Sunopta Inc (STKL) 2008 Q2 法說會逐字稿

Good day and welcome to the SunOpta, Inc. Q2 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Steve Bromley, President and CEO. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen, and welcome to the second-quarter 2008 shareholders conference call for SunOpta, Inc. I am joined on this call today by Jeremy Kendall, Chairman of the Board of Directors, and John Dietrich, Vice President and Chief Financial Officer. Ben Chhiba, the Company's Vice President, General Counsel and Secretary is not able to join us today. 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 operating results that may involve a number of risk and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. These risk factors are detailed in SunOpta's filings with the Securities and Exchange Commission. Please note that our financial results are reported in US dollars and in accordance with US GAAP. We plan to file our 10-Q for the quarterly period ended June 30, 2008 by the close of business today, August 11, 2008. It is with great pleasure that we announce our second-quarter 2008 financial results.

During the three months ended June 30, 2008, the Company achieved its highest-ever quarterly revenues, realizing its 43rd consecutive quarter of increased revenue growth versus the same quarter in the previous year. Revenues in the second quarter of 2008 increased by 41.5% to $291.9 million as compared to $206.4 million in the second quarter of 2007. Second-quarter 2008 revenues in the SunOpta Food Group increased 41.9% to $266.2 million versus $187.7 million in Q2 2007, driven by internal growth of 20.5% and the impact of the acquisition of The Organic Corporation B.V., referred to as Tradin Organics in April 2008 which contributed revenues in the second quarter of approximately $37 million. Revenues in Opta Minerals increased 37.3% to $25.3 million for the quarter, and revenues in the SunOpta BioProcess Group increased to $471,000 versus $319,000 in the second quarter of 2007. Consolidated internal revenue growth for the quarter was a very strong 20.8%.

For the six months ended June 30, 2008, the Company has realized revenues of $522.4 million, versus $389.9 million in the first six months of 2007, an increase of 34%. Consolidated internal growth the first six months of 2008 was 20.8%. Based on these results and continued expected internal growth in core operations, we can reconfirm our 2008 revenue guidance of annualized revenues in excess of $1 billion. Earnings for the second quarter were $719,000 or $0.01 per diluted common share as compared to 2007's second-quarter earnings of $3.405 million or $0.05 per diluted common share. Second-quarter 2008 results include professional and related fees and severance costs of $6.352 million related to the Company's investigation into the writedown in the SunOpta Fruit Group berry operations in 2007. Without these costs, adjusted earnings from the quarter would have increased from earnings in Q2 2007 by approximately 49% to $5.070 million or $0.08 per diluted common share. Further removing these costs plus the segment operating loss of $1.077 million incurred within the SunOpta Fruit Group berry operations, our second quarter 2008 earnings would have increased approximately 29% versus Q2 2007 to $5.727 million or $0.09 per diluted common share versus 2007 second-quarter adjusted earnings of $4.427 million or $0.07 per diluted common shares.

Earnings for the six months ended June 30, 2008 were $2.205 million or $0.03 per diluted common share versus $4.459 million or $0.07 per diluted common share in the comparable 2007 period. These results are after professional and related fees and severance costs of $7.720 million related to the Company's investigation and related activities into the writedown in the SunOpta Fruit Group Berry Operations. Again after removing these costs, adjusted earnings for the six months of 2008 would have increased approximately 68% versus 2007 to $7.493 million or $0.12 per diluted common share. And further, after removing these costs as well as the segment operating loss of $5.109 million incurred within the SunOpta Fruit Group Berry Operations, 2008 adjusted earnings would have increased approximately 43% versus 2007 to $10.609 million or $0.16 per diluted common share versus adjusted earnings of $7.398 million in 2007 or $0.11 per diluted common share.

Operating income for the quarter was $5.5 million, as compared to $6.8 million in Q2 2007. Segment operating income within the SunOpta Food Group increased 23.7% to $9.1 million. And segment operating income in Opta Minerals, Inc. increased 62.6%. Offsetting these increases was the combined BioProcess Corporate segment, largely driven by an increase in cost in this segment of $4.3 million, which includes the impact of incremental professional fees and related costs of $6.4 million as previously noted, offset by increased Corporate cost allocations to the operating groups, favorable foreign exchange, and general spending reductions. Excluding the professional fees and related costs, adjusted operating income in Q2 2008 would have increased from Q2 2007 results by approximately 74%, reflecting strong results in the company's operations. We believe that the professional fees and related costs associated with the previously discussed internal investigation should decrease significantly in the coming periods.

Please note that the results of SunOpta BioProcess are combined with Corporate Office costs for segmented financial reporting purposes. It should also be noted that the interest income attributable to cash and short-term investments applicable to the SunOpta BioProcess Group is also not segregated, and thus is reported on a consolidated basis. The SunOpta Food Group reported segment operating income of $9.1 million versus $7.3 million in Q2 2007, an increase of 23.7%. I should note that these results include the impact of $910,000 in increased Corporate cost allocations in the 2008 period. The improved segment operating income was driven by the SunOpta Grains and Food Group, which realized a 10.9% increase in segment operating income comparing Q2 of 2008 to Q2 of 2007, due to strong sales and margins of non-GMO and organic grains and grain-based ingredients and continued growth in packaged soymilk products, offset by increased costs which were not entirely passed along to customers during the quarter, and start-up costs associated with the installation and commissioning of new aseptic filling equipment in Alexandria, Minnesota which commenced production in July 2008.

