Sunopta Inc (STKL) 2013 Q1 法說會逐字稿

Good morning, and welcome to SunOpta Inc.'s first-quarter fiscal 2013 earnings conference call. By now, everyone should have access to the earnings press release that was issued after the close of business yesterday. If you have not received a release, it is available on the Investor Relations portion of SunOpta's website at www.SunOpta.com. This call is being webcast and a transcription will be available on the Company's website.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. We refer you to all of the risk factors contained in SunOpta's press release, issued yesterday, the Company's first-quarter fiscal 2013 quarterly report on Form 10-Q that will be issued at the close of business today, and other filings with the Securities and Exchange Commission, for more detailed discussions on the factors that could cause actual results to differ materially from those projections in any forward-looking statements.

Finally, we would also like to remind listeners that the Company may refer to certain non-GAAP financial measures during the teleconference. A reconciliation of those non-GAAP financial measures was included with the Company's press release, issued yesterday. And now I would like to turn the call over to SunOpta's CEO, Steve Bromley. You may begin.

Great. Thanks very much. Good morning, everyone, and thanks for joining us today. On the call with me are Rik Jacobs, our President and Chief Operating Officer; and John Ruelle, our Chief Administrative Officer and Senior Vice President of Corporate Development.

Before we begin, we would like to send our best wishes to Rob McKeracher, our Vice President and Chief Financial Officer, who is away, as his wife, Laura, had a baby yesterday, their third child. As a result, Rob will not be joining us today.

On the call, I will provide you with a brief overview of our first-quarter 2013 financial results and status of our key strategic initiatives. Then Rik will provide an update on our segment operational developments. And finally, I'll provide a few closing remarks, and then we'll open up the call to questions.

Please note that unless otherwise mentioned, all figures discussed today are in US dollars and are occasionally rounded to the nearest million.

We were pleased with our first-quarter 2013 financial results, which were in line with our expectations. Our team continued to execute on our core strategies to leverage our integrated platform and to increase our value-added packaged foods and ingredients portfolio to gross sales, operating margins and profitability long-term.

We increased revenues approximately 9% to a record $283 million, and this was on top of what was a record first quarter last year with $259 million in revenues. As we expected, the extremely dry conditions in 2012 influenced the volume and quality of grains-based product available for sale in 2013. Even so, on a like-for-like basis, our internal growth rate for the Food Group was 7.5% and 6% on a consolidated basis.

The increase in consolidated revenues was driven by strong demand and increased prices for organic grains and feed products, continued growth in consumer packaged categories, including aseptic nondairy beverages and resealable pouch products, as well as higher sales within Opta Minerals as a result of recent acquisitions.

Operating income for the first quarter of 2013 was $10.7 million, or 3.8% of revenues, an increase of 110 basis points over the fourth quarter of last year. However, as expected, we did see some contraction compared to the first quarter of last year.

On the positive side, we were pleased to see that our Consumer Products Group improved significantly in the first quarter and is now close to breakeven, with an 80 basis point lift in operating margins versus Q4 of 2012.

The Ingredients Group turned the corner, as we anticipated, and realized operating margin improvement of 210 basis points versus Q4 of last year.

Finally, the Grains and Foods Group had another strong quarter, driven by organic feed and integrated aseptic nondairy beverages.

However, similar to what was anticipated, our margins were impacted by crop quality associated with the drought-like conditions experienced in 2012, especially on our sunflower crop. Also, as we previously indicated, we did incur a number of expansion costs which impacted the operating margins in Consumer Products and International Foods.

What we did not anticipate was a delay in our agronomy sales, the seeds and relevant inputs for growers, and that was as a result of inclement weather in the majority of our growing regions in the USA. This impacted our operating results versus the prior year by roughly $800,000, before tax. Fortunately, this is merely a timing issue which should be recovered during the second quarter.

Earnings for the first quarter of 2013 were $5.1 million or $0.08 per diluted common share as compared to $5.9 million or $0.09 per diluted common share during the record first quarter of 2012. The effects of discontinued operations were not significant during the quarter. However, earnings for the first quarter included approximately $1.2 million in pretax severance, acquisition and startup costs, or approximately $0.7 million after tax and minority interest.

As I mentioned, these costs related primarily to continued investments. To be a little more specific, investments in our Consumer Products Group, where we incurred costs of approximately $600,000 related to the installation of our third and fourth pouch lines in Allentown, Pennsylvania, and the retrofit of our premium juice operation in San Bernardino, California.

In the International Foods Group, we incurred costs of approximately $200,000 related to the commissioning of our new cocoa processing facility in Holland. In addition, acquisition and severance costs related to both the purchase of our Bulgarian grains processing facility, acquired early in the first quarter, and severance and other costs, primarily at Opta Minerals, as they integrate WGI, amounted to approximately $400,000.

Now, focusing on a few balance sheet highlights, we ended the first quarter of 2013 with total assets of $715 million and a net book value of $5.00 per outstanding common share. Total debt outstanding net of cash was $193 million, an increase of $17 million compared to December 29, 2012. The increase in debt in the first quarter is a normal trend for our Company, as we generally pay for our product harvested late in the previous year during the first quarter. Even so, our net debt to equity remains well within our target range of 0.58-to-1, with roughly $100 million within our current debt facilities available for funding incremental growth projects, both internal and through acquisition.

