Sunopta Inc (STKL) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the SunOpta Inc. first quarter, 2010, shareholders conference call. I will now turn the call over to Steve Bromley, President and CEO of SunOpta. Please go ahead, sir.

Thank you very much, and good morning, everyone. Welcome to our 2010 first quarter shareholder conference call. I am 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. Since you can't see us here, I have to tell you hockey fans that Tony Tavares is here handsomely adorned in his Montreal Canadian hockey sweater today.

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 operations, market and economic conditions, and financial position. All forward-looking statements reflect our current views with respect to future events and are subject to risks and uncertainties and assumptions we have made in drawing the conclusions included in these in this 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 and 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-Q for the quarter ended April 3, 2010, no later than the close of business today. Please note that except where specifically identified, our financial results are reported in US dollars and in accordance with US GAAP. I also want to mention at this time that we're targeting to keep this call to approximately one hour.

As we review our first quarter, we to want reiterate our commitment to improving operating margins and return on net assets employed with a focus on continually strengthening our balance sheet. As we will discuss over the course of this call, we are making good progress in doing just that. While we are pleased with the progress we have made, we believe many opportunities exist to continue to improve our financial returns and our work will continue accordingly. A solid and stable operating platform is rounding into shape and combined with the long-term demand for healthy food options, we are truly excited as we look forward. For the first quarter of 2010 we realized revenues of $266.1 million, versus first quarter 2009 revenues of $232.1 million, a year-over-year increase of 14.7%. Revenues and SunOpta Foods for the quarter were $247.6 million, an increase of 13.9%. After adjusting for movements in foreign exchange rates and commodity prices, food revenues increased approximately 10.8% in the quarter.

All operating segments realized increased revenues year-over-year. It should be noted that the first quarter of 2010 includes 93 days versus 90 in the prior year accounting for approximately 2% of additional revenues. For the first quarter of 2010 the Company reported net income on a GAAP basis of $4.6 million or $0.07 per diluted common share versus a loss in 2009 of $1.7 million or $0.03 per diluted common share. Results for the quarter include additional pretax costs of approximately $2.4 million including legal and professional fees of approximately $1.9 million and pretax costs related to ongoing facility and operational rationalizations of approximately $500,000. First quarter results also -- pardon me, 2009 first quarter results also included additional pretax costs of approximately $2.4 million related to legal and professional costs, operational rationalization, and start up and other costs. Gross margin as a percentage of revenue increased to 18.4% in the quarter versus 14.5% in the prior year.

All of our operating segments realized improved gross margins as a percentage of revenue. Operating income increased to $10.7 million or 4% of revenues versus negative operating income in the prior year of $0.4 million. EBITDA for the first quarter of 2010 increased to $15.7 million versus $4.4 million in the first quarter of 2009 indicative of the improved operating performance realized in the business. At April 3, 2010, our balance sheet reflects a current working capital ratio of 1.3 to 1, long-term debt to equity ratio of 0.36 to 1 and total debt to equity ratio of 0.72 to 1. During the first quarter of 2010 we used cash from operating activities of $14.3 million due primarily to increased accounts receivable and normal seasonal fluctuations. At April 3, 2010, we have total assets of $571.1 million and a net book value of $3.68 per outstanding share. At quarter end we are in compliance with all banking covenants.

Based on these results and our numerous continuous improvement initiatives we are making good progress in improving the underlying fundamentals in our operations and strengthening our financial position and have confidence in our focus on natural, organic, and specialty foods and natural health products. The class action settlement process is proceeding. We have determined that the number of class members opting out of the proposed class settlement was very low and thus acceptable to the Company, and the actions are now before the courts for final approval. The Canadian final approval hearing was held on May 3, 2010, the presiding judge is finalizing the order and is expected to be completed shortly. The US hearing is scheduled for May 17th, 2010. Class members have until June 11, 2010, to file claims related to the settlement.

Earlier this week we announced that we entered into a definitive agreement with United Natural Foods, UNFI, the leading distributor of natural organic and specialty foods in the United States to sell our Canadian Food Distribution Assets for cash consideration of approximately CAD68 million. The transaction is subject to certain customary closing conditions, and we expect to complete the deal in early June 2010. The Food Distribution Assets included in this transaction are part of the SunOpta distribution group. We will retain the natural health products distribution and manufacturing assets which represent the balance of the assets in the distribution group. Employees currently directly involved in the Canadian Food Distribution operations will be offered employment with UNFI. For fiscal 2009 the SunOpta distribution group realized revenues of $237.3 million.

The Canadian Food Distribution operations included in the transaction generated revenues of $169.6 million and positive operating earnings while the natural health products operations generated the balance of the revenues of $67.7 million realizing negative operating earnings, and Tony will talk more about that in a few minutes. We expect to realize a net gain on the sales of the Canadian Food Distribution assets with the final gain somewhat dependent upon a number of closing matters and related costs and the value of the Canadian dollar at closing.

In addition, the transaction is expected to have a small dilutive effect of $0.02 per share in 2010 prior to the expected gain on the sale. Net proceeds from the sale will be used to reduce existing debt as per our banking arrangements. In 2002 we started to build our natural organic and specialty food and natural health products distribution business in Canada. We are very proud of the attractive platform that has been put in place. Divesting the Food Distribution assets is an important milestone in our strategy to focus on our core food manufacturing platform, strengthening our balance sheet and positioning the Company for the future.

We have long admired UNFI's strong values and commitment to the natural organic and specialty foods industry and believe they will bring great value to the Canadian marketplace. We want to express our sincere appreciation to our fellow employees for the years of hard work and dedication and wish them continued success on under UNFI's leadership. I will now 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 current debt status. Eric.