The SunOpta Distribution Group realized an increase in segment operating of 64.1%, due primarily to continued strong demand for natural and organic grocery and natural health products. The SunOpta Fruit Group realized improved segment operating results in Q2 2008 versus Q2 2007, realizing a net segment operating loss of $281,000 versus a loss of approximately $1.1 million in Q2, 2007. Included within the SunOpta Fruit Group results, the Berry Operations realized a 72.9% improvement in operating results versus the loss of $4 million that was realized in the first quarter of 2008. Realized as inventories that were written down in 2007 to net realizable value are sold through and improved pricing and reduced storage costs were realized in hand with the expected benefits of the new management team. Segment operating income in the SunOpta Ingredients Group group decreased when comparing Q2 2007 to Q2 2008 by $902,000, as a result of rapid increases in input and processing costs in advance of customer pricing and approximately $350,000 in costs related to the temporary shut down of two fiber facilities as a result of the recent flooding in Iowa. We expect to recover these costs in the future via business interruption insurance, and both of the facilities have both returned to service.

Opta Minerals realized segment operating income in the second quarter of 2008 of $3.4 million as compared to $2.1 million in Q2 2007, an increase of 62.6%, driven by strong sales of abrasive products in the US, combined with increased sales of magnesium desulfurization products and the acquisitions of the Company's industrial minerals operation located in Slovakia in July 2007. Opta Minerals continues to pursue strengths, strategic transactions and new product development to complement its existing product portfolio. And on July 10, 2008, announced the acquisition of 67% of MCP Mg-Serbien SAS of France referred to as MCP. MCP sells ground magnesium products to a variety of industries in Europe and further expands Opta Minerals's European operating platform. At June 30, 2008, the Company's balance sheet reflects the current working capital ratio of 1.63 to 1. Long-term debt to equity ratio of 0.45 to 1 and total debt to equity ratio of 0.89 to 1. The Company has total assets of $676.9 million, and a net book value of $4.03 per outstanding share.

We continue to execute on a number of activities focused on our strategy of continuing to build our company as a major participant in the natural organic and specialty foods and natural health products sectors. Recent activities have included the establishment of a joint venture to build and operate an organic and natural vegetable oil refining facility, scheduled for start-up in early 2009, expansion of our aseptic soymilk processing and filling facility in Alexandria, Minnesota which has now been completed, expansion of our soy concentrate processing facility in Heuvelton, New York, which also has now been completed, our intention to build a new aseptic filling operation in Modesto, California, scheduled to start production late in the second quarter of 2009, and the expansion and consolidation of a number of Canadian-based distribution warehouses to increase capacities and improve efficiencies, which has largely been completed as well. Along with these, we completed the acquisition of Tradin Organics of Amsterdam in early 2008. Tradin is a global supplier of a wide variety of globally sourced organic food ingredients, including frozen fruits and vegetables, dried fruits, coffee, cocoa, cereals, rice, soy, seeds, nuts, oils and more. We believe that the control of organic supply is very important and a key area of focus for SunOpta. Tradin certainly brings a wide range of expertise in this regard, and we are most pleased to have the management and staff of Tradin as part the SunOpta team. We believe these are very strategic initiatives and we continue to pursue similar opportunities in support of our long term strategic objectives. We have also recently announced a number of key additions to our Senior Management team, all of whom we believe are exceptionally well qualified individuals and who should bring a great deal of experience to SunOpta as we move forward in support of our company's long-term objectives.

During the most recent first-quarter conference call I provided specifics regarding ongoing activities in each of the operating groups. I do not propose to cover all of these again today, but I will provide this opportunity to give a brief summary of the second-quarter results as well as a brief update on each of the operating groups. The SunOpta Grains and Foods Group posted a solid second quarter, realizing revenues of 86.5 million, a 32.7% increase versus the second quarter of 2007. This increase was driven by a combination of increased commodity pricing, and increased sales of organic and non-GMO grains, grains-based ingredients and refrigerate and aseptic and refrigerated soymilk products. Segment operating earnings increased 10.9% to $5.6 million when compared to Q2 of 2007. The group has realized year to to date revenues of $159 million versus $118.2 million in the six months of 2007, an increase of 34.5%, and achieved year-to-date operating earnings of $11.1 million, an increase of 38.9% versus the same period in 2007.

Operating earnings for the second quarter reflects strong results in the group's grains and sunflower operations, demand for packaged organic soymilk beverages remains strong, although results on the group's soymilk operations were impacted in the second quarter by increased raw material input and processing costs which were incurred in the period. We planned to pass these costs on via increased customer pricing during the third quarter. Results for the soymilk operations were also impacted by incremental processing costs as the group commissioned new packaging equipment in Alexandria, Minnesota, and updated equipment in Heuvelton, New York. These initiatives are now essentially complete and these costs should not reoccur. It should be noted that even with these incremental costs in the quarter, results for the second quarter for the Grains and Food Group were still the highest in the group's history.

