that except for historical information, the matters discussed during this conference call may include forward-looking statements, including statements relating to our 2007 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.

I am pleased to report that the Company has had an excellent second quarter and first six months, realizing record revenues and record net profit, in line with both our internal expectations and those of TheStreet. Steve will provide further details in a moment. Our company continues to grow, executing on our strategy of building a dominant, world-class leader focused on the sourcing, processing and supply of vertically integrated natural, organic and specialty foods and food ingredients. The SunOpta Food Group represents over 90% of SunOpta's revenues, and continues to grow based on the rapidly growing healthy eating categories within which we participate.

While healthy foods are clearly our focus, we are most fortunate to have two other businesses that are very well positioned in exciting markets: Opta Minerals Inc., which focuses on industrial minerals and environmental recycling; and SunOpta BioProcess Inc., which focuses on the development and supply of proprietary technologies and equipment utilized in the production of cellulosic ethanol. We will update you on all of these businesses over the course of this call.

I'm now going to turn this call over to Steve at this point.

Thanks, very much, Jeremy, and good morning. For the next few minutes I will provide an overview of operating and financial results for the quarter. John Dietrich, our CFO, will provide further detail on a number of financial matters; and Joe Riz, our Executive Vice President responsible for Operations, will update you on key activities in each of the Operating groups.

We are very pleased to report record revenues of $208 million for the quarter ending June 30, 2007, representing a 33.5% increase over 2006 second quarter revenues of $155.7 million. These revenues are the highest quarterly revenues in the Company's history, and 39th consecutive quarter of record revenue growth versus the same quarter in the previous year. The Company's revenue growth in the second quarter was led by a 37.9% increase within the Company's Food operations, and a consolidated internal growth rate of 16.2% led by a 19.4% internal growth rate within the SunOpta Food Group.

For the six months ended June 30, 2007, the company has realized record revenues of $391.4 million versus $289.1 million in the prior year, an increase of 35.4%. This growth reflects an internal growth rate of 19.8% within the SunOpta Food Group, and 16.2% overall.

We previously provided our 2007 revenue guidance of $740 million to $760 million, which represented an annualized increase of 24% to 27% over 2006, excluding acquisitions. Based on the strong results of the first half, we are pleased to update our revenue guidance for 2007, and now expect to recognize revenues in the range of $775 million to $800 million before any further acquisitions not completed by the end of the second quarter. We continue to target a revenue exit rate of $1 billion in 2007, which is subject to achieving a 15% internal growth rate, and completing acquisitions at a similar level as in prior years. We expect to reach this target through continued expansion within our existing operating segments by a combination of internal growth and accretive acquisitions.

Each of our Food Group operating segments are focused on today's healthy eating trends and align with the USDA's dietary guidelines, which call for increased consumption of fruits, vegetables, whole grains, fiber and plant oils, soy, corn, and sunflower.

Operating income for the quarter increased to $11,402,000 as compared to $8,772,000 in 2006, driven by increases in operating income in all groups in the SunOpta Foods Group, and led by the SunOpta Grains and Foods Group and the SunOpta Distribution Group. Net earnings in the quarter increased 55.4% to $6,750,000 or $0.11 per diluted common share, as compared to $4,343,000 or $0.08 per diluted common share in the prior year. The results in the quarter represent the highest quarterly operating earnings in the Company's history, and are indicative of the positive momentum within the organization.

For the six months ended June 30, 2007, the Company has realized net earnings of $10,600,000, an increase of 44.1% versus 2006, representing earnings of $0.17 per diluted common share versus $0.13 in 2006. Based on our year-to-date earnings results, we remain on target to increase our diluted earnings per share by approximately 100% versus 2006. Thus, we are pleased to reconfirm our earnings guidance for fiscal 2007 of $0.35 to $0.40 per diluted common share.

In the quarter, the SunOpta Food Group reported record revenues of $189.3 million as compared to $137.3 million in 2006, a 37.9% increase. Segment operating income increased to $11,411,000 versus $8,168,000 in 2006, an increase of 39.7%. This increase includes an increase in corporate cost allocations of $1,326,000 versus the amounts allocated to the operating groups in 2006. Excluding these allocations, operating income increased 55.9%.

The improved segment operating income was driven by the continued rebound in sales and margins within the sunflower product operations, strong volumes and margins in organic grains, packaged soy milk products and food ingredients, strong demand for organic fruit products, and improved margins within the SunOpta Distribution Group.

During the second quarter, the Company's fruit bar operations continued to implement improvements designed to address ongoing operational issues which have impacted results thus far this year. Year-to-date revenues have almost tripled versus 2006, reflective of the solid demand for healthy snack products. Unfortunately, the increased revenue has not translated into improved earnings to this point, but we are currently implementing a number of process improvements and new technology which will double current capacity, and we expect this business to return to profitability in the back half of 2007.

Opta Minerals revenue increased to $18.4 million in the quarter due primarily to the acquisition of Bimac Corporation late in 2006, offset by cyclical weakness in the foundry and steel industries. Segment operating income for the quarter declined to $2,061,000 from $2,396,000 last year. The Group is doing well all-in-all, and continues to pursue strategic acquisitions and new product development to compliment its existing product portfolio.

