Sunopta Inc (STKL) 2013 Q2 法說會逐字稿

Good morning and welcome to SunOpta Inc. Second Quarter Fiscal 2013 Earnings Conference Call. By now, everyone should have had access to the earnings press release that was issued after the close of business yesterday. If you have not received the release, it is available on the Investor Relation 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 all to the risk factors contained in SunOpta's press release issued yesterday, the Company's second 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 a more detailed discussion of the factors that could cause actual results to differ materially from those projections and any forward-looking statements.

Finally, we would also 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 yesterday.

Now, I'd like to turn the call over to SunOpta's CEO, Steve Bromley.

Thank you, and good morning, everyone. Thanks for joining us today. On the call with me today are Rob McKeracher, our Vice President and Chief Financial Officer; Rik Jacobs, our President and Chief Operating Officer; and John Ruelle, our Senior Vice President of Corporate Development and Chief Administrative Officer.

On today's call, I will provide you with a brief overview of our second quarter 2013 financial results and the status of our key strategic initiatives. Then Rob will discuss our second quarter financial results in more detail. Then Rik will provide an update on our segment operational developments. Finally, I will provide a few closing remarks and then we will open up the call to questions.

In the second quarter of 2013, we continued to see strong demand for organic grains and feed products, continued growth across our consumer packaged categories, including aseptic non-dairy beverages and re-sealable pouch products, and increased demand in the US market for internationally-sourced organic food ingredients. Each of these businesses outperformed our internal expectations for the quarter.

This strong growth across our key product categories enabled us to achieve record quarterly revenues of $311 million, an increase of 10.2% versus the second quarter last year. We accomplished this improvement on top of our first quarter record revenue performance of $283 million. More importantly, we generated operating income of $13.3 million or 4.3% of revenues. Despite seeing some contraction versus the second quarter last year as we expected, we generated our second sequential quarter of operating margin improvement.

Operating earnings were driven by solid results across the Company's grains, feed, international ingredients and consumer products operations, partially offset by the negative effect of sunflower processing yields and byproduct values and Opta Minerals, who faced cyclical weakness in both the steel and infrastructure sectors and the cost of integrating their recent acquisition.

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 grow sales, operating margins, and profitability long term. We were also pleased to see that our Consumer Products Group improved operating income significantly and the Ingredients Group held as we anticipated. The Grains and Foods Group continued their progress with another strong quarter, driven by organic grains, feeds, and most importantly, non-dairy beverages, non-dairy aseptic beverages.

With the economic fundamentals for alternative energy companies having declined substantially, we recorded a noncash charge to our P&L this quarter related to our investment in Mascoma Corporation. In the third quarter of 2010, when we sold SunOpta Bioprocess Inc. to Mascoma, we recorded a noncash gain based on market values at that time and we normalized our results to remove the gain, similar to what we have done this quarter. While Mascoma continues to build the business, our strategic intention to liquidate this holding remains unchanged.

Before I turn the call over to Rob to discuss our financial results, I would once again like to reiterate our three core strategies, which form the basis of our ongoing initiatives; one, to focus on becoming a pure play, natural organic foods company; two, to aggressively grow our value-added consumer packaged foods and ingredients portfolio; and three, to leverage our integrated platform. We are progressing on all these fronts and when combined with growing interest in healthy eating and healthy living around the world, we believe we are well positioned to capitalize on this long-term trend.

With that, I will turn the call over to Rob to discuss our financial performance. Rob?

Thanks, Steve, and good morning, everyone. I'll take the next few minutes to review our financial results for the second quarter and 6 months ended June 29th, 2013. Please note that unless otherwise noted all figures discussed today are in US dollars and are occasionally rounded to the nearest million.

For the second quarter of 2013, the Company reported record revenues of $311 million, an increase of 10.2% compared to revenues of $282 million during the second quarter last year. Excluding the impact of changes, including acquisitions, foreign exchange, commodity pricing and rationalized product lines, the consolidated base growth rate for the Company was approximately 6% and over 7% in SunOpta Foods. All operating segments of the Company reported increased revenues versus the second quarter of 2012.

