Sunopta Inc (STKL) 2013 Q3 法說會逐字稿

Good morning, and welcome to SunOpta Inc.'s third-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 this 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 all to the risk factors contained in SunOpta's press release issued yesterday, the Company's third-quarter fiscal 2013 Quarterly Report on Form 10-Q that will be issued at close of business today, and other filings with the Securities and Exchange Commission for 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 the teleconference. A reconciliation of these non-GAAP financial measures was included in the Company's press release issued yesterday and now I would like to turn the call over to SunOpta's CEO, Mr. Steve Bromley.

Good morning, everyone. Thanks for joining us on the call today. 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 third-quarter 2013 financial results and the status of our key strategic initiatives.

Then Rob will discuss our third-quarter financial results in more detail, and Rik will provide an update on our core foods' operating segments.

Finally, I will provide a few closing remarks and then we will open up the call to questions.

In the third quarter of 2013, we generated record revenues due to continue momentum in our core natural and organic foods business. Specifically our growth was driven by our consumer products categories including resealable pouches and aseptic beverages; increased demand in prices for internationally sourced organic raw materials and higher sales of value-added fruit ingredients. This strong growth across our key product categories enabled to us to achieve record third-quarter revenues of $303 million, an increase of 8.4% versus the third quarter last year. 2013 has thus far been a year of record performance from a revenue point of view.

We continued to see strong growth in our value-added product offerings during the quarter. With a number of our expansion projects now coming on line and starting to ramp up, we should realize the benefits of these investments going forward.

Despite our strong record, strong revenue growth, pardon me, we incurred incremental expenses in the quarter related to start-up and plant retrofit costs and these weighed on our operating earnings. Rob and Rik will explain these in further detail on the call.

In addition, our results were impacted by continued processing challenges in our sunflower operations as well as cyclical weakness in the steel and infrastructure segments within our noncore holding Opta Minerals.

We also recognized non-cash impairment charges in Opta Minerals along with other expenses totaling $1.9 million after-tax or $0.03 per diluted common share. While we experienced several challenges during the quarter, our team continued to focus on our core strategies and we believe these efforts will lead to increased operating margins and profitability long term. We will discuss these in further detail on the call today.

As I mentioned last quarter, we are currently realigning our food operations to align with our strategies, simplify our operations, better serve our customers, and maximize our growth potential. We are on track with these changes and began operating in our new segments at the start of the fourth quarter. This realignment results in three food-based operating segments -- raw material sourcing and supply, value-added ingredients, consumer packaged products, each of which will be focused on growth in line with consumers demands for healthy natural and organic food products.

At the same time, we have added a number of key leadership resources in sales, operations, human resources, and information technology to help drive our strategic priorities and objectives. 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 and 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. When combined with growing interest and 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 will take the next few minutes to review our financial results for the third quarter and nine months ended September 28, 2013. Please note that, unless otherwise stated, all figures discussed today are in US dollars and are occasionally ramped to the nearest million.

As Steve mentioned, for the third quarter of 2013, the Company reported record revenues of $303 million, an increase of 8.4% compared to revenues of $279 million during the third 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 8% and over 10% within SunOpta Foods.

All operating segments of the Company reported increased revenues versus the third quarter of 2012. Operating income for the third quarter of 2013 was $9.8 million versus $12.7 million in the prior year. While progress was made in ingredient and consumer product categories, we experienced an overall decline versus the third quarter of last year which can be explained by three primary areas.

First, operating margin during the quarter was negatively impacted by startup costs related to our cocoa processing facility located in the Netherlands, as well as retrofit costs related to our premium juice facility in California. Second, lower sunflower processing yields and reduced byproduct values due mainly to smaller and lighter weight feeds put downward pressure on operating income in the Grains and Foods Group. And third, Opta Minerals continued to incur costs related to the integration of recent acquisitions in addition to the continued cyclical weakness in both the steel and infrastructure sectors.

On the positive side, the Ingredients Group experienced a $0.8 million improvement in operating income compared to the third quarter of 2012 due mainly to increased sales and improved pricing for industrial and food service fruit ingredients. As well, the Consumer Products Group increased operating income by $1.2 million as a result of increased sales of resealable pouch products and healthy snacks all despite ongoing costs associated with our integrated juice facility expansion.

Rik will provide further details on a number of ongoing business developments within Opta foods during his operational update in a few moments.

