Sunopta Inc (STKL) 2009 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the SunOpta Inc. first-quarter 2009 earnings conference call. Today's conference is being recorded.

Please note that we will be having a question-and-answer session near the conclusion of the call. At this time, it is my pleasure to turn the conference over to Mr. Steve Bromley, President and CEO. Please go ahead sir.

Thank you very much and good morning everyone. Welcome to our first-quarter 2009 shareholder conference call. I'm joined on this call today by Tony Taveras, SunOpta's Vice President and Chief Operating Officer; Eric Davis, our Vice President and Chief Financial Officer; and Ben Chhiba, the Company's Vice President, General Counsel and Secretary.

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 without limitation statements relating to our operating results, market and economic conditions and expected incremental volumes and contributions, cost improvements, improved operating margins, additional expected revenues from new products and reductions in working capital. All forward-looking statements reflect our current views with respect to future events and are subject to risks and uncertainties and assumptions we have made in drawing the conclusions included in such forward-looking information.

Many factors could cause our actual results, performance or achievements to be materially different from those expressed or implied by our forward-looking statements including those factors and assumptions set forth in the Company's quarterly report on Form 10-Q for the quarter ended March 30, 2009 and Annual Report on Form 10-K for the fiscal year ended December 31, 2008 in the sections in these reports entitled forward-looking statements and risk factors. Our Form 10-K for the fiscal year ended December 31, 2008 was filed earlier this year with the SEC and Canadian securities regulators and we plan to file our 10-Q for the quarter ended March 31, 2009 by no later than the close of business on May 8, 2009. That's today.

Please note that except wehre specifically noted, our financial results are reported in US dollars and in accordance with US GAAP. I want to mention at this time that we're going to target to keep this call to about one hour.

Let me start by saying that the deteriorating and uncertain economic conditions which have gripped the global economy for a number of months clearly led to a very challenging first quarter. January and February were especially difficult months.

But the good news is we started to see some improvement in March and as we will discuss during this call, we have many reasons for optimism going forward. In spite of the tough economic conditions, we remain focused on investing in a wide series of cost containment and increased productivity initiatives, positioning our business for improved results and improved returns on assets employed.

We will discuss key activities in the Company throughout this call. But let me assure you that our management teams and staff are extremely focused and we're making good progress. We're paying attention to every detail, pursuing growth opportunities while at the same time turning over every rock in an effort to improve the cost-effectiveness and efficiency of our operations.

For the first three months of 2009, we realized our 46th consecutive quarter of increased revenues versus the same quarter in the previous year. Revenues in the first quarter of 2009 were to $232.1 million versus $230.4 million in the first quarter of 2008. These results reflect an $8.4 million increase in revenues from the SunOpta Food Group, offset by declines in revenue in non-core businesses of $6.7 million.

The main driver of increase in revenues in the SunOpta Food Group in the first quarter was the positive contribution of the April 2008 acquisition of The Organic Corporation, our European international sourcing and trading operation, totaling $25.5 million. This was offset by year-over-year foreign exchange rate changes versus the US dollar and the impact of declines in commodity prices that have a direct correlation on selling prices totaling $15.9 million.

Revenues in the first quarter were also impacted by significant inventory deleveraging that has been reported from consumers, through retailers, branded products, suppliers and food manufacturers. Fortunately, it seems we are starting to see the end of some of these inventory reductions.

For the first quarter of 2009, we realized a loss of $1.7 million or $0.03 versus earnings of $1.5 million or $0.02 per diluted common share in the first quarter of 2008. These results include an increase in foreign exchange losses of approximately $1 million versus the first quarter, plus about $2.4 million of additional costs which were realized during the first quarter and I will talk about those.

Adjusted earnings for the first quarter of 2009 were essentially breakeven after adjusting for the additional pretax costs of $2.4 million. We expect that these costs will generate significant future benefits for the Company.

These costs included about $1 million in startup costs related to our Modesto soymilk processing and packaging facility which is scheduled to begin production the week of May 18. We also incurred severance and facility rationalization costs of approximately $700,000 within a number of our operating segments as we continue to position these operations for improved future performance.

Also during the quarter, we incurred costs of approximately $0.4 million, $400,000, in investing in new packaging, new formulations, and new products intended to revitalize a number of our Company-owned natural health products brands. These new products will come to the market during the second quarter of 2009 and are expected to drive incremental volumes and contribution going forward thereafter. Adjusted earnings for the fourth quarter of 2008 were $2.4 million or $0.04 per common share after adjusting for additional professional fees which were incurred in 2008.

Please note that the adjusted earnings and adjusted earnings per-share do not have any standardized meaning as prescribed by GAAP and therefore are unlikely to be comparable to similar measures presented by other companies. This non-GAAP financial measure should be considered in the context of our overall GAAP results and a full reconciliation of these amounts were provided with our press release that was issued last night and is available on our website at www.SunOpta.com.

