Sunopta Inc (STKL) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the SunOpta Inc first-quarter 2011 earnings call.

Before I turn the call over to Steve Bromley, President and CEO of SunOpta Inc, we would like to remind listeners that except for historical information, the matters discussed during this teleconference may include forward-looking statements including, without limitation, statements relating to the Company's operations, market and economic conditions, and financial position. All forward-looking statement 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 Information.

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 fiscal year ending January 1, 2011. 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.

Thank you very much, and good morning, everyone. Welcome to our first-quarter 2011 shareholder conference call. I'm joined on this call today by Tony Tavares, our Vice President and Chief Operating Officer; Eric Davis, our Vice President and Chief Financial Officer; and John Dietrich, our Vice President of Corporate Development and Corporate Secretary.

Before we get going, I want to mention that we're targeting to keep the call to about an hour, and want to note that we will be filing our Form 10-Q for the period ended April 2, 2011, by the end of the day today.

As we review the first quarter, we want to reiterate our commitment to building a global leader in natural, organic, and specialty foods that drives sustainable well being. As we will note during this call, we continue to make progress on many fronts, albeit not without some challenges in this difficult commodity environment. With growing markets and the long-term demand for healthy food and healthy living options, we remain very confident in our strategic direction and our future prospects.

For the first quarter of 2011, we realized revenues of $260.9 million versus revenues of $216.7 million in the first quarter of 2010, a year-over-year increase of 20.4%. Revenues increased 9.7% excluding the impact of acquisitions completed in 2010. The underlying base growth rate for the business was approximately 7% after accounting for changes including FX and commodity-related pricing.

For the first quarter of 2011, we reported earnings per diluted common share from continuing operations of $0.08, or $5.1 million, as compared to $0.06, or $4.2 million in the first quarter of 2010. These represent record first-quarter earnings for our Company. We realized EBITDA in the first quarter of 2011 of $15.9 million as compared to $14 million in the first quarter of 2010.

During the first quarter of 2011, we realized operating income of $11 million, or 4.2% of revenues, versus operating income in the first quarter of 2010 of $9.6 million. The increase in operating income was driven by increases in the Grains and Foods Group, International Foods Group, and Opta Minerals Inc, combined with reduced corporate spending. Excluding the year-over-year impact of foreign exchange, operating earnings increased 31.3%. Our earnings in the first quarter include approximately $1 million of pretax costs of a non-recurring nature, including severance, rationalization, and professional fees.

At the end of the quarter, our balance sheet reflects a current working capital ratio of 1.39 to 1, long-term debt to equity ratio of 0.22 to 1, and total debt to equity ratio of 0.62 to 1, all within our target ranges. During the first quarter of 2011, we used cash from continuing operating activities of $33.9 million as compared to $13.6 million in the first quarter of 2010, reflecting the impact of increased commodity volumes and costs, and increased inventory and accounts receivable balances related to the growth in our business. Eric will discuss these further in a moment. At April 2, 2011, we have total assets of $657.4 million, and a net book value of $4.56 per outstanding share. At the end of the quarter, we are in compliance with all bank covenants.

In hand with our ongoing focus to improve the underlying operating returns within our business, we have remained focused on addressing operations deemed non-core, or generating returns less than target. In that regard, last week we announced the sale of our frozen fruit processing equipment in Rosarito and Irapuato, Mexico, to Fruvemex Mexicali. The processing equipment included in this transaction formed part of the SunOpta Fruit Group, more specifically the SunOpta Fruit Specialties frozen fruit operations. These assets focused on industrial-type products for the food service and industrial markets versus our focus on retail markets, thus the decision to sell. As part of this transaction, we have entered into a supply agreement with Fruvemex, who will supply strawberry and other fruit products for retail applications to us from their facilities that they acquired from us and also other operations under their control.

This divestiture is the latest step in our strategy to improve the profitability of our frozen fruit operations, and continue to simplify our business model with a focus on core areas of expertise. Fruvemex is a privately-owned Mexican entity headquartered in Mexicali, Mexico. The business has deep roots in frozen, refrigerated, and dehydrated fruit and vegetable products, and has been a supplier to SunOpta for several years. We believe that Fruvemex will be an excellent long-term partner, and provide SunOpta with cost competitive fruit products. The selling price was $3.15 million. An initial installment of $750,000 was received on the signing of the transaction, and the balance will be paid by a series of installments over the next year. As part of this transaction, we also entered into a market-value lease for Fruvemex's use of the land and buildings in Irapuato, which remain the property of SunOpta.

I will now turn the call over to Eric Davis, our Chief Financial Officer. Eric?

