Sunopta Inc (STKL) 2012 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the SunOpta Incorporated 2012 first quarter earnings conference call.

Before I turn the call over to Steve Bromley, President and CEO of SunOpta, we would like to remind listeners that except for historical information, the matters discussed during this teleconference may include forward-looking statements including without limitations statements relating to the Company's operations, market and economic conditions, and financial position. All forward-looking statements reflect Company's current views with respect to future events and are subject risks and uncertainties and assumptions that they have made in drawing 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 reports on form 10-K for the fiscal year ended December 31, 2011. Such information can be found in the section in these reports titled forward-looking statements and risk factors.

We would like to remind listeners that the Company may refer to certain non-GAAP financial measures during this teleconference. A reconciliation of these non-GAAP financial measures was included in the Company's press release issued last night.

I will turn the call over to Steven Bromley.

Thank you very much and good morning everyone. Welcome to our first quarter shareholder conference call. I'm joined on this call today by Robert McKeracher, our Vice President and Chief Financial Officer; and John Ruelle , our Vice President and Chief Administrative Officer. Before we get going, I want to mention that we intend to file our form 10-Q and related electronic submissions for the first quarter by the end of the day today.

On our year-end conference call this past March we discussed a number of on going initiatives. Some of the challenges we faced over the course of the 2011, and our continued focus on positioning our Company for improved performance. We believe our results for the first quarter reflect the impact of these initiatives , and we are quite optimistic we will see continued improvement over the course of 2012 and beyond.

For the first quarter we realized revenues of $274.5 million, a first quarter record for our business. We believe that healthy eating and healthy living are long-term trends , and as a result believe our integrated natural organic, organic foods product portfolio is well positioned for continued growth.

Our operating income of $13.4 million in the first quarter increased by $1.8 million or 15.8% from $11.6 million in Q1, 2011. Outpacing the previously mentioned record revenue growth of 5.4%. Our operating margins also improved as a percentage of revenues to 4.9% in the first quarter of 2012 compared to 4.5% in Q1 last year and 3.1% for the entire fiscal year of 2011. These results are indicative of the significant initiatives undertaken to improve operating results, including product rationalizations, cost reductions, new product introductions, and organizational streamlining. We will expand on these initiative over the course of our call today.

On a net earnings basis we realized earnings of $6.1 million or $0.09 per diluted common share from continuing operations as compared to $5.4 millions or $0.08 in Q1, 2011. These first quarter earnings are a record for the Company when excluding a one-time item that was realized in 2005.

Our focus remains on natural and organic foods platform, a business we believe offers long-term growth and earnings potential. While food is clearly our focus, we are also pleased with our non-core investments in both Opta Minerals and Mascoma, and I will briefly comment on the status of these investments in a few moments. I would now like to turn the call over to John Ruelle our Chief Administrative Officer who will provide a brief update on our organizational streamlining and realignment efforts. John

Thanks, Steve. It's my pleasure to join this call today. During the first quarter we undertook a process to streamline our operations and organizational structure addressing underperforming business based operations and doing so targeting improved earnings, predictability , and return on assets. As part of this, we reorganized SunOpta Foods to realign our operate segments according to the type of customers and markets served as opposed to products offered. These efforts were implemented to further streamline operations and rejuvenate our innovation and commercial activities. We expect to see benefit from these realignment efforts through the remainder of the fiscal year as they take hold.

To this end, the former fruit group has been eliminated, and a new consumer products group has been created to focused on non-grains based consumer packaged products. The consumer products group comprises of the frozen foods and healthy snacks operations, which were formerly part of the fruit group and our food solutions operations which was formerly part of the international foods group. Our fruit ingredients operations which were also part of the former food group have now been merged into our existing ingredients group. Our international food groups now comprises of international sourcing and supply operations, otherwise known as Tradin Organics which is headquarters in Amsterdam, the Netherlands, as well as the Canadian based operations of Purity Life Health Products. The grains of foods segments has remained unchanged.

Our segment in financial reports for the first quarter reflect these changes and on April 27th, we provided a summary of the effects of these reporting changes related to SunOpta Foods historical operating results for fiscal years 2011 and 2010 on form 8-K. In conjunction with the segment realignment, we also announced the rationalization of a number of operations and staff functions, impacting approximately 6 % our salaried work force. These reductions will lower pre tax annual operating costs by approximately $3 million. Severance costs related to these rationalization activities were approximately $300,000 in the first fiscal quarter of 2012 and another $200,000 as expected in the second fiscal quarter.

We have also addressed certain underperforming business operations in SunOpta Foods. It should be noted that as expected Purity Life Health Products was a positive contributor in the first quarter , and our frozen food operations realized significantly improved results and returned to profitability in the March period.

