Sunopta Inc (STKL) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the SunOpta Incorporated second quarter earnings call. Before I turn the call over to Steve Bromley, President and CEO of SunOpta, we would like to remind listeners that except for historical information, the matters discussed during this teleconference call may include forward-looking statements, including without limitation, statements relating to the Company's operations, market and economic conditions, and financial position. All forward-looking statements reflect the Company's current views with respect to the future events, and are subject to risks and uncertainties and assumptions they have made in the drawing the conclusions, including forward-looking statements. Many factors could cause the Company's actual results, performance or achievements to be materially different from those expressed or implied by these 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 section in these reports titled forward-looking statements and risk factors.

Steve, you may begin.

Great. Thanks very much, and good morning, everyone. Welcome to our 2010 second quarter shareholder conference call. I'm joined on this call today by Tony Tavares, SunOpta's Vice President and Chief Operating Officer, and Eric Davis, our Vice President and Chief Financial Officer.

Before we discuss our results, I wanted to note that, except where specifically identified, our financial statements are reported in US dollars, and in accordance with US GAAP. I also wanted to mention that we're targeting to keep this call to approximately one hour, and note that we will be filing our 10-Q for the second quarter by no later than the close of business today.

As we review our second quarter, we want to once again reiterate our commitment to improving our operating margins, and return on net assets employed. As you will see over the course of this call, we're making great progress. A solid and stable operating platform is rounding into form, and our balance sheet is in very good shape. When combined with what we believe is growing interest in healthy living, and the long-term demand for nutritious and sustainable food options, we are truly excited for the future.

Also, before we review our results, I want to note that as a result of our June 2010 sale of the Company's food distribution business, all results from this business have been reported as discontinued operations, and thus are not included in operating results. All operating financial results reported thus exclude this business, and are comparable on a year-over-year basis.

For the second quarter of 2010, the Company realized revenues of $235.9 million, versus second quarter 2009 revenues of $216.1 million, a year-over-year increase of 9.2%. Revenues in SunOpta Foods were $212.7 million, an increase of 5.5% versus the second quarter of 2009. After adjusting for movements in foreign exchange rates and commodity prices, revenues in SunOpta Foods increased approximately 6.9% versus the first quarter of 2009, reflecting continued momentum in our business, and the natural and organic food sector in general. All operating segments realized improved revenues and operating income year-over-year. And Tony will provide further details in that regard in just a couple of minutes.

For the second quarter of 2010, the Company reported net income on a GAAP basis of $20.5 million or $0.31 per diluted common share, versus net income in the second quarter of 2009 of $1.8 million or $0.03 per diluted common share on a GAAP basis. Included in the results for the second quarter was a gain on the sale of the Canadian food distribution assets of $13.8 million or $0.21 per diluted common share. And I'll get into that a little bit more in a minute.

Earnings from operations for the second quarter of 2010 were $6.7 million or $0.10 per diluted common share, after eliminating one-time gains and related costs. A reconciliation in this regard was included with our press release last night. These earnings absorbed additional pre-tax costs of $1.3 million in legal and professional fees, and costs related to ongoing facility and operational rationalizations. As previously discussed, we have chosen not to normalize 2010 earnings for these additional expenses, which was our practice in prior years.

Operating income in the quarter increased to $11.8 million or 5% of revenues, as compared to $4.6 million or 2.1% of revenues last year. Operating income in SunOpta Foods increased to $12.8 million or 6% of revenues, versus $6.8 million or 3.4% of revenues in the prior year.

EBITDA for the second quarter of 2010, excluding the benefits of one-time gain items and contributions from discontinued operations, increased 76% to $15.8 million versus $9 million in 2009, indicative of the improved operating performance realized in the business. For the year-to-date period ended July 3, 2010, the Company has realized revenues of $453.3 million versus $407.4 million last year, an increase of 11.3%. Revenues in SunOpta Foods for the period were $411.6 million, an increase of 8.8% versus the second quarter of 2009. After adjusting for movements in foreign exchange rates and commodity prices, the increase was also 8.8%. Year-to-date, all operating segments have realized improved revenues and operating income versus the prior year.

Year-to-date, the Company has realized net income on a GAAP basis of $25.1 million or $0.38 per diluted common share, including a gain on the sale of the Canadian food distribution assets of $13.8 million or $0.21 per diluted common share, versus net income in 2009 of $100,000 or $0.00 per diluted common share. Earnings from operations for the first half of 2010 were $11.3 million or $0.17 per diluted common share, including the absorption of additional pre-tax costs of approximately $6 million in legal and professional fees, and costs related to ongoing facility and operational rationalizations. Again, I want to refer you to the reconciliation that was included with our press release, and also note that we have not normalized our year-to-date results for any costs in 2010.

Year-to-date, the Company has realized operating income of $20.8 million or 4.6% of revenues, versus operating income in the prior year of $3 million or 0.7% of revenues. Operating income in SunOpta Foods increased to $24.2 million or 5.9% of revenues, versus $8.8 million or 2.3% in the prior year. The Company has realized EBITDA through the six-month period ended July 3 of $29.2 million, versus $11.7 million in the prior year, excluding the benefit again of the one-time items and discontinued operations.

At July 3, 2010, the Company's balance sheet is in very good shape, and reflects a current working capital ratio of 1.71 to 1.0, long-term debt-to-equity ratio of 0.33 to 1.0, and total debt-to-equity ratio of 0.43 to 1.0. At July 3, 2010, the Company has total assets of $500.8 million, and a net book value of $3.84 per outstanding share. And Eric will get into more details on this in just a couple of moments.