Thanks, Steve, and good morning. As a housekeeping matter, the fully diluted weighted average number of common shares outstanding was 66,828,512 for the first quarter of 2011. And please note that all comparative balances discussed are for continuing operations only.

During the first quarter of 2011, we invested $43.3 million into working capital, compared to $23.4 million in the same quarter of 2010. The first quarter is seasonally our highest demand period for working capital. Higher commodity prices, and increased volumes of commodities in our grains and international sourcing and trading operations, were primarily contributors to the increase in the cash used to fund working capital.

On a year-over-year basis, after removing the impact of changes due to acquisitions, foreign exchange, and commodity-related pricing, our first-quarter working capital is consistent with the first quarter of 2010. Controllable working capital consisting of accounts receivable, inventory, and prepaid expenses less accounts payable and accrued liabilities was $253.8 million at the end of the quarter, compared to $205.2 million at the end of 2010. The increase in controllable working capital reflects a seasonal lift, plus the impact of commodity prices and of foreign exchange previously noted. We expect working capital levels to decline and trend similar to 2010.

Days sales outstanding improved to 37.9 days compared to 39.5 days at the end of 2010, and 39.1 days in the first quarter of 2010. Inventory turns remained consistent with 2010. Capital expenditures of $3.9 million in the quarter included spending on the aseptic line expansion at our food ingredient operation, which is expected to be operational early in the third quarter of 2011. We anticipate our capital spending for 2011 will be approximately $30 million, divided evenly between strategic growth projects and normal maintenance capital.

As of April 2, 2011, we had debt and operating lines, net of cash, totaling $179.9 million, an increase of $41.7 million from year end, due primarily to the increased investment in working capital, as previously discussed. At the end of the quarter, we had $41.4 million in additional borrowing availability on our operating lines, and are in compliance with all banking covenants. The effective tax rate for the first quarter of 2011 of 34.7% reflects the impact of tax rates on income earned. We expect our annual effective tax rate to be between 34% and 36%.

In summary, cash from operations, combined with continued working capital management and investment into strategic capital projects, will allow the Company to continue to exploit growth opportunities.

I'll now turn the call back over to Steve.

Great, thanks, Eric. With that, I would now like to turn the call over to Tony Tavares, our Vice President and Chief Operating Officer, who will discuss activities in SunOpta foods. Tony?

Thanks, Steve, and good morning, ladies and gentlemen. First-quarter operating income for SunOpta foods was $10.5 million compared to $11.4 million last year. The operating income reflects a strong performance from our packaged beverage and international operations, offset by reduced earnings in our sunflower, ingredients, and food operations. We continue to make progress across most of our business units.

The Grains and Foods Group continued to deliver strong operating income in the quarter due to record results from sales of packaged soy milk and other products. Operating income and revenues from the group's grain operations were both up 36% in the quarter compared to last year. The increase in revenues is due mostly to increased volumes and selling prices for corn and seed ingredients. The revenue increase from selling prices for soy beans were mostly offset by lower sales volumes. Soy bean sales in the quarter were affected by weak demand related to the Japanese disaster. We expect demand to improve as their infrastructure is repaired, and there's also potential for increased sales going forward due to concerns of radiation-contaminated Japanese crop lines.

Organic feed revenues in the quarter increased compared to last year due to higher selling prices driven by commodity markets. Margins remained strong and were 36% ahead of last year. The Group continued to record strong results from food ingredients. Organic vegetable oil selling prices were strong, but margins on vegetable oil were poor in the quarter due to high-cost expeller pressed oil market purchases to cover existing sales contracts. This is expected to continue for the next 2 quarters.

The Colorado Sun Oil Processors joint venture essentially operated at break-even in the quarter, before professional fees related to the legal dispute. The Grains and Foods operating results in the quarter include approximately $350,000 in legal fees related to this dispute.

As discussed during the previous earnings call, the performance from the Group's sunflower operations continued to soften in the quarter due to higher cost product and slower export sales. Margins for Inshell were lower in the quarter as world market selling prices have not increased as much as our purchase costs in North America, which are more closely connected to increasing prices for other grains and commodities, which compete for the same agricultural land. Customer shipments have been slow on contracted volumes, and spot sales have not materialized for North American product due to lower-cost South American and Chinese supply.

We do not expect margins to recover until late in the third quarter when the South American crop is sold through, and higher new crop pricing is achieved in the market. Demand is also being affected by recent unrest in the Middle East, which represents a significant portion of our Inshell sales. Sales and margins of bakery and confection kernel in the quarter were also well below previous year because sales contracts for kernel are being filled with higher-cost raw seeds.

