Sunopta Inc (STKL) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the SunOpta Inc. third quarter earnings call. Before I turn the call over to Steve Bromley, President and CEO of SunOpta, we would like to remind listeners that, expect for historical information, the matters discussed during this teleconference 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 future events and are subject to risks and uncertainties and assumptions they have made in drawing the conclusions included in such 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 sections in these reports titled Forward-looking Statements and Risk Factors. I will now turn the call over to Mr. Steve Bromley, President and CEO of SunOpta.

Great, thanks. Thank you, and good morning, everyone. Welcome to our 2010 third quarter shareholder conference call. I'm joined on the call today by Tony Tavares, our Vice President and Chief Operating Officer, and Eric Davis, our Vice President and Chief Financial Officer. At the outset, we want to take a moment to acknowledge our military personnel and veterans on this Veterans Day in the United States and Remembrance Day in Canada. We want to thank them for their sacrifices and honor them for their commitment and courage.

Before we discuss our results, I wanted to 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. Note that we'll be filing our 10-Q for the third quarter by no later than the close of business today. But as a result of Veterans day in the United States, will not be posted by the SEC until tomorrow.

As we review our third quarter, I want to once again reiterate our commitment to improving operating margins and return on net assets (inaudible). We're making good progress and are creating a solid and stable operating platform. When combined with what we believe is continued interest in healthy living and the long-term demand for nutritious and sustainable food options, we believe we're really well-positioned for the future.

I also want to note that as a result of our June 2010 sale of our food distribution business, and August 2010 sale of SunOpta BioProcessing, all results from these businesses have been reported as discontinued operations and thus are not included in the operating results. All operating results reported thus exclude these businesses and are comparable on a year-over-year basis.

For the third quarter of 2010, we realized revenues of $217.9 million versus 2009 revenues of $212.5 million, a year-over-year increase of 2.5%. Once adjusted for movements and foreign exchange rates and commodity-related pricing, revenues actually increased approximately 7.6% on a consolidated basis versus the third quarter of 2009. For the third quarter of 2010, we reported net income on a GAAP basis of $34.1 million, or $0.52 per diluted common share, versus net losses in the third quarter of 2009 of $4.7, million or $0.07 per diluted common share. Included in the results of the third quarter was a net after-tax gain on the sale of SunOpta BioProcessing of $34.6 million, or $0.52 per diluted common share, offset by after-tax non-cash charges of $6.4 million, or $0.10 per diluted common share.

Earnings from operations for the third quarter of 2010 were $5.3 million, or $0.08 per diluted common share after eliminating gains on dispositions and non-cash charges. Earnings from operations absorbed additional pretax costs of approximately $600,000 related primarily to ongoing facility and operational rationalizations. We provided a reconciliation of these earnings from operations with our press release last evening.

Operating income for the quarter increased 96.2% to $10 million, or 4.6% of revenues, versus operating income in the prior year of $5.1 million, or 2.4% of revenues. Operating income in SunOpta Foods increased to $9.7 million, or 4.9% of revenues, versus $5.3 million, or 2.7%, in the prior year. EBITDA for the third quarter of 2010, excluding the net effect of discontinued operations and non-cash charges increased 52% to $14.1 million, versus $9.3 million in 2009, indicative of the improved operating performance realized within the business.

For the year-to-date period ended October 2, 2010, we've realized revenues of $668.5 million, versus third quarter -- year-to-date third quarter 2009 revenues of $619.8 million, a year-over-year increase of 7.9%, again adjusted for movements in foreign exchange rates and commodity rate pricing, revenues have actually increased approximately 11.2% on a consolidated basis, and approximately 9.7% in SunOpta Foods. Year-to-date, all operating segments have realized increased revenues and operating income versus the prior year, indicative of our continuous improvement efforts throughout the organization.

Year-to-date, we've realized net income on a GAAP basis of $59.1 million, or $0.90 per diluted common share, versus a net loss in 2009 of $4.5 million, or $0.07 per diluted common share. Included in the year-to-date results is a net gain after-tax on the sale of the Canadian food distribution assets of $13.8 million, or $0.21 per diluted common share and the net gain after-tax on the sale of SunOpta BioProcessing of $34.6 million, or $0.52 per diluted common share, offset by after-tax non-cash charges of $6.4 million or $0.10 per diluted common share. Earnings from operations for the three quarters are $16.6 million, or $0.25 per diluted common share. These earnings from operations absorbed additional pretax costs of approximately $4.6 million, including legal and professional fees and costs related to ongoing facility and operational rationalizations. Once again, I refer you to the reconciliation for non-GAAP measures that was included with our press release last night.

Year-to-date, we have realized operating income of $31.5 million, or 4.7% of revenues, versus operating income in the prior year of $9.6 million, or 1.6% of revenues. Operating income in SunOpta Foods increased to $33.9 million, or 5.6% of revenues, versus $14.1 million, or 2.4% in the prior year. We've realized EBITDA through the first three quarters of $43.9 million versus $22.4 million in the prior year, an increase of approximately 96%, excluding the net benefit of dispositions and non-cash charges.

On October 2, our balance sheet reflects a current working capital ratio of 1.61 to 1, long-term debt-to-equity of 0.25 to 1 and total debt-to-equity ratio of 0.33 to 1. During the quarter, we generated cash from continuing operations of $20.7 million. At the end of the quarter, we had total assets of $517.4 million and a netbook value of $4.42 per outstanding share. Eric will discuss this further in a moment.

During the second quarter, we received final approval of the US and Canadian courts, related to the settlement of class action proceedings, and in this last quarter, we also finalized the Securities & Exchange Commission investigation via a series of administrative orders. This brings all of these matters to a close.

Earlier this week, we announced the acquisition of 100% of the outstanding shares of Dahlgren & Company, Inc. on a debt-free basis for cash consideration of $44 million, subject to normal post-closing adjustments plus an earnout based on predetermined targets over the next two years. Dahlgren is an integrated confection sunflower producer headquartered in Crookston, Minnesota, with four strategically located operating facilities in Minnesota, North Dakota and South Dakota. Dahlgren is a global supplier of confection sunflower seed products, including in-shell, kernel, roasted sunflower and soy nuts, bird food, hybrid seed and other miscellaneous products. Dahlgren services a number of sectors, including the snack food, bakery and food ingredients industries.

Approximately 40% of its products are marketed internationally, and the business sells to customers in every state in the United States. Dahlgren has had annualized revenues of approximately $80 million and has been a consistently profitable business. The combination of the Dahlgren business with our existing confection sunflower platform will be very synergistic --pardon me --and will create one of the largest confection sunflower businesses in the world with extensive vertically integrated operating capabilities via operations in North America and in China. The transaction is expected to be accretive to our earnings and was financed through existing banking facilities. This acquisition is consistent with our strategy to grow our core value-added natural and organic foods platform, creating leading positions in niche categories while at the same time, continuing to focus on continuous improvement and a divestiture of non-core businesses.