The realignment we are undergoing is an important step in our development as a global leader in natural and organic foods. The process we have undertaken is being cascaded across all foods business operations and better aligns our business structure to our go-forward business model. These changes will drive operating leverage through a customer centric realignment of commercial activities focused on end markets and customer segments served.

Additionally, we are driving back office standardization, business process automation, and enhanced risk management practices through the implementation of process and technology improvements. We have grown rapidly over the last 12 years, and built a solid organization within market segments which we continue to believe are well-positioned for long term growth. We believe that these changes that we are undertaking will make us a leaner and more agile organization, well-positioned to achieve our full potential.

With that, I will now pass the call over to Rob.

Thanks, John, and good morning everyone. I will take the next few minutes to review our financial results for the first quarter ended March 31, 2012. Please note all figures discussed today are in U.S. dollars and relate to continuing operations unless otherwise noted. Accordingly all comparative figures have been adjusted to remove the effect of discontinued operations. As a housekeeping matter the fully diluted weighted average number of common shares outstanding at March 31, 2012 was 66,381,560.

For the first quarter of 2012, the Company reported revenues of $274.5 million compared to revenues of $260.6 million during the first quarter of 2011, a year over year increase of 5.4%. These first quarter revenues are a record for the Company, and are being driven by strong growth and integrated package food product categories within SunOpta Food and the steel product segment within Opta Minerals. These increases were somewhat offset by the effect of product rationalizations in SunOpta Foods and decreased sale volume across certain of our food ingredient categories.

Excluding the impact of changes including acquisitions, foreign exchange, commodity pricing, and rationalised product lines, the consolidated base growth rate for the Company was approximately 7%. Operating income for the first quarter of 2012 increased to $13.4 million or 4.9% of revenues versus $11.6 million or 4.5% of revenues in the prior year a year-over-year increase of 15.8%. This increase was driven by improved operating income in both SunOpta Foods and Opta Minerals.

Within SunOpta foods the grains and foods group, consumer products group, and international foods group all realized improved operating results versus the prior year. This is reflective of continued growth in many of our consumer package categories include aseptic beverages, healthy fruit, protein and grain-based snacks, and flexible pouch format offerings as well as improved margins in our sunflower, frozen foods , and natural health product operations. It should be noted that revenues in our natural and organic consumer categories increased approximately 18% year-over-year, indicative of a strong trend in the industry. Opta Minerals also realized increase operating income from its base business as well as acquisitions of Babco and Inland refractory. Steve will provide a few details on a number of ongoing business developments during his update in a few moments.

Earnings per diluted common share from continuing operations were $0.09 or$ 6.1 million during the first quarter of 2012 compared to $0.08 or $5.4 million during the first quarter of 2011. Other than the first quarter of 2005 which included a large one time dilution gain on the Opta Minerals IPO, these first quarter results are a record for the Company. At March 31, 2012, our balance sheet reflected a current ratio of 1.38 to 1, and a total debt to equity ratio of 0.64 to 1. Total debt outstanding at the end of the first quarter is $196.2 million and increase of $34.2 million from the year-end to December 31, 2011.

To end the first quarter we had total assets of $669.3 million and a net book value of $4.66 per outstanding common share. Controllable working capital , which is defined as accounts receivable , inventory, and prepaid expenses less accounts payable and accrued liabilities totaled $268.2 million at March 31, 2012, compared to $236.4 million at the end of the first quarter in 2011. The increased working capital reflects higher accounts receivable from increased revenues in the first quarter and lower accounts payable levels due mainly to a larger carryover of inventory into 2012 which I will explain in a moment.

Cash used in operating activities from continuing operation was $7.3 million during the first quarter of 2012 compared with $33.9 million in the first quarter of 2011. The decrease in cash used in operating activities of $26.6 million reflects a continued focus on cash utilization and the impact of significantly lower purchases of grain commodities including sunflower and soy due to the decision to carry over more inventory from 2011, contracting less acres in 2012 in order realize the benefit of increasing commodity prices. In addition the decrease in cash used to front operating activities reflects reduced purchases of fruit based commodities due to streamlining of frozen foods operation.

Capital expenditures of $4.9 million in the first quarter include spending at our aseptic soy milk and alternative beverage facilities plus investment in maintenance spending across a number of other business units. Cash provided by financing activities of $31.1 million during the first quarter relates primarily to increased borrowings on our line of credit and increased long-term debt to finance higher working capital and cash consideration related to the Babco acquisition of $17.5 million.

At March 31, 2012, our operating lines had approximately $54 million in additional borrowing availability. Our North American line of credit and term debt facilities mature on October 30, 2012, and we are currently in discussions with our lenders regarding renewal. We are reviewing the very sources of credit available to us as the renewal date approaches to support our future capital and working capital needs to grow our business, andwe anticipate the renewal of our existing facilities to be in place prior to the end of the third quarter of 2012.