Before I turn the call over to Rik, I would like to once again reiterate our three core strategies which form the basis of our ongoing initiatives. One, to focus our development efforts on becoming a pure-play and natural and organic foods company; two, to aggressively grow our value-added packaged foods and ingredients portfolio; and three, to leverage our integrated platform. We are progressing on all these fronts and truly believe that we are well-positioned for the long-term.

With that, I will turn the call over to Rik to discuss our segment operational performance in the first quarter. Rik?

Thanks, Steve, and good morning, everyone. In the first quarter, we remained focused on our strategy to expand and enhance the Consumer Packaged and Ingredients capabilities. These efforts have enabled us to generate improved margins in the Consumer Packaged and Ingredients segment versus the fourth quarter, as Steve already mentioned.

And as for our longer-term strategy, we believe these categories offer the strongest growth and profitability potential for the Company, and we will continue to invest in these areas going forward.

We expect our margin expense to be further enhanced by leveraging that integrated food platform by a proactive sharing of our best practices, from procurement through manufacturing and logistics. I'm pleased to say that we are starting to realize results in this area, but there is much more we can do to drive our future results. Over the next few minutes, I will comment briefly on the Grains Foods, Ingredients, Consumer Products and International Food Groups.

In the Grains and Foods Group, revenue grew by 8% compared to the same quarter last year. The biggest driver was organic feed, where demand is strong, with solid pricing and margins. While we do expect the positive trend to continue, you will recall that last year we generated exceptional margins in organic feed during Q2 and Q3 due to the drought conditions which drove our prices overall in [food] materials while we were carrying lower-profit inventory.

Our aseptically packaged nondairy beverages continued to grow in the quarter and we continue to realize strength in this segment of our business. We have commenced with the installation of the new lines and improved formats, which will further enhance growth in our current nondairy categories, as well as new categories. We are pleased to report a significant portion of the expanded capacity has already been contracted. As a result, we will be well-positioned as a leading integrated aseptic manufacturer.

On the down side, we did experience quality issues with both our soybean and sunflower inventory, and that has resulted in lower-than-average yields and lower revenue versus prior year. The decline is partly due to lower sales, especially in the case of soy, but also due to lower prices in the sunflower byproducts, which has led to the majority of our margin decline.

With the industry experiencing poor yield, the sunflower byproduct market has been flooded so that it has become a buyer's market. Just as an example, bird food, a byproduct of our sunflower operations, now sells for $0.25 a pound, while last year, the price was around $0.32 a pound, a decrease of more than 20%. The good news is that we are seeing the market for sunflower kernels, a key sunflower primary product, begin to increase due to a lack of supply.

While we anticipated most of this decline and mentioned it in Q4, we did not anticipate the later than usual planting season, which compressed our agronomy revenue and, more importantly, our margin. We estimate that we missed about $800,000 in crop input margin in the quarter, but obviously, this margin will be recovered in Q2.

Now, focusing on our Ingredients Group, as we indicated last quarter, we felt this business had bottomed out, and indeed we have seen both revenue and margin improvement from Q4 with an impressive 210 basis points lifting our operating margin. This is not only due to better revenue, but we are also seeing the positive impact of our cost reduction programs from last year.

I'm also happy to report that on the food side of the business, we landed one of the large accounts that we refer to. At the same time, we are continuing to pursue a number of opportunities which are required for us to truly see full utilization of our capacity and therefore significantly increase margins. You will recall on the last call I referred to these as the large, big buffaloes. We are making progress, but continue in our hunt for the entire herd.

As part of that effort, we are working hard to extend our pipeline of products, especially on the fiber side, and have put additional resources in place. We are also upgrading our manufacturing capabilities to be able to produce a broader array of products at a lower cost. The aseptic line in our food operations and the new ball milling equipment in our fiber side are testament to that.

Turning our attention to the Consumer Products Group, we also realized increases in both revenue and operating income for the fourth quarter and it is great to see that our investments in this business are starting to pay off. On a like-for-like basis, excluding the industrial frozen fruit part of the business, which we exited last year, our frozen food business is the best performer of the Group with a sales increase of 15% and a very steep increase in our operating margin.

On an absolute basis, pouches have taken the crown with a revenue increase of more than $5 million versus last year, mostly from our newly-opened Allentown facility. The installation of two new lines should be complete early in the third quarter, and as with our aseptic lines, we've already been able to contract some volume for these new lines. Again, importantly, the new contracts will expand our presence in new categories and with new customers.

As I reported last time, we are currently installing new equipment in our San Bernardino refrigerated premium juice facility, with an increased focus on extraction, in addition to our current [buffing] business. However, most of these actions will only begin generating results in Q3.

Finally, in our healthy snacks business, although we did improve margin versus Q4 of last year by 200 basis points, we are below where we want to be and where we were last year. Some of the decline is due to volume contraction on the fruit snack side of this business, as some of our customers have taken their retail price beyond what consumers are willing to pay for the products. We are correcting that with our customers as we speak, but we will not see the impact of that until the second half of this year.

Also, the capital investments we've been making at the Carson City Nutrition Bar operation have not yet borne their full benefit, and therefore, margins here remain at a level well below where we want them to be in this business.

In conclusion, our Consumer Products Group as a whole performed to expectation and we have seen margin growth from Q4 of last year, and the Group is now about breakeven if we exclude the startup cost of $600,000, as Steve mentioned earlier.