The Dahlgren Sunflower business results reflect the same challenges as the legacy SunOpta sunflower operations, although results were more profitable due to the value-added components of the Dahlgren business. The process of integrating the Dahlgren and SunOpta sunflower operations continues, and is going well. We've begun to direct production to specific clients in order to gain efficiencies and increase yields, and have coordinated or standardized processes in a number of other areas. The plant expansion project at our Ralston facility in Wahpeton, North Dakota, is proceeding well. We are integrating Ralston of Inshell sunflower into the Crookston, Minnesota, facility, and moving the other oil and dry roasting of non-sunflower products between the 2 locations to realize benefits due to less frequent changeovers in CIP activities, as well as process focus.

We anticipate to see a lift in profitability starting in the third quarter, as capacity is increased with the plant expansion, and due to strong [roasted] corn sales and improved efficiencies from the design changes. As we mentioned on our previous earnings call, the sunflower results reflect the commodity nature of this business, and our objective is to convert as much of the business to value-added products. We remain confident that the acquisition of Dahlgren is an important step towards this strategy.

The Group's value-added packaged operations continued to gain momentum and delivered another record quarter. Sales of packaged soy milk and other products in the quarter were 28% ahead of last year, and operating income was even further ahead due to the increased sales, and better packaging and processing yields resulting from numerous continuous improvement initiatives. We are working on a number of new product and customer opportunities, and expect continued sales and profit growth from this segment of the business. The launch of [Sole] Sunflower Beverage began in the last week of February, and there is significant interest in the product from the natural health segment of the industry.

In summary, the Grains and Foods Group continues to deliver strong operating performance increasingly as a result of value-added products. In spite of the negative impacts of a poor commodity situation in our sunflower operations, the Group achieved a strong increase in operating income compared to last year.

As expected, the Ingredients Group achieved lower sales and operating income in the first quarter compared to last year, mostly due to the impact of the loss of a significant oat fiber customer, and reduced soy fiber sales. Profits were also affected by under-absorption of fixed plant costs due to the lower production volumes corresponding to the reduced sales, and our continued focus on keeping inventory levels in line. Margins, excluding these effects, continued to be strong and comparable to prior periods, as plant efficiencies and improvements have kept pace with increasing costs of raw materials. The Group's sales and product development and applications teams are working with a number of customers on innovative uses for our fibers, and we remain confident in our ability to develop new business. In the first quarter, we have successfully secured new business with estimated annualized revenues of approximately $2.7 million.

The Louisville, Kentucky, facility was idled in March, and a capital project has been approved to produce a variety of other fibers. We expect to have the project completed by the end of the first quarter next year, and the new production capability is expected to generate approximately $10 million in annualized revenues. As mentioned previously, we've already begun to solicit business for the new fibers, and there appears to be significant interest from a number of customers for use in both human and pet food products. In summary, although there is some short-term challenges, we remain very positive about our prospects in this sector.

The Fruit Group results reflect continued strong performance from our process food ingredient and healthy snacks operations, offset by losses in our frozen food operations. We continue with our efforts to rationalize our frozen food operations, and, as Steve mentioned a few minutes ago, we've recently completed the sale of the Mexican processing assets. This moves us closer to our objective to exit the processing of fresh field fruit, and we are working on selling the processing equipment at Salinas, California, and the land and buildings at Irapuato, Mexico.

Going forward, we will purchase the frozen IQF fruit for our facility in Buena Park, California, through supply contracts. This will allow us to essentially exit sales of bulk frozen food products to the industrial channel, and substantially reduce the amount of inventory which we carry. The related reductions in warehousing and other carrying costs will be an important factor in the improved results we expect in the second half of the year. Frozen fruit sales were lower in the quarter compared to last year, as we rationalize our customer and product base, and because of reduced sales of blueberries due to supply issues. The inability for selling prices to keep pace with dramatic increases in the cost of blueberries remained a key factor in the quarter results. As we mentioned in our last call, we've implemented price increases, and expect to achieve improved margins in the second quarter.

Sales of Garden Green Garbanzo products to the health food channel started in March, and customer reaction has been positive. We remain positive that this will be a significant market opportunity, especially as we reduce production costs with the new harvest in July. We're completing renovations to the freezer and production areas at the Buena Park frozen fruit facility, and we expect benefits from improved efficiencies, reduced energy use, and additional customer opportunities in the near future.

The retail frozen fruit sector continues to show growth as a category. The downsized business model for the frozen fruit operations will allow us to focus exclusively on this segment, and we expect results to improve over the balance of the year. The simplified model will also allow us to more easily explore other options for this business.