Operating income for the first quarter of 2009 reflects a loss of $400,000 as compared to income of $5.4 million in the first quarter 2008, reflecting positive segment operating income in our core SunOpta Food Group operations, offset by the combined effect of losses in our non-core businesses and corporate costs. These results reflect the combined impact of reduced volumes and margins.

(inaudible) inventory deleveraging and current macroeconomic conditions, unfavorable foreign exchange and the additional costs that I described that were incurred in the quarter. Segment operating income within the SunOpta Food Group decreased to $2.7 million, reflecting the difficult market conditions experienced during the quarter combined with these additional costs.

All operating groups reported reduced operating income versus the prior year with the exception of the SunOpta Food Group which improved by $2.5 million as compared to the first quarter of 2008, and in fact achieved positive EBITDA in March, confirming our forecast of turnaround in that business. Segment operating results within Opta Minerals reflect a loss of approximately $800,000 in the quarter as compared to operating income of $2 million in the first quarter of 2008.

These results reflect a significant drop in demand in the foundry and steel industries as a result of decline in the global economy. Operations have been restructured to deal with this decline and the group is positioned to benefit from expected increases in infrastructure spending that should start to happen later this year.

Segment operating groups in the SunOpta BioProcess Group marginally improved in the first quarter of 2009 versus 2008 but remain in a loss position. The group remains focused on leveraging their technology and expertise in the production of cellulosic ethanol.

At March 31, 2009 the Company's balance sheet is strong, reflecting a working capital ratio of 1.7 to 1 with Accounts Receivable and inventory values of approximately $292 million. Our long-term debt to equity ratio at the end of the year was 0.48 to 1 and total debt to equity ratio was 0.83 to 1.

Our Company has total assets of approximately $574 million and a net book value of $3.42 per outstanding common share. We have reached agreement with our lending syndicate to extend the term on our operating facilities scheduled for renewal on June 29, 2009 through to December 31, 2009.

As part of this agreement, we negotiated a waiver of financial covenants for the first quarter of 2009 and amended certain covenants for the balance of the fiscal year. This is very positive. Eric will provide further details in a moment.

We have made excellent progress over the quarter in addressing our markets and operations and have great confidence in our business focus on natural, organic and specialty foods and natural health products. We believe we will benefit from a number of long-term trends including the growing interest in health and wellness around the world, the increasing awareness of the relationship between foods consumed and quality of life, the staggering increase in long-term health costs and the need to address this at many levels and the demand for sustainable and environmentally responsible business practices and products.

We believe this all bodes well for our future. I would now like to turn the call over to Eric Davis, our Chief Financial Officer. Eric will provide some specifics related to the Company's financial position and balance sheet items, and an update on our debt. Eric?

Thanks Steve and good morning to everyone on the line. Based on the seasonality of our operations, we traditionally consume cash during that first quarter.

For the first quarter of '09, operating activities consumed $4.5 million reflecting a slight improvement versus 2008. However, cash utilized during the first quarter of 2009 for working capital purposes improved by approximately $7 million versus the first quarter of 2008. Indicative of the organization's wide efforts to reduce our use of working capital, we expect to see this trend continue.

During the quarter, inventories declined to $190.4 million from $207 million at year-end while total Accounts Receivable dollars have increased to $101.4 million versus $95.1 million at year-end. Days sales outstanding have remained in line with prior periods.

Investing activities including short-term investments utilized $5.1 million in cash as compared to $2.9 million in the first quarter of 2008. This increase is primarily related to capital expenditures of of $4.6 million for the period versus $2.4 million for the same period last year.

Almost half of the $4.6 million was used on our Modesto plant. Approximately another $1.6 million was spent on two new minerals facilities in the Southern US and the expansion of a pilot plant capabilities for SunOpta BioProcess.

I would like now to address our current debt status. At the end of Q1, we had total debt excluding cash balances of $183.6 million for an increase of $4.9 million over December 31, 2008, our main facility that is held by a banking syndicate and services our core food operations.

Excluding Europe and our non-core operations stood at $109.7 million including operating lines of $44.1 million. Subsequent to the quarter end, we have negotiated amendments to our banking facilities. The agreement includes an extension of the maturity date of our current US and Canadian line of credit facilities from June 29, 2009 to December 31, 2009.

As part of the renewal process and as a result of our focus on working capital reductions, we have reduced the availability draw under our Canadian line credit facility by [$5] million and the revolving acquisition facility by [$4.4] million. This reduces available facilities from the syndicate to approximately [$145] million.