Going forward we expect this margin expansion to continue as more of our capital investments take hold to either drive more output with the same SG&A expense or improve efficiency.

Finally, our International Foods Group continued to experience softness on the European side of the business, almost completely offset by strong demand from the North American business. However, the operating margin in Q1 also includes startup costs for our cocoa facility, as well as margin contraction in the specialty coffee market, which is the result of a dramatic drop in worldwide coffee prices. With new crop coming in, we are starting to see the situation improve, but in the quarter these two items combined for a hit of about $500,000 to the Group's operating earnings.

We just visited the new cocoa facility on Monday and are excited about the prospects this new venture will bring, as the facility will allow us to exert greater control over product quality and provide us with the ability to enhance margins through further integration. I will now turn the call back to Steve for some brief closing remarks. Steve.

Thanks, Rik. As anticipated, the first quarter of 2013 included growth across our key product categories, and we are pleased with our overall results and remain optimistic that we will enjoy another record year.

Going forward, we will continue to focus on our portfolio of natural and organic food offerings, and are actively involved in a number of internal growth projects, as well as potential acquisition opportunities.

For our non-core holdings, we will continue to assess all options to maximize shareholder value, and in doing so, create additional capital that can be reinvested in our global integrated natural and organic foods platform. Both Opta Minerals and Mascoma continue to execute on their strategies with stand-alone capabilities, thus allowing the management team at SunOpta to focus on our core natural and organic foods business.

As I mentioned earlier, we remain focused on our three core strategies. One, to focus on becoming a pure-play natural and organic foods company to simplify and streamline our business model for our customers and shareholders. Two, to aggressively grow our value-added packaged foods and ingredients portfolio to fully utilize our integrated field-to-table capabilities and offer improved margins as we add more value to customers. And three, to leverage our integrated platform to drive improved operating margins.

We believe the outlook for the natural and organic foods industry remains strong and we are optimistic about our ability to capitalize on our future growth opportunities. We continue to expand our capabilities to meet the demands of this growing market, which is being driven by a wide range of factors, from health concerns through the desire for sustainable food alternatives.

For example, despite Proposition 37 being narrowly defeated in California, there are now new efforts in several states that support the mandatory labeling of genetically modified engineered foods. As many of you will know, Whole Foods Market announced that it will require GMO labeling in all its stores within five years. In addition, we believe the introduction of the Genetically Engineered Food Right to Know Act will also be a potential catalyst for our industry.

And so we at SunOpta feel strongly that our business is well-positioned with the right products and people at the right time for future growth in the natural and organic food industry, and are optimistic that 2013 will be a great year.

In closing, our confidence comes primarily from two areas -- one, we are well-positioned in the growing healthy foods space; and two, we are making good progress on executing on our core strategies, which will allow us to capitalize on this fast-growing market.

With that, thanks very much for joining us on the call today, and we will now turn the call back to the operator for questions. Operator.

(Operator Instructions) Peter Prattas, Cantor Fitzgerald.

Good morning, guys. As you forewarned, the yield on the soy and sunflower did impact you through Q1. And I'm just wondering are you almost through that now, or how long does that continue to play out for before you are through those batches and we see things normalize?

I think we are -- on the soy side, I think the damage is mostly that we have basically less product available for sale. On the sunflower side, we will continue to see the effects of that through the current crop year, and that should basically end in Q3. So as we get the new crop in, that should be over.

Okay, thank you. And you've been investing in this cocoa plant. Are you still on track for July as a startup? How big is your cocoa business right now, and how much of a margin lift do you think you can get from moving this process in-house?

We are still on track with a factory startup of July. As a mentioned, we just visited this factory on Monday, and we are doing the testing of individual machines right now, getting all the certificates in place in July. And of course, we will first of all move our own products over there, so we will already get a lift on the roughly 3000 tons of product that we do already today that we're currently having contract packed somewhere else. So we'll get that initial lift.

And in the meantime, since we are the only factory in this important cocoa processing area in the Netherlands that is purely focused on organic and other certified cocoa products, we think we can attract a lot of other volume from around Europe for that.

Great, and revenue-wise --

But that will take some time.

How big is that revenue-wise right now?

EUR15 million? Approximately? Yes, around EUR15 million.

Great. Thank you. And the final question is just in the Ingredients Group, I know you've been working on a pipeline there for a while, hoping to see some sort of win to start moving that upwards again. Are you seeing anything coming to fruition anytime soon that could favorably impact you in Q2 or Q3, let's say?

I think if you look on the fruit side, we are already seeing the effects over there. I mean, we are seeing double-digit growth, and the double-digits is starting with a two, so that's very, very good. It's in the food service business, it's in the yogurt business, which are the core categories on the food ingredients side.

On the fiber ingredients side, we are continuing to explore new areas, and with the ball milling equipment, we've actually broadened, as I mentioned, the array of product, not only in bakery, but now also in meat, but beyond and beyond. So fruit, very, very positive trend to continue Q2 and Q3. Fiber, we are continuing to chase the herd, as I mentioned.

But we feel we are getting closer, but quite honestly, I personally am getting a little bit tired of telling you guys that, so we need to land one.

Very good. Good luck with that. Thank you.

Christine Healy, Scotiabank.

The first question I have is on the resealable pouches. Can you give us an idea on how much volume you've pre-contracted for Lines 3 and 4 and how many customers you've signed on to date for the pouches?