At quarter end, we are in compliance with all banking covenants. Also during the quarter, we received final approval of the US and Canadian courts related to the settlement of class action proceedings stemming from the restatement of our 2007 quarterly financial results.

On May 10, 2010, we entered into an agreement to sell our Canadian food distribution assets to UNFI Canada Inc, a wholly-owned subsidiary of United Natural Foods. The transaction closed on June 11 for cash consideration of CAD68 million, a US equivalent of $65.8 million. The proceeds from this transaction have been used to reduce debt, and will be available to fund future growth opportunities. We recognized a net gain on the sale of $13.8 million or $0.21 per share, and this has been recorded in discontinued operations on our consolidated statement of operations.

In 2002, we started to build our natural organic and specialty food and natural health products distribution business in Canada, and we're really proud of the attractive platform that was put in place. Divesting the food distribution assets was an important milestone for the Company, and our strategy to focus on our core food manufacturing platform, strengthening our balance sheet and positioning our Company or future growth.

We have long admired UNFI's strong values and commitment to the natural, organic and specialty foods industry, and are really confident that they will bring great value to the Canadian marketplace. Once again, we do want to express our sincere appreciation to our fellow employees for the years of hard work and dedication, and wish them continued success under UNFI's leadership.

The food distribution assets included in this transaction form part of the SunOpta distribution group. We are retaining the natural health products distribution and manufacturing assets, which represent the balance of the assets that form the distribution group. The natural health products component has now been consolidated, and now forms a part of the SunOpta International Foods group, which includes our non-US based foods operations.

With that, I'll now turn the call over to Eric Davis, our Chief Financial Officer. Eric will provide specifics related to the Company's financial position, and certain balance sheet items, and our current debt status. Eric?

Thanks, Steve, and good morning, everyone. Before starting my comments, please note that all balances discussed are related specifically to continuing operations, except otherwise noted. As such, comparative balances have been adjusted for the impact of the discontinued operations.

As a result of the gain realized on the sale of the distribution business, and tax planning strategies executed during the second quarter, the tax provision includes a gain relating to Canadian tax losses that were set to expire in 2010, and previously written off. We expect the annual effective income tax rate for 2010 to be between 28% and 30%.

Cash generated from continuing operations was very strong in the quarter, and totaled $16.6 million as compared to $11 million in the second quarter of 2009. Cash flow from continuing operations on a year-to-date basis was $1.6 million, as compared to $7.3 million in the same period of 2009. The increase in the quarter was due to improved cash flow from continuing operations before changes in working capital of $11.9 million versus $7.9 million in the comparative period, and a reduction of working capital of $4.7 million compared to $3.1 million in the second quarter of 2009.

Cash generated from working capital increased to $4.7 million in the quarter, driven by continued inventory reductions, as compared to $3.1 million in the second quarter of 2009. Cash consumed on a year-to-date basis was $18 million, compared to cash generated of $1.6 million in the first six months of 2009.

Accounts receivable increased to $99.7 million, compared to $98.4 million at the end of the first quarter. Sales outstanding at the end of the quarter was 38.2 days, improved from the 39.1 days in the first quarter. Cash from reduced inventory levels improved to $6.3 million, compared to cash used in inventory of $3.3 million in the second quarter of 2009. Inventory was $146.6 million at the end of the second quarter, as compared to $175.6 million in the second quarter of 2009, a reduction of $29 million. Inventory turns in the quarter improved to 5.3 turns, as compared to 4.3 turns in the second quarter of 2009. We continue to focus on inventory reduction, improving the inventory turns, and are pleased with the progress we are making.

Accounts payable as of Q2 were $80.9 million, as compared to $93.7 million at the end of Q2 2009. The reduction is due primarily to reduced inventory levels, and taking advantage of supplier discounts for early payment.

Controllable working capital consisting of accounts receivable, inventory and prepaid expenses, less accounts payable and accrued liabilities and other current liabilities, was $172.1 million, versus $193.4 million at the end of the second quarter of 2009, reflecting the changes I mentioned previously. Working capital remains a key focus for our organization. And we expect further improvements throughout the balance of 2010.

Capital expenditures were $3.3 million in the quarter, compared to $4.1 million in the second quarter of 2009. Spending in the quarter was primarily related to the expansion of our fiber processing capabilities in Cedar Rapids, Iowa, equipment to process soups and broths in our Alexandria, Minnesota septic processing facility, and a refrigeration upgrade and a septic line expansion in our fruit topping facility in Southgate, Florida.

At the end of the quarter, we had total debt and operating lines of $107.7 million, representing a decrease of $64.1 million from the first quarter. Cash increased to $38.4 million from $22.3 million in the first quarter. Included in cash is $19.2 million available for use within our core food operations.

Our primary facility, including operating and term debt, is held by a banking syndicate that services our core food operations excluding Europe, and totaled $45.5 million at the end of the second quarter of 2010, versus $104.9 million at the end of the first quarter. Subsequent to the quarter end, the Company made an $11.3 million payment to our syndicated term debt facility. This payment was related to the sale of the Canadian food distribution business, and was required by our syndicated banking agreement. The remaining long-term balance of $33.7 million matures December 2010, and we are currently in talks with our syndicate to renew this long-term facility.

As of the end of the quarter, we had $89.8 million in availability on the syndicate banking facilities, and are in compliance with all banking covenants. Our European food operations are financed via an asset-backed operating line, with total outstanding of $21.5 million, and approximately $2.7 million in foreign availability. Opta Minerals is financed and operated on a long-term facility of $24.2 million, with availability of $8.4 million. Both of these facilities are stand-alone, and have no recourse to SunOpta. And we are in compliance with all facility requirements.

