Sunopta Inc (STKL) 2009 Q3 法說會逐字稿

Hello, and welcome to the third quarter 2009 earnings results conference call. (Operator Instructions) I will now turn the call the over to the President and CEO, Steven Bromley. Please go ahead, please.

Thank you very much and good morning, everyone. Welcome to our third quarter 2009 shareholder conference call. I'm joined on this call today by Tony Tavares, SunOpta's Vice President and Chief Operating Officer, and Eric Davis our Vice President and Chief Financial Officer. Before we begin we would like to remind listeners, that except for historical information, the matters discussed during this teleconference call may include forward looking statements, including without limitation, statements relating to our operating results, market and economic conditions, expected incremental business opportunities and/or revenues from new products, cost improvements, improved operating margins, reductions in working capita,l and expecting benefits from our new syndicated banking facilities.

All forward-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 September 30, 2009, an annual report on Form 10-K for the fiscal year ended December 31, 2008. Such information can be found in the sections in this reports titled Forward-Looking Statements and Risk Factors. Our Form 10-K for the fiscal year ended December 31, 2008 was filed with the SEC and Canadian securities regulators, and we plan to file our 10-Q for the third quarter ended September 30, 2009 by no later than the close of business today.

Please note, except for where specifically identified our financial results are reported in US dollars, and in accordance with US GAAP. I want to mention that we are targeting to keep this call to approximately one hour. During this call I will provide a corporate overview. Eric will provide details on the Company's financial status, and Tony will provide details related to our core foods operations. We will follow our presentation with a question and answer period. As you review the third quarter results, I want to reiterate our Company's ongoing committment to improving our operating margins and return on net assets employed, all the while continuing to strengthen our balance sheet. As you will see, we have made progress in improving operating margins in a number of our core operating businesses, and have continued to leverage working capital and reduce our debt. We will review many of these and provide further details over the course of this call.

For the third quarter of 2009, the Company realized revenues of $253.8 million versus third quarter 2008 revenues of 287.7 million, a year-over-year decrease of 11.8%. After adjusting for revenue decline -- the impact on revenues due to changes in foreign exchange rates and commodity prices, food revenues actually declined approximately 4% in the third quarter versus 2008. For the third quarter of 2009, the Company reported a loss on a GAAP basis of $4.7 million, or $0.07 per diluted common share. Adjusted earnings for the third quarter of 2009 were $4.4 million or $0.07 per diluted common share, versus adjusted earnings in 2008 of $5.2 million or $0.08 per diluted common share.

Third quarter results include pretax costs of $10.6 million, including net non-cash charges after minority interests of $4.8 million related to the impairment of goodwill in the Company's subsidiary, Opta Minerals, Inc., pretax costs of $2.6 million, related ongoing product and facility rationalization efforts, which includes non-cash charges of $1 million related to the consolidation and closure of two food operations, pretax costs of $1.5 million related to the ongoing revitalization and relaunch of a number of Company-owned natural health product brands, and additional legal and professional and banking fees of $1.7 million related to the 2007 restatement class action settlement, a legal action in the SunOpta BioProcess group, and costs related to our recent bank -- amendments.

We believe the facility and product rationalization, marketing, legal and banking costs are all essential elements of positioning our business for long-term sustainable business performance. Adjusted earnings, excluding the impact of foreign exchange gains for the third quarter of 2009 were$ 3.8 million or $0.06 per diluted common share versus adjusted earnings, excluding the impact of foreign exchange of $2.4 million or $0.04 per diluted common share in the third quarter of 2008. On a segment basis, both SunOpta grains and food groups and SunOpta ingredients group had very strong earnings during the quarter, achieving their operating income targets with 16 -- 6.1% and 16.4%, respectively. This is indicative of our ongoing focus on improving operating margins across our Company. In fact, the ingredients group realized record quarterly operating income of approximately $2.9 million.

Within the SunOpta fruit group, the processed fruit ingredients and healthy fruit snacks segments realized excellent results as compared to the prior year, and in fact are operating within target operating ranges. These were offset by losses within the frozen fruit segment, due to lower than expected retail sales and additional product rationalization costs as the segment continues to be transformed But the international sourcing and trading group and Opta Minerals, Inc. returned to positive operating income in the quarter, as a result of numerous cost improvements, combined with improving external markets. The distribution group continues to evolve its business and incurred brand relaunch costs in the quarter, as well as costs to reduce skews and inventory levels and rationalize it's portfolio. SunOpta BioProcess continues to focus on building it's business, advancing its technological base and establishing strategic partnerships to leverage its technology.

At September 30, 2009, the Company's balance sheet reflecting a current working capital ratio of 1.7 to 1. Long-term debt to equity ratio of 0.46 to 1, and total debt to equity ratio of 0.7 to 1. During the quarter, the Company generated cash from operating activities of $19.3 million, including cash generated from working capital of $13.6 million, reflecting our ongoing efforts to reduce working capital, especially our inventories across the Company. The Company continues to focus on reducing debt, and realized the decrease of approximately $19.5 million in debt versus the seconds quarter of 2009, and a reduction of approximately $38.2 million versus the prior year. At September 30, 2009, the Company has total assets of $563.8 million, and a net book value of $3.60 per outstanding share. At September 30, 2009, we are in compliance with the amended financial covenants that were negotiated with our banking syndicate earlier this year on facilities that finance our core food operations, excluding Europe.

On October 30, 2009, earlier, just a few days ago, we entered into a new three-year syndicated asset based lending credit agreement. The asset based lending facilities amend the Company's credit facilities, such that credit limits in our facilities are determined on eligible accounts receivable and inventory balances as determined on a monthly basis. We were extremely pleased to have finalized these new facilities, and believe they provide us with additional flexibility and lower interest rates. And Eric will provide more details on this in a moment. For the nine months ended September 30, 2009, the Company has realized revenues of $743.6 million versus revenues of $810.1 million for the nine months ended September 30, 2008. After adjusting for revenue declines in non-core food operations and the impact on revenues due to the changes in foreign exchange rates and commodity prices, food revenues have declined approximately 2% versus the same period in 2008.