The group is targeting to open a soymilk processing and filling facility in Modesto, California by mid-2009. The California facility will be commissioned in phases, but when complete, will approximately double our packaging capacity to between 250 million to 300 million quarts and move us into other organic packaged products such as organic soups and other alternative organic beverages which are aseptically process and packaged. Work continues on this project with the target remaining to commence production at the facility late in the second quarter of 2009. Based on current demand and customer discussions, we expect this operation will open to very strong demand. We have had a good early season harvest of sunflower from the Texas growing region, and our traditional midwest sunflower crop appears to be in good condition thus far. The soy and corn crops are a few weeks behind, but the quality to date is good, and August is a key month for these crops, and the final yields which will be realized.

The SunOpta Ingredients Group contributed revenues of $16.8 million in the second quarter, a slight decrease versus Q2 2007. Fiber sales increased approximately $1.8 million versus Q2 2007, but this was offset by a decline in dairy blend revenues, mainly due to a decline in raw materials cost that resulted in a subsequent decline in the finish products selling price. Year to date, the Ingredients Group have realized revenues of $33.8 million versus revenues of $34.2 million in the first six months of 2007, Including increased fiber revenues of $2.8 million, which have been primarily offset by the previously mentioned decline in dairy blend input costs, and thus revenues. Segment operating income for the second quarter was $586,000 versus $1.488 million in the second quarter of 2007.

In mid-June, the group's fiber processing facility operations in Cedar Rapids, Iowa and Louisville, Kentucky had to be shut down and this had a negative impact on results for the quarter of approximately $350,000 as incremental costs were incurred and fixed overheads were not absorbed. Similar costs have been incurred in July 2008, and we are working with our insurance carrier to quantify costs that we expect to be covered by our business interruption insurance. The Cedar Rapids plant returned to service the week of July 14, and the Louisville plant returned to service on August 3. Throughout this period, we were able to meet all customer orders from existing inventories.

The group was also significantly impacted in the quarter by rapid increases in processing costs, especially energy, transportation and processing chemicals. Of all of our food businesses, the fiber operations are very process intensive and thus susceptible to rapid cost increases. Customer pricing is in the process of being increased August 2008, and the group is working on new lower cost processes and supplies to help alleviate cost increases going forward. The group continues to make progress in expanding new actions into meat and dairy products and has recently launched three internally produced fiber products offering unique functionality versus current offerings. These new fibers are unique to the food industry and provide specific functional characteristics in cracker applications, whole grain bread applications and snack food applications including increased dietary fiber and crunchiness, texture or breakage reduction.

The SunOpta Fruit Group contributed revenues in the second quarter of $94 million, an increase of 76.4% over the comparable 2007 period. Internal growth was 9.6% in the quarter, reflecting a change in philosophy in this unit, especially within the Berry Operations, where efforts are focused on rationalizing certain customers where margins are not acceptable. The acquisition of Tradin Organics contributed approximately $37 million of the revenue increase in this quarter. Quarterly segment operating loss versus second quarter of 2007 improved by $856,000 to a loss of $281,000 versus $1.137 million in the second-quarter of 2007. The improvement in segment operating loss was driven primarily by the acquisition of Tradin Organics and improvement in the Berry Operations. We are really pleased with the results of Tradin since acquisition, and look forward to leveraging these operations as synergies and new business opportunities are pursued. Year to date, the Fruit Group has realized revenues of $143.9 million, versus $94.8 million in the first half of 2007, and has incurred a segment operating loss of $4.1 million, versus $3.8 million in the first half of 2007. The group's Berry Operations remain focused on addressing issues arising from the inventory writedowns which occurred in 2007. Results in the berry operations for the second quarter of 2008 include an operating loss of approximately $1.1 million versus a loss of approximately $1.7 million in the second quarter of 2007. These results are showing improvement, but reflect the impact of selling through higher cost inventory from the 2007 season, higher storage costs plus incremental costs associated with the efforts to improve numerous internal processes and efforts to reposition the group for future profitability.

Specific to the Berry Operations, the group remains focused on implementing new processes and internal controls and has made solid progress in this regard. The group is also dedicating significant resources to customer and grower relations, with the objective of improving these relationships and developing win-win relationships as we attempt to position for profitability. We believe that we can return the Berry Operations to acceptable profitable levels over time, but expect 2008 to be a year of transition with improved results expected in the back half of the year. Within the SunOpta Fruit Group operations, the global sourcing group is working hard to integrate the recent acquisition of Tradin Organics. We have transition teams working together to integrate the businesses to execute on a wide range of synergies including leveraging supply capabilities, sales of products to new markets, further development of private label offerings in new markets and more. We are really pleased with the progress to date,

As demand for organic ingredients and organic private label products continues to grow, we feel we are well positioned to meet this need. The Fruit Group's healthy fruit snack operations continued to progress with the installation and commissioning of innovative snack equipment and technology. We believe this is one of a kind technology in the processing of natural and organic fruit snacks, and has positioned the business to provide unique and innovative all natural food products such as twists, ropes, shapes and others. A number of consumer packaged good companies have launched some of these new products, and we look forward to bringing further innovation to the market. Year-over-year, revenues in the first half of 2008 have increased over 100%, demonstrating strong demand for healthy -- healthy snack foods and we are working very hard to continually improve returns which have yet to meet expectations as this complex technology is implemented.