To summarize, we believe we are well-positioned for the future with a strong balance sheet, addition borrowing capacity, and improved operating cash flows to support future growth in the business. With that , I will turn the call over to Steve.

Thanks, Rob. First quarter operating income for SunOpta Foods was improved versus the prior year and reflects improved results from the grain and foods group, consumer products group , and the international foods group. Results in the ingredients group remain below target, but improved from the fourth quarter of 2011. The grains and foods group achieved a higher operating income in the quarter due to continued strength in our value-added packaged products categories plus significantly improved results from our sunflower operations.

Revenues and operating income for the groups grains operations were a ahead of last year due mostly to increased volumes for soy and increased selling prices for organic feed. As expected results from the group sunflower operations improved, but returns are still short of historical levels due to soft demand for North American seeds and ample supply from South American and Eastern Europe. Costs for North American crop continues to be high as a result of competitive pressures from other grains and commodities which compete for the same agricultural land. The situation is not expected to change in the near term, and we have accelerated implementation of our strategy to convert sales of North American supply to more value added items for the North American market and develop alternative sources of supply closer to our international customers.

Because of the issues in 2011, we have carried over inventory and cut back our contracted acres for this year's crop. This should address the imbalance in the shorter term and bring margins back to more acceptable levels, but will create some absorption issues in the plants during 2012, as well planting seed sales for 2012 are expected to be lower than last year due to the decision to reduce contracted acres. We are continue to serve our European bakery kernel customers from Eastern European supply sources and are looking to continue to expand our presence in this growing region.

The groups value added packaged operations recorded another solid quarter with significant growth in sales and operating income. We expect to see continued sales and profit growth as we introduce new value added products to compliment our current aseptic non dairy beverage offerings. The project to add capacity at our facility in Modesto, California to meet growing demand is proceeding well and should be completed in Q3. We are also assessing options to further increasing product capabilities from our aseptic product operations.

The ingredients group operating results improved from the fourth quarter, but remain well below the record results achieved in 2010. As we have discussed previously, our fiber ingredients business has faced a number of recent challenges, including the loss of significant fiber customer in the first quarter last year, and the loss of exclusivity in the Canadian market due to the approval of another oat fiber for sale into Canada. We have also seen increased competition, especially from cellulose fiber as an alternative to oat and soy which has limited our ability to pass on cost increases. Although improved from the fourth quarter of 2011, the accumulative effect of all these changes led to a substantial drop in operating income compared to the first quarter last year.

The number one opportunity in the fiber ingredients business continues to be increased market penetration, and we have developed a multi track approach to regenerate sales volumes which we described in some detail on the last earnings call. The team continues to make progress on a number of initiatives , and we expect to see continuing improvement in results as the year pro-degrees. We continue to work on the commercialization of rice fiber to address the demand for allergen and gluten free alternative as well as reduced particle size in soluble fibers for the beverage and bakery industries and a new starch product for use in dairy products such as Greek yogurt.

We have completed the initial phase of the project to produce cellulose and other fibers at our Louisville facility and the equipment has now been commissioned. We believe cellulose fiber will continue to gain acceptance as a food ingredient, and we will then start the second phase of the project to expand the range of capabilities for this equipment later this year.

Controlling cost is also key and in addition to continuous improvement initiatives we have assessed SG&A spending in the group in light of the industry changes over the past two years. As a result of these reviews, the group recently eliminated an additional 12 staff positions across the business unit in order to right size its spending to current activity levels. The cuts represent annual savings of approximately $1 million, and the charge of approximately $200,000 for one time severance expense will be booked in the second quarter.

The integration of the fruit ingredients and fiber operations is proceeding well , and we believe there will be significant benefits from leveraging the resources of the two operations. As expected, the results from the fruit ingredient operations improved from the fourth quarter, but continue to report lower operating income compared to 2010 and the first half of last year. Installation of the new aseptic line was completed in December and was ready for commercial production in February, but we only received final approval from the County Health Department at the end of April. In spite of the many delays caused by bureaucracy in the state of California, the project was completed on budget.

The additional capacity will allow us to pursue a number of potential new applications and when fully utilized should add in excess of $20 million in value added revenues in this category. The new aseptic line will generate efficiencies in productions and yield gains and further enhance product quality and flexibility for our customers. As is the case with fiber ingredients, increasing sales via new products and new customers remains a key opportunity and important as we target profit levels which we achieved in the first half of 2010. The fruit ingredient business has seen an increase in volume and profitability in 2012, and we expect operating results to improve over the course of the year as the benefits from increased sales and the new aseptic line are realized.

