Sunopta Inc (STKL) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to SunOpta Inc. second-quarter 2011 earnings conference 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 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 information. Many factors could cause the Company's actual results, performance or achievements to be materially different from those expressed or implied by those forward-looking statements, including those factors and assumptions set forth in the Company's annual report on Form 10-K for the fiscal year ending July 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.

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

As you are likely aware, Eric Davis left his position as Vice President and Chief Financial Officer at the end of June. As we noted previously, we have commenced the search to fill this position with consideration for both internal and external candidates. The progress -- the process is progressing well and we are optimistic that we will finalize this process during the third quarter.

Before we get going, I want to mention that we are targeting to keep this call to approximately one hour and want to note that we will be filing our Form 10-Q for the period ended July 2, 2011 by the end of the day today. As we review our results, we want to reiterate our commitment to building a global leader in natural organic and specialty foods that drive 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 future prospects. We look forward to updating you on many of these initiatives during the course of today's call.

For the second quarter we realized revenues of $290.8 million versus revenues of $233.9 million last year, a year-over-year increase of 24.3%. This represents the largest quarterly revenues from continuing operations in our history and reflects continued growth in the natural and organic foods sectors. Revenues increased 13.2%, excluding the impact of the acquisitions completed late in 2010. The underlying base growth rate for the business was approximately 9.4% after accounting for changes, including foreign exchange and commodity prices.

For the second quarter we reported earnings per diluted common share from continuing operations of $0.07, or $4.4 million, as compared to $0.09, or $6.2 million last year. 2010 quarterly results included a one-time gain of $0.22 per diluted common share, due primarily to the sale of our Canadian food distribution assets in June 2010.

We experienced continued strong performance in the International Foods Group and Opta Minerals Inc., offset by reduced earnings in the Grains and Foods Group due primarily to commodity market pressures in the sunflower segment, reduced earnings in the Ingredients Group due primarily to the loss of a major customer earlier this year and higher income taxes. We'll discuss these further in a minute.

Earnings for the second quarter reflect an income tax rate of 42.2%. Our income tax rate is expected to normalize over the balance of the year to an annualized tax rate of approximately 36% due to the expected realization of certain tax benefits from the third and fourth quarters of 2010. The difference in tax rates had an impact of approximately $0.01 on our results for the quarter.

Our quarterly results include other pre-tax income of $3.2 million due in most part to gains on the sale of assets in our Fruit Group during the quarter. These gains were offset by additional pre-tax costs of approximately $3.4 million that are included in the segmented operating results. These include costs related to continued rationalization efforts in the Fruit Group, including costs to exit the Mexican operations; incremental legal and operating costs to exit -- costs related to the ongoing Colorado Sun Oil Processors matter; rationalization-related costs at Purity Life; and costs associated with the retrofit of our fiber operation in Louisville, Kentucky.

For the second quarter we realized EBITDA of $12.9 million as compared to $15.8 million last year. Year to date we have reported revenues of $551.7 million versus revenues of $450.6 million last year, a year-over-year increase of 22.4%. Revenues increased 11.6%, excluding the impact of acquisitions completed late in 2010, and the underlying base growth rate for the business year to date is approximately 7.5% after accounting for changes, including foreign exchange and commodity prices.

Year-to-date we have realized earnings per common share from continuing operations of $0.14, or $9.5 million, as compared to $0.16, or $10.4 million last year. Year to date we have realized EBITDA of $28.8 million as compared to $29.8 million last year. At July 2, 2011, our balance sheet reflects a strong current ratio of 1.47 to 1, long-term debt to equity ratio of 0.2 to 1, and total debt to equity ratio of 0.55 to 1.

For the second quarter we generated cash from continuing operating activities of $20.5 million as compared to $18.6 million in the prior year. At the end of the quarter we have total debt outstanding of $167.8 million, a decrease of $17.8 million from the period ended April 2, 2011. At the end of the quarter we have total assets of $631.4 million and a net book value of $4.65 per outstanding share. We are in compliance with all our debt covenants.

In hand with our ongoing focus to improve the underlying operating returns within our business, we have remained focused on growing our core natural and organic foods platform and on addressing operations deemed non-core. Earlier this week we announced the acquisition of Lorton's Fresh Squeezed Juices, Inc. located in San Bernardino, California. Lorton's is a vertically-integrated producer of a variety of citrus-based products in both industrial and packaged formats with revenues of approximately $10 million.