Operating income for the second quarter of 2013 was $13.3 million or 4.3% of revenues versus $14.3 million or 5.1% of revenues in the prior year and versus $10.7 million or 3.8% of revenues in the first quarter of this year. This represents the second sequential quarter of operating margin improvement while continuing to invest in our business.

As anticipated, margins in the Grains and Foods Group were unfavorably affected by the crop quality associated with the poor growing conditions experienced in 2012, especially in our sunflower operations where we continued to experience lower than normal processing yields and byproduct values. In addition, Opta Minerals continued to face cyclical weakness in both the steel and infrastructure sectors as well as the cost of integrating recent acquisitions, although expectations for the second half of 2013 are improved based on feedback from the key markets that they serve.

On the positive side, the Consumer Products Group realized a 350 basis point improvement in operating margins compared to the second quarter of 2012 and reported a $2.1 million operating profit, led by its pouch, beverage, and frozen operations. Our International Foods Group realized a 60 basis point improvement in operating margins compared to the first quarter of 2013. However, margins were lower than the prior year, due in part to costs associated with the startup of the new cocoa processing facility in Holland. Rik will provide further details on a number of ongoing business developments within SunOpta Foods during his operational update in a few moments.

For the second quarter of 2013, the Company reported a loss from continuing operations of $15 million or $0.23 per diluted common share, compared to earnings from continuing operations of $7.3 million or $0.11 per diluted common share for the second quarter of 2012. Included in the results for the second quarter is a noncash charge of approximately $21.5 million after tax or $0.32 per diluted common share, representing a 64% write down of the carrying value of the Company's non-core investment in Mascoma Corporation. While Mascoma continues to build its business, comparable public companies in the renewable energy space have experienced significant declines in value. These prolonged declines no longer appear to be of a temporary nature. The investment in Mascoma was established in the third quarter of 2010 following the sale of SunOpta Bioprocess Inc. in return for a minority equity stake in Mascoma and, at that time, a noncash gain was recognized on the sale.

Excluding the noncash Mascoma impairment charge, adjusted earnings from continuing operations in the second quarter of 2013 were $6.5 million or $0.10 per diluted common share. In addition, earnings for the second quarter include approximately $1.7 million in pretax severance, acquisition, and start-up costs or approximately $1 million after tax minority interest. These costs have not been excluded when arriving at the adjusted earnings amount that I just mentioned.

On a year-to-date basis, we reported record first half revenues of $594 million, an increase of 9.7% versus revenues of $542 million last year. Year to date, we've reported a loss from continuing operations of $9.8 million or $0.15 per diluted common share compared to earnings from continuing operations of $13 million or $0.19 per diluted common share for the first half of 2012. These results include the previously-mentioned noncash impairment of our investment in Mascoma, which is not reflective of normal operations. After excluding this item, adjusted earnings from continuing operations in the first half of 2013 were $11.7 million or $0.17 per diluted common share.

Earnings for the first half of 2013 include the impact of approximately $2.9 million in pretax severance, acquisition and start-up costs or approximately $1.7 million after tax and minority interest. Once again, these costs have not been excluded when arriving at the adjusted earnings amounts that I just mentioned.

Year to date, we have realized EBITDA of $34.8 million as compared to $36.9 million last year. At June 29, 2013, we had total assets of $695 million and a net book value of $4.80 per outstanding common share. Our balance sheet remains strong and at the end of the second quarter reflected a current ratio of 1.46 to 1 and a net debt-to-equity ratio of 0.57 to 1.

Total debt outstanding was $195.5 million as of June 29, a decrease of $10.7 million from March 30, 2013. The reduction in total debt reflects positive operating and cash flows of $23.9 million, due in part to a $15.2 million reduction in working capital offset by capital expenditures of $14.1 million.

On a year-to-date basis, the Company has generated $17.2 million in cash from operations, as compared to $21.5 million in the first half of 2012.

At June 29, 2013, we had approximately $100 million in unused capacity within our current debt facilities. When combined with our positive operating cash flows, we continue to have sufficient access to capital to support our growth projects.