On a GAAP basis for the nine months ended September 30, 2009, the Company has realized the loss of $4.5 million or $0.07 per common diluted share. Adjusted earnings for the nine months ended September 30, 2009 were $9 million or $0.14 per diluted common share versus adjusted earnings in the comparable 2008 period of $13.5 million or $0.21 per diluted common share. 2009 results include additional pretax costs of $17.3 million, including net non-cash charges of $4.8 million related to the impairment of goodwill in the Company's subsidiary, SunOpta Minerals, Inc. Pretax costs of $6.6 million, related to ongoing product and facility rationalization efforts which include non-cash charges of $1 million, pretax costs of $2.7 million related to the ongoing revitalization and relaunch of a number of our Company-owned natural health product brands, and additional legal, professional and banking fees of $3.2 million, related to the 2007 restatement, the class action settlement, legal action in SunOpta BioProcess Group, and costs related to banking amendments.

Adjusted earnings excluding the impact of foreign exchange gains for the nine months ended September 30, 2009 were $8.7 million or $0.13 cents per common diluted share, versus adjusted earnings excluding the impact of foreign exchange of $10 million or $0.15 cents per common diluted share in the nine months ended September 30, 2008. We have reported adjusted revenue and adjusted earnings and adjusted earnings per share, as we believe this gives insight into the ongoing results from the Company's base operations. Please note that these measures do not have any specific meaning as prescribed by GAAP, and are therefore unlikely to be comparable to similar measures presented by other companies. These non-GAAP financial measures should be considered in the context of SunOpta's GAAP results, and a full reconciliation of these results was provided with our press release which we issued last night, and which is available on our website at www.SunOpta.com.

We truly believe we are making solid progress in addressing our markets, improving our operations and strengthening our financial position, and have confidence in our business' focus on natural, organic and specialty foods and natural health products. We expect to benefit from a number of long-term trends, including the growing interest in health and wellness around the world, 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 in many levels, and the demand for stable and environmentally responsible practices and products. When combined with our ongoing commitment to continuous improvement throughout our organization, we believe this all bodes well for our future. I would like to turn the call over to Eric Davis, our Chief Financial Officer. Eric will provide specifics related to the Company's financial position, certain balance sheet items, and our new syndicated loan agreement. Eric?

Thanks, Steve and good morning. As a result of our committment to working capital reduction and cash generation, the Company realized another quarter of positive cash flows. Operating activities in the third quarter provided $19.3 million in cash, compared to $23.7 million in 2008. More importantly on a year-to-date basis, the Company has generated $26.2 million in cash from operations compared to $12.7 million in the nine months ended September 30, 2008. During the quarter cash generated from our improved working capital position totaled $13.6 million. For the nine months ended September 30, 2009, cash generated from working capital totaled $10.8 million versus cash consumed of $8.9 million in the first nine months of 2008. This represents a year-over-year improvement of $19.7 million, indicative of our ongoing focus on reducing working capital, especially inventories across our Company.

During the quarter inventories decreased to $178.2 million from $194.9 million in the second quarter, while total accounts receivable remain consistent at $105.1 million, versus $106 million for Q2. When compared with the third quarter of 2008, inventories have declined $28.1 million from $206.3 million and accounts receivable have declined by $17.1 million from $122.2 million. Day sales outstanding have decreased by one day compared with prior year and inventory returns were consistent with prior year at 4.8. Controllable working capital consisting of accounts receivable, inventory, and prepaids, less accounts payables and other current liabilities totaled $193.5 million versus $231.5 million at the end of September, 2008, a decrease of approximately 16%. And we firmly believe there is opportunity to further reduce working capital and borrowings.

Investing activities including short-term investments used $0.3 million in cash, as compared to $4.3 million used in the third quarter of 2008. This decrease in cash, used primarily related to reduced expenditures of $2.5 million for the acquisition of businesses and deferred purchases of consideration paid in the prior year, and proceeds from lease financing amount of $2 million, offset by higher capital expenditures of $0.6 million, due to primarily to spending on equipment for our Colorado Mills vegetable oil refining project.

Finance activities included credit facility repayments of $19 million, compared to $19.7 million in the third quarter of 2008, plus payments of $3.1 million to reduce long-term debt, compared to net repayments of $0.7 million in the comparable period. Offsetting the payments noted, was cash received at $0.2 million from other financing activities, compared to $0.9 million in the prior period, due primarily to reduced proceeds from issuance of common stock via exercised stock options. As of September 30, 2009, the Company had 64,915,443 common shares outstanding, and 65,370,109 fully diluted common shares outstanding.

As a result of these activities at the end of Q3, we had total debt in operating lines of $166 million, representing a decrease of $19.5 million from June 30, 2009 and a decrease of $38.2 million compared to the same period in the prior year. As Steve mentioned earlier, our primary facility including operating and term debt is held by a banking syndicate and services, our two core food operations, excluding Europe and total $100.3 million at the end of the quarter versus $113.9 at the end of the second quarter. At the end of the quarter we were in compliance with all banking covenants.

As announced earlier this week, we have signed an amended and restated credit agreement with our syndicate of lenders. The credit agreement provides for two asset based revolving facilities of up to $80 million in US funds, and $20 million in Canadian funds, subject to borrowing base availability, plus long-term debt of $45 million.

The facility has a maturity of three years from the date of closing, and provides us with additional flexibility and lower overall interest rates. We feel this is a key accomplishment for the Company and an important step in positioning our business for long-term sustainable success. Now, I will turn it back over to Steve. Thanks, Eric. We feel we are fortunate to be operating in business segments with growth potential, as we believe consumers will continue to move over time to healthier natural foods and health product offerings. In hand with this, we continue to streamline our operations aimed at improving earnings and return on assets employed. We are implementing lean enterprise systems across our organization, and continue to realize the benefits of this initiative. In SunOpta, we refer to lean as PEP. Process excellence through people. We are on target to achieve our goal of $10 million in annualized margin improvement and cost reduction by the end of the year. Our non-core operations Opta Minerals, Inc. and SunOpta BioProcess now represent approximately 6% of annual revenues, and both are strategically important businesses within the sectors where they compete.