During the quarter the Company completed a $30 million financing within SunOpta BioProcess Inc. at a post money valuation of $230 million. This confirms the importance of our steam-explosion technology and related processes, and established a value for this business at just over $3 per outstanding share. We were very pleased with the completion of this transaction.

The funds from this financing are being used to further broaden SBI's proprietary technologies and invest directly in the production of cellulosic ethanol. SBI is currently working to complete a number of proprietary pre-treatment and fiber preparation equipment projects and is pursuing a number of exciting cellulosic ethanol projects in both North America and around the world. We will provide further details in a few moments.

Operating results from the combined SunOpta BioProcess and Corporate Groups resulted in a net expense to the Company of $2,070,000 in the second quarter versus costs of $1,792,000 in the prior year. These results reflect continued investment in Corporate infrastructure such as information technology, human resources and supply chains, and development costs related to BioProcess, offset by increased allocations of these costs to the operating groups I've previously mentioned.

The Company remains well-positioned for future growth with working capital of $155.3 million, and total assets of $525.4 million. The long-term debt-to-equity ratio at June 30, 2007 was .31 to 1, still very conservative and providing the Company financial resources to invest in internal growth, capital projects, and execute on our acquisition program.

Book equity per outstanding common share has grown to $3.94 versus $3.72 at March 31, 2007.

I will now turn the call over to John Dietrich, who will address a number of financial issues. John?

Thank you, Steve. As mentioned, the Company had record revenues, gross profit and earnings for the three months ended June 30, 2007.

Gross profit increased to $40.1 million, a 46.7% increase versus the first quarter of 2006. As a percentage of revenue, gross margin increased to 19.3% versus 17.6% in 2006. This reflects the impact of improved product mix, operating efficiencies, and ongoing cost rationalization initiatives.

Margin improvement continues to be a key focus across the company. All operating groups have implemented long-term improvement programs focused on facility utilization, cost reduction, pricing improvement, and product mix emphasizing high-value added products. In hand with our three-year, $10 million improvement project being driven by our Global Supply Team, we expect to continue to improve margins as we leverage the base we have built.

Selling, General and Administrative expenses, excluding intangible amortization, were $23 million or 11% of revenue in the second quarter, as compared to $14.6 million or 9.4% in the second quarter of 2006. The higher rate for SG&A reflects the acquisitions completed in 2006 within the SunOpta Distribution Group, which also had historical higher gross margins; also the impact of appreciation of the Canadian dollar versus the U.S. dollar, which result in higher Corporate SG&A once converted to U.S. dollars for both SunOpta and Opta Minerals Corporate Offices; and accelerated IT costs in support of the Company's roll-out of Oracle across the Food Group.

Warehousing and distribution expenses have increased (sic) from $3.8 million in the second quarter to $5 million in the second quarter of 2006. These expenses are solely related to the SunOpta Distribution Group. As a percentage of the distribution revenues, these expenses have decreased to 9.7% compared to 12.4 in the comparable 2006 quarter, reflecting leverage realized as the business grows.

SunOpta's average interest rate on outstanding debt is approximately 6.3%, reflecting a combination of fixed rate debt and operating lines of credit. Subsequent to the quarter end, the Company completed an expansion of its credit facilities and added Rabobank and HSBC Bank to its syndicate of lenders. The company expanded it's U.S. based operating line of credit from $30 million to $60 million, and added an acquisition line of credit with maximum draws of $20 million. The addition of HSBC and Rabobank strengthens our syndicate by adding two very well-regarded, multi-national banks that have numerous resources, capabilities and relationships in many of the countries where we currently source products or are exploring future strategic alliances.

The Company's year-to-date tax rate is 27%. We expect that the full year income tax rate for 2007 will be between 26% and 28%.

During the quarter, the Company spent $7 million on capital expenditures, and $13.3 million on acquisitions. While capital expenditures are widely dispersed across the groups, the two largest in the quarter were $2 million on the expansion and upgrades within our fruit bar business in Omak, Washington, and the addition of a second IQF tunnel within our frozen fruit business.

Consistent with the growth in our businesses and seasonal peak demand, working capital increased by $22 million in the quarter, excluding working capital obtained through acquisitions. The Company's (unintelligible) outstanding and accounts receivable have stayed consistent, with the increase in AR due to internal growth and seasonality of sales. Inventory increases are almost exclusively from the Fruit Group as they move through their peak berry processing season with substantially higher volumes than previous years.

The company expects to reduce working capital in the back half of the year by approximately $20 million to $25 million, and is very focused in improving working capital (inaudible) and (inaudible) in concert with improved operating margins across all groups.

Finally, since the first quarter, we have added our sunflower and global sourcing operations to the Oracle financial and operating platform. The Company is now adding advanced functionality, such as manufacturing research planning and customer relationship management to the base platform.

The SunOpta Distribution Group is expected to add two of its businesses to its new distribution system IT platform beginning in August. The new system is expected to derive improved reporting and inventory management, and will be bridged to Oracle for reporting purposes.

I will now turn the call over to Joe Riz, who will update you on Operations.

Thank you, John. Good morning, everyone. The SunOpta Grains and Foods Group had an excellent quarter, realizing a 29.6% increase in revenue, and outstanding 106.6% increase in segment operating income. This increase was driven by strong sales of organic soy milk, both aseptic an ESL; strong demand for organic grains and grains-based ingredients; and the return to profitability of the Group's sunflower operations after an extremely tough 2006.