For fiscal 2013, we expect total capital spending to be in the range of $35 million to $40 million, with most of the investment allocated to our value-added ingredients and consumer packaged operations.

Our second quarter capital expenditures of $14.1 million and $22 million year to date includes spending on our new cocoa processing facility in Holland; expansion activities to install three new lines at our aseptic beverage facilities; processing and capabilities enhancements at our premium juice, snack and pouch businesses within our Consumer Products Group; plus investment in maintenance spending across a number of other business units.

With that, I'll now turn the call over to Rik, who will discuss our second quarter operational performance in more detail.

Thanks, Rob, and good morning, everyone. In the second quarter, we continued to focus on our strategy to expand and enhance our consumer packaged and ingredients capabilities. These efforts have enabled us to generate another quarter of higher margins in the Consumer Packaged and Ingredients segments versus the prior-year period. We believe that consumer packaged goods and value-added ingredients offer the strongest growth and profitability potential for the Company and we will continue to invest in these areas long term.

We will also leverage our integrated foods platform for -- via proactive sharing of best practices from procurement through manufacturing and logistics. We've just hired a senior operations leader to oversee these efforts, but we're still in the early stages of realizing these sizable benefits.

Over the next few minutes, I will comment briefly on the Grains and Food Ingredients, Consumer Products, and International Food groups. In the Grains and Food group, revenue grew approximately 7% compared to the same quarter last year. The biggest drivers were increased sales of raw grains including soybean, corn, and organic feed as well as higher revenues in the Consumer Packaged aseptic business. As Steve mentioned, we realized strong demand for our products. In Organic Feeds, we experienced solid pricing and maintained our double-digit margins versus prior year. As a reminder, last year we generated exceptional margins in Organic Feed during Q2 and Q3 due to the drought conditions, which drove up prices of raw input materials while we were carrying lower cost inventory. Going forward, we do expect Organic Feed to generate somewhat lower margins as the new crop comes in at a lower commodity pricing and market prices are therefore adjusted.

Our aseptically packaged non-dairy beverages continue to grow in the quarter and we continue to realize strengths in this segment of our business. We are excited that our three new lines have been commissioned and product started shipping in July. The expansions will further enhance growth in our current non-dairy categories as well as open up new opportunity in adjacent categories. Some of the product we're now producing includes organic dairy and nutritional beverages, both of which are large growing categories. As a result, we feel we're well positioned as a leading integrated aseptic manufacturer.

Focusing on our sunflower business for a few moments, similar to last quarter we experienced lower-than-average yields and lower revenue versus prior year. Margins during the second quarter also declined versus prior year due to poor processing yields and low byproduct pricing. While we anticipated the decline, we did not anticipate the large margin impact. If we take the upside versus our target under raw soy and corn business but deduct the downside we experienced in sunflower, the net impact in the quarter was about $2 million. Part of this was caused by lower-than-expected agronomy sales in sunflower due to the late and unusually wet planting conditions. These input sales carry a significant margin, which we miss in the quarter. On the positive side, through our network, we have identified some new global growing regions in order to meet the demand for our finished products. We remain focused on addressing these issues and improving this side of our business.

Now, focusing on our Ingredients Group. We realized a quarter of solid growth versus the second quarter last year. Revenue increased 7% here as well and operating margin expanded 20 basis points. We continued to see the positive impact of our cost reduction programs from last year. The fruit side of the business performed well. We are making big strides, landing and growing with key large accounts with attractive margins through offering new products and great service and are working on landing further business to fully utilize the available capacity.

Consistent with our efforts to expand our pipeline of products, especially on the fiber side, we hired a new VP of Sales and he's already started to make an impact with both pipeline filling and R&D. While the time to bring projects to conclusion can be long in this sector, we are now landing new business to offset the market weakness and the bread and ready-to-eat cereal categories, which have been traditional strongholds for us. Overall, we have a good platform in fruit, fiber, and grains based ingredients that is already profitable today and has great longer term potential through continued innovation.

