Sunopta Inc (STKL) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the SunOpta, Incorporated, third quarter 2011 earnings call. Before I turn the call over to Steve Bromley, President and CEO of SunOpta, Incorporated, 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 statements. 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 ended January 1, 2011. Such information can be found in the sections in these reports titled forward-looking statements and risk factors.

I would now like to turn the call over to Mr. Steve Bromley, please go ahead.

Great, thank you very much, and good morning, everyone. Welcome to our third quarter 2011 shareholder conference call. I'm joined on this call today by Tony Tavares, Vice President and Chief Operating Officer; Rob McKeracher, 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 will target to keep this call to approximately one hour; and we want to note that we will be filing our form 10-Q and related electronic submissions by the end of the day tomorrow. As you are likely aware, we recently announced the appointment of Rob McKeracher as Vice President and Chief Financial Officer responsible for the Company's financial affairs and reporting activities, including operational and external financial reporting and control, banking, treasury and tax, and also playing a key role in industrial relations and strategic corporate development. Rob has been with the Company since 2007 and most recently served as Vice President of Financial Reporting. His in-depth knowledge of our global operations, combined with extensive reporting, treasury and regulatory experience positioned Rob well for this role.

At the same time, we also announced the appointment of John Ruelle to the newly-created position of Chief Administrative Officer responsible for human resources and organizational development, information technology, shared administrative services, insurance and operational legal management. In this role, John will focus on continued improvement and linkage of business processes and [talent] management and play an important role in strategic corporate development. John has been with the Company since 2007, and most recently served as Chief Financial Officer and Vice President of Finance and Administration in our largest operating segment, the SunOpta Grains and Foods group.

Both Rob and John are settling into their new roles; and I am personally really excited to have them as part of our senior leadership team. Both bring new ideas and energy to our team and have been well received both internally and externally.

As we review our third quarter and year-to-date results, we want to reiterate our commitment to building a global leader in natural, organic, and specialty foods that drives sustainable wellbeing. As we will note during this call, we continue to make progress, but not without some challenges in this difficult commodity and economic 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 quarter ended October 1, 2011, we realized quarterly revenues of $272.4 million versus revenues of $217.5 million for the quarter ended October 2, 2010, a year-over-year increase of 25.3%. This increase reflects continued growth in the natural and organic food sectors. Revenues increased 14.6%, excluding the impact of the acquisitions completed during 2010 and 2011. The underlying base growth rate for the business was approximately 8.2% after accounting for changes including foreign exchange and commodity prices.

For the quarter, we reported earnings per diluted common share from continuing operations of $0.06 or $3.7 million as compared to a loss of $0.2 million for the same quarter in the prior year. These results were driven by continued strong performance in our International Foods group, offset by reduced earnings in the Grains and Foods group due to commodity market pressures in the Sunflower segment, reduced earnings in the Ingredients group due in part to the loss of a major customer earlier in the year, and reduced earnings at Opta Minerals due primarily to the impact of foreign exchange losses in 2011 versus significant gains in the third quarter of 2010.

Our third quarter 2011 results include additional pretax costs of approximately $2.1 million, related primarily to ongoing rationalization and legal matters, acquisition and start-up costs, plus foreign exchange translation-related losses as a result of significant currency fluctuations during the quarter. Earnings per share, including discontinued operations for the quarter, were $0.05 per diluted common share versus $0.52 per diluted common share in the third quarter of 2010. The 2010 results included a gain realized our sale of SunOpta BioProcessing of $34.6 million or $0.52 per diluted common share, and non-cash, goodwill and impairment charges of $6.4 million after-tax or approximately $0.10 per diluted common share.