In summary, the sale of our distribution business, combined with our focus on reducing working capital with strong operating results, have allowed us to reduce our total debt levels from $228.5 million in June of 2008 to a net debt position of $87.3 million at the end of the quarter, a reduction of $141 million. We are very well-positioned for continued growth, supported by favorable cash flow from continuing operations, strong balance sheet. We will continue to focus on improved cash flows, operating results and working capital management, as well as identifying opportunities to invest in future growth.

I will now turn the call back over to Steve.

Great. Thanks, Eric. Opta Minerals, which represents approximately 9% of second quarter revenues, post the sale of the food distribution business, realized solid operating performance in the second quarter, versus a loss in the same period in 2009. For the quarter ended June 30, 2010, Opta Minerals realized operating earnings of $1.7 million or 8.1% of revenues, versus an operating loss of $0.1 million in 2009.

This represents the fourth 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 remain confident that activity levels in the steel and abrasives sectors have improved, and remain confident that results for 2010 will be significantly improved versus 2009.

Operating results in SunOpta BioProcess Inc in the second 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 and pre-treatment technology for use in the eventual 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 is being built for a planned cellulosic ethanol demonstration plant, located adjacent to an existing starch-to-ethanol facility.

The group also continues to pursue a solid pipeline of further opportunities to provide its technologies in a number of applications, and is working to complete the fabrication of its state-of-the-art modular pre-treatment pilot system, that will be able to operate at a scale that is smaller than current pilot equipment. SunOpta BioProcess 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.

SunOpta Bioprocess is continuing to refine and expand its technologies and applications, all focused on the development of commercial-scale production capabilities. The group is also actively exploring a number of strategic partnership opportunities.

With that, I'd like to turn the call over to Tony Tavares, our Chief Operating Officer, who will provide some details on our operations in SunOpta Foods. Tony?

Thanks, Steve, and good morning, ladies and gentlemen. As Steve mentioned earlier, SunOpta Foods posted record results in the quarter, on the strength of improved operations across all groups. The second quarter operating income for SunOpta Foods with $12.8 million, compared to $6.8 million last year. And year-to-date, the operating income was $24.2 million, compared to $8.8 million last year.

The grains and foods group continued to achieve operating income ahead of last year due to strong results from soy milk alternative beverages, soup products, and sunflower, partially offset by lower margins on corn, soybean, organic feed, and crop input sales, and losses and expenses from the Colorado mills joint venture. Results continue to be affected by poor crop quality, creating inefficiencies and lower yields through the plants, combined with lower margins on poor quality product.

Although additional revenues from the upgrade and expansion of the soy handling system at the Hope, Minnesota, facility partially offset these costs, crop quality has been and is expected to remain an issue through the end of this crop year, impacting results for the second half. Current crop conditions are good, and barring issues in the latter half of the growing season, we expect an average to above-average crop this year.

Organic feed margins did not rebound as quickly as expected in the second quarter, but should approve over the balance of the year. Vegetable oil margins improved as expected in the quarter, and were profitable. The group's sunflower operations again achieved very strong sales and operating earnings. The plan to aggressively forward-sell the 2009 crop to take advantage of the current markets has worked well through the first two quarters, and has resulted in payroll overhead absorption at the plants, and processing efficiencies.

In shelf sales to Turkey, Egypt, and Mexico continue to grow, and supplement our strong in shelf sales to Romania and the German bakery kernel market as a return to much stronger levels, with healthy margins and good demand. We expect the sunflower operations to continue to perform strongly through the next two quarters. Sales of packaged soy milk and alternative products in the quarter were ahead of last year, as a result of sales increases to new customers more than offsetting the loss of a refrigerated soy milk customer in the fourth quarter of 2009. Year-to-date, sales are now at the same level as last year.

Operating income for the quarter and year-to-date were well ahead of last year, as a result of favorable cost, and improved efficiencies and yields in the plants. Revenues are expected to improve over the balance of the year, as we have not yet started shipping refrigerated soy milk from an agreement with a major new customer. Production, which was expected to start in late May, is now targeted for late August due to packaging development and other delays on the customer end.

SunOpta South Africa had positive operating income in the quarter and year-to-date, as the first orders for export sales of whole milk replacement spray-drive soy product to Taiwan, Europe, Mexico, and South America hit in early June. The group's roasting and packaging operations have improved compared to last year, although the business remained unprofitable for the quarter and year-to-date. Although progress has been slower than we had hoped for, we remain confident in our strategy of increasing bulk sales to generate production efficiencies, combined with a more flexible plant capable of handling a variety of packaging formats.

Overall, we believe that the grains and foods group is on a solid foundation, although we expect a less profitable second half due to the crop quality issues we had previously mentioned. Results should remain strong compared to historical levels, and the group is well-positioned for the future.

Second quarter and year-to-date operating income for the ingredients group continues to pay strongly ahead of last year, on the strength of increased sales, higher margins due to process efficiencies and product formulation gains from pet projects, and improved margins on sales of natural food protectants. Revenues in the second quarter remained essentially on a par with the first, and operating income was approximately $3 million or 18% of revenues in the second, down from the first quarter due primarily to sales mix and unfavorable plant absorption variances.

The Cedar Rapids expansion project is on schedule, and we expect to get the additional capacity online by the end of the year. We delayed the bulk handling project at our Cambridge facility, and we now expect completion by the end of the third quarter. The [old hall] grinding project at the Louisville plant was completed in January, and is working well. And the biogas methane recovery project in Cambridge was completed at the end of May, and is also working well.

Fiber fortification remains a key food trend, and the group continues to pursue a number of new opportunities. We expect the ingredients group to continue to perform well, and deliver operating profits similar to the second quarter for the second half of the year.