Turning our attention to the Consumer Products Group, we also realized increases in both revenue and operating income versus second quarter last year. Excluding our aseptic business, which as you are aware, we report in the Grains and Food Group, revenues increased 9%. Our gross margin is now north of 10% while operating margins expanded 350 basis points as we start to better utilize the overhead in our facilities. We continued to realize the benefit from our investment in this business and will see continued momentum in revenues, gross and operating margins going forward.

On a like-for-like basis, just excluding the industrial frozen food part of the business, which we exited last year, our frozen and pouch businesses are the best performers of the group. Frozen continues to outperform our internal expectations for both revenue and profitability. On an absolute basis, pouches are doing extremely well. Revenue doubled to $8.7 million with the addition of our East Coast facility in Allentown. We commissioned line 3 and 4 the last week of June in Allentown and have started shipping product there as well as in July. We believe the outlook for this business remains strong.

The revenue and margin strengths in our pouch business is now enough to offset the losses associated with our San Bernardino facility. 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 packaging business. This should be completed by the end of Q3 so that we expect a positive run rate exiting 2013 for this business as well.

Finally, in our healthy snacks business, we saw some decline versus a strong first half in 2012. But we should see growth in the second half as we've added new business and have a strong promotion program in place with key retailers. We're pleased that in the quarter our cost controls paid off as our operating margin improved significantly in the fruit side. Going forward, we should see the same trend on the nutritional bar side.

In conclusion, our Consumer Products Group continues to perform better every quarter and we expect revenue and margin expansion to continue as more of our capital investment take hold to either drive more output with the same SG&A or improve our efficiencies. This is a segment where we add the most value to our customers, which should allow us to retain the highest margins of all the segments we do business in longer term.

Finally, our International Foods Group revenue recovered versus the first quarter and prior year with an increase of approximately 17% as demand remains strong in the North America business, which now accounts for close to 50% of the group, partially offset by the continued weakness in the European market. However, the trends in Europe are slowly improving with June being the best month of the second quarter.

Our operating margin in Q2 also includes approximately $400,000 in start-up costs for our cocoa facility and the impact of a higher exchange rate, which resulted in a foreign exchange loss in the quarter versus a foreign exchange gain last year. We believe our new cocoa facility will allow us to exert greater control over product quality and provide us with the ability to enhance margins through further integration. This facility should also be commissioned by the end of the third quarter.

I will now turn the call back over to Steve for some brief closing remarks.

Great. Thanks, Rik. To summarize we are pleased with the continued strong demand for our products and our ability to generate record revenue in the second quarter of 2013 with positive momentum across our key product categories. Going forward, our management team will continue to focus on the growth of our core natural and organic foods businesses. For our non-core holdings, we remain committed to reviewing all options to maximize shareholder value and in doing so, create additional capital that can be reinvested in our global foods platform.

We believe the outlook remains strong for our core business and we are optimistic about our ability to capitalize on future growth opportunities. We will continue to execute on our plan 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.

In closing, our long-term confidence comes primarily from two areas; one, we are well positioned in the growing healthy food space; and secondly, our team is extremely focused on managing the controllable aspects of our business as we make the necessary enhancements to progress further on the execution of our core strategies. As part of this process, we are currently realigning our food operations to reflect our strategies, simplify our operations, better serve our value-added customers, and maximize our growth potential. We expect that this will be completed by the end of the year and will result in three food-based operating segments; one being Sourcing and Supply; two being Value-Added Ingredients; and, three being Consumer Packaged Products.

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 foods industry and are optimistic that 2013 will be another excellent year. Thank you for joining us on the call today. With that, we'd now like to open the call up for questions. Operator?

(Operator Instructions) Peter Prattas with Cantor Fitzgerald.

Good morning, guys.

Hi, Peter.

Hey, Peter.

Perhaps I'm a bit early, but given the success of your expansion initiatives like your pouch facilities, have you started to consider where you might keep expanding in 2014?

Absolutely, I mean we're in the middle of our budgeting processes right now and I think it's fair to say that we will continue to have capital expenditures in both of our aseptic and pouch businesses in 2014 as well. You know we now have four lines on the East Coast in Allentown facility. That facility has room for more. Obviously, we're also considering what we can -- how we can expand on the West Coast.