The Group continues to pursue a number of large soy-based ingredients and packaged product opportunities, and is currently finalizing plans to expand extraction and filling capabilities to meet expected future demands.

On Tuesday, we announced the acquisition of the operating assets of ProSoya Corporation located in Heuvelton, New York. The addition of this facility, including land, buildings, machinery and equipment, expands SunOpta's soy milk concentrate manufacturing capabilities to the East Coast and will significantly enhance our ability to serve our customers in the Northeastern United States. We will immediately upgrade the acquired facility to improve capabilities and processing efficiencies.

We have finalized our 2007 crop plan and have met our targets for the contracting of soy and corn. Contracting of sunflowers should meet our demands, as we have significantly increased plantings which are expected to result in good or better yields due to the high ground moisture content within our Kansas plantings. To date we are pleased with the crop quality in our growing regions. We will know the final crop conditions over the next six weeks.

We continue to expand our growing areas, both domestically and internationally, to offset the increased pressure on growing regions to plant crops for utilization in ethanol production.

Our sunflower operations have experienced an excellent quarter, and we expect the current operating environment to remain strong throughout the year. As part of the Group's roasting and packaging operations, we continue to market our new sunflower-based nut replacement ingredient to be used as a low-cost, nutritious replacement for higher priced nut ingredients. We have commenced production and expect to start shipping this product in the third quarter.

The SunOpta Ingredients Group continued to grow its base business during the quarter, enabling the Group to offset the loss of a soluble fiber contract manufacturing relationship that ended in the second quarter of 2006. Excluding the year-over-year impact of the loss of this business and the increase in the allocation of Corporate costs, revenues increased 13.1% and segment operating earnings increased 22.3%.

Segment operating earnings are expected to continue to show significant improvement in future periods, as the full impact of increased pricing on fiber products are realized. The Group has implemented a number of wastewater reduction projects at each of its fiber processing facilities, and continues to implement other cost reduction projects across its operations.

With the internal expansion of our three fiber facilities complete, adding approximately 25% to our fiber capacity, the Group is now well positioned to meet increased demand and new product opportunity. These expansions provide the added capability to produce each grade of fiber for multiple manufacturing locations, resulting in added flexibility and efficiency.

We expect an excellent second half for the SunOpta Ingredients Group as we realize benefits from each of these initiatives.

The SunOpta Fruit Group achieved year-over-year revenue growth of 39%, and internal growth of 30.3% in the quarter. Excluding the incremental allocation of corporate management fees, segmented operating income increased 16.9%. Segmented operating results in the quarter were driven by strong demand and growth in natural and organic, individually-quick-frozen fruits; specialty ingredients; and growth in our global sourcing operations.

Our recently acquired Mexican operations performed well in the quarter, but due to the timing of the acquisitions had a minimal earnings impact on the quarter. The positive results were partially offset by capacity constraints and other operational issues within the company's fruit bar operations. These operational issues that negatively impacted margins in the first quarter were addressed in the current quarter and are expected to provide positive results in the second half of the year.

Demand for healthy fruit snacks continues to grow, and during the quarter we completed the first stage of an equipment and technology upgrade at Kettle Valley, increasing annual capacity by approximately 40 million fruit bars. Production has commenced, and we are producing a new, innovative fruit snack that will be launched in the fall by a well-known healthy foods brand.

The second stage of this expansion is proceeding on plan and is expected to be completed late in the third quarter, with production commencing in the last three months of the year. The capacity of the second-stage production line is approximately 100 million bars per year in total, more than doubling the company's fruit snack capacity in 2006.

The SunOpta's Fruit Group continues to expand supply sources around the world in order to meet increasing demand. Over the past number of months, the Group has completed a number of strategic initiatives. In addition to the acquisition of Baja California Congelados on May 4th, which was discussed during the First Quarter Conference Call, the Group further expanded its international production capability with the acquisition of the net operating assets of Congeladora del Rio and all of the outstanding shares of Global Trading.

Del Rio operates a fruit processing facility in Irapuato, Mexico. The high quality facility processes strawberries, peaches, mangos, bananas, pineapples, honeydew melons and other fruits, into individually-quick-frozen, block-frozen and purees for the food service, industrial and retail markets.

Global is the U.S.-based sales and administration arm for Del Rio located in Greenville, South Carolina. Sales and administration for all Mexican berry operations have been consolidated with Global.

The Mexican acquisitions provide additional capacity for other synergistic opportunities to the SunOpta Fruit Group. These acquisitions expand the Group's vertically integrated model for additional fruit varieties, as noted above, and position the SunOpta Fruit Group as the largest processor of strawberries in North America.

As demand for healthy food products continues to grow, the Fruit Group completed a number of internal expansion projects including the installation of a second IQF tunnel in Salinas, California, increasing it's processing capacity by 50%; expansion of the Buena Park berry processing facility, adding an additional 25% capacity; and a number of process automation projects throughout the Group.

The SunOpta Distribution Group had a strong second quarter as revenues increased 66.4% and segment operating earnings increased 43%. Excluding the impact of incremental corporate cost allocations, segmented operating earnings increased 69.8%. Revenue growth in the Group continues to be propelled by the acquisitions completed in 2006; improved grocery volumes and pricing primarily in Western Canada; and strong sales in natural, organic and Kosher lines in Eastern Canada.