For the third quarter, we realized EBITDA of $12.5 million as compared to $14.7 million last year. During the quarter, we divested our 50% ownership interest in Colorado Sun Oil Processing, LLC, our joint venture oil refining operation. As previously discussed, relations with our venture partner were very troubled and lead to a number of litigation matters. During the quarter, an asset purchase agreement submitted by our former JV partner was accepted by the courts; and as a result we have exited our ownership position in the operation. We realized a small gain on the disposal of our interest, offset by losses for these operations up to the date of this sale, plus related legal costs. A separate arbitration proceeding is pending related to our business due to the Colorado Sun Oil Processors business. We are continuing with our natural and organic oils business, within the SunOpta Grains and Foods group, but no longer have an interest in Colorado Sun Oil Processing.

Earnings per share, including discontinued operations for the third quarter of 2010, were $0.52 per diluted common share. Year-to-date, we have reported revenues of $823.6 million versus revenues of $667.7 million, a year-over-year increase of 23.3%. Revenues increased 12.5%, excluding the impact of acquisitions. The underlying base growth rate for the business was approximately 7.5% after accounting for changes, including foreign exchange and commodity prices.

Year-to-date, we have realized earnings per diluted common share from continuing operations of $0.21, or $13.8 million, as compared to $0.16 or $10.6 million last year, and EBITDA of $42.5 million as compared to $45.5 million for the 3 quarters last year. At the end of the quarter, our balance sheet reflects a current ratio of 1.49 to 1, and total net-to-equity ratio of 0.53 to 1. For the quarter we generated cash from continuing operations of $11.6 million as compared to $20.3 million for the quarter ended October 2, 2010, reflecting the impact of increased inventory levels versus the same time last year. At the end of the quarter, we have total debt outstanding of $161.7 million, a decrease of $6.1 million during the quarter; and we have total assets of $623.4 million reflecting our net book value of $4.65 per outstanding share.

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 being non-core. During the quarter, we announced the acquisition of Lorton's Fresh Squeezed Juices, Inc., located in San Bernardino, California. Lorton's is an integrated producer of a variety of citrus-based products in both industrial and packaged formats. The acquisition expands our citrus and beverage operations into the extracting, processing, and packaging of citrus-based ingredients through value-added, consumer packaged products. These facilities capacity for further growth and expansion.

Also during the quarter we announced that the Board of Opta Minerals, Inc., has commenced the process to identify and review strategic alternatives to enhance shareholder value. We own approximately 66.4% of Opta Minerals and approximately 64% on a fully-diluted basis. As a result of a limited public float, and thus very low trading volumes, Opta Minerals has limited access to the capital markets; and we do not believe that the market properly reflects Opta Minerals' financial performance and future growth opportunities. Consequently, although we are very supportive of the Management team at Opta Minerals, we support the decision to complete the review of strategic alternatives, including the possible sale of the business. There is no defined timeline for the strategic alternatives review and there can be no assurance that the review will result in any specific action.

This is consistent with our strategy to focus on our core and natural and organic, value-added, foods business. In this regard, we have already divested 3 non-core assets, including our Canadian food distribution assets, SunOpta BioProcessing, and certain California and Mexican-based assets within our Fruit group, all in an effort to streamline and simplify our business model. At the same time we have continued to invest in and grow our natural and organic foods business by a number of internal growth projects and the acquisition of 3 businesses, including Dahlgren's, a vertically integrated producer of confection, sunflower products; Edner of Nevada, a producer of nutritious portable snack bars; and Lorton's Fresh Squeezed Juice.

In the quarter, Opta Minerals realized operating earnings of $1.6 million, or 6.7% of revenues, versus $2.8 million or 13% of revenues in the prior year. These results reflect a year-over-year negative foreign exchange impact of $1.3 million due to significant currency fluctuations. The underlying operating results, excluding currency fluctuations, have improved year-over-year, driven primarily by strong results in the steel industry component of the business, offset by weaker results in the abrasives component due to weak economic conditions.

Tony will provide an overview of a number of ongoing business developments in SunOpta Foods during his update in a few minutes. I will now turn the call over to Rob McKeracher, our new Chief Financial Officer, for an update on cash flows and capital resources. Welcome, Rob.

Thanks, Steve. Good morning, everyone. Before I begin, I want to say how pleased I am to join you on this call today. I look forward to meeting with investors in the near future. And like Steve, I welcome your calls in the interim should you wish to discuss aspects of the Company further.