As I mentioned earlier, $109.7 million was drawn at the end of the quarter. The agreement also includes a waiver of certain financial covenants as of March 31, 2009 and amendments of covenants for the remainder of 2009.

Our European sourcing and treating operations are financed via asset-backed operating lines which totaled $25.2 million at the end of Q1 and Opta Minerals are financed via stand-alone operations and long-term facilities of around $27.3 million, both of which do not have recourse to SunOpta.

In addition, the Company has promissory notes due to various parties related primary to companies that we have acquired. These are subordinate to the Company's banks.

We have started the process to convert our current operating lines to facilities which will provide more flexibility and better utilize the Company's strong asset base. And we are targeting to complete this process no later than the end of the current fiscal year.

Thanks Eric. We are most fortunate to be operating in food business segments with solid growth potential as health-conscious consumers remain committed to natural and organic foods and natural health products. In hand with this, we continue to streamline our Company's operations aimed at improving earnings and return on assets employed.

We are implementing lean enterprise systems across our organization and are starting to realize the benefits of this initiative and Tony will speak to us about that in a moment. We do expect to achieve $10 million in savings and efficiency improvements by the end of 2009.

We have also leveraged our global supply chain and achieved further cost reductions in areas such as energy, chemicals, packaging and new materials. Tony will talk about that as well. But needless to say, attention to cost is key in this environment.

As we move forward, our Company's primary focus remains the improvement of operating margins and return on assets employed. And our non-core operations, Opta Minerals and SunOpta BioProcess, which are now less than 10% of annual revenues, are both strategically important businesses within the sectors that they compete.

Opta Minerals was obviously significantly impacted in the quarter by the decline in the global economy, especially the steel and foundry sectors. While Opta has yet to feel the impact of expected increases in infrastructure spending, we do believe it is well-positioned when that spending starts.

The Company is focusing on a number of new product introductions and cost rationalization initiatives plus establishing new operations in Florida and Texas (technical difficulty) improve the Company's sourcing and supply capabilities for silica-free abrasives in the Southern region of the United States. SunOpta BioProcess remains focused on the utilization of its technologies in the production of cellulosic ethanol.

The opportunities in this sector are attractive as the world looks to reduce its dependence on fossil fuels and reduce greenhouse gas emissions. While production of cellulosic ethanol in North America is very small, the renewable fuel standards in the US call for 16 billion gallons of cellulosic ethanol by 2022, a large task and an excellent opportunity for SBI -- or the BioProcess Group.

In fact earlier this week, President Obama signed a memo directing the USDA, the Department of Energy and the EPA, the Environmental Protection Agency, to form an interagency committee to expedite funding for renewable fuels. The Department of Energy also announced $786 million to be invested in next-generation biofuels through the Recovery Act. And as well, President Obama directed the USDA to make available a large number of new funding opportunities detailed in the Farm Bill including loan guarantees, grants for commercial facilities, cellulosic feedstocks assistance and support to retrofit corn ethanol plants for cellulose production.

We are really hopeful that this will provide a much-needed stimulus for a number of projects. The group continues in its efforts to refine its technologies and applications in many parts of the world and has completed the expansion of a new pilot facility and continues to work on its joint venture initiative with Central Minnesota Cellulosic Ethanol Partners on the development of a commercial scale production facility.

I would now like to turn the call over to Tony Taveras, our Chief Operating Officer, will discuss activities in the SunOpta Food Group.

Thanks Steve and good morning everyone. As Steve mentioned, the Food Group results for the first quarter continued to be affected by the downturn in general economic conditions.

The double-digit growth which the organic and natural foods industry has experienced over the past several years has not been there in the last two quarters. Food sales volumes were essentially flat to last year after adjusting for the impact of foreign exchange, decreased commodity prices and the acquisition of Tradin Organics in April 2008.

A large factor creating these sluggish sales volumes over the past two quarters was the intensive effort on the part of participants in the food supply chain to reduce inventory. The good news is that Nielsen sales and other point-of-sales data show comparatively stronger sales for natural and organic products at retail.

We remain confident that sales demand will rebound this year when inventory levels throughout the supply chain are brought to the desired lower levels. In fact, we're starting to see sales pickup.

What are we doing to respond to these conditions and to ensure that the Company emerges through this period much stronger and poised for growth and superior profitability? First, we are investing in our most important asset, our people. The key component of the lean enterprise, Lean Green and Blue Ocean initiatives is to invest in training programs so that all SunOpta employees learn how to recognize waste in all its forms and have a process to enable them to act and make improvements within a structured framework.

We continued to make progress to lower our operating and general and administration costs through these lean enterprise initiatives. The number of continuous improvement projects is mushrooming as lean takes a firmer hold across more and more parts of the Company.

