Sunopta Inc (STKL) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the SunOpta Inc. third-quarter earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Steve Bromley, President and Chief Executive Officer. Please go ahead.

Good morning, and thank you very much. Welcome to the third-quarter 2007 investors call for SunOpta Inc. I'm joined on this call today by John Dietrich, the Company's Vice President and Chief Financial Officer, and Joe Riz, our Executive Vice President responsible for operations. Jeremy Kendall, our Chairman, will not be joining us on the call today as he is at home recuperating from recent foot surgery.

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. We will be filing our 10-Q for the period ended September 30, 2007 by no later than the close of business on November 8, 2007.

I am pleased to report that the Company has had a solid third quarter and first nine months, realizing record revenues and record net profits. We are quite pleased with these results and continue to see strong growth prospects within each of our operating segments.

Over the next few minutes, I will provide an overview of operating and financial results for the quarter; John Dietrich will provide further detail on a number of financial matters; and Joe Riz will provide an update on operations and update you on key activities in each one of the operating groups.

We are very pleased to report record revenues of $205.7 million for the quarter ending September 30, 2007 representing a 41.4% increase over 2006 third-quarter revenues of $145.5 million. These revenues are the highest third-quarter revenues in the Company's history and represent the 40th consecutive quarter of record revenue growth versus the same quarter in the previous year.

The Company's revenue growth in the third quarter was led by a 45.2% increase within the Company's vertically integrated food operations and represent a consolidated internal growth rate of 21.6% led by a 24.8% internal growth rate within the SunOpta Food Group. For the nine months ended September 30, 2007, the Company has realized record revenues of $597.1 million versus $434.5 million in the prior year, an increase of 37.4%. This growth reflects an internal growth rate of 21.4% within the SunOpta Food Group and 18% on a consolidated basis.

Based on these results, we are pleased to reconfirm our revenue guidance for 2007 in the range of $775 million to $800 million before any further acquisitions not completed by the end of the third 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 execution of our ongoing acquisition program. We have a number of interesting acquisition opportunities in our acquisition pipeline that we are working to bring to fruition by year end and we are confident that our $1 billion objective will be achieved.

Each of our food operating segments are focused on some of today's core healthy eating trends and aligned 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 154.4% to $9,025,000 or 4.4% of revenues as compared to $3,547,000 or 2.4% of revenues in 2006 driven by strong growth in the SunOpta food group and led by the SunOpta grains and food group and the SunOpta distribution group.

The third quarter is seasonally the Company's lowest earnings quarter as a percentage of revenues. Adjusted for the change in operating income due in most part to ongoing costs and investment spends in two key business segments versus the prior year, operating income in the quarter on an adjusted basis was 5.6%.

Net earnings in the quarter increased 234.4% to $5,096,000 or $0.08 per diluted common share as compared to $1,524,000 or $0.03 per diluted common share in the prior year. These results in the quarter represent the highest third-quarter operating earnings in the Company's history and are indicative of the positive momentum within our organization.

For the nine months ended September 30, 2007, the Company has realized net earnings of $15,696,000, an increase of 76.8% versus 2006 representing earnings of $0.25 per diluted common share versus $0.15 per diluted common share in 2006. Based on these results, we are pleased to reconfirm our net earnings guidance for fiscal 2007 of $0.35 to $0.40 per diluted common share.

At this point, we expect to be in the lower end of this range after absorbing significant costs in investment spending in our healthy fruit snacks business and SunOpta BioProcess Inc. and the impact of the rising Canadian dollar on Canadian-based overhead costs. We will discuss these points in further detail in a moment.

In the third quarter, the SunOpta Food Group reported increased revenues of $184.4 million as compared to $127 million in the third quarter of 2006, a 45.2% increase. Segment operating income increased to $8,480,000 versus $2,625,000 in 2006, an increase of 223.1%. This increase was realized despite additional corporate cost allocations of $1.657 million versus the prior year.

The increase in segment operating income reflects improved results in the SunOpta Grains and Foods Group due to strong sales up non-GMO and organic grains and grain-based ingredients, increased sales of Aseptic and extended shelf-life packaged beverage products and is reflective of the significant turnaround that has been realized within the Group's sunflower operations.

The SunOpta Ingredients Group realized improved segment operating income due to higher volumes of oat and soy fiber and dairy-based ingredients plus the beneficial impact of process improvement and cost rationalization initiatives within the Group's processing operations. The SunOpta Distribution Group realized strong improvement in segment operating income as well due to continued growth in the natural and organic grocery sector combined with ongoing margin improvement initiatives.

These increases were partially offset by a decline in segment operating earnings in the SunOpta Fruit Group as the Group continued to invest in operational improvements and expanded capacity within its healthy fruit snack operations. These investments will significantly increase capacity and address ongoing processing efficiencies which have significantly impacted this business during 2007. In fact, the healthy fruit snack business expects to realize improved results in the fourth quarter and a $2 million profit turnaround in 2008.

Opta Minerals revenue increased to $20.5 million due primarily to the acquisitions of Bimac Corporation in late 2006 and Newco AS during the quarter, offset by cyclical weakness in the foundry and steel industries.

Segment operating income for the quarter increased by 10.7% to $2.236 million from the $2.02 million due primarily to the acquisitions completed offset by product mix and reduced sales of higher margin desulphurization products which are sold into the steel industry.

The acquisition of Newco AS in the quarter was very strategic as it positions Opta Minerals to serve existing European markets and establishes a platform for further growth in a fast-growing economic region of the world. The Group continues to pursue strategic acquisitions and new product development to complement its existing product portfolio.