Please note that all balances and cash flows that I will be discussing relate to continuing operations unless otherwise noted. Accordingly, all comparative period balances have been adjusted to remove the effect of discontinued operations.

Controllable working capital, which is defined as Accounts Receivable, inventory and prepaid expenses, less Accounts Payable and accrued liabilities, totaled $234.6 million at the end of the quarter compared to $194.8 million at the end of 2010. We expect working capital levels to stay in this range through the remainder of the year due mainly to increased inventory levels as a result of rising commodity prices, which I will touch on momentarily.

During the third quarter, cash generated from continuing operations was $11.7 million as compared to $20.3 million in the same period of 2010. Cash used in continuing operations on a year-to-date basis was $1 million as compared to cash generated of $25.9 million in the first 3 quarters of 2010. The reduction in cash generated from operations reflects an increase in cash used to fund higher commodity costs and the carryover of inventory in the Grains and Foods and International Food groups, to offset a corresponding reduction in 2011 contracted acres and purchase commitments. We expect this inventory position will help establish more favorable market conditions in the fourth quarter and into 2012.

Despite higher inventory levels, our inventory turns improved to 4.8 turns at the end of the third quarter comparable to the 4.7 turns for the same period last year, and reflective of continued strong sales in 2011. Capital expenditures of $6.1 million in the quarter and $15.3 million year-to-date includes spending on the aseptic line expansion in our fruit ingredients operation, maintenance and capacity enhancements at our aseptic soy milk and alternative beverage facilities, plus investment and maintenance capital spending across a number of other business units. We expect capital spending for 2011 to be in the range of $23 million to $25 million. As well, during the quarter we used cash of $2.5 million to finance the acquisition of Lorton's Fresh Squeezed Juices.

As of October 1, 2011, we had debt and operating lines, net of cash, totaling $154.2 million, a decrease of $8 million from the prior quarter and an increase of $15.9 million in the first 3 quarters of 2011. The changes noted are primarily due to fluctuations in non-cash working capital and capital expenditures, offset by cash generated by operations. Total debt to equity at the end of the third quarter was 0.53 to 1. Operating lines had approximately $52.5 million in additional borrowing availability and we are in compliance with all banking covenants. We remain well positioned for continued growth as opportunities present themselves supported by a strong balance sheet and cash from operations.

On a year-to-date basis, our effective tax rate was 35.9%. This rate reflects a greater proportion of earnings and lower tax rate jurisdictions and the realization of state tax credits, offset by increased, nondeductible expenses and certain reserves recorded at Opta Minerals. We expect our annual effective tax rate for 2011 to be in the range of 36% to 37%.

As a housekeeping matter, the fully-diluted weighted average number of common shares outstanding for the third quarter was 66,352,297 on a quarter-to-date basis and 66,648,407 on a year-to-date basis.

With that, I'll now turn the call over to Tony Tavares, our Vice President and Chief Operating Officer, who will discuss the activities and performance of SunOpta Foods during the third quarter. Tony?

Thanks, Rob. Good morning, ladies and gentlemen.

The third quarter operating income for SunOpta Foods was $8.6 million compared to $9.7 million last year; and year-to-date operating income was $27.2 million compared to $33.9 million last year. The lower operating income continues to be caused primarily by reduced earnings in our sunflower fiber and processed food ingredients operations. The combined operating income of these operations is approximately $4.4 million lower in the quarter and $14.6 million lower year-to-date. We are confident we understand the root causes underlying these results, and believe we have action plans in each to improve operating income. The markets for organic and natural products remains strong and several of our business segments again posted strong advances compared to last year. We continue to make progress in many areas, as I will detail in a few moments; and we remain very optimistic about the future of our Company.

