Sunopta Inc (STKL) 2009 Q4 法說會逐字稿

Welcome to the SunOpta fourth quarter and year end 2009 conference call. As a reminder, all lines are on listen-only mode and there will be time for Q&A at the end of the call. (Operator Instructions) I would now like to turn the call over to Mr. Steve Bromley, President and CEO. Go ahead, please.

Thank you very much and good morning, everyone. Welcome to our 2009 fourth quarter and year end shareholder conference call. I'm joined on the call 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 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, rationalization and efficiency initiatives, reductions in working capital, expected reductions in total debt. and expansion of operations and proposed new facilities.

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 in such forward-looking material. 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Such information can be found in the sections in these reports titled forward-looking statements and risk factors. We plan to file our 10-K for the year ended December 31, 2009 no later than the close of business today, March 10.

Please note that except where specifically identified our financial results are reported in U.S. dollars and in accordance with the U.S. GAAP. I want to mention at this time that we're targeting to keep this call to approximately one hour. During this call, I will provide a corporate overview, Eric will provide current details on the Company's financial status, and Tony will provide details related to our core food operations. We will follow our presentation with a question-and-answer period.

As we review the fourth quarter and year end results, I want to reiterate our Company's ongoing commitment to improving our operating margins, return on net assets employed, all the while continuing to strengthen our balance sheet. As you will see over the course of this call, we have made good progress in improving margins in a number of our core operating businesses and have continued to optimize our working capital and reduce debt.

In summary, over the course of the year we have focused on operating margin improvement throughout our operations, all in support of our three-year stated objective of realizing 8% operating margins. The impact of these efforts is most evident in our Ingredients Group which are now operating above target margin levels and in the progress which is now becoming evident in many of the operating groups.

Numerous operations have been rationalized, underperforming assets closed or disposed, unprofitable SKUs rationalized and processes reengineered. The costs of many of these initiatives are reflected in our 2009 results. There is still more to do. But the bulk of the heavy lifting is behind us and we feel we are clearly on the right track.

We have deleveraged our balance sheet. Over the course of this year, we generated over -- over the course of 2009, we generated $44.9 million in cash from operating activities including cash generated from working capital of $27.3 million which was driven primarily by reduced inventories.

As a result, we reduced total debt by $34.4 million, partially offset by the impact of foreign exchange, represented a reduction of approximately 16% versus December 2008, and a reduction of 34% versus June 2008.

We completed the conversion of our syndicated banking facilities to a new three-year asset backed lending arrangement providing the organization with long-term financial stability, reduced costs of borrowing, increased flexibility, and the financial resources to support long-term business objectives with available debt capacity and excess of $60 million, which Eric will discuss in a moment.

We are developing a continuous improvement culture across our organization known internally as Process Excellence Through People, or PEP. This has involved extensive training and process reengineering and the benefits are now being realized.

We set out with a goal of generating $10 million in annualized operating improvements from this initiative and to date we have realized a run rate of approximately $7.5 million in cost improvements with further projects and in process with projected savings in excess of $5 million. This is progress.

PEP is an ongoing process and we expect further improvements will continue to be generated as continuous improvement is a journey that never ends. We will always be striving to do better. We used Blue Ocean strategic analysis within our food operating groups with the intent of identifying areas of opportunity and positioning these businesses for long-term growth.

The process has resulted in new go-to-market strategies, new product offerings, and new and differentiated approaches to business, all important for long-term success. The successful launch in the fall of 2009 of SunOpta MultiFiber Blends and SunOpta Soy Fiber Blends by the Ingredients Group are good examples of new products that resulted directly from the Blue Ocean strategy process.

Subject to applicable court approval and our right to terminate in certain events, we have tentatively settled outstanding class action lawsuits resulting from the 2007 restatement of our quarterly financial results within our D&O insurance limits. Final court approval dates in both Canada and the United States are scheduled for May 2010.

We successfully commissioned our new soy and alternative beverage processing and packaging operation in Modesto, California and an organic sesame operation in Ethiopia and Opta Minerals successfully commissioned a new abrasives operation in Texas and will complete a second operation in Florida in the second quarter.

We continued our efforts to improve our internal operating, reporting and control systems via continued implementation of new technologies and enhanced control processes. As a result, our public accountants have expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting for the second year in a row.

We commenced an internal process to focus our efforts on our core vertically integrated natural and organic food sourcing and manufacturing platforms, assessing options to expand core operations while exiting non-core businesses. We expect to realize substantial progress in this regard over the next 12 months.

We are pleased with the progress we have made in 2009, and are confident that these efforts will show themselves via a profitable 2010 and beyond. Our work will continue as there are still opportunities to realize targeted results in certain of our operating segments including further reductions in our working capital.

A solid and stable operating platform is rounding into shape and when combined with the long-term demand for healthy food alternatives we are truly excited as we look forward. For the fourth quarter of 2009, the Company realized revenues of $245.5 million versus revenues of $245 million for the fourth quarter of 2008.

Adjusted earnings for the fourth quarter of 2009 were $3.9 million or $0.06 per diluted common share versus an adjusted loss in the comparable period in 2008 of $1.1 million or a loss of $0.02 per diluted common share. On a GAAP basis, the Company realized a loss of $2.2 million or $0.03 per diluted common share for the quarter versus a loss of $17 million or $0.27 per diluted common share for the fourth quarter of 2008.

2009 fourth quarter results including non-cash write down of tax assets of approximately $900,000 and additional pre-tax costs of approximately $7.6 million related to a number of restructuring and related costs including product and facility rationalization efforts, legal and professional costs, costs related to completion of a number of ongoing legal matters and banking amendments, a non-cash goodwill impairment charge in the Fruit Group and costs related to the ongoing revitalization and relaunch of a number of Company-owned natural health products.

Results for the fourth quarter of 2009 reflect significant improvement in operating performance versus the fourth quarter of 2008 and continued operating performance improvement versus the third quarter of 2009. Gross margins increased to 15.9% for the quarter versus 11.7% in the fourth quarter of 2008.