The acquisition expands our vertically-integrated operations into the extracting, processing and packaging of citrus-based ingredients through consumer packaged products. These facilities have capacity for further growth and expansion. Purchase price for the assets and business was $2.5 million on a debt-free basis subject to post-closing working capital adjustments plus a potential earn-out dependent upon achievement of certain future targets.

The acquisition of Lorton's assets and business is expected to be accretive in fiscal 2012 and will be part of our International Foods platform. This acquisition will leverage our strengths in sourcing and supply of citrus products and further strengthens our vertically-integrated model from sourcing through ingredients and finished packaged products. This is consistent with our strategy to continue to grow our core value-added natural and organic foods platform.

Over May and June we sold our frozen fruit processing assets in Rosarito and Irapuato, Mexico. These assets focused on industrial-type products for the food service and industrial markets versus our new focus on retail markets, thus the decision to sell. As part of these transactions we entered into a supply agreement with the purchaser who will supply strawberry and other fruit products for retail applications to us from these facilities, as well as other operations under their control.

In addition, in May we sold our frozen fruit processing equipment located in Salinas, California, to a company that had previously been leasing this equipment from us. This transaction completed our exit from the Salinas, California, operations as well. These divestitures are 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 our core areas of expertise. We continue to assess further growth opportunities while at the same time assess options for our remaining non-core assets.

As a housekeeping matter, the fully-diluted weighted average number of common shares outstanding for the second quarter was 66 million 826 million (sic) on the quarter-to-date basis, and 66.805 million on a year-to-date basis. Cash generated from operations was very strong in the quarter, totaling $20.5 million as compared to $18.6 million in the prior year. Cash used in operations on a year-to-date basis is $13.4 million as compared to cash generated of $5 million in the same period of 2010. This reflects increased cash use due to higher inventory levels as a result of increased commodity costs, plus higher inventory and accounts receivable levels required to support the growth in our business.

Controllable working capital of $238.8 million at the end of the quarter compared to $193.7 million at the end of 2010. Controllable working capital consists of accounts receivable, inventory and prepaid expenses less accounts payable and accrued liabilities. We expect working capital levels to continue to improve through the remainder of -- sorry, to decline through the remainder of the year. Day sales outstanding in the quarter improved to 35.9 days as compared to 39.6 days at the end of 2010. Inventory turns improved to 4.9 turns at the end of the second quarter as compared to 3.8 turns at the end of 2010.

Capital expenditures of $5.3 million in the quarter and $9.2 million year to date include spending on the aseptic line expansion in our value-added fruit ingredients operation plus investment and maintenance spending across a number of other facilities. As of July 2, at the end of the quarter, we had debt and operating lines net of cash totaling $162.2 million, a decrease of $17.7 million from the prior quarter and an increase of $24 million in the first half of 2011. The changes noted are primarily due to fluctuations in non-cash working capital offset by cash generated from operations.

At the end of the quarter our operating lines had approximately $55 million in additional borrowing availability and, as I mentioned earlier, we are in compliance with all of our banking covenants.

On a year-to-date basis our effective tax rate was 38.4%. This rate reflects an increase due to our mix of jurisdictional earnings and certain non-deductible expenses. As I mentioned previously, we expect our annual tax rate will be in the range of 36%. 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. Second-quarter operating income for SunOpta Foods was $7.8 million versus prior year of approximately $11.3 million and year-to-date operating income was approximately $18.2 million compared to approximately $24.2 million last year. The decline in operating income was due primarily to reduced earnings in the sunflower and ingredients operations.

Overall, SunOpta Foods achieved record revenues in the quarter, a reflection of the strength of the organic and natural markets, and several of our business segments posted strong advances compared to last year. We remain very optimistic in our future prospects and are making solid progress in many areas, as I will detail in a few moments.

The Grains and Foods Group achieved a lower operating income in the quarter compared to last year, mostly due to commodity pressures in the sunflower segment. The year-over-year pre-tax contribution from our legacy sunflower operations declined approximately $2.6 million in the second quarter and approximately $5.1 million year to date. Revenues for the Group's grain operations continued to be well ahead of last year due mostly to increased volumes and selling prices for corn and seed ingredients and increased selling prices for soybeans.