And we have been busy divesting of non-core assets this quarter, as well. On September 1, 2010, we announced the sale of SunOpta BioProcessing to Mascoma Corporation. The combination brought together our fiber preparation and pre-treatment technology with Mascoma consolidated bioprocessing technology to create a company with comprehensive capabilities for converting non-food cellulose such as wood chips, energy crops and organic solid waste, into ethanol and high-value co-products.

By integrating SunOpta BioProcess' state-of-the-art fiber preparation and pre-treatment technology, known as the upstream component of cellulosic ethanol production, with Mascoma's consolidated bioprocessing technology, known as the downstream component of cellulosic ethanol production, the new company brings together two core technical competencies essential for the conversion of non-food cellulose into ethanol and high-value co-products. In addition to the technical synergies, the combined entity has operational presence in both the United States and Canada and an extensive intellectual property position in the cellulosic biofuel sector.

The transaction was valued at approximately $51 million and was funded by a combination of preferred and common shares in Mascoma. As a result, the combined company is approximately 73% owned by existing Mascoma shareholders, approximately 18% by SunOpta on a treasury basis and the balance by other SBI shareholders. Jeremy Kendall, Chairman of SunOpta and Former Chairman of SunOpta BioProcess, has joined Mascoma's Board of Directors. As noted in our financial statements to be filed on our 10-Q, we're accounting for our ownership position in Mascoma on a cost basis and, as a result, no longer include the ongoing results of the business in our operating results.

We're very pleased to have entered into this transaction with Mascoma. We believe that Mascoma is an ideal partner for SBI, given its leading edge biotechnology and the conversion of non-food biomass into biofuels. This transaction allows our shareholders to continue to participate in the commercialization of low cost biofuels in Xylitol through an equity investment in Mascoma, but more importantly, it allows us, the Management, to realize on our stated objective to focus on our core value-added natural, organic and specialty foods business. As previously announced, on May 10, 2010, we also sold our Canadian food distribution assets to UNFI Canada, Inc., a wholly-owned subsidiary of United Natural Foods. The transaction was closed on June 11, 2010, for cash consideration of $65.8 million US. The proceeds from this transaction were used to reduce debt, with some of the funds now redeployed as part of the Dahlgren acquisition. 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, certain balance sheet items, and our current debt status. Eric?

Thanks, Steve. Good morning, everyone. Before starting my comments, please note that all balances discussed are related specifically to continuing operations, except as otherwise noted. As such, all comparative balances have been adjusted for the impact of the discontinued operations. As a housekeeping matter, the fully diluted weighted of average of number of common shares outstanding as of October 2, 2010, was $65.986034 million, and $65.764865 on a year-to-date basis.

Cash generated from continuing operations before changes in working capital totaled $12.3 million in the quarter, versus $6.4 million in the comparative period. On a year-to-date basis, cash from operations before changes in working capital was $32.9 million versus $13.4 million for the same period in the prior year. Cash generated from working capital was $8.4 million in the quarter, reflecting the lower receivables from increased collection and higher accounts payable due to seasonally higher inventories. Controllable working capital consisting of accounts receivable, inventory and prepaid expenses, less accounts payable,accrued liabilities and other current liabilities was $162.3 million versus $175.9 million at the end of the third quarter of 2009. Working capital remains a key focus and we expect to maintain our strong working capital position through to the end of 2010.

Capital expenditures of $4.7 million in the quarter were primarily related to the expansion of our fiber processing facility in Cedar Rapids, Iowa, and a refrigeration upgrade and a septic line expansion in our food ingredient facility in Southgate, California. At the end of the quarter, we had total debt in operating lines of $94.7 million. The reduction from the prior quarter is attributed to net repayments of $16.5 million, as a result of cash generated from operations. On a year-to-date basis, total debt and operating lines have been reduced from $150.7 million in December of 2009 to $94.7 million in the current quarter. Cash at the end of the third quarter was consistent with the prior quarter at $21.1 million, including $20.2 million in funds available for use within our core food operations.

Our primary food operating and term facilities, including -- excluding our European operations totaled $33.7 million versus $45 million at the end of the second quarter. The reduction was due to a payment made in conjunction with the sale of the Canadian food and distribution assets. The remaining term facility is scheduled to mature on December 20, 2010 and we're currently finalizing a new $30 million long-term facility with our syndicate of lenders. It is anticipated the new debt facility will expire in 2010 -- 2012, concurrent with our Canadian and US operating facilities. As of the end of the quarter, we had approximately $88 million in cash and availability on the syndicate banking facilities and are in compliance with all banking covenants. We've used part of this capacity to fund the Dahlgren acquisition earlier this week.

Our European food operations are financed via an asset-backed operating line with total outstanding of $20.7 million and approximately $6 million in cash and (inaudible) availability. Opta Minerals has financed the operating and long-term facilities of $24.3 million with cash and availability of $12.6 million. Both of these facilities are stand-alone and have no recourse to SunOpta, and they're in compliance with all facility requirements.

The reduction of our year-to-date tax rate to 19.9% reflects the impact of our tax planning strategies on a lower estimated annual taxable income. Estimated annual taxable income was lower due to the fixed assets and tangible and goodwill write-offs realized during the third quarter. Effective tax rate in the fourth quarter is expected to be between 23% and 25%.

In summary, our strong operating results, combined with our continued focus on working capital and the sale of non-core operations, have allowed us to significantly reduce our total debt levels, allowing us to fund acquisitions out of existing facilities which would not have been possible one year ago. We're well-positioned for continued growth supported by favorable cash flow from continuing operations and a strong balance sheet. We will continue to focus on improving cash flow operating results, as well as identifying opportunities to invest in future growth. I'll now turn the call back over to Steve.

Great. Thanks, Eric. Opta Minerals realized solid operating performance in the third quarter versus a loss in the same period in 2009. For the third quarter, Opta Minerals realized operating earnings of $2.8 million, or 13.7% of revenues, versus $1.3 million in 2009. This represents the fifth 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 reduced 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 abrasive sectors will be relatively stable for the foreseeable future, and remain confident that results will continue to be positive for the balance of 2010 and into 2011. With that, I would like to turn the call over to Tony Tavares, our Chief Operating Officer, who will discuss activities in SunOpta Foods.