Sure. But just given the strength of your cash flow and your balance sheet and the success you're having, is there room to be even more aggressive with your organic growth plans, particularly in the absence of any acquisitions? Do you think that there is sufficient demand from your customer base for that?

Yes, we believe we do. I mean I think it is -- we have an aggressive growth plan for, especially for Consumer Products as well as our Ingredients platform going forward in 2014. As I mentioned already in my remarks, we're now expanding in new categories in aseptic where traditionally we've been very focused on the non-dairy segment. We're now going into dairy. We're going in nutritional. Those are huge categories and we're just dipping our toes in and I see a lot of potential there. The same is true for pouch. We have done a lot in the baby food categories and now there as well we're working with some large nutritional companies who launching new products that you should hopefully see on supermarket shelves by the end of this year.

Great. Thanks very much.

Take care, Peter.

Christine Healy with Scotia Bank.

Thanks. Hi, guys.

Good morning, Christine.

I wanted to I guess ask a couple questions on the Consumer Products segment, cause I think this is the big surprise for the quarter, just the margins close to 4% with only 2 of the pouch lines running. Can you talk about what you expect for margins after lines 3 and 4 are up? So I guess second half of this year and into next year? I know on your last call you said lines 1 and 2 will lead to a breakeven and 3 and 4 should get you to 5%. So how has this view changed?

Yes, I think we were positively surprised by the fact that the Allentown facility was able to run only a very small but still a small operating profit on -- based on running just a few lines. So, of course, with not having to add a lot of staff, lines 3 and 4 should significantly add to that one. As I mentioned in my remarks already, Consumer Products as a whole is now well north of 10% gross margins. That I see continue growing as we are able to attract more value-added businesses to all of our facilities really.

Okay and then I know it wasn't just the pouches that led to that strong margin. You mentioned that the beverages and the frozen did quite well too. Is it sustainable on those sides or was there anything unusual I guess that happened this quarter that led to higher margins in those other areas?

I think in our traditional beverage business, which is really lemonade and waters, we were aided in the second quarter by fairly heavy retail promotion programs. So there's a bit of seasonality in that. I think on the frozen business we have done a lot of upgrading our facility over there that have now come to a close. We have our SQF 2 accreditation, so we should be able to start bidding for other businesses. We see positive things going there for at least the remainder of this year.

Okay and then I guess last quarter's call, Rik, I think you mentioned that you had locked in about 50% of the volume for lines 3 and 4. So, line 3 was essentially full and you just needed to fill 4. Can you give us an update there and how soon could we see a decision on 5 and 6?

Yes, I think -- well as I've just mentioned lines 5 and 6 as well as West Coast is going to be -- is going to basically be part of our budgeting process. So we'll hopefully be able to update you on that more in the November timeframe. When you talk about the capacity being full, of course, we wouldn't be talking about lines 5 and 6 already now in concept and in November hopefully in much more detail if we wouldn't be filling that capacity. So we're very confident that that capacity will be filled.

Okay and just last question for you guys. I know the US farmers have a really good crop on their fields right now. That should benefit your processing margins in Q4 and onwards. But can you talk about the impact of the grain prices falling? How is your inventory carry, particularly on corn? Do you expect you could see some lower pricing on your consumer products next year? Is it really just the raw green sales that will get impacted?

Christine, we're going to turn that over to John Ruelle who's kind of the in-house agronomist.

The ag guy?

You had quite a few questions in there. But we did experience some impact as Rik mentioned on our input sales as the late wet spring did cause some acres to not get planted. So we've really turned our sourcing group on and are expanding our sourcing to different geographies, both North America and around the world. So, specifically to buy commodity, I think corn and soybeans for sure, we're very confident that we're going to be able to fill supply gaps. Across all commodities, current contracts, we are confident that we will cover. I think the last one you mentioned was corn. What specifically question -- was your question there?

Yes, yes, no sorry. Just with the corn price really coming off, I was just wondering like your inventory carry before the new crop comes in, could there be an impact on I guess inventory charges?