I think to date, we've probably -- and this is just an estimate right now -- but we probably have about 10 to 15 different customers over there. But we have -- it is very, very much dominated at the moment by the baby food category. That is the vast majority of what we do.

Some of these new customers that we are bringing on board right now will take us into new categories. And I think I'm not at liberty to say right now what that is, because they are yet to launch, but that is exciting. And this baby food, by the way, continues to grow. If we look at our current Allentown, we are having to run on Saturdays over there to just keep up this production. So some of that contracted volume is actually with current customers. But we are bringing new ones onstream, as well.

Could you give us an idea of the magnitude of how much you have already pre-contracted?

This is on three and four (multiple speakers).

Three and four, yes.

Let's put it this way. I think that three is pretty much full. So 50%, which is -- by the way, when we install new -- have new capital investments, whether you talk about the aseptic or whether you talk about pouches, the way we obviously like to do it is to fill at least 50% of that capacity so that we can get a very decent return initially already on our capital, and then it goes up from there. So on the aseptic side, it is -- was also 50% when we started and I think it is beyond that now.

Okay. And Rik, can you remind us when is Lines three and four going to be commissioning?

Early in the third quarter. And the same is true for the aseptic lines.

Okay, great. Next, I wanted to touch upon your Canadian growth strategy. There was a report that came out last month saying that Canadian organic food sales have tripled in the last six years. This is far outpacing the growth in the US right now and is expected to continue.

So how can SunOpta take advantage of this growth in Canada? Can you do it through US operations, or do you guys have plans to add some plants in Canada, or do some acquisitions here? If you can talk about that, that would be great.

Sure. Look, we did have a really large presence in Canada, which was on the distribution side of natural and organic foods, which we sold off and are no longer in. So today, the bulk of -- all of our manufacturing operations are US-based.

You are quite right that the Canadian market is growing. It is a market that we are extremely interested in. Some of our products can travel to Canada and be cost-effective, and that does happen on the aseptic -- on some aseptic beverages and (technical difficulty) pouches and snack bars and that sort of thing.

But to your point, we are looking at the Canadian market. We are looking for complementary acquisitions that are complementary to what we have and where we can also leverage Canadian facilities to serve certain parts of the US. So it is a big part of our strategy. Not only from a business point of view but from a tax efficiency point of view, there is a lot of reasons why Canadian assets makes sense for us.

But they have to be the right ones.

They have to be the right ones. You don't do something just to save tax; you do it because it is the right business decision. But in making the decision about it being a good business decision, taxes come into play there. So that is also a reason.

So it is high on our list, Christine. We just have to find the right one at the right price.

Steve, I would add to it, that it seems like an increasing portion of our pipeline of new acquisition opportunities have Canadian components, obviously driven by the strong demand of the market there. So we are seeing more of this stuff showing up in our acquisition pipeline that has a heavy Canadian portion to it.

Okay, just one last question for you guys. Just want to get an update on the European situation. We all know that your sales have been weak in that market over the last, I guess, year, year and a half. Is the situation improving? Is it getting worse? Is it stable? If you can give us some color there, that would be great.

Yes, I think the situation at the moment is fairly stable. But still, everybody is hoping for this Euro crisis to go away. It isn't. New things keep popping up all the time. And I think what it is really leading to is insecurity in the market, as a result of which the buyers, if you like, that our International Foods Group deal with, remain very, very careful.

At the same time, we are seeing pockets, but then they are being offset by other pockets again. So you can't really say the entire business is down. Some parts of the business here are way up and other parts are significantly down. The biggest one of that is what I mentioned already is the coffee one. But if you have the NYMEX I think going from $2800 to $1400 year-to-year on coffee, then that has also had significant impact on the specialty coffee market, as well.

Okay, great. Thanks, guys.

Tim Tiberio, Miller Tabak.

Good morning. If I can go back to the Allentown facility, can you kind of help us start thinking about the operating leverage as you get to the third and fourth line? I know it is probably too early in the third quarter, but is this a situation, as you get to the third and fourth line, that there is enough margin uplift to start consistently getting into a 5% type operating margin range? Any color that you can provide there would be much appreciated.

I think what -- I think we said in the past, and it is true, and that is how we are tracking at the moment. When you have the first two lines filled, you are definitely breaking even, and you are covering all of the costs that the facility is generating. As you start adding more and more lines, you obviously improve your operating margins. And with three and four up and running, 5% should definitely be doable.

But if you look at the facility and you go through the facility, you will note that we actually have room for more lines, either more of the same or some different ones. And that of course we're then truly generating the kind of operating margins that we expect ultimately in this Consumer Products Group, which is in the 10% to 12% range.

Tim, the strategy at Allentown is just -- it's a carbon copy, a copy and paste of what we did in Modesto, California, where we built the facility -- in that case for aseptic lines, where you can put up to eight lines in. Five and six are now going in, and we are really starting to see the leverage off of that platform. So we expect to see the same thing over time. And to Rik's point, we will see it this year. But like, three and four are good, five and six are better and (multiple speakers).

Seven and eight are great.

Okay. So (multiple speakers). (technical difficulty) Is it fair to say that you from (technical difficulty) that once you get to three to four, you have to set a date line before you start talking about the 10% to 12% target that you've been suggesting?

I think that lines 5 and 6 should get us to that target range already. Obviously, depending a little bit on what are the different categories and what are the different -- I mean, the kind of business that we really, really prefer is total turnkey business as well. And that is really want we are chasing, if you like. So we are not only a contract manufacturer of pouches, but we fully leverage that integrated capability that we have from the organic ingredients all the way to the finished product in the pouch.