The Grains and Foods group achieved a lower operating income in the quarter and year-to-date due primarily to commodity market pressures in the Sunflower segment. 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 feed ingredients and increased selling prices for soybeans and organic feed. Soybean sales in the quarter and year-to-date were higher than last year, with increased selling prices more than offsetting lower volumes. Margins on soybean sales were lower in the quarter and year-to-date due to lower demand in Southeast Asian markets.

In order to manage inventory levels entering the new season, we have sold specialty soybeans into the commodity markets and have reduced our 2011 contracted acres for non-GMO soybeans. We are hopeful that demand in Southeast Asia will return to historical levels and believe that our carryover inventory combined with the planned reduction in harvest will set up favorable market conditions for 2012. We are in a balanced position for organic soybeans with good sales demand and tight industry supply levels. Although the conditions are varied from region to region, in general we expect the 2011 crop will be close to the 5-year average for both quality and yield for corn, soy, and sunflower.

The group's food ingredient sales in the quarter and year to date were again well ahead of last year. Margins on vegetable oil in the quarter were affected by the dispute with our partner in the Colorado Sun Oil Processors joint venture. Because we didn't receive crude oil supplies as planned, we filled contracts for expelled or pressed oil with higher cost purchases. We have also incurred legal costs of approximately $675,000 in the quarter and $1.6 million year-to-date related to this dispute. As Steve mentioned earlier, we've divested our ownership in the joint venture in accordance with a court-directed settlement and all results have been moved to discontinued operations.

As expected, our Sunflower operations continue to struggle due to the factors discussed on our last earnings call. Operating income from the Sunflower operations was approximately $1.6 million lower in the quarter versus the prior year and approximately $6 million lower year-to-date. The results are being driven in part by losses on export sales of sunflower kernel. Through the end of the third quarter, contracts were being filled with higher cost, raw seed purchased on the spot market. Spot market prices in North America for oilseed rose sharply at the end of 2010, due to the lower crop and increased demand from birdseed manufacturers. We've stopped export sales of sunflower kernel from North American supply. And beginning in late September, contracts are being filled by purchases from a sunflower operation in Bulgaria through SunOpta's European-based International Foods operation. This is consistent with our long-term strategy to bring production closer to final markets.

The sunflower results are also being caused by lower margins on in-shell products. In this segment of the business, confection sunflower seeds contracted with the farmers are used for our domestic roasting and kernel business as well as export sales of in-shell products in the Middle East and other markets. Purchase cost 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.

Because of political unrest in the Middle East, demand has been soft and export shipments have accordingly been slower on contracted volumes. Spot sales for North American products have also shifted to lower cost South American supply. This combination of factors has resulted in a much larger swing in margins year-over-year than we've experienced in the past. The change in sunflower results reflect the commodity nature of parts of this business and our inability to hedge as easily as we do in other commodities. As discussed previously, our strategy for this business is to focus on selling our North American production in North America, in the form of value-added products, and to develop alternative sources of supply closer to our export customers, especially in the Black Sea region, which is currently the low-cost producer of sunflower.

We remain confident that confection sunflower is the key business segment for SunOpta. The Dahlgren operations provide a strong, North American, value-added business 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. The integration of the Dahlgren and SunOpta sunflower operations continues to progress well. The group's value-added, packaged operations again performed very well with good processing yields at all locations and strong sales demand. We continue to focus on developing new products to complement our base soy milk business and expect to see strong sales and profit growth from this segment.

As recently announced, we are in the process of adding capacity at our facility in Modesto, California. The project is scheduled to start up in September 2012 and will meet growing demand for aseptic, nondairy beverages and other products from existing customers and to accommodate the production of new private label, nondairy beverages that are scheduled to be launched with a wholesale club retailer in early 2012.

In summary, although the Grains and Foods group has been facing some challenges due to commodity markets, the operations remain on a solid foundation overall. The Ingredients group reported lower sales and operating income due mostly to the loss of a significant old, fiber customer at the end of January of this year. Operating margins continue to be affected by the reduced volumes, as well as processing costs increases for chemicals and other materials, increased healthcare costs relating to a few major claims, and cost associated with retooling the Louisville, Kentucky operation.