Thanks, Steve, and good morning, everyone. Cash generated from operations before working capital changes totaled $11.5 million in the quarter as compared to approximately zero in the first quarter of 2009. This represents our strongest quarter in more than two years. In this period we invested $25.8 million in working capital due to a combination of seasonality of our business, decreased accounts receivable due to significant stronger sales, and reduced trade payables. I should note that normally we consume cash resources in the first quarter based on our business cycles. During the quarter accounts receivable increased to $119 million compared to $94.2 million at the end of the fourth quarter. The increase is primarily related to higher revenue in the quarter, foreign exchange movements, and the timing of payments.

We expect the day sales outstanding experienced in the quarter of 41.6 days to return to previous levels in the coming quarters of approximately 35 to 37 days. During the quarter inventories reduced to $172.1 million compared to $178.1 million at the end of the fourth quarter 2009 continuing the strong trend in this regard. Inventory positions were positively impacted by strong sales in the quarter as well as our ongoing efforts to reduce inventory levels and improve inventory turns. We expect there is still room to further reduce our inventories. Accounts payable reduced to $94.5 million as compared to $106.3 million at the end of the fourth quarter. The $11.8 million reduction was due to lower inventory levels taking advantage of better supplier pricing and the seasonal payments for crops and currency movements.

Controllable working capital consisting of accounts receivable, inventory, and prepaid expenses less accounts payable and accrued liabilities and other current liabilities was $204.1 million versus $175.9 million at the end of December 2009 reflecting the items I mentioned previously. Working capital remains a key focus for our organization. We expect further improvements throughout the balance of 2010. Investing activities in the first quarter of 2010 excluding short term investments utilized $6.6 million in cash compared to $5.1 million in the prior year. The cash used was primarily related to capital expenditures and payment of a deferred purchase consideration. Capital expenditures were $6.3 million during the quarter compared to $4.6 million in the first quarter of 2009.

Spending in the quarter was primarily related to an aseptic line expansion at our Southgate California food and ingredient process facility and expansion of our receiving capabilities at our Hope, Minnesota, grain processing facility, and the expansion of our fiber processing capabilities in Cedar Rapids, Iowa. Tony will discuss the current status of these projects in a moment. Funds generated from finance activities in the quarter totaled $22.3 million compared to $9 million in the first quarter of 2009 due to increases in operating lines of $23.4 million offset by $1.1 million in long-term debt repayments.

As a result of these activities at the end of the quarter we had total debt and operating lines of $171.8 million representing an increase of $21.1 million from the fourth quarter. Our primary facility including operating and term debt is held by a banking syndicate services our core food operations excluding Europe and totaled $104.8 million at the end of the first quarter 2010 versus $89.1 million at the end of the fourth quarter of 2009. As at the end of the quarter we had $37.7 million in foreign availability on these facilities, are in compliance with all banking covenants.

Our European food operations are financed in asset backed operating line with a total outstanding of $21.7 million and approximately $16.6 million in bore availability. Opta Minerals is financed via operating and long-term facilities of $25.8 million with availability of $10.8 million. Both of these facilities are stand alone, have no recourse to SunOpta and are in compliance with all facility requirements.

In summary, we believe we're very well-positioned for continued growth supported by strong cash flows from operations and a strong balance sheet. We will continue to focus on reducing our debt levels through stronger operating results and ongoing working capital management. I will now turn the call back over to Steve.

Thanks, Eric. Opta Minerals and SunOpta bio-process which represent approximately 7% of first quarter revenues, are both strategically important businesses within the sectors where they compete and both realized improved operating performance versus the first quarter in 2009. For the quarter ended March 31, 2010, Opta Minerals realized operating earnings of $1.7 million or 9.6% of revenues versus an operating loss of approximately $800,000 in 2009.

This represents the third consecutive quarter of positive operating earnings for Opta Minerals after three successive quarters of negative results. The improved results have been driven primarily by increased activity levels in the steel industry combined with the positive effect of efforts focused on reducing costs across the organization and the -- opening of new abrasives operations in Texas and Florida. Management of Opta Minerals are confident the activity levels in the steel and abrasive sectors will continue to improve as global economic activity accelerates and are optimistic that results for 2010 will continue to be significantly improved versus 2009.

SunOpta bio-process remains focused on the utilization of its technologies and the production of cellulosic ethanol. The opportunities in this sector remain attractive as the world looks to reduce its dependence on fossil fuels and reduce greenhouse gas emissions. SBI is continuing to refine and expand its technologies, applications and its joint venture initiatives focused on the development of commercial scale production capabilities. The group is also actively exploring strategic partnership opportunities.

Operating results in SBI in the first quarter of 2010 improved versus 2009 as a result of work on a $6.7 million contract for a Chinese customer for the supply of proprietary fiber preparation or pretreatment technology for use in the production of cellulosic ethanol. The client is one of the largest operators in the corn and biochemical processing and new energy sectors in China our equipment will be installed in a cellulosic ethanal demonstration plant located adjacent to and existing starch to ethanol facility. The group also continues to pursue a solid pipeline of further opportunities to provide technologies in a number of applications.

In January of this year SBI was awarded CAD5.5 million in funding from sustainable development technology Canada to assist SBI in its partners 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 processors to increase their profitability and competitiveness. Operation of the facilities is expected to commence in 2011 with process validation by the end of 2011. -- process validation by the understand of 2011.

SBI and Xylitol Canada have exchange their interests in the jointly developed Xylitol production process for shares in Chudleigh Ventures Inc., a company traded on the Toronto Stock Exchange Venture Exchange under the symbol XYL. SBI now owns approximately 30% of Chudleigh. SBI also continues development of its state of the art modular pretreatment pilot system which will be able to operate at a scale smaller than current pilot availability and attractive price point. They expect to complete fabrication of the first unit during the third quarter with that I would now like to turn the call over to Tony Tavares, our Chief Operating Officer, who will discuss activities in SunOpta Foods. Tony?