As expected, the processed food ingredient operations remained strong, with reported lower sales in operating income in the quarter compared to last year as a result of changes to our customer base. We finally received all of the necessary government agency approvals for the new aseptic line project. The project remains on budget, but start of operations is now expected at the end of the second quarter. The sales and product development teams are working on a number of opportunities, and we should be able to quickly fill the new capacity, which would set the stage for a future expansion to the east coast of the United States. We expect operating income for the processed food ingredient business to increase in the coming quarters, and are optimistic that in the second half of the year we can return to and exceed the record income levels achieved in the first 3 quarters of 2010.

The healthy snacks operations had another strong quarter in sales and operating income. We have a number of customer growth opportunities in fruit snacks, and will likely need to increase our production capacity before very long. We are currently working on plans to increase the capacity of the existing equipment at Omak, Washington, and are also evaluating an eastern United States facility, which would house a second high-speed fruit snack line. The Omak operations are running well, and performing above standard.

The integration of the Edner of Nevada portable, nutritious snack bar operations is proceeding well. We are working on a number of new product opportunities, and we believe that we will be successful in landing new business in the second half of the year. We remain very excited about the Edner acquisition and the healthy snack operations. We continue to believe that portable, nutritious food will be an important and growing profitable platform for SunOpta.

The International Foods Group reported strong earnings in the first quarter, driven by record quarterly profit by the industrial organic ingredients business, and improved results in SunOpta food solutions and Purity Life Natural Health products. The market for organic products in the EU and North America remains quite strong, and the operations posted sales and profit increases across most products compared to last year. As expected, our organic coffee business also continued to perform exceptionally well.

The SunOpta Dalian operations in northeast China increased sales in the quarter as planned, with a focus on pumpkin seeds, beans, lentils, and other grains for the EU market. We've started to sell organic green coffee beans into the Chinese market, and we will also be roasting coffee for sale to retailers and food service operators. We have also begun to package organic grains and seeds in the Dalian facility for sale to the domestic market. The select sesame seed joint venture operations in Ethiopia were essentially at break even levels in the quarter, and are expected to improve as we increase production in the months ahead. Overall, the outlook for the industrial organic ingredients business continues to be very good, and we expect strong results over the balance of the year.

The food solutions operations continued to progress in the first quarter, and retail sales and profits improved compared to last year. Sales of orange juice to a major retailer under their private label brand started at the end of February, and the program is performing very well. We continue to work on the project to sell fruit purees in an innovative resealable pouch format. We expect the first packaging line to be in operation in the third quarter, and a second packaging line has been approved and is expected to be operational in the fourth quarter. These 2 lines will be located in a facility in California, and we are assessing the purchase of a third packaging line to be located in the eastern United States. This project continues to progress nicely, and customer interest in this packaging format is quite robust. We're very pleased by the improving results, and are confident that SunOpta food solutions will deliver strong operating results in 2011.

The results in the quarter from Purity Life Natural Health products were much improved compared to last year, but still below break-even levels. Revenues in the quarter were lower than last year due to lower sales to the food/drug mass channel. Sales to the health food stores channel were essentially on a par to last year, and gained momentum during the quarter. We are beginning to see some positive trends in the health food stores channel as a result of our efforts to fix the product mix in store, and have sales rep training prioritizing sales efforts and promotional support on higher growth brands and customers, and a number of other initiatives. New product launches in the professional line for the health stores channel, as well as 2 Quest products, should also have a positive impact on sales and profits. The many changes which have occurred in the industry have made the climb back to profitability more challenging, but we believe we have taken the right steps to return to profitability.

To conclude my comments, we are making progress in our vision to be a sustainable organization, which can generate progressively greater economic and other benefits for our shareholders and other stakeholders. Our results will still be affected by commodity markets, but their impact will be less and less as we continue to grow sales of healthy, innovative products which deliver value to our customers and consumers.

Steve?

Great, Tony, thanks for the overview. Opta Minerals, which represented approximately 8% of first-quarter revenues, realized solid operating performance in the quarter. For the quarter, they realized operating earnings of $2.5 million, or 11.3% of revenues, versus $1.7 million, or 9.6% of revenues in 2010. This represents the seventh consecutive quarter of positive operating earnings for Opta Minerals after 3 successive quarters of negative results during the economic downturn.

The strong 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 the southern USA. Management of Opta Minerals remain confident that activity levels in the steel and industrial minerals sectors will be relatively stable for the foreseeable future, and that results will continue to be positive going forward.

In conclusion, we are pleased with our first-quarter results for 2011, which represent a record first-quarter earnings for our Company. Consistent with our strategy, improved profitability from value-added products and our efforts to continuously improve operations, more than offset commodity price pressure in the quarter.