Okay, thanks. And just one last question. You had mentioned that there needs to be some, I guess, channel optimization or price volume mix changes in the snack bar segment. What specifically is going on there, and can you provide a little bit more clarity of when this is going to happen and when you think this will be resolved in that segment?

Sure. We have our biggest customer in the fruit snack business is a retailer, a very well-known retailer. And this retailer has decided last year at a certain space that the price point of what they were selling at was going to above the $3.00 range. And we found out together with this retailer that that was not necessarily the right strategy, and it led to reduced volumes and therefore margins to us, but also to the retailer. And so together with us, we have now come to the conclusion that that should be corrected, and that is exactly what is going to happen. But it's going to take some time and it will happen in the second half of this year.

Okay, great. Thanks for your time.

Chris Krueger, Northland Capital.

Good morning. In your Ingredients business, I know last summer you introduced several new products, and I know there is a long lead time to seeing it result in new customers. But on the rice fiber, I know it is well-suited for gluten-free products. Can you give us an update on the potential pipeline there? Are you seeing demand from gluten-free companies, at least for projects to work on?

Yes, and I think I talked about this before. When we come out and we launch a product, then before you get a product like that actually integrated as an ingredient into a recipe of one of these big consumer packaged goods companies, you have to go through an incredibly rigorous stage-gate process. And so we are progressing, but of course, we would like to do that a lot quicker. But it can be up to 18 months before you start seeing any results.

Okay.

The pipeline is there, and we are moving through stage-gate. Yes, of course, gluten-free being a very big attraction. But it is taking us time, especially if -- some of those, quite honestly -- I can't divulge the details -- but some of them, you know, you end up reformulating halfway through and then you start at the stage gate one again.

On the aseptic nondairy beverage, I know you are increasing your capacity; I believe it is to add a single-serve line. Has that been largely driven by one customer or is there more demand potential from others?

Well, in fact, we are increasing our capacity with two multiserve ones, one in our Alexandria facility and one in our Modesto facility, as well as a single-serve line in our Modesto facility. So that is driven by some of our current customers. But I find the most exciting is up until now, we have been very focused on non-dairy beverages. We are now expanding into dairy-based beverages. We're expanding into nutritional beverages. And we are having some prospects at the moment for fruit-based beverages, so high-acid beverages.

So not only are we seeing that the capacity is being filled. I think it is a good thing that we are able to diversify, as well.

And again, there, we are leveraging what we have built in Modesto and we are leveraging our entire -- if you like, our integrated field-to-table capabilities again.

Last question. I know you talked it about on the call a little bit. A lot of talk about food labeling and non-GMO and all that. Are all of your products non-GMO, or can you let us know where that stands? I believe they are but I just want to verify that.

Yes, that's the case. Everything into the Food business is non-GMO. We will end up handling some GMO crops that arise at our facilities that has to be disposed, and we will provide an elevator service. But everything that goes through -- anything like that will just end up being shipped over on a toll fee basis for ethanol. Everything going into Food is non-GMO.

And actually, to answer that a little bit, Steve, it's kind of getting crazy on the whole non-GMO side. Even crops that don't even have a GMO variant, so to speak, our customers are asking us if we can label it non-GMO. It's kind of nuts, so to speak.

But it is a huge trend moving forward, and I think Whole Foods' decision to ensure that everything in the stores is labeled by (technical difficulty) is indicative of -- is really indicative of the desire for consumers to know that. And I mentioned the number of food acts and potential bills that are out there, which are also driving awareness.

So we are being approached by many, many food manufacturers who want to talk about kind of the plan and how they would go about converting to all non-GMO. It is great that they come and speak with us early, because you just don't turn it on. You've got to get it contracted and get growers converted, et cetera. So the sooner we can start working with the customers, as we are, the better.

All right. Thanks.

Scott Van Winkle, Canaccord Genuity.

Thanks, and to add on to that GMO question from Chris, with the GMO project and the more certifications happening, have you run into any challenges, more paperwork, more tracing, things of that nature, with all these certifications popping up?

The sort of two-level answer to that, Scott, is, look, we have been non-GMO and have had to have the traceability standards in place for a long, long time. And we've had a non-GMO program we called TRIP, was traceability identity preserved, and that has been in place for a long time. Like organic, there is also a lot of documentation. So that has always been in place for us.

But now, you have the non-GMO project, which has a little bit different certification system and processes and papers. So that does create additional paperwork throughout the whole chain, not just for us, but also whoever is going to take the product and brand it. So there is more paperwork throughout, really created by having more than one methodology that is being followed.

And there is also all kinds of different certifications at the moment that you can see. You have the Rainforest Alliance, then you have the organic, then you have fair trade, et cetera, et cetera. So that actually does add a little bit of complexity when you can actually put four stamps on, if you like, right?

But traceability has been a core fundamental for us for years and years and years. So we are used to the paperwork. It's just when you get more than one certification process.

A few other questions. First, mix of sales, last year you started talking about your business kind of 40/30/30 as far as a mix between raw materials, ingredients, package. Any update there? Have we seen any kind of movement towards more value-added products?