Thanks, Steve, and good morning, ladies and gentlemen. SunOpta Foods first quarter operating income was $12.5 million or 5.1% of revenues as compared to $2.7 million or 1.3% of revenues in the first quarter of 2009. The grains and foods group operating income was ahead of last year as a result of strong results in the soy milk processing and sunflower operations partially offset by weaker results from sales of organic feed and dairy ingredients and specialty vegetable oils. Overall the group realized operating margins of 6.4% of revenues.

Organic feed ingredient margins improved in the month of March and are expected to remain stronger for the next two quarters and should help offset the impact of lower sales volumes due to reduced demand. Vegetable oil margins were negative in the quarter compared to profit last year but should improve over the balance of the year. The grains and foods group quarterly results including $300,000 in losses related to the Colorado Sun Processors joint venture facility which became operational in the first quarter. Results in the quarter were also affected by inefficiencies in reduced yields related to lower soybean crop quality versus 2009.

Although crop quality is expected to remain an issue through 2010, the project to upgrade and expand the soy handling system at the Hope facility was completed in February and the additional revenues should continue to help offset the costs associated with crop quality. The group's sun flower operations achieved very strong sales and operating earnings in the first quarter due to strong command for in shell and strong sales in good margins for bakery kernel. In-shell sales to Turkey, Egypt and Mexico continue to grow and supplement our strong in shell sales in Romania. The German bakery kernel market has returned to much stronger levels with healthy margins and good demands. We expect the sun flower operations to continue to perform strongly through the next two quarters.

Packaged soy milk and alternative product sales in the quarter were lower than last year due mainly to a loss of refrigerated soy milk customer in the fourth quarter of 2010. Operating income for the quarter was ahead of last year as a result of favorable costs and improved efficiencies and yields in the plants. Revenues should improve over the course of the year. We have signed an agreement with a major new customer to supply refrigerated soy milk started at the end of the second quarter and have recently started sales of aseptic package soups from the new equipment installed at our Alexandria, Minnesota, facility. Overall the outlook for our packaged soy milk and alternative products business remains very positive. The group's roasting and packaging operations continue to improve although the business remained unprofitable for the quarter.

The Dakota gourmet brand was replaced effective January with Sunrich Naturals and an in-shell sun flower product in a bucket format was launched in March. Profitability is expected to improve over the course of the year as the operation adapts to the new packaging formats and from processing efficiencies from increased bulk sales. In summary we believe the Grains and Foods Group is on a solid foundation and we expect to continue to deliver solid results in 2010. The ingredients group posted another strong quarter on the strength of increased sales, higher margins due to processed efficiencies and product formulation gains from PEP projects and improved margins on sales of natural food protectants.

We started work on a Cedar Rapids fiber processing expansion and expect to get the additional capacity online in the fourth quarter and have also started the bulk handling project at our Cambridge facility which we expect to bring online by the end of July. The (inaudible) grinding project at the Louisville plant was completed in January and is working well. The biogas methane recovery project our Cambridge facility was also completed and is expected to be fully operational by the end of the month.

We continue to work on several projects for new sales opportunities and new products including sun flower and rice fibers. Wastewater charges at the Louisville and Cedar Rapids plants remain a significant cost reduction opportunity, and we have active projects to reduce these costs by finding new avenues for the higher strength traction of wastewater and reduce sewage charges from the cities. The ingredients team continues to work on a large number of continuous improvement projects and solid C I culture is being created. We should continue to generate increasing efficiencies over time and expect the Ingredients Group to continue to deliver outstanding results.

The Food Group continues to show improvement in the quarter achieving an operating income of approximately $1.9 million or 4.3% of revenues compared to an operating loss last year of $1.2 million. The results include record earnings in our Health Fruit Snacks and processed food ingredients operations. The Frozen Food operations had an operating loss in the quarter but results also improved. Frozen Food sales for the quarter were essentially flat to last year but margins have improved as a result of a higher mix of retail products.

Retail sales for buyers of individually quick frozen product increased over last year as a result of lower retail pricing driving larger consumer demand as well as retail replenishing warehouse inventory levels after a year of reducing them. We continue to work aggressively with retailers to help them manage this category. The increased retail IQF sales were very welcome, but the unexpectedly quick wrap up created some additional freight costs and inefficiencies. The excess costs related to these factors in the first quarter are estimated to be approximately $300,000. We are working to add another shift at the bagging facility in Buena Park, California, to increase our production to full capacity and increase the sizes of our production runs to reduce these costs. On you newer green gar bans owe product line is extremely well received and we believe sales in the second half could be significant. We also are getting positive reactions on our Splash It Up product line of juice purees and have begun production in Buena Park. In summary, we're making progress in the Frozen Food operations.

The process food ingredient operations reported record sales and profit in the first quarter. The large sales increase in last year's being generated mainly by sales of ingredients in the yogurt and dairy industries. We are running 24/7 on our existing a aseptic line and barely keeping up with orders. Additional refrigeration and capacity was installed in May to accommodate the new aseptic line which will be operational by the end of the year. In the meantime the additional refrigeration should allow us to increase capacity on the existing line and alleviate some of the order lead times we are currently experiencing.

As I mentioned on the last call, the PEP projects at the food ingredients facility in Southgate, California have resulted in changes to production planning and the way we hold finished product and has freed up a lot of space at the facility. [Oracle MRP] was implemented effective February 1st, and is working well. And we've started the barcode scanning project. The team is embracing PEP and C I and we're very pleased with the visible and tangible changes to this operation. We should be in great shape to handle the increased volume from the new aseptic line. In summary the process foods operations should deliver very strong results in 2010 and are on a very solid foundation.