We've identified some fundamental changes to the North Americans fiber industry over the past year. A number of companies have switched to cellulose-based fiber for use in bread as an alternative to soy and other fibers, and a competitor's fiber has also recently been approved for bakery use in Canada. Because of these competitor pressures, we have maintained or, in some cases, reduced selling prices despite the increase in production cost. Although we've been successfully replacing a significant portion of the volume related to the loss of the old fiber customer, the cumulative effect of all these factors has been a drop in operating income compared to last year.

It has become clear that some of our fiber products will generate lower margins going forward than we achieved in 2010. We have developed a strategy to aggressively market these fibers and believe that by taking a very focused approach, we can attract new business, mitigate potential selling price declines and increase overall profits. The success of the Ingredients group depends on our ability to find innovative applications for our fibers and solutions for our customers using our existing product portfolio and new products. The entire team is focused on this, and the sales innovation and application teams are working on a series of new proprietary fiber and other products which will supplement our current product portfolio.

Active new projects include the development of rice fibers and a sunflower fiber to address the demands for allergen and gluten-free alternatives, as well as reduce particle size in soluble fibers for the beverage and meat industries, and a new starch product for use in low-fat yogurt. The project to produce cellulose in 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 in 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. It has become clear that cellulose fiber will continue to gain acceptance as a food ingredient; and our decision to enter this market will allow us to develop innovative new products to meet customer demands and open the way for future growth opportunities.

In October, we started production of a new, roll-dried starch at our Galesburg, Illinois facility. We believe that this new product has significant potential in the dairy industry for use in yogurt and other products. We've also started to coordinate the sales and product development efforts of the ingredients and processed food ingredients operations and believe there will be benefits from leveraging the resources of the 2 operations, especially with dairy industry customers. We remain very positive about the prospects for the Ingredients group and in the ability of the team to respond to the changing competitive landscape and to generate superior returns.

Within the Food group, the frozen food operation results were in line with our expectations, and the turnaround initiatives are proceeding as planned. Over the past year we have taken several steps to rationalize our frozen food operations and are now focused on the IQF retail channel. We continue to sell the food service and industrial inventory which used to be produced in our Mexican facilities, and we will see increasing improvement over the course of the next few months from reductions in warehousing and other carrying costs. This simplified business model has also allowed us to significantly reduce our SG&A and other overheads. We are realizing benefits from the upgrades at the Buena Park facility, as well as the many process changes implemented this past year.

Leveraging of the frozen food operations with SunOpta Food Solutions is proceeding well, and all of the functional areas, including customer service, QA, purchasing and production planning, and sales, are being coordinated. The products offered by frozen food are an integral part of our total program for several important retail customers, and the combination of the two groups' product offerings allows us to provide a more complete solution using company-owned manufacturing sources as well as Co-Pack agreements. We are confident this also creates a stronger business model and base to go from, and expect the frozen food operations to continue to improve as the benefits from the various initiatives take hold. We believe that the frozen food operations should be a key component of our Company, but the simplified and reduced scope of the food operations will also allow us to evaluate other options over the next few months.

As expected, the processed fruit (audio difficulty) operations within the Food group with slower sales and operating income in the quarter and year-to-date compared to last year, as a result of the loss of a customer in the third quarter last year. We've completed the installation of the state-of-the-art, aseptic, processing line at the South Gate, California facility. The line has a processing capacity of approximately 30 million pounds. Target applications for the new equipment include fruit bases for yogurts, smoothies, fruit toppings and food service products, in both organic and conventional formats. The additional capacity will allow us to pursue a number of potential new applications, and when fully utilized, will arrive in excess of $20 million in value-added revenues in this product category.

The new aseptic line will also generate efficiencies in production and yield gains and further enhance product quality and flexibility for our customers. Sales volume remains the key to returning to the exceptional profit levels we achieved in the first half of 2010; and we're working on a number of opportunities to fill the new capacity.