I think if you look over the last year, I think that our Consumer Packaged products have actually grown the fastest, especially if you compare it on a like-for-like basis. And as I mentioned, I think the first quarter is a little bit clouded over there, just because there are some segments that we have basically gotten out of, such as the industrial frozen fruit business, which was about $3 million, $4 million of revenue in the first quarter of last year, which we didn't repeat this year.

So Consumer Package is growing the fastest, and as a result, that is basically also the one that has taken share from the others, if you like. And our ultimate goal is actually to be more like a 60/20/20, Consumer Packaged Ingredients, and -- as we grow from a $1 billion to a $2 billion company. So it doesn't mean we want to see decline anywhere; it basically means that we want Consumer Packages to grow the fastest.

So just to clarify, Scott, it was 40/20/40 -- 40 in raw, 20 in ingredients and 40 in consumer. And to Rik's points, consumer is where we've seen the highest levels of growth, so that is expanding. And I think when we look at the numbers, given that we don't have as much supply of raw, especially on the soy side, we will see it move even a little bit quicker than we really would have had it moved. But it's moving in the right direction.

And then I missed the comment there was -- I believe you were talking about -- was it sunflower pricing being down 20% year-over-year, is that right?

No, what I'm saying is we are experiencing poor yield on our sunflower. And those poor yields are having an impact on the byproducts. So the byproducts last year, for example in bird food, we sold that for $0.32 a pound. That's not really where we make all of our money, but of course, if you can sell the byproduct for $0.32 a pound, it has a certain impact on the margin that you make on your primary product, be that the in-shell or the kernel. Now, we are selling it for $0.25 or 20% lower, just because everybody is experiencing poor yields and that is a fairly unstable market.

There is only so many birds.

There is only so many people that are going to feed the birds, too. So that is kind of what is impacting us.

Another thing that has happened in Q1 is that because there are so many small seeds around, some of the oil crushers have actually said, well, we don't necessarily want to buy your byproduct anymore because there are so many small seeds we can't get any oil out of it.

So those are -- so some of these byproduct markets are being flat because of the poor yields, and that is then having an impact on our ability to make enough or make a high enough margin on our primary product.

Got you. And do the farmers, or your suppliers, do they share in kind of the burden of a lower quality crop?

This is John Ruelle. Yes, the way we do it is we do what are called acre contracts. So we fix a portion of the offtake at a price, and then the overage, which could be as much as one third of the output, is kind of an arm's length market transaction that occurs at time of harvest and spot purchases thereafter. So about one third of the exposure is mitigated by that market factor versus the fixed commitment.

We test all the incoming loads and those loads get adjusted as well. But it is hard in this particular case to adjust the load for small seeds. It is just impossible -- not impossible, it's difficult for us to predict just how efficiently they can be processed. And to Rik's point, the yields are a lot tougher this year with the quality and we're having to work really hard to get quality product.

I think we experienced improved -- we're just getting better at handling this stuff, and I'm sure everybody that is trying to deal with this crop this year is -- we're getting better at it and the dynamics are improving. And one of the dynamics that you always expect is at a point in time prices start to go up, and we're starting to see selling prices go up on the primary product, which is what should happen here.

So look, it's going to get progressively better over the course of the year, but the reality is it is just not going to be as good a year as other years (multiple speakers).

Just to be clear, we're talking about the crop year, we're talking about crop year. And so as of late Q3, we should start getting the new crop in, which hopefully has more toward the average processing yields.

So we're halfway through this year already, and we will continue to get better. But look, reality is sunflower, just given the crop quality, won't be as profitable as previous years.

And on pouches, does the Hain acquisition of Ella's have any impact on you?

Today, we are not packing for Ella's. But we'd love it to bring business opportunity, but we'll have to see. It's early days and we haven't chatted about that.

Lastly, everything integrated and set in Bulgaria on the acquisition a few months ago?

Yes, the acquisition is complete. The systems are integrated. Management teams have been integrated, selling efforts have been integrated. There is a couple of -- where one of the sort of postacquisition items that we wanted was to install an oil line there, which is really important, because we are shifting that facility from primarily conventional over to organic. And part of making the organics quite profitable is having an oil-crushing line there, so you can crush the byproduct yourself and then sell the really high-value crude oil off of that.

So other than that, the system is integrated and performing as we would expect. And this harvest year, we've been contracting a lot more organic product. So we've got that facility which is primarily running non-GMO for us for servicing the European market. We will be in a transition process here where we will do both non-GMO and organic, moving down the road to, if our projections are right, it will just do organic at a point in time, or we will expand it to keep doing the non-GMO. We have to start that. But I would say, Rik, all seems to be (multiple speakers).

It's on track.

Just to clarify, there was very little external customer business prior to acquisition, correct? So the pickup there is really just the margin of bringing the processing in-house, right?

Yes, and as Steve mentioned, I think the big opportunity there is organic. And including, if you buy your organic kernels and you don't have an oil line, then -- or organic seed and you don't have an oil line, you are buying them obviously at a premium. And then if you don't have the oil line, you have to sell them to a conventional crusher, and that is kind of what kills everybody's economics.

At the moment, the only organic oil that is being crushed is being crushed in Western Europe. So they are shipping raw seed over to Western Europe. We will be able to process raw seed at -- the small seeds, if you like it, through an organic crushing process in Bulgaria that should be one of our USBs.

Great. Thank you very much.

Keith Howlett, Desjardins Securities.