The SunOpta Distribution Group had an excellent quarter as well, realizing revenues of $68.9 million versus $51.9 million in the second quarter of 2007, an increase of 32.6%. Internal growth for the period was $30.7%, the increase in revenue was driven by continued strong demand for natural and organic grocery products, combined with an increase in product lines and new customer listings. The natural health products sector also realized strong growth due to new product lines, new customer listings, and increased distribution capabilities in western Canada. Segment operating income increased 64.1% in the second quarter to $3.1 million in 2008, versus $1.9 million in the second quarter of 2007. Year to date, the group has realized revenues of $138.4 million versus $106.8 million in the first half of 2007, an increase of 29.5% and segment operating earnings of $6.7 million versus $4.8 million in 2007, an increase of 40.2%. The Distribution Group continues to focus on driving efficiencies across its natural platform and leveraging their position as a National distributor to obtain new product listings and new customers. In hand with this, the group continues to integrate the operations of Neo-Nutritionals, which were acquired in late 2007, and recently have expanded efforts to sell a number of internally produced natural health products into the Far East.

Opta Minerals, Inc. in which we own 66.6%, realized $25.5 million in revenues in the second quarter of 2008, a 37.2% increase versus the comparable 2007 period, representing approximately 8.7% of SunOpta's consolidated revenues, the increase in revenues was driven by the July 2007 acquisition of the business in Slovakia, the buildout of new production facility in La Belle, Quebec, increased revenues of magnesium-based products and a net increase in the sale of mill, foundry and abrasive products. Quarterly segment operating income increased 62.6% to $3.4 million, versus $2.1 million in Q2 of 2007, reflecting the increased gross margin on increased sales, offset by increased SG&A, and related costs to support business operations. Year for date, Opta Minerals has realized revenues of $46.6 million, versus $34.9 million in the first half of 2007, an increase of 33.5%, and segment operating earnings have increased 50.7% to $5.4 million. We are pleased with these results given the tough economic climate in North America. As previously noted, European operations are doing well and Opta continues to expand in this market. In addition the Company continues to launch a number of new products to North American and European markets that are being well received.

We believe that the July 2008 acquisition of MCP will further add to Opta's European platform and will drive a number of interesting growth opportunities. SunOpta BioProcess continues to focus on the development and implementation of its technology in the production of cellulosic ethanol. The group is working on a number of supply products and hopes to bring a number of these to close in this fiscal year. The group has been active over the last few weeks with the installation and commissioning of equipment supplied to a cellulosic ethanol facility, located in Jennings, Louisiana. This process is ongoing and should be completed over the next month as installation issues are identified and addressed. In addition, the group plans to expand their technological base through the addition of new patents and is also heavily involved in the feasibility phase of their joint venture to build a 10 million gallon cellulosic ethanol plant with the Central Minnesota Ethanol Co-op. This project is nearing the completion of the first phase of the feasibility schedule. Based on the results of the first half, we are pleased to reconfirm our earnings guidance for fiscal 2008 of $0.25 to $0.30 per share, before the impact of professional fees and severance costs related to the independent investigation and related recommendations, and costs attributable to the defense of the class-action lawsuits in Canada and the United States.

In closing, we want to once again express our pleasure at the completion of the 2007 year-end audit and the filing of both our first and second-quarter results. We are fully committed to continuing our efforts to build a strong and vibrant company, and are most fortunate to have a wonderful company with exceptional growth opportunities and a strong balance sheet, supported by a wonderful management team and the support of over 2200 employees. With that, we would like to open the call to questions, but want to remind you that we will not be commenting on the events leading to the restatement or the Audit Committee's investigation. The events surrounding the restatement are the subject matter of litigation before the courts in Canada and the United States, and therefore, it is not appropriate to comment further at this time. Thank you.

(OPERATOR INSTRUCTIONS). Please stand by for your first question. Your first question comes from Ed Aaron, RBC Capital Markets. Please go ahead.

Thanks, good morning, guys.

Hi, Ed.

Hey, I wanted to ask a little bit on the Grains and Food business. The margin pressure you saw there. You mentioned that you had an impact from higher input costs. We have had higher input cost for some time and I am curious why this is the quarter that it showed up more in the numbers?

Well, there were two things, Ed. The first is a lot of the input costs were more processing related with natural gas and those sort of things. Second, in the first quarter our hedges -- we were really well hedged. In the second quarter, due to demand and some of our growers pricing -- pricing to the market at that time based on our purchasing relationships. We were impacted a little bit more during this quarter.

Okay. On the minerals business, it is kind of funny, the results there are so strong but that's supposed to be your most cyclical business when you look at it in the context of the broader economy. It's a little bit hard to reconcile, so I'm wondering if you could just maybe give us more clarity on that.