Opta Minerals, achieved improved operating results during the quarter, realizing an operating profit before a non-cash writedown of goodwill. For the quarter, Opta Minerals achieved operating earnings of $1.3 million or 7.7% of revenues versus $0.8 million, total in the first half and EBITDA of $2.5 million versus an EBITDA of $1.7 million in the first two quarters. These improved results were driven primarily by increased activity levels in the steel industry which are still well below historical levels. Management in Opta Minerals believes that activity levels in the steel sector will continue to improve over time with some ups and downs along the way, but are hopeful that the worse is now behind them. While expectations were high for a strong resurgence in the abrasives and industrial minerals component of the business, as a result of government infrastructure spending, growth in this segment has been moderate as government spending has been slower than was expected.

During this economic downturn, Opta Minerals has focused on streamlining operations and generating positive cash flow. And in doing so, has reduced annualized operating costs by approximately $6 million, including 4.3 million in compensation costs. And at the same time generated approximately $7.6 million in cash from operations. They have recently commissioned a new abrasives operation in Freeport, Texas, and demand for product for this facility is growing rapidly and presents a good opportunity moving forward. A second new abrasive operation in Tampa, Florida is also in development, and is expected to be fully commissioned over the next few months. We believe Opta Minerals is well positioned as the economy starts to return to positive territory, and that they will certainly benefit from its re-engineered cost base, product offering and geographic operating platform.

SunOpta BioProcess remains focused on the utilization of its technology of 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 emissions. While production of cellulosic ethanol in North America is very small, the renewable fuel standard in the US calls for 16 billion gallons of cellulosic ethanol by 2022, a great opportunity for SBI's expertise. Government assistance programs are being made available, and we are hopeful that this will provide a much needed stimulus for a number of projects. The group continues in its efforts to further refine its technologies and applications, and has completed the expansion of a new pre-treatment pilot facility, and continues it's joint venture initiatives focused on the development of commercial scale production capabilities.

SBI also continues to focus significant effort on the Chinese cellulosic ethanol industry, a market they believe we will offer excellent growth opportunities, given that the Chinese government is no longer approving corn to ethanol facilities, combined with an increasing emphasis on environmentally friendly technology that reduce greenhouse gas emissions. In addition, SBI recently introduced a state of the art modular plug-and-play, pretreatment pilot system which will be able to operate at a scale which is smaller than current pilot equipment available from the group, and at an attractive price point. As part of this development, SBI has been awarded a grant from the Canadian government of up to $800,000 in Canadian funds to support the development optimization of this equipment, and has applied for further funding from the Canadian government to build a fully integrated cellulosic ethanol pilot facility.

On September 24, 2009, the Company announced it had entered into an agreement to settle claims raised in two proposed class actions proceedings arising from the Company's restatement of our interim financial statements for the first three quarters of 2007. The class actions were pending before the United States District Court for the Southern District of New York, and the Ontario Superior Court of Justice. In return for the dismissal of the class actions and releases from the proposed class members of many settled claims against the Company, and the remaining named defendants, the settlement agreement provides for total cash contribution of US $11.25 million to a settlement fund, and the adoption of certain corporate governance enhancements by the Company.

The settlement fund would be funded entirely by our D&O insurance provider. The settlement agreement contains no admission of wrong doing by SunOpta, or any of the other named defendants, and is dependent on the Court's approval, which has now been received by Canada, and is expected to be obtained by the plaintiffs for the United States in the near future. I would now like to turn the call over to Tony Tavares, our Chief Operating Officer, who will discuss the activities in the SunOpta food group. Tony?

Thanks, Steve, and good morning, ladies and gentlemen. Third quarter operating income for the SunOpta food group was $6 million versus prior year of $5.6 million, and year-to-date operating income was $16.85 compared to $20.9 million last year. The overall results reflect a combination of some operations performing very well, while others continue to work to address market dynamics, poor operating and adjust to reduced inventory levels. I will now make some comments on the operating results of the individual groups within the SunOpta food group. The grains and food group third quarter operating income of $5.3 million is ahead of last year's operating income of $3.2 million, and year-to-date operating income of$ 14.5 million is slightly ahead of the $14.4 million reported last year.

Third quarter results were $200,000 in start up costs at the new Colorado Mills facility. And the year-to-date results include approximately $2.7 million of start up costs related to the Modesto and Colorado Mills facilities. The results for the third quarter and year-to-date also reflect a gain of approximately $600,000 from the collection of a business interruption claim in our sunflower operations related to 2008. Over all, the division continues to perform well. And the story remains the pretty much the same as in the previous quarters. In the grains and sunflower operations, strong performance in soy bean and in-shell sunflower, were offset by weaker sales in margins by corn, food ingredients, vegetable oils, bakery kernel and high oleic kernel. We will be upgrading and expanding the soy handling system at the Hope Minnesota grain handling facility over the next few months to accommodate current business opportunities, and this will significantly increase our capability of that site, and provide an opportunity for future growth and profit.

Soy milk revenues, margins, and operating income for the quarter and year-to-date were ahead of last year, with new sales to food service customers more than offsetting lower sales to retail and warehouse channels. We have a number of soy milk opportunities in the pipeline with new customers, and have developed other products like peas and soups to take advantage of our aseptic capacity. We will also be installing new filler equipment at our Alexandra, Minnesota aseptic packaging facility to provide greater flexibility in package formats and open up new market opportunities. The Modesto, California aseptic packaging plant began production in July, and is well positioned for future growth. The start up as planned, and the operation achieved breakeven in the month of September. Recently installed equipment should improve soy-based yields in the fourth quarter, and combined with additional sales we should see improved earnings.

The new Colorado Mills facilities should begin production in November. Profitability in the short term is expected to be a challenge because of poor market conditions for oils at this time. But the operations should represent a good opportunity as markets improve. The group's roasting operations results have improved, as the business is being repositioned to do more bulk sales, to generate the volumes needed to make the plant run more efficiently, as a result of rationalization of existing retail sales customers and distribution.