For the fourth quarter of 2009, operating earnings within SunOpta Foods increased to $4.4 million versus $2 million in the same period in 2008. Opta Minerals realized operating earnings of $700,000 in the fourth quarter of 2009 versus a loss of $2.4 million in the fourth quarter of 2008.

For fiscal 2009, the Company realized revenues of $989.1 million versus fiscal 2008 revenues of $1.055 million. For 2009, the Company reported a loss on a GAAP basis of $6.8 million or $0.10 per diluted common share versus a loss of $10.9 million or $0.17 per diluted common share in fiscal 2008.

Adjusted earnings for fiscal 2009 were $12.9 million or $0.20 per diluted common share versus adjusted earnings in fiscal 2008 of $13.3 million or $0.21 per diluted common share. Adjusted earnings excluding the impact of foreign exchange gains for fiscal 2009 were $12.2 million or $0.19 per diluted common share versus $10.2 million or $0.16 per diluted common share in fiscal 2008.

Fiscal 2009 results include the impact of a non-cash write down of tax assets of $900,000 and the impact of additional pre-tax costs of approximately $24.8 million including net non-cash charges related to impairments of goodwill, plus ongoing product and facility rationalization costs related to the revitalization of a number of our natural health products brands and additional legal and professional fees.

We have reported adjusted earnings and adjusted earnings per share as we believe this provides insight into the ongoing results from the Company's operations. It should be noted that these measures do not have any standardized meaning prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures presented by other companies.

These non-GAAP financial measures should be considered in the context of our GAAP results and a full reconciliation of these amounts was provided with our press release that we issued last night and is available on our website at www.SunOpta.com.

At December 31, 2009, the Company's balance sheet reflects a current working capital ratio of 1.37 to 1, long-term debt to equity ratio of .37 to 1 and total debt to equity ratio of .65 to 1. At December 31, 2009 the Company has total assets of $551.3 million and a net book value of $3.58 per share.

We believe we are making solid progress in improving our operations and strengthening our financial position and have confidence in our 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, the increasing awareness of the relationship between foods consumed and quality of life, the staggering increase in long-term health costs, and the demand for sustainable and environmentally responsible business practices.

When combined with our ongoing continuous improvement focus, we believe this all bodes real well for our future. With that, I will turn the call over to Eric Davis, our Chief Financial Officer. Eric will provide details on the Company's current financial position, some balance sheet items and our current debt status. Eric?

Thanks, Steve, and good morning. As a result of our commitment to working capital reduction and cash generation, the Company realized another quarter of positive cash flow. This is the Company's third consecutive quarter where we have realized positive cash from operating activities.

Operating activities provided $18.7 million in cash in the quarter compared to $20.9 million in the fourth quarter of 2008. More importantly, as Steve has just mentioned, on a year-to-date basis the Company generated $44.9 million in cash from operations compared to $33.7 million in the 12 months ended December 2008.

During the quarter, cash generated from our improved working capital position totaled $16.5 million and for the 12 months ended December 2009 cash generated from working capital totaled $27.3 million versus $13.4 million for 2008. During the quarter, inventories held steady at $178.1 million while accounts receivable improved to $94.2 million compared to $105.1 million at the end of the third quarter.

When compared with December 2008, inventories have declined $22.6 million from $200.7 million and accounts receivable have declined by $0.9 million from $95.1 million. Days sales outstanding remains strong at 35.2 days and inventory turns improved to 4.6 turns per year. Controllable working capital consisting of accounts receivable, inventory and prepaid expenses less accounts payable in accrued liabilities and other current liabilities was $175.9 million versus $202.6 million at the end of December 2008, a decrease of approximately 13%.

Investing activities in the fourth quarter of 2009 excluding short-term investments utilized $1.1 million in cash, the same as fourth quarter 2008. This cash use was primarily related to capital expenditures and deferred purchase considerations offset by proceeds from the sale of fixed assets.

Capital expenditures were $13.2 million during 2009, compared to $9.6 million in 2008. Spending in 2009 was primarily related to Modesto, California's septic soya milk processing facility and Colorado's Sun Oil Partners vegetable oil refining project. Additional expenditures during the year included projects intended to improve our operating performance and reduce our environmental footprint.

Financing activities in the quarter included net debt repayments of $15.7 million compared to $23.6 million in the fourth quarter of 2008, plus $2.2 million paid in financing fees offset by $0.2 million from other financing activities due primarily to the proceeds of the issuance of common stock via the employee stock purchase program.

As result of these activities at the end of 2009, we had total debt and operating lines of $150.7 million representing a decrease of $15.7 million from the third quarter of 2009 and a decrease of $28 million after the impact of foreign exchange movements compared to 2008.

Our primary facility including operating and term debt is held by a banking syndicate and services our core food operations excluding Europe and totaled $89.1 million at the end of 2009 versus $100.3 million at the end of the third quarter. The amended and restated credit agreement with our syndicate of lenders provides for two asset-based revolving credit facilities of up to $80 million of U.S. funds and $20 million in Canadian funds subject to [borrowing] base availability.

The facility matures October 2012 and provides us with flexibility and lower overall interest rates. In addition, the Company has long-term debt of $45 million maturing in December of 2010. The Company has a number of options available for placement of this debt. As of the end of 2009, we had $53.3 million in additional borrowing available on this facility and we are in compliance with all banking covenants.

Our European food operations are financed via an asset-backed operating line with total outstanding of $16 million and approximately $6.7 million in additional borrowing availability. Opta Minerals has financed via an operating and long-term facilities of $24.5 million with availability of $9.8 million. Both of these facilities are stand alone and have no recourse to SunOpta.

In summary, we have made great progress over the past year in strengthening our balance sheet. Our ongoing focus on reducing working capital has resulted in strong cash flows and reduced debt and when combined with improving operating results leaves the Company well positioned financially. I will now turn it over to Steve.

Thanks, Eric. Our non-core operations, Opta Minerals and SunOpta BioProcess, which represent approximately 6% of annual revenues are both strategically important businesses within the sectors where they compete. For the quarter ended December 31, 2009, Opta Minerals achieved operating earnings of $700,000 versus an operating loss of $2.4 million in 2008.