Yes, and I think what you're seeing now on the board is indeed corn going lower. But don't forget that I think across the USA it was a very late planting season that we referred to in our last quarterly call. So even though prices are going a lot lower right now that remains to be seen whether or not we get an early frost or not that could still damage the yields. So, I wouldn't -- if I would be a betting man, I wouldn't be betting yet at this moment.

What I think to that end as well, they're -- we're in specialty crops, so the -- what the Chicago Board of Trade may be doing is not necessarily a direct correlation to our specialty crops. So, I think as far as a crop year to crop year issue, we did have some issues last year when we converted from old crop to new crop with having to cover new crop sales with -- or I'm sorry old crop sales with new crop pricing. We're pretty balanced in that regard heading into the fall.

Okay, okay, great. Thanks, guys.

Thanks a lot.

Scott Van Winkle with Canaccord Genuity.

All right, thanks and congratulations, guys. Very good quarter.

Thanks, Scott.

Going into this year, I figured we'd get into the middle of this year and that Grains and Food Group would be down year over year as you lost the kind of basic input sales. How have you -- can you give me thoughts on kind of how you've overcome last year's scenario going into this year?

I'll offer a couple of comments and then Rik will jump in. But I think it goes to a couple of things. One is the capabilities of our global supply chain. As John just mentioned the fill supply gaps and so we've done a nice job there. Second, a lot of growth has come from the value-added side, which since we add more value, it carries a higher value-added sale value. So those are the two keys that I would suggest. Rik, do you have further?

Well the only thing I would say is that and I, again I think I referred to this in our last quarter, if you look organic feed, that is a significant portion of the raw grains that we sell. The prices are a lot higher than they are this year. The volume is about the same. We're able to carry the same kind of percentage margin. I think that's really kind of a driver on both revenue as well as on the margin side.

Should we think about that as kind of a natural hedge?

In which way, Scott? I'm not sure I get you.

Well I'm thinking does the feed kind of offset -- do they run in different directions where one side of the business may be a little short while one's strong. Is there a correlation, a negative correlation between the two or is this the way it, you know one's so strong this year it's offsetting the other?

The real strength in feed just comes from the demand for natural and organic poultry, meats -- poultry and meats and that sort of thing. John, I don't think they're really a hedge against each other?

No, no I think the real drive for the feed business is demand for all the products, feeding cattle for beef and poultry and eggs, all those animals that are being fed to produce the products down the organic chain. It's really what drives demand for that side.

As I mentioned the last time, what is good to see is that a couple of years back I guess when the price for organic feed went up, all of sudden demand came down. This time demand is strong. That is also because we have programs in place with retailers where we supply their suppliers of poultry, eggs, etc. So that's leading to more stability I guess on our volume side.

Okay. Then on the ingredients segment, any changes in the customer roster there? Any opportunities, new moves happening?

Yes, I think we're making as -- we're making very good gains on the fruit side with the dairy, Greek yogurt specifically and the pancake segment is continuing to grow. I think on the fiber side, we have seen weakness in some of our really big customers on the cereal side, on the bread side. Of course, [House] is going out of business hasn't helped either. But at least we're now making it up with new business that we're landing with other accounts and with other products.

Great. Thank you very much.

Take care, Scott.

Tim Tiberio with Miller Tabak.

Good morning, guys. My question I guess is more around the future business that you're contracting in the aseptic beverage. In the pouch business, you've obviously made very good progress on the operational side. You're filling in these production lines. But as we look forward and you're judging these new contracts, are you still happy with the margins that you're winning on this new business versus the initial business that you were ramping? Is that still kind of getting you to the operating margins that you've been talking about on the consumer product side?

Yes, I think there's a couple of things there. First of all, we are going into some new categories and if you think about nutritional categories having a lot higher retail shelf price that also leads to higher margins there already. I think it's also in a way diversifying into adjacent categories and potentially diversifying also our customer base, which we're actively working on both of those. I am a firm believer that even though aseptic traditionally and including this year is one of our strongest performing businesses that we own, there's a heck of a lot of potential for more there.

Okay, I guess if I can put it another way, it's great that you're ramping these lines very quickly but it doesn't sound like you're feeling the pressure that you have to give up margin just to get this new business in the door.

I think that's a valid statement.