The food group reported an operating profit for the second quarter in a row, due to strong results in the healthy food snacks and processed food operations, partially offset by less favorable results in the frozen food operations. The second quarter frozen food results reflect non-recurring expenses of approximately $400,000 related to legal costs, additional moving and storage costs due to the closure of a third-party frozen warehouse, and additional lab testing and other costs.

Sales at frozen food for the second quarter and year-to-date were slightly below last year, but margins have improved compared to last year as a result of a higher mix of retail products. We have adjusted our fresh production at our plants in Rosarito and Irapuato, Mexico to better align with sales demands, and have focused on reducing inventories. As a result, frozen food inventory is approximately $11 million lower than at the same time last year.

We continue to focus on improving the profitability of our frozen food operations. There have been a number of operational issues at the bagging facility in Buena Park, California, which we are addressing. And which were aggravated when sales demand exceeded budget expectations in the first half. A plan is in progress to address these issues. We are still in the planning stages of moving the bagging operations in California to a refrigerated facility in 2011, and plan to have the Buena Park operation functioning smoothly to ensure a good start at the new facility. On the positive side, the issues at the Buena Park, California bagging facility provide an opportunity for bottom line improvement going forward.

During the quarter, we signed a long-term marketing agreement, which gives us the exclusive rights to sell and market green garbanzo beans. Green garbanzo beans are a unique healthy food product offering exceptional nutritional value, and we see this product as a blue ocean opportunity. The patents on the growing and harvesting process are meaningful, and our sales plan is to sell the products to as broad a customer base as possible. The product line continues to be well received, and initial sales of IQF frozen beans are encouraging. We are also working on value-added products which use the beans as a raw material.

We are getting positive sales results on our recently launched [splash it up] product line of juice purees, and are developing new products, such as frozen smoothie puree cubes with fiber. We continue to focus on innovative value-added products to draw a bottom line profit as we move forward.

We also continue to work on our long-term plan to increase our competitiveness in frozen fruit. We have already exited fresh processing in California, and are making progress on a plan which would locate a third-party, state-of-the-art processing facility in Baja, the heart of strawberry growing in Mexico, in order to reduce freight costs and improve product quality and yields.

In summary, the frozen food operations continue to be a work in progress. We have short-term opportunities to improve our bagging operations, and we continue to move forward on our strategy to exit processing of fresh field fruit, and to develop and sell more value-added products.

The processed food ingredients operations reported record sales in the quarter, and profit continues to be very strong. The large sales increases from last year continue to be generated mostly by sales of ingredients of the yogurt and dairy industries. Additional refrigeration capacity to accommodate the new aseptic line, which will be operational by the end of the year at our facility in Southgate, California, became operational in July. This refrigeration will allow us to increase production on the existing line, and will alleviate some of the long order lead times we have been experiencing, allowing us to increase sales in the second half before the new line is installed.

As previously mentioned, the continuous improvement projects at the Southgate facility the last few months have resulted in changes to production planning, and the way we hold finished product. And have freed up a lot of space at the facility, and also generated additional production capacity. In summary, the processed food ingredient operations should continue to deliver very strong results in 2010, and are on a very solid foundation longer term.

The healthy food snacks operations had another strong quarter. Sales in the quarter were slightly below last year as a result of higher volumes, but lower selling prices, driven by reductions in material costs and promotional pricing, as the team continues to successfully use category management and branding techniques to increase private label sales. The improvement in results continues to be driven mostly by efficiencies from PEP initiatives.

The [cartoner] equipment at our Omak, Washington facility is being replaced in August, and the new equipment should drive greater flexibility on our main production line, and reduce quality issues and inefficiencies. The move of the Summerland Bridge, Colombia operations to the facility in Omak, Washington took place at the end of May. The project progressed smoothly, and the equipment was in production in early July as planned. The second quarter results include $457,000, and the year-to-date results include $806,000 in costs associated with the move. The management team remains focused on increasing sales, as we still have capacity to almost double sales with the existing equipment once the cartoner issues are resolved.

We continue to roll out our product innovations to private label customers, and have started production for the September launch of a fruit bit product in a single serve pouch with a major food service customer. We also have confirmed new business on Bits and Twists with a major retailer, and there are a number of other sales opportunities which we are hopeful in securing. The healthy food snacks operation should continue to perform well in the second half of the year.

International food group recorded a strong operating income in the second quarter, from record results in the European industrial organic ingredients operations, and improved results in the consumer products solutions division, partially offset by operating losses in the Purity Life natural health products operations. The record results in the industrial organic ingredients operations are being driven by generally improved market conditions for organic products in Europe and North America, the positive impact of lower-cost inventory purchased when the euro was higher relative to the US dollar, and the continued focus on improving margins, inventory controls, and purchasing.

The results include foreign exchange gains of approximately $900,000 in the quarter, and approximately $1.3 million year-to-date related mostly to gains on currency hedges to fix the cost of raw materials at the time a purchase commitment is made. Some of the foreign exchange gains relate to inventory which has not yet been sold, or inventory which has yet to be received, and we expect margins in the third and fourth quarters will be lower as a result.

As expected, margins on seeds, [pulses], and dried fruit and nuts drop at the end of the second quarter, as lower-cost inventory has been replaced with higher cost purchases. Margins are expected to remain at lower levels for the rest of the year. As expected, coffee sales and margins improved considerably in the second quarter, and are now ahead of last year, and are expected to remain strong the rest of the year.

As of April 1, we completed the transfer of the North American industrial organic ingredients operations under the direction of the European management team. The transition went smoothly, and the North American industrial sales team has been energized by the new, more aggressive selling approach, and sales have increased dramatically compared to the first quarter and last year.