The fourth quarter represents the second quarter of positive earnings for Opta Minerals after three successive quarters of negative results as the Company rationalized its cost base and adjusted to the significant decline in demand for products especially in the steel and foundry industries. The improved results over the last two quarters have been driven primarily by increased activity levels in the steel sector which are still well below historical levels, combined with the positive effect of the efforts focused on reducing costs across the organization.

Management of Opta Minerals believe that activity levels in the steel sector will continue to grow over time as global economic activity continues to improve. While expectations were high for a strong resurgence in the abrasives and industrial minerals component of the business due to government infrastructure spending, growth has been modest in that section as government spending has been slower than was expected, although there are some indications that this may improve during the second and third quarters of 2010.

During the economic downturn, Opta Minerals focused on streamlining operations and generating positive cash flow and in doing so, reduced annualized operating costs by approximately $6 million and at the same time generated over $10 million in cash from operations. They have recently commissioned a new abrasives operation in Freeport, Texas to strong demand and that business continues to grow.

A second new abrasive operation in the Tampa, Florida area is also in development and is expected to be commissioned in the second quarter of 2010. We believe that Opta Minerals is well positioned as economic growth returns to positive territory, but they will benefit from their reengineered cost base, product offering, and geographic operating platform.

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 remains small, the renewable fuel standard in the U.S. calls for 16 billion gallons of cellulosic biofuel by 2022, a great opportunity for SBI's expertise. SBI continues in its efforts to further refine its technologies and applications and has completed the expansion of a new pretreatment pilot facility and continues its joint venture initiatives focused on the development of commercial scale production capabilities.

In January, SBI announced that negotiations with a major supplier of ethanol in China were completed and resulted in a $6.725 million contract for the supply of proprietary fiber preparation and pretreatment technology for use in the production of cellulosic ethanol. The client is one of the largest operators in the corn biochemical processing and new energy sectors in China.

Our equipment will be installed in a planned cellulosic ethanol demonstration plant scheduled for completion in late 2010, located adjacent to an existing starch-to-ethanol facility. SBI believes the development of cellulosic ethanol is now taking a higher profile in China as the central government is discouraging further development of starch-to-ethanol plants due to environmental and food supply issues.

Also in January, SBI was awarded $5.5 million Canadian in funding from Sustainable Development Technology Canada to assist SBI and its partner, Xylitol Canada, to design build and operate an integrated cellulosic ethanol plant and co-located xylitol production facility. The fabrication of valuable co-products such as xylitol is expected to allow biofuel producers to increase their profitability and competitiveness.

Operation of the facility is expected to commence in late 2010, early 2011, with process validation by the end of 2011. In addition, SBI has developed 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 and at an attractive price point.

As part of this development, SBI was awarded a grant from the Canadian government of up to $800,000 Canadian to support the development and optimization of this equipment. SBI expects to complete fabrication of the first unit during the second quarter and will begin active marketing of this technology at that time.

I'd now like to turn the call over to Tony Tavares, our Chief Operating Officer, who will discuss activities in SunOpta Foods. Tony?

Thanks, Steve. Good morning, ladies and gentlemen. The fourth quarter operating income for SunOpta Foods was $4.4 million versus a prior year of $2 million. And year-to-date operating income was $20.9 million compared to $22.8 million last year.

Most operations are performing very well including record annual results at Ingredients, Healthy Fruit Snacks and processed food ingredients and a strong performances from Grains and Foods and our Sourcing and Trading operations in Europe. These strong results were partially offset by Frozen Fruit, Purity Life and our North American Organic Ingredients operations which have been slower to realize profitability improvements.

The Grains and Foods Group's fourth quarter operating income of $3.6 million is lower than last year's operating income of $4.3 million and year-to-date operating income of $18 million is also slightly behind the $18.5 million reported last year. The fourth quarter results included approximately $300,000 in start-up costs at the new Sun Oil partner's facility.

The year-to-date results include approximately $3 million of start-up costs related to the Modesto and Colorado facilities. The year-to-date results also reflect a gain of approximately $600,000 from the collection of a business interruption claim in our Sunflower operations related to 2008.

Overall the division continues to perform well despite some challenges in the quarter from delayed harvests and lower crop quality due to weather, losses from the oil business, and the loss of a refrigerated soy milk customer. Results for the soybean operations were below last year in the quarter as a result of reduced volumes through the plants created by weather related delays in harvest. Crop quality was also lower, creating inefficiencies and lower yield through the plants and is expected to remain an issue through 2010.

The project to upgrade and expand the soy handling system at the facility in Hope, Minnesota was completed in February of 2010, and the additional volume should help offset the costs associated with crop quality. The specialty vegetable oil business continued to be challenging due over supply in the market. The Colorado facility became operational in January 2010, and although the results from the joint venture are expected to be for 2010, due to continuing over supply and increased competition.

Longer term we believe the demand for expeller pressed oils will be strong due to the superior quality of the product. The sunflower operations continue to reflect strong demand with margins for in-shell partially offset by lower margins on bakery kernel.

Margins for bakery kernel improved in the fourth quarter due to lower raw material prices and the weaker dollar compared to the euro. Aseptic results were well ahead last year in the quarter and year-to-date despite the loss of a refrigerated soy milk customer on the strength of increased sales to other customers, favorable raw material costs and improved efficiencies and yields in the pants.

The new Modesto plant was profitable in the fourth quarter on the strength of stronger sales and improved yields due to new equipment installed in the quarter. The outlook for aseptic in 2010 looks positive. We have signed an agreement with a major new customer to supply a refrigerated pack of soy milk starting in May and have recently started production of aseptic packaged soups for new packaging and filler equipment at our Alexandria, Minnesota facility.

The Group's roasting operations have improved, although the business remained unprofitable for the year and in the quarter. Margins have improved as a result of increased pricing for new school-year contracts and the rationalization of smaller customers as well as processing efficiencies from increased bulk sales and implementation of efficient minimum order quantities.

In summary, we expect the Grains and Foods Group to continue to deliver solid results in 2010. The impact of crop conditions should be offset by the volume increases at the Hope facility as well as new contracts for aseptic and refrigerated products and other sales and market growth initiatives which are underway.