Okay. Thank you for your time. Great quarter.

Thanks a lot, Tim.

Brian Freckmann with LS Capital.

Hey, guys. How are you?

Brian, how are you doing?

Good quarter. You guys talk about -- well on the call it seems like you guys sort of used the word consumer products and then I would say throw in aseptic in that in sort of stripping that out of Grains and Foods. I'm glad to hear that you guys are going to change the way you're going to report from I guess it's Sourcing, Value-Add, and Consumer Product is that, is that, Packaging? Is that correct?

That's right.

Is aseptic going to end up in Consumer Packaging?

Yes, exactly. What we're doing, Brian, is we're realigning internally. As we've built this business over time, we've had -- we've had a number of operating segments as we've built the Company. The real meat of our Company is we do sourcing and supply. We do value-added ingredients and we do consumer packaged products. What we've been doing internally is realigning how we manage each of those categories from the raw materials right through to the consumer and our go-to-market. So as part of that realignment, our Consumer Products Group will manage all of our basket of consumer products that we take to the market including aseptic. So, the same people that are working on pouches and beverages etc. will also work with our customers on aseptic beverages.

So it makes our key account planning much more streamlined. It makes our billing processes with the customers much more streamlined. It makes our ability to service the customers better. So we've been involved in doing that. As part of that, we have an obligation and it's what we've wanted to do. The nice byproduct of that is that we'll streamline our reporting.

So rather than seeing our aseptic beverage business, which has traditionally been in our Grains and Foods segment, you'll see it now as part of Consumer Packaged Products as well as grain snacks, all of the roasted soy and sunflower and corn etc. which is in the Grains and Foods business today. You'll now see that in the Consumer Products business. So we're simplifying as we indicated in our comments. We're simplifying our structure to get to our customers better, to better align with our strategy and the wonderful byproduct of that is that it will simplify our reporting and our segment reporting for all of our -- for all of the shareholders and users of our financial statements.

So our target is to be completed with our internal realignment by the end of this year. It's a mass -- not a massive undertaking but it's a large undertaking across the organization and we've been working on it hard all this year. What we expect will happen is that for Q4 we'll report in the new segments and provide a bridge to the old segments.

Okay, so you guys will do that by -- it's great to hear. So one more quarter of the old and then fourth quarter we're going to get the new reporting?

Yes, that -- the only thing that could stop that is if somehow we're not finished with our internal realignment. But our goals and right now we're on target to do that. So that would be the -- that's the plan.

I just wanted to make it absolutely clear that when I talk about Consumer Products growing 9% and having a 350 basis point expansion on the operating that actually excludes aseptic. I'm not tossing aseptic in there at the moment.

Yes, I was going to -- I was going to make a big reach here and sort of say if you put your kind of hat on and said if you were throwing in aseptic into that and just a casual guess, I promise I won't hold you to it, but what -- if you added aseptic to your consumer business or you sort of thought about the consumer business as it will be versus sort of what it is now, what is the growth rate -- what has been the growth rate at least maybe this last quarter? Maybe what do the margins look like right now?

I would say that if our aseptic business is just about double the size of our consumer products. The margins there would make Consumer Products look even more attractive than we already have in our own internal forecast for the future.

Well, guys, I mean obviously I think there's a lot of people on this call who are very excited about that business and the future there. So, as soon as you can get those out, I think that would be great to see. Thanks, guys. Good quarter.

Take care. Thanks, Brian.

(Operator Instructions) Ron Reuven with Reuven Capital Investments.

Hi, Ron.

Ron, your line might be muted.

Yes, sorry about that. Hey, guys. Good quarter.

Thanks, Ron.

So just want to know as far as the business obviously it's stabilized dramatically and now it's back on a growth phase. Where do we stand in regards to starting to give projections for the next year for earnings and margins?

Well as Rik said, we're into our budgeting and planning process for next year. We normally conclude that later -- late November type thing. So at that stage of the game, we'll have a better view on what next year looks like. But we're cautiously optimistic.

Okay and in regards to the longer term goals of getting to 8% operating margins, 10% EBITDA margin, are we still on target? Is this something that?