Operating income was also positively impacted by the rationalization of our Eastern Canadian produce operations, which were consolidated to reduce overhead costs and better utilize existing capabilities.

The Group is progressing with the installation of its new state-of-the-art food distribution software. The software roll-out has started in the Western grocery operations, and will move to the Eastern grocery operations later in the year. The new system is expected to drive significant internal efficiencies, working capital improvement, and customer service enhancements; all essential, as we maintain and grow our position as the dominant natural and organic food distributor in Canada.

Construction continues at the Group's new 95,000 square foot Western Canada distribution facility located in Richmond, British Columbia. This facility will come online early in the fourth quarter and will result in the integration of three warehouses in the Vancouver area and provide room for significant continued growth in this important market.

Opta Minerals realized revenues of $18.4 million versus $18.3 million in the second quarter of the prior year. Segment operating income for the quarter was $2.1 million versus $2.4 in 2006. The Group completed a strategic expansion of its Waterdown, Ontario facility, to include the production of magnesium desulphurization products. With this expansion, the Group is now able to produce desulphurization products at multiple facilities, capabilities that are very important to our customers. The Company continues to expect annualized revenues from this expansion of $3.9 million, with strong internal growth expected to be realized in 2008.

In the first quarter the company acquired the production assets of an industrial minerals processing facility in Laval, Quebec. The plant is now up and running and processing both hematite and ebony grit. In the third quarter the facility will start to process garnets from our (unintelligible) plant for water filtration media. The group continues to explore additional facility rationalization opportunities.

The Group also continues to evaluate several strategic acquisitions to further its production and supply capabilities within its core product lines, specifically magnesium desulphurization and abrasives. As Steve mentioned, we were most pleased to complete the $30 million financing with the SunOpta BioProcess Inc. The Group continues to expand its organization and patent portfolio, and pursue a number of exciting opportunities.

BioProcess continues to work closely with both its existing and other potential Chinese customers for the provision of its patented equipment and technology for the next phase of cellulosic ethanol development in China. The Group is currently completing the shipment of equipment to Spain for the first plant in the world to process wheat straw to ethanol. This plant should commence production in the last half of 2007.

The Group is also scheduled to ship the final pieces of equipment to Verenium during the third quarter for the first plant to process wood chips into gas to cellulosic ethanol.

The Group's joint venture with GreenField Ethanol, Canada's largest corn to ethanol producer, continues to assess the suitability of a number of sites for the development of a commercial scale cellulosic ethanol facility from woodchips or similar feedstock, and is seeking government support for such ventures.

SunOpta's BioProcess Inc. is focused on a significant number of new opportunities as interest in cellulosic ethanol continues to increase, as many countries begin to focus on the environmental benefits of cellulosic ethanol. The Group expects to finalize additional opportunities over the remainder of the year.

The Group recently entered into an agreement with Xylitol, Canada to conduct an extensive research and development program to determine optimal processes for the production of xylitol from various waste streams. Commencement of the project is conditional upon a successful capital raise by Xylitol Canada, which should be completed before the end of the year.

Under the terms of the agreement, SunOpta BioProcess Inc. and Xylitol Canada will complete an extensive R&D program and form a joint venture leading to the construction of commercial facilities for production of Xylitol as a sugar substitute made from xylo-sugars found in a wide variety of biomass, notably in oat hulls and woodchips.

I will now turn the call back over to Steve.

Thanks, very much, Joe. As I'm sure you can tell, the second quarter has certainly been a busy one. We have experienced record revenue and record earnings growth within the SunOpta Food Group with solid prospects for the future; our margin improvement and business development initiatives are continuing to show positive results; we have continued our acquisition program with our first transactions outside of Canada and the United States; and a strong pipeline of future opportunities exist in each of our operating groups.

We have completed the financing in SunOpta BioProcess Inc., and the business is now well positioned for exciting future growth focused on the development and production of cellulosic ethanol and other valuable materials.

Fiscal 2000 (sic) is off to an excellent start after two solid quarters, and we are pleased to confirm an increase in revenue guidance to $775 million to $800 million, and confirm our earnings guidance of $0.35 to $0.40 per diluted common share, before any further acquisitions.

All of our business units are well positioned in fast-growing markets, and we remain focused on improving operating margins and in turn earnings, all in support of driving exceptional shareholder value.

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

(OPERATOR INSTRUCTIONS) The first question comes from Chris Krueger, Northland Securities. Please go ahead.

Good morning.

Hi, Chris. How are you?

Good. I have a couple of quick questions. I know you indicated that the soybean crop and sunflower crop seem to be coming along nicely, but with another month to go or more. Can you just go over, just historically, how commodity pricing of soybeans-- if it has any effect on organic soybeans later in the year? I know that pricing of soybeans has gone up for conventional soybeans. I'm just curious how organic falls through, and if you can just comment on that in general?

Sure. Organic tracks very closely to that pricing, with a premium. So as the pricing moves on the board, the organic moves as well. It's normally based on a pretty standard premium that is paid over and above what commodity soybeans are at. So they move.

Okay. And then when you contract with-- if you have to pay a higher price, are you typically able to pass most of that on to your customers, and they'll pass it on to-- all the way to the stores?