SunOpta BioProcess Inc. recorded revenues of $779,000 in the quarter ended September 30, 2007, as compared to $1.573 million in the prior year which included the sale of a pilot plant to the Chinese customer. The Group continues to work toward completing firm proprietary pre-treatment and fiber preparation equipment projects and is pursuing a number of cellulosic ethanol projects in both North America and around the world.

With the increasing interest in cellulosic ethanol due to raw material, supply and cost issues in traditional ethanol markets, the Company has increased development in commercial activities and continues to responsibly invest in personnel and technological advancements deemed essential to execute on the potential of this fast-growing market.

The Company remains well-positioned for future growth with working capital of $154.8 million and total assets of $571.6 million. Capital additions in the quarter were $9.562 million including approximately $1.5 million for the acquisition of the soy milk manufacturing facility during the quarter. These numbers compare to $2,143,000 of capital spending for the same period in the prior year.

Our long-term debt to equity ratio at September 30, 2007 was 0.35-to-1 providing the Company financial resources to invest in internal growth, capital projects and execute on its acquisition program. Book equity per outstanding common share has grown to $4.11 from $3.94 at June 30, 2007.

I will now turn the call over to John Dietrich who will address a number of key financial matters.

Thank you, Steve. Gross profit increased to $37.9 million in the quarter as compared to $22.7 million in the same quarter of 2006 resulting in a 66.8% increase. During the third quarter of 2006, the Company had gross margin losses of approximately $2.1 million within its sunflower business including inventory write-downs.

As a percentage of revenue, gross profit increased to 18.4% versus 15.6% in 2006 or 17% after adjusting for the sunflower issue. This increase reflects the impact of improved product mix, pricing, operational efficiencies and ongoing cost rationalization initiatives offset by ongoing processing inefficiencies at the Company's fruit snack business into the impact of the increase costs in SunOpta BioProcess Inc. On a year-to-date basis, gross margins are 18.9% as compared to 17% for the comparable nine months of 2006.

Selling, general and administrative expenses excluding intangible amortization were $23 million or 11.1% of revenues in the third quarter as compared to $14.4 million or 9.9% in the third quarter of 2006. The higher rate of SG&A reflects the impact of the appreciation of the Canadian dollar versus the U.S. dollar which results in higher corporate SG&A once converted to U.S. dollars for both SunOpta and Opta Minerals.

Also includes investments in personnel and technology within SunOpta BioProcess Inc., accelerated IT costs in support of the Company's rollout of Oracle across the Food Group. Year-to-date SG&A rates are comparable to the quarterly rates for both years.

Warehousing and distribution expenses have increased from $3.9 million in the third quarter of 2006 to $5.2 million in the third quarter of 2007. These expenses are solely related to the SunOpta Distribution Group. As a percentage of distribution revenues, these expenses have decreased to 9.9% as compared to 13.1% in the comparable 2006 quarter reflecting leverage realized as the business grows and rationalization of a Quebec based distribution center in Q1 of this year.

SunOpta's average interest rate outstanding debt in the quarter was approximately 6.4% reflecting a combination of fixed-rate debt and operating lines of credit. The Company has available operating lines of credit of $15 million plus an unused acquisition line of $20 million excluding lines available to Opta Minerals for their funding purposes and available cash resources in SunOpta BioProcess Inc., specifically earmarked for their growth plans.

Overall the Company's long-term debt to equity is at a conservative 0.35-to 1. The Company currently funds approximately 29% of its accounts receivable inventory through operating lines of credit allowing ample room for further expansion.

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

During the quarter, the Company spent $9.6 million on capital expenditures including approximately $1.5 million for the acquisition of an additional soy concentrate manufacturing facility. Also during the quarter an additional $3.7 million was spent on new bar forming equipment and capacity upgrades within the Company's fruit snack business. This equipment is key to the planned turnaround in this business.

Year-to-date the Company has spent just under $22 million on capital projects. We expect to spend between $28 million and $30 million for the year.

During the quarter Opta Minerals acquired Newco AS in Kosice, Slovakia for a total cost of $13 million, of which $6.2 million was cash consideration. Other consideration consisted primarily of Opta Minerals shares and notes. The full preliminary purchase allocation will be included in our third-quarter 10-Q.

Consistent with the growth in our business and seasonal peak demand, working capital increased by $17 million in the quarter as compared to approximately $12 million in the third quarter of 2006. Approximately $15 million of this increase is in inventory. Inventory increases are almost exclusively from the SunOpta Fruit Group as they completed their peak berry processing season in mid-September with substantially higher volumes than previous years.

The internal growth for the SunOpta Fruit Group is 26% for the year and this increased inventory will support higher sales rates through to the new season next spring. These inventories will decline in the fourth quarter, however, there will be a partial offset with new higher value crop inventory currently in harvest within the SunOpta Grains and Foods Group.

The Company expects to reduce working capital in the last quarter, however, due to higher commodity prices, a decline is expected to be $10 million to $15 million versus our previously planned $20 million to $25 million.

I will now turn the call over to Joe Riz, who will update you on key activities within our operations.

Thank you, John. Good morning everybody. SunOpta Grains and Foods Group had an excellent quarter realizing 41.7% increase in revenues and an outstanding 782.5% increase in segment operating income. This increase was driven strong demand for organic corn, organic soy, IP soy, organic feed, grain-based ingredients, organic soy milk, both Aseptic and ESL, and the return to profitability of the sunflower operations after a disappointing 2006.

The Group has recently initiated soybean sales to new markets in both Thailand and Taiwan, further diversifying its global sales platform. The Group continues to pursue a number of large soy-based ingredients and packaged product opportunities and is currently expanding its processing and filling capacity in Alexandria, Minnesota by 25% as well as completing the upgrade of the soy milk concentrate manufacturing facility acquired in Huevelton, New York, and announced last quarter.