We also expect savings from our PEP continuous improvement program which only started to be implemented in the Grains and Foods Group later in 2009. The Ingredients Group had a record operating income in the fourth quarter of $3.1 million compared to $1.1 million last year and a record year-to-date operating income of $8.7 million compared to $3.4 million last year.

As expected, revenues grew in the fourth quarter compared to last year as a result of new contracts and increased sales due to higher demand for our fiber products. The sales approach which the Ingredients Group utilizes focuses on value added products, multiple points of contact, and the partnerships sales model which was affirmed during the Blue Ocean sessions. This sales approach continues to deliver substantial winds.

The improved earnings also reflect process efficiencies and product formulation gains resulting from the many PEP projects which the division has started. These savings are reflected in the record results in the third and fourth quarters and continue into 2010. With the additional business that we have landed over the past few months, there is a clear need to expand capacity in the Ingredients Group.

We have started work on the expansion of our Cedar Rapids, Iowa facility and expect to get the additional capacity on line in the fourth quarter. We will also be adding a bulk handling system at our Cambridge, Minnesota facility and recently completed installation of [old] hull grinding equipment at the Louisville, Kentucky plant to reduce costs and secure raw material supply.

In short, everything is pointing in the right direction for the Ingredients Group and the business is on a solid foundation. Although still early in the year, we expect the Ingredients Group to have an even stronger year in 2010.

The Food Group had a fourth quarter operating loss of $1.8 million compared to a loss in 2008 of $3.2 million. And a year-to-date loss of $4.1 million compared to a loss in 2008 of $10.2 million. The results include record earnings in the Healthy Fruit Snacks and processed food ingredient operations offset by losses in Frozen Fruit.

The current year's losses include approximately $1.8 million in the quarter and had $4.4 million year-to-date in costs related to rationalizing our inventory position and product offering as well as severance and other rationalization costs. Sales in the Frozen Food operations were well below the last year in the quarter and year-to-date as a result of a decline due to general economic conditions and migration from our traditional retail customer base with the club store channel, inventory reductions on the part of retailers, and lower sales to food service.

The lower sales also resulted in higher inventory at year end than we had planned. Although the composition has obviously improved, total Frozen Fruit inventory remains essentially unchanged from last year. The positive news is that we are optimistic that the worst is finally behind us and retail sales to our existing customer base are gaining strength in 2010.

New bagging equipment to service the club store channel was installed in January of 2010 and we have started packing product. With a more stable environment and less focus on old inventory going forward, the Frozen Fruit sales team is also able to devote more energy to expanding sales.

We are also starting to see positives from our focus on product innovation. The new Splash It Up juice puree and Green Garbanzo product lines are being extremely well received by our customers and we believe sales in the second half could be significant.

We continue to work on rationalizing the frozen food operations. We stopped fresh processing at the Buena Park, California facility in December and have now exited processing of fresh fruit in California entirely and will concentrate production in our lower cost Mexican facilities.

We have developed much better sales demand planning tools and are confident we will be able to substantially and quickly reduce our inventory levels. We are off to a great start in 2010. It has taken longer and been more expensive to reposition the frozen food business, but we believe that we have developed a business model which can deliver acceptable returns on investment.

On a much more positive note, the processed fruit ingredient operations had record sales and profit in the quarter and fiscal year. The situation is very comparable to the Ingredients Group and the results are being driven by solid gains from PEP initiatives, from increased sales and the return of focus to core competencies.

The demand for aseptic fruit products is currently outpacing our production capacity and we have started work on installing a new aseptic line at our facility in South Gate, California and have implemented a number of changes as a result of PEP projects at the facility which have resulted in better production planning and improved product handling.

In summary, the processed food ingredients operations are poised to deliver very strong results in 2010 and are on a very solid foundation longer term. As mentioned earlier, the Healthy Fruit Snacks operations delivered record results in 2009.

Revenues for the year were on par to last year as the result of higher volumes and lower selling prices and the improvement at Healthy Fruit Snacks continues to be delivered principally by improved plant operations resulting from PEP initiatives.

The focus of the Healthy Fruit Snacks operations continues to be on increasing sales. We still have capacity to almost double sales with existing equipment. The team has successfully used category management and branding techniques to increase private label sales volumes and we have begun to use these techniques in other operations to do the same.

We recently launched a private label fruit bit product and continue to work on new product ideas arising from Blue Ocean. These products will be at center of our innovation as we try to use fruit snacks as a delivery mechanism and we'll try to move gradually from a Healthy Fruit Snacks offering to a healthy portable snack line which will also include products with other ingredients.

This week we announced that we will be shutting down our fruit bar facility in Summerland, British Columbia and transferring these operations to our facility in Omak, Washington as part of our ongoing rationalization. The savings are expected to be approximately $1 million on an annualized basis.

In summary, we think that we have positioned the Healthy Fruit Snacks operations for future sales and profit growth. Despite slower demand in the category last year as result of the economy, we are having success in growing our revenues. The focus remains very much on private label for 2010 and on filling the plant.

An increase in sales from our current base will provide a tremendous lift to our bottom line and we are confident that we will continue to improve in 2010. The International Sourcing and Trading Group's European operation showed a strong performance in the quarter and year-to-date as a result of generally improved market conditions for organic products in Europe, but more importantly through a renewed focus on improving margins, inventory controls and purchasing.

We expect sales volumes and margins to remain strong across all commodities in 2010 and are optimistic that we will see improved performance compared to last year. The sesame seed hulling plant in Ethiopia owned by Selet, a joint venture with an Ethiopian company, started operations in November.

This project is a great example of how we can combine our social responsibility and sustainability objectives with sound business objectives. We expect to achieve our revenue and profit targets in 2010 and at the same time generate a tremendous amount of benefit for the communities in Ethiopia through improved margins to local farmers and funding of schools and other community services.

As expected, the Group's North American operations continue to post poor results in the quarter and year-to-date as a result of reduced demand for industrial organic ingredients in the United States and inventory rationalization efforts. Although organic markets improved in the fourth quarter the impact was offset by these costs.

Poor orange juice crops in South America and issues with organic production in Brazil have created a shortage in organic juice supplies near term. This has helped in 2010 to establish an EU market for Mexican product which we have available to us as the result of an initiative which we started three years ago to certify organic production in eastern Mexico.