We are concerned with the quality of 2009 crop that is to be harvested across SunOpta's North American production area. A cool summer and an extremely wet fall resulted in corn, soy bean and sunflower are maturing late that will create reduced yields and quality. With a large part of the crop still in the fields, it is difficult to predict what the final quality and quantity will be, but if the wet weather persists and crop quality deteriorates, increased operating costs and lower product yields will have an impact on operating margins. The SunOpta ingredients group operating income in the third quarter of $2.9 million was well ahead of the $700,000 of last year and year-to-date operating income of $5.6 million compares to $2.3 million reported last year. The record operating income was primarily caused by higher margins resulted from improved pricing, process improvements, and cost reduction programs, as well as reduced costs for (inaudible) natural gas.

Sales improved in the quarter due to the impact of new contracts and were ahead of last year. But year-to-date sales are still lower than previous year. As we discussed last quarter, we expect the sales from new contracts will have a positive impact on our financial performance going forward. Although we expect that increased costs and competitive activity could create some pressure in our margins in the months ahead, the market for fiber products are expanding, and we expect operating results will be quite strong in this division. We continue to focus on innovation to develop new products, and working on collaboratively with our customers to develop strategic relationships. These two areas are key to our long-term future success.

The SunOpta food group had a third quarter operating loss of $1.7 million compared to a loss last year of $1.1 million, and a year-to-date loss of $2.3 million compared to a loss last year of $7 million. The current year's quarterly losses include approximately $2 million in costs, due to the rationalization of our product portfolio, and the resulting cost to liquidate inventory, and the year-to-date numbers include $3.2 million including product rationalization, plant, and office severance and closure costs. Sales of frozen fruit in the quarter were $7 million below last year, and reflect overall sluggish demand from traditional retailers in this category, caused by the economic downturn, a loss of market share at the club and discount stores, and abundance of fresh summer fruit at very low prices. As discussed last quarter, we have purchased equipment to be able to service the club and discount store channel,and expect to see a positive impact in sales in the first quarter of 2010.

We are also working with our traditional retailers to lower their relatively high retail prices, to drive promotional activity and sales to counter the trend to these other channels. The lower prices of fresh fruit in the quarter also led to lower selling values for older inventory, and resulted in the additional product disposal costs I mentioned earlier. The lower frozen food sales resulted in more inventory on hand than we had planned at the end of September, and the team has adjusted production and purchases to bring our inventories in line with targets by year-end. The frozen fruit results were disappointing, but when you factor out the costs related to product rationalization and inventory liquidation, as well as severance and other restructuring costs, there has been a significant improvement. We are continuing our efforts to restructure the frozen food operations, and remain confident we are creating a business model which will deliver acceptable returns on investment. Sales demand is still an issue but the focus on category management with existing retailers, new product innovation and new sales through the club and discount warehouse channels should produce improved results.

On the positive side, the processed food and ingredient operations have record sales and profits in the third quarter, as a result of the margin improvement and processing initiatives, as well as a return of our focus to our core competencies which resulted in sales of new products to existing customers. We expect this operation to continue to perform very well with solid growth opportunities. The improved performance in the healthy fruit snack operations continued into the second quarter -- into the third quarter -- excuse me -- and operating income continues to be well ahead of last year. The turn around is being driven principally by improved plant operations resulting from our PEP initiatives, as well as lower raw materials and utility costs. We are presently working on new product innovation ideas arising from our Blue Ocean strategy sessions. And we believe that healthy fruit snacks have great potential to kids, teens, adults and seniors markets, and these products will be at the center of our innovation and marketing efforts next year.

The SunOpta national sourcing and trading groups third quarter income of $400,000 is improved from the first two quarters, but still behind the $1.2 million achieved last year. Year-to-date the operating loss of $800,000, compares to an operating income of $3 million last year. The results in the quarter reflect a much stronger performance from our operations in Europe, offset by continued weak performance in the United States. Margins in Europe have improved, as the issues related to quality and suppliers reneging on contracts that occurred in the first two quarters are now behind us, and as a result of improving market conditions, sales of Ethiopian organic fair trade coffee improved in the quarter, but still behind last year, but we expect to be ahead by year-end.

We also commenced operations in October at our Joint Venture sesame seed hulling facility in Ethiopia, and should see sales late in the fourth quarter. Sales and margin in the quarter and year-to-date for industrial organic ingredients in the United States continue to be lower than last year, due to overall reduced industry demand. Year-to-date, our sales of our private label products continue to be ahead of last year due to increased sales to the club store channel, offsetting generally lower sales to the traditional retail channel. We are continuing our efforts to leverage our strong sourcing platform, and are working on a number of new private label products which will take advantage of our core expertise in organic juices, coffee, cocoa, agave, and other products. As reported previously, inventories are a primary focus for the international sourcing and trading team, and we have changed our protocols to avoid the issues which led to excess inventories and quality issues in the past. Inventories at the end of September were $17.5 million lower than last year, and we expect further reductions by the end of the year.

Overall we are encouraged by the improving picture for organic products in Europe, and the potential for some of the new products we are working on. Although we expect some challenges in the short term as we continue to reduce inventories. The SunOpta distribution group reported an operating loss of $800,000 in the third quarter, compared to an operating income of $1.6 million last year, and a year-to-date operating loss of $400,000 compared to last year's operating income of $8.3 million. Sales in the quarter and year-to-date are below last year due to reduced demand as a result of the economic downturn. The decline in earnings is being caused primarily by operating results in Purity Life, our natural health products division, and some issues at the Ontario food operations. During the quarter, we continued our efforts to enhance our national distribution platform in the food operations to reduce the number of SKUs, and to increase our focus and consistency across the country. The food distribution and Purity Life continue to incur costs related to write downs and liquidations of inventory, as well as excess spoilage, as we continue to aggressively rationalize our our product portfolio. The costs related to these various factors are $700,000 in the quarter, and $1.5 million year-to-date. We are also restructuring our sales and marketing approach to organize our efforts around product categories and are developing category management expertise in our sales team.