For the third quarter of 2013, the Company reported earnings from continuing operations of $2.9 million or $0.04 per diluted common share compared to earnings from continuing operations of $5.8 million or $0.09 per diluted common share for the third quarter of 2012. Included in the results of the third quarter is a non-cash goodwill impairment charge of $3.6 million related to Opta Minerals as well as severance, facility restructuring and long-lived asset write-downs all reported in other expense for $0.8 million.

Excluding the non-cash goodwill impairment charge and the other expense, adjusted earnings from continuing operations in the third quarter of 2013 were $4.8 million or $0.07 per diluted common share. In addition, adjusted earnings for the third quarter included approximately $2.6 million in pretax start-up expansion and integration costs or roughly $1.7 million after-tax and minority interest. These costs have not been factored into the adjusted earnings amount that I just mentioned.

On a year-to-date basis, we reported record revenues of $897 million, an increase of 9.2% versus revenues of $821 million during the first three quarters of 2012 and realized EBITDA of $50.2 million and adjusted earnings from continuing operations of $17.1 million or $0.25 per diluted common share. At September 28, 2013, we had total assets of $689 million and a net book value of $4.88 per outstanding common share. Our balance sheet remains strong, reflecting a net debt to equity ratio of .57 to 1.

On a year-to-date basis, the Company generated $31.8 million in cash from continuing operations as compared to $38 million during the first three quarters of 2012. The reduction in operating cash flows reflect increased investment in working capital to support our growing business.

At September 28, 2013, we had approximately $100 million in unused capacity within our current debt facilities that funds SunOpta Foods. 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 capital spending to be in the range of $38 million to $43 million with most of the investment allocated to our consumer-packaged and value-added ingredients operations.

Our third-quarter capital expenditures of $10.8 million and $32.8 million year to date include spending on our new cocoa processing facility in Holland, expansion activities to install three new lines at our aseptic beverages facilities; processing and capabilities enhancements at our premium juice, snack, and pouch businesses within the Consumer Products Group; plus investment and maintenance spending across a number of other businesses.

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

Thanks, Rob, and good morning, everyone. In the third quarter we continued to focus on our strategy to expand on our value-added [consumer packaged foods] and ingredients capabilities. These efforts have enabled us to increase operating income in (technical difficulty) and ingredients segment versus the prior year period.

We believe the consumer package 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.

While we are still in the early stages, we have continued with our plan to leverage our integrated foods platform across the business which will allow us to proactively share best back practices from sales and administration to procurement manufacturing and logistics. As Steve mentioned earlier, we have added a number of resources to help drive these efforts.

Moving on, I will now discuss the performance of each of our operating groups within SunOpta Foods. In the Grains and Foods Group, revenue increased compared to the same quarter last year. This was primarily due to sales of raw grains including soybean, corn, and organic feed as well as higher revenues in the packaged aseptic business.

As Steve mentioned, we realized strong demands for our products. As a reminder, last year we generated exceptional margins on organic feed during Q2 and Q3 due to the drought [foundations] which drove our prices of raw input materials while we were carrying lower cost inventory.

Going forward, we expect organic feed to generate traditional margins as we return to a normal position in the market.

While the quality of the crop coming off the field this year appears to be good, as we mentioned on the last call, due to the wet spring a number of acres went unplanted which will impact the quantity for sale from North American sources. In 2014, we will once again leverage our unique international sourcing capabilities to somewhat offset North American supply.

Our aseptically packaged beverage platform continued to grow in the quarter and we continued to realize strength in this key segment of our consumer products portfolio. Last quarter we announced three new lines and we began shipping new product as planned in July. The expansions further enhance growth in our current non-dairy categories as well as open up new opportunities in adjacent categories. We are now entering the organic dairy and nutritional beverage segment both of which are large and growing.

Looking ahead, we plan to aggressively pursue market share, customer share, and new product categories which we believe will continue to position us as the leading integrated aseptic manufacturer in North America.

Turning to our sunflower business, we have continued to experience lower revenue and gross margins versus prior years. These results were due to a shift in our customer mix, increased cost related to processing, low byproduct pricing and increased international competition.

To address the continued margin pressure, we are aggressively pursuing cost reductions in our factories and supply chain. For example, we have reduced our international shipping cost by transloading at the various ports which will save us more than $300,000 a year and in our factories we are putting new operating procedures in place to further increase our yields.