Soybean sales in the quarter and year to date were higher than last year, with increased selling prices more than offsetting lower volumes. We are carrying a long inventory position of specialty soybeans due to weaker demand, especially in Japan, and have reduced our 2011 contracted acres for non-GMO soybeans to account for this. We expect industry planting levels to also drop and we believe that our carryover inventory will offset the reduced planting and help set up favorable market conditions for the end of the year. Although the conditions are varied from region to region through the end of July, in general we expect the 2011 crop will be close to the five-year average for both quality and yield for corn and soy.

The Group's food ingredient sales in the quarter and year to date were well ahead of last year. Although organic vegetable oil sales remain strong, margins on vegetable oil were negative in the quarter due to high-cost expeller price oil purchases to cover existing sales contracts. This was due, in part, to our [part] in the Colorado Sun Oil Processors joint venture not supplying crude as planned due to our ongoing dispute. We have also incurred legal costs of approximately $530,000 in the quarter and $880,000 year to date related to this dispute. This matter is currently before the courts and we expect this to be brought to resolution by the end of the year.

As we discussed previously, purchase costs of sunflower seed in North America have significantly increased due to higher prices for other grains and commodities, which compete for the same agricultural land. At the same time, export selling prices have not increased proportionally due to competition from lower-priced product from South America, China and Eastern Europe. Demand has also been affected by unrest in the Middle East, which represents a significant portion of our in-shell sales.

These combination of factors have resulted in a much larger swing in margins year over year than we have experienced in the past, and as previously mentioned, margins for in-shell and bakery kernel were negative in the quarter compared to strong positive margins last year. We expect some relief from commodity margins late in the third quarter when the South American crop for in-shell is essentially sold through and when commitments to cover current sales contracts come to an end.

The change in sunflower results reflect the commodity nature of this business and our inability to hedge as we do in other commodities. Going forward we will focus on selling our North American production in North America in the form of value-added products. The Dahlgren operations provide a strong base to build on and we are working on a number of exciting projects to increase sales of our roasted kernel and other value-added products. We are also developing alternative sources of supply closer to our export customers, especially in the Black Sea region, which is currently the low-cost producer of sunflowers.

The process of integrating the Dahlgren and SunOpta sunflower operations is well underway. The production of all kernel has been moved to the Breckenridge, Minnesota, plant which should result in improved yield due to the more refined processing equipment at this facility. In-shell production has been all moved to the Crookston, Minnesota, facility to generate similar efficiency gains and a stronger market for certain sizes of in-shell through the roasting facility. These improvements will help mitigate the reduced margins on the kernel and export in-shell business.

The Group's value-added packaged operations continue to perform very well, with good processing yields at all locations and continued strong sales demand. We expect to see continued sales and profit growth from this segment of the business and we'll be adding further capacity at our facility in Modesto, California, to keep up with demand.

The launch of our unique sunflower milk is going well. The product is now listed at a number of retailers and feedback to date has been positive. While still in the initial stages, we are encouraged by the potential for this healthy and nutritious product. In summary, although the Grains and Foods Group is facing some challenges due to commodity markets for sunflower, the operations remain on a solid foundation overall.

As expected, and as we discussed during our first-quarter earnings call, the Ingredients Group reported lower sales and operating income due mostly to the loss of a significant oat fiber customer at the end of January this year. Operating margins were also affected by processing cost increases for chemicals and other materials, increased healthcare costs relating to a few major claims and costs associated with retooling the Louisville, Kentucky, operation.

As we've mentioned previously, the success of the Ingredients Group depends on our ability to find innovative applications for our fibers and solutions for our customers. We are working on a number of exciting opportunities which would replace the oat fiber business lost and we remain confident we will grow our business both domestically and with other customers in other parts of the world. We've already secured new business representing approximately half this volume, but the impact will only begin in earnest in the second half.

Active new product projects include the development of rice fibers and a sunflower fiber to address the demand for allergen and gluten-free alternatives, as well as reduced particle-size insoluble fibers for the beverage and meat industries and a new starch product for use in low-fat yogurt. The sunflower fiber provides an opportunity to further vertically integrate our sunflower operations.