The Healthy Fruit Snacks operations had record earnings in the first quarter. Sales in the quarter were essentially flat to last year on higher volumes and lower selling prices. The improvement at Health Fruit Snacks continues to be driven principally by improved plant operations resulting from PEP initiatives. The team continues to successfully use category management and branding techniques to increase sales on private label products and we are receiving favorable comments from retailers for these efforts. Plant operations continue to work well, but there remains plenty of room for further efficiencies and cost reductions and we have reorganized the reporting structure to allow plant management to fully concentrate on plant floor operations.

We will be changing the [Cartner] equipment in the Omak Washington facility in the third quarter to create greater flexibility on the main production line, eliminate a production bottleneck, and reduce quality issues and inefficiencies. The previously announced consolidation of our Summerland, British Columbia. operations to the facility in Omak is proceeding on schedule and the plant will be closed at the end of May with the move and commissioning of equipment at Omak in June and start up of operations in July. The focus of the group is on increasing sales as we still have capacity to almost double production with the existing equipment once the new Cartner equipment is in place.

We will be rolling out our product innovations to private label customers in several phases over the next 18 months starting with two dimensional shapes, twists, and bits packed in vested bags and single serve pouches. These are currently being presented to our private label customers. We have already launched a private libel fruit bit product with a major retailer and recently confirmed the September launch with a major food service customer for a single serve pouch. We believe these products have great potential and other wins are expected.

In summary we believe the Health Fruit Snacks business is well positioned and that we have a plan in structure in place which will allow to us double our sales and provide a lift to our bottom line. The international sourcing and trading group reported strong operating results in the first quarter of $1.6 million or 4% of revenues versus the loss in the prior year. Improved results were led by the industrial ingredient operations in Europe due to generally improved market conditions for organic products and a continued focus on improving margins, inventory controls and purchasing.

The first quarter results also include approximately $500,000 in unrealized foreign exchange gains. Sales were higher in most product categories and in total were approximately 10% higher than last year. Margins were also higher due to improved markets as well as the impact of selling lower cost product purchased when the Euro currency was higher in relation to the US dollar. The outlook for the European ingredient operations for the rest of the year remains quite positive but results will not be as strong as in the first quarter. Margins on certain products are expected to decrease as new costs come into effect and we'll also see the impact of the reversal of the $500,000 in unrealized foreign exchange gains as products are sold to fulfill the contracts.

During the quarter we have transitioned all of the North American industrial ingredients operations under the responsibility of the European management teams. The transition has gone well. Markets for organic food ingredients have also continued to improve and sales and margins in North America for the first quarter were well ahead of last year driven by strong sales of agave, sugar, tomato, orange, grape and cocoa and we expect the continued strength for the rest of the year. Within the international sourcing and trading group consumer product solutions division sales in the first quarter were approximately 15% higher than last year driven mostly by sales to the club store and natural health channels.

Margins also improved due to stronger sales of frozen organic broccoli, organic energy drinks and vitamin waters. Margins on orange juice sales remained essentially at break even in the quarter but will improve in the second quarter when we move away from higher cost inventories. A consumer products team continues to work on a number of opportunities in orange juice, quinoa, agave, coffee and cocoa in the USA and new markets. As discussed previously 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 and international sourcing and trading is providing much sharper focus on very distinct and separate markets and will produce better results. The distribution group's operating loss in the first quarter reflect loss at Purity Life, our natural health products division offset by earnings in food distribution operations led by strong results in western Canada and Quebec. The large swing in the value of the Canadian dollar relative to the US dollar needs to be considered when evaluating the distribution group results.

Revenues in US dollars were approximately $65.9 million in the quarter compared to $56.7 million last year. In Canadian dollars, however, sales in the quarter were actually slightly lower than last year, CAD69.2 million in 2010 compared to CAD70.5 million last year due to the declines in our natural health product operation. The Ontario fresh grocery and produce operations reported a loss of approximately CAD800,000 in the quarter. We have exited sales of fresh produce in Ontario, closed the warehouse and have transferred a portion of the refrigerated business to existing grocery warehouse operations in Toronto.

All related severance costs, inventory writeoffs and fresh product losses have been reflected in the first quarter results. Ontario grocery operations realized a loss in the first quarter as a result of operational issues due to the combined effect of the conversion to a new enterprise system in January, huge seasonal volume increases due to Passover, and the transfer of refrigerated SKUs in the fresh grocery and produce warehouse. This resulted in additional freight and warehouse expenses as well as higher product spoilage costs during the quarter. Although the first quarter was challenging for the Ontario food distribution operations, they have emerged stronger with a new operating system, improved processes, and expanded refrigerated product portfolio positioned the operation for much better results going forward.

Strong first quarter results were realized in the western Canada and Quebec base grocery operations. The Purity Life natural health products operations reported a higher operating loss in the first quarter compared to last year due mostly to a 6% drop in revenues in the quarter. The lower sales occurred mostly in the food, drug and mass channel with a sales decrease was approximately 25% compared to the first quarter last year mostly as a result of lower sales and distributed brands, feature activity in the first quarter last year, and changes in listing base for several distributed brands. The demand for higher price natural personal care and beauty products in this channel appears to have sagged during these tougher economic times.

Sales to the health foods channel were also slightly lower than last year due to lower sales on some shared distributed brands. As mentioned previously, the difference in sales results between the channels probably reflects a stronger commitment to natural and organic products by shoppers in the health food channel. Branded sales fared better but were slightly lower than last year in the first quarter because of product launches and listing base changes from last year. On the moving annual basis branded sales increased in the quarter. We had made several changes to strengthen our sales efforts over the next three quarters. Trade and marketing spending was heavily weighted in the first quarter and higher than last year.