Thanks, Steve. Good morning, ladies and gentlemen. We're pleased with the progress we're making within SunOpta foods. The third quarter operating income for SunOpta Foods was $9.7 million compared to $5.3 million last year, and year-to-date, the operating income was $33.9 million compared to $14.1 million last year. As Steve mentioned earlier, compared to the prior year, SunOpta Foods revenues increased approximately 1% in the quarter and 6% year-to-date. When adjusted for foreign exchange and differences related to commodity pricing, revenues actually increased approximately 6% in the quarter and 10% year-to-date.

In the third quarter, the Grains and Foods Group achieved operating income essentially on the par to last year. The quarterly results were driven by very strong performance from soy milk, alternative beverages, corn, organic feed and food ingredients, partially offset by weaker results in sunflower and soybeans, as well as losses in expenses from the Colorado Mills joint venture. The lower margin on soy beans were caused by the ongoing impact of a poor 2009 crop. The organic feed business showed improvement in the quarter. Volumes in the quarter exceeded prior year by 20%, due to an expanded customer base. Margins improved and were ahead of last year partly as a result of improved input cost, and on a year-to-date basis margins are now slightly ahead of last year. Food Ingredients sales and margins in the quarter were well ahead of prior year mostly due to improved sales from expeller-pressed sunflower oil.

During the quarter, the Colorado Sun Oil Processing joint venture facility continued to record operating losses. As a result of a dispute with our joint venture partner on pricing of sunflower, we have moved to arbitration and the operations are now in the hands of a court-appointed trustee. We have also presented the proposal to the trustees to purchase the interest of our joint venture partner, and have received a favorable decision and are working to give effective to that decision. We do not expect that a settlement of the pricing disputes will result in a significant cost to SunOpta.

The sunflower financial performance softened in the third quarter as we finished processing old crop and worked through our remaining lower quality inventories and lower volumes in the plants. Slower sales of inshell seeds and bakery kernel also reduced profits. Year-to-date, sales and margins remain well ahead of last year. Markets are expected to improve in the fourth quarter due to the drop of the US dollar to the euro, as well as poor crop yields in the Black Sea area. As Steve mentioned earlier, the addition of Dahlgren should provide significant benefits to the business.

Sales of pack of soy milk and other products were well ahead of prior-year in the quarter, and year-to-date sales are ahead of prior-year, with revenues from new customers more than offsetting the loss of refrigerated soy milk customers in the fourth quarter last year. Margins in the quarter and year-to-date were also higher due mostly to improved fields to efficiencies in the plants. We expect revenues to continue to improve over the balance of the year due to sales of refrigerated soy milk and single-serve soy milk to major new customers. SunOpta South Africa had light sales in the quarter and we expect to resume shipping in the fourth quarter and expect the positive operating income by the end of the year.

The Group's roasting and packaging operations have improved compared to last year, although the business remains unprofitable for the quarter and year-to-date. The acquisition of Dahlgren will provide opportunities to focus production on specific products and the Dahlgren roasting and packaging capabilities will be factored into our funds for our existing facility.

In summary, the Grains and Foods Group continues to deliver strong operating performance. Results are expected to improve in the fourth quarter with the benefits of a higher quality new crop, increased revenues from packaged soy milk and alternative products and the benefits from the Dahlgren acquisition. The Group is well-positioned for the future.

Third quarter results for the Ingredients Group continues to be strong, and sales and operating income remains essentially at the same levels as the second quarter. Year-to-date operating income continues to pace strongly ahead of last year on the strength of increased sales, higher margins due to process efficiencies and product formulation gains from PEP projects and improved margins on sales of natural food protectants. The year-over-year improvement was less in the third quarter, as the benefits from the additional sales volumes in the process efficiencies have begun to take hold by the third quarter last year.

We continue to work on several other projects for new sales opportunities and new products, including sunflower, soy and rice fibers. Fiber fortification remains a strong food trend and we believe that the Ingredients Group remains on a solid foundation and is a core operation which we can build on and grow through acquisition and internal investment. Although input costs have increased over the course of the year and are expected to be at higher levels throughout next year, we expect the Ingredients Group will continue to perform well and deliver solid operating profits.

The Food Group operating profit in the third quarter was again driven by strong results from the healthy fruit snacks and processed food operations, partially offset by losses from the frozen food operations. The third quarter results for frozen food were improved over last year, but were disappointing and are behind where we thought they should be at this time. We'll accelerate our strategy to simplify the business, lower the SG&A costs and reduce the working capital requirements for our frozen food operations. The third quarter results reflect provisions taken against the frozen food assets.

We've also started to coordinate the sales efforts of frozen fruit and consumer products. By combining our production capabilities of frozen fruit with our sourcing expertise of consumer products, we can create a point of difference with our competitors and add value to our customers by offering them the best total solution combining product from our own and third-party facilities. Because of late plantings and unseasonably wet and cold conditions in the fall in some production areas, the green garbanzo crop harvest was lower than anticipated. We'll be able to accommodate customer demand with this supply, although it will dictate a slower rollout than we had initially planned. We have made investments to promote the garbanzo product and to the secure the exclusive marketing agreements with the owner of the patents, and continue to believe this will be a strong product for us going forward. In summary, we believe we have short-term opportunities to improve our operations and we continue to move forward on our efforts to create a profitable business model for our frozen fruits operations.

The processed food ingredients operations again reported strong sales and operating income in the quarter. Sales and operating income were marginally lower than last year because of strong product launches by a major customer in the third quarter last year. Year-to-date sales and income remain well ahead of prior year. The new aseptic line project is on track and should be operational in January. The sales and product development teams are working on a number of opportunities and the team remains confident that we will be able to aggressively fill the new capacity.

The Southgate, California, facility continues to operate well and reap the benefits from their commitment to PEP and continuous improvement. Bar codes scanning equipment is now operational in producing the efficiencies we expected. In summary, the processed food ingredients operations have continued to deliver very strong results in 2010 and are on a very solid foundation longer term.

The healthy fruit snacks operations have another strong quarter in sales and operating income. Sales in the quarter were ahead of last year on higher volumes with lower selling prices, driven principally by reductions in materials costs. The quarterly results include a non-cash write-off included in other expenses of $350,000 related to the return of non-performing packaging equipment at the Omak, Washington, facility. The replacement equipment is operating well and we're beginning to realize the labor and efficiency gains expected. The equipment transferred from the Summerland, BC, facility has been in production at the Omak, Washington, facility since early July, and we're now achieving production standards. The focus of the Group remains very much on increasing sales and we're working on a number of opportunities with the potential to fill the capacity of the main production line. We expect results in the fourth quarter to continue at the year-to-date pacing.