Yes, no change to those targets. As we've stated, our targets are for 8% operating margins, 10% EBITDA margins and 15% return on net asset margins. We want to exit 2015 on those rates so we can see the full benefit in 2016. All of the core strategies that we have are focused on that. Obviously moving up the value-added chain and all of the investments and the bulk of our energy being associated on adding value clearly drives margin shift and sorry -- mixed shift which drives margin shift. Rik talked about the fact that as part of our realignment we've brought in another senior operational resource to really work on the leverage side of this business, which is also critical to achieving those targets and that continuing to grow our revenues.

Our assumption is, is that our revenues can grow 10% a year at the same time. So, you've got the contribution from new business that comes at a higher margin because you're utilizing the platform that you have in place. We've got higher value-added product mix, which is extremely important. We saw some of the benefit of that starting to show through in the Consumer Products Group this year. Lastly, leveraging the platform which is doing more with less and streamlining costs wherever we can. We have resources in place to work on that. So, all of those targets remain in place.

In regards to the Mascoma write down I guess, as far as the -- I guess it's being compared to the public companies that haven't done too well. I mean do you see this as somewhat of a permanent loss or in essence a permanent valuation on it or I mean do you see this -- is Mascoma still growing where you think that it's eventually going to turn around and the value of it will increase?

Well, a couple of things, Ron, when we did this transaction back in 2010, it was all noncash. Following the rules of reporting, we had to record a gain, which we normalized at the time. Our position at the time and our position today was that Mascoma is a good company doing good things and they're a real business and they're continuing to build their business. So, we remain optimistic on the prospects for that business as we much as we -- as much as we can know from being minority shareholders. Having said all of that, correct to your point, the markets for the public companies in this space are down significantly and we felt, based on our evaluation, that it would be prudent at the time. As much as we're optimistic about the business, it would be prudent to take the external factors into account based -- and then mirror that up with what we know about the business.

So, net-net it was noncash. We normalized it at the time (inaudible) cash, we'd normalize it again. (inaudible) We had that obligation.

Got you. Okay, well terrific quarter, guys, and looking forward to next one.

Great. Take care, Ron.

Take care.

Keith Howlett with Desjardins Capital Garden Market.

Pretty close. I was just wondering on the product formulation and new product development, as you realign your segments is there any change in how you're going to develop new products?

Yes, well I think it is -- as we're changing these segments, first of all, I think the most important change that will happen is, is that as Steve alluded to already, I think it puts us especially with retailers and that is a significant part of our business. Puts us in a better position to have account management with those people because we will be able to sell a broader portfolio of our products over there. If you think about the R&D side, the R&D side is to some degree already kind of linked across our Company if you like. But that will become only stronger as we go forward and making sure that our pipeline of R&D project is aligned to what our customers really want. So I don't really see too many significant changes on the R&D side. I see it more on how we can serve our customers better side.

I know some of the other companies may be larger in scale like Maple Leaf centralized their development to try and put all the people together. Is that -- I know you've, in the past you've indicated that they all work together anyway. Doesn't really need to be physically together. Is that still your view that it can be in different locations?

Well we've having a -- yes, we're having a debate on that as we speak and we're looking even at, at least bringing some of our people together, but it's always there's always a tradeoff about you can bring all your R&D people together and you can do great R&D but you've got to make sure they stay connected to the business as well. So, and that's exactly the exercise we're going through right now and we should have more clarity on that as we go into 2014.

Just as we look to the 2016 targets, what would the -- do you think roughly speaking would be the gross margin rate that would accompany the 10% EBITDA margin?

That really depends a lot on the segment where we do business in. The highest being in our newer products and low would be in our Grains and Foods. In the mix of the business as that shift towards Consumer Products that's how you going to reach the 10% EBITDA.

Thanks very much.

Great. Take care, Keith. Thank you.

I'm not showing any further questions at this time. I'd like to turn the call back over to Steve Bromley for closing remarks.

Well, thank you very much. I appreciate everyone -- we appreciate everyone joining the call today and look forward to speaking with you again in early November. So I hope everyone has an enjoyable rest of the summer and we'll look forward to seeing you soon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.