The key to success in this area is to engage all of our employees in continuous improvement. The no-blame culture and the focus on process and continuous improvement is spreading. We are extremely pleased with the progress in this regard and has seen impressive transformations in some of our facilities. We are very much on track to deliver the $10 million in run rate savings by the end of the year which we've spoken about previously.

As a result of these savings, we anticipate that operating margins will improve going forward. Another key objective for lean is the systematic reduction in working capital by lowering inventory as a result of more effective demand and sales planning and pulling versus pushing product through the value streams.

We've done value stream mapping for a large number of our operations and are working on a number of opportunities. We remain confident in achieving a $20 million reduction in inventory this year.

We have also done a comprehensive review of all of our credit limits and credit terms. This combined with progress made with utilization of our Oracle enterprise system and increased focus have resulted in reduced sales and receivables in spite of economic conditions.

In short, all of these can be described as doing more with less. We are also investing in the development of new products and new markets for existing products.

The Blue Ocean strategy process has helped us to identify a number of opportunities and we expect to see a positive impact on sales in second half of the year. In fact, a number of the new fiber products, which have been brought to market by the Ingredients Group, were the direct result of opportunities identified in the Blue Ocean process.

Finally, I want to mention the investments we are making in a number of SunOpta natural health products brands, specifically the Vivitas, Herbon and Quest brands currently offered in Canada by Purity Life, our natural health products business. Our Vivitas supplement brand is being repositioned as Vivitas Woman, the only full-range of line of health supplements formulated specifically for women.

The Quest supplement brand is being repositioned as a full life stages product line. We will have the only vitamin in a health supplement line with formulations designed specifically for children, teen girls, teen boys and adults and mature men and women.

The Herbon natural throat lozenges product line and packaging has also been totally redesigned with specific products for children, teens and adults and new on-the-go pack formats. We believe these will be real winners with great growth potential.

Consistent with our environmental and sustainablility goals, all the new product formats have been designed to use less packaging and utilize recyclable materials all the while streamlining production processes. The factory designs have been tested extensively with consumers, are truly fresh and an exciting new look across the board.

We are supporting the launches with extensive multimedia, print, television and Internet marketing programs coordinated with promotional activity. Customary reaction has been amazing with all chains listing our products. The sales and profit impact will start in the second quarter but we expect to get full stride in the second half of the year.

We are truly excited about the work that the team has done and about the future potential of these brands. The Purity Life branding initiatives signal an evolutionary change for SunOpta.

We will focus more attention going forward on developing and marketing unique products under our own brands, utilizing our vertically integrated capabilities. Having said this, we will also continue to grow our private label programs with our customers.

Private label products continue to grow at retail and we fully intend to participate in and help drive that growth for our customers. We strongly believe that we can excel in both areas.

I will now make some specific comments on the results of each of the operating divisions as well as update you on the status of some of the key ongoing initiatives. The Grains and Food Group performed well in the quarter, led by strong sales of the (inaudible) soymilk and alternate beverages, including new sales to a major food service customer which began in late 2008.

The group also had strong margins in grains operations due to good spot markets, offset by poorer results in sunflower operations due to weakness in the bakery, kernel and byproducts markets. The group's roasting and packaging operations had much stronger operating performance versus the prior year which is expected to carry over to future periods as new customers are integrated along with the impact of numerous process improvements which have been implemented.

The firs quarter operating income for the Grains and Foods Group of approximately $3.9 million was approximately $1.6 million less than last year due in part to lower commodity markets and margins and approximately $1 million in expenses related to the construction and commissioning of the Modesto plant. Overall, the outlook for the Grains and Foods Group remains positive. Construction of the Modesto aseptic plant is in its final stages and we expect to begin production the week of May 18.

The Ingredients Group had operating earnings $0.8 million, slightly below last year's results due to improved operating costs and efficiencies and lower SG&A, partially offsetting weak demand in the fiber markets and poor margins in brans and dairy (inaudible)

The reduced demand for fibers has been larger than the management team expected in the first quarter. We expect demand to pick up over the balance of the year as we make further inroads with our new product launches and other sales initiatives.

We expect the Ingredients Group full-year operating income in 2009 to be ahead of last year. Our healthy fruit snacks operations, known as Kettle Valley, continues to show much improved operating results due to the lean initiatives at Omak and Summerland plants.

This business has now realized five months of profitable operations and we expect to realize a year-over-year operating income turnaround of approximately $3 million. Performance is expected to continue to improve over the next three quarters as efficiencies improve and new innovative product offerings come to market.

The Fruit Group had a first-quarter operating loss of $1.2 million versus a quarter loss last year of $4.1 million. The Fruit team has made significant progress in repositioning this business and reducing breakeven levels.

The Mexican plant operations have been rededicated to higher value IQF frozen fruit for packaging at the Buena Park facility. The Salinas plant has been closed and the equipment and plant will be leased to another company and we will buy the fruit needed for our frozen requirements on a contract basis.