International Food Group recorded higher operating income in the third quarter compared to last year due to improved performance in the consumer product solutions division and the Purity Life Natural Health Products division, partially offset by lower operating income in the European Industrial Organic Ingredients division. As expected, and discussed during our last earnings call, operating income of the European industrial organic operations was lower in the third quarter due to the impact of unrealized gains on foreign exchange -- excuse me, on foreign currency hedges, which were booked in the second quarter relating to inventory on hand or which had yet to be received at the end of the second quarter. When these items were sold in the third quarter, margins were lower as a result.

The third quarter results also include a foreign exchange loss of approximately $600,000 as the euro gained against the dollar in the quarter. In effect, a double hit from foreign exchange in the quarter. We expect margins to be accordingly higher in the fourth quarter. When adjusted for the impact of foreign exchange, the operating income in each of the quarters has been relatively stable. Sales in margins in general continue to perform well across most of the product categories and, as expected, coffee sales and margins were strong in the quarter and are now well ahead of last year.

The Group continues to work on opportunities to integrate and expand deeper into its chains of supply. Currently, approximately 50% of the products sold by the European industrial organics division are sourced from suppliers where we control the organic programs through ownership of certificates, or processing facilities like the sesame seed cleaning and hulling plant in Ethiopia or the soy and sunflower facility in Dalian, China. These arrangements provide us with a more secure supply and greater control over the supply chain to ensure product quality and organic integrity. We believe this will become increasingly important to our customers and will be what differentiates us from competitors who simply trade products. The goal is to increase this amount to 70% of sales over the next three years. The active programs in this regard are the growth of the sesame seed business in Ethiopia and the processing of the pumpkin seeds that are planted in China. In addition, we're looking at agave production in South Africa, fruits in Eastern Europe and sunflower processing in the Black Sea area.

The Consumer Products Solutions results continue their improvement in sales and margins were ahead of last year in the quarter and year-to-date, and the division reported another profitable quarter. We have been awarded private label organic orange juice business with a major retailer and have signed a three-year deal which allows us time to build our supply base to meet the total demand, and which provides flexibility to adjust pricing based on raw material costs. Sales of the existing branded OJ business with this customer will cease in the fourth quarter and will resume under the private label starting in February 2011.

The OJ contract is the large project with a lot of moving parts, and is an excellent example of how the Consumer Products Solutions team can create value for customers using their supply chain expertise. The team continues to work on expanding its vendor base for frozen organic vegetables, mostly broccoli, in anticipation of growth in this segment with a major customer. The Group is also coordinating our efforts to market SunOpta range of consumer products in China and other Asian markets, and we have developed a command brand and package design, which can be used by all SunOpta divisions. Although we expect progress will be slow, we believe that the market for organic products will continue to grow in China and that we can make inroads over time with our product offerings.

A project to sell a line of fruit purees in an innovative packaging format continues to progress, and we will be purchasing equipment and plan to be in production in the second half of 2011. This resealable pouch packaging format is gaining ground in Europe and several major retail and food service companies are looking at it for North America. The Consumer Products team has also assumed responsibility for selling fruit, frozen packaged products to the food service channel and will be leveraging our sourcing expertise to develop innovative, value-added products for our food service customers. Because of the increased scope of the sales teams, the name will be changed to SunOpta Product Solutions.

Although results are expected to be lower in the fourth quarter because of the temporary decline in the orange juice business, as I mentioned earlier, we're very encouraged by the results in SunOpta Product Solutions. The third quarter results of Purity Life Natural Health Products were much improved over last year and the first two quarters this year. We're beginning to see improvements from the changes we have made and are encouraged by the results.

Trade and marketing spending was heavily skewed in the first half of 2010, and the third quarter reduction in SG&A results mostly from reduced spending in this area. As mentioned previously, the allocation of marketing personnel time and effort has also been adjusted to provide more support to the health food channel, as well as to promotional activities to drive sales activity. The largest challenge continues to be a decline in revenues, mostly in the food, drug and mass channel. The changes we have made to refocus our sales team, to scale back and redirect the marketing spend and to implement new disciplines appear to be having a positive impact. The small loss achieved in the third quarter is what we had forecast, and we're hopeful we can achieve a small operating profit in the fourth quarter.

In summary, our vision is to be a sustainable organization that has the capacity to achieve economic, environmental and social sustainability, which will result in the progressively greater positive impact to our triple bottom line of people, planet and profit. We're seeing results from our PEP, lean green and other sustainability programs and expect continued and increasing benefits to our triple bottom line. Although we're still at the early stages, we're confident that we are heading in the right direction and look forward to reporting as we make progress on our journey. I'll turn the call over to Steve.

Great. Thanks for the overview, Tony. In conclusion, we're extremely pleased with our progress for this quarter and year-to-date. We have divested two non-core businesses and reinvested in our core operations with the recent acquisition of Dahlgren. We're a transformed business with great opportunities. Results from our operations have improved significantly, and we believe this will continue. Our balance sheet is solid with resources available for growth in our core segments. We have invested in our people and processes for the focus on innovation, category management, cost control, productivity improvement and improved asset utilization. These are now showing their benefits. Our core business is growing.

While never satisfied, we're extremely pleased with our progress. Our previously-stated goals for 2010 remain clear, and we're making excellent progress. These goals include, returning our Company to profitability; two, continuing to leverage the strengths of our organization to drive long-term sustainable positioning and natural organic foods and natural health products, categories that we believe are very relevant in today's society and offer excellent opportunities; three, continuing to focus on margin improvement and support of our three-year operating margin targets; four, continuing to reduce working capital and maximize cash flow in support of our three-year minimum RONA target of 15%; and five, continuing the process of liquidating non-core businesses with a focus on additions to our core value-added food sourcing and processing platforms. As our results demonstrate, we're making real progress on all of these initiatives, and we're extremely optimistic about our future prospects. Our balance sheet is strong and we're well-positioned for continued growth opportunities. We're looking forward to a successful conclusion to 2010 and an exciting 2011 for our Company and our shareholders. With that, we will now open the call to questions.

Thank you. (Operator Instructions) Our first question comes from Peter Prattas of Fraser Mackenzie. Your line is open.

Good morning, guys. Just with respect to the Dahlgren acquisition, can you confirm what segment that will be reported in?

That will be in the Grains and Foods segment, where our existing sunflower operations are.

Great. How do you balance going forward your new-found strength in terms of the balance sheet with the growth opportunities you have, and can you comment on which segments look particularly appealing from an acquisition perspective?

Sure. Well, first off, Peter, we're regenerating nice cash from our operations and our balance sheet is in good shape. All of us around this table here remember when we were quite highly leveraged, so we've been pretty clear on the fact that we want to maintain a conservative balance sheet. Having said that, even after the Dahlgren acquisition, there is still a nice cash balance as well as room available in our operating lines to fund future opportunities.