The restructuring also seems to have created increased momentum in the consumer products solutions division. Sales and margins of consumer products were well ahead of last year in the quarter and year-to-date, and also gained momentum in the second quarter compared to the first. The division returned to profitability in the quarter and year-to-date after two years of operating losses. Sales and margin increases are being driven mostly by organic frozen broccoli, energy drinks, low-calorie lemonades, and vitamin waters.

The consumer products team continues to work on a number of opportunities in a variety of products for North America, including a line of fruit purees in an innovative packaging format, and the program to produce a private-label conventional, as well as an organic, orange juice product for a major retailer. The consumer product solutions team is also coordinating SunOpta's efforts to market a range of consumer products in China and other Asian markets.

The revised structure is providing the sharper focus which we had expected, and when combined with the improved market for organic products, as well as a number of good opportunities we are currently working on. We are hopeful that the consumer products solutions division will continue to generate improved earnings in the next few quarters.

As was the case in the first quarter, the fluctuation of the Canadian dollar relative to the US dollar needs to be considered when assessing the Purity Life natural health products results. Sales in Canadian dollars in the quarter and year-to-date were actually lower than last year. The decline in revenues is mostly in the food, drug and mass channel, and mostly in our distributed brands, both shared and exclusive, as demand for higher priced natural health and beauty products appears to have dropped during these tougher economic times.

Branded sales were essentially at prior year levels in the quarter, and slightly lower than last year, year-to-date because of product launches, and listing base changes from the first quart last year. On a moving annual basis, branded sales have increased, and we expect further improvement in branded sales compared to last year in the second half, as a number of promotions and product launches are expected to have some momentum.

In the second quarter, as a result of the sale of our food distribution business, and the need to streamline operations, we made a number of organizational changes in marketing, sales and operations. And the results include a charge of $636,000 in severance and other costs associated with this restructuring. The changes should create a more dynamic atmosphere and culture at Purity, and have generally been very well received by the employees, and by our customers and vendors.

Trade and marketing spending at Purity was heavily skewed to the first half, and will be much lower in the second. As mentioned previously, marketing spending and effort have also been redirected to provide more support to the health food channel, as well as to promotional activities to drive sales. We have also outsourced our merchandising efforts in food, drug, and mass to better identify gaps in our distribution.

We're disappointed that the second quarter operating loss at Purity is only slightly improved from the first. We remain confident, however, that the changes we have made to refocus our sales team, to scale back and redirect the marketing spend, and to introduce new disciplines should generate much improved results in second half of the year.

On a more general note, the PEP continuous improvement, and other initiatives, are delivering improved margins and substantial reductions in our working capital across most of the divisions in SunOpta Foods. The impacts are clearly reflected in our improved profit margins and lower debt levels compared to two years ago. The focus of the team will remain squarely on process improvement, and eliminating waste in all its forms in all areas of our operations. There will always be room for improvement, and we are still very early into our lean journey.

Going forward, we expect that results in SunOpta Foods will continue to improve over time, though will not be an uninterrupted ever-increasing record profit -- after record profit quarter after quarter. That is simply not the nature of our business today. Having said that, we are very pleased with our results, and are confident that we are on the right course. And that we will succeed in our goal to become a sustainable organization, which will deliver exceptional returns to our shareholders by focusing on a triple bottom line of people, profit, and finance.

I will now turn the call over to Steve.

Great. Thanks a lot, Tony. So in conclusion, we are extremely pleased with our progress this year, and the improvement in our operations and our results, and we believe this will continue. We have invested in our people and processes, with a focus on innovation, category management, cost control, productivity improvements, and improved asset utilization, and these are now clearly showing their benefits. While never satisfied, we are pleased with our progress.

Our goals for 2010 remain clear, return our Company to profitability. Two, continue to leverage the strengths of our organization to drive long-term sustainable position in natural and organic foods and natural health products, categories that we believe are very relevant in today's society, and offer us 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 return on net asset target of 15%. And five, continue the process of liquidating non-core businesses, with a focus on streamlining operations within our core value-added food sourcing and processing operations.

As our results demonstrate, we are making real progress on all of these initiatives, and we are optimistic about our future prospects. We are really looking forward to a successful 2010 and beyond for our Company and our shareholders.

And with that, we will open the call to questions. Thank you.

Thank you. (Operator instructions)

Our first questions comes from Peter Prattas with Fraser Mackenzie.

Hi Peter.

Those are some great results.

Thank you.

I was just looking across your four food segments. Can please discuss what segment may have the largest opportunity for sales growth over the next year or so? And maybe if you can add some color on which segments right now have the most excess capacity, and which may be getting a little tighter?

Volumes and capacities? Tony.

Okay. Well, in terms of opportunities, I think there are opportunities for internal growth across all of the divisions. Within grains and foods, the most obvious one is the Modesto facility. We have a facility there that's a couple hundred thousand square feet with two lines and room for eight. So, we're working hard on products already profitable, and there's great opportunity there. A lot of active projects on the go. Same situation at our healthy snacks operations in Omak. We have facility where we can double without any significant investment sales, and certainly focusing on that. The others are all -- there's a range of, sort of capacity utilization, but there are active projects in all of them. We certainly have capacity in fruit. We're nowhere near running all four of our lines at Buena Park, for example, at full capacity. And some of the value-added products should add nice production there at great margins. So, I honestly believe there is room to grow internally in every single one. I don't know, Steve, do you have anything --

Is that okay, Peter?

Yes, that's great. If you could just add some color on where the most likely growth will be?

I honestly like our chances across most of what I just told you.

Good enough. Okay, and if we can just move over to Opta Minerals for a second. Can we get your outlook for the second half of the year, and can you comment there on what the improved results -- do you now think that you're in a far better position to dispose of the business while realizing a more reasonable price?