On a full year basis marketing will be lower than last year and the allocation of marketing personnel time and efforts will be adjusted to provide more support to the health food channel as well as to promotional activities to drive sales in the food, drug and mass channel. In summary, soft sales combined with heavier trade and marketing spending in the first quarter have resulted in operating losses at Purity Life. Although the changes we have made will take time to come into effect, we believe that the moves to refocus our sales teams and to scale back and redirect the marketing spend should lead to us a better position in the coming months. We still forecast to have an operating loss next two quarters but results should be much improved compared to the first quarter.

On a more general note, we continue to make incremental progress and are realizing increasing benefit from our PEP continuous improvement initiatives as evidenced by the improving margins and operating profits in several of our divisions. We're still only starting our lean journey and as we explained in previous calls, lean is a journey not a destination. We will always have room to improve. A continuous improvement culture is definitely taking hold in several of our operations and we are excited about the longer term prospects and we will see this culture across all of SunOpta. I will now turn the call over to Steve.

Great. Thanks a lot, Tony. In conclusion, we are extremely pleased with our return to profitable operations, and we expect this to continue going forward. We have invested in our people and processes with a focus on innovation, category management, cost control, productivity improvement, and improved asset utilization and these are now starting to show their benefits.

As Tony said, while never completely satisfied, we are pleased with our progress. Our goals for 2010 remain clear. One, return our Company to profitability.,

Two, continue to leverage the strengths of our organization to drive long-term sustainable positions in natural and 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 (inaudible) target of 15%, and,

Five, commence the process of liquidating non-core businesses with a focus on streamlining operations within our core value-added food sourcing and processing operations. As you can see we are making progress, and we are optimistic about our future prospects and are looking forward to a successful 2010 and beyond for our Company and our shareholders. With that we will now open the call to questions.

(Operator Instructions) Our first question is from Peter Prattas of Frazier Mackenzie. Please go ahead.

Good morning and congratulations on great progress there.

Thank you.

Clearly we saw nice improvement across almost all your business segments, but the only laggard really being the distribution group and you just talked about there that being driven by the natural health Products Group. Did you just say that you hope to turn positive operating income positive in that group by Q4 and can you give us any sense as to how much of a drag that will be on operating income over the next two quarters?

Yes. Okay. I guess just to start off first, Peter, I guess as Tony indicated the issue in the distribution group wasn't related to food. It was related to natural health products and food performed quite well exclusive of rationalization and one-time costs that we had specifically related to closing one of our operations and the system's integration and the challenges you normally have with that in the first quarter, and they're really well-positioned now, so you're right, it is in the natural health products site.

Just to step back on natural health products a bit, this business goes beyond distribution. We also have a manufacturing platform where we manufacture our own supplement brands that we distribute into the Canadian market, and in 2008 we had operating margins in that segment of 5%, and we've always felt we could improve those operating margins with a higher branded component, and last year we invested heavily in relaunching those brands, and have continued through on those commitments in the first quarter. As Tony indicated, those costs are expected to fall off in the back part of this year, and we expect to return to profitability on a quarterly basis during the fourth quarter. I went on a little bit. You were asking how much the drag would be?

Yes.

I would suggest it is about a penny or a little less than a penny in the second quarter and then half of that in the third quarter type thing.

That's helpful. Great. Thanks very much. And as you continue with these rationalization efforts in Q1, and presumably continuing on into the future as you see opportunities, can you say where your focus was in Q1? Was it all with the natural foods group and can you also say where you expect to focus over the next couple of quarters?

I would say the focus is broad, room for improvement across all the operations. Clearly a lot more of the senior management time is dedicated to one that is are still lagging behind, so very much on the Purity group, still focusing on the frozen operations, food group improved so a lot of room to grow on frozen, so I wouldn't say there is any one area that we're honing in on. There is opportunities across all of them, idea is to make the sick ones healthy and I the healthier ones even healthier.

Okay. And my last question just relates to CapEx. Looks like you have a lot of new business initiatives under way. Is that going to impact the number that you have been suggesting in terms of CapEx for the year?

Not really, no. Our major capital project that is we have under way as Eric mentioned were Cedar Rapids fiber expansion. We're adding in the range of 10% additional capacity. Our aseptic line capacity expansion at our food ingredient operations which as Tony mentioned we're just -- I wish the line was in now. We would get it filled up pretty quickly. Then we have the soybean receiving expansion at Hope and a number of biogas methane project that was implemented at one of our environmental initiatives, so those are all reflected, and --

All the CapEx was planned and budgeted for.

Everything was planned and budgeted for. CapEx in the range of $18 million to $20 million on the food side and $23 million to $25 million overall.

Excellent. Great. Thanks very much and good luck to Tony and his Cavs in the next round.

You should be here. You should see him.

Thank you.

Our next question comes from Bob Gibson of Octagon Capital. Please go ahead.

Good morning, everybody.

Good morning.

Legal costs, can we assume those are going to go away once the class action is done and finished with?

The bulk of those should go away. There were other issues in the legal costs with regards to outstanding matters that we have been working to resolve, so we would expect that those will continue to decline over time.

Okay. Can you give me what your thoughts were with [Cordon] Gourmet going to a different name and what's going on with the roasting business?

Sure. The roasting business is the volumes have picked up substantially, and it is a smaller operation and I think, Bob, you have been to that operation and smaller and we spent a lot of time realigning and doing a lot of internal work to improve the operation, and it is really showing some good progress.

We're trying to build a base for efficient production with some heavier bulk sales and having some success on that, and the idea with repositioning the name, there was really very little equity in the Cordon Gourmet name. Sunshine naturals is a name -- Sunridge.