The project to produce a variety of alternative fibers at our Louisville facility is proceeding well and we expect to be in production by the end of the first quarter of 2012. As we mentioned on our last earnings call, the new production capability is expected to generate approximately $10 million in annual revenues and we are getting significant interest from a number of customers for use in both human and pet food products. We remain very positive about our prospects in this sector and we expect profits to return to first-quarter levels in the second half and to progress further as we see the benefits for the projects we are working on.

Within the Foods Group the frozen food operation results in the second quarter were disappointing. The frozen food results in the second quarter include approximately $800,000 in expenses related to costs and write-downs resulting directly or indirectly from the sale of the Mexican processing assets, but the balance of the operations performed below what we had expected. Over the past year we've taken several steps to rationalize our frozen food operations. A key part of that strategy was to exit the processing of fresh field fruit and with our recent sales of the Mexican assets and the assets at Salinas, California, that part has been completed.

We are now focused on the IQF retail channel and are in process of selling the food service industrial inventory, which used to be produced in our Mexican facilities. We expect to have this part essentially completed by year end and will see improvements over the course of the next few months from reductions in warehousing and other carrying cost. The simplified business model has also allowed us to reduce our SG&A and other overheads.

Another key component of the strategy was to implement changes to create an efficient bagging operation at our facility in Buena Park, California, and eventually a facility to be located in the Eastern United States. We've recently completed the renovations to the freezer and production areas of the Buena Park facility and expect savings starting in the third quarter from improved efficiencies, reduced energy usage and additional customer opportunities.

Another important element of our strategy is to grow top-line revenues through more competitive costs and by developing innovative IQF fruit and other value-added products. This part of the strategy is very much in progress and we are leveraging the resources and talents of other groups within SunOpta to drive this effort, especially the selling team at SunOpta Food Solutions.

We believe we will be able to provide a more complete solution for our customers using our own manufacturing assets and combining them with our global sourcing network. The outlook for the frozen fruit operations is expected to improve over the next two quarters, as the benefit from the various initiatives take hold each month. We now expect that we will return to profitability in 2012 after a breakeven first quarter.

The products offered by frozen fruit are an important part of our total program for several important retail customers and we continue to believe that the frozen fruit operations should be a key component of our Company. Over the past year we've simplified and reduced the scope of the fruit operations and are also now better positioned to more easily evaluate other options.

As expected in the last quarter, the processed fruit ingredients operations within the Fruit Group reported lower sales and operating income in the second quarter and year to date compared to last year as a result of the loss of a customer in the third quarter last year due to freight costs to the East Coast. The operations continued to run well despite the lower volumes and costs are being well controlled.

The new aseptic line project remains on budget and is now scheduled to start in early October. The new line has the capacity of approximately 30 million pounds compared to 15 million pounds on the current line. Sales volume remains the key to returning to the profit levels we achieved in the first half of 2010. The sales and product development teams are working on a significant number of opportunities, and the team at processed fruit remain confident that they will be able to fill the new capacity within a year of production start.

The SunOpta Healthy Snacks component of the Fruit Group reported record sales and operating income in the second quarter and in the first half of the year from their fruit snack operations. As previously discussed, because of continued growth in this segment we will need to increase the capacity of the existing fruit processing equipment at Omak, Washington, and we are evaluating with the Food Solutions Group an Eastern USA facility closer to our East Coast customers, which would house a second high-speed fruit snack line in addition to other equipment.

The integration of the Edner of Nevada nutritious snack bar operations is proceeding well. Customer response to the acquisition by SunOpta continues to be very positive and the sales team is confident that we will secure new business for the bar operations in the second half of the year. We remain very excited about the Edner acquisition and the healthy snack operations. We have a solid management team in place and we continue to believe that portable nutritious food will be a key platform for SunOpta.

The International Foods Group continues to have a stellar year on the strength of results from the Industrial Organic Ingredients business and SunOpta Food Solutions. The Industrial Organic Ingredients business achieved another record operating income in the quarter. Sales and margins for organic products remain strong and a solid performance is expected through the second half of the year.