The SunOpta Healthy Snacks component of the Food group continue to report strong sales and operating income in the third quarter from their fruit snack operations. As previously discussed, because of continued growth in this segment, we are increasing the capacity of existing fruit processing equipment at our Omak, Washington facility. This product should be complete by the end of the year and will add approximately 15% to our capacity. Along with the Food Solutions group, we are also evaluating an eastern USA facility closer to our East Coast customers which could house a second, high-speed, fruit snack line in addition to other equipment.

The integration of the Edner, Nevada nutritious snack bar operations is proceeding well. We've lined up some new customers with production starting in the fourth quarter and expect the Edner operations to continue to gain momentum over the next few months. We remain confident in the business prospects for our Healthy Snacks business and continue to believe that portable nutritious foods will be a platform for SunOpta.

The International Foods group continued its excellent performance in the third quarter due to strong results from the industrial, organic ingredients business and SunOpta Food Solutions as well as much improved performance from Purity Life Natural Health products. The industrial, organic ingredients business achieved a record third quarter operating income. The European operations continue to perform exceptionally well, due to robust sales for organic sugar, organic orange juice concentrate and coffee.

As I mentioned previously, our European operations have also assumed sales of sunflower bakery kernel to customers in the EU. The USA operations has also achieved great results, mostly on the strength of organic sugar, agave and fruit. We have not seen any slowdown in demand and expect a strong performance to continue into the next 2 quarters.

The status of the SunOpta Dalian operations in northeast China remains essentially as reported in the last quarter. The focus of processing for export continues to be on organic pumpkin seed, beans, lentils, and other specialty seeds for the EU market. We also continue to evolve this operation to sell products into the domestic Chinese markets.

The select sesame operations in Ethiopia continue to make progress, and the 2 peeler machines are now both functioning well. Demand for organic sesame seed remains strong and growing, and we've increased the amount of plant production from this operation for 2012. 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 delivered another strong performance in the third quarter. A key driver in the success of SunOpta Food Solutions has been our private label programs for organic orange and other citrus juices and beverages. A poor quality harvest in California resulted in lower margins on citrus products in the third quarter and is expected to impact the next 2 quarters as well. We acquired Lorton's Fresh Squeezed Juices, a juice extraction and packaging facility located in San Bernardino, California, in August to complement our sourcing capability and existing Co-Pac agreements to further integrate our supply chain in the organic citrus sector.

We have implemented a number of changes in the production processes to improve production efficiencies, rationalize SKU offerings, increase quality and [align] sales prices. We've also started capital expenditures to upgrade the physical facility and expect to have them completed by the end of the first quarter of 2012. Although our forecast 2012 harvest of organic oranges from Mexico will also create some challenges, [and] we are focused on developing new sources of orange supply as well as other citrus and food products to process at this facility. We believe that the organic citrus category will be a key platform for SunOpta Food Solutions, and that inspires some short-term challenges. The San Bernardino facility will be a solid contributor to the success of these programs.

Another significant growth initiative for SunOpta Food Solutions is the project to sell fruit purees in an innovative, resealable, pouch format. The flexible, resealable, pouch market is well established in Europe and Asia and is rapidly expanding into the North American market. The pouch is applicable to a wide range of product categories, including natural and organic fruit and vegetable snacks, apple sauces, tomato products, baby food, yogurts, toppings and many more. We've completed installation of 2 flexible, pouch-filling lines at a production facility in California. The 2 lines have an annual capacity of approximately 36 million pouches. And SunOpta has entered into agreements for the majority of this capacity.

We've also approved additional lines to be located in a facility in the eastern United States, which, as I mentioned earlier, would also likely house an additional fruit snack line and other equipment. We are very excited about this initiative and believe we can create a platform which generates $100 million in profitable revenues.

Although we expect to see a drop in operating income in the next 2 quarters, due to the short-term organic orange supply issues I just mentioned, we are pleased with the results in SunOpta Food Solutions. We are confident that 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 excited about the revenue and profit potential of the projects we are working on, and we believe that SunOpta Food Solutions will be a key contributor to SunOpta's future success.