We have also closed the group sales and admin offices located in South Carolina and consolidated them into Buena Park offices. In addition to lowering our breakeven level, these groups will result in further reductions in inventory and working capital.

We believe the Fruit Group actually performed much better than the GAAP results would indicate as the first-quarter results include a number of nonrecurring cost items consisting of severance payments and related costs for the closure of Salinas and the global sales office of approximately $600,000 plus sell-offs or rework costs related to aging inventory of approximately $500,000; in total, approximately $1.1 million in additional costs.

Demand for frozen fruit items was sluggish in the first quarter but has shown signs of resurgence. We also have several new sales opportunities which are expected to produce improved results in the second half of the year.

The team is quite optimistic about operating results in the next three quarters and expects a full-year operating income in 2009. The International Trading and Sourcing Group operating loss in the first quarter was approximately $1.2 million compared to last year's operating earnings of $0.3 million.

This was due to sluggish demand for organic industrial ingredients and lower margins across a number of commodities in the United States and Europe. Although demand for industrial products is expected to remain sluggish, we are starting to see some improvements.

Product margins and operating income are expected to improve considerably in the next three quarters as a result of increasing sales of cocoa on contracts carried over from 2008 and lower-cost replacement product in some commodities like sunflower kernel. We are also actively pursuing a number of new opportunities in retail private-label for the European and US markets, using core products handled by Tradin. But these are not expected to result in new sales until the fourth quarter at the earliest.

Sales for private label products in the US were 10% higher than last year in the first quarter and performance is expected to improve as a result of significant new contract for organic OJ which began in mid-March and is expected to generate revenues in excess of $10 million annually. There is continued interest in new product label products given the current economic environment and we are actively pursuing a number of excellent opportunities.

The Distribution Group results were substantially below last year at $0.3 million operating profit versus $3.5 million profit in Q1 of 2008. Revenues in Canadian dollars were at the same levels as last year at approximately CAD70.7 million this year versus CAD70.5 million last year.

But because of the decline in the Canadian dollar, the revenues in US dollars are down substantially from last year, $56.7 million vs. $69.5 million. Of the $3.2 million drop in earnings from last year, $1.4 million is in the natural health products business and the balance in the food distribution operations.

Clearly the rapid decline in the value of the Canadian dollar has been a significant factor in the reduced profits. We simply have not been able to fully realize the necessary selling price increases to offset the decline in the competitive market where retail margins are also under pressure. A full review of all customer and vendor product margins is being performed and we expect to implement selling and purchase price changes as soon as possible.

Improved results will not be achieved solely as a result of price increases however. There are many operating areas we can and will improve and intensive, lean, continuous improvement (inaudible) has been launched across the Distribution Group and we are already seeing improved results in many key metrics. As for Purity, the natural health products component of the Distribution Group, the majority of the first-quarter earnings shortfall was caused by delayed timing of new product launches and reduced margins on distributed products due to softness in the markets, sales mix as all as as well as increased program fees to retailers and increased selling, general and admin expenses due to higher selling salaries and marketing expenses.

As mentioned a few minutes ago, the largest initiative within Purity is the relaunch of three of the branded lines. The relaunch has gone exceptionally well with every single customer listing our product lines.

We believe that we will recoup most of the resulting additional spending on listing fees by the end of the year and be in a tremendous position going into 2010. In summary, we are enthusiastic about the large number of exciting projects we have on the go.

Although 2009 has been a challenge this far, we are confident that we are on the right track and that we will emerge as a much stronger Company, poised to grow in what we believe is an exciting market segment with strong growth potential.

Thanks Tony. In closing, the last six months have certainly been an interesting time for our industry and SunOpta, perhaps the most challenging times in memory.

Having said that, it's also been a time for our organization to focus on cost control, productivity improvements and improved asset utilization; all areas that we believe are keys to our future success. We have implemented lean across our organization and these efforts continue with the goal to realize annualized profit improvements of $10 million by year-end with more to follow.

We've implemented Blue Ocean strategies in an effort to grow our markets and broaden the applications for our products and services. We continue to reduce the use of working capital to improve and rationalize working capital practices and believe reductions of $20 million can be realized.

We have extended our current syndicated banking facilities to through year-end and are now actively engaged with our lenders to realign our facilities with our strong asset base. Our hands are on the wheel reducing costs, reducing assets employed, implementing new product development initiatives and new operations to meet customer demand, all focused on driving improved returns on assets and on equity.

While the markets will return to past times overnight, we are confident that as current economic conditions improve, our product portfolio combined with improved operating metrics will position the Company for future success. Finally, I want to advise you that in keeping with the Company's efforts to meet best practices and corporate governance, the Board of Directors yesterday approved certain changes to the Company's employees stock purchase plan to ensure compliance with recommendations made by the risk metrics group, ISS Governance Services.