Additional extraction and filling capabilities are also being planned to meet expected future demand including expansion into organic soup production. The Group continues to grow its base of packaged soy milk beverages and a major customer has recently expanded its product offering into the Canadian market and is preparing to expand to other international locations. New soy customers include the addition of a new European retailer entering the U.S. market and one of the largest areas of Mexico who are using our soy concentrate for a new soy milk launched in Mexico.

The Group is well into the 2007 harvest season. Crop conditions continue to be good with yields and quality meeting or exceeding expectations. We also continue to expand our growing area in order to meet the needs of growing non-GMO and organic grain markets.

The Group is also currently finalizing a joint venture agreement for the construction and operation of a vegetable oil refinery. Non-trans fatty oil trends and the rising need for organic oils have led to increased demand for our soy, sunflower and safflower oils. This growth has been somewhat impeded due to supply shortages as it is become increasingly difficult to get processing time as the refineries that we contract with often cannot meet our needs.

Through this joint venture, our current and projected needs will be satisfied and we will be able to meet continued increases in market demand. Once the joint venture is completed, we expect to have the facility online in the second half of 2008.

The SunOpta Ingredients Group continued to grow its base business during the third quarter. Revenues increased 19.5% which was mainly attributable to higher volumes of oat and soy fiber as well as dairy blended ingredient products. This has led to increased segment operating earnings of 354.2% in comparison to 2006.

Segment operating earnings are expected to continue to show significant improvement in future periods as the impact of increased pricing on fiber products are realized as well as a number of cost reduction projects across its operations including wastewater reduction projects at each of its fiber processing facilities. The Group continues to focus on expanding its fiber portfolio and developing additional soluble and nonsoluble fiber applications. The Group is close to finalizing arrangements with a major customer for the first large-scale fruit-based application for organic soy (inaudible).

The SunOpta Fruit Group achieved year-over-year revenue growth of 32.3% and internal growth of 18.1% in the quarter. Revenue growth in the quarter was driven by strong demand in growth in natural and organic individually quick frozen fruits, continued growth in our global sourcing operations and the full quarter impact of the acquired Mexican operations.

However, the Group realized a decline in segment operating earnings as it continues to invest in its healthy fruit snack business to significantly increase capacity and rectify operational inefficiencies. We will begin to see improved results in the fourth quarter as our new fruit bar line is commissioned.

There was also excessive temporary labor costs related to a significant volume increase and product mix shift to food service toppings within the Group's fruit snack operations. Implementation of an automated topping line during the fourth quarter will significantly improve current production costs.

The Group also continues to invest in resources required to support continued rapid growth including additional food safety and quality assurance personnel, vitally important as the Group expands its global sourcing expertise.

Demand for healthy fruit snacks continues to grow and during the last quarter we completed the first stage of an equipment and technology upgrade at Kettle Valley increasing annual capacity by approximately 40 million fruit snacks. This line is now operating at full capacity. The second stage of this expansion is proceeding on plan and the new line is due to be commissioned over the next couple of weeks.

The capacity of the second stage production lends approximately 100 million units per year in total more than doubling the Company's fruit snack capacity versus 2006, improving efficiencies and ensuring our ability to meet demand which is very strong and includes a number of large branded product customers planning to bring innovative healthy fruit snacks to the market.

As we move forward, we expect this to be a highly successful segment of the Food Group and the operational spending thus far in 2007 will be a good investment -- will prove to be certainly a very good investment.

We are projecting an operating earnings turnaround in 2008 of in excess of $2 million. We're also seeing continued high demand for our food products particularly organic fruit and we continue to expand our supply sources around the world to meet this demand. We have recently entered into a number of contractual arrangements with large fruit manufacturers to utilize our growing international sourcing expertise and we expect this trend to continue.

In addition, we continue to invest to expand our own facilities. This month, a new polybag line was commissioned at our Buena Park, California operation in order to meet the group's demand for polybag fruits and vegetables. The new line will expand capacity by approximately 35%, improve yields, reduces labor cost per pound, reduces the need to use copackers and provides the capacity to target potential new accounts.

Utilization of this line will allow us to serve the needs of a major European retailer who is entering the U.S. market and has appointed SunOpta as its exclusive frozen food supplier.

We are also commissioning a new topping line at our food based operations which is designed to automate the existing line and increase capacity from 3.5 million pounds to 10 million pounds as we endeavor to meet increasing demand particularly in the food service area, from a number of large customers. This line is expected to be fully operational by late in the fourth quarter.

The SunOpta Distribution Group had an excellent third quarter as revenues increased 80.3% and segment operating earnings increased 249%. Excluding the impact of incremental corporate cost allocations, segmented operating earnings increased 320.8%. Revenue growth in the Group continues to be propelled by the acquisitions completed in 2006, improved natural and organic grocery volumes in Western Canada, and strong sales in natural and organic product lines in Eastern Canada including new listings with a number of major Canadian retailers.

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 rollout has started in the western grocery operations and will move to the eastern grocery operations early next 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.

In mid-October, the Distribution Group officially opened our new 95,000 square foot Western Canada distribution facility located in Richmond BC. This facility integrated our previous three warehouses in the Vancouver area and has provided room for significant continued growth in this important market.

In order to facilitate ongoing increased demand for frozen products, the Group is currently doubling its freezer capacity at our eastern distribution center to 17,000 square feet. This addition should be operational by the end of this month, leveraging one of the Group's core strategic strengths.