As previously stated, our goals for 2011 and beyond remain focused on building a profitable, sustainable, and growth-oriented global natural and organic foods business. Our specific objectives for 2011 remain -- one, improve our profitability in support of our long-term objectives of 8% operating margins, 10% EBITDA margins, and a 15% return on net assets. Two, leverage our strengths to drive long-term sustainable positioning in natural and organic foods, categories that we believe are very relevant in today's society, and which offer excellent opportunities. Three, invest in our core value-added natural and organic foods platform via internal growth projects and strategic acquisitions. And four, explore divestiture opportunities for non-core or non-performing assets. We are making progress, and remain committed and focused to these objectives.

With that, we will now open the call to questions. Operator?

Thank you. (Operator Instructions). Our first question is from Peter Prattas with Fraser McKenzie, you may begin.

Good morning, guys.

Hi, good morning, Peter.

Can you please highlight for me where you see the largest near-term opportunities for internal growth in the higher-margin, value-added categories like any additional lines you might add at Modesto or garbanzo beans or whatever it may be?

Peter, it's hard to be specific because you don't want to tip your hat to too many confidential things, but generally the value-added sunflower business and the packaged business at Modesto are both high up there, as well as the Edner facility, lots of growth opportunities. We've got lots of balls in the air there and some items on the healthy fruit snacks and we believe green garbanzos. The [gualapack], something we refer to as gualapack but that's the name that we give to the pouch-- but that resealable pouch fruit puree we believe could be very, very big and certainly we're making a commitment to it and the investment we think we're going to do well there. I don't know if -- so I think I covered pretty well everything. There's opportunities everywhere.

And then there's the expansion of the aseptic fruit capacity, as well, and the fruit processed ingredients, and that line comes on during the third quarter, so there'll be significant uptick there, as well.

There's really opportunity across every operation, which is nice to see it spread around.

Great to hear. Okay. And then just moving over to your EBIT targets. You just reiterated your 8% goal internally there and, obviously a lot has happened over the last year with acquisitions and divestitures. So I was just wondering if there's been any change in the individual segment targets given all the changes that has happened?

No, the segment targets remain very much the targets which they were, Peter. I think the one -- we have to be a little bit careful on a percentage basis, as commodities go up in price we still get the ring on the dollar, but the percentages can be put under a little bit of pressure because on some of the products, we pass the commodity costs through and still make the same net dollar on a particular item. So, we saw a little compression that comes from that but these commodities move around so it may be beneficial in a future period. So, yes, the targets remain.

Excellent. Thanks very much, guys.

Great, thank you, Peter.

Thank you. Our next question comes from Chris Krueger with Northland Capital, you may begin.

Hi, good morning.

Good morning.

Hi. You talked a little bit on your call, on your comments about the sunflower beverage product. Have you actually had any sales yet or is that in -- hit any stores yet?

Yes, it's hit the stores. We've already sold through our first production run and are going to be doing a second one. It's going to be a slow and steady growth. We're quite optimistic about the prospects for that one, but it's in stores and selling.

Then as far as the frozen fruit business with all the moves you've made there and the sale of some assets and it looks like you're looking to sell more pieces of that, is there a timeframe in mind when you'll analyze how well it's doing after doing all these moves and decide whether or not you want to stay in that business and if so, when would that be?

I think you have to look at everything we've done the last two years as an execution of strategy. We've been exiting key parts of that business the last two years and I think where we are right now is on -- we have a relatively simple model, it's a model that focuses on a category that's still growing. We think we can make a go of it. But as I said in my comments, simplified business does make exploring other options easier and it could vary. So, I don't think there's a lot of patience here for continuing losses but we are confident that what we've done so far will get us across the goal line and other options become available.

Okay. Then it sounds like your coffee business in your International Group has been a strong business, can you give us an idea of just in annual sales or some kind of metric how big it is roughly.

Guys, it's150?

Coffee?

No, the overall International Foods.

In coffee?

Yes, coffee's approximately EUR15 million.

That's annual?

Yes.

And growing nicely. It's a strong segment. Remember it's a very specialty segment. We are talking about organic fair trade Ethiopian coffee. It's a really niche business, does really well.

Okay, last question. Here in Minnesota, I think parts of the midwest, the planting season is off to a late start. Any thoughts on that so far?

Yes, it's exactly what you said, Chris. Off to a little bit of a late start but certainly not -- it's been later. So, no, we're not concerned about it at this stage.

Okay, that's all I got. Thanks. Take care, thank you.

Thank you. Our next question is from Greg Badishkanian with Citigroup, you may begin.

Morning, Greg.

Hi, good morning. This is actually Alvin Concepcion in for Greg.

Hi, Alvin.