I was wondering if you could talk a bit about the healthy snacks market overall and how you put together new product offerings for it, and how you feel you are doing in terms of share. I ask that because you are sort of soup to nuts, as it were, fiber, and you've got all the components there, I would think, to be a developer of new healthy snacks for your retail partner. I'm just wondering sort of on the big picture where that is going.

I'll let Rik talk about the innovation we have in the category. I will tell you, though, that I read a research report yesterday that talked about the snack bar category, and it talked about sort of traditional snack bars, sort of the center of the plate bars' growth slowing, with specialty bars, i.e. the Cliff Bar type products and private label, continuing to grow quite nicely.

So the good news for us is that we are in the categories and playing into the categories that are seeing growth, and we are seeing that there is a fair amount of innovation leveraging our integrated capabilities both on the fruit side and on the grains/proteins side. Rik, do you want to comment a little bit on that innovation?

On the fruit side, we have been working with an equipment manufacturer already that will allow us to do a lot more (inaudible) extrusion. So think about fruit and vegetable. We are thinking about doing different shapes, et cetera, et cetera. So think about the kind of innovation.

When you are talking about on the nutritional side, I mean, we have like four R&D people on site that are basically every single nutrition bar that comes out of that facility working with our customers, whether that be a retailer or be a brand owner, is really about customizing that bar to exact specifications. And every single bar is basically put together in a different way. So in a way, every single bar is innovative.

Just on the number of -- well, they are already here -- but the US retailers in Canada that are expanding, like Costco has been here a long time, but it is expanding, Target has entered and Whole Foods, small but expanding. Do you find that your products follow those retailers or do you have to deal with a whole new set of buyers, so you don't necessarily transfer the border easily?

It depends a little bit on the retailer, but in most cases, our products follow across the border, even when it goes across the border to Asia, and sometimes even when it goes across the border to Europe out of the United States. So of course everybody knows about Target expanding in a big way in Canada are right now. We have products in Target and those are going to go across the border.

They go across the border in a different package, though.

Yes, of course, it is actually English and French.

Or wherever we are going.

So in terms of servicing North America, excluding the dairy business, it doesn't particularly matter where your plants are located?

I think it obviously, as it is tough for everybody, it very much depends. Because it depends on basically how far you can ship your product economically. So the lighter and more compact the product is, the further you can ship. And I think the best example of that is if you look at our fruit snacks business, we have the plant in Omak, Washington, and that goes all the way over to New York.

But if you think about our aseptic business, well, we open up a separate facility on the West Coast to service that, because that is not nearly as economical to ship those heavy multiserve fluid-filled the packages across the entire nation.

Great. Thanks.

(Operator Instructions) Ron Reuven, Reuven Capital.

Congratulations. Looks like you got your revenue growth mojo back. Couple of questions. You mentioned regarding the resealable pouches that it is dominated by the baby food category. It seems like Ella's Kitchen was purchased by Hains recently. Does that have any effect on your business, improving or anything in any way?

As I mentioned earlier, it is not a current large customer of ours in any way, and we don't know the answer the rest of the way yet.

I missed part of the conference (technical difficulty). As far as the Consumer Products business, you are saying that it is getting to breakeven or almost breakeven, with the exception of about $600,000. What do you see as the potential of the business as far as one year out, two years out. How big do you think this business will actually get?

I'll let Rik deal with that, but just to be clear, we incurred $600,000 in costs related to the ramping up of the -- just the costs for Allentown, the pouch facility, and also the costs for the retrofit that we are doing at the premium juice facility. So that was $600,000.

Our operating loss in the group was, I think, $175,000 -- or call it $200,000. So we were profitable excluding those one-time costs, but certainly not where we think we will be. And Rik, I will turn that over to you.

I think longer-term, the operating margins that we want to generate from this line of business is the 10% to 12%, of course, a little bit depending on which category we do business in and also which customer set we have. As I said, some of our customers we do turnkey business for and some of our customers we just do tolling business for. As you can imagine, it is -- sometimes tolling business looks like an incredibly nice gross margin, but you don't have nearly the amount of revenue and total margin at the coffer.

And really, not the customers that value us the most, because in that particular case, if we are tolling for them we are not providing our integrated capabilities, which is using our global sourcing platform to provide the ingredients. But we still do have business that we do in certain sectors where we just toll for people.

But 10% to 12% is really where we want to be.

I guess -- I got a recent question from an investor about what makes this particular business much more profitable as far as margins than your prior businesses. Can you remind us a little bit more of why you see this as the future of the Company or at least a significant part of the future of the Company?

I think Steve indicated that. But if you say, Ron, why is the future going to be better, well, it is because we want to be a pure-play natural and organic food company. It simplifies our business for our customers and for our shareholders and potential shareholders.

I think we want to grow that value-add business part of our business, which we consider to be Ingredients and Consumer Products. You know, like I said, longer-term if we go from $1 billion to $2 billion, if we have a 60/20/20 split, that would mean that our Consumer Product goes -- if you just call it $1 billion right now -- goes from $400 million to $1.2 billion, that Ingredients goes from the current $200 million to $400 million, and that our total raw material supply roughly stays at the $400 million that it is today. That is kind of what we are targeting.

And as I think as we move up that value chain and add more value to our customers through all the things that we do, from sourcing through to packaging for them, hopefully they will -- not only hopefully -- we already know that and we see that in some of our businesses already today -- we will be able to retain more margin for ourselves.