Opta Minerals realized revenues of $20.5 million versus $16.9 million in the third quarter of the prior year. Segment operating income for the quarter was $2.2 million versus $2 million in 2006. All in all the business performed quite well in the face of a number of market related challenges during the quarter. Results within the U.S. abrasives operations were strong but were offset in part by continued weakness in the Canadian foundry and abrasive segments driven by weakness in the auto and steel sectors due to the rapid increase in the Canadian dollar.

To offset these challenges, the Company has successfully developed a number of new opportunities in the steel and U.S. abrasive sectors and had expanded its operating platform into Europe.

On July 30th, the Group acquired 100% of the outstanding common shares of Newco AS. Newco operates a production facility in Kosice, Slovakia producing magnesium desulphurization products similar to those currently produced in North America. This Company employs approximately 22 people and maintains a very high level of customer specific technical service. The addition of Newco further increases Opta's position in the industrial minerals business and further expands its current position as a key service provider to the steel industry.

The acquisition also expands Opta's business capabilities into Europe and complement existing operations which supply a wide range of desulphurization products in both the United States and Canada from operations in Indiana and Ontario. The Group also continues to evaluate several other strategic acquisitions.

The Laval Quebec operation which was acquired earlier this year is up and running and processing both hematite and ebony grit. In early November, the facility will start garnet processing trials using raw material from our [Keesital] plant. Once the facility is fully commissioned, the plant is to streamline other existing operations and transfer production to Laval, generating significant savings.

The Group also continues to aggressively explore additional cost rationalization opportunities. The Group has also recently completed a three-year exclusive agreement for the supply of Greek nickel slag for the North American market. The agreement runs through the end of 2010 and is an important supply agreement given the impending shortage of raw materials in the North American market and the initial success with this product. The Group is currently using Greek nickel slag at its operations in Norfolk, Baltimore and Hardeeville with excellent growth opportunities in the pipeline.

In the BioProcess Group, we continue to invest -- investment spend to allow the Group to expand its organization, develop new processes in technologies and pursue a number of exciting opportunities. Over the last quarter, the Group filed a number of new patents resulting from recent development efforts. The Group is in the final stages of delivery of equipment to Spain for the first plant in the world to process wheat straw to ethanol. This plant should commence production early in 2008.

The Verenium project in Jennings Louisiana is also progressing well and most of the equipment has been delivered and is in place at the site. SunOpta 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. Negotiations are at advanced levels with key players in the rapidly developing cellulosic ethanol market in China and the Group expects to finalize the details in the coming weeks.

The Group is also working on a number of potential joint venture alliances focused on developing commercial scale operations and is working to finalize details for its first commercial scale ethanol venture during the quarter -- during the fourth quarter.

Thank you. I will now turn the call back over to Steve.

Thanks, Joe. As I am sure you can tell, the third quarter has certainly been yet another busy one. We've experienced record revenue and record earnings growth within the SunOpta Food Group, with solid prospects for the future. Our investments in Opta Minerals Inc. and in SunOpta BioProcess Inc. offer exciting growth potential as well.

We continue to see strong growth prospects within each of our operating segments and are continually positioning the Company to realize these opportunities. Last year we stated that our sunflower business would see a turnaround of $4 million dollars year-over-year, and we're extremely pleased to report that these results have actually increased by over $5 million after just nine months.

We expect that the significant investments being made within our healthy fruit snack business and SunOpta BioProcess Inc., which have impacted the third-quarter operating results are a wise investment for the long-term and will provide excellent returns to our Company.

Once again, we are pleased to confirm our revenue guidance of $775 million to $800 million and confirm our earnings guidance of $0.35 to $0.40 per diluted common share albeit at the lower end due to the investment in key business segments but before any further acquisitions which will be completed over the course of this year. We will provide revenue and earnings guidance for 2008 early in the new year.

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 would like to open the call up for questions.

(OPERATOR INSTRUCTIONS) Ed Aaron, RBC Capital Markets.

Thanks operator. Good morning, guys. Thank you. I just have a couple of questions for you just looking at the kind of lower end of your full-year guidance, it was sort of implied maybe like a $0.10 to $0.11 type of number for the fourth quarter. Is that something that -- am I reading that correctly? And if so, that is actually when you consider the impact of seasonality that would imply some pretty meaningful improvement and I'm just curious to know if you're already seeing that improvement in the quarter or if that is something that you expect to materialize more toward the end of this quarter?

Sure, first off, your conclusion is correct as far as what we see the fourth quarter looking like. We have great trends in the businesses through the grains and foods and ingredients and distribution. Fruit clearly had a tough third quarter, a tougher third quarter with the issues within the fruit snack operation. Joe had mentioned that some of these issues are now getting behind us so we expect significant improvement there. And given the combination of the momentum in the base businesses and our continued effort to address some of the issues that we've been dealing with, we're pretty comfortable that we're set up for a decent fourth quarter.

Okay. That is helpful. Thank you. On the soy milk business, Dean Foods had made some cautionary comments about what they were seeing with their Silk business a few weeks ago which they attributed to a tougher organic milk pricing environment which had impacted the soy milk business. It doesn't sound like you are seeing that in your business, just curious to get some color on that.

No, we are continuing to see real solid growth with our customers. I think they are growing and they are growing their markets. We mentioned on the call that one of our larger customers has now expanded their product offering into Canada and into some international markets which allows us to grow. And many of our customers are big on the food service side. I think the demand for soy at the food service level continues to grow. So we aren't seeing that being an issue with our customer base.

As a matter-of-fact, we've -- Joe mentioned in the call, we're expanding our Alexandria facility to add another 25% in filling capacity. So not so much an impact on our side.