Finally, we are evaluating our seed development and planting strategy in conjunction with our recently acquired Bulgarian operation so that we are more closely aligned with the demands from our customers all over the world. The harvest is much later this year and, as a result, the impact of new crops will be realized much later in the year versus what we experienced last year. We are building a sustainable global platform based on marketing competitive trends and should therefore see significant improvements in 2014.

Now focusing on our Ingredients Group, we realized solid revenue growth of 20% versus the third quarter last year and increased operating income although operating margin remained relatively flat. Performance in the fruit side of the business continued to be ahead of our expectations while somewhat lower in the fiber business, which means we continue to experience underutilization [in sunflowers and] fiber plants.

We believe that our cost controls in this segment remained top priority. Ultimately we have to attract new customers with new application for our current product as well as new ones. It is encouraging to note that these new customers and applications are now offsetting the continued weakness in the cereal and bakery categories which have been our traditional strongholds.

Overall, we have a good platform in our Ingredients Group and are optimistic about our longer term potential.

Turning our attention to the Consumer Products Group, we also realized increases in both revenue and operating income vis-a-vis the third quarter last year. Revenue in the Consumer Products Group increased 14% and our gross margin is now north of 7% while operating margins are at 1%.

The target is for operating margins to ultimately be above 10% when we realize all of the benefits on ongoing investments. While we are not quite able to repeat the performance of the second quarter of this year due to the timing of several promotions, which I mentioned in the last update, we expect that the investments in our business will lead to continued top and bottom line growth also in the short term. After all, the natural and organic category we participate in are by and large continuing to grow and we aim to get more than our fair share of this growth.

The [IQF] Frozen Foods business continues to outperform our internal expectations and revenue was up 14% on the year-over-year basis. We remain optimistic for this business as we continue to look at new products and customers to fill the land capacity.

As I reported last time, we had planned to bring our San Bernardino, California, refrigerated premium juice facility fully online in this third quarter. Unfortunately, delays in both the arrival of the equipment as well as government permits have led to timing setbacks which contributed to sizable margin losses at the facility which, therefore, also had a negative impact on our overall consumer product operating margins in the quarter.

We have continued to work through these efforts and now expect these costs to extend through the full fourth quarter and into the first quarter of 2014 as the facility is brought online.

Finally, in our healthy snacks business, we saw increases in both revenue and margin versus the same quarter last year. We expect this growth to continue and Q4 should be the strongest of the year for both fruit and protein. We are pleased with our progress in this area of our business and it is evident that our cost control paid off and that they have led to improved operating margins. Looking ahead, we will continue to innovate to drive revenue and margin growth in these categories.

In conclusion, our Consumer Products Group continues to grow double digit from a revenue standpoint and we anticipate incremental margin improvement to accelerate as more of our capital investments take hold to either drive more output with the same SG&A or improve our efficiencies. This is the 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 long term.

Finally, our International Foods Group revenue performed well with an increase of approximately 15% as demand remains strong in the North American business, while trends in Europe are improving. The increase in revenue was not matched by a similar increase in margins. One of the key factors was a startup interrelated inventory buildup for our cocoa factory. We built up stock in order to feed a new cocoa factory and in the meantime the price of cocoa has soared to new heights.

Of course we hedged our cocoa position, but until we sell our inventory, we are required to report mark-to-market adjustments to reflect unrealized losses of these hedges. The cocoa facility has now been commissioned so we expect to unwind our hedges over the coming quarters. [As properly assigned] on global customer juice and an overall improving economic environment in Europe, we remain optimistic in our ability to continue to grow our revenue and margin in this segment.

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

Thanks, Rik. In closing, we continue to believe that interest in healthy eating is a long-term global trend and feel we are well-positioned to capitalize on future industry growth. We remain committed to our three core strategies of one, becoming a pure play natural and organic foods company; two, aggressively growing our value-added ingredient and consumer products portfolios, and three, leveraging our integrated platform.

Through our continued growth and realignment initiatives, we are progressing on these fronts and we remain committed to reviewing all options as it relates to our noncore holdings and to maximize shareholder value and in doing so, create additional capital that can be reinvested in our global foods platform.

To conclude, we believe we are taking the necessary steps that will position our Company well in the growing healthy foods space. Our team, which includes recent key additions, is working to consistently manage the controllable aspects of our business and to progress on the execution of our core strategies.

With that -- and I apologize for the frog in my throat -- with that, I will turn the call over to the operator for questions. Operator?