Well, a couple of questions -- two questions there. The first is with regards to the outlook on the back half. There are some who say the steel industry will decline a little bit. There are others who say it should stay where it is, and maybe increase. We see no reason that we can't expect the results to be in the ballpark where they were thus far this year. Hopefully continue to improve, but as you know, Peter, it's a little bit dependent on where the steel industry goes. So, our team are watching it closely as I indicated. Some feel it'll drop off a little bit. We'll see as the year goes, but it'll certainly be profitable and certainly be in a good place. Clearly, this is now four quarters with the business being profitable. Opta Minerals is a very well run business, with a great management team, a stand-alone board of directors, stand-alone operating systems, and it's a really good business. But we're in the food business, and I think we've been clear that at the right point in time, we will do something. And a right point in time includes a combination of factors when it's best for Opta Minerals to have a different owner. We're clearly not in need of the cash. We're clearly very happy with the operations. I think we've been clear about the fact that at the right time we'll do it. So, it's well-positioned, but to give you a time would be unfair because we don't have the time that it'll come to fruition.

Fair enough.

I think there's no rush to keep (inaudible), but it doesn't remove any focus from the food game on anything. We barely get involved at all.

I can tell you that of all of our non-core businesses, which we're whittling down, this business literally runs its own. I and a couple other guys will have conversations with the management team there, but they do such a great job that -- it's just not a diversion of our focus. Others are, and we've been dealing with them, but one's not.

Great to hear. Thanks very much.

Thanks, Peter.

Our next question comes from Greg Badishkanian with Citigroup.

Thanks. Greg Badishkanian here. Hi, good. Yes, great quarter, guys. And just -- the organic sales, very solid. Just wondering as we look out the back half of the year, is there any reason why we'd expect maybe a material drop off, or do you expect the same that we've seen thus far?

No, expectations are to keep the same 6%, 7%, 8% pace in your over year that we saw in the first half. And we've got some nice opportunities in some divisions where, for example, in the aseptic division in grains and foods, we lost a major customer in the fourth quarter 2009, and we've eventually replaced all that volume. The year-over-year comparisons are going to get nicer in the fourth quarter, for example. So, but natural growth, Steve likes 6%, 7%, 8% so --

Yes. I think it's in that 5% to 10% range, Greg. And the markets seemed to be there, and we see how UNFI are doing and Whole Foods, and what our customers are doing, and Hain. Everybody seems to be in that ballpark. Yes. So, we're -- that would be nice.

Yes. And I was going to ask -- Whole Foods reported pretty decent same-store sales. How about some of the conventional supermarkets in the independent foods. Do you have any visibility on to -- is it across the board, or are there certain segments that are doing better?

I think the category in general is doing well. The club stores, in my opinion, and Tony you can -- are probably outpacing some of the traditional supermarkets in some categories, but they're all experiencing strength in the category.

Great. And then also -- pretty nice -- very nice progress on the debt reduction in terms of your priorities going forward at a certain point. Are you going to focus cash on buying back shares or acquisitions, or do you really just really want to strengthen that balance sheet?

Well, we clearly want to have a stronger balance sheet going forward. I always lament back in the day when our debt levels were massively higher before the crash, and the bankers were lined up at the door to give you more. And then life really changed quickly. And so, we want keep a strong balance sheet, but look, there's no question that at the right point in time with the right opportunity that really fits with our model, and can be well consolidated and integrated, that we're going to look for good growth opportunities. We believe they're out there. We know businesses that would be a wonderful fit. And we're going to manage ourselves very carefully. We don't intend to get ourselves overly leveraged. But with the cash flow that we're generated, we're going to be to a stage where we're going to have to either buy back or invest into the markets, and we'll be very careful about how we do that. Tony you wanted to --

Yes, I'd say that the other thing that we're excited about is that we're created a culture and a structure here that continually focuses on this thing. So, we think there's real opportunity in buying a company that's performing well, and then wringing a lot more out of it. And bringing -- importing that same type of culture and attitude to whatever we acquire. So, it'll be great. I think we're going to (inaudible) on these opportunities as they present themselves. And we're in a position where options can now be looked at.

But we'll be very careful, but that's good too.

I'd imagine that some of the smaller companies that you'd potentially look at would be in a little bit more desperate situation, so in terms of valuation parameters, do you have any discipline on that, or any thoughts on take-out multiples you'd look at?

Well you know Greg, we have a pretty detailed acquisition set of priorities and acquisition -- what's the word I'm looking for guys -- criterium that we follow. And historically, we've been pretty low on the multiples that we pay, but we've traditionally bought smaller businesses, and had earn-out scenarios. And those fundamentals will still remain in place, but we'd like to move up in the size and the quality of the assets that we acquire going forward, so --

And the criteria doesn't nearly focus as much on multiples as it does on (inaudible) and growth, and so -- what we think we can do with the company and how it fits into our structure.

So, depending on if it's good, we're ready to pay. If it's more and more opportunity, you're right to pay a little more.

And just finally, in terms of legal costs and some things that maybe are not part of your ongoing operations, at least at a certain point those will be reduced. How much was that in the quarter? And what do you expect in the back half of the year?

Well, our legal costs were in the range of $500,000 up to $1.3 million if you just simply break it down. It was $500,000 on legal, then about $800,000 between the Summerland plant closure and some of the rationalization at that fruit, as well. In the first quarter, we had similar costs of $2.4 million, of which legal was at about $1.2 million? So, the legal costs are coming down. The class actions are now settled, and a number of other legal matters are getting behind us. So, we would look for the legal costs to continue to come down. And I suspect, if we're doing our job right, we'll always have a view rationalization costs, because they're long-term investments and improving your operations. So, I think the heavy lifting's all behind us, but we're always looking for places that we can rationalize and streamline and make better, and if there's costs associated with those, but you get the future benefit -- we take them. But you should expect legal to continue to drop.