The European operations again performed exceptionally well in the second quarter, driven mostly by organic sugar, organic orange juice concentrate and coffee. The USA operations continued to gain momentum and achieve record sales and operating income in the quarter, mostly on the strength of organic sugar, agave and fruit. Sales from the SunOpta Dalian operations in Northeast China decreased in the quarter due to reduced export activity. The focus of processing for export continues to be on organic pumpkin seeds, beans, lentils and seeds and other specialty seeds for the EU market.

We also continue to evolve this operation to sell products into domestic Chinese market. We will be packaging organic seeds, grains and cereals at the Dalian facility in the fourth quarter and have applied for a license to import agave. We will trial a number of consumer packaged products in several SunOpta operations in the chain with 400 organic food stores starting in the third quarter.

We've also continued to sell organic green coffee beans, and coffee roasting machinery for this facility should be operational in the third quarter to expand the number of potential customers for our organic coffee. We are also launching an online shop to sell the consumer packaged products previously noted.

The Selet sesame operations in Ethiopia continue to make progress. The factory is operating well with one peeler operational and the second peeler should be operational by the end of August. Overall, the outlook for the Industrial Organic Ingredients business is very good and we remain well positioned to take advantage of the continued growth in the organic food industry.

The Food Solutions operations within the International Foods Group also continued to improve and gain momentum and reported record sales and operating income in the second quarter. A key driver in the success of SunOpta Food Solutions has been our private label programs for organic juice and other citrus juices and beverages.

As Steve mentioned, on Monday we announced the purchase of Lorton's Fresh Squeezed Juices, a juice extraction and packaging facility located in Southern California. Combined with our sourcing capability the acquisition allows us to further integrate our supply chain and when leveraged with our [full packing] agreements with other processor partners sets the stage for further growth in the organic citrus sector.

Another significant growth initiative for SunOpta Food Solutions is a project to sell fruit purees in an innovative, resealable pouch format. Two packaging lines in the facility in California will be operational later this year. We've also approved additional lines to be located in a facility in the eastern United States, which, as I mentioned earlier, will also house an additional fruit snack line.

We are very excited about this initiative and believe we can create a platform, which generates $100 million in profitable revenues. This is an important initiative for the Company.

We are very pleased with the results in SunOpta Food Solutions. The business model of leveraging our expertise in sourcing materials, supply chain and product development to create innovative products for retail and food service is working. We are now moving to solidify our supply chain in key categories by investing in facilities and equipment. We are excited about the revenue and profit potential of the projects we are working on and we remain confident SunOpta Food Solutions will deliver strong operating results in 2011 and is on a solid foundation for the future.

The second-quarter operating results at Purity Life Natural Health Products include approximately $900,000 in costs related to our continued product and operational rationalization efforts. Although the results don't show it yet, we believe that Purity is making progress. The lower sales and operating losses are attributed entirely to the food, drug, mass channel. We've cut back marketing spending to the minimum levels required to sustain promotional activity and support limited product launches.

The lower spending on marketing has improved our bottom line, but as we expected, it is also resulting in lower sales in the food, drug, mass channel and some delist costs related to slow moving products. We believe that we've worked through all of the significant potential costs related to the delists in this channel.

We're beginning to see positive trends in the health food channel and have further refined our strategy to focus resources even more on the distribution business and the health food channel and further reduce SG&A. We've also taken steps to make better use of our manufacturing assets and are working on private label opportunities from our facilities.

We are returning to Purity's origins and distribution in the health food channel and the sales and management team at Purity have been re-energized by the changes and the strategic direction. We believe that the operation will return to profitability in the fourth quarter.

To conclude my comments, in the second quarter I believe we continued to show progress across most of our operations, but unfortunately, commodity markets and other factors combined to camouflage these positives. I'm confident that we have the right strategies in place for long-term success and the talented and dedicated team to deliver for our shareholders and other stakeholders. Steve?

Great, thanks, Tony. Thanks for the overview. Opta Minerals, which represented approximately 8.5% of second-quarter revenues, realized solid operating performance in the quarter. In the quarter, Opta realized operating earnings of $2.2 million, or 8.1% of revenues, versus $1.7 million, or 8.1% of revenues in the prior year. 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 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.

To wrap up, we continue to focus on building a profitable, sustainable and growth oriented natural and organic foods business. We are making progress and are confident in our future prospects, but we acknowledge that our results this quarter were impacted by a number of factors that somewhat mask the progress we are making. Our revenues and growth prospects are strong and we remain focused and committed and continue on our strategic course. With that we will now open the call to questions. Thank you.