So we have a combination of a number of -- what we believe are very exciting internal growth opportunities that we'll dedicate some of the funds to -- Tony talked about new packaging formats, utilizing our vertically integrated expertise, those types of business opportunities we'll certainly continue to improve and use resources. We're going to continue to look for acquisitions that are center of the plate and really fit in within the grains-based, fiber-based or fruit-based businesses, obviously supported by a global platform. Tony talked about a number of internal growth projects on the international side where we believe we can continue to grow and increase our strategic significance. So, we're really excited, the industry continues to grow, our volumes, as we talked about, were up over 7% for the year -- in the quarter. We have a really nice balance of both internal and acquisition opportunities, Dahlgren's being our first acquisition in a number of years.

Just had a couple of comments. We're going to take a very structured approach, as Steve mentioned. We've got criteria. We've identified potential opportunities in each one of our segments, and we're going to focus on the areas that are doing well. And we think there are opportunities in each one of the business segments to do.

The other thing I would add is that we've developed a platform internally and a culture -- are developing a culture with PEP and CI and sustainability that we think we can take an existing operation that we'd acquire and add value by bringing those principles to it. So it is going to be very much a structured, focused approach, as Steve mentioned.

Okay. And it is still seems that you're very underleveraged, even without any disposition of Opta Minerals, if you were to do that. What target debt-to-equity ratio would you target going forward?

Yes, we've targeted total debt-to-equity of 0.5 to 0.7, as comfortable range. Depending on the situation, you can go -- you could reconsider, but 0.5 to 0.7. We were 0.33 at the end of the quarter, and with the Dahlgren acquisition, Eric, we're about 0.4, a little over 0.4.

Right, yes.

So we're still really in a comfortable place. And of course, we continue to generate cash.

I can tell you it feels good to hear someone say we're underleveraged.

Yes.

Good work, guys. Thanks very much.

Thanks, Peter. Take care.

Thank you. Our next question comes from Greg Badishkanian from Citigroup. Your line is open.

Hi, Greg.

This is Alvin sitting in for Greg.

Hey, Alvin, how are you?

Good. Thank you. You posted pretty solid organic sales growth of 7.6%. Would you expect that -- those sales growth trends to hold up in the fourth quarter, excluding FX (inaudible). Is there any reason to expect a material drop-off?

No. We don't see a material drop-off at all. You have to back out the commodity and FX. Trends are strong in our industry and we've been clear for awhile that we think in the 5% to 10% range is quite reasonable. And we see no reason to think that that won't continue at all.

You're not -- (inaudible -- multiple speakers)

Gains in our value-added businesses are where -- are the ones that are really, really solid, and the aseptic side, the healthy fruit snack side, really good growth -- unit growth in those businesses.

Great Okay. So the -- you just haven't seen the change in the industry demand in October, November to date, it sounds like.

No, not at all. No.

Okay, great. And can you provide more color about your outlook on input cost inflation in 2011 and your ability to pass on some of that pricing or absorb it and still grow margins?

Yes. Really the -- on the raw materials side, in the grains business, is where you'd expect that to have the largest impact with soy and corn prices. Basically, we'll buy at higher prices, sell at higher prices, or we'll have locked in on both sides. It is really not -- you'll see the impact probably next year in higher revenues, but margins will be very similar and good as they were this year. That's a general comment.

On the -- in terms of internal use, again, in grains division where it is most obvious, the percentage of total cost that the grains represents in soy milk and some of the other value-added products is very, very limited, and we -- it's very, very low, rather, it's very low impact, very small percentage of total cost. And we do have an ability on a program basis to pass on some of those as they occur. So we don't expect it will be a negative at all.

Okay, thank you.

Great. Take care, Alvin.

Thank you. Our next question comes from Tim Tiberio of Chardin Capital Markets. Your line is open.

Good morning. Thank you for taking my question. My first question is just surrounding your International Foods Group. Looking out into fiscal 2011, where do you see the most opportunity on a regional basis and then also within product category?

I'll just make a couple of very brief comments. Obviously -- and then Tony will jump in to a little bit more detail. Obviously on the international side, the Canadian natural health products operations, we see continued improvements in profitability coming off a couple of tough years. And, as Tony mentioned, much improved results due to all of the initiatives that they've implemented in the third quarter. We expect that to continue. So we expect to see some good -- improved results there.

Tony also talked about, on the Consumer Products side, or now, I guess, Product Solutions side, with a large private label OJ contract going into 2011 and a number of product initiatives around food service, which we see as very exciting. And Tony also mentioned a number of backward integration opportunities that are being pursued on the international side, which I think also bode really well for the future. Tony, I don't know if you have more.

Yes, I think generally in terms of the -- on the industrial side, the markets in both the US and the EU are very good. They did rebound nicely this year, and we expect that to continue. And we expect the margins across pretty well all of the categories that we're involved in on the industrial side to be quite good. Probably single out the coffee area as one where we believe we're going to have an excellent growth opportunity, just because of where we're positioned and some of the things that are happening. But I would say generally, it looked -- the outlook for that one is really good.

Okay. Thanks. And then I guess within the US, looking across your customer base, do you think we're starting to trend back towards that 10% year-over-year growth in organic food demand? Or do you think it will take a few more quarters of economic improvement to get back to those levels?

Well, there's a few categories that are at 10% and there are others that are at 3%, and it really depends on the innovation that's in a particular category. We've been fairly confident in that 5% to 10% range. And obviously new product innovation can certainly drive the categories for us, and we're working hard on a number of new innovative products that we can get to market from fiber-based products to packaged products, et cetera. So that can help us as well.

It is a tough one. It depends, does a specific retailer decide that they want to dive deeper into the natural organic space and create more demand? 5% to 10% is really the range. I don't think we can --

I think that's a good average for our Company. I think some of the more value-added product categories that we're into I think have potential to be more than that. And the innovation that Steve mentioned, for example, we're going to launch a sunflower milk product that we think could be a brand-new category. Very, very hopeful, that's just in sales, a product that isn't out there. Same thing on fruit snacks. We think we have an opportunity to expand those categories more than 10% through innovation. But as an average, I think it is really hard to make that call, other than 5% to 10%. It is a big range, but.

We also watch -- Tim, we also watch the rest of the public companies in our sector and we see the experience that Whole Foods is unifying (inaudible) and it all leaves us very encouraged.

It's all encouraging.

Okay, great. Thanks for taking my question.

No problem. Take care, Tim. Bye.

Thank you. Our next question comes from Bob Gibson of Octagon Capital. Your line is open.

Good morning, everybody.

Good morning, Bob.

China. Can you give me a little more color if you have any feet on the ground there, what's going on?

Go ahead, Tony.