Sunshine, that's not a bad name either.

It is a name ear would you use ago cross a few categories and we think we can leverage a little bit more this way, so it is really a combined strategy to get the volumes up and get some process efficiencies.

Any thoughts to putting that in the retail channel in Toronto?

Yes. It is certainly a possibility. I don't know specifically if we present it to any retailers in Canada, but as of yet, but absolutely no reason why it wouldn't work here.

Okay. And can you give us just overall color on soy milk pricing and is it being affected by-- I will call it regular milk pricing?

No impact with respect to the pricing of regular milk, and pricing on soy milk has been steady. Margins are good, costs are in line. Our plants are running well. It has been -- there has been really not much movement in soy milk pricing.

Thanks a lot, guys.

Take care, Bob.

Our next question comes from Chris Krueger of Northland Securities. Please go ahead.

Good morning.

Good morning, Chris.

A couple quick questions. You talked a lot about your expansions in the ingredients area and whatnot. As far as the a septic packaging in Modesto is there -- how many lines are running and how much room do you have there and do you have to do anything you think this year and looking forward is there any need to add more on the East Coast let's say?

We have got-- on Modesto, we have two lines installed out of a possible eight that could fit into the facility, and they're running not at capacity. They're running perhaps three quarters capacity right now, still some room to go on that. The real encouraging news is at that capacity utilization the plant is making money which is really bodes well when we gear up in that production volumes.

We don't expect to start a third line before the end of the year, but certainly my expectation will be very early into 2011 we'll have at least one more line in there and there is lots of potential for that plant. In the East we don't have any immediate plans to increase capacity right now. There has been a rebalancing of production between the East and Modesto. I believe it has been discussed in prior quarters, so that certainly has allowed to us reduce some transportation costs and just make our distribution to market a little bit more efficient. No immediate plans in the East over the course of the year.

Okay. In my other question relates to the natural health products or Purity or whatever it is called. Going forward do you intend to segment that as a separate group essentially replacing the Canadian distribution or how do you plan to report that?

We're reorganizing internally, Chris, and our segment will reflect how we reorganize. I suspect we're going to expand into an international food segment. We're just working on the reorganization. We will report it -- we will segment it as we're operating it. Okay.

That's all I got. Thanks.

Take care, Chris.

Our next question comes from [Ron Ruben of Ruben Enterprise]. Please go ahead.

Good quarter, guys, how are you?

How are you doing, Ron?

Good. Just wanted to get information about the recent transaction with the distribution group. As far as valuation, who came up, how did you come up with the valuation of what to get for that division?

Well, it was based on a comparatives in the industry and recent transactions and what both parties determined was a fair value.

Now, was this a transaction that had been planned for some time or this just something that came up within the last quarter where you guys decided to divest out of the business?

Well, Ron, we started to build the distribution business back in 2002, and really enjoyed the opportunity to consolidate and build a food distribution platform in Canada, and when we looked at our operations, clearly we stated for some time that our long-term focus was on food and specifically within food on value-added manufacturing and global sourcing and doing that on a global basis supported by our global sourcing and trading operations, and so distribution wasn't specifically core to what we do.

It is clearly specifically core to what United Natural Foods does as an example and always in our plan we had contemplated that at some point in time we would divest of our distribution operations, and we have had a long and good relationship with UNFI who we respect very much, and we have often chatted in the past about when it might make sense or if this asset would make sense for their operations, and just happen to at this stage of the game we felt it was the right thing to do.

And are there any other potential divested of any other businesses coming up or that are in the cards at all this year or is it something --

Ron, we have always indicated that at the right point in time we would divest of our non-core businesses, and Opta Minerals is one of those non-core businesses and I wouldn't say there is anything imminent, but we're always looking for the right positioning for minerals and bioprocess and where it would make the most sense and when we can create the most shareholder value for our share holders and position those businesses for continued growth and long-term success.

We'll certainly do that. I think it is fair to say at this stage of the game we have been really focused on getting this transaction done, the food distribution transaction. We don't expect it to close for another month.

There is lots of work to be done in getting ready to close, so that will be our focus, but the others are always -- we're aware and in working hard in those areas to make sure the businesses are well-positioned and operating well and when the right time comes we'll be able to move.

And what about acquisitions? I know in the past there was quite a few acquisitions per year and then with everything that happened with the berry business it slowed down. Are you planning on getting back into that mode with the market being where it is as far as opportunities or do you think that you're really going to more concentrate on profitability in the interim and then perhaps reconsider that sometime in the future?

We to want do both. First and foremost to be clear, this is about profitable operations, profitable, sustainable, and predictable operations, and that's what we have been focused on for seems like forever now.

We have been focused there, and we're going to continue to focus there. At the same time the markets are rebounding and we won't -- we'll be aware of what's going on in the markets and look for our growth opportunities and make sure that we're totally aware, so we're -- I don't look for to us do five or six a year, but we're going to edge our way in.

Just add to that I think the focus is going to continue to be on building a platform and a Company and a culture that drives outstanding results of what we have right now, and that will enable us when we do acquire a company to be able to offer them something extra to what they're currently doing so we can get better results than they achieved historically. We're really close to being at that state, I think.

Yes.

Where we can tuck them in and take synergies.

Offer something.

What about the bioprocess group? There has been a lot of I guess deals that you guys have been trying to do with China and different companies within China. I know they take quite a bit of time to make decisions. Have there been any recent developments as far as negotiations with CRAC or any of the other major contracts you have been working on the last couple of years?

Ron, they're an incredibly busy group, and they have been really working on developing their technology and taking some of their technologies to the next step, and they have made great progress on that and we're very pleased. Since the start of the year we have had the Chinese contract that they're working very hard on and the progress with the Xylitol initiatives. There has been a great deal of progress.