Thank you. (Operator Instructions) Our first question is from Bob Gibson of Octagon Capital. Your question, please.

Morning, everybody.

Hi, Bob.

CapEx for this year, you had guided about $30 million and you've done about $9 million to date, color?

Well, yes, we'll probably still be in the range. Tony talked about a number of the projects that we have underway with -- on a number of fronts, so there is some spending that will take place on those. And I think as a general comment a lot of those projects the bulk of some of that spending will be in the back, so to be safe, stay in that $30 million range.

Still a -- should be still a good number.

Okay, cool. Can you just, for my benefit, tell me the difference between the Fruit Group and the International because when I looked at Lorton's I initially thought it might go in the Fruit Group?

The Lorton's acquisition, what we're doing with the International and Food Solutions team is we're taking -- we have expertise in supply chain, we've got a lot of ability in sourcing product and sourcing finished product. We've got a lot of contracts with processors to produce private label products.

We're now looking at our 3 or 4 key areas and looking how to solidify that with investments in machinery and equipment of our own. That happens to be the first one. It really is an extension of the business that SunOpta Food Solutions is doing and it's juice; the Fruit division is mostly frozen fruit. There is some overlap admittedly, but this is an extension of the Food Solutions business.

To take it a step further, Bob, the Food Solutions Group today have, as Tony mentioned, a significant number of contracts where they use their sourcing expertise and they're supplying major retailers et cetera with finished package products. And what we like to do is when we get to a point where there's mass then we want to own the asset ourself and take control of the whole vertically-integrated chain, which is what we're doing here.

Okay, great. Thanks a lot, guys.

Take care, Bob.

Thank you. Our next question is from Greg Badishkanian with Citigroup. Your question, please.

Hi, good morning, this is Alvin Concepcion in for Greg.

Hey, Alvin, how are you?

Hey, I'm great. You guys posted very strong organic sales growth in the quarter. Can you give us a sense of if those organic and natural industry trends have changed significantly in July and August to date and what's your outlook given the current macro environment?

We haven't seen any drop off in growth through today, so through July and mid way through August. Things continue to be strong top line, so that answers the first question. Outlook to us still remains about the same. We think we're going to see high single-digit growth the rest of the year, so that's our expectation still today.

Okay, great. And then looking at operating margins, if I pull out the Fruit Group disposal cost of $3.4 million, I think operating margins would've been closer to 3.9%, so looking at the back half of the year, do you think operating margins should improve beyond that 3.9%?

Yes, that's our expectations.

Okay.

And we fully expect to be able to do that. The other businesses continue to do well and we expect to see some improvement on the frozen end.

Great, and then I just wanted to get some more color on the Lorton's acquisition. If you could just talk about operating margins there and how that compares to your overall business, and if you expect that to be dilutive in 2011, and how much so and how accretive you think the business will be?

I think the Lorton's acquisition is really sort of a question of the opportunity we have to grow with the assets we purchased. It's a relatively small business so our expectation is just to make it a much larger business using the expertise we have within Food Solutions. The margins going in are probably in the lower range of what we're achieving but as I said, we expect we'd do quite a bit more with the assets going forward. It was a nice set of opportunity to buy a nice click-in.

And what do you think the -- at $10 million in sales what do you think the potential is there? You want to grow the business but what kind of sales potential do you think there is in that acquisition?

One of the things that we'll do here, Alvin, is lay in a lot of the business that we do today but take the operating efficiency from that over time as it makes sense. And we should be able to double the size of the base business that's there --

Yes, I think so.

-- over the next period of time and then lay in on top of that our own stuff.

Yes, the existing equipment can do 2, 3 times the volume we're doing right now and then we'll invest further as we go along.

Great, that's all for me. Thanks very much.

Thanks, Alvin. Take care.

(Operator Instructions) Our next question is from Tim Tiberio with Chardan Capital Markets. Your question, please.

Good morning, guys.

Good morning.

My question is around the Dahlgren acquisition, you now have 2 full quarters behind you. How do you see the integration going? Do you see this as fully synchronized with your legacy business at this point?