It is not -- well, a couple of things. This group sells a lot into the US steel industry. And the US steel industry has done very, very well even though the economy has turned down, they have done very, very well because the price of higher-priced imports is priced -- with the US dollar being as low as it was for importers of steel, you know they had to deal with the higher Euro. Interesting that the US steel industry has done very well. The European operations have done pretty well, and there's a number of infrastructure projects in the United States which have also required abrasives, et cetera, which has done really well. So we are thrilled with the results that they are posting and the European operations continue to do well as well so.

Okay. Last question. We are almost to the midpoint of the third quarter and just curious to know if you have seen any -- any change in any of the trends relative to what you experienced in the second quarter?

Ed, not really. Demand still seems good. Seeing a lot of new and organic products coming to the market. So not a lot, no.

Has the mix of your business by customers changed much? I mean it seems that -- the category growth from most of what we hear is still pretty solid, but the numbers from Whole Foods last week were a little bit weak and wonder if the mix on your business by customer is any different?

We have not had a material shift in that mix, no.

Thanks, guys.

Okay

Thank you. Your next question comes from Chris Krueger, Northland Securities. Go ahead.

Good morning.

Hi, Chris.

I have several question here. First the Tradin group. Just to sum up that is being lumped in with your Fruit Group?

Yes, it is currently.

In that business, is there seasonality?

Um --

Yes, a little bit.

Like what would that be then?

They have some coffee businesses that they get a little bit stronger in -- in Q2, I believe. And not a lot.

It wouldn't -- the top line wouldn't buffet around two or three percentage points.

Okay. Nothing too dramatic in there. And margins within that business, would that -- would that business -- if you broke it out, was it profitable already in the first -- in the second quarter?

Chris, when we acquired the business as we indicated in our press releases, Tradin is a very strategic acquisition for us and we felt that by the time amortization and the interest cost et cetera of our acquisition were laid on, that we would be sort of a neutral for this year until we realized synergies. In fact in the first quarter that we owned the business, they did well, and we were -- we were profitable. Overall, and it was accretive to our earnings. So we are really pleased with how that -- that has gone thus far. And I forget the second part of the question.

Just had to do with margins with that business?

I wanted to talk about margins. This business has much more orientation to trading, sourcing and trading rather than value-added processing. They do do some value added processing and does it well but a smaller percentage of their business and will be in our business. That is one of the areas we saw real responsibility. Their gross margins are within the 10, to 10.5% range in the quarter, which is where we expected to be and we see a lot of opportunity to grow those margins and overall that had a weighting on the company's overall gross margins of about 0.8%. So we understand that mix and it is strategically something we want to do and will be increasing those significantly over time.

Okay. Back on the last question. They touched on the margin pressure from maybe the commodity input. If we are looking at the food -- the grain and foods group during the month of June as far as normal and traditional soybeans, pricing increased dramatically when the Iowa flooding and all that occurred. Did you feel an impact in that for the last few weeks of the quarter and if so have you noticed it going in the other direction since things have declined since then?

Yeah. There clearly were some huge spikes in the markets when the flooding was under way and people really didn't get a good feel for exactly the extent of the damage. That has reversed itself substantially. The commodity markets have fallen off. With the commodity markets, the organics markets follow. The preserve markets follow along. But we did see some real spikes late in the second -- late in the second quarter.

Okay. As far as professional fees and the one-time stuff, about 6 million, about 6.4 million in the second quarter. A little bit more of that in the third quarter to be expected?

There will be a little, Chris, but it will be dramatically lower.

Okay. And I notice the debt balance has gotten quite a bit higher year to date. Can you give us some insight into that and the outlook there?

Sure, the -- the issue there is Tradin. Tradin has their own.

Asset-backed.

Their own banking program in place and they have an asset-backed program which allows them them to leverage nor against the business and the core SunOpta business there wasn't much of a change.

Plus we have a debt, Chris, for paying for the second half of Tradin in a couple of years.

Okay. Last question -- I think last week Verenium, which is your partner in Jennings, Louisiana announced a pretty significant strategic relationship with BP. Any additional insight into that and whether or not SunOpta could be -- could benefit from that?

Well, we hope we can benefit. You know our relationship with Verenium is solid and we are working with them and as I mentioned we are in the process of working with them as their operation in Jennings comes on line. And, we don't have any further specifics, but we certainly are very hopeful that could be very positive for us.

I think two other things, Chris. Clearly it strengthens the financial position of Verenium which is very good for us and secondly they are obviously not investing in this forking to this one demonstration plant. The plan obviously is to roll out additional facilities in the future once this facility is up and running. So I think that is certainly good for us to.

All right, thanks

Thank you. Your next question comes from Bob Gibson, Octagon Capital.

Good morning, everybody.

Good morning.

I would like to get a little color on the Fruit Group excluding Berry. If I ex Berry out, you made something like $800,000 this quarter and a little over $500,000 last year. Yet you added, with Tradin and stuff over $41 million bucks to the top line. So if you can kind of give us a color on how the rest of the Fruit Group is doing ex Berry, I would appreciate it.