You talked about, excluding FX, your operating margins improved year over year. I think that was mainly because of lower SG&A. Can you talk about some of the drivers of the improvement there? Was it just operational efficiencies or what else was going on there?

Specifically with regards to SG&A or overall?

SG&A.

SG&A. Yes, we've had -- as part of our continuous improvement programs, there are efforts across all our businesses to continue to leverage the platform that we put in place to leverage the business, and so we've been doing that and realizing some savings. Keep in mind that we've been streamlining a lot of the back office, as well, which has very beneficial. We're also, over time here, ridding ourselves of some of the legal hangover that we had from the issues that we had related to 2007, and so we've been able to streamline those costs. In every business there's initiatives and that's why, Alvin, we often focus on operating income rather than on gross margin. Although we do focus on gross margin but SG&A also on how we're managing the business does play a key role in how these businesses are being operated. And, Tony, you had --?

Just as a comment, I think we, certainly across the piece, consolidating, combining back offices. Specific efforts on the SG&A front on fruit, significant reductions there as we're taking that business over.

Natural health products.

Yes, and natural health products, as well. The purity -- so those two things, I guess, are reflected there. The other comment I'd make is that we've got a good SG&A base to grow, so as we grow our top line, we don't -- certainly don't expect our SG&A growth to grow anywhere near that same percentage. You'll have to add resources here and there, but we certainly expect to grow our top line a lot more quickly than we grow SG&A going forward.

Great, that was very helpful. And you posted very solid organic sales growth in the quarter, can you talk about the trends you've been seeing since the end of the quarter? It would be interesting to hear how trends are progressing, particularly in light of tougher comparisons coming up.

It's really no change, continues to go very well through April into early May.

Okay, great, that's all I have. Thank you very much.

Take care, Alvin, goodbye.

Thank you. Our next question comes from Scott Van Winkle with Canaccord Genuity, you may begin.

Hi, good morning, guys.

Morning, Scott.

I missed your comments about the international sourcing business. My question is, if you look at that growth year over year sequential and it was obviously very impressive, how much of that is driven by higher commodity prices versus higher tonnage?

We will get you the actual price lift in a second, but --

There's a part of it but a lot of the growth is volume and one of the -- for me one of the key drivers if you recall, we split up that business into food solutions piece and industrial piece end of first quarter last year and what we wanted was the focus for each team on each and that's ended up being quite effective with both food solutions and international ingredients business both growing at a much bigger pace. So combined with renewed strength in organics, it has resulted in some really impressive growth gains.

Do you know what percentage of what Tradin sourcing is organic? Is it -- it's not 100%, it's got to be a high number, though.

Tradin, If you say 100% you might be off one percentage point and it's (inaudible). Okay, fair enough? Their legal name is Tradin Organic Corporation, that's all they do virtually.

Okay. And another question I had is, I'm trying to understand when you go from processing field berries to procuring already frozen berries, I understand the inventory savings, et cetera. What does that do to margins? I would -- I guess I would assume it'd a lower margin if you're doing less processing.

Obviously whoever's in that business is going to have to make a margin on their processing asset, so that's true if you could do it as effective. What I would say to that, though, is that we already purchased 50%, 60% of our requirements IQF or frozen and others, so all blueberries, all the other -- the vast majority of other parts that we sell in IQF format that's purchased; we don't process. So for us -- and we do okay in those other items so it should work. We have competitors, as well, in this business that -- whose business model is that. If you focus on efficient plant and you focus on R&D and product development, we think we can -- we have a solid model. But clearly whoever is --

The inventory.

Yes, the inventory -- he is saying that he realizes that but, clearly, whoever's going to process it needs to make a margin to reinvest. We think if we specialize they'll do better at what they do and we'll do better in this one.

I was just -- I assume you're much more efficient on capital, certainly.

It's night and day. The most significant part of the inventories in that division relate to this industrial piece that we're exiting.

Okay. And a little off topic, any update on your minority investment in the cellulosic ethanol venture?

We continue to have that position. It's about 19.2% position. I think they've public -- recently announced publicly that Valero, who's the largest ethanol player in the United States, has invested both in Mascoma and in one of the ventures that they have to build a facility for the production of cellulosic ethanol. From our position things are going quite well. They're making nice technical progress and they've -- some of the products that they're putting out in the marketplace that will start to generate revenue seem to be doing well. All in all, Scott, at this stage we're very pleased with how things are going and obviously can't say too much given they're private, but we're pleased from our end.

Great, thank you.

Great, thanks, Scott.

Thank you. Our next question comes from Bob Gibson with Octagon Capital, you may begin.

Good morning, everybody.

Good morning, Bob.