Another major factor is, of course, is the cost associated with the investment and branding initiative for the Vivitas, Herbon and Quest product lines. The third quarter results include $1.5 million related to listing fees and marketing costs, discounting to retailers to move products with old packaging on shelf, and rework costs associated with product return from distributors and retailers. Year-to-date results include $ 2.7 million related to these costs. The product launches continue to be exceptionally well received by retailers, and the Vivitas and Herbon online campaigns and the Quest TV campaigns are creating momentum with consumers. I would encourage everyone to visit the www,GetyourHerbon.ca and www.OurLifeNaturally.com websites to get a first hand look at some of the creative features of these campaigns.

We continue to believe that the relaunches and the branding investment are the right things to do, and that we will see strong benefits coming out of this year. The brands were in need of revitalization, and we believe we would had not served very well through the tough economic times had we not invested in them. Unfortunately the impact of the poor economy and our sales overall, and issues with some of our distributed brands as well as the costs I described earlier, have all combined to create a less than positive result in 2009. Although progress has not been as fast as we would have liked in all areas, we are confident that the SunOpta distribution group is moving in the right direction. The recent rise in the Canadian dollars should also improve our product costs, and provide an opportunity to both lower prices to customers to spur demand, and improve our profit margins.

On a final note, we are making good progress in all the divisions with our process to excellence lean enterprise program. A culture of continuous improvement is beginning to take hold across the Company, and we are achieving significant costs in working capital reductions. We are also investing in training for our sales teams in category management skills, and believe that excellence in this area is the key to success in many of our divisions. We remain confident that our core food operations are well positioned as we continue to restructure and rationalize their operations, and as we realize improved margins through our continuous improvement programs, we remain confident that we will take full advantage of the trends towards health and wellness, and generate superior concerns for our shareholders. Steve?

Thanks, Tony. In closing, the last 18 months have certainly been a challenging time for our industry, perhaps some of the most difficult times in memory. Having said that, it has certainly been a time for our organization to invest in our people, in processes, to focus on cost control, productivity improvements, improved asset utilization, improved use of working capital and reduction of debt. All keys to our future success. We were implementing process excellence through people, and continuous improvement process throughout the organization and these efforts continue. We have implemented Blue Ocean strategies in an effort to grow our markets and broaden the applications for our products and services.

We continue to reduce our use of working capital and debt through improved and rational working capital practices. We have renegotiated our syndicated banking facilities, resulting in increased long-term flexibility and lower interest rates and this positions us well for the future. Although we have made improvements, we believe there is still much that can be done, providing continued improvements to improve our profitability. The tough economic conditions we have experienced are expected to gradually improve over time, and we will be well positioned as this happens. On that note, we will finish off and turn the call over for questions Thank you..

(Operator Instructions) Our first question is from Chris Kruger. Go ahead please.

Hi, good morning, guys.

Morning, Chris

Can you talk a little bit more about facilities that may be closed and consolidated, and if there is potential for more of that to occur in the next couple of months.

Sure. Over the course of this year we have closed a number of facilities, all focused on streamlining costs and improving our profitability. So we have dealt with a fruit operation earlier this year in Salinas, California. We closed a trading office in the fruit business in North America. We have closed some offices in Europe as well that we were able to streamline. And then this quarter, of course, we were able to consolidate the Afton,Wyoming facility into Modesto. And then take down for the final time the Bertha, Minnesota facility, the drying facility. So all of those operations have been consolidated into other existing facilities, and it is an ongoing process, Chris.

I couldn't today tell you that the specifics of what others would be. We are continuing to work really, really hard on operations. Obviously on the fruit side we are continuing to really, really focus in that area. So when the opportunities present themselves, we are certainly going to continue to streamline. The goal of these is always to improve our facility utilization, improve our costs, and improve our delivery of services to our end customers. So Tony and his team on the fruit side, are working around the clock on a lot of these initiatives. And I would think it is reasonable to assume there should be more of these opportunities as we go forward and we will them as we can, because its better for our cost.

In your distribution business, believe I have heard in the past that some new IT tracking systems have been installed in the western region, and I heard there is talk that that is coming in the eastern region. Can you talk a little bit about that and what that could mean?

We are in the final stages of converting the Ontario distribution operations to an IT system called Retail ICS. It is specific to the distribution business. We have had good results with it in our western operations. Basically perfected the use there, and are sort of getting ready to take it into Ontario, and eventually into the other warehouse operations. I assume that is what you were referring to? We expect to do that by the end of the year.

By the end of 2009?

Yes, and then Ontario and then the other operations next year.

Okay.

That will be the only platform other than the Oracle platform at the by of next year in the business pretty much. So we have consolidated and streamlined all of that.

You talked a little bit on the call about other -- I think aseptic product categories you are looking into.? Can you give us what you are looking into there beyond the soy milk.

We have current opportunities -- that is as much as we can say -- in the soup area. And that's why we are installing that filler equipment out in Alexandria. That is the most significant one. And we have again, current opportunities with a couple of major retailers on the soy line, and a number of projects that are very eminent. And a few others that look good but a couple months away.

Last, just across the business, what are the concerns maybe related to deflation? Commodities made a huge run up last year and have fallen off. Just wondering where you are there? And how much of an affect that have on the grains and foods in the most recent quarter?

The impact on grains and foods, in terms of soy and in-shell sunflower raw are all very, very positive. The other areas that I mentioned continue to be stressed. The oil one is probably the one that will take a little bit longer to come out of this. We expect to operate it at about break even. The other ones I don't feel today will have much of an impact on our operations.

I would agree with you.

That's all I got. Thank you.

Our next question from Bob Gibson. Go ahead please.

Good morning. Okay. I just went on that website get your Herbon and checked out the rock hoppers.

Yes.

What sort of stores are you in right now? I haven't seen them.

They are in -- pretty good distribution. I can't -- I'm sitting here -- I'm drawing a --

Hoppers.

I'm having a bit of a senior moment. You will see them across the board. They are probably going into store as we speak now. The distribution piece now, I'm surprised there isn't a reference on that website. I can certainly get back to you on specifics.

Bob, I was in my (multiple speakers) on Sunday and they are now in there.

They are, eh? Excellent.

Great product

And then further on the distribution business, can you give me any color as to how much FX hurt that group?