In particular, the revised plan now requires shareholder approval for matters relating to changes in employee contribution limits and to the discount factor applied to the exercise price. And this matter remains on the agenda for the upcoming annual and special meeting of shareholders being held this coming Thursday.

With that in mind, we would like to open the call to questions. But I do want to remind you that we will not be commenting on the events that led to the restatement of our 2007 quarterly financial results.

The events surrounding this restatement are the subject matter of litigation before the courts in Canada and the United States and therefore it's not appropriate for us to comment at this time. With that, I would like to turn it over for questions. Thank you.

(Operator Instructions) Peter Prattas, Fraser Mackenzie.

I have a few questions relating to your operating lines. If we can firstly just go over the waiver. Can you tell us what sort of magnitude that was and how that gets expensed? And as well if you can comment on the covenants and would you characterize the amended covenants as tighter or looser than previous?

Well you know, Peter, I guess the first point is on the covenants. You know, our first quarter certainly below our expectations given where the markets were and some of the incremental spending that we incurred in order to reposition the business.

So our covenants are based on a rolling 12-month EBITDA. So we worked with the banking syndicate to amend the rolling 12 months going forward so that we are in a good position to meet those going forward.

So to characterize them, I think that they are appropriate for our business and where we see the rends for the balance of the year. So that's on the covenants. You had asked about costs?

The waiver. Is there a fee associated with that waiver and how does that get expensed? I'm just trying to --

There was a fee that really is a roll-up of the waiver and also an extension to the end of the year. So any fees associated with that would be written off over the course of the year and there were fees.

Just lastly, on your plans to renegotiate the facilities by year-end using the asset-based approach, can you go over your thinking there and I guess what the expected rollout would be?

We're going to look at a number of various perform forms of potential lending here. The reality is we have a very strong asset base. You take a look at the receivables and the inventory and our assets for our property plant and equipment versus the amounts that we have borrowed, there's great strength in there.

So working with our lenders and also in our opinion, there may be some alternate forms of structuring that will work better for us including forms that would allow us to leverage the asset base that we have. So we're working with the lenders in doing that.

What that would do is free up borrowing capability. But quite frankly, that's not something that we are intending on doing given the assets -- given our efforts that are underway to reduce working capital and to continue to control our spending.

We better structure ourselves. So it would create availability if opportunities come along that are appropriate. And on top of that, it would likely reduce our costs going forward.

Thanks very much.

Peter, I did want to mention that the amended agreement will be -- it will be posted with our filings.

Great.

Brant Jaouen, RBC Capital Markets.

How much of the new Modesto facility is -- the capacity is already kind of spoken for?

There are some significant customers that go into that facility as well as some product that will be transferred that makes this much more economical to move to the coast. The facility has been built such that it's going to be -- it's built and it will operate, but we can add more capacity as more demand comes in. So the filling operations that we have put in place there now are suited to the customers that (inaudible). So we're probably going to be at two-thirds.

Should we expect to see one-time charges associated with I guess not kind of having fully utilized that facility or at this point have we seen most of what we are going to see in terms of those kind of charges?

You'll certainly see some charges through to until we get it running here. And --

We expect that operation to be profitable. As Steve has mentioned, it's very scalable. There's a lot more real estate than lines. There's room to add additional lines.

But with the revenues we have in place, it is expected to make money from the get-go. The amount of $1 million that's been expensed so far relates to pre-opening costs and probably pay something close to that for a month or two, but it's expected to make money from the get-go.

Great, just one more question for you guys. You've talked a lot about kind of operating margin improvement across most of the business lines and I know it's difficult to quantify. But can you give us kind of a big picture sense of where you expect those margins to sort of settle eventually as we are thinking about kind of numbers in the out years?

I think we have stated before that our long-term goal is to have operating margins of 8%. We're clearly not there and I think Tony hit on the fact that this is going to be a continual improvement.

We're just going to continue to chip away at it -- a combination of the efforts to reduce cost, our expansion efforts, pricing, etc. So we are expecting continued improvement over three years as we work towards the 8% target.

Where do you think you would be if you had sort of a normalized volume right now?

That's a real hard one (multiple speakers) to put your finger on. Really, probably (multiple speakers) I couldn't give you an answer without doing some work on that.

Fair enough. Thanks guys.

Chris Krueger, Northland Securities.

The last caller asked a couple of my questions. But on the Modesto facility, add that roughly two-thirds of current capacity level, can you give us just an idea of what that means for revenue or kind of a loose range there?