Yeah, we attempt to set up our contracts to limit our exposure to commodity risk.

Okay. On that same note, with this ethanol driven corn planting season, how has adding or getting new farmers to switch to becoming organic farmer-- how is that apt to work this year? I imagine it's sort of a lull while this corn thing is going on? Can you comment on that?

You know, we have an active program, Chris, where we're out working with farmers all the time to put them into transition. On the organic side we had pretty good success again this year. We were able to get the supplies that we believe we need. I think all farmers are having a little bit more of a thought process on the corn side, as to whether or not they should plant GMO corn. But for many of the growers, it's almost cultural. They just don't want to plant GMO products, and they want to convert. So it hasn't been a big problem for us to this stage.

Remember, Chris, it's a three-year process. So anybody that's going to convert to organic this year, has already started that process three years ago. So if he's made a significant investment in the conversion, he's unlikely to convert back. Anybody that's organic today is very unlikely to convert back.

I agree. I was just getting at the ones that are not organic, and that there's always more coming on to keep this 15% type of supply needs going-- if there is any kind of concern that-- a new one starting the process.

Keep in mind, Chris, that we still ship a lot, and one of our lowest sort of margin areas is when we ship [hexess] to Asia, to places like Japan. So we have a nice outlet valve in that we can always focus more to value-added applications in North America.

I suppose he has a little extra to shift things around, okay. Two more quick questions. In oat fiber, I haven't really heard much on a competitive front in the last few quarters. Is there anything to say there?

Sorry. It was on the oat fiber side?

Yes.

Well, it's always competitive, but [Rettenmyer], who built a plant in-- well, they started building a plant in 2004 to open in 2005, as we understood it, in Cedar Rapids, hadn't opened the plant. They are producing product there now which we're not quite sure exactly what the product is, and it's probably none of our business. So they've remained competitive in the market over the years. It's a competitive market, but we're very satisfied with how things are going.

Okay. Last question. Sunflowers, last year, obviously, was a tough year for that business. I know earlier you indicated, I think, the year-over-year impact on earnings would be, I think, a $.07 swing or something like that. Can you indicate year-to-date, how does the first two quarters of this year compare to last year as far as its impact on EPS. I don't know if you can do that off-the-cuff here but--

Well, let me tell you a couple of things. The business has performed very well. It has performed to expectation. Last year we had an operating loss of almost $4 million, and this year we're projecting to have an operating earnings of about $2 million. So that's a $6 million, sort of pre-tax swing. At this stage of the game we're on schedule. I don't know the exact numbers in the Sunflower Group.

Yeah, we'll see if we can dig those up for you before the end of the call.

On schedule is good enough. Thank you.

Okay, thanks. Yeah, we're very pleased with the Sunflower Group. They've done a wonderful job of addressing their issues, and they're really focused on what they're doing. It's been wonderful. As Joe had mentioned, they've added some value-added sunflower-based products which is all really good stuff.

All right, thanks. That's all I've got.

Your next question comes from [Erin Penson] from Rubin & (inaudible). Please go ahead.

Thanks a lot. Good morning, guys. Congratulations on a great quarter.

Good morning, Erin. Thanks.

First off, I did want to confirm that as far as the company's official guidance for the '07 year obviously, $0.35 to $0.40, that's currently based on the total weighted shares outstanding of about $63 million, which would equal about $22 million to $25 million, I'm assuming?

It's based on the 63 million and change--

-- inflated average. That's right.

Oh, okay. I just wanted to make sure because your prior guidance was based, I think, only on 57 million or 58 million shares. So, practically, you raised guidance by $2 million to $3 million dollars, or about 10% or so?

Sure.

Okay, very good. I just wanted to confirm that. Second off, I know [Kroger] made an announcement yesterday. I just wanted to find out if it's fair to assume that you guys will probably have some new private label business with them, or you're at least vying for some of their contracts?

Absolutely. That's a great assumption.

Are you guys in talks with them yet, or nothing solidified as of now?

Kroger as a customer, we're talking. We do talk to them on a regular basis. And many of our customers that use some of our ingredients also talk to them.

Very good. In regards to BioProcess, I mean, we haven't seen a lot of PR recently. I know you gave a brief update on a couple of the contracts. Is there any more color or more detail you can give us in regards to that CRAC contract that we talked about for a long time now? I know you guys are planning on expanding that. Maybe some dates or time lines on where you guys stand about that, and the Verenium contract?

Sure. Let me hit the Verenium contract first. We're in the process of finalizing most of the equipment, so that's getting ready to ship and will ship. I know there's a large, large portion of it leaving here tomorrow. So that's in the process of being shipped. And the Group continues to work on a number of exciting opportunities. A number of us were in China about three weeks ago, where we met with [Coscove] and a number of other interested parties in China. The Coscove project, they're continuing to work on it. They've applied to the Federal Treasury in China as part of the process in China, very similar to the DOE grants here in North America, with regards to the next phase of their project. We're in active discussions with them, and the timing, quite frankly, it's just bouncing around with the process that everybody is going through.

But we're really pleased with where things are at. I'd love to stand here today and tell you that the next contract is already in place. Unfortunately, we can't necessarily set all the timing there, but we're really pleased with where things are at.