As reported previously, reducing inventory is a primary focus for the International Sourcing and Trading team. Year end inventory has been cut by over 50% from a year ago. The related warehouse and other carrying charges have obviously also been a significant factor to profitability and should improve results going forward.

Effective January 2010, we have restructured the International Sourcing and Trading operations in two distinct teams to focus more clearly on specific market channels. The first team will be responsible for sales of all industrial organic ingredients and the existing North American industrial ingredient operations and related personnel and inventories are being assumed by [Chodden], our European operations team.

The second team within International Trading and Sourcing will be called Consumer Product Solutions and will focus their efforts on expanding our sales of private label products using our sourcing core competencies and supply chain strengths. The consumer products team is currently working on a number of opportunities in orange juice, quinoa, agave, coffee and cocoa in the USA and export markets.

The business model is based on providing customers with a total solution for natural and organic private label products from sourcing to delivery. We believe that the revised structure in International Sourcing and Trading will provide much sharper focus for each of the teams and produce better results.

The SunOpta Distribution Group's losses in the quarter and year-to-date were caused primarily by operating issues in Purity Life, our natural health products division, and operational issues in the Ontario food operations. The food distribution operations in western Canada and Quebec performed very well and showed improved results in the quarter year-to-date compared to last year.

The issues at Ontario food operations have necessitated substantial changes to sales and operations including the closure in February 2010 of our fresh produce operation in Ontario and the transfer of a portion of the refrigerated business for our grocery warehouse. Product spoilage continued to be an issue in the quarter and work continues on redesigning the sales demand, purchasing, inventory and sales value stream at both the Ontario and Western food operations.

We have also continued our efforts to rationalize our product offering and the food distribution results include approximately $400,000 in the quarter and $2 million year-to-date in costs associated with excess spoilage and inventory rationalization. The Blue Ocean strategy sessions for the Distribution Group in early May produced a number of key insights in their revised strategy.

The objective is to pattern the operations more in the model of the Western and Quebec distribution operations, less SKUs, more local suppliers and more focus on exclusive supply contracts. We strongly believe that this will be a winning approach and the continued strong performance in Western Canada and Quebec in spite of the economic downturn is a solid indicator that this is the right way to go.

The Purity Life natural health products business reported operating losses in the quarter and year-to-date. The Purity results in 2008 included the favorable impact from the rapid increase in the Canadian dollar that took place that year and the currency fluctuations has also explained a portion of the revenue decline in U.S. dollars.

Purity Life total revenues are down approximately 13% compared to last year in U.S. dollars, but only approximately 5% in Canadian dollars. Sales of Purity Life products to the food, drug and mass channels have been especially hard hit by the recession and the impact has been felt on both distributed and branded products.

Total Canadian dollar sales in 2009 to these channels were down 11% with almost all of the decline caused by deteriorating sales of two third party distributed brands. In contrast, total sales in Canadian dollars to the health food channel actually grew by 3% during the year.

The 2009 year-to-date results include approximately $1 million Canadian in costs associated with rationalizing the inventory and approximately $3.7 million Canadian related to the relaunch of our branded products including one-time marketing costs, the increase in the marketing spend compared to 2008, listing fees and rework and other costs due to product returns.

We believe that the relaunches were the right things to do and that we will see strong benefits in the future. The Vivitas, [Surebond] and Quest brands were in decline and the brands lacked an identity which differentiated them from the competition. We were losing listings with key accounts in 2009 and needed a change to reverse the trend.

The redesigns in marketing campaigns have been enthusiastically received by retailers and we are now being recognized as being the innovators in these categories. Each of the brands now has a unique positioning statement and platform and we will work to develop products which are on trend and which will complement each position.

Given the enthusiastic reaction by retailers, the sales increase in the brands has been well below what we had hoped for and expected so far. A large factor is a very aggressive price and market share war between the two leaders in the vitamin and supplement category beginning in September of 2009 through the end of January 2010 in the food, drug and mass channels.

With the long consumer buying cycle in this category, this has had a significant impact on sales of other brands in the category including our own over the past five months. We are being encouraged by retailers not to join this deep discount strategy and instead stick to our strategy of differentiation. We agree.

We will continue with our strategy of differentiation and will also be offering several promotions which bundle complimentary products to offer value to consumers and we will also be diverting a portion of the marketing funds to execution and point of sale. We believe the SunOpta Distribution Group is going in the right direction, but the issues were more deeply rooted than we initially anticipated and the turnaround of the business has taken longer than expected.

We are confident that 2010 will show substantially improved results. On the final note, we have continued to make strong progress with our PEP continuous improve programs and, as Steve and Eric mentioned, we are achieving significant cost and working capital reductions. We have also recently launched a Lean Green program which will use the PEP framework and tools and apply them to our environmental and sustainability initiatives.

As is the case with PEP, the objective of Lean Green will be to make the reduction of all forms of environmental waste a part of everyone's job description and to create a culture of continuous improvement in this important area.

Overall, we believe we have made progress in our core food operations as evidenced by the improving margins and operating profits in several of the divisions and we remain confident that we will be able to deliver superior returns for our shareholders. Steve?

Great, thanks, Tony. Before I summarize and we go to Q&A, I wanted to ask our operator to provide instructions on how to enter the queue to ask a question.

(Operator Instructions) And now I will turn the call back over to Mr. Steve Bromley.

Great, thanks very much. The last 24 months have certainly been a challenging time for our industry and the global economy in general. Having said that, it has also been a time for our organization to invest in our people and processes and to focus on cost control. To focus on productivity improvements, improved asset utilization, improved use of capital and reducing our debt, all keys to our future success.

While never completely satisfied, we are pleased with our progress in this regard. Our goals for 2010 are clear. One, return our Company to profitability.

Two, continue to leverage the strengths of our organization to drive long-term sustainable positioning in natural organic foods and natural health products, categories that we believe are very relevant in today's society and offer excellent opportunities. Three, continue to focus on margin improvement in support of our three-year target of 8% operating margins.