Sure. Ex Berry, I guess the first group that we would talk about would be local sourcing which was Tradin aside, they were -- they were pretty good year-over-year. Revenues grew. Let's get some numbers here. Revenues grew and operating earnings were pretty much flat year-over-year. Kettle Valley, as I indicated their top line continues to grow. We are incurring -- we are continuing to incur some costs as we go through the installation and commissioning and refining of the equipment. So they were -- they were down year-over-year. And I guess that is the three.

And Tradin.

And Tradin that did fairly well. Global sourcing was about flat, and there was a decline in the earnings within the Fruit Snack operations. The great news on the fruit snack operations is that demand remains strong and we are getting through the technical installation of the equipment, but it's taken a little bit, as I indicated earlier, it's taken a little bit longer and been a little more expensive than I had thought?

Okay, great, thanks.

Okay.

And I hate to put this one on on you but --

I am used to it.

Sorry. Severance I hate to say it for you, will that be in Q4 or next year?

It has already been accrued in Q2.

Oh this was in this quarter.

And for John Dietrich.

Okay.

That is already written off.

Gosh. All right, sir, that's it for me.

Thanks.

Thank you. Your next question comets from Keith Howlett of Desjardins Securities. Please go ahead.

Yes. Just a question. Is the Hess Group in global sourcing or is that with Kettle Valley? Where does that fit in?

The Hess groups falls in with berry ops.

When you were saying how people did part of the global sourcing.

Part of the berry ops group.

They remain profitable, I presume.

Small but good.

And I hate to go back to this topic, but inventory. Inventory seemed to be up quite sharply year-over-year.

I will let John comment on that a little bit, but, obviously if you take a look, Tradin carries a significant amount of inventory.

Tradin took a lot. Minerals was up quite a bit in the quarter because they source a lot from China and wanted to get a lot of stuff out of there before the Olympics started. They went up about $8 million. Tradin picks up $24 million -- More than that. I am sorry $37 million for Tradin. Probably 24 in Euros and the rest is as expected.

Berry ops is in their season and the berries again and they have gone up with the -- the new berries are processed, so they have gone up a little bit as well and organic ingredients -- or sorry global has gone up as they bought their juice program basically for the year. Actually, it is not up as high as I would have expected. We have done a good job moving through a lot of the older inventories. And it's in -- ingredients is down as they have had a couple facilities close and distribution is down as through passover.

And then -- I don't -- in terms of the Berry Division, is there -- are we sort of like three quarters of the way through the 2007 markdown inventory? Or how far along are we, I guess.

Yeah, somewhere between 60% and three quarters. We have actually -- we have done a very good job in July as well in moving through. Interesting with -- with the -- with the relatively lower volumes that we have processed this year. We are not really trying to push as hard in getting through everything, because we think there is -- we are going to need some of the volume throughout the back half of the year and prices are also looking to go up as we price through in that division come Q4. So I guess a summary of that, Keith, we are certainly getting there.

And expect a much better half.

And expect it to be gone here in the back half.

And in terms of the berry prices, any chance you get a lift on the markdown inventory or kind of in a different class?

Yeah, we are trying. The markets have certainly bounced up, and it hasn't hurt our position. And we are trying to get more for some of that markdown inventory, but it sort of goes all over the place.

Then just in terms of the forecast for the year of $0.25 to $0.30. Am I correct in assuming the position after -- on that -- on the basis of that calculation or at, we're at $0.12?

We are at $0.12.

Great. And then just on the Ingredients Group, is -- it was very helpful that you broke out the dairy blends versus the fiber. Do you think the fiber, soy and oat are maintaining some sort of fiber share or is there any pressure.

Certainly. I think they are maintaining share. We have had some -- you will recall -- and as a matter of fact, growing in some areas, you will recall that we launched organic soy fiber, which was the Otera byproduct and it is really starting to move now into the food industry after a couple of years of working to move it from feed into food. And so that -- you know they are picking share up in those areas, and then on the -- on the sort of rest of the fiber business, I think we are holding our own.

Yeah, I think we are actually pushing hard to move a lot of the -- the soy fiber into oat fiber particularly because the costs of producing soy fiber are higher than producing oat fiber. So we are certainly seeing that, I think.

And just in terms of the -- the fruit bar division. I think we are -- I think maybe at the end of the 2007, the thought was the Fruit Bar division just by recollection might add $2 million year-over-year.

That's right, yeah.

I wondered -- I know some teething problems there. How does that look at this point?

I think $2 million will be at the top end of what we will achieve. And, you know, sort of how things go here in the next couple of months in -- you know, getting the equipment. What we have realized, Keith, is, boy, this is very, very technical equipment. We are producing all natural and organic fruit snacks without the benefit. So these are -- I don't want to call them "pure," but they are pure. And we are doing that and learning how to make shapes and twists and ropes and peels and all of those sort of things with this technology. We don't think anybody else in the world is actually doing it on the natural and organic side, and to be quite honest, it has just been a little bit longer and more difficult process than we had anticipated.

We are meeting our customer demands and orders and that's all been very good. And as I mentioned the number of consumer goods company have launch products. But we just haven't been able to get quite the efficiency that we need. And you know the difference between being really good and not getting what you want is the difference of five or six percentage points on your yields. So we have made great progress, but we are not quite there. So I -- we are going to spend a lot more time here in the third quarter on this one. I don't know if we will make the $2 million, but it will certainly be improved over last year.