Well we've got an operation in China in Dalian, basically a soy grain processing facility. So we've been focused up until now on taking products out of China. And as the situation there changes and really trying to become more of a market export, too, rather than exports out of. And we've got a couple of items that were using that as the base and hiring -- we have three or four sales people on the ground there but it is still very, very much in its infancy. The demand for organic products is still very, very low still, but the good news is that there's not a whole lot of folks out there yet, either. So it is going to take some patience. It is not going to grow by leaps and bounds right off the bat. But yes, we've made some long-term plans to be part of that growth as it happens. That is about of the detail I have right now.

China is an interesting situation. Tony and I spent some time there. The middle-class is clearly growing, there are food safety issues there that are a major concern. Organics are really -- natural product is -- my choice of words here, kind of in their infancy in that market, but there's no doubt that they're going to grow. And the trick for a Company like SunOpta is to be careful and find the right place and the right partners to do business with in China. We're working on that.

Okay, great. Can you give a little color on the current soy crop and how you see that unfolding?

Sure. In 2009, we had a decent soy crop that was really impacted by harvest conditions, which turned it into not-so-good a soy crop. The soy crop this year on the non-GMO and organic side is much, much better. Good yields, good quality. So we're quite encouraged by that. Very similar situation with the non-GMO and organic corn. Good quality, decent yields. so, generally very, very positive and better crops than we experienced in 2009. So that bodes well for the future.

The sunflower crop, depending on the geography, there was a lot of wet growing conditions in the northern -- Manitoba and in certain areas. So sunflower crop, kind of the same as last year, not a big variance. But overall, very good crops. We're feeling quite good about it and there's lots of supply.

Okay, great. Thanks very much.

Take care, Bob. Bye-bye.

Thank you. Our next question comes from Chris Krueger of Northland Capital. Your line is open.

Good morning.

Good morning, Chris.

Hi. Just had some questions on the frozen fruit or frozen foods, whatever, segment. I know there's been struggles there. Can you give us some specifics as to what is exactly the problem there?

Yes. So I'll let Tony get into more of the specifics. We've made significant progress versus last year, and so a lot of the initiatives that were put in place have succeeded and improved the operation significantly. That combined with the rest of the operations in that segment, being the healthy fruit snacks and the processed ingredients, doing extremely well. But I think -- and Tony will jump in on it, but we've come to a point where we seem to have hit somewhat of a plateau. And so we need to -- we're not -- we don't need to, we're in the process of looking at further opportunities to improve the profitability.

And the conclusion we're reaching is that the existing model that we have with the various plants, it's basically too complex to imagine. Our SG&A costs are high, accordingly. We're going to take a solid look at simplifying the model and getting back to a much more focused approach, both focused on a specific sales channel and look at products. So we -- it's a combination of things. Complexity is still in the business, lots of opportunities to take costs out, both in the plant and SG&A that we're -- we need to get at. And a more focused approach on sales channel just to drive top line sales. So it was a combination of things.

As Steve mentioned, we made significant improvement but the results still suck. So it is really accelerate -- it is really an acceleration and getting to the point of simplifying the model. We're confident one way or the other that we are going to simplify it to a point where we can have a smaller business but with more focus and a much larger bottom line, which is what we're targeting. So, that's one of the -- it is tough to get more specific than that because there are plans in place and there are folks that need to be advised and not really a time to talk about it.

Okay.

But there will be changes.

Okay. Has there been any customer losses in recent quarters? Have --?

It really wasn't a question of customer losses. It is really -- the hope was to gain, we haven't gained the customers on the top line we were expecting at this point. It is really that. We haven't lost anything. We've improved our fill rates, we've improved our -- certainly our reputation, relationships with the customers. All of that is positive. Except some of the gains we're expecting to see just haven't occurred.

Would that be related to the larger packaging to go after club-store-type of gains?

That was one of the areas that didn't materialize anywhere near the extent we were expecting. So certainly that's an item in progress. It was really more -- we're confident we can simplify the business to improve to the point to actually make money, and then once we do that, lots of options become available.

Okay. Last question, similar -- related to fruit. Is there any seasonality in that business?

Yes,there is. The second quarter -- after looking at this the last three years, the second quarter, there is -- the sales are higher. a large part of the frozen fruit business goes into fruit -- having a mental block. Fruit drinks.

Beverage and yogurt

And smoothies.

Yes, smoothies. There you go. That's the word I was thinking of, having a senior moment there. But yes, so that is related -- the sales leading up to that summer season are higher. And that's one of the things we are working hard on is to develop sort of more value-added products that take a little bit of that out. So definitely there was a bit of that, as well.

But in general, it just -- it was a troubled business. We've improved it a lot. Still haven't simplified it to the point where you can take enough SG&A to make it profitable, very confident we can do so shortly.

Okay. What do you expect your tax rate to be next year?

You could be looking at somewhere between the 34%, 35% range for taxes normally on it. We're continuing to do some tax planning on that and might be able to bring it down from there, but that would be the range.

Okay, thank you.

Thank you. Our next question comes from Christine Healy of Scotia capital. Your line is open.

Thanks, hi, guys.

Good morning, Christine.

Just a couple of questions for you. Just I guess further to Chris' question on frozen fruit, can we gain from your comments here that you are motivated to remain in this business or are you considering selling or exiting this business in the future if you can't turn things around?

We really, really believe that grains, fibers and fruits are core to long-term, healthy eating and living trends. We've been committed to the fruit side of the business. We've made great progress in improving the operations and we think we have to continue to improve it. We remain committed to the business and really believe that it fits with our model. So at this stage, very much committed.

Okay.

The focus for certainly the next two or three quarters, we think we can, again, simplify it to the point of having a smaller but profitable business, and once you've done that, a lot of options become available.

Okay. And then on your aseptic business, can you speak to some of the trends you're seeing in this business? Are you seeing customers switch from soy to almond, rice and hemp. Are you seeing more sales to club stores these days? What are some of the trends you're seeing here?

Okay, first, on the customer switch. Clearly, there have been a number -- our position would be that a large part of the growth is coming in a lot of the alternative forms, so rice, almond and hemp and a number of those types of beverages. And we're going to continue to grow the category. We talked about sunflower milk.

The soy milk category has matured and we've had good success in taking sort of a mature product across more customers. So we continue to grow that business and found alternative customers for it, as an example. So that one continues to grow even though it is mature. And then as Steve mentioned, the innovation we've done, the alternative beverages, alternative products, that's where we're getting the double hit.

So even though soy is maturing, we've found other opportunities for the equipment that really makes that business exciting. It is really one of the rocks, and we're really -- I'm super pleased with what it's done and super confident that one is going to be a real winner. We have two nice facilities in Alexandria and Modesto, lots of capacity to go after, as you know, and lots of opportunities. So it is -- the aseptic category on its own is definitely not mature, it's just finding the right products for it, and we're having good success doing it.