The consumer products group achieved strong sales growth of approximately 25% in the first quarter as a result of strength in our healthy snacks categories and addition of flexible pouch package products to our portfolio. Operating income in the consumer products group was impacted by costs of approximately $1 million, related to our expansion initiatives into the eastern U.S. as we expand our pouch packaging operations. The transition of the San Bernardino juice operations which were acquired in 2011 and the expansion of our production capability at our Carson City snack bar facility through the addition of new chefs to keep up with the business growth.

As expected the frozen foods operations which are part of this group improved significantly from prior quarters and last year as the cumulative effect of the many changes and improvements are starting to reflect in results. The frozen foods business is now focused on individually quick frozen, private label products, and the simplified business model has allowed us to reduce SG&A and other costs in addition to improve profits, inventory levels have been substantial reduced as planed. We expect the frozen foods operations will continue to improve as the benefits from the various initiatives continue to gain momentum. We remain focused on the business and continue to evaluate options as to how best to use the current production assets to create shareholder value.

The healthy snacks operation continue to report strong sales growth for both the fruit, protein, and grain bar segments of the business and achieved approximately 40% sales growth compared to the first quarter of 2011. The fruit snack operations in this division achieved another record operating income in the quarter, because of the continued growth in this segment we have recently completed a project which will increase the capacity of the Omak, Washington facility by approximately 15%, and we are currently looking at sites in the eastern U.S.A. to locate another fruit snack operation.

We remain confident in the prospects for a healthy snacks business and continue to believe that portable nutritious food is a key platform for SunOpta. The food's solutions business delivered another strong sales performance in the first quarter and food solutions is also part of this consumer products group. Excluding the impact of the juice business acquired in August 2011, sales increased approximately 45% from the first quarter last year. The juice extraction and packaging facility located in San Bernardino, California posted an operating loss in the first quarter due to the seasonality of this business and increase costs for raw materials, as well as costs related to the transaction from the previous ownership I mentioned a few minutes ago.

As we discussed previously, we have made a number of changes to the management team as well as to the production processes, and should begin to see positive results in the second quarter as the extraction season in California begins and lower fruit costs come into effect. The project to sell fruit purees in a flexible resealable pouch format continues to develop at a very rapid pace. As expected, the performance of the two initial pouch filing lines installed at a production facility in California continued to improve and are now exceeding initial expectations.

The work on the Allentown, Pennsylvania facility to initially add two more lines to produce pouch products on the East Coast is progressing on schedule, and the quarterly results include costs related to this project. The facility is expected to be operational by mid August with the potential of additional capabilities to be added in the first quarter of 2013. We remain very pleased with this initiative, and believe we are on the way to creating a platform which we expect will generate a $100 million in annualized profitable revenue and we expect to achieve that over the next couple of years.

The international foods group continue its excellent performance in the first quarter due to strong results from the Tradin Organic business and much improved results from Purity Life Natural Health Products. The Tradin Organic business delivered another strong quarter, however sales in the quarter were approximately 5% lower than last year due to lower sales of organic coco, organic orange juice, and organic coffee due to changes in commodity prices and reduced supply in some cases. Off-setting these declines sales and margins across most of the other organic categories in North America and Europe were strong. European operations continue to perform well and margins remain strong, but below the record levels achieved last year due to increased costs in a number of products.

The U.S. operations achieved record results, mostly on the strength of organic sugar, agave, and fruit. There is a sense of some slow-down and demand in the EU markets, but the outlook in North America continues to be strong, so we expect results to remain strong, recognizing the record results achieved over the last couple of years. Overall, the outlook for Tradin organic business is good , and we remain well positioned to take advantage of the continued growth in the global organic food industry.

As expected, the Purity Life operations reported an operating income in the first quarter compared to a loss last year. The focus at Purity has been to establish stronger operating controls in the business and to return to Purity's origins and strength in the health food channel. We have continued to strengthen our relationships with vendors and customers as we have developed information tools for us to manage the business better. This was a key strategy in trying to create value for customers and vendors and in order to differentiate ourselves from the competition.

We are continuing to see positive trends in the health food channel as a result of our continuing efforts to address the basics of the business, including the product mix in star, sales rep training, prioritised sales efforts and promotional support on higher growth, brands , and customers. We have made good progress in repositioning Purity in light of the significant industry changes which have taken place over the past two years , and we expect the operations to continue to perform very well. Overall, we are quite pleased with the progress we are making with SunOpta food. We have a number of exciting growth opportunities in several of our operations and believe that with the new organizational structure, and our focus on sales growth, risk management, sustainability, and continuous improvement, these will all help us to leverage our strength as we move forward and realize many opportunities that our business has.