Yes, I mean certainly, as I mentioned, we've made significant progress. There are still a few things left to do, but certainly they're in sync -- in your words they're in sync. We've synchronized the selling of seed business, which is one of the opportunities we had. We've already specialized a few of the plants, as I mentioned, so it's well in hand, well in progress, we're pleased with how that's evolving.

Okay, and a follow-up question, you were mentioning that you have opportunities to renegotiate some of the sunflower contracts. When we look out into the second half, I guess on an annualized basis, what percentage of your sunflower book potentially would come up for renegotiation in the second half?

Yes, on the -- it's really a question of stopping or not having to fill existing contracts at a loss. So as we go into the new season, we will get a chance to reset and knowing what we know right now, a few things. We're going to have probably reduced business, so there's some business that we had last year that we feel that we won't have next year and we'll decide to opt out. Some business we'll source closer to where the customers are.

As I mentioned, we've got a few supply options other parts of the world. I mentioned Bulgaria and Eastern Europe. Bulgaria specifically is one. So it's not so much the percentage of the volume, it's the extent of the negative margins. We were really caught in this one, that's what's going to come to an end in the third quarter.

Okay. And you mentioned that it's difficult to naturally hedge the sunflower segment. Is it correct to say that the long-term solution for SunOpta is, as you mentioned, branch out more into value-added products in North America, but at the same time broaden your supplier base in Europe. Is that really the long-term solution in dealing with some of this commodity volatility?

Absolutely, and that's our strategy internally and that's the strategy that we had approved by the Board when we bought the Dahlgren operations. The first step -- first significant step in moving to value-added North America and that's our mission there. To bring sourcing closer to our customers, [awful] lot of these export customers, and value add what we have here and eventually value add on the export side closer to source. So that's clearly it.

We were surprised, frankly, by the extent of the move this year. All it does, in my mind, is it really emphasizes even more the importance of delivering on our strategy. I think we're right on strategy. Unfortunately we're having to do it in a rough commodity market that makes it more compelling to move quickly.

Okay, I will pass it on. Thanks so much for your time.

Great. Thanks, Tim. Take care.

Thank you. Our next question is from Christine Healy of Scotia Capital. Your question, please.

Hi, guys. Just a few questions for you, first on the International Foods Group. The quarter-over-quarter revenue increase was almost $15 million so it's a pretty big move and from your comment, Tony, it sounds like it was really sales of sugar, coffee, orange juice, that they were really strong in the quarter. I'm just trying to understand the variance and the sustainability of the increase. Were any of these products new for SunOpta, or did you get any new customers in the quarter? What is the real explanation for that big of a move from quarter over quarter?

There was good sales and decent growth across all of the products that we sell in that division. I singled those out because they're the ones that year over year were most dramatic, although we had growth pretty well across all the segments. We have had new customers in a lot of those sectors. We're making -- in terms of new, say, newer I'd signal maybe the agave as being something that's a relatively new category for us that we've had a lot of positive feedback from customers or having a lot of positive results.

We've got a very nice supply situation with a strategic partner for the organic agave, so that's one that stands out, but none of the products are necessarily new. It's just that we're having good luck with our selling model. Remember, as well, that we -- in that sector we offer a little bit more than some -- than most of our competitors.

Our ability to control supply chain, to guarantee quality, to guarantee supply, it's all things that over time as you do that -- sometimes you get caught, a supplier doesn't deliver, you live up to your expectation, you incur cost, but long term that's what gets you the business and I think that's what we're seeing.

Okay, but were any of the sales in the quarter what you'd frame as very chunky, particular one-off contract? Just want to be careful that we're not too aggressive in our ongoing assumptions for the segment.

No, I would say that there was no large one-time sales.

Okay, that's exactly what I want to know, perfect. Thanks.

There was no --

Okay, and then just moving on. So my understanding is that you source a portion of your products -- I think mainly sunflowers -- from Manitoba, maybe even North Dakota, so there's been some flooding issues in both those areas this year. Can you give us a sense just what percentage of your supply is from these regions and if you expect this to have an impact on the crops this year?

Yes. So on the sunflower side, Christine, we actually source from a lot of states, everywhere from Texas through Colorado, a lot in Kansas, the Dakotas, Minnesota and then up into Manitoba. Clearly the northern part of the growing areas, especially North Dakota and Manitoba, were very, very wet in the spring, so the acres that were planted were behind. I don't have the exact number but I would say 15% of the acres just didn't get planted.