(Operator Instructions). Christine Healy, Scotiabank.

First question is on the Consumer Products segment. Can you talk about how the Allentown plant has been performing in the fourth quarter? Is it ramping up as planned, are volumes being taken up and where would you expect that those additional two lines could reach capacity?

Yes. In the third quarter you mean and --

Sorry, in the fourth quarter because you just put it online in the third, so how is it doing since commissioning?

Okay, so, since commissioning it is doing well. We are now about 75% full and on the four lines that we have there. And so we -- and we have a new customer and a new category coming on board in Q4. So we expect to continue to fill up these lines over the course of the next two quarters, I would say.

Then in the International segment, you mentioned that you are seeing some good trends in Europe. Can you speak to that? Are you seeing the levels get back to pre-downturn levels or is it more gradual than that?

It is a bit more gradual, but in the third quarter they have seen significant growth and what is encouraging to see is that in Europe we have been able to make some deals for next year that we haven't done in the last two years. So old customers are returning, so to speak, and that is encouraging to see, especially one of the key markets -- our biggest market in Europe is actually Germany and that one seems to be turning around the most.

Okay, so is your expectation that you should be able to see good demand for your new cocoa plant in Europe?

Absolutely. In Europe and as well as in the United States, in fact. So, we do have some customers also in the United States, but the majority of that will indeed be sold in Europe.

But and again, we have made a lot of investments in our cocoa facility and in the Bulgarian sunflower facility internationally. Those obviously will not repeat in the next year, so we should see improved margins as well.

Great. Lastly, probably for Steve. In Opta Minerals there's some negative headlines early this morning that they breached some financial covenants. So, just wanted to confirm with you that that debt is fully nonrecourse to SunOpta.

Yes, Christine. They did breach their third-quarter covenants. They have a waiver from the bank and they are in the process of putting an amendment in place going forward. And so, I think everything is under control there and, yes, it is totally nonrecourse to SunOpta.

Great. Thanks.

Tim Tiberio, Miller Tabak.

Good morning, everyone. Can you maybe give us a little bit more background of what is happening at San Bernardino? And did you have contracts and customers that were committed there ahead of this announcement? And how will that potentially play out both on the customer sourcing side and then in resolving the ramp issue?

Yes, so first of all, if I take the second part of your question first which is the ramping up. So we had expected to start off this facility in the third quarter of September basically. The first impact that we had was equipment delivery delays, because they are coming from overseas. And the second part is that we have permitting issues as well. So that is causing a significant delay.

Now when you look at this facility, it is made up of two parts really. It is the extractions. So we start with oranges, organic oranges, I would add, coming from Mexico and places in Southern California and the bottling side of it.

So, the major part of where we can -- the unique element of our facility, if you like, is on the extractions side. And that's -- and so until we get that online, and that we now expect to happen in the first quarter of 2014 but that is when we will start making money. So we have the extracting customers lined up. We also have the bottling customers lined up, but without the extracting, there's not much sense in bottling a whole bunch of customers because it just leads to incremental costs.

Is there any cost related to your commitment to customers if you can't actually ramp those in the targeted timeframe? I mean, how is that working on the customer relationship side?

I think on the customer relationship side, we are fine. We are continuing to service our customers, but when you only have a small part of your factory open, with a full factory overhead, that is really what is leading to the losses that we are incurring over there. So we are fulfilling all of our commitments at present and that the real, as I said, the real bang for our buck comes once we are able to open the extraction side of the plant.

And maybe it would be helpful just for certainly 2014 expectations, and what type of EBITDA run rates would you be expecting from this expansion once you are at full run rate?

I think if you are looking at the -- if you are looking on an annualized basis, once this plant is up and running, we would really expect to see operating income of around [600, 700] and EBITDA obviously then --

Yes, EBITDA is generally about two percentage points higher on average above our operating income. So you would be looking at a ramp-up but we can see the trajectory in that business fit into our overall target of the Consumer Products Group of gradually getting to double-digit EBITDA percentage.

NOI.

And it is ramping up through the course of next year, right? So, next year is not going to be a full deal.

One follow-up question on Opta Minerals. I would assume that this is delaying your thought process on a full divestiture at some point. Maybe you can just give us an update now that this news is out on the debt covenants.