I would also like to take a minute to provide a few comments on our two non-core investments Opta Minerals and Mascoma Corporation. Late last year we announced that the Board of Directors of Opta Minerals decided to suspend its on going strategic review process for the business. The decision to suspend the strategic review process was based in part on assessment of global market conditions, but more importantly, the number of actionable near-term growth opportunities within Opta Minerals. As part of these growth opportunities , on November 10, 2011, Opta announce the acquisition of Inland Refractory , a manufacturer of pre cast refractory shapes, , injection lances and electric furnace deltas , and on February 13, Opta Minerals announced they had acquired Babco Industrial Corp. located in Regina, Saskatchewan. Babco is a profitable industrial processor and supplier of petroleum coke, synthetic slag, ladle sand and crushed graphite. The acquisition compliments Opta's existing product portfolio. The Babco facility has capacity for further growth and expansion and is strategically location in proximity to its key vendor and customers.

In addition, Opta Minerals continues to explore additional acquisition opportunities as well as a number of internal growth opportunities which are either in development or have been completed. Opta Minerals realized record revenues and earnings in the first quarter and these results are expected to continue. Opta Minerals is well run with a strong management team and operating systems, thus allowing the senior management of SunOpta to focus on our core foods business. Opta Minerals remains non-core for SunOpta, and while the active strategic review process has been suspended for the time being, we intend to continue to assess options for this business as appropriate.

I also wanted to comment on our investment in Mascoma. As you may recall we sold our investment in SunOpta BioProcess to Mascoma in September of 2010, and have an approximately 18.65% voting interest in Mascoma. Mascoma has developed innovative technology for the low cost conversion for the low cost alternative abundant biomass for alternative fuel applications. Using its proprietary consolidated bioprocessing technology or CBT, Mascoma has developed generically modified yeasts and other microorganisms to reduce cost and improved yields in the production of renewable fuels and chemicals.

Mascoma's first commercial application of the CBT technology is it Mascoma grain technology, or MGT , yeast product, which is a drop-in substitute for existing yeast designed to improve the economics of corn based ethanol. Mascoma is also working with collaborators to develop and construct commercial scale facilities to convert hardwood to cellulosic ethanol. As you may be aware, Mascoma recently announce they have filed a registration statement on form S-1 with the FCC relating to a proposed public offering of shares of the common stock and this is now final with the FCC. We remain pleased with our investment in Mascoma , and believe it provides our shareholders with a low-risk option to participate in the fast-growing renewable fuel industry while not detracting from our core foods portfolio or impacting our on going operating results.

In conclusion, our goals for this year and beyond remain focused on building a profitable sustainable and growth oriented global natural and organic foods business. Our goals include ,one, improving our profitability in support of objectives of 8% operating margins, 10% EBITDA margins and 15% return on net assets via a continued focus on operational excellence, risk management, continuous improvement, product innovation and improved customer interface.

Two, leveraging the strengths of organization to drive our position in natural and organic foods, categories we believe are very relevant in today's society and offer excellent opportunities. Three, investing in core value added natural and organic foods platform by internal growth projects, strategic acquisitions, and investments in categories offering above-average market growth rate. And finally, four, continuing to explore divesture's of non-core assets.

We are very pleased with our first quarter results, a record for our Company, and we remain committed to building a profitable, sustainable, and growth oriented natural and organic foods business. We are confident in our future prospects and look forward to a successful 2012 and beyond. With that, we will now open the call to questions. Thank you.

Thank you. (Operator Instructions). Our first question comes from Peter Prattas from Fraser Mackenzie .

Good morning guys. Nice quarter.

Thank you, Peter.

First question with the staff reductions that took place in the first quarter, the benefit obviously we'll see that starting in Q2 , and you just made some mention there that there were a few further reductions in Q2 which will benefit you going forward, as well. But are the staff levels appropriate now, or do you see room for more cuts, or conversely, does the current staff level limit your ability to grow in any way?

This is John Ruelle, I think the cuts we've made to this point have pretty much been to align our current spend activity levels. Q2 mainly focused on ingredients business at this time there's no planned future cuts, but we'll obviously continue to assess as the business progresses here through Q2 and Q3.

Peter, just to add a little bit of color to that, as we continue to realign the organization and execute on the realignment efforts, there may be opportunities that just fall out of that process, we don't know what those are at this time. But as we improve or internal efficiencies and internal efficiency in going to our customers, hopefully more will fall out.

Great. And then my last question is, I know you are investing internally and you have lots of opportunities there , but your balance sheet remains strong here, you have improved profitability and your generating cash flow. So does that mean that you continue to look for acquisitions? Is that something that could happen this year? Are the targets of significant scale, and what segments are you focused on?

Sure. Number of questions in there. First off, the point I want to make we were we have some fabulous internal growth projects going on in the healthy snacks business and in our grains and foods business and our pouch component of the consumer package business, and we really like internal growth projects, these are high-growth categories and businesses that we know.