We continue to work on a number of other exciting opportunities, and you're quite right, they take some time. Often they're reliant upon some government funding for the customers that we have, but we continue to push ahead, and we're always hopeful that we're getting closer on some of the opportunities.

And as far as the plants that are being built now, the pilot plants where do we stand with some of these? Are they close to completion? Are any new ones completed already with the pilot plans I know were built in the US?

Well, our equipment is now installed and running at the [Vereneum] facility in Jennings, Louisiana, and so that's completed, and I would say that other than just supporting their operations and ensuring that the-- all of our equipment is working as spec we're pretty much through that one. The work is ongoing and developing the microsystems, so manufacturing on that particular project. We are getting very close to the end of the assessment phase on the CMCP project. There is a little extra time taken to prove out some of the metrics, but that's moving along, and so we're making good progress.

Okay. That's about it. Good job on the quarter and look forward to another one.

Thanks, Ron. We're looking forward to another one, too.

Our next question comes from Keith Howlett of Desjardins Securities. Please go ahead.

Yes, I just had sort of a larger picture question on organization in terms of your private label business. Can you just sort of review how you're structuring that and how you see it going forward?

The structure corporately very much is to leave each of the divisions a fair amount of autonomy and day-to-day operations. We believe that allows us to be a lot more responsive, nimble, quick to decide things and take advantage of opportunities. That's very much sort of going to remain the strategy. What we have done, though, is develop I guess processes internally to try to leverage sort of -- and it is a fairly simple thing to do.

We have regular calls where is we try to combine the sales efforts and product development efforts, that type of thing, risk management efforts, so we have ongoing meetings and regularly scheduled initiatives to bring the groups together, but very much the idea is to leave this as a matrix organization where each one of the operations pursues their own opportunities. We have consolidated a bit of the selling, but still each one of the companies very much responsible for their own sales.

And is there much in the sense of intersegment sales like fiber to fruit or this and that or are they pretty much operating on their own?

No, there has been good activity in that, and we're working active projects to try to incorporate fiber in some of our fruit and other products as an example, so they're definitely is there, and obviously there is international sourcing and trading group is sourcing product for several of the divisions as well, but over and above when you expect obviously from the outside we are working to expand on the product development side in that area.

Thanks very much.

Thank you.

Our next question comes from Scott Van Winkle of Canaccord. Annuity Please go ahead.

Hi. Like that new name? Guys, first of all, the Bruins crashed, but a general question for you, Steve. Most of my questions has been answered, and you have talked about Tony has gone in detail on improvement that is have happened. I wonder what your impression or what are the conversations you're having with industry leaders and you're well connected in the natural organic space.

We have had some indications over the last several months such as whole foods reporting last night the category is back and posting growth. I am wondering what the conversations you're having today and what the general impression out there is of the market?

Good question, Scott. I think it is pretty consistent across the board that we went through a tough first half of 2009 where we had inventory deleveraging and we had a consumer that was a little bit paralyzed, and worried about how we were all going to eat for a period of time. That seems to be behind us. We're seeing growth back into the category.

We've learned through the process that our leading indicator often is our international sourcing and trading group. They seem to be on the front end, and we have seen good growth back in the category and the category that they're operating in, so everybody that I am talking to essentially sees growth. I don't think we're seeing 10, 15% growth. I think that underlying fundamentals are in the 4% to 6% range.

There is no question that consumers are connecting health and what they eat, so we like that, and the categories are growing for us, so it is pretty positive. We believe there will be continued momentum. Some of our categories have grown faster than others. Fiber is really, really hot right now. Others not quite as hot, but growth across the board everybody is seeing growth versus prior years.

Do you think it is easy comparisons or do you feel like the momentum is building kind of sequentially?

Yes, Scott, I think it is both. In our particular case our revenues were up 14.7% versus the prior year. When you backed out FX and things, we were back closer to 11%. We benefited a couple of percentage points by having a few extra days in the quarter as we go to a new reporting calendar. We believe that our underlying growth is when you peel back the onion completely is 4% to 6%, probably 5% and a little over 5% and growing.

And, Tony, you have certainly had a rule of selling only profitable products. I am wondering how much business have you maybe ceased or walked away from because it didn't meet profit expectations? Is that one of the reasons we don't -- one of the reasons maybe that growth has been impaired since you joined the Company?

I would like not to think so. What we have concentrated on in terms of SKU rationalization are items that typically you will get rid of 20% of the SKUs, 30%, 40% of the SKUs, and you cut out 1% of sales. We have done that in a couple of places. We also looked at items in international trading for example where we were swapping four quarters for a buck on almost every sale why tie up the working capital, that type of thing, and I think what you will see is I agree very much with Steve's assessment maybe 5% industry growth, I think that's specifically in some of businesses we're in.

We have opportunities to grow a lot more than that. Certainly on the Health Fruit Snacks I mentioned sort of ability to double our sales. We have internal plans to get there relatively quickly. We think there is a number of opportunities. We think we'll get there.

I would say that what we have done on the SKU rationalization and actually allows us to grow a little bit more quickly because we're not spending time and energy and a lot of stuff that just in the end doesn't add anything to your bottom line, so I think the last two years the slowdown has been more general economics and where we have been. We're out of it now, and I think well poised to grow a lot more quickly, and we're investing in the capacity to do so as we discussed.

Thank you.

Take care, Scott.

Our next question comes from William Ditti of the Gato Group Please go ahead

Good morning. Excellent quarter. A quick question. E is working on a universal organic logo. Just on the cost side would that affect you guys in terms of just changing some of the packaging and the insignia there going forward?