Four, continue to reduce working capital and maximize cash flow in support of our three-year minimum run rate target of 15%. And, five, commence the process of liquidating non-core businesses with a focus on streamlining operations within our core value added sourcing and processing operations.

We are optimistic with regards to our future prospects and look forward to a successful 2010 for the Company and our shareholders. With that, we will now open the call to questions. Thank you.

Okay. Our first question is from Scott Van Winkle. Go ahead, please.

Hi, guys. A few questions. Did you give a CapEx target for the upcoming year?

We didn't give a CapEx target, Scott. As a general rule, I would use approximately $20 million in our food operations and then when you roll in the non-core $24 million, $25 million.

And then an Opta Minerals you mentioned the new facility in the south. Where do they stand on capacity. I would assume with sales down from the run rate we saw 12 months ago, or 18 months ago, I would assume the mass utilization is relatively low?

I don't have an exact percentage but a lot of capacity for growth.

That was more of a kind of a logistical move. You had to be close to where the demand was?

Yes, and in the case of Opta Minerals you have to be close to the supply and you have to be close to the customer because moving the raw materials can be quite expensive. So this was just to get close to open up new markets.

Scott -- just -- go ahead.

On the soy, two pieces on the soy side, one, the higher processing cost, you can't cover those in pricing? Is it not something you can pass through? And then, second, can you quantify the new soy milk refrigerated customer in size?

Sure. Tony?

We can certainly, the pricing contracts that we have tend to be about three months out so there is some ability obviously subject to sort of not going past retail price barriers. There is some ability to recover pricing with through-price increase costs, so that would be the first answer. And in terms of the revenues on the thing it's somewhere in the vicinity of $10 million, $15 million.

Are you packaging that? Or is it, you have a partnership with the dairy operation that's packaging in gable top for you?

The latter. It's sort of a partnership with a dairy, packaging in gable top.

Okay. And on then sticking on aseptic, is there a large customer on the soup side? Are you at that stage yet? I mean the aseptic soup market is large and growing it seems. I'm wondering, you said you are already packaging some soups. If you have something set up there on a customer side?

We did a press release on announcing sort of the one very large anchor customer for the new equipment. There is one in place. And certainly working on several other opportunities.

And then lastly, I think the quote is in frozen, you believe the worst is behind you. Can you kind of go through in more detail why you're confident that's the case on the frozen fruit processing?

Why I think we have gone through -- I'll make a few points. We have gone through the inventories that we had, reworked them. Liquidated what was there for the most part and confident that's not going to repeat. Same thing with the rationalization costs, closure costs associated with bringing the business model back in line.

We shouldn't have that any more. We are sort of basically through the majority of that. And then on the market side, retail demand for our products has improved in 2010. I mean, the plant is busier than it's been the past two years. The bagging operation. And things look positive.

We also have a number of opportunities with new accounts that we've discussed sort of broadly and briefly in the past. Those are looking as if they are going to commence. So we're a lot more optimistic.

This one, I always use the word cautiously, we thought to a certain extent we were there last March and had a lot more work to do this time around. A year later, I'm a lot more confident in making that statement.

And then the first piece there, talking about rationalizing inventory. I assume that's on the volume side. Are you comfortable more near term that you are in the right pricing position on your inventory relative to pricing of demand out there?

Short answer is, yes. We have a business model now that is a lot more flexibility. Has a lot more flexibility. We can turn the process on and off a lot more quickly.

When we were sort of deep into processing fruit in California, you make certain commitments, the product comes in and the timing of those commitments and the sales weren't exactly in sync. It works a lot better with the process in Mexico and buying our requirements bulk from the outside. It's just a lot more flexible. We have a lot more ability to adjust that to pricing.

Okay, great. One last question. You mentioned a 50% inventory reduction in, I don't know if it's the entire Sourcing operations.

Yes. Entire.

Or just the [trodden] side of the business. Do you own the physical warehouses where all that inventory is stored? Can you handle a 50% reduction in inventory and outsourcing the warehousing and, therefore, there is no deleveraging or anything like that on occupancy cost?

We do not own them. And the warehousing costs are strictly variable. And the savings will be substantial. And the 50% coincidentally apply to both. They were both down by about half.

Great. Thank you very much.

See you, Scott.

Our next question is from Bob Gibson. Go ahead, please.

Good morning, everybody.

Hi, Bob.

The $3.6 million in facility rationalization, I don't think I caught a break down by group. Can you share that with us?

The $3.6 million by group?

Yes.

Let me see if we have that -- you know what, Bob, if you have another question --

Okay. What are fruit bits?

Fruit bits are fruit bits.

Basically if you imagine like a three-inch fruit rope and then cut into smaller, much smaller sections. What we have is the ability with the equipment to turn it into various shapes. So right now we started with something basically very simple. There are smaller rope bits, but we have the ability to make products that look like cars, like anything you can imagine, stars, stripes. You name it.

Okay. Great. Shutting down the Summerland, BC operation, costs involved with that and when are you going to account for them?

The costs will go into -- we have some of them in 2009, and, Eric, how much was --

It will be about another $500,000 in the first half offset by savings in the second half.

So net-net, Bob, we expect it to be relatively flat over the course of the year. Some costs in the first half offset by savings in the second.

Okay. What else did I have here? That's it. If you would get back to me with that $3.6 million break down, that would be great. That's it, thanks very much.

I got it for you. This is give or take a little bit. $2.6 million in Fruit. $300,000 in Distribution. $400,000 in International Sourcing and Trading. And about $200,000 to $300,000 in Grains and Foods. Does that add to $3.6 million? We look at it a little differently.

Great. Thanks very much.

Thanks, bob. Take care.

Next we have a question from Chris Krueger. Go ahead, please.

Good morning, guys.

Good morning.

Your overall sales were flat last year, up just a slight bit. After being down I think about 12% the last two quarters. Can you give us any indication as to the month-to-month trends? Did they strengthen as the quarter ended or I'm trying to look beyond that all the way up through February and how those types of top line trends have moved?

The answer is as you described, it strengthened as the months have progressed and some of that would be related to the Canadian dollar exchange, I imagine as well.

Little bit of that.

But generally speaking in the market.