Two issues. The complexity of the equipment coupled with the necessity of training being able to operate this equipment. So that -- the training itself is something that just takes time. We have got a large number of employees now in this operation, and so that is improving every month as -- as a measure -- in the efficiency output. Those are the two factors we have to focus on.

And then on the -- the new Alexandria septic line, I have forgotten, is that a quart line?

It is a line that can actually be converted so it can do both but we are running quarts right now.

And it is sort of still ramping up? Or is it where you want at this point?

It is pretty much there. I think on the last call I indicated in one week we produced 240,000 cases of finished product. So it's -- it's come up to speed very well and really fast. It should because we know how to run that sort of equipment. That's what we do.

And then -- just on some housekeeping questions. I know you were asked this a couple of weeks ago, but is the class-action fee still an insignificant sort of number and outside of the -- the designated professional fees and severance category?

Class-action has been very slow.

It is not incorporated in that other number though?

Yeah, it is in that number --

Oh, it is in the number.

But very small.

Very small. Okay. Great. And then just on the -- on -- a couple of things on -- do you have the shares outstanding at quarter end and the weighted -- the weighted, dilutive and basic by any chance?

Yep, I do. The -- first we will give you just the outstanding. The outstanding common shares are 64,214,373. And the diluted --

64,373?

64,214.

214?

214,373.

All right, right.

Jeremy is really impressed that he has that number.

Diluted is 64,885.

Basic -- diluted weighted average.

Yes.

One question on the annual general meeting. Have you set a date for that?

September 25.

September 25. Great. Thanks very much.

We will be announcing that shortly.

Thank you.

Thank you.

Thank you. Your next question comes from William Dittl of Gato Group, please go ahead.

Gentlemen, good morning. In terms of the septic, the filling equipment, will you be automatically he be put into the Modesto plant?

The same type of equipment that goes into Modesto.

Okay. That's good. As you guys know, Dittl group is 60 investors with 1% of the Company stock and I have a couple of questions about the BioProcess Group group. You guys talked about being in contact with three oil companies on a previous call, one of them you mentioned was in China. Just out of curiosity, can you guys give us a little bit of -- give us a little color on that in terms of are some of these companies in the US or in the UK?

I think the answer is that one of them is in the US, one is in South America, and one is in China.

Okay. Okay. That's helpful. And in terms of the Chris's question, the BP Verenium contract. Obviously that is a big endorsement for your technology because you supplied the pretreatment there. Just on a theoretical scenario, if somebody was to source equipment for pretreatment for somewhere else but still used continuous steam explosion, they would still fall under licensing and royalty through you guys, that's correct?

Is this specific to Verenium?

Any company actually. But if they are using that particular pretreatment, they would then fall under your IP, that's correct?

Yes it would fall under our IT, our patents, yes.

That's what I thought. It is certainly a big endorsement for your technology with -- with the President of B.P. Biofuels saying that they have now had access to the most advanced technology.

Absolutely.

It is -- it is really interesting. And just -- in terms of the ongoing relationship there. Do you guys -- they are talking about several 30 million-gallon facilities. Again, would that fall into recurring revenues such --

I think as we said earlier, William, we really hope that we will be participating in these projects, and the fact that BP is now entered into their company I think is a real stimulus toward -- you know they are not doing that just to have this single plant. So they are obviously looking at a technology which they can hopefully apply worldwide. So, sure, it is a really exciting development for us.

Okay. That's great. Thanks very much for the answers.

Thank you. Bye-Bye

Thank you. Your next question comes from [Aaron Pinson, Raven Enterprises]. Please go ahead.

Hey, guys. Congratulations continue to -- up with the headaches the last few quarters. I want to ask you a question on the CEO search. As you know on Friday, United Natural Foods announced the retirement of Rick Antonelli. Coincidence or maybe on the search committee and that had something to do with it?

It had nothing to do with it.

Is he a candidate now being, you know --

Is he a candidate, is that what you are saying? Is that your question? No he is not at this point. Not that he couldn't -- not that he couldn't be, but he is certainly not a candidate.

Okay. And in regards to the overall -- I guess the CEO search there you're looking for. Are you looking for someone that is going to be, with the Board making the decision here in the last couple of years as far as the overall strategic direction of the company, say, in regards mostly to spinoffs and divestitures, these other noncore businesses, are you looking for a CEO that is going to right away just fold into this -- you know the Board -- have the same outlook that the Board has had over the last several years or a CEO that might just take over and be maybe a fresh new outlook on about how you guys go going forward?

Certainly we are looking for someone with wide experience. Somebody who is focused in the food business, because, as you said, we may be reviewing our strategic direction here with regard to our noncore businesses, and, so, yes, we are looking into -- very likely that person -- it is a worldwide search -- it will be, but definitely someone who is focused and experienced in the food business.

But I guess my question is, do you necessarily need someone that will automatically fold into what -- the direction that you guys are looking for as a -- sort of as a -- a necessity before you would hire someone.