Yes, so, it doesn't change our position on the business at all, Tim. I have been pretty consistent that we wanted to see it -- see this business through the end of the year and see the full benefit of the integration of their recent acquisition, et cetera, which I would assume you haven't noted, but they have now completed the integration of [WGI] which was the latest acquisition. So their spending on that now is behind them and they have the savings.

We have been pretty consistent around the fact that we wanted to see that completed and see that get into their run rate, and then we would be -- we would look at moving forward. None of that has changed.

Has this moved it around by a couple of months? Sure. But we are still very consistent about our intentions and I wouldn't call them long-term intentions, because they are not long-term intentions. They are intentions that we intend to move forward.

The exact month I wouldn't quote to you, but nothing has changed, nothing.

One last question before I had back over. As far as the timing of line five and six in Allentown, you mentioned that you are roughly 75% full on lines -- four, for the first four lines.

Any thinking as far as the timing of that in 2014? Are you starting to actually go out and contract new business for those lines? Maybe you can provide a little bit more color there. Thanks.

Yes, we are. Of course we are continuously looking for more business. We have more room in that facility and we fully intend to fill that facility up over the course of 2014.

Now as we don't own our own brands, as you know, we are obviously contracting business with retailers as well as with brand owners, and so we are also a little bit dependent on their appetite, if you like. But we think that the pouch is still in its very, very early ramp-up stages in North America. And if you compare it to any other region in the world, this format is really way, way under its normal market share so we should continue to see growth in that format.

I think importantly it is also for us, you know, we have a lot of our current volumes are in one category and I think that is the one category that we see the most penetration of these pouches on today, which is in baby food. As we go out and contract more volume, we also want to make sure that we get our spread across multiple categories. That is good for us and that is good for the pouch.

All right. Thanks for your time, guys.

Mitch Pinheiro, Imperial Capital.

Good morning. Steve, can you talk maybe broadly about your -- the cost of goods inflation outlook for the next quarter and into 2014?

General, sort of a large grain commodities, Mitch, or the prices are in decline versus 2013 prices if you will.

The drought crops.

Sort of the -- yes, the drought crops. So, corn and soy are down in price, so that is inflationary. We also see some deflation in some of the smaller grains. Then you see things like cocoa, organic cocoa way up in price.

Rik, what else is way up? There's one more that --

Chia and quinoa are way up and then coffee is at an all-time low.

And coffee is at an all-time low. But I would say generally deflationary versus inflationary.

And is any feel for -- can you put any sort of range of percentage down on that, relative to 2013?

It varies by crop and so -- John, can you think about an overall percentage (multiple speakers)?

It would be hard to say (multiple speakers) on a specific basis overall because each crop is dependent on --

And then traditionally, Mitch, as well, the organic and non-GMO crop don't move off step with the conventional crop. So the decline would be less on those that are more supplier-restricted.

How about -- could you also explain on the sunflower business you sort of -- with the later harvest, and I guess I don't know how the supply is looking, but you said that you should see significant improvement in 2014. How does that come about?

Well, I think overall the cost of the raw material that will be coming off the field here this fall is lower than the previous year. So, as well, we have made investments and changes in our processing capabilities that will improve our processing yields. So net, net our expectation year over year is that we will see some improvement in the spread between sell price and cost, but at this point only about 10% of the crop is off the field.

So, we could have some muting of our expectations, depending on when the crop is actually harvested and what the ultimate yields are.

But we will also expect to have less small seed this year.

Correct.

Given some of the growth we see -- .

This last question is on fruit. Can you -- it was ahead of plan, you said, in the quarter. What's driving that? Can you give a little more color around that business? And when you talk fruit is that including your frozen?

No, when we are talking fruit ingredient, what that really is, is on the one hand side when all of your Greek yogurts that have the food on the bottom, we are supplying a lot of that. It is basically on the branded side as well as on the private label side and, obviously, mostly located on the West Coast since that is where our plant is. So that is the fruit ingredient in -- for the food and dairy industry. That is growing quite nicely and we are doing a fantastic job as, by the way, evidenced by a press release that came out from IHOP as well as from ourselves where we were made Vendor of The Year by them.

So that is also a very important and growing part of our business, which is the food service side of things.

How about on the frozen fruit side?

Yes, on the frozen fruit side, most of what we do is actually on the private label and think about all of the natural and organic private labels that you are seeing out there. And there again, we have that is where we actually no longer really participating in the food service side, but much more on the retail side we have done significant operation through our facility over there and when our -- we have now actually as of last week we are SQF 2 certified there now. So now we that means that we can also go more aggressively after other bids that makes sense to us.