But in regards to your own fields that you guys are doing together with GreenField Ethanol, I did see an article, I think it was by the Albany Herald or something, that you are investing $70 million together for a 10 million gallon cellulosic ethanol plant in Hancock County. I think that's in Georgia? I mean, you guys didn't make any press release or any announcement about that. Is that an accurate news clip from them?

Well, we were really happy to hear about that because it was news to us as it was news to you. So we did place a call to the reporter, who wasn't very forthcoming about where he got all of his information, and also to the county development person. I mean, look it, there's no secret that we're looking around in a number of places for potential sites. But I can assure you that the minute we do something like that, our shareholders will know about it.

Okay, because it was a big deal. I mean, $70 million, even if it's a partnership, that's quite a big deal.

You know, I wish I had $70 million to throw around like that. That would be wonderful. Look it, we-- that's a fabricated story. We're looking at a number of places for potential sites, and there's no question that that area is a potential site area.

Do you think an announcement like that, something where-- I know originally when you partnered with GreenField you were hoping the first of this year was when you were going to be ready to have a place and have one at least to begin producing ethanol. Is that something which you're expecting in the third quarter now?

We continue to work with GreenField. We are working on a facility plan, et cetera. I can't commit to when we're going to have a Press Release for you, but I can tell you that we're making good progress and there's a lot of work going on.

That's fair enough. Also, earlier this year you guys did an estimate that you're spinning off the BioProcess, I think you mentioned in about 18 months or so. Now that [Blackrock] is heavily involved in this deal, and obviously that's their specialty, do you think that will still be around that range now maybe 10, 11 months from where we are today, or expecting it to happen sooner? Could you give us an update on that?

Yeah, what we have said is that we think the time for the next phase of a spin-off would be once we have a commercial plant up and running. We believe that the timeframes that you've indicated are logical to when we should have something. Once we have something and there's technology that has been further approved on that commercial scale, and it will probably be the first time in the world that it will have been done, we think that's the time. The timing hasn't changed for us.

Any reason, I mean, you guys chose Blackrock as far as doing this? I know you were mentioning that there was a lot of potential partners that you were going to get involved in, and I know the deal was also maybe on the low range or a little bit less than some people were anticipating. So was there some specific reason you chose Blackrock for the actual spin-off coming-- that you're hoping to do soon?

We haven't disclosed who the investors were, nor are we permitted to disclose who the investors are.

I mean, there SCC filings stating clearly who they were. You guys put those out, didn't you?

Yeah, but we're not privy here to talk about what Blackrock's motivation or intention is.

Certainly, a shareholder like that is interested in seeing it become a public vehicle and is probably interested in continuing to invest as we go through the different stages. I mean, they have an enormous interest in this technology.

Yeah, I can understand that. On a different front, in regards to Opta Mineral, any updates on when you're planning on divesting that? I know they had actually a little bit lower quarter this year than they-- from the year prior. Any updates as far as a timeline on divesting from that business?

No. At this point, it's not a-- we don't need the cash from it. The company is growing nicely. It's a very nice profit contributor. There are things that are happening, as Steve has indicated, that will, I think, be very positive for the organization. We've always intended that we wanted to build it to over $100 million before we did even consider the sale of the company.

Okay, very good. I appreciate it guys. Again, congratulations on a great quarter, and we're looking forward to talking to you soon.

Take care. Nice to talk to you.

The next question comes from Bob Gibson from Octagon Capital. Please go ahead.

Good morning, everyone.

Hi, Bob. How are you?

Good. Can we just talk about cost savings? I know you've put some people in place to look at that. Could you tell us how it's going?

Very well. There's a number of areas-- first off, we, over a year ago now, hired a Global Supply Chain Executive, Roger Eacock our Vice President, and he has been leading a number of global, cross-functional programs to take costs out of our system. He established a 10-year-- pardon me, a 3-year, $10 million savings target. We're well along our way. We've made significant enhancements in freight, and logistics, and containers, travel suppliers, packaging suppliers, cleaning product suppliers, et cetera, et cetera. So that has gone exceptionally well.

On top of that, each one of our operating groups are extremely focused on margin improvement, as Joe had indicated. Joe, with each one of the operating groups, has developed a margin improvement program which are based on a combination of taking costs out of the system, putting more volumes through the system, pricing customers properly, et cetera, et cetera. You're seeing many of those impacts now on our gross margin line, and we expect to continue to see that happen.

So it has gone really well to this stage of the game, and I can tell you that it is a significant focus. A couple of examples on the side line, about a week or two ago we announced that we've, in a couple of our cost savings projects in our fiber plants, reduced our water consumption by 2.5 million gallons. That translated into savings of over $200,000. So we just keep working away at all of these initiatives and they're doing really well.

Great. Can you guys just give us an idea how you're going to account for this new joint venture?

With Xylitol?

No

No, with GreenField.

Oh, with GreenField. Well, GreenField will be a 50/50 venture. Right now we're each sharing our costs as we go here, so that's in our numbers. And then it will be a 50/50 joint venture. John, how will we account for that?

Well, we haven't rolled it into a separate legal entity yet, so we haven't concluded on that yet, Bob. It will depend on where the control sits at the time, whether we consolidate 100% or not.

And I guess you'll have a minority interest now for this showing up on your statement?