Year-to-date, it certainly hurt the group towards the end of last year. And as we started this year, when the dollar sort of went the other way, and now the Canadian dollar is coming back, we expect to recoup that. It takes a couple of months, obviously for the impact to hit our inventories. It is really as we replace the US purchase product that we get the lower cost kick in. But I would say this year probably relatively neutral, and the first quarter would have been the biggest impact, and going forward, we would expect it to be a positive.

And the stuff you buy in Europe, is that priced in Euros or US dollars or what is the translation there?

It is all over the map. In the European operations, there is a fair amount of their business that is done in Euro, but a lot of it is purchased in the US. But generally in US, the US dollar, being at a lower value helps us for the most part.

Can you -- I might have missed it, but can you give me any color as to what this new credit facility is going to do to rates, like order of magnitude.

It is Eric. What we have got is the two main facilities in there, the 80 million US and 20 million Canadian that replaced the previous operating lines, and our two acquisition facilities we had. That has been combined up in to there. The reductions will take us down about 2%, 2.5% from where we are currently across the board from there. Of course, we have stand by charges on those, but we had those in the past also that will vary somewhere between zero to three quarters of a percent depending on how much GAAP we have. As of right now with our -- facility sitting at about $100 million, we have about $45 million for the food group.

Capacity. The net benefit is about 2%.

Yes, 2.5%.

And the $700,000 Purity Life writedown and stuff, is that part of the $1.5 million relaunch and revitalization, or is that separate?

It is separate. We have to take inventories down, we are incurring some of those costs.

We haven't included those in the adjusting earnings.

They are excluding.

I guess, one sort of thing is the goodwill write down, what prompted that? Can you give me color?

There is just a series of tests that you go through now to verify goodwill on the balance sheet, Bob and there is a number of tests. But in simple terms,You take a look at the discounted cash flow into the future of a number of different operations versus the asset value you have. And they are given the -- given the economic downturn, a lot of the projections needed to be dramatically tempered. And given that there was goodwill in certain of the operation that is need to be written down. And it was just in minerals, but needed to be written down. And its pretty common in most of the businesses that are in that particular sector. It is really hard even though you would like to, project what the steel industry, it is around about 30% of historical rates. It is pretty hard to put projections out there, to suggest it will return to a hundred percent over a short period of time. So it create a lot of stress on those calculations, and it is prudent to take those write downs.

Great, thanks guys.

Oh, Tony wanted to say something.

The curiosity on that one is that, as the Opta Minerals sort of returns to profitability, where all there things were, that's the time where we write off good will, but thats the accounting rules.

That's the way accounting works.

Our next question is from Ed Aaron. Go ahead please.

Good morning. I actually wanted to follow-up on the earlier question about some of the different restructuring programs and your outlook on that. Your business has a lot of moving parts, so it is hard to conceptualize -- number one, what these projects will mean for your numbers. And number 2, how long they might be -- persist over time. I think you have -- if I look at your 10-K somewhere in the neighborhood of 50 different properties listed. As we are thinking about sort of differences between GAAP earnings, and adjusted earnings over the next couple of years, I'm just trying to get a forward look there to understand how long we might see that GAAP.

All of us aren't too pleased that we have to report these adjusted earnings. And I guess a real quick answer is, we expect to continue to restructure. And certainly in the fourth quarter, there will be a little bit more. But expect very, very little of it going forward after 2010. We have got a solid plans and ideas as to what we want to do in the quarter. Haven't pulled it yet and haven't done it yet and working on a few initiatives that will help. All of these things, going forward will add millions of dollars we believe to our bottom line.

Okay. Thanks. And then, you had some nice results from grains and foods and ingredients this quarter. So it seems like operationally you have these divisions where they need to be. I'm trying to understand a little bit better, what has caused the operations in those divisions to improve faster than the others? Is it entirely a function of demand trends being better? Or is the pace of operational improvement in those businesses faster than the other divisions? If so, what causes the other divisions -- what causes them to lag and what causes them to catch up?

I say that the grains and foods just continue strong performance from prior year. They have been a consistent performer for quite a while. The ingredients division, it is a combination of factors. Most of it is sustainable. We believe it is pretty much majority related to process improvements, cost reductions, a lot of the impacts of the overall programs we have spoken about.

The other is that there have been major progress in other divisions. The healthy fruit snack and process fruit operations, compared to last year there has been a major turn around in those two. Unfortunately, as we have really worked through the issues in the frozen, that's hidden for a quarter or two, but you will continue to see those. I think those are on good footing. The trading operation has rebounded nicely. The European trading operation rebounded nicely. And there is a lot of it is caused by market improvement. But there has been a change in improvement in the way we manage the business, how closely we follow contracts and margins, attention to detail on inventory. All that is contributed. There has been improvement in a lot of areas. There is still a couple we are working through, and we are confident we will get there real soon.

And lastly, just on the factory in Colorado, if I heard your prepared remarks correctly, it sounded like maybe maybe the near term anyway that the demand isn't going to be as good as what you might have expected. It concerns me a little bit to see you adding capacity in an area where the demand isn't materializing like you thought, just from a return on capital standpoint. It seems like a bit of a risk there. Can you maybe give us a little more clarity on what is causing that short-term demand pressure, and why it is entirely a short-term issue?

First off, demand is -- we were having all of this product processed by third parties. So establishing our own operation became very important for us in this industry, given our ability to given to hold onto a number of people doing coldpack for us. The market has been pretty heavily flooded with a lot of stellar pressed and non GMO oils. Not on the organic side so much. The demand is good on the organic side, it's more just the nonGMO and stellar pressed. That was further complicated by cost -- raw input costs. We still believe that long term, as we move to healthier food products we have to move to healthier oil as well. It is consistent with some of the economic or shifts we have seen in these economic times. We are certainly comfortable long-term.

I think just to put it in perspective, the expectations that we are going to break even in those operations for a few months, rather than start off out of the starting gate with solid profits, it's not be a drain. I guess that's one point I would like to make. Longer term as Steve mentioned more and more as people understand the differences between the alternative hexing extraction and all that means, and the unnaturalness of that process, versus take ago product and squeezing the oil out of it, we think is good potential here. Unfortunately we are coming into a market at a time where commodity prices are not great, but that is not expected to last long-term.