Right. Great. Well, congrats on a nice quarter and thank you.

Thanks a lot Greg, take care.

Our next question comes from Chris Krueger with Northland Capital.

Hi, good morning.

Hey, Chris.

Hi. I believe early in the year you announced a large aseptic soup customer, and I don't think I heard an update on how that has ramped up, and if there's a pipeline for other soup opportunities. Could you talk about that?

Sales production did start early in the second quarter, probably in the second quarter, and part of the reason why the aseptic sales were not ahead of last year. So, it's ramped up, its done well, and that's operating as we expected. We are looking at other opportunities in the area with -- in that area as well.

So, pretty much where we expected to be, Chris.

Okay. In your old fiber business, I know about a year ago is when you took a big customer, and sales and margins really started to improve. The last few quarters, it's stayed around that same level. Can you talk about a potential pipeline of new opportunities there, or what could drive further growth, or is it just a capacity issue?

Well, we're were addressing the capacity issue with the expansion of our Cedar Rapids facility, so that'll give us some ability to get new sales. So, it's been partially that, and yes, we have a number of opportunities to -- that are customer-specific, product-specific that are in the pipeline. Most of these things the -- I guess the interesting thing to understand about that business, the time from prospect to landing a new sale is a little bit longer than a lot of other areas. It's about working with a customer, developing the right product, having it sit in their production stream, takes a while. And we've got a lot of active projects, but nothing really concrete to say just yet.

Okay. Last question. I know in your 10Ks you guys state operating margin goals for you individual segments. Have any of those goals changed, and I guess the international food segments or the new mix of business there. Can you give us a range where your goal is for that segment?

Yes. So, you'll see in the queue that comes out, Chris, that the international -- the former international sourcing and trading group was at 4% to 5%. That's now been rebalanced to 5% to 6% with the natural health products business which, when we get it turned around, should operate at a little bit improved margins. We're having a look at all of the others. Based on the 5% to 6% in our calculations, we still align to our 8% target. Clearly, ingredients has performed above our target level, and Tony and the team are monitoring that closely. And we'll update that target as we get through this year. Grains had a -- grains and foods had a very good quarter, and were in the top end of their range, which is 6% to 8%. They were at 7.8% I believe. Tony mentioned that it won't be quite as strong in the third quarter, maybe into the fourth just as we get through the - by the tail end of the tough crop year and get into the new crop. Won't be a disaster by any stretch of the imagination. The results will be very, very good, but not as strong. So, we're continually looking at those, and it's really part of our -- one of the things that Tony talked about, it's never enough. And our 8% target someday will go to -- hopefully go to 9%, and we'll be adjusting those ranges. There's opportunities in each, so the only change that you'll see this quarter is 5% to 6% in the new international foods group.

Okay. Thanks. That's all I have.

Take care, Chris.

Our next question comes from Christine Healy with Scotia Capital.

Good morning.

Hi Christine, how are you?

I'm good, thanks. Just a couple questions for you guys. First for Tony, I just wanted to clarify on the grains and food. You say you're saying that you expect lower margins for the remainder of the year. The US crop is expected to come off really early this year, so I wanted to get a sense of when you expect to be processing some of that new, higher-quality crop?

Yes, that'll help. So, right now we're -- the comments were based on expectations that crop comes off as in prior years. Anything that makes the crop better earlier, better quality will certainly help.

And maybe towards the end of Q3 we could see --

Especially in the fourth quarter.

You're right, Christine. The crop's a couple weeks ahead. And at this stage, it's pretty good in most of our growing areas. Yes, so, that'll help.

Okay. The next -- I know that on corn and soybean prices, you guys try to stay as hedged as possible, but with the recent price increases, could we see some kind of impact here on Q3 for you guys?

We don't think so, Christine, nothing material.

Okay. And Steve, can you talk a little bit about what opportunities you see for expanding in China? Both your operating footprint, and just sales to China?

Yes, sure. We've had an active working group here for a period of time now. We've identified China, because we talked about this. 1.4 billion people and their dietary preferences are changing, and there's more North American food, and they're very concerned with food safety there, given all of the issues that they've had. And so, natural and organic, and the safety aspect of that food is becoming much more relevant in China. We do have a small operation in China as part of our international foods business, and that business is being focused on bringing some products into the Chinese market. We've met with retailers and distributors, and we're understanding the market. It's an area that we're dedicating a fair amount of time to. I don't see in the next six months a big uptick. Some of our natural health products are going into those markets. We see it as a really big opportunity, both on a ship -- a product imported to those regions, but also maybe establishing our footprint there. Tony, I don't take it's fair to say that we have the plan nailed yet.

No, I think we still -- like Steve said, there's been a group which we've both been involved quite a bit on the last eight months at least, and we've done quite a bit of the groundwork. We've developed a common look-branding approach to several of our product offerings across the divisions that have the ability to leverage one common name going in there. We've developed pricing to test markets going into this thing. We've made very formal presentations to a number of distributors. As Steve said, just generally learning about the opportunity. The really nice thing is that we're not late at all. Certainly the organic and natural foods market in China is still very small, but growing. Expectations that'll obviously be significant compared to other opportunities given the size of population. So, we're in there, and my hope is that sometime early 2011, we can start seeing some sales going in there. But it's going to be a slow, gradual build for long-term success, rather than trying to go in and be a flash in the pan. So, that's the way we've approached the thing.