Good to hear. And then last thing I wanted to ask on the BioProcess business. We've seen oil go up pretty big since you last talked to the street a quarter ago. And curious to just to get some your thoughts based on what you are hearing from some of your potential customers and whether that levels of interest have changed materially just with kind of the recent surge in oil prices?

I think things have changed recently and without being self promoting, I think the sort of focus on cellulosic ethanol continues to grow. I mean many of the traditional corn to ethanol players are struggling with the price of the commodities etc., etc. And there is more and more publicity about some of the negative impacts of corn to ethanol. We're certainly seeing it in food inflation. There's many environmental reports coming out now talking about the true consequence of all of the herbicides and pesticides and artificial fertilizers that are used in the production of the corn, genetically modified corn etc. that is used for corn to ethanol.

So we are seeing real continued expanding interest and of course we're expanding our group to try and deal with that. During the quarter, we were very involved on a number of fronts that Joe mentioned. One, working in China where the growth of corn stover to ethanol is really moving afoot in China. You know they've banned any further corn to ethanol plants so there is a real move to get some cellulosic ethanol applications up and running. So we are in very advanced stages of discussions with some significant players in the Chinese market and so we're very --.

Unfortunately we're not quite in a position to announce those yet. So there is a lot of work being done on those during the quarter and of course there is no revenue that gets attached to those. We expect to see that.

We've also been working very diligently on opportunities to develop our own commercial scale cellulosic ethanol plant. Again, hate to sound this way -- we are making great progress but at this stage of the game, we just aren't in a position yet to make a formal announcement what we were spending against in the quarter. So this is going to turn and revenues will be applied against these costs as we go forward but we're kind of right in that spot where timing -- it's just a timing issue for us.

Do you anticipate 2008 seeing material earnings contribution from process?

We would expect to not be incurring the type of ongoing costs that we have and then depending on the timing of these contracts and when some of them kick into place that will be the gauge as to the contribution. But we do expect much improved contribution versus 2007.

Okay, great. Good luck on the fourth quarter.

Chris Krueger, Northland Securities.

Good morning, guys. You answered a couple of my questions already. be more that I have is looking at the Canadian dollar and its appreciation versus the U.S. dollar, I think it was up about 8% in the second quarter -- I think about 6.5% in the third. I know it is up over 8% already in the first month of the fourth quarter. What kind of impact do you think that had on EPS on each the second and third quarter? And if it were to accelerate and increase a total of 10% to 15% in the fourth quarter as a whole -- do you think -- what kind of impact do you think you would see?

John and I will tackle this question together. Probably in the third quarter our impact was around $0.01. Essentially it impacts our business in a number of spots, some positive and some negative. On the distribution side of our business, there is sort of temporary benefit when we purchase product in the U.S. and pass it through to the Canadian market. But obviously we have to adjust those prices in order for the products to be competitive in the Canadian markets. That is a little bit of a benefit for us.

The minerals business as Joe had mentioned in his discussion, was really impacted. They sell product that's produced in Canada to a number of foundries in Ontario and Quebec primarily and in Ontario, the foundry industry has really been impacted by the decline in the automotive industry which has been sort of driven by the increase in the Canadian dollar. And in Quebec, many of the foundries have been significantly impacted because they ship finished product into the United States and obviously they haven't been competitive.

So that was a pretty significant hit to the Opta Minerals Group which they've managed to offset with the good numbers that they were able to put forward. And then of course, all of our corporate overhead costs are in Canadian dollars and they are just -- when we translate to U.S. dollars, they cost more. So that is sort of the in the third quarter. And, John, do you want to comment?

Yes, my only comment to that is we won't just stand pat on that so I think we will start looking for our overheads areas where with our Canadian suppliers where we should get reduced pricing based on if they have U.S. source costs. And also we will look to compare versus U.S. suppliers against Canadian suppliers now where we can in our corporate costs. And see if we can bring our corporate costs down.

We also have other opportunities. We essentially leave our balance sheet here effectively hedged so we are neutral against the dollar and we can do things there to kind of offset a little bit of what is happening on the actual SG&A costs. So we will look at strategies to mitigate going forward and we are doing that and hopefully some of that helps us in 2008 and more so into -- and a little bit in Q4 as well.

All right, hopefully that also turns the other way and you feel the benefits at some point too. Any update on a potential aseptic facility on the West Coast?

Well, you know we did announce that we're expanding East Coast facility and we also announced our East Coast filling facility and we also -- so we can handle both soy-based products and also organic soups which are a fast-growing area that many of our customers could use some service in.

We also announced that the Huevelton, New York facility on the East Coast that we had acquired we're expanding the soy concentrate processing capabilities there. And we're continuing to look at a number of options for the West Coast and we're still planning on doing that. We just don't have a final date at this stage.

Okay. Last question and then I'll ask you this off-line recently. But local media has talked a little bit about a fire in their sunflower facility and just worth noting the impact I think to everyone as well. I know it is hopefully pretty minimal -- but anyways.

Sure, I can certainly talk about that and also tell you that subsequent to the fire, we have a sale on roasted soy sunflower seeds. Essentially at our Breckinridge, Minnesota facility, we had a fire last Thursday, last Thursday in one of our storage bins. We are fully insured for the loss of the bid, for the loss of the ingredient and the business interruption. I believe there are five or six storage bins there anyway so just to put this into perspective this was one of a number. We lost operations at the facility for the better part of the day but we were back up and running and we're in full operation now. So we are covered from an insurance point of view.

The major challenge that I believe we're having pretty good success dealing with is we've lost that bin during the harvest when product is rolling in and out of those bins quite quickly. And so we've been working -- our folks have been working very hard and as of yesterday in discussing it was with Allan Routh, the President of the Group, they'd had pretty good success now in finding alternate storage locations to take us through the harvest and we're immediately preceding to put a new bin up but that will probably take two to three months and maybe a bit longer to have it delivered and set up.