Not really. We would run through the old stuff and work with our customers to do that.

Okay. And then on the fee margins you guys are quoting somewhat lower sales but making up for that in better margins. Are you guys coming at that from better sourcing costs or ongoing operational efficiencies?

No. Operational efficiencies, on the organic feed that gets sold to make I guess to livestock that are grown organically, we have seen demands lower a little bit, but through operational efficiencies and a few other changes our margins are improving there.

Okay.

And one should offset the other.

And then just on the refrigerated soy milk contract did you guys throw out a number on annualized revenue there is?

We did not.

Okay.

On annualized revenues what now?

Just on the new refrigerated contract.

Yes, about a million a month.

Okay. All right. Great, guys, thanks a lot. Great quarter.

Thank you.

Our next question comes from George Harvey. Please go ahead.

Good morning, Mr. Bromley and good morning, gentlemen.

Good morning, George.

As a private investor I have to say given some of the events of the recent past that your combined efforts as a new team at debt reduction and increasing your margins continue to be very impressive.

Thank you very much.

What I am interested to know and what I would like to speak to this morning is how much energy and focus are you directing towards your risk management policies, procedures, and practices protocols and so forth, and what measures are you taking to ensure that these practices are in compliance and are being taken seriously in all the different aspects of your organization?

George, great question. I will start off and, Tony, I will let you finish. I can tell you that risk management has always had focus in this organization, but clearly with the issues that we experienced in 2007 and 2008 it has taken on a much higher level and I am certainly going to let Tony talk specifically operationally about risk management that but from a higher level it's ongoing focus of our board.

It is an ongoing focus of our senior management team. We have implemented a number of new processes and practices and policies around that that is being instilled throughout our organization. In 2008 we hired a new vice president of risk management, a gentlemen by the name of [Brian Metler] who has now been with us for a couple of years and has done a great job, combined with that keeping the old standards in place we've had obviously Tony and Eric join the organization to bring further discipline in that.

From a corporate perspective I can tell you that from our board on down through our operations risk management and the quality control around our processes has continued to improve. We clearly ended up with a problem in one of our operations but the processes were pretty good across the business other than where we had our problems. On top of that, Tony has implemented numerous risk management processes in the operations and, Tony, maybe you can help --

I was going to say there are a number of areas that go into that general category risk management, Steve spoke a little bit to the financial controls area, and some of those items and over and above that we have protocols and processes in place that looks at improving QA, our product safety protocols, we've got regular framework in place to assess property risk damage at each one of our locations this is a group that's set up for that.

We've got initiatives in the employee safety area. We've got initiatives and new rules and guidelines in terms of foreign exchange hedges on products and positions on product so I would say across the board this is as Steve mentioned is very much a focus and encompasses a lot of areas, and I feel pretty confident that we have got good controls in each one of those.

Could I just ask one additional question regarding this? With all the new practices and the protocols and procedures in place and the broader more intense overview of these issues and the problems they've caused in the past, what prevents people from getting sort of lazy and sort of assuming that things are working properly but is there a mechanism in place to send people out to do spot checks to ensure that the very things that are in place are being followed?

We're all jumping. We all want to answer this.

I can assure you with the monthly reviews, weekly reviews, weekly reporting, you can't hide anything. It is sort of jumps off the page. We have transparency pretty well across the board and in any area you can mention.

And over and above that one of the things I would like to emphasize is part of the lean process and lean initiative is you don't see anything from your office, so over and above having all of these nice reports and the full transparency, believe me, a couple of us including myself we're on the road 70% of the time and out there, so sometimes what doesn't show up in a report you see live and I can assure you there is sort of frequent and regular visits.

It is also something that we encourage across our division, so we're encouraging QA people to visit each other's plants. We're encouraging risk management people to visit each other's plants and new eyes looking at the same thing come up with new ideas.

Tony, I think it is important as well, George, we have-- sure there are other corporate controls that are in place, there are also divisional and operating group controls and we have the full support, we have a fabulous management team and I want to leave you with the impression that this isn't something that we have to fight to implement.

Absolutely not.

We're blessed to have just fabulous support across the organization.

Thank you very much. I find that very encouraging, and I wish you continued success with this. You can be doing so many things right, but if you get this part wrong, you know what happened a few years back.

Agreed.

Thanks very much, George. Good to talk to you. Bye.

Our next question is a follow-up from Ron Ruben from Ruben Enterprise. Please go ahead.

Sorry for that. A couple questions. As far as projections, I know that you have stopped giving projections or revenue projections and things in the last couple years. Do you anticipate getting back to doing that later this year with profitability being back in the picture and a little bit of a clearer road ahead of us?

That's a good question, Ron. We're clearly assessing that. We want to make sure that when we come back with guidance that we have got this business operating where it is stable, predictable and we're very comfortable in providing that guidance.

Clearly we have just had a significant transaction, and we want to readjust all of the numbers once the transaction takes place and we adjust our corporate costs and all of those types of things. So we're evaluating it. I don't want to commit to timing at all, but when we're comfortable and we feel that we can can get back out there and be extremely credible and be sure that we're providing solid accurate information, we'll evaluate that at the time.

Okay. That's it. Appreciate it.

I am showing no further questions at this time, gentlemen.

(inaudible) I just want to thank everyone and reemphasize that we're very pleased with the results of the first quarter. We're excited with where this business is going. We're finally -- we're pleased to finally get rid of a lot of the noise and be able to layout the numbers in a simpler format.

We really want to thank all of our shareholders and everyone that's on the call or listening via the web for your support. We look forward to talking to you in three months. As always, feel free to call Eric, Tony, myself, John Dietrich, we're all here, and always pleased to talk to everyone and if we don't see you we'll certainly speak to you in August. Thanks very much.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.