Okay, and then last question, there has been quite a few weather events this year, Asia, parts of Europe. Can you talk about the supply environment for organic ad commodities? Is it a tight supply situation? And what kind of impact do you see this next year on your International Foods Group?

I don't expect any supply issues for the items that we buy and sell in International, Steve talked about the good crop conditions here in the US. Crops, the one area that is a factor for us is sunflower production in the Black Sea area, that is coming to harvest now. Our expectation is that yields are going to be low, and we're going to see an increase in market pricing in that area. So we view that as -- right now as a positive for us. But we don't see really any issues with supply anywhere in our -- in the items that we market.

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

Thanks, Christine. Bye-bye.

Thank you. Our next question comes from Scott Van Winkle of Canaccord Genuity. Your line is open.

Hi, guys, good morning.

Good morning, Scott.

So the conversation about the organic orange juice customer, I didn't catch if that was a natural food customer or a traditional supermarket. My question is are you seeing -- or is there renewed opportunity in the traditional supermarket industry where it appears that natural organic is starting to regain distribution after a couple of years of economic woes?

Yes. I would agree with those comments that we are seeing gains coming back. Growth coming back in those areas.

Okay. And I think there was a comment about coffee. It seems like coffee is a hot flavor. And I saw an aseptic coffee product in a club recently that caught me a little off-guard. Is there anything that you can do in that regard? Because you have coffee obviously exposed in your International business, you have an aseptic business. I'm wondering if that's an opportunity you see, something like the garbanzo bean opportunity.

It is a real good product idea. I think it is a good opportunity and like coffee, a position in our new product development area. It is a good item. And that is something that we're going to have a look at. Certainly, we do teas. We do all sorts of other alternative beverages, coffee could be one, as well. It is a very strong product in some parts of the world. Japan is the one that I was thinking about as well. So definitely it could be a good item here.

Okay. And, Steve, there were comments -- a question about the acquisition strategy and you talked strategically about what would fit in. I'm wondering if you can kind of restate your financial requirements now that you've made your first acquisition in three years on any potential deals?

Do you mean what we're trying to do with the deals?

What would your minimum expectations be for any potential acquisition financially?

Well our --first off, we don't acquire businesses that aren't profitable. We're not the experts to go in and turn around businesses, so we're looking at businesses that are profitable. We're looking for businesses that can be accretive very quickly. Businesses that fit our model and have opportunity for significant synergy, and Tony talked about the platform we've put in place and our desire to leverage and integrate as quickly as possible. So, they have to fit that. We're always value buyers, Scott. So we're not out there looking to buy at 7, 8 times EBITDA. We're 4 to 6 times EBITDA type people. We would like to do deals that have greater scale.

Dahlgrens was a good example of a business that comes with a solid management team and a solid business. If you go back over history, a lot of our acquisitions were smaller, and they were smaller because the players in the industry were smaller. So our preferred approach is to do larger businesses that -- my choice of words here, can turn the dial a bit. But I don't want to leave with you the impression that if there isn't a good, smaller business that bolts on and has a good growth profile that we won't take a look at it. But you know, we would like to do them a little bit bigger. I don't know if that answers the question, Scott.

That's great. Thank you.

Okay.

We look at every specific one.

They're all -- keep in mind, we're coming off -- we've been really focused on streamlining and divesting, and so we're well-ramped-up in our acquisition opportunities, but that will increase as we go forward.

If anyone in the room knows of any companies that can sell 4 to 6 times and have outstanding growth potential, we're all in.

Please call.

Thank you. Our next question comes from Aron of Pinson of KP Financial. Your line is open.

Hey, guys, good morning. How is everything?

Good, Aron. How about you?

Doing good, doing good. Just a follow-up first on Scott's and Peter's earlier question. Size. This Dahlgren was $44 million. You're targeting companies around that size or going back to like $10 million, $20 million? What would you say?

Dahlgrens, we paid $44 million. The revenue size was $80 million. So we would like to be in that $50 million range, as an indicator. But again, Aaron, if there is a smaller one that really fits and it makes sense and it is growing and we can do something with it by integrating it, we're not going to turn our back on that at all. And, frankly, there are a number of really interesting opportunities that aren't $50 million in revenue but could be $50 million with proper support. And, boy, if we can bring some value to an operation and synergize it and help it grow, boy, we're not going to turn our back on that.

Okay. And guys, in regards to, I guess it was Alvin's question earlier, with commodity prices, food prices going up, could you I guess give more color in regards to your advantage being vertical versus maybe another player that just sells the actual ingredients or different type of commodities like soy, corn that have been going up a lot in price?

I said -- the vertical integration certainly provides us a lot of benefits in terms of control, the quality of controlling the whole supply chain to ensure organic integrity or specs, type of thing. But in terms of pricing, I mean the producer/farmer is going to get a fair price. We don't own any ag fields. So it is really more a question of controlling quality and the process rather than a cost reduction opportunity, I would say.

So, Tony, you don't have longer term contracts with some of the farmers since you're dealing with them for longer-term, or I mean as far as the actual cost?

Yes. We will have long-term arrangements with a number of suppliers, but the pricing of the commodity year to year obviously gets adjusted. So it ensures more secure supply, a better quality supply, you can work with the producer year to year to improve a number of factors. But pricing for the commodities will be marketed. The important thing is that, as I was saying earlier, we'll buy high, sell high. When we're sort of buying to resell (inaudible -- multiple speakers).

So you're expecting the margins to stay stable? Just the volume, total revenues would probably be going up a little bit?

Correct.

Okay.

When you get in trouble is when you make a real commitment one side or the other of that. We don't do that.

Aron, we wouldn't want to enter into -- this is an example. We wouldn't want to enter into a three-year deal with a grower because --

On a fixed price.

On a fixed price because we could get hurt or the grower could get hurt. And there's no use having a deal where the markets go up and the grower gets hurt, as well, so it is done annually.

At the same time, we don't go into fixed pricing on the sale side (inaudible -- multiple speakers).

Totally understood. Just a couple of housekeeping questions here, probably for Eric. Investments. New balance sheet item here, $33.5 million. Is that the Mascoma cost basis?

That's exactly right.

You guys said it was 17% of Mascoma that you currently own? On a -- just on an outstanding shares basis, it is just slightly under 20% but on a treasury basis, factoring in some dilution for options and that things, it is 18%.

It's 18%?

Yes.

Okay. And Other Expenses on the income statement here, $7.5 million, what was that from?

The major item in there were some non-cash charges that we took in the quarter related to our fruit business.

So the fruit business?