And certainly we are able to execute on the skill sets that we already have, so we really like that and we find that we get very positive return on assets employed when we do that because we're leveraging system. Clearly though we have a keen eye for opportunities that strategically y fit with our business. To be quite honest, we would like to do much larger transactions, a couple of the recent fields that we did were smaller and they were essentially to add capabilities to our platform, but a small transaction is as much work -- well, it's proportionality more work per dollar of business you bring in than larger deals.

We have a keen eye for those, and when the right opportunity is there to support the model that we have which is focused on integrated grains, fiber and fruit based food we certainly are going do those and we do have the resources available. So we're active. If I was to predict whether or not we do one this year, I would be shooting myself in the foot because as you know deals take time, and you never how they come together, but certainly rest assured, we're actively looking at a number of potential opportunities.

Fair enough. Thanks and good luck.

Thank you , Peter.

Thank you. And our next question comes from the line of Christine Healy from Scotia Bank.

Thanks. Hi guys. Great quarter.

Thanks, Christine.

First question I have for you is on the international foods so the EBIT margins were about 4.5%. This was pretty impressive. I looked back several years and couldn't find another quarter where you came anywhere close to that. You are already hitting your long-term targets. Can you talk about what the key drivers were for the margins and whether or not this is sustainable or if there is something unusual this quarter?

Sure. There were two key drivers. One, is the Purity Life operations return to what I would call more appropriate operating margin levels for distribution business versus losses we incurred in the prior year , and then with Tradin Organics, as they've continued to developed their model they have developed a much more defined process to mitigate risk because they do handle a lot of raw material. So they become much more refined, and then they continue to integrate. By that, getting deeper into the integrated production process for a number of assets. That is one of our strategies over time is to take the full integrated manufacturing model we have in North America and move it into the Tradin operations and we've been doing some of that. Our target operating margins for that group are 4% to 5%. We're extremely pleased we've landed in that range. We think that's a reasonable range.

I don't think you should be looking at that going, we'll certainly let you know when we think it could go to 5% to 6% to 7%, but for the foreseeable future to operate in that range we would be very pleased. And of course, as we mentioned, we have a keen eye on the European market, which is the way our guys describe it was it's a little cautious there now, and with everything going on inside of Europe, we should expect that. Last year we saw just really good growth out of Europe at times and at times our business was doing very well, but the economy wasn't doing well.

So if we could hold at those levels or close to those levels as we wait for Europe to sort itself out, I think that would be great. It is good strength in the North American side and hopefully that can help off set it, but they're a wonderful operation and have added so much to our business over the last 3.5 year , 4 years since they have been part of the Company.

What about Asia. (Inaudible) reported last week, and theysaid on their conference call shipment to Asia doubled year-over-year. Can you talk about what you are seeing in your business in Asia, and also give us an update on your launch strategy into those markets?

So we have within our international operations, we have a small operation in China it is in Dalian, and this is an operation that for many, many, many years was really focused on export. From there, we would export soy products, pumpkin seeds, what else am I missing?

Sunflower.

Sunflower, et cetera. And it was primarily for export. It's not an exceptionally large operation, but it's the operation we're using to look into China. We have now, as part of that operation, we're producing some product that is staying in the country because of their need for food, and we are also starting to distribute some of our packaged products in to the Chinese market. And I apologize I don't know the name of the chain we are working with, but there's a 400 store chain we're testing some of the products in to see. So it's a very small, small , small -- not small, small but it is not a big part of our business at this stage, and it's one that we're working to develop with the personnel that we have there and it is an area we continue. We spend a fair amount of time studying that, and this was the way we felt could best penetrate that and do some learning without losing our shirt and move forward.

Last question, (Inaudible) announced last week that its presidents choice products are going a 100% natural by 2013. We know you guys sell products to (Inaudible) for presidents choice,do you see opportunities with them going a 100% natural?

We hope so.

Okay. Thanks, guys, appreciate.

Thanks a lot Christine.

Thank you. And our next question comes from the line of Scott Van Winkle from Canaccord Genuity.

Thank you. Congratulations on the quarter as well.

Thanks, Scott.

So you had a bunch of facilities you're talking about with internal projects. What's the total number of manufacturing facilities you are operating now in North American, and what percent are under an expansion plan?

I would say those are really good questions and we're all looking at each other here. I would say we have 25 manufacturing operations. I have to be careful because some are more warehousing than manufacturing and some grain elevators and that sort of thing, but if we use 25 as an example, we have at least 25% under expansion.

And the magnitude might be an average of 15% or 20% type of expansion in those facilities?

Well, some are a 100%. The Allentown facility is a 100%. That's just doubling the capacity that we have in the pouched capabilities we have. We just talked about ALMAC, we added 15% capacity, Pacific Fruit we really doubled the aseptic side of that capacity. The capacity that we are adding in Modesto, California is going to add 35% or 40% to that , 35% I think to that facility.

Carson City as well we are adding in there.