So during that time we just have to deal with the storage issue which appears it won't be a problem. And insurance is a place to cover all of that. So it won't be an issue for us although it is a pain.

And even if it's covered and all of that would there be any kind of one time thing on your statements next quarter or is that --?

We will have a minor deductible of $50,000 -- maybe $25,000 to $50,000.

At this stage, Chris, it's pretty, pretty minor but that is as much as we know right now. We don't expect it to be anything of issue at all.

Okay, very good, that's all I've got.

[William Ditto], [Gato Group].

Gentlemen, good morning. Very good quarter. Good. Just going over to the fiber plants right now, are you guys seeing the same progress in operating efficiencies on the new capacity that you're seeing with the original existing facilities?

Yes, we completed expansions at all three of our facilities over the last year, probably raised our overall capacity between 25% and 30%. And so we got those initial efficiencies and we have just an excellent operating group within our ingredients group and they've really been into those facilities now and have been working at really diligently on -- I don't want to use the word tweaking -- but they are really working on driving every pound of fiber out of those facilities as cost efficiently as possible. And they've done a really, really good job on that.

We've seen cost improvements at all three of our facilities working very hard on utilization of raw materials and on water. I think we've saved in the millions of gallons in water over the past period of time. We really tackled those from an environmental point of view but they do offer economic benefits as well. We made really good improvements there and we'll continue to make improvements and as we make these cost improvements, we're also getting efficiency gains which give us more volume.

Okay, okay, that is good. And then you guys went over your fruit bar division which was pretty good and then with the expansion and capacity of the two fruit facilities in Buena Park and Salinas and you guys are having this higher inventory, we're probably thinking about having that maybe notched a little bit once that smoothie rollout starts going.

Well right now the Group have a -- the Group have a 26% internal growth rate. Fruit is a little bit different than grains in it's a discipline that we hope to build into the fruit business over time. But essentially in grains, when grains come in we get them delivered throughout the year and we pay for them throughout the year. On the fruit side of our business and especially with our global sourcing practice, we are really having to pay for the bulk of the fruits during the season and we don't have much opportunity yet and we're working on a number of alternatives where we don't pay for the fruit all upfront.

And given the growth in that business, we've invested heavily in the raw materials that will take us through to start of the next harvest. So our inventories are clearly high and I don't mind telling you that within the company, our inventory levels are a major focus. We're working to rationalize and leverage the inventories that we have and reduce those costs.

Part of these inventories are just critical to get us through and have us continue to serve the customers that we have through to the start of the next season. Our fruit inventories will certainly start to drop off in a big way now because the seasons are behind us. That will be offset somewhat by the grains harvest although we're well into that and it's not as material a lift going the other way. So we will see a significant improvement during the fourth quarter.

Okay. And then regarding the BioProcess Group, you guys kind of mentioned the earmarked funds and on the first commercial facility, I'm assuming you guys are hanging onto that. Is that kind of incongruent with what you guys are working with the GreenField Ethanol?

What we've indicated is that funds that were raised -- first off the funds that were raised in the financing are not available to SunOpta. They are specifically earmarked for SunOpta BioProcess Inc., and that is the only area where those funds would be spent. And they are obviously being preserved and have been preserved I believe there's around $28 million which is essentially the proceeds, net proceeds that we received give or take a little bit since the placement was completed.

They are really earmarked for commercial production and expansion of pilot facilities, etc. That is what they are being retained for. We're working on a number of potential ventures. The GreenField venture was primarily focused on Canada and we have some interesting ventures in other parts of the world but primarily in the United States. We've made some excellent progress on those fronts as well and would hope that we are at a position where we can really spill the details on what we're going to do here during the fourth quarter.

Okay, that is all I have. Thanks very much, guys.

Pamela Bassett, Cantor Fitzgerald.

Thanks so much for taking my call. I have a few questions that you mentioned that you've delivered equipment to the Verenium Jennings site. Is that equipment currently installed?

It is pretty much. It is certainly -- I've seen pictures of it in place and I believe it is in the process of being installed.

And at what stage of construction of a cellulosic ethanol plant do you generally put the equipment in? Does it vary depending on design and the type of feedstock at all?

Normally you are in there five -- four or five or six months before start up. It goes in obviously a lot of the infrastructure gets built and then the equipment gets dumped in -- not dumped in -- pardon me wrong choice of words. It gets placed, that is an accountant talking for you. All the engineers in our BioProcess group just jumped out the window. It gets placed into --

Hold them back.

Yes.

And do you guys have a backlog right now for the equipment given the expansion on the cellulosic ethanol front?

Sure, so we are delivering on the contracts that we currently have in place. We talked about sort of advanced negotiations in China and we have a really solid pipeline of opportunities that we're in discussions on at this time with major companies around the world and major players in a number of industries. So there's a lots of opportunity out there for us.

And will that create any bottlenecks in your manufacturing process or is this a big opportunity for expansion and you'll be able to meet that demand as it comes on line?

Well, Pamela, we use outside -- we don't manufacture the equipment ourselves and we use a series of contract manufacturers who produce selected components for us. We don't have any one manufacturer produce all the components just to protect the proprietary nature of the technology. So we have -- we're always expanding and our -- the number of manufacturers that we have so we don't see that as being a bottleneck.

Great. And last question. In the cellulosic ethanol plant that is currently under construction by SunOpta, do you plan to use enzyme cocktails and/or engineered fermentation organisms or one or the other, both, none?

First off, we don't have a facility under construction --

I misunderstood, I'm sorry.