Just wanted to get a better handle on your CapEx. When you were going through the various divisions, you said and maybe an expansion to the USE, et cetera, et cetera, looks like there is a lot of potential for expansion. Is that in your number or no?

Our number this year, based on the expansion projects that we are engaged in this year, is around $30 million and so we're expanding aseptic packaging lines and adding more lines in some of the beverage facilities, et cetera, but on -- so that's this year. Going forward, I can tell you we have a significant list of internal growth projects in our core segments and categories that we believe offer great -- we'd rather do internal growth projects that we can manage than -- there are just great opportunities, so we have a good funnel of those in the book for the next 2, 3 years and beyond that.

But the two that I specifically referenced in my comments are not included in this year's numbers. They would be next year or --

At some point.

At some point.

Okay, and just housekeeping. You were talking about legal, any legal expenses in the Fruit Group.

Legal expenses in the Fruit Group, nothing significant, no. There is a little bit but just day-to-day matters.

Okay, beauty. Thanks so much, guys.

Great, thank you, Bob.

Thank you. Our next question comes from Christine Healy with Scotia Capital, you may begin.

Thanks, hi, guys.

Hi, Christine.

I want to start with China so I thought your comments were pretty interesting there, Tony. So first I just wanted to know if you could talk to us about what you're seeing there in terms of consumption trends of organic food? And then second, if you can just talk about your product rollout plans there? It sounds like you've started selling coffee and some packaged grains. Is this just the start for you guys?

Yes, we hope it's just a start. It's very much in its infancy and we're using our existing resources there to test a few products that we think are winners. Coffee was, for us, an obvious first entry. But it is very much in its infancy, but with the number of consumers that are there, we think it will grow and certainly as middle class and upper income families grow in China, we think there's good opportunity there. But still very much in infancy. We're exploring a few things but really aren't in a position to say very much more than that. But have our toe in the water and we want to build a solid foundation and go surely but not necessarily all that quickly.

So you seeing some positive consumption trends already, because I know you guys have been looking at that market for quite a while, but you're seeing some growth there?

Yes, we're -- certainly in the few items that I mentioned, we got sales and it's -- it seems to be received quite well. We are exploring all sorts of things including who to partner with in some of these categories, finding local partners, that type of thing. . It's still too early to really comment on any specifics.

Okay. And then on the Japan and Middle East, you touched up on this briefly, but just for our knowledge so we have an idea on your geographic breakdown of sales. The Japan impact, can you just clarity? Was that mainly whole soy beans and not value-add products, just the commodity soy bean selling?

Correct, it's identity preserved soy beans for further processing by Japanese companies.

And how material is Japan to your overall sales of those products?

It sort of explains some pressure on the soy bean sales but it's not a huge percentage of overall sales and soy beans -- I'm not sure.

Just roughly's fine?

Yes, I'm not --

I don't have it.

Yes, I don't know, but it wouldn't be more than 10, I wouldn't think.

Okay. No, that's helpful enough. Then the Middle East that was sunflower seeds and, again, is that not the value-add products but just the commodity?

Yes, it's not really a commodity. Those are the in-shell for, I guess, what some of them call, not too flattering, spit and chew, or chew and spit. I guess you can't spit before you chew.

You chew first.

But then you spit.

And is that -- sorry -- is that a big component -- is that market a big component of those sales? Is that a material market for you?

It's export market. It's significant.

Significant.

Yes.

Okay, and then just last question. I just really just want to clarify the sunflower margin impact. I know that you guys normally are really good at just locking in your margins by matching your purchases of your sales, this quarter is a bit different. Is that just because you had higher inventories on hand than you normally would? And then the second question is just -- I know that you guys have said that you've mitigated this impact going forward and can you just tell us how you've done that?

Yes, sunflower is not a commodity we can hedge on Chicago Board, so the way that we hedge is to try to match purchases and costs of purchases to sales and selling prices, and we've historically done a pretty good job at that. This year, because some of the influences on selling prices are different than the influence on cost, as I mentioned in my comments, that gap is bigger than we were expecting. So, we're -- certainly as we work through our inventories as to the world market works through the alternative supplies, as I mentioned, those markets are going to come back. We're adjusting, as well, our purchase commitments for the new crop to make sure that we enter next year proper, we're taking some steps to address. Also trying to source products from other origins to try to match that against our sales commitments. Believe we've gone through the worst but it's going to improve -- should improve significantly towards the end of the year in the fourth quarter.

Okay. Thanks, guys, appreciate it.

Christine, take care.

Thank you. Our next question comes from [Tim Tiviario] with Sheridan Capital Markets, you may begin.

Hi, Tim.

Good morning.