They'll have a minority interest showing up now for SunOpta BioProcess.

Right.

John was speaking directly to the joint venture that GreenField--

Yeah, I know.

-- and BioProcess will have, yes.

Okay, great. Thanks, guys.

Take care.

Your next question comes from William Dittl from the Gato Group. Please go head.

Joe, John, Steve and Jeremy, good quarter.

Thanks, a lot.

The first question I have is, do you guys have a combined tonnage on oat hulls from the three fibers facilities?

Oh, tonnage of oat hulls? Probably-- go to you next question, and let us tumble some numbers here.

Okay. Regarding the packaging segment in the Food Group, are you guys kind of doing anything to mitigate some of these higher petroleum costs? Some of the packaging is coming from oil-laced plastics. Are you guys implementing some of these cost-savings strategies in terms of the packaging area?

Yes, we are. Of course, it's becoming a really important issue with a lot of our major customers. So were looking at, for example, moving some customers from quarters to half gallons, which reduces a significant amount of packaging; reducing the amount of material that goes on the--

In the overwrap.

-- in the overwraps, and the cardboard containers. It's a phenomenal amount of material that is reduced. It has become almost an overriding factor in dealing with some of our customers now. They're very concerned about this, as are we too. So we can provide a lot of advantages, and are doing so.

And then just regarding the CapEx costs for say a 10 million gallon plant, if they're in the range of like about $70 million, can you guys give an estimate on how long it would take to recoup those CapEx costs in terms of operation at full capacity? Do you have kind of a ballpark figure on that?

I think the return on cellulosic ethanol plants is very much a function of volume, and how many gallons you're producing. So I think it's still a bit early to make that kind of a prediction. We're working through various models today to-- and providing quotes to various perspective customers at different levels. So I think it's a bit early to comment on that.

Okay. Then the Smoothie roll-out with the quick-service food operator, can you guys kind of give a comment on that or an update?

Well, we're very much involved in the program. The program has a schedule that's laid out by the customer. We are working-- because of the potentially very large volumes involved, the first part, of course, the critical part, is supply. So the acquisitions that we've made in Mexico is an example, and the transactions that we did in Argentina and Chili earlier in the year, are all related to ensuring supply for this customer and all of our other customers, and also broadening it, of course, from not just strawberries, but also peaches and other products that will be required for that Smoothie program. So I could say at this point in time it's going well, and it's in the hands of the customer.

Okay: Those are all the questions I have. Did you guys have a combined tonnage on the fiber facilities or-- ?

I am going to get that for you before this call ends.

Okay. Thanks, very much, gentlemen.

And the next question comes from Ed Aaron from RBC Capital Markets. Please go ahead.

Hey, everyone. It's Ed Einboden for Ed Aaron.

Ed, how are you?

Good, how are you?

Fine thanks.

First off, I was hoping that you could provide us with an idea of capacity (inaudible) in the Food Group, and where you may need to add some capacity over the next 6 to 12 months?

Oh, boy.

Fruit is pretty close.

Yeah, if we can just maybe start right at the top with soy? When we're talking about soy, we just added the facility on the East Coast because we're starting to come up near capacity in our facility in Alexandria, Minnesota. We also have the facility in Afton, Wyoming. So that adds some capacity for a period of time there, but we're probably-- with the continued growth in the business, look for us to continue to add capacity on that side of the business.

Our packaging capacity on aseptic packaging is probably at 85% to 90% here, and we're going to continue to expand in that area. So you can watch for that.

On the fiber side, as Joe had mentioned, we've put 25% capacity increases in. That volume is being taken up. So we're coming to the top end, and I would look for further investments in fiber over time.

On the fruit side, most of the facilities are well utilized at this stage of the game. Can you guys think of any facility that's under utilized in fruit? I can't.

No.

And we've continued, and Joe mentioned it-- we've continued to add IQF capacity. We've continued to add individually-quick-freezing capacity; continued to add to our topping capacity; and our fruit bar capacity. So these are great-- all of these facilities, it's just great when you get them up into these capacity levels. They're very profitable. But we'll continue to invest as our business grows there for sure. Adding the Mexican operations certainly gave us more processing capacity that was very positive for that business.

On the distribution side, Joe mentioned, we're expanding into a new 95,000 square foot warehouse in Vancouver, so that will give us some nice capacity on the West Coast. We're making some improvements in the East. We're expanding our freezer at our Keele Street location. That's a 135,000 square foot facility that we built a couple of years ago and consolidated three businesses in. It's a well-utilized facility, and we are out of freezer capacity. Frozen foods are really growing, and they're one of our core strategic strengths on the distribution side. So we had built the facility with a footprint to easily expand the freezer. So we're going to be doing that here over the next few months.

So, there's some investment there, but we're certainly staying ahead of the curve.

And if you could, I was just looking at our CapEx number. It looks like you guys are running a little bit ahead of that. Do you guys have an idea of where that will fall out for the year?

I think we'll still be in the $26 million to$30 million range for the year.

And do you guys have a sense for what the acquisition pipeline looks like for the second half?

Well, the acquisition pipeline is pretty busy. There are a number of decent opportunities that we're working on, and I would expect that-- you know, we're comfortable from the point of view that we think we can still hit the $1 billion exit run rate, and that would requite us to acquire $100 million to $125 million. So we have some really--

For the year as a whole.