Other parts of the growing -- the Kansas crop is doing really well. Texas was doing really well. It is very dry there now. Fortunately sunflower thrives in dry weather. So the crop -- and the quality of the crop is decent, what is growing.

So one of the things that's happening is our working capital is a little bit higher because we've adjusted to that by carrying higher -- we're going to carry higher inventories into next year to account for that. Plus we have our International Sourcing Group who also contract counter-seasonally, so we'll be able to manage through and we'll be fine for supply. But those northern areas, you're quite right, were very wet in the spring and --

Okay, so any shortfalls then you would just use your International Sourcing Group to --?

Correct.

Okay. All right, good to know. And then just last question here, just on the Grains and Foods, Tony, I just want to be certain that I've got this right on what I should expect for the margins going forward on the sunflowers. So is it correct that we should assume modest improvements in the second half but not likely to return to the normal 7% to 8% EBIT margins until sometime in 2012 after you've made some changes to where you're getting your supply and the product mix, and moving to more value-add? Is that how we should look at it? So modest improvement but not really getting back to normal levels until sometime later in 2012, is that right?

I'd say that's a good way to summarize the situation. We're going to see some immediate improvement for the reasons I mentioned, repositioning, more value-add; that's going to take a little bit more time. We've got a lot of things in progress; it's going to take a little bit more time. So I think you nailed it right on.

Okay. Great, thanks so much, guys. Appreciate it.

Take care, Christine. Bye-bye.

Thank you. Our next question is from Chris Krueger of Northland Capital Markets. Your question, please.

Yes, you mentioned some weakness of selling into Japan. I know it's related to the earthquake, but can you quantify a little bit better what kind of impact that has had on either sales or margins or the seasonality of that business?

I don't have that off the top of my head, honestly, but yes, soybean sales are off from a year ago by -- volume-wise by --

It's the high-end natto soybeans going into Japan that we're hope -- Chris, we don't have that number.

I'm going to say 15%, 20%, but that's trying to remember a very detailed schedule from a few days ago, Chris. Something like that.

Basically what's happened --

On the soy side volumes are down --

Because of that.

Yes, because of that.

Now what we expect to happen and what we're seeing, of course, is that the markets are starting to open up and the ports are getting back in line and there's a good chance that we see a lot of that volume that's contracted go there anyways, just it's delayed at this stage.

Okay.

Sorry we don't have the exact number. Tony's flushing away. We'll come back and confirm it with you, Chris.

Okay. And as far as your Grains and Foods, the aseptic business, I know it's been an area of strength for quite a while. Any new opportunities you're working on there, or any new -- recent new contracts?

Sorry, Chris, I was looking at Tony on the number he was pulling out. You're asking about Grains and Foods and new contracts?

For the aseptic beverages.

On the aseptic side, yes. One of the things that Tony mentioned is that our volumes continue to grow, and we've just approved more equipment to go into the Modesto facility. We've had nice growth from some of our core customers. There's been growth from some smaller additional business that we've taken on. There are some good opportunities in the pipeline that we hope to come to fruition.

Which we're not at liberty to say who.

We're not at liberty to say and we always think that it's bad luck to count it before -- we always like to say we know we have it when we get the P.O.

Yes, you also don't like to tell your competitors that you're about to take business either sometimes, so not good.

But we are working actively on that and adding capacity in those expectations.

As far as the Modesto capacity, and maybe you stated it before, but was there a timeline when that's expected to begin producing?

Well, the additional capacity won't really come online until later in the year, quite late in the year actually.

Yes, (multiple speakers).

Of this year?

Of this year, yes. Assume it for next year, Chris, but we have capacity that we can take stuff on in the interim.

All right, thanks. That's all I've got.

Okay. Take care, Chris. Thanks.

Thank you. At this time there are no other questions in queue. I'll now like to turn it back over to Steve Bromley for any further remarks.

Well, great. I'd like to thank everyone for joining the call today and appreciate you taking the time. As always feel free to call us at any time if you have any further questions or would like to discuss anything further. So thanks very much and have a great day and survive these markets. Thank you.

Ladies and gentlemen, thank you for your participation. That concludes the conference. You may disconnect and have a wonderful day.