-- that is our own but we hope to have it shortly and we would use various enzyme cocktails obviously. We've worked with many, many enzymes so we would use a number of those.

Thank you so much.

[Ron Rubin], Rubin Enterprises.

How are you doing, guys? As far as the BioProcess Group, you mentioned that the plant in Spain is going to be I guess expected in early 2008. What about the one in Louisiana? Do you have a little bit more color -- expected timeframe or at least a horizon?

Our understanding at this stage, and it's clearly not our decision, is sort of in that first quarter of next year is when they would be up and running.

Okay. Now do you expect to start generating out of the plants that once they are up and running do you start generating revenues at that point for the division or do you mainly make the revenues from the sale of the equipment?

In those particular cases we make the revenues from the sale of the equipment. As our business model develops though, we will be looking for recurring revenue streams coming off of the proprietary solutions that we sell to particular operations and obviously when we get into our own production, that will be ongoing revenue.

Have you -- I guess in regards to once the operation is much larger and the demand as much bigger, it's probably big already now, have you guys contemplated possibly doing something where you would generate a certain amount of money per gallon versus just making money off of the plants themselves?

Absolutely, you are absolutely right. And our intention is as that as the equipment rolls out we will enter into arrangements with the people using the equipment to participate in the downstream revenue streams.

Okay. In regards to China resource and alcohol, I know that the negotiation has been going on for quite some time and also China resource I think was applying for a grant or to be part of the grant for the government. Do you have any knowledge as far as the status of that grant?

What we do know at this stage of the game is they have applied for the grant and they are waiting for the grant. And I can't tell you that I really have great insight into the potential timing of it. But there are other opportunities in China as well.

Okay, okay. And let me see -- the other answers -- I actually have all the other answers. So I appreciate it.

(OPERATOR INSTRUCTIONS) Keith Howlett, Desjardins Securities.

Yes I have a question on the organic soups. The first one I wasn't sure quite where you were making them whether it is out in the Midwest or somewhere else? And secondly, what is the program there? Is there a private-label program or a rented program?

Well, Keith, a couple of things. The organic soup production capabilities that we would be installing would be in initially in Alexandria, Minnesota. So when we do this expansion of the soy packing facility, the aseptic packaging facility, the processor that we will put into place and the filler that we will put into place will also be able to hand broths and low particulate type soups so you won't do chunky soups by any stretch of the imagination. But we will do the lower viscosity type product.

And interestingly enough, organic soups are one of the fastest-growing Tetra Pak categories in North America today so there is real strong growth there. And we've had requests from a number of customers to leverage our vertically integrated system where we're able to provide the vegetable purees or whatever the raw materials are that are required. We can backward integrate here and provide a turnkey solution for food retailers or both private-label food retailers and also branded food players.

So it is another option for us at that facility as we roll out capacity and given the growth there, we will certainly take a look at those.

And then just on the fruit bar business. As we go through 2008, what is sort of the outlook or potential of that business as you see it?

Well, we've struggled this year just trying to keep up with capacity and we made the investment decision that we took a number of customers on realized that at the end of the day that we couldn't do that overly efficiently but we respected the customer relationship and clearly as we go through our expansion, we wanted to have those customers stay with us. So we've carried those customers through at low to no profitability on the basis that when we get to new equipment we're going to have a really good opportunity to service them cost effectively and earn respectable margins for what it is that we are doing. And obviously these facilities as well utilize our organic sourcing capabilities which are very, very important.

We're projecting a turnaround next year of $2 million. That will continue to grow. The turnaround is precipitated on a number of new customers who we have some significant commitments from to use the new equipment, develop the innovative products that we can produce off those lines. But they phase themselves and over next year. So we won't be essentially running full next year as we ramp up these customers. We're full ramping them up but we are not at wide-open capacity and the following year we will be. So will continue to see that turnaround.

We really feel positive about the business for the future. I don't want to get ahead of ourselves but we can see ourselves needing another line at a point in time here in the future given the demand that we see. It all needs to be proven out yet. But healthy snacks and nutritious snacks are growing really rapidly and gosh there isn't a day goes by that you don't read something in the paper about obesity and taking junk foods out of the schools and that sort of thing.

So it has got great potential for us and I think bringing innovation to the category is really important and moving away from -- trying to provide mothers with that fruit rollup that isn't the junk that's in fruit rollup but a fun fruit product that is really good fruit. So we see great opportunity there.

And then just on the commodity price issue. Your results don't show any squeeze going on. Just can you speak to that -- you are passing through all of the costs I take it pretty much?

Essentially, Keith, we hedge ourself on the grain side of the business so we pretty much know what we're paying for the bulk of the year. So those commodity costs don't come along and surprise us. And when we do have to increase the commodity costs, we are able to pass those through in a fairly timely manner. So it is not a real big issue for us. It's a little bit of an issue and there is always timing issues but for the most part, we are pretty good shape there.

And just finally, as the -- on the BioProcess as the plant begins operation in Spain in 2008 and I guess in Louisiana, what is the sort of time to get useful information out of those plants up and running? Just sort of know in two months how things are going or three months or six months or what sort of is the review period?

You get useful information pretty quickly, three months.

Great. And does that information sort of go to how to tweak it or is there any sort of stop go decision after you see this information?

Well that information is really proprietary to the customers and what it allows us to do is be sure that we tweak their system for maximum efficiency.

I see. So they don't necessarily share that information with you?

Not -- no, most of that information is specific to their particular application and obviously we'd have to be very careful with any proprietary information. Obviously we are learning on how we can make our systems better but our focus is on making sure that our customers are most successful.

Can you just remind me how big those commercial test facilities are relative to what you've run yourself and package or head office when the plant was there?