Thank you.

Thank you, Ed.

Our next question is from Scott Van Winkle. Go ahead please.

Hi, I just got a quick question. I think Tony talked about a culture of continuous improvement in the organization. I was just wondering if you could expand on that? Have you changed compensation for divisional managers and things of that nature? Now in an environment with a lack of organic growth for organic, are margins and returns in invested capital driving everyone's compensation or how do you make sure that culture stays that way?

We definitely made changes to our bonus plans to focus them predominantly on the return on net assets. That was a key change that we made last year and is certainly helping. The way I described the process, we have a Company wide infrastructure that we are creating, infrastructure without additional costs. We got a steering committee leading up this process with representatives from across the various divisions. We have a continuous improvement champion at each one of our locations. We have ongoing training sessions, all sorts of projects that are started implementing, a daily accountability process across all operations.

This thing is a very formal process. The majority of the investment is time and training. And it is really getting people or providing them a forum for that good idea, those good ideas to come out and for them to focus on improving operations. That is becoming a part of everybody's job. There is a long formal process, internal consortium of those groups. We are participating in external consortiums with other companies we don't compete with. This lean is really a movement, and there are very few companies in the end that get it right and make it sustainable. We are confident we will be one of the few that do it. It is off to a good start, but things this never ends. I don't know if I answered your question, it is a formal process within the Company.

It certainly sounds like kind of the management level at each division pushing down. Does that also include things like integrating a sales force between two separate operating segments, that call on the same customers? Or is it more on the procurement and process side or we haven't gotten there yet?

It is across every single part, function of the business through finance through sales through QA to production to add energies. We have ongoing projects in all of those areas. On the sales side, the consolidation, we have a strong process internally, where the senior sales folks get together monthly on a call, talk about opportunities, talk about how to leverage contacts taking common approaches to the big customers. We have all those things in play as well. It is much, much more than just production.

Last question, what are the numbers for global staffing or employment at SunOpta, maybe relative to the beginning of the year, a year ago, what has been the trend or the absolute change in the number of employees?

We have reduced 230 positions, 60 salaried and 170 hourly, approximately, they bounce around. I would say our compliment at this stage of the game is about 2250.

Thank you, guys.

Take care, Scott.

Our next question is from the Keith Howlett. Go ahead please.

On the $10 million annual cost savings, how much would you have seen built into the numbers this year, as opposed to the go forward run rate of $10 million?

We have got a good third of it sort of in. Another third that is definitely in sight, and we build on that and we think we cover the third and the last quarter. A lot of these things -- remember that the program and the initiative really started earlier in year. It takes a while to get off the ground and it is cumulative. So is by the end of the year, call it half maybe.

In the P&L.

Yes. You will see a lot of it is in -- if you look at the ingredients division and the healthy fruit snacks operations, I'd say that is where the bulk of the solid realized stuff is right now and there is pieces everywhere but those two account for the largest part of the realized ones so far.

With obviously the program of continuous improvement, you will keep looking, but do you think you would have a target of that scale for 2010 or more incremental on top of the $10 million?

It will be incremental on top of the 10 million and the values we are trying to instill in everyone again without driving people crazy and making -- it is never enough. You lock it in -- you lock in a staff -- [ lost audio ] We will try to set a minimum target for folks but we haven't discussed that yet.

You cut out for a little bit there but I think I got the gist of the message. In terms of the stock keeping rationalization within Canadian distribution, and I guess talking more broadly than the Purity Life inventory changes, where are you in that process?

We are -- it is ongoing. But I can tell you for example, on the Purity Life SKUs, we have reduced their SKU base by over a third. Gone from 6000 to 4000 the last little while, and with very, very little impact on sales going forward. This is the 80/20 rule at the extreme. Doing similar types of numbers within distribution, we spoke last quarter about a change in philosophy, if you will, a change in strategy to focus attention on fewer items, and the bigger players within a category, and to go through the categories and eliminate the third, fourth, fifth player in it. That's the initiative that we are doing, the type of thing we are doing.

And then I know that berry division, I have had a difficult time forecasting that. I don't mean to be impolite here, we had the sort of JAMBA juice recall, and then didn't need to recall, and then there was a charge there and inventory liquidation issues. We hired an expert I think over a year ago to try to get the operation going. I guess I'm wondering how critical is the frozen berry business to Your overall integrated organic and natural food strategy? And when do you -- not that I suggest persistence isn't a good thing, when do you fold the tent, and perhaps exit that business?

We understand the question.

It is one that obviously we evaluate. The feeling here is that frozen fruit, fruit is still an item that has appeal. In regards to our own situation, the issues from a couple years ago, obviously had an ongoing impact, and we worked through them. On the sales end, what I'm going to say, is the trend away from the traditional retailers, the club stores, maybe should have been on it earlier. We are going to get on it, and we are confident and think we can make in roads. When you look at the operations this year, there has been a significant improvement. We are confident when we are finished that within this year, we will be a lot better. It is one item I would really like to stop talking about, or to have to talk about next year. We are confident we are on pace. But -- I guess in the unlikely event, it isn't, it is something that the group here will evaluate whether we want to stay in this.

Thanks, very much.

Thanks a lot, Keith.

Our next question is from Kim Johnson.

Good morning. Just wondering if you can comment a little bit on margins in the food group in particular. I know you can't really give guidance. In the quarter, are you seeing margins kind of stay the same or any improvement?

In general the economic conditions are improving so certainly where we have had issues in the organic area, we are seeing some uplift in that, the other ones you start to take it one by one. We spoke about distribution, the currency and the initiatives, you should see improvement in that. We expect to see improvement in that. The Purity Life operations certainly going into next year, the impact of the branding spend, and the uplift in branded sales should provide a lift to margins. And distribution in both Purity and just focusing on fewer SKUs should help as well. The other businesses, grains and food, we continue to expect it to perform well. Some margin pressure depending on how, I guess, poor the crop ends up being. It is not going to be a huge issue but don't expect it to be a positive in that case.

Do you think you can maintain the current target you have in those, ingredients in the grains and foods.