It's improved.

We are seeing very consistent with what Whole Foods have said and UNFI have said that we are seeing improved demand in the marketplace both from an ingredient and raw material point of view and from a consumer products point of view and we are comfortable that those trends will continue.

Do they seem less volatile, a little more predictable as well?

Compared to this time last year when inventory was deleveraged for sure, it's much more consistent. That's sort of trend that's happened over the course of the year than little ups and downs.

We have seen consistency returning to the platform after the last month and a half two months of 2008 and first quarter of 2009 when everybody was balancing inventories and delisting SKUs. That was pretty -- that was a roller coaster ride in there, but it certainly isn't like that any more.

Okay. You quantified the new soy milk contract. I can't remember if the large soup customer, if you guys have quantified the annual revenues from what you expect from that?

Yes, I don't think we have.

One million to 2.5 million cases and we will get you --

I don't recall.

Just right off the top of my head. We will get that for you, Chris.

All right. Then last while you look for that, in your old fiber business, I know it's been a nice strong, especially the second half of the year, how is your pipeline of opportunities, potential new customers and new uses for the old fiber? How is that going versus maybe six months ago or a year ago or in the past?

Very, very, very well. And it really, I think everything in that division is pointing in the right direction. We certainly have strong capacity utilization and a lot of prospects to fill the added capacity we're going to put in.

So that's across our existing product line, some of the [blinds] we developed good prospects all around. It's a division that is in the right segment and I think we have done the right things in the last couple of years to really position ourselves well.

Okay. I think that will do it for me, thanks.

Okay, Chris. We will come back to you with that number.

Next we have a question --

I know that we had targeted $25 million overall in our soup and broth business. And this was going to get us a part of the way there. Pardon me, we didn't announce the exact amount for customer reasons. This is a nice piece of that.

The line has a capacity of about that.

Sorry, operator?

Next we have a question from Peter Prattas. Go ahead, please.

Good morning. I would like to just focus a little bit more on the Distribution Group. Obviously, it's been an area where you have been uncharacteristically weak in 2009 versus historically. You have gone over some of the reasons why. I'm just wondering, what are the primary, say, three or four factors which will return you back to the 4% or 5% EBIT margin levels that you are used to in that Group? Is that something that at least conceivably could occur by year end?

I feel good it can occur by year end. The way I would answer is really a return to just solid basics. There was a lot of things that weren't done well. That we had -- we just had to correct basic procedures on demand planning. I would say really it's a return to core basics on distribution.

Okay. And just if we can switch over quickly to the balance sheet. Obviously, you have done a great job there in managing that in 2009, bringing your working capital needs down and paying down debt.

But I do recall that Q1 is typically a quarter where you do spend some money in your inventory. Is that expected to occur again in Q1?

To some degree, but I think our debt levels in that and our inventory levels will be fairly consistent with the end of this year. I think Tony had mentioned during his call in there is still room for us to be rationalizing on the inventories, reducing them down further, especially in the Fruit Group we can get the inventory levels down farther in there. I don't expect the debt level to be much higher than it was by the end of December.

Super. Now that your operations have improved significantly and the bulk of the rationalization efforts are now behind you, is it conceivable that sometime in 2010, let's say, that you will revisit kind of what's been your historic strategy of growing through acquisition? Or is that still a long ways away?

No, we certainly have the resources and we are satisfied with the progress we've made on the rationalization. So we will certainly be watching. I don't want to cue everybody to we will race back to four or five acquisitions through the year.

That's not our plan. But certainly as opportunities present themselves that are appropriate for our business, we will certainly be looking at those.

But as Steve mentioned, we've sort of gone through each of the divisions and kind of identified potential opportunities for us. And depending on timing and opportunity and readiness.

It's just where the particular business is at.

Yes, readiness of each particular division will trigger some sooner and others a little bit later. That has been the objective of this whole rationalization effort just to position ourselves in such a way that we can get back on that. It's just a question of time.

Peter, just to be clear, we still have lots of work to do on our operating margins and we will be remaining very focused on that as our first priority, and then watching for the growth opportunities as well.

What I would add is whatever we acquire in the future we will bring the same mentality and improve whatever margins come in.

Excellent. Thanks very much.

Thanks, Peter.

Next we have a question from Keith Howlett. Go ahead, please.

Yes, I had a question on the capital expenditures for 2010. Just wondering across your business if there is any place where your capacity constrained that is attracting the capital expenditure and generally where is the money going to go in 2010?

Yes, okay, good question, Keith.

Want me to go on? I mentioned in my comments, there is the large portion Pacific fruit, the processed fruit operation. Capacity constrained, we are spending money there and Ingredients getting investment as well. Mentioned capacity constraints. Those are the two principal ones.

Great. And then just on your private label initiative at the International Sourcing and Trading division. Is that sort -- are they now quarterbacking corporate-wide private label? Or is that sort of more specific to what they historically do?

More specific to what they historically do and more specifically to the items that we source within International Trading.

Great. And in terms of broadly within the Company is the private label initiative still pretty -- is it division by division quarterbacked by you? Or do you sort of see perhaps assembling that in a sort of a team, more central team?

Yes, that's a good question. What we have is what we have been able to do, I think, quite successfully is maintain all of the autonomy and responsiveness of having each division do their own. Quite often they are different contact people at each customer anyway.

But we've managed to keep that and coordinate the efforts in leverage contacts and leverage presentations and use the total strength we have quite effectively. So we have regular meetings, monthly meetings, the senior sales folks across the divisions to do just that.

But it's still very much an individual team, we think that's the right thing to do just because of the responsiveness and being more nimble.

Thanks very much.

Thanks, Keith.

Next we have a question from Christian [Renerschneider.] Go ahead, please.

Yes, regarding the $7.6 million related to restructuring costs for the quarter, I assume that shows up on the SG&A. When does these types of costs of this magnitude cease?

Now. We think, Chris, that the bulk of our heavy lifting is behind us and so we don't see these types of costs continuing into the future.

Tony has talked about the fact that we are completing -- well, we announced we are going to close one of our fruit bar facilities in Summerland, so we are going to have some costs in the first quarter -- first half -- offset by savings in the second half. If you analyzed that $7.6 million, the bulk were for facility rationalizations and issues that we've put behind us so we don't see anything near that magnitude continuing.