Are you matching the growth? I mean, we are seeing the whole frozen fruit category retail up in the mid-teens. Are you seeing that type of growth in your private label customers?

Yes. As I mentioned, I think during the remarks the frozen food business and this is really the first quarter that you can have a clean comparison to prior year because we exited the food-service business. And this quarter frozen fruit's up 14%.

All right. That is all I had. Thank you very much.

Chris Krueger, Lake Street Capital.

Good morning. I know there is a variety of start-up costs with your growth initiatives and your expansions, particularly the aseptic and cocoa and the juice facility. Which of these expenses are going to carry into the fourth quarter and into the first quarter?

As Rob commented on, the cocoa plant is now conditioned. So we are -- we will have some small trailing cost on the cocoa plant as we get into the fourth quarter as it was commissioned right at sort of on the border of the two quarters. I mean the biggest part of the cost that we experienced and which Rob talked about was this unrealized cocoa hedging loss mark-to-market loss on the hedge that we had. That comes back over the next couple of quarters as that inventory is moved.

So, that is temporary and we won't experience that again. There will be some cost, but don't look for the cocoa plant to be material at least not at this stage of the game. We don't see anything.

The aseptic lines are up and running now and as Rik had mentioned in his comments, so there's nothing more to come on those, same with the pouch lines. They are all up and running. And we had these integration costs at Opta Minerals by integrating WGI and they should go away. They are done now.

The one that will carry over and as we indicated in the press release and as Rik indicated in his comments, will carry on for the next quarter at least and then ended 2014, based on the timing that we are seeing for the project now or the cost at San Bernardino for the premium juice facility.

So to answer your question, sort of the major is going away, all of those are going away with the exception of costs that we will have at San Bernardino.

Okay, kind of on the same note, are there expansion plans for later in 2014 in place yet? Like more pouch lines or anything or is that too early to say?

No. Go ahead, Rik.

Yes, we are obviously right now in the middle of our final budgeting process, but it is fair to say that the budget for 2014 will definitely include further expansion plans on our Consumer Products platform and as well as on our Ingredients platform where that makes sense. One of the smaller expansions that we are currently undergoing is, for example, [the main] ingredient site is on the [bill form] business. That has seen very, very good growth and we just want to keep up with that growth.

Being driven by demand for non-GMO.

Yes. So, will we continue to further expand? Absolutely. Where will we expand? It is going to be in Consumer Products and Ingredients and that is consistent with our strategy of continuously wanting to move up the value chain, if you like.

But, to put it all into perspective, when you think about this year, we at one point in time we had pouch lines going into Allentown. We had the cocoa plant being built. We had three aseptic lines going in and the new processor going in, and I am missing a couple of other things. And San Bernardino underway and there was a fifth budget which I just -- sorry, off the top I can't remember.

Do we expect -- it would be wonderful to have the demand to have to be proceeding at that pace, but we don't have in our budget because we do have some capacity that has now been built that we can sell through. So should you expect more -- more filling lines next year? Yes. At the pace that we have added them in this year, that would be great, but I think we have got capacity to fill here which is the good news.

One last question on the San Bernardino facility. How big is that business as far as whether it is in terms of units or sales or percent of group sales or something like that?

When fully in line and operating near good capacity levels, it will generate around $30 million in revenues. It is less than $10 million right now and, of course, because of what we are doing and being shut down it is even less than that right now.

That helps. Thanks a lot.

Scott Van Winkle, Canaccord Genuity.

First question is a lot like the last one, but related to cocoa. You had some one-time costs here in cocoa and juice and others. How significant a business is cocoa? Is it on the order of where you are today in premium juice?

Yes, I would say so. I think it is a little bit bigger than that at the moment, but obviously we have expectations of being able to get that to grow further, Scott. And the main reason being and it is consistent with our strategies, we used to sell the raw beans or had the cocoa from somewhere else. Now we are taking in the raw beans and processing it ourselves. So, we see significant growth for that category going forward. Especially because there's -- even if you go to grocery stores in North America, you all of the specialty chocolate makers actually growing as well.

I apologize if I missed any commentary on gross margin. Was there any mix-driven margin shift, gross margin maybe towards more a higher percentage of sales being less processed raw materials or is it the same thing we have seen over the last couple of quarters on the gross margin?