-- for the year as a whole. That's annualized. Then we have some nice opportunities in the pipeline that we're working on that we really like. So, we hope so.

Second, on the minerals business, did you guys have these challenges related to a single customer or was it industry-wide; and do you guys think that the business will sort of turn around in the fourth quarter so you guys can still achieve operating margin improvement?

The slow-down that Steve referred to is directly industry related. It is not loss of customers. In fact, we've been adding customer here, and I think we'll see pretty good results for the second half.

Do you guys still think for the year you'll be seeing some operating margin improvement year-over-year?

We do expect-- we expect to be on budget for the year in that division.

Okay, great. And I don't know if I missed this already or not, but do you guys have sort of an updated timeline or expectations for the commercial cellulosic ethanol plant-- when that will be up and running?

We haven't formally announced that.

That is all. Thanks, everybody. Good quarter.

Thanks a lot. Just before we take another call, William had a question regarding oat hull. Just suffice it to say we would handle over 100 million pounds of hull, oat and soy. The next question?

The next question comes from Keith Howlett from Desjardins Securities. Please go ahead.

Yes. I just wondered whether the proposed combination of Whole Foods and Wild Oats has any effect on you-- positive, negative or neutral?

For the most part, Keith, we're fairly neutral to the whole thing. They are both customers of ours, obviously, and customers of many of our customers. If they consolidate and close a number of stores, the reality is, is that most of-- if they lose sales, a lot of those sales would go to other retailers and we serve most retailers. So it's not a major issue one way or another. I mean, we're keenly interested in what they'll do if their stores in Canada that we distribute to-- not the Whole Foods-- in this particular case the Wild Oats Stores primarily out in Western Canada. But, again, if they dispose of them, they're going to sell them to somebody else.

I think there are certain products that we sell under the Whole Food house brand that would then be extended into their stores, which I think, therefore, could result in an increase.

Yeah, sure.

Like some of the drinks that we're doing right now-- natural.

Yeah, and further to Jeremy's point, we've produced similar products for both that would probably get consolidated under one (inaudible) which would probably be cost effective for everyone. So we don't see it as a big negative for sure.

And then I just had a question on the drinks innovation, and your soy, I guess, and your smaller tea business. The healthful drinks is sort of a ballooning category, obviously. Soy milk might be the lead player, I guess, in some ways in that. I'm just wondering what you might have in your innovation pipeline on the soy beverage front, if anything? Any news there?

Well, we've had a number of new customers on the soy side of the business using some of the soy powders that we produce to produce new products. Actually, there's a new customer in Spain, and a new customer in Mexico using the dry material. So that's really good. We're always continuing to refine our concentrate and filling (inaudible) to improve products. Some of the customers are looking at fortifying with Omega 3s and those sort of things, so you do see that.

An area though that we really see a lot of innovation on beverages, more over in-- not that it's not going great guns on soy milk, is over in some of the fruit based beverages, using some of the high antioxidant fruits: pomegranate, acai, goji, and those types of products. Yummberry is another product that we're now importing and (inaudible) that we can bring over here that's used in a number of innovative juice products. We've used our juice product technology to produce some pretty interesting sports-related organic drinks, some vitamin waters and those sort of things, under private labels for some accounts. So beverages is a big area, and growing rapidly. And the demand for healthy beverage is really growing.

Great. Thank you.

Thanks.

(OPERATOR INSTRUCTIONS)

Okay. Well, thank you, very much.

Oh, we've got another call.

Yeah, the next question comes from Renee Reynolds from Gilder, Gagnon, Howe. Please go ahead.

Hi, good morning. I was just wondering if you could quickly go through the components of SG&A so I can understand where the increase came in?

Components of SG&A, sure. SG&A has increased a little bit as a percentage of revenues. Some of that just comes from the fact that a lot of our Corporate costs, both at SunOpta and Opta Minerals, are in Canadian dollars. So with the appreciation of the Canadian dollar, the conversion of that into U.S. has probably added about $300,000 to $400,000 to our SG&A just based on that conversion.

We've also increased our IT spending here. We've added a number of people and resources to accelerate the Oracle roll-out. So we're working through that this year, and we expect that that will stay relatively flat now going forward.

The other areas are just in mix in some of the acquisitions that we have that come with a lot higher SG&A spend, but also higher gross margins. So areas like Purity that we acquired in Distribution Group last year, has Brands brand, so they have brand spending that they have. And there's other costs in SG&A that are variable in nature-- brokerage and commission fees. Commission rates are directly related to revenues, and we've also added a few extra Corporate (inaudible). So those are the big areas.

And what was the person that's up on the IT spend? And is this the run rate going forward or will that taper off once it has been implemented across all the project groups?

It will eventually taper off. It will-- the run rate has been-- we will run about an extra $800,000 to $1 million annually this year, and that should start tapering off next year, especially as a percentage of revenue.

Great. Thank you, very much.

Thanks a lot.

There are no further questions. Please continue.

Okay. Well, thanks, very much, everybody, for joining us this quarter, and we look forward to talking to you again in the next quarter where we hope we can repeat the performance of this particular last two quarters.

As always, please feel free to call us. We're very happy to talk with you at any time. Thanks. Bye-bye.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation, and have a nice day.