As expected, Purity Life Natural Health Products reported much improved results, and the operations were at breakeven in the quarter. Sales in the quarter were lower than last year in the food drug mass channel, but ahead of last year in the health food channel. This reflects our strategy to cut back marketing spending on food drug and mass to the minimum levels required to sustain promotional activity and support some limited product launches. The focus is to return to Purity's origins and its strength in the health food channel. We are confident that we've worked through all of the significant potential costs related to delist and food drug and mass and have also addressed all third-party vendors where we had exposure to delist costs.

We are continuing to see positive trends in the health food 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. We expect that Purity Life will return to profitability in the fourth quarter.

To conclude my comments, we are continuing to show progress in many segments of our Company. Unfortunately the sunflower commodity markets and other factors combine to very effectively hide this progress. We believe that we have the right strategies in place for long-term success and the right team to deliver value for our shareholders and other stakeholders. Steve?

Great, thanks for the review, Tony. Before closing, I want to mention that we are nearing completion of our first Corporate Social Responsibility Report and expect to release it before the end of November. We are proud of our efforts to build a sustainable organization and this report provides a balanced assessment of where we are at in our sustainability journey and where we are going. Copies will be made available on our website or via request at our office.

In conclusion, 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 have been 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 path of building a viable, natural and organic foods business.

With that, we will now open the call to questions. Thank you.

(Operator Instructions) One moment for the first question. (Operator Instructions) I have a question from Chris Krueger with Northland Capital, please go ahead with your question.

Good morning. You probably went over this a little bit on the call, but you gave us a lot of information. If we're looking at the Grains and Foods group, and just took out the Sunflower part of the business, how have the remaining operating margins been overall?

Very good and certainly on the value-added, aseptic businesses against growth and top line and growth in margins. And the remaining part of the business pretty much are in line with last year.

Okay. And on the soybean part of it, can you just give us a summary of how you view the current crop from this year? Then your inventory situation as far as how comfortable you are with meeting the needs for the next 12 months? And your margin expectations for 2012 for soybean-related business?

Yes, we've done a lot of planning there, as I suggested in my comments, and looked at the reduced sales from this year. We realized that early in the year, and as I said earlier, reduced our contracted acres for the export part of the business early on. We believe that the two are carryover and the reduced plantings will be a good supply for next year. And we expect the export markets to return to historical levels.

We had a lot of issues, obviously, in export markets. The tsunami in Japan, all those things were factors and we're certainly hopeful that those markets will continue or will return, rather, to historical levels. So, we expect it to be an improved year in that business next year.

Okay. Moving on to the fruit business, right now I know that the Healthy Snacks has been a very strong area, and you've had struggles with the frozen berries. In processed food, you've had lower sales. Is that actually profitable still, even with the reduced sales?

Yes, very much so. We had an exceptional year, an exceptional 12 months, from about third quarter of 2009 I guess to third quarter 2010. And we said, we lost some volume there. We reported that in the past, and are working hard to replace it. But the Company, the operations, are profitable.

We've just finished installing new equipment there that we expect will create significant opportunity to grow and we are very bullish about that operation.

Okay, then on the International. You stated a goal to get to $100 million in annual sales for the Food Solutions. Can you give us how big that is right now?

Actually, the $100 million target is what we think that flexible, pouch business can be over the next three or four years.

Oh.

We think it's going to be a significant category. So that's intended to be all new. The range of the existing business, say, run rate circa $50 million.

Okay. And kind of the same question for Purity, what has their annual sales been and how long has it been since Purity generated a profit?

It's been a couple of years. Two years. And sales are $50 million, $70 million.

Thank you, that's all I got.

(Operator Instructions) I am not showing any other questions in the queue at this time.

Well, great. Thank you very much. Appreciate everyone tuning in for today's call. And as always, please feel free to give us a call, Rob, myself, or Tony, or Susan Wiekenkamp, if you wish to discuss anything further. We appreciate you taking time to join us today and hope you all have a great day.

Thank you very much.

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