Well -- I would hope that that person is committed to the organic sector and natural food sector because that's what we are about. And I would hope that that person would -- you know would also reflect the values which I think are critical in this company. And so I think those things are important but I think his experience -- or her -- experience is going to be the key here.

Okay. And lastly in regards to Opta Minerals, obviously this has been, something that you have been talking about spinning off for a while already, but fortunately you haven't from the best -- in the last year or so. What is the plan going forward with that? And any update on I guess any plans of spinning it off or what it looks like from this point?

As I said -- and I think we will be undertaking a strategic review of our noncore businesses. Clearly Opta Minerals is doing extremely well, and with the -- with the prospects that they have, the new acquisition in France, it looks like it will be very incremental. When we take a look at the option which we on the second company in Europe which we have only mentioned in the press release, that -- that opportunity, which would be exercised within the next 18 months but probably earlier is -- is very, very interesting. So I -- if we are keeping it, it looks like Opta Minerals has tremendous growth in front of us. If we were selling it, then the buyer is going to -- should be very entranced with this additional opportunity.

As far as capital, you would be liquid enough to continue doing these acquisitions in the past strategically without selling off Opta Minerals?

I think as we indicated we have slowed up our acquisition activity for a period of time, but there are always opportunities that are let's say smaller opportunities that can be folded in. As you can see, we are focusing a lot on expansion of our existing businesses with the new Modesto plant, the new Colorado facility, the expansions in -- in Minnesota and in New York. We are doing expansions and warehousing expansions in the Distribution Group. So our -- our -- at the moment, our -- our available capital is more focused on internal expansions, which, of course, are lower risk and fit perfectly within our existing business. So -- but for sure we are continuing to look at acquisitions, and I think we will gear up our acquisition program initially with smaller opportunities but as our cash flow improves and we get past all of these one-time costs, we will have a lot more capital available just from internal operations to invest.

Okay. Well, thanks a lot for your time and congratulations again on the updated filings.

Thanks a lot

Thank you. Your next question comes from Keith Howlett. Please go ahead.

Yes. I just wanted to return for a second to the grain and food division. On the margin squeeze. And I just wanted to make -- one aspect is natural gas which I guess relates to the processing business, like the soymilk and other things. The other side of it I just wanted to make sure I understood related to something to due with the farmers and the position they wanted to take on hedging I guess.

There were three things, obviously input costs went up, that was energy and all of those types of -- all of those types of costs. Second, when we were commissioning the new line, one of those deals where you are tying in a line -- a line right in the live processing. So there is a lot -- a number of inefficiencies that are created you know when you are doing that. And that occurred both in Alexandria and the Heuvelton, New York plant where we were doing a lot of work during the quarter. The third was just in the rising costs where we may not be totally hedged or some of the hedges we worked through hedge materials and we are moving into higher price -- higher price -- higher priced inputs, especially soy and passing those through to our customers. We have the ability to pass those costs through, but inevitably there is a delay until you work with the customer to put new pricing in place. So really a combination of those three.

And the last one is more on the processing side. On the -- on the soybean trading to Japan and elsewhere, pretty much a pass through?

Right. More on the finished product. Great, thank you.

Thank you. (OPERATOR INSTRUCTIONS). The next question comes from James Gash, private investor. Please go ahead.

Gentlemen.

Hi.

I am looking at the markdown inventory in severance packages and trying to balance those two things. Is it possible to perhaps pay off at least the portion of those severance packages in strawberries?

I don't think so, sir. We are talking here about severance packages that go to people that are leaving the Company. So I don't know what they would do with the strawberries. So, no, I don't think that is possible, sir.

Well, it was worth a try.

It is a good -- good suggestion. I could certainly talk to them, but I kind of doubt it.

Maybe we could adjust the next severance packages for the incoming candidates with performance as a factor.

Yeah. There certainly will be performance bonuses and so forth related, to his or her compensation.

Well -- okay. I am just trying to make the point that shareholders sometimes get tired of paying what seems like fairly lucrative severance packages for what seems like rather poor performance on occasion.

Yeah. Actually, sir, I can tell you that the compensation at the executive level of SunOpta has traditionally been very, very reasonable. Particularly, of course, in the past when the Canadian dollar was lower. When you were paying in Canadian dollars, you actually ended up with, you know, a much lower cost when converted into US dollars. Today, of course -- well even now the dollar has fallen again. So -- so costs generally in Canada are lower than in the US, and -- and, of course, in translation or even -- even more economic. But we have not traditionally paid large salaries here.

Okay. Well, something needs to be tweaked. Thank you, gentlemen.

You are most welcome. Thank you.

Thank you.

Thank you. There are no further questions at this time. I will turn the conference back over to Mr. Bromley.

Great. Thank you very much. It has been nice to speak to everyone as always. Please feel free to call if you have any questions or anything that you would like to discuss. We do our best to get back to all of our share holders in a timely manner. And if you would like to visit any of our facilities as well, the opportunity is there for to you do so. If you contact us. So once again we want to thank you. We are very pleased now to be totally current with our filings and look forward to speaking with you at the end of the third quarter. Thank you.

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line and have a gray day