I think on the gross margin side, the -- if you look at our international raw materials they were impacted obviously by this cocoa. So that basically led to them because that is really a cost of goods issue there. So that has really impacted their growth margins.

And I think, on the raw material side, obviously, that's been impacted by the sunflower which we talk about all year. But also realize that we are now coming out of our inventory position that we had at the end of the drought year.

So, on the sunflower has been ongoing. But if we take out the sunflower issue and take out the hedge loss, which I assume is right in that cost of goods sold, was there any gross margin --? I guess what I'm asking is, was raw materials as a percentage of your sales, I guess going towards your future disclosure, was raw materials as a percentage of sales, was it higher and therefore mix drove a little pressure on gross margin, too?

No. There's not so much of a mix more than the costs that are putting pressure on the margin. If you look in top line and mix across our various components, that was not very influential on driving the margins down. It is more about the costs we've mentioned.

Got you. Then, Steve, in your opening comments you talked about realignment of the business. Can you go further into what SunOpta looks like in 2014 as we focus on different segments?

Yes, sure. I appreciate the opportunity to do that. So, our business model is based on an integrated platform. It starts with raw material sourcing and supply. And those raw materials are both used internally proportionately sold externally. The internal are move through and transformed into value-added ingredients which are sold externally or used internally and moved right through into Consumer Package Products. So as we describe our business and really what our business model is, is we are an integrated processor of natural and organic foods integrated from raw materials through ingredients and into packaged products.

For those who have known the business for a period of time, we have had various operating segments. And today we operate in four operating segments, Grains and Foods, Ingredients, Consumer Package Products and International. What there is in all of those business units, well, not in all of them, but across those business units is a lot of overlap. In grains and foods they do raw, they do ingredients, they do consumer package. And as you move through the different businesses, they do various components of our model.

What we have done, Scott, is realigned the business around raw material sourcing and supply, around ingredients, and around consumer package products. And it is really based on the customer.

So, for customers that are buying consumer package products, we now have a very much more streamlined go to market to provide our entire portfolio of products to a specific customer. And that model may -- simplifies our relationship with the customer, it also simplifies our internal operations and streamlines how we go to those particular customers. And the groups now have greater capacity to focus on their slot in our supply chain.

And so what we have been doing is realigning all of the management structures, realigning our reporting systems, realigning our go-to-market strategy, realigning our marketing. And we started this process really over a year ago and we are now to the point where we have changed and are now operating in a new leadership structure in these segments. And we believe that that will drive much improved performance across the organization.

In hand with that, we have added new internal resources to support those new operating segments. So we have a new Senior Vice President of Operations whose full job is around costs, quality, delivery and safety. We have a new Chief Information Officer who is all about the information that these groups need to operate effectively. And so we have added support resources where we thought it was really important as we take our existing operating resources and get them realigned.

The nice byproduct of that will be commencing this quarter. We will report in those new segments. So for people trying to understand our business, that will be greatly simplified because we talk about our raw material sourcing and supply segment, that is how you are going to see reported. When we talk about consumer package products, you are going to see all of our consumer package products.

So where all of the aseptic business was sitting in grains and foods and then we had a consumer products business, we have now completed that realignment under one management structure. So we are [now] allowed to report the new segment in that manner. I think it will simplify for everyone and we will report that way in the fourth quarter and we will issue an 8-K at the right time to go back and restate the historical, so all of our users can see that information in a consistent format.

So it is a big undertaking, Scott, across the organization. We have invested in it. I mean, we have had a lot of project management and extra IT resources here to help us, but we are well along the way and operating in the new segments and we are really excited about it.

Great. Then, take all that and roll it into centralization. I always thought of SunOpta historically as being relatively decentralized with presidents running your segments. Is the SunOpta that starts this quarter, is it more centralized than it was in the past?

Yes, absolutely. And just to put it into perspective, Scott, over the last call it 18 months, we now have centralized and standardized shared services. So all of the administration across the organization, which was spread out, is now centralized. Our human resources group is centralized. Our information technology group are centralized and provide services across all of the businesses. Any of our financial components are now centralized. I mean there's still financial people in the operating plants because they need to be there for costs and that sort of thing.

And then as you take a look at the go-to-market -- and by the way all of the operating facilities report to one person. So they are becoming -- you can't centralize the operations, but you can certainly standardize them. So there has been a massive push underway to do that.

And then our go-to-market resources, while not centralized, are much more standardized and aligned within the operating groups. And those three food operating groups are report to Rik who --

As well as the operations.