Some of the revenue -- it's not all incremental because some of it gets transferred from Alexandria (multiple speakers)

Honestly I don't have that number off the top of my head (multiple speakers)

Incremental revenue would be in the 10 $15 million annualized.

So higher number at Modesto and a little bit lower at Minnesota near-term?

Yes, that facility is just --

Net, 10 to 15?

It really provides an opportunity for future growth. We're tapped out capacity at Alexandria. This just gives an opportunity to grow.

Okay, as far as all of the various cost-cutting moves you've done so far this year, and I know you -- I believe you stated you targeted $10 million in annual savings by year-end. How far along do you think you are?

This is early on and we are still in development stage, training modes and really haven't got all the facilities on board yet. But I would say we are more than one-third to -- close to 40% of the way there as of now.

(multiple speakers) feel a portion of that benefit ithe second quarter then?

We should begin to see sort of improvements quarter over quarter. The thing about this program is that it's cumulative. It's a little bit like drip, drip, drip and you sort of keep adding to the bucket and eventually it overflows. That's the idea.

There's no necessarily huge sort of groundbreaking opportunity. It's just improving every part of the business and locking in the best practice and moving forward.

Over time -- the previous caller asked about margins. It could very well be higher than the 8% target we have. It's just -- it's the never-settle-in for where you are now. But maybe 40% of the way there, I would say.

I think you commented on a new contract for organic OJ. I didn't quite catch all that when I was taking notes. Can you repeat that?

We started in the month of April, we started shipping -- we started a contract for organic OJ at a club store. I will leave it at that.

About $10 million in annual sales (multiple speakers)

(multiple speakers) impact annual sales this year.

Bob Gibson, Octagon Capital.

In case I missed it, could you touch on your fruit acquisition that you made in Central and South America and how they are doing?

We never acquired any business but we made investments in the businesses in South America. One was in Chile where we actually entered into a partnership and loaned money for equipment that is used to process a number of products for us with a repayment schedule and that has gone real well.

The second investment as you will recall, last year we wrote off the value of the investment. That was an investment in Argentina. We still deal with the business there but given the economic uncertainty that that business had, we had to write that investment off.

That was done last year. We're hoping to collect that back over time through continued purchases. But it hasn't been as successful as the Chilean. But we don't have an ownership position in any of those direct ownership positions.

Could you maybe just walk me through Salinas, why you closed it, what you see as the upside?

Absolutely. Tony do you want to --?

Yes, the upside in Salinas is that we are renting the equipment to another frozen food operator who will be able to bring volume of his own in and between our volume and his combined volume, we think we can buy -- we know we can buy -- the fruit that we need at a lower price than we could operating it on our own. So it's a bit of a strategy of rationalizing industry capacity, if you will, and deriving the benefit. So that's one opportunity.

The other thing that it does is it makes our business a lot more valuable. So carry less inventory on our own, better able to adapt to changes and that kind of thing. So that's the essence of that deal.

And I guess lastly on the biorocessing deal you've got in Minnesota, are you expensing that any costs you get there or amortizing or how should that look?

Those expenses are -- a lot of it is just engineering and design work and that's being expensed as we go.

But eventually there's going to be actual construction, right?

That would be the plan.

So when you get to actual construction, are you going to amortize or expense that?

You'd capitalize it according to GAAP. But right now, there's no guarantee that -- we hope there's a guarantee. But until you actually finalize and we get through -- we're well into the second phase on that project now, you keep expensing.

Okay, great. Thanks.

Chase (inaudible) Desjardins Securities.

Chase is filling in for Keith this morning. So my first question was on the $20 million reduction in inventory this year. It sounds like a lot of that is going to come from the Fruit Group. I'm just wondering if you could give a bit of a breakdown of where you see that coming from?

It's going to come from a number of divisions. One of the interesting things is if you look at March numbers year over year and you factor out the impact of Tradin and you factor out -- we're already showing a good part of that reduction, due to commodity grain increases and foreign exchange differences on the Canadian inventories, what we are talking about in $20 million is not that.

What we're talking about is actual volume [instead of] volume declines. Fruit Group will be a component of that. We believe there is opportunity in the Distribution Group and we believe there's opportunity in the International Trading Group. Any one of those three operations especially will be large contributors.

Thank you. Wondering -- the frozen berry inventory, I think it was 6 or $7 million at the end of the year. Any updates on that? Are we through it or still some more to go?

We continue to sell those inventories off. Net carrying as of the end of March, I think it was around 2.5. And we expect again by the end of the year the target is to have no inventory of frozen fruit that wasn't produced in 2009.

Okay, great. Thanks. And the last one, just a housekeeping item. Wondering if you could give the diluted shares outstanding for the end of this quarter and last, please?

Diluted shares outstanding for this (multiple speakers)

Diluted, yes.

This quarter and the last quarter?