I think the large -- the third strategy that -- quite honestly, I've only been with the Company for a fairly short time, as most people are aware -- but it is fair to say that SunOpta has grown significantly, as well, through acquisitions. And I think there is a lot to be gained from basically leveraging the platform for sharing and standardizing best practices across the group. And that journey has started right now as well, and we are already seeing some of the payback coming, and that is a very, very quick payback if you can make that happen.

In regards to Opta Minerals Group, I guess two questions about that is, number one, is it on the market yet as far as are you actively talking to any potential buyers? And the second question in regards to that is what does the potential buyer look like? Obviously, you can't name any names until the deal is done. But as far as what kind of companies would you say are interested in Opta Minerals? Would it be more of like a private equity type of name, or would it be a competitor that is much larger?

You asked a bunch of questions in there, Ron. The first one is is it formally on the market. We've made no announcement that it is formally on the market. It is a public company. It is for sale every day. And we've made it quite clear that as wonderful a company as it is, it is not a long-term holding, and it's a business that needs to have a new owner.

We've also been pretty clear about the fact that we wanted the business to have time to integrate the last acquisition, which has some significant synergies attached. They are working hard on that. Our take is that they need the better part of the second quarter before that is going to be demonstrably visible within the business, but they are making good progress in that regard.

And what we've stated and where we are today is that we are going to proceed with that when we feel we can create the most value. And I think we've been pretty clear about the fact that it is not a long-term plan, and that we want to get on with that.

So that is where we are currently. The guys there are working extremely hard on the integration and realizing the benefits. And by the way, I must say that the integration of WGI, which was the company that they acquired late last year, is going really well, and they are meeting all the targets that they had for that business.

The business in general improved versus Q4, so some of the weakness that they saw in the steel industry bounced back. One area that didn't bounce back as quickly as they had expected was the infrastructure, kind of the abrasive side of the business. I'm going to try and say this word -- the sequestration in the US has certainly delayed a number of large infrastructure projects. So if you went to Norfolk, to the US naval shipyard and took a look at the number of ships that are actually and repair versus what would normally be the case, it is quite dramatic, because a lot of those projects are on hold while all of the government funding gets sorted out.

Who are the typical buyers? This is a really neat investment. And I can tell you from the past that they were a very -- this is a unique investment for strategics and it's a unique investment for private equity. From a private equity point of view, it generates good cash flow, it is well-managed, and it's an industry that you can continue to consolidate. If we were going to hold this business long-term, there is no reason why we wouldn't go on a large acquisition binge and grow this thing to $300 million, $400 million, $500 million. That is the type of opportunity that would be compelling for private equity and was compelling for private equity when we chatted in the past.

And then there are strategics that are in the business. I certainly don't want to mention any of the names, but people in the industrial minerals category around the world is of interest. And some who are actively involved in complementary businesses in the steel and foundry and infrastructure businesses.

So it is a pretty diverse combination and it's interesting for not just North American players but global players who want a bigger position in North America.

And last question. As far as the -- I guess this is more of a speculation of the future of the organic food industry -- in regards to Prop 37 and just the whole non-GMO movement that is happening right now, let's say the rules were passed tomorrow. What kind of potential do you see or what kind of change do you see within the entire industry, and obviously within SunOpta, as far as revenues -- what kind of impact?

I don't know if I could even -- let me make a couple of comments first, though. What has to happen is we've got to go out and get a whole bunch of genetically modified growers and we've got to get them to convert. Okay? So the economic model -- there has to be an incentive there for them. So read between the lines; we've got to pay them more to grow GMO. And I don't think there is any secret right now that people are getting paid a boatload of money for growing -- in North America for growing genetically modified corn and soy for the biofuels industries.

And so the economics are interesting. We do it today because we have numerous non-GMO growers. But we've got to convince a lot more. And it's going to be a supply and demand, which is why we've told our major customers, if you are serious about this, like please don't come knocking once the growing -- crop is going in the ground now. So if a big customer comes along and says, I want to convert -- well, they wouldn't be a customer of ours today -- but somebody who is getting GMO products says, I want to convert and I need 60,000 tons of whatever, that won't happen overnight. It is a planning thing. Whole Foods has done exactly the right thing by drawing a line in the sand and then making the industry fall into line and figure it out. So we have lots of those conversations on the go, but it is economics.

I also think it's going to take time, as you point out, Steve. And I also think let's not be confused too much about the non-GMO. I actually think that is only step one towards actually much more sustainable. Because non-GMO doesn't mean that it hasn't been completely sprayed full with pesticide and things like that. And ultimately, where we want to position ourselves is continuing to be more and more also in the organic spectrum of this whole thing.

And I think once consumers understand the difference between GMO and non-GMO, I think they are going to start asking questions about the non-GMO. And I don't know when that's going to be, but that is kind of I think where I see it going long-term.

At the end of the day, Ron, it is a really good opportunity to quantify it. It would be such a guess, it is probably not fair to make it.

Got you. Okay, well, congratulations again for a record quarter, and look forward to speaking to you guys soon.

Thanks a lot, Ron. Take care.

I am showing no further questions at this time. I would like to turn the conference back over to Mr. Steve Bromley for any closing remarks.

Thank you very much. Thanks, everyone, for joining us today. Much appreciated. We'll look forward to talking with you later in August. As always, if you have questions or would like to chat, please let us know and we will be sure to set up a time to do so. So thanks very much, and have yourselves a great day.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.