Carson City another second line. So 15 or so for sure.

Okay. And speaking of Allentown, what's the status on the completion of that? I know you said it was completed, but you called it out in the quarter. When will that be done?

So the Allentown facility , and by the way I was there last week and I walked around the town the whole time singing a Billy Joel song it is really infectious when you are there, it's scheduled to go up -- this is a facility, Scott, that we're developing similar to how we did Modesto. So we are putting in two lines initially and there is capacity to add a number of more lines, at least four more under the current configuration into that facility. And we'll do that as the business warrants.

So we're targeting to be up August 1st, during the month of August, and of course, you're always somewhat dependent on the health agencies and everybody checking off on the commissioning but we're on schedule for August. So we would expect $400,000 , $450,000 over each quarter over the next period of time here in just costs in bringing that up, very similar to the costs we incurred that we incurred when we were bringing up Modesto.

Great. And sticking on that subject , and if you said it I apologizes I must have missed, what's the CapEx plan for this year?

This year we are looking in the range of about $30 million.

Okay. And then a few other questions. The margin being up in international, is that purely because of Purity, because you are down in ingredient sales -- I'm sorry, in international. You were down in Tradin, but your margin was up year-over- year was that purely because of Purity?

No, it was both.

You're seeing better margin in Tradin even though the sales are off in coco ,and coffee, et cetera?

Yeah, we did and some of that is due to favorable buys and favorable positions that they would have and have contracted over the last year.

And then, on the ingredient side, can you give us kind of a magnitude of the pressure you might be seeing on pricing in fiber? Obviously we can look at customer losses like last year's, but what's the type of pressure you are seeing on pricing that drove the lower margin and rationalization on the headcount?

In the Canadian market, that's the area where we really came up. We just had a competitive fiber come in and that was about 800,000 annual impact in that business. That's where the major price pressure has been.

Mostly in Canada.

Yes.

And then, gluten free, I think there was a comment about gluten free, and it has been the big talk this week, Domino's launching gluten free pizza. Can you give us an idea all the things you are doing around gluten free ? It looks like it's exploding, and we'll see how big and the duration, but what are you guys doing to capitalize on gluten-free?

We'll sort of go through some of the products that we have that participate in the gluten-free category , but one of the ones we are working on right now is a rice fiber for the gluten-free category. Obviously that is a category where we would participate. Rice milk, obviously, participates, the sunflower milk that we have launched participates, a number of the grains that we carry that don't carry gluten, rice-based sweeteners and those sort of products. We've seen an uptick from our users that use some of these ingredients, all the fruit products are gluten-free, et cetera. It's a category that we participate in a number of points.

Okay. And then, a question on the segment reporting, the four new segments, is there a divisional management team that is aligned to those four segments?

Yes.

So you now have four direct reports to you from the operations side; is that right?

No. A little bit further to that, there is a divisional team that is in place in grains, a divisional team that is in place in ingredients, there are two divisional teams that work together and report as one unit in the consumer products group, and two as well in the international group, just because one is in Canada and one is in Europe.

Okay. Great. Thank you very much.

It's fairly streamlined for sure.

Okay. Great.

Thank you. And our next question comes from the line of Bob Gibson from Octagon Capital.

Good morning, everybody.

Good morning , Bob. How are you?

I am okay. Can I just drill down a little bit because I love this pouch stuff. If you were to plunk another line in somebody else's facility who has decided to do go that way, A, how easy is it to do it, and ,B, what would be your competitive advantage over someone else from doing it?

First off our plan is not to plunk another line into anybody else's place.

Okay.

And plunk them into our own facilities. What differentiates us from others that would do that sort of thing, I would say there's two or three things. First off, our integrated capabilities. So we're not just -- this is my choice of words, we're not just a toll processors where if you want something packed, we have the packaging equipment. That's really not what we're selling. We're not selling our capability to put it in a package. We are selling our integrated capabilities to source the raw materials, process the raw materials, and put those raw materials into a packaging format. Very similar to what we do with on our grain's business with our alternative beverages. You don't worry about where the soy, the rice, whatever is coming from, that's our job. We provide a turnkey solution. What differentiates us is our turnkey solution, that we can provide. And we've been talking about using fruit in these applications. We will be using vegetables in these applications and we will be using other raw materials into these applications , and I think that's what sets us aside.

Okay. Great. Also, I love new product development. Anything on the healthy snacks field that might be coming down the pipe or has come down the pipe recently?

Well, let me make a couple comments there. There are innovative products in the pipeline. And I just want to be careful here on what we should and shouldn't say. There are clearly a lot of on the fruit side of the business there's some extensions into fruit and vegetable type products. Where we're trying to get daily dose -- sounds like the wrong word -- daily servings of fruits and vegetables, there are shaped type products. There are a number of unique type products that they are continuing to develop through their application, and I apologize, some of them are right in with customers now and I can't say a ton about them. But assume that there is continued innovation there.