It remains a reasonable target. On the ingredient side, no doubt this last quarter, yeah, we continue to have some spectacular months. There are good things happening there. Most of it is sustainable. We expect some of the costs to tick back up. So those might come off a little. But we still expect to be well ahead of what we established as targets. Overall, I would say we are fairly positive that margins will improve short-term.

Absolutely.

Okay, thats it for me.

Thanks, Kim. I apologize we are running over the hour that we set ahead. We will try to take a couple more questions here.

Our next question is from Ron Pollet .

Good morning. Can you provide an update on the CMEC feasibility study?

Yes, it's proceeding. We are working at the pilot scale at this stage of the game at our pilot facility, in both Waterdown and here in Roseville. The work continues, and I say we are a few months behind, so it is probably in the first quarter of next year where we get to the next go/no go stage.

Anything new on the Abengoa arbitration?

The Abengoa arbitration? Yes. The second week of the arbitration took place the week of October 19th. So all the arbitration is now completed, and the arbitrator has committed to come back to a final decision by no later than February 1st.

In BioProcess not too long ago, it was said that you guys were going to stop talk being China, because of all the delays in closing contracts. You brought it up again today, does this mean there is reason for renewed optimism.

Sure, yes. We are spending time there, it's fair to say we are spending time on it. We are still working to move a few projects along. Although, we are not saying much about it because we have said it before. There is good interest in China.

Anything new in the large oil company partnership possibilities?

The large oil company possibilities, there are a number of large oil companies we are having discussions with that are obviously looking to capitalize to the move on cellulosic ethanol. They need to be involved cellulosic ethanol. We are having discussions with a number of those players as potential partners, or also as suppliers of technology and equipment.

Let's say the CMEC feasibility study gives you a green light, can you discuss the current capital market? And how long you think it could be before the lending atmosphere makes it possible to give funding for a project?

Any project like that will require government funding. So there are a number of other DOE programs that are available both at the local state and at the federal level. Any project that moves forward has to be a combination of both private money and government money -- that you can you have to have some government money. That's what we are seeing in most of the projects that are moving anywhere.

Is that process mature or does that process start with the government once the feasibility study is done?

No, there are various steps. You don't wait until the feasibility study is done.

Last question, you haven't provided revenue and earnings guidance in some time. Is this a permanent policy, or will guidance be provided in the future and if so, what will it take to provide guidance again?

What we indicated with this year, as being as economically volatile as it was, combined with our focus on really streamlining and rationalizing and implementing processes across the Company, we didn't feel it was appropriate. As the economy stabilizes, and we are clear on where the external world is going and we continue our process internally, I'm quite sure the day will come where we provide guidance again for sure. Maybe we have time for one more question.

Our next question from [Ronald Emimen] Go ahead please..

Good morning, gentlemen. Steve, this is directed primarily to you. Recently and currently, there has been a strong emphasis on your current bottom line, strong belt tightening. With that thought in the background, I would like to talk about your thoughts on any expansion. With that in mind, what are your plans for any new plants, new lines, new products, acquisitions in the hopper, what is your attitude toward future acquisitions and the time factor on any and all of the above.

Well, certainly Ron we are focused internally and there is a number of interesting internal operating facilities. The Modesto plant is up and running. We have a very good start to that facility, and to be at a break even position with a nice stack of business is great. There are really solid opportunities to continue to grow in that business. We see internal growth opportunities across all of the business units, and so we are continuing to focus on those. As we stabilize and get comfortable, and we are clearly getting very close to that. And as our financial position continues to improve, the day will come where acquisitions are the right things for us to do. I don't see us in the acquisition game in the short-term, because we still have work to do internally in improving our margins. But it will come and we will be well positioned at that time to do so. But I don't see us kind of turning our attention to that in a big way like we used to in the past for -- it is just not time yet. We are not there. There are a number of good internal growth opportunities across the organization.

When you speak of internal growth, does it have anything to do with taking on new lines, or anything that you are not currently involved in?

For example, we just announced about a week or so ago, Ron, that we have entered into a agreement with Best Cooking Pulses in Manitoba where they are going to produce pea fiber for us, and we're going to market that and take that across to our customer base. Growing our business without investing in our own assets, and partnering with people to leverage with what they have.

There are a number of opportunities like -- a lot of opportunities where we have programs, projects in the pipeline to invest. For example, in fibers, we have a couple very specific programs to increase our capacity at two of our facilities. And likely trigger one of them if the trend continues to be as strong as we expect -- and we have another project in the process food line. They have had demonstrating a permanent capability. That is in the design stage.

What concerns me, it sounds almost opposing your belt tightening situation, whenever you take on anything new, you are incurring some unexpected costs, and some very well projected costs that work opposite having the better bottom line. I needed some clarification, and I'm not sure at this point after hearing your response that I'm confident of which way you are going.

Well --

What I'm hearing is you might be going both ways. You are trying to getting a better bottom line, but at the same time you are not opposed to incurring start up costs for new lines or products --

I can assure you that if we are going to add exalt at a fiber facility, the incremental capacity will be immensely profitable. So they are one in the same. I don't think there should be confusion. We will take on these new opportunities and take on new lines and new product expansions based on the fact that -- adding to an already rationalized cost base. It will be immensely profitable. I can tell you for example, if you go to any type of facility, and you add more capacity because you are approaching capacity, and if you can fill that capacity based on what you believe, that is all good.

The only thing I would add is obviously the emphasis this past year has been to stabilize our operations, and really create a model where you can get to grow again. Fix what is there, and prove what is there, and then use it as a base to grow. And that will generate a certain amount of shareholder value, no doubt about that. Once you have that base, I mean the way to really grow and get people to invest in the Company and generate the returns we have to get, you have to expand. We can't cut our way to record profits. You cut, establish a base and then you go from there. As Steve was mentioning, we are approaching that point, but still focused internally, but we are going to cross that point, where we are going to use the base to grow and invest, and go and buy other companies. And that is going to come soon.

Well said. I appreciate your response.

Take care. That's it. I want to thank everyone for joining the call today, and appreciate all of your support as always, feel free to call, should you have any further questions. Thanks very much, and have a good day