Hello, Tim?

Hello?

Tim?

Lost him.

Please check your mute button.

Hi, Tim?

He's no longer on, I don't think.

Oh, well.

(Operator Instructions). Our next question is from Keith Howlett with Desjardins Securities, you may begin.

Good morning.

Morning.

I had a question on the new sunflower beverage. I was just wondering, is that your own -- are you doing that through private label, or are you doing it on your own label through health food stores, or what is the plan to roll the product out?

Right. So, first off, it's a proprietary process that we internally developed so that we could -- obviously it's part of our strategy to add value to sunflower, a category that we think really offers very good nutritional benefits and notwithstanding the wacko commodity market that we're working through right now is normally very well priced versus other nut-based products. And so the sunflower milk is gluten free and very high in folic acid and we're enriching it with vitamin D and those sort of things. So it's internally developed. Initially we put one of our own -- we put our own label on it. As we -- as Tony talked about, we're ramping it up slowly so we're making modifications to our facilities, et cetera, to handle higher volumes. So we've selectively put it into the market. We're selling it through -- it's under our own brand for now, but certainly it's a product that we'll offer in private label as soon as we feel we have the commercial capability in place. And Tony, you want --?

It's not unusual, Steve, as well, for there to be a really effective private label demand. You need a branded product to sell against and right now it's a new item so we're trying to establish the brand and the private label opportunity should come.

I'm sorry, what is the name of -- you're marketing it under?

Sol, S-O-L.

SOL. And in terms of (laughter)

That doesn't sound --

That didn't sound right but you know what I mean.

Right. (laughter) And is there other sunflower beverages in the market or is this the first one or --?

We believe it's the first.

I see. And I guess you've had focus test groups on it?

Absolutely.

You bet you.

Taste tests, focus tests.

It is a great tasting product if you haven't tasted it. It is really good stuff.

And I guess -- is it sort of a Trader Joe type of trade channel that you're using right now, or --?

Yes, right now it's in the health food channels.

(inaudible) probably.

Not that I'm aware of yet, no.

And that just led me to the other question on your general -- on your soy beverages, and I know you've been down this road before but there's a lot of products in the channel now in juices, adding yumberries or elderberry or ACAI or something to more typical base juices, like orange juice, et cetera. Is there anything move afoot to do that sort of thing with soy beverages.

Yes, we've had -- in the past we've done some juice/soy combinations in private label. We have those capabilities and product offerings. Not a lot of demand from the marketplace at this stage of the game but it's certainly a product that we have and would look to promote.

As soy, you're referencing a bit instead of soy becoming a -- beverage becoming a bit more mature market but as that's happened and we see it, we've successfully evolved into other aseptic packed beverages from various other-- teas, soups, broths, other types of milk, almond milk, rice milk. So we're finding other effective uses for the equipment. As that alternative beverage market consumption shifts we're following along with it.

It's interesting that the statistics on consumption really don't reflect increased consumption at food service levels and there's a number of major retailers that are out of --?

Some of the warehouse clubs aren't included in --

Yes, they aren't in there where there's been big demands, so certainly --

True as well.

Yes, so the statistics are what they are but there is more to the story.

And then on the fruit bar business, can you update us there in terms of where you are in product rollouts or your private label program at major mass merchants, that sort of thing?

I can't give you specific names but I guess to reference my comments before, we have a lot of significant opportunities that we're working on and it remains a product line that's being very well received. We're developing items that add to the value; either different shapes or there's 3-D, have products out among retailers that (inaudible) with fiber, that's another dimension. So it's really a product line that's only -- I think at its infancy, so there's a lot of potential there, but I can't really talk to specifics.

Do you want to talk at all about some of the new products?

No.

No, okay.

And would the fruit bar business be in the $40 million to $45 million range at this point?

It's getting -- yes, it's in that range.

In that range. And just finally on the corporate overhead expenses, is the number in Q1 a good run rate?

Yes, it's a reasonable place to be, Keith. Keep in mind that in those -- in that line are some variable costs that roll with sales for brokerage and those sort of services that are in those lines. So, it's not totally flat overall on the SG&A line but from a corporate spending view it is fairly flat.

Right.

Great, thanks very much.

Thanks, Keith.

Thank you. I'm showing no further questions at this time. I would now like to turn the conference over to President and CEO, Steve Bromley.

Well, great. Thank you very much, everyone, for listening in today. We look forward to keeping in touch with everyone. As always, feel free to give us a call and we'll certainly answer your calls. We appreciate everyone's support and we're pleased with the direction that the Company's heading and we look forward to chatting with you next on, I believe, August 11, if not sooner. So take care and have a wonderful day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.