One of the areas we really have innovation is we acquired Edner to expand our capabilities to move away from extruded fruit into layered products, enrobe products, so fruit enrobe by chocolate, fruit enrobe by yogurt all of those sort of opportunities are things that we're looking at. You may have seen that I think it's Oreo's that came out with a cookie straw, so I know that there's a fruit straw that's been available. So you can eat the straw once you're done. Those sorts of things. So there's interesting stuff and some of that innovation, I think the revenues were up 40%, right?

Yeah.

So it is that type of innovation that's driving some of that category.

Great, thanks, guys.

Take care, thanks, Bob.

Thank you. And our next question comes from the line of Chris Krueger from Northland Capital.

Hi.

Hi, Chris. How are you?

Good. Just had a couple of questions. First, I know on the previous question you indicated that your international foods operating margin target is still 4% to 5%. I was wondering if you could lay out the other three food group target margins.

Sure. Grain and foods, 6% to 8%, they are in their range, and ingredients 12% to 15%, they are out of their range, and consumer products 8% to 10% , and if you were normalize for the cost that we were incurring with the process, we're probably 3%, 3.5% sort of thing, so some work to go there. Tradin 4% to 5% , not Tradin, international 4% to 5%, we are in the range, Opta Minerals, 10% to 12%,we are in the range.

Okay. And then you mentioned on Mascoma, did you state as far as what they need to do with the FCC, that everything is final with them , that essentially they need to go forward and market the potential IPL, or where is that?

Yes. Our understanding is that the S-1 filing is final on the FCC website, subject to Mascoma if they wanted to do anything to it, but I think it's cleared through. John, that is our understanding on that?

Yes.

Yes.

Okay, thank you.

Take care, Chris.

Thank you. (Operator Instructions). Our next question comes from the line of Keith Howlett from Desjardins Securities .

Yes, I had a question on the pouch business. What is the revenue potential of the pouches that you're already doing in the leased facility or the 36 million pouches a year?

About $12 to $15 million, Keith.

And is that sort of the size of Allentown or larger than that?

It will be larger.

And on the Pacific Fruit aseptic capacity, what would be the sort of revenue potential there?

Sorry, which aseptic capacity are we talking about?

At the Pacific Fruit facility?

About $20 million.

And in terms of the go-forward business, do you think you will be sort of 6 to 12 months to get to where you want to be on that business or from the opening in April?

Yeah. I would think it's 12 months sort of range. What happens is once there is a lot of customers in the pipeline but now they have a run on that system and now that it has been approved and sort of -- they'll start to go hard with some of that stuff now and once that's ready, you are into the customer's product launch profile and that can take time, but yes, we think over 6 to 18 months, 12 is a good target.

And in terms of -- are you still doing the Archer Farms fruit snack bars?

Yes.

So will you basically follow target into Canada on that?

Sure hope so. Yes.

Great. And finally on the ingredients business. I think you had got cellulose fiber ready for the meat industry and I think some oil dried starch products available and you were looking at some exports to Australia. I know those are all pretty new initiatives, but how are they going?

Sure. So with the expansion that was done in Louisville, the first phase of the expansion was to be able to do cellulose fiber for meat industry, and we're now on the second phase of that technology which we have to further process the fiber for the bakery and other industries. In hand with that, we add other fiber capabilities beyond just cellulose.

So there has been a ton of work done with the meat industry , and that clearly will be where the first potential applications comes pass followed by bakery and then other food products. That is going well. On the worldwide starch product, that is now in test with a couple of the really big yogurt players, and it seems like everybody now has a Greek yogurt. Interestingly enough I think it was Kraft who got rid of their Greek yogurt application. So that is proceeding and we are pleased with that. And you are the third one, you asked about Keith?

I think it was the export fibers to Australia.

Export to Australia, we have a new customer that has been served in Australia, and one of the areas that we are focusing on is expanding international efforts in fiber, including using the international group to use their contacts around the globe to put fiber into their portfolio and add it as well, again, leveraging our cross Company capabilities. And they are working on that, but there is a new customer in Australia.

Great. Thanks very much.

Thanks a lot , Keith.

Thank you. And this concludes our question-and-answer session. I would like to turn the question back to Steve Bromley for any concluding remarks.

Great, well , thank you very much. I would like to thank everyone for joining the call today. I appreciate you joining us. To conclude we are pleased with the first quarter. We are very confident that the initiatives that we have taken are proving themselves to be some of the correct steps to take. We're excited, and look forward to talking with everyone again in early August for our second quarter results. In the meantime, as always, if you have questions, please feel free to give Rob or myself or Susan Wiekenkamp a call at any time, and we would love to talk to you. So thanks very much , and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.