Okay, that's great. That's it for me, guys. Thanks.

See you, Christine. Bye bye.

Our next question comes from Bob Gibson with Octagon Capital.

Good morning everybody.

Good morning Bob.

Just a couple of housekeeping things. The gain on dilution of the bioprocess business. Would that be in the operating income for bioprocess?

No, it's not. It's netted out in other income, so on our P&L -- I don't know what the number is, $65,000? Other income there's that gain offset by all the one-time costs going the other way that we talked about.

Okay, cool. And I'm having problem coming up with your net debt number of $87.3 million.

You take the $107.7 million that's in debt, and deduct the cash position available to the food business of $19 million about.

Oh, okay.

It's a net debt. Yes, it's a net debt.

Okay. Beauty.

And mentioned in the call, Bob, was we used about $11 million of our cash to pay down some of the term piece in that, so it was just timing on that.

Okay, cool. And I'm getting old so my hearing's going -- tax rate going forward. What should we be using?

Well, for this year, somewhere between 28% and 30%. Going out beyond this, somewhere between 34% and 36% in and around that range. Because this year, we do have the benefit of that loss carried forward that we've utilized in here.

It got triggered by the --

Because of the Canadian group, plus some tax planning that we put in place here.

Excellent. Thanks a lot guys.

Take care, Bob.

Our next question comes from Ron Rubin with Rubin Enterprise.

Hey guys, good quarter.

Hey, hi Ron.

I just wanted to follow up on a couple of items. With the Abengoa loss that you had, started a few years ago -- any status on that? Is something that you're continuing to pursue, or --?

No, I though we had announced that earlier. Right at the start of this year, the arbitrator ruled, and the matter was settled, and all of the issues around IP were resolved. So, it's done.

Okay, so that's where it's at. You're not pursuing anything in addition to what you announced earlier.

No, we're not.

Okay. And as far as the projection of growth, do you see yourself growing more through organic growth, or through acquisitions?

Well, our -- that's a great question, Ron. Our first priority is to grow internally. Leverage what we have, continue to bring new products, new innovative products. Tony talked about our new product development opportunities, which we had a good pipeline of internal new products leveraging the facilities that we have. So, we clearly want to continue to grow internally. We've got growing markets, but also leverage what we have to bring new products to those markets, and -- so that's our first priority. We'll combine that with external growth opportunities that we identify, or when they identify themselves that are the right fit to the business. So, first and foremost internally, but clearly there will be those other opportunities.

Okay. And then as far as the -- I know you can't really know the exact future, but as far as the amount in comparison between the two. Do you see yourself growing much more from the acquisitions, or do you see yourself growing more from the organic growth? At least in the -- future?

I think the way to look at it is this way. Assume we have $1 billion platform, and if the internal growth is between 5% and 10% a year, that could be just -- the math is there. There's lots of opportunities out there, at $50 million, $100 million each in acquisitions. You're right, I can't put my finger on it other than to tell you we're going to grow internally and really focus there. And those other opportunities, there aren't great deal of businesses in the natural and organic space that we're in that are in the $200 million, $300 million range. They're generally smaller than that. So, you have to balance that out. We intend to do both, but first and foremost, we want to grow internally and continue to meet the demands of our customers, and we think there's great opportunity there.

Oh, well, as far as to elaborate more on the acquisitions, I know that in the past you made quite a few acquisitions that are very, very small. And then the most recent was a relatively large one. Would you say that you're looking at companies that are generating between $10 million and $25 million a year, $50 million to $60 million a year? Where are you looking at as far as criteria in the amount of sales that these companies are generating?

Ron, our criteria isn't so much around size, although I think we've said that look, when we get out there and we're looking, and some of these divestiture issues are behind us, and our debt's in a good place where we are, that we're going to get out there and look. We would like to acquire larger companies that are a little bit more sophisticated than what we have done in the past. Having said that, if there are smaller businesses that meet with our criterium, and one of the key criterium will be really good growth opportunity, and a really good fit with our model that we can integrate and bolt onto our system, and make one and one equal three, we won't turn our back on those.

Okay. And as far as divestiture of the non-core businesses, would you say that the bioprocess group -- I know that ultimately you'd like to divest out of it, but is that something that you're looking at doing in the nearer future, or maybe sometime down the road, looking at a few years from now?

Well, you're right, and we've indicated to everyone that there are number of non-core businesses that we're working on, and that's one that we've been spending time understanding a variety of options on it. And I'd say that we're more actively working on those options than, as I said earlier, on Opta Minerals. And -- that's hard to predict where they'll go, but I would hope that there's something that can come to fruition by the end of the year. But, it's just like anything, Ron. It's like, what's the stock market going to be in November. It's hard to -- But you might be pretty good. You might pin it, actually. It's really hard -- it's hard to put an exact timing on. And we aren't -- the good news is that it's a great business, and there's no rush. When the right opportunity is there, we can do it. It's not like we're sitting here on the brink of do it or it lose your business or anything. We're just not in that situation. So, we'll do the right thing at the right time.

Okay. And lastly, as far as the China resource alcohol -- I know that this is something you've been working on for a very long time. Are there any new developments whatsoever with the -- actually coming to fruition in the near future, or this is something that's still just waiting for maybe another year or two?

The CRAC is -- I know it's in their pipeline. I don't have a good -- I couldn't give you the timing. I know that they're looking. There's the other Chinese project that's underway, and there's a couple of other really interesting opportunities in China. Timing's hard, as we always know. That -- those are always hard to pinpoint until they actually happened. But they're all moving ahead.

Okay. Great color vision. Talk to you soon.

Okay. Thanks Ron. Take care.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.