Yes, all non-cash and we just took the -- we just wrote them off.

$7.5 million wasn't chump change.

No, it's not chump change. No.

Okay. And on the liability side of the balance sheet, you have a lot current portion of the long-term debt. Are you planning on financing that with rolling it over sometime soon? Issuing some more debt?

Yes, we've got $33.7 million that comes due in December 20 of this year.

Okay.

And I've been working with our syndicate group and we're just finalizing off them putting in $30 million to offset the $33.7 million and we'll top the rest of it off with cash in there.

So that will fall down to long-term again, Aron.

Yes.

Do you think your interest will get a little bit lower based on the market interest rates?

Yes, that long-term piece has been costing us in around 9% and that will come down by about half, so around 4.5% range.

So longer-term over -- we should expect interest expense to go down on the income side of this, I guess?

Interest rates won't.

Interest expense will go down before the acquisition of Dahlgrens, Aron.

Correct. Okay.

Yes.

Okay, just based on -- I'm saying just a longer-term interest rates, based on what you guys are paying, we should expect some savings there. Obviously if you're have more volume of interest.

The rates will definitely be better.

Yes, for sure, you're right.

Okay. Perfect. That's it I got. Thanks.

Aron, thank you.

Thank you. Our next question comes from Ron Reuven of Reuven Enterprises. Your line is open.

Hi, Ron.

Good morning.

Good morning, Ron.

Can you hear me?

Yes.

Can you hear me now? Sorry about that.

Don't worry about it.

Alright. Good quarter, by the way.

Thank you.

Just wanted to get clarification on a few things. Within regards to the Mascoma deal, in the past, you said that the BioProcess Group ultimately would be spun off, but things have changed, of course. I guess what kind of information will we be able to get in the future as far as how investors will benefit out of this deal or as far as realizing some of the growth that this may end up generating?

No. Ron, what we'll do is -- as we indicated, Jeremy Kendall is on the Board of Mascoma. I have an observer position on the Board that I will use. We're in close contact with the management of Mascoma, and on a quarterly basis, our intention will be to provide an update on how things are going so that everybody gets a feel for how the business is doing and how our investment is looking.

Now, do you think that, ultimately, the goal may stay the same as far as doing a public offering from Mascoma?

Yes. Ron, their goal is -- their goal is to continue to develop cellulose ethanol expertise, which they're doing a great job of, and the integration of the BioProcess --of our BioProcess technology has really advanced them in a number of areas. They have a large development center and a pilot facility, they have plans to move to a commercial facility. Everything is moving along quite well. They have interesting pieces of their technology that will be utilized in industry. And I think a couple of years from now, you could look for them in the public arena.

Okay. Now as far as the negotiations that you had going on for some time with China, as far as building a commercial plant, are you still involved in this? I guess -- is it something that Mascoma is taken over from now on?

Yes, the whole team from SunOpta BioProcess went to Mascoma, and so they're pushing forward on all of those initiatives, but they're doing it through Mascoma.

Okay, and last question regarding to the food business. I guess Dean Foods is having some major issues with their pricing on milk. Is that in any way affecting you as far as -- in any capacity, I guess?

No. I haven't seen it.

No.

Not that I can think of.

No.

Okay. Great quarter. Looking forward to finishing off the year strong.

Great. Thanks, Ron. Take care.

Alright. Take care.

Thank you. Our next question comes from Rene Reynolds of GGHC Asset Management. Your line is open.

Hi, guys, good morning. How are you doing?

Good, thanks. How are you?

Great, thanks. Just wanted to follow up on the Other Expenses. What's the $7.5 million for? I get the $1.7 million for good will, but the remainder is for what?

Well, it is for assets in the fruit business, and Tony talked about some rationalization that we're considering, so we moved those assets to realizable values.

Okay. And just a broader-term question. We're seeing a lot of inflation on GMO corn, but what are you experiencing in the segments that actually relate to you?

Well, traditionally, the non-GMO and organic pricing is substantially higher than the GMO pricing that you'll get on the boards. And these prices, because they're already higher and they're higher because of input costs and also supply and demand, they don't buffet around as much. So if you get a large run on corn or soy, maybe the market is up 10%, the organic and non-GMO generally doesn't move 10%. It might move a couple of points one way or another. They trade in the tighter band. Then at the same time, we keep ourselves tightly hedged, so there is not a lot of exposure there.

Okay. So we shouldn't expect the same kind of step change in your cost as we're seeing for all of the other grains?

Well, if there is -- normally, it is not as dramatic and if it is -- even if it is, we still, as Tony mentioned, set it up to pass it through.

Okay. And on the natural products business that you have in the International segment, I think I heard you say that that's now positive for the quarter. Are you expecting any kind of improvements going forward or will it kind of peter along at this rate?

So we -- Tony talked about it, but were profitable in August and September, so --

I didn't quite understand?

You're talking about the natural health products in Canada?

Yes.

So we're -- it has been a struggling business, as we reported in the past, but the third quarter results were essentially at break-even. And we expect that to be -- that level, probably a little bit better, slight profit in the fourth quarter, which is a significant improvement over the first two and boarders in certainly last year. So lots of changes that we've discussed in prior calls and they seem to be having a positive impact. We're encouraged by the progress.

And Rene was asking about do we expect it to continue to improve or stay where it is. We expect it to continue to improve.

Yes, obviously break-even isn't good enough. We expect it to get better.

What do you need -- like are your costs at roughly where they need to be and the rest is just a matter of sales?

In that business is really a question of refocusing the marketing and sales efforts to the health food channel, where we've historically had some successes, bringing some of the spending in line and directing it more at that channel versus -- so really a combination of things. But the costs, it is mostly a distribution business. So really, it is a question of sales execution as much as anything else.

And are you still seeing the pricing pressure from the -- I guess the standard channel that's affecting the natural space?

That's always a factor but the products that get traded in each or get sold in each aren't necessarily the same. So in some items, yes. In some items, it is a non-factor, a lot of items it's a non-factor. It really is a question of our repositioning our sales teams and marketing initiatives to focus on a channel -- on a specific channel, really directing that a little bit more effectively.

Okay. Thank you.

All right. Take care, Rene.

Thanks, you too.

Thank you. I'm showing no further questions in the queue. I'll hand the call back over to the speakers.

Well, great. Thank you very much. I want to thank everyone for joining the call today. Once again, to reiterate, we're really pleased with the progress we're making. We're pleased with the prospects for our business and we certainly appreciate all of your support and look forward to speaking with you again at year-end or sooner. As always, feel free to give Eric, Tony or myself or Susan Wiekenkampa a call, and we would love to chat with you whenever you'd like to. So thanks again, and have a great day.

Thanks very much.

Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a great day.