In regards to putting that $45 million in current liabilities, what is going to happen to that at the end of the year and how are you paying that off?

Sure. Eric can talk to that.

Yes, we have a number of different options open to us. One of them, with the amount of cash availability that we have, bank lines available to us, we can just go through the operating line itself.

Obviously, we will have cash being generated by the business throughout the year and that will be another source for us to be doing it. Alternatively, and we are just going through evaluating right now is what is the exact amount of long-term debt we ant to be having and we can just refinance through a number of lenders that are available to us out there to put that into place.

And it would be nice to be able to take advantage of the low interest rates right now to be able to have a little bit of refinancing that piece where it's (inaudible) high interest rate and replace that with some interest rates that are about half as much.

Yes, I think one of the interesting sort of events this past year with our improved balance sheet and just better liquidity in the banking system we are confident we won't have a shortage of suitors for that debt.

So a majority of that will go back into long-term debt or it would go into bank debt?

Yes. We'd certainly have a portion of that, if not all of it, sitting there in long-term debt. We really can get some really good favorable rates on that. We have a pretty strong balance sheet and it's only going to get stronger between now and December.

And what is your target goal for reducing debt this year?

We've established a target long-term debt to equity ratio of .3 to .5 to 1. And total debt .4 to .6. Those are the ranges. And we are in those now.

But we do expect to move to the lower end based on our base operations and then if there is something specific that we wanted to do later in the year, whatever the case might be, that can change it. But we are moving into the range where we want to be.

Okay, thanks.

See you, Chris.

Our next question is from Ronald [Emmerman.] Go ahead, please.

Hello, gentlemen. Steve, would you mind amplifying, say in the last two to three years, what the trend differences in your food products are compared to the traditional markets?

Yes, sure, Ron. On the natural and organic side, clearly, those markets experienced growth of 15% to 20% a year for four or five years leading up to late 2008 and into early 2009 where, given that these are a bit more expensive in the economic downturn we had there was a slowdown in the uptake on those products. We are seeing them grow again.

As we talked about on the call, we expect that the annual growth rate will normalize between probably 5% to 10% which will still be significantly higher than commodity foods. On the fiber side of our business, we've seen a number of different trends impact that business. You will recall, Ron, about the four to five years ago there was a large spike in that business due to the low carb business.

These are insoluble fibers, so people were taking soluble fiber out and putting insoluble fiber in. As we all know, the bulk of that trend went away. We are now, for the last year and a half, we are just seeing sustainable demand for insoluble fiber products and the fiber addition to many, many foods because of obesity issues. That trend has picked up versus where we were, say, a couple of years ago.

Clearly, we are seeing more demand for private label products. There has clearly been a value conscious consumer emerge from the recession. People that want better value. Not that they don't want branded products.

There also seems to be a really good demand for private label and, of course, we do a fair amount of private label product. So we were benefiting from that. And I would say that trend is gaining momentum.

The other one I would say is really growing in our particular instance is consumers' demand for products that are sustainable and environmentally friendly. Both our customers and consumers are all paying more attention to the world and where do these products come from. How are they grown. What chemicals are used, et cetera.

So we are benefiting from that. We were far outpacing conventional foods for years. That tightened up over the last couple of years and I'd suggest that we are going to start to create some gap there again.

How would you compare your products to conventional foods on a percentage basis? How much more expensive, for example, would your private be comparing equals to equals to the conventional market?

Really depends on the retailer and it depends on the product. But there can be premiums anywhere from 20% to 100% and beyond. It's really all over the board, Ron. As a general rule, they are going to be more expensive.

Okay. On a different issue, the two governments, the Canadian government and I think it's the Chinese government, with reference to your, I believe they would be called pilot plants. Would you amplify on what's happening there?

In China, the plant that will be built is a demonstration plant so it's larger than a pilot plant, but not a commercial demonstration which -- commercial demonstration, the kind that line in the stand is 10 million gallons of output -- no, a commercial plant is 10 million gallons of output. And a commercial demonstration plant is sort of more than a million, in between there.

The Chinese operation is a demonstration plant. So it's larger than the other facility that we have running there. What we are told is that in China the central government, they haven't banned, but they are really discouraging any more food ethanol, sort of starch-to-ethanol.

So we see that as a good opportunity and we have a couple of projects that are underway now in that country giving us some good insight into what's going on there and we are hopeful that that will continue to grow. And in North America, while the governments haven't banned or really stopped the buildout of starch-to-ethanol, I think given the food concerns, et cetera, of the bulk of that buildout has really slowed down.

At one point in time there were many, many plants in development. There aren't so many anymore and I think we are now seeing that industry move to the next phase which is to take a look at alternate, be it cellulosic biofuels or other technologies that can convert various forms of raw material into usable product. We are seeing nice trends there.

Recently there was a resulting hearing on the Abengoa relationship, could you amplify perhaps more, has it gotten any further than what was reported in the press?

Yes, no, what happened, Ron, was we ended up in an arbitration around the use of our technology and use of technology that we had developed together, is how I should say it. Use of technology that we had developed together as part of a technology development agreement. At the end of the arbitration process, what the judge said, or the arbitrator said, was that our appeal for money damages was not allowed.

But that rather than not have access to the joint technology that was developed which was our position. We didn't have access to it so we should get some fees for it. The arbitrator ruled that we both had access to it. So it adds another piece of technology to our technology bucket and we move on. There has really nothing further with Abengoa.

Thank you. Nice report. Thanks, Steve.

Okay, thank you, Ron. Bye-bye.

Operator, do you have any more calls in the queue?

That's all the questions we have in queue.

That's great. Thank you very much. I apologize the call went a little bit longer than we anticipated, but we wanted to provide fulsome details on what has happened in our organization.

We are really excited about moving forward. We thank all of our shareholders for your patience and support as we work through. We're excited about 2010 and as always, should you have any questions, please feel free to give us a call.

You can be assured, you will get a call back. Take care. Thank you.

Thank you for joining today's conference call. Have a wonderful day.