And last -- previous year, same quarter.

Previous year? Chase, we will move on in the call and I will get it for you before we get off the call.

Okay, great. Thanks.

Ron Paul, private investor.

Can you provide an update on the where the [CME's EC] feasibility study stands and what is left to do?

Sure, so as you will recall, the second phase of that study was being -- a lot of the support for that second phase was coming through a next-gen grant of almost $1 million. That phase of the study gets into a lot more of the detailed work that goes in behind Phase 1 and we're looking to complete Phase 2 late third quarter. So I'd say it's on schedule.

One of the key parts was the group completing the expansion of their pilot facilities which are now done. And so they really move into the pilot to verify a lot of the detailed engineering work that's been done. And it's sort of moving through to a completion late third quarter to the end of the year.

And if you get the results you hope for, what is the road map after that?

At the same time, I should indicate that there's a lot of work being done on funding, at the same time pursuing all of the various loan and funding opportunities that are available with the governments and also talking to third parties who may partner and become part of that facility. The goal at the end of that would be to potentially twin a cellulosic ethanol plant beside the corn to ethanol plant and -- at a commercial scale, higher than 10 million gallons per year. And so the program from there would be of course moving forward with the funding and the construction.

Besides the CMEC study, can you talk about what else is going on in that division? There obviously haven't been contracts in a while, but there's been things you've discussed as potential. Is it still potential or has that gone by the wayside?

Well there still are a lot of potential contracts. Interestingly enough, the projects that -- the Chinese projects are not moving along as quickly as possible due to the economic situation in China. But there is a number of projects that the group has ongoing.

They've developed some new equipment that is at a smaller scale that will facilitate smaller pilot projects that a number of people -- a number of contacts want to bring to the market. You know, our pilot scale equipment as it was designed was quite large. So it required a fairly large application and many of our customers indicated that if the pilot scale equipment was a bit smaller, it would help them get into their activities quicker.

So that has been ongoing and you'll hear from the group between now and the end of the year on that front. There are a number of projects around the world and some in the United States.

The big issue is funding right now. As I indicated earlier, it looks like the US government took some actions this week to free up some dollars to assist on those projects. So that will all help.

Are you anticipating that SunOpta will be in a position to get some of that funding?

We are applying, yes we are.

On your inventory, what is your target dollar amount ultimately that you would like inventory to be at?

If you ask Tony that, nothing.

I don't recall what the amount was at the end of calendar 2008, but 200 so -- we're targeting -- if it was 200 last year, we're targeting a minimum of 180 this year. And then I personally believe there is potential to cut a lot more than that over time as some of these programs come in. It is a question of aligning our more traditional businesses, the ones where you don't have to buy a crock, and demand planning and really in my view cutting some of those businesses almost -- the inventory in half. But for this year, we have set I think a modest reduction target of $20 million going forward. I expect as we build on that, it will be considerably less than that.

Do you have a time frame for where you think you'll get to where you don't need to lower inventory anymore? How long is it going to take to get there?

Again, the thing with this sort of lean culture and lean initiative is that it's never a destination. This is really about a journey and the moment that you think you've completed, you haven't.

So at any one of the operations wherever we are next year, it's -- in a positive constructive way, it's never good enough. That's kind of the mentality that we're trying to instill. So it's not really the right question, I don't think.

Is there anything new to report regarding strawberries in the national fast food chain sector?

Working on some significant opportunities in the berry division, absolutely. But nothing I can really share. We have got some -- we have just recently secured some nice business there and I'm not so sure it's all that public in the industry. I prefer not to talk about it. But there is some good progress on increasing that, yes.

Last question, you have announced the Company started the process of converting its current operating lines to facilities which will provide more flexibility. Do you have a projection of what this conversion will cost?

There definitely will be fees and costs associated with it. Really would be early for us to give you a really quantified number on that.

Thanks a lot. I just also wanted Chase -- you had asked and for others on the call -- for the diluted weighted average number of shares outstanding. March 31, 2009 64,556,333; so 64,556,333; March 31, 2008 64,307,911; 64,307,911.

At this time, gentlemen, we do not have any additional questions. (Operator Instructions). There are no questions at this time, sir.

Well great. Thank you very much and just to wrap up, I want to thank everybody for joining us on the call today. We really do look forward to the future.

It's been tough [sledding] here in the economy and I know we're not alone and everyone has been impacted in one way or another. But we are very excited about the future.

As always, please feel free to give us a call and we work hard to answer all the calls from our shareholders. We appreciate your time and your support and look forward to chatting to you at the end of the second quarter. Thank you. Good day.

Ladies and gentlemen, this does conclude the SunOpta Inc. first-quarter 2009 earnings conference call. We thank you for your participation and hope you have a great day. Thank you.