Well, these facilities are about 1.5 million gallons give or take a little bit. But they are about 1.5 million gallon operations. The facility that we had back here in Norville would do 250,000 to 350,000 gallons a year.

Great, thanks very much.

Both of those are about five times as big.

Five times. Thanks very much.

[Aaron Penson], Rubin Enterprises.

Good morning, how are you? I know it's pretty late and most of the questions were already answered. I just had a couple more. First off, a follow-up on the Canadian dollar. Just to confirm, on the distribution side of the business, the Canadian distribution, that is a positive that the Canadian dollar is rising?

Yes, that is correct.

For a period of time. I mean at the end of the day the pricing balances out in the marketplace. But it is short-term positive.

Okay. Would you say that it's better offsets the costs enough to say that you won't go into hedging strategies with the dollar or is that something you might consider as well going forward?

We will consider all strategies. Generally right now we do some hedging but not too much between the Canadian and U.S. dollar mostly between other currencies.

The most unique strategy that was offered up so far was to just close down our corporate office in Canada. Fortunately we didn't like the idea so we're going work on a couple other alternatives.

We're trying to get Joe and Steve to take U.S. dollars instead of Canadian dollars for their salary.

If you watched [NBC] the last couple of days, he will do some other top models in the world. I don't know if you've seen that?

Yes, we did see that. Yes.

Okay. On a question in regards to your $1 billion run rate. You said that you're going to exit still. You are confident that you're going to exit this year with $1 billion. According to my math and I just want to confirm, does that makes sense? As far as the purchases, are you going to be doing in this quarter is going to be maybe a little bit bigger than what you're normally used to? I'm thinking that you should have about a $200 million quarter just based on the organic growth without acquisitions.

You know you add 15% internal growth to our base business rolling into next year, you normally grow about 15%. So call the base between 900 and 925 and then you -- there's acquisitions in the pipeline in the 100 million range.

Okay.

In the last couple of years, we've had acquisitions between 100 and $150 million revenues. And we've done four acquisitions so far this year.

As far as the size of acquisitions you are still targeting those under $50 million or you're looking for maybe a --?

Well, no, that is our comfort spot but obviously if opportunities are out there that makes sense and they are bigger than that, we'd certainly at the stage of the game considering them.

Okay. Well that is it. I wish you success in the fourth quarter and I think I speak for everybody on the call, we definitely miss Jeremy and wish him our best.

Thank you very much. We miss him as well. Take care.

[Ron Rubin], Rubin Enterprises.

Two guys from the same company, can you imagine?

That's good. It means you are interested.

Well, we own a bunch of the stock so I think we should be. As far as -- two questions that I forgot about the BioProcess Group. One question in regards to the marketing of the actual group itself, do you have a specific strategy that you use to market the actual group, is it mainly based on referrals? Is it mainly based on specific advertising? How do you actually advertise the actual group itself?

So we have a commercial group that is obviously out contacting folks on a regular basis. We attend many conferences where we talk about our technology where there are specific scientific and technical folks that are in attendance. We don't do a lot of advertising in magazines and those sort of things but between attending conferences and being know to the trade, quite frankly at this stage of the game, we don't need to do much more. Because people know this technology or they are participating in the cellulosic ethanol industry and know the challenges that they are going to have there.

So it is a combination of both, Ron. We are out there talking to people, introducing the technology. And through word of mouth or whatever the case might be, there is just no shortage of opportunities.

Okay well --

As a matter-of-fact, we wouldn't market it any harder because -- and I don't say to be smart. It is just not required. It would be money that we don't need to spend right now.

I got you. Well I mean I guess the reason why I explored it is because many of the many people out there that are familiar with the company in the investment part are familiar with it as your core business which is for obvious reasons based on the sales part of it. But most people don't actually even know that -- or at least until they start talking to us about the existence of the BioProcess Group in the first place. So that is why I was asking if you are planning on I guess expanding that part of it.

I guess -- I guess a follow-up in regard to -- I don't know if this is the most proper question that you could probably answer. Have you guys explored the possibilities of once the BioProcess Group does start generating some serious revenues to potentially spin off the division?

When we did our -- when we did the placement in the business what we indicated was that we felt that there certainly is an opportunity in the future to take this business public. We feel that we need to ramp up the business. We need to execute and develop the technology and get the technology to commercial scale where it is proven and it is viable and investors could kick the tires and understand that this isn't hocus pocus, that there is a real technology here and it can be cost efficient from both a capital point of view and an operating cost point of view and be competitive on a global scale.

And once that happened then it might make -- that would probably be the time to do a further offering of the business and we intend on doing that.

Any idea I guess as far as I guess your expected timing -- whether it's going to be some time in a year timeframe from now or a couple of years, five years? I mean any I guess consensus?

What we need to do is get the commercial scale facility up and running and proven out and as we indicated, we're working very hard to finalize the plans for that. It would probably take the better -- assume that we're not going to start from the ground up and that there will be an existing facility that we would put our technology into and retrofit. If that were the case and assuming that we could have it up and running in 12 months or so from when we start and then prove it out. And once it is proven out, you should be able to define this technology and consider an IPO. So it could be 18 to 24 months if things go well. It really depends. But that is our thinking.

Got you. Okay, appreciate it. Good luck in the fourth quarter.

Thanks a lot.

Thank you. And at this time, Mr. Bromley, we have no other questions.

That is great. Thank you very much. I'd just like to thank everyone for joining us on the call today and for your interest. And as always, if you have any concerns or comments or questions that you'd like us to address, please don't hesitate to give us a call and we look forward to chatting to everyone at the end of the successful fourth quarter.

Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for participating and at this time we ask that you please disconnect your lines. Have yourself a great day.