As well as the operations all report to Rik and so they are under direct control of one person. So what we are really attempting to do is gain -- and you know our third core strategy is to leverage the platform. This is all about leveraging the platform. And we believe and I don't want to commit to this, but as we get better at doing this, it is going to free up resources to focus on the customer at a much more enhanced manner than we have been able to do in the past.

Great. Thank you very much.

Keith Howlett, Desjardins Capital.

I want to make sure on the juice business, longer term, I know it is ramping up, it's thought it could be a $30 million business at a 10% EBIT margin. Is that the objective, roughly speaking?

Yes.

And in the cocoa business, I was trying to -- I guess you have got a bean business and now you are going to be processing some beans. So what would be the size of the bean business and are you intending to process 100% of those beans?

So, it just -- and I am going to let Rik handle it, but Keith, just to be clear, we have had a cocoa ingredient business for some time with our international operations. We moved from just being a cocoa bean supplier, organic cocoa bean supplier to being a supplier of ingredients but we use third parties to do those.

And the challenge we had -- and it is a nice profitable growing business, but as our business got bigger, the availability of reliable co-processing for us became a challenge and we see good growth in this business. So we said, well, let's take the existing business and let's grow it.

So, that -- we have always been there. So I don't want to leave (technical difficulty) [the impression] all of a sudden we are just moving in. We have had these butter, powder and liquor, cocoa liquors for some time.

But now we see a real opportunity to grow now that we have our own facility because we have sources of supply. Rik, do you want to ---?

Yes, no, I think you answered it. But the only thing that I would add is I think we are unique in the world in terms of being an organic cocoa bean processor. There is nobody else that does that.

The only thing I would add is it is kind of odd maybe that it is built in the Netherlands for some of you. But from historical reasons, more than 60% of the world cocoa beans actually go through the port of Amsterdam.

So, if I understand right, you are internalizing a margin that was elsewhere, I guess, (multiple speakers).

We are internalizing margin that was elsewhere and we are taking the opportunity to get more margin by processing more than we were able to.

And right now if I understand it the business would be -- the cocoa business would be around $15 million. Is that correct?

I think that is right in the zone.

And on the hedge, you have to sort of pay for the hedge in advance, but will you get the benefit of the -- presumably the rising cocoa prices when you sell what you have in inventory? Will you not get it back, so to speak?

Yes. In essence, we've -- the whole point of entering the hedge was to give us some cost certainty on our long position in inventory. So that, as we sell through that inventory, we will realize some benefit there.

On the new segments, will you -- will it be -- show all the movements between the segments or will it be based on third-party sales from each segment?

Yes. We are going to recast for everyone via an 8-K what the new segments are. At this stage what you'll see is very similar to now we are not going to bridge the change for folks and I -- what you will primarily see is our external sales and not the internal moving parts, if you will, behind the scenes. But you will see the external sales for each of those go-to-market segments.

As you -- as we move forward next -- could you see providing guidance in the future or not?

We evaluate it every year and, as we get larger, it is a topic that we have all the time, but we are not prepared to commit to providing guidance. But I can assure you it is on our agenda.

Then maybe just lastly on the Opta Minerals, is it -- do you think it is the WGI it is mostly just a cyclical issue on the steel business and that anyone who might want to buy the business would be, would obviously understand that because they are in the business?

So I guess what I am asking, do you have to wait for results to improve or could you sell it because everyone who would buy it already knows that it is a cyclical business?

Sure. The strategics that are the buyers for this business all understand the cyclicality, so there's really not an issue there. People do understand that.

To your point -- to the point that you were asking, what has really caused some of the downturn in the business and it is twofold. One is the steel industry, which has been difficult this year and then the infrastructure business which uses a lot of the abrasives has also been challenged this year. Sequestration and reduced spending on military cleaning of ships and all that sort of thing has slowed that down. The good news for them is that be it a bridge, or be it a ship, it has got to get cleaned over a period of time so you can delay, but you can't stop it. It is got to get done or things start to crumble.

So, no, our strategics that would buy that understand the cyclicality. That is why I don't think we are in a position where we are going to wait for two years to let this cyclicality wash its way through.

And do the two components, the two segments of Opta Minerals, are they typically found together amongst the prospective purchasers, do you think?

Yes and no. There are some that do both, but more of the buyers would be really dominant in one or the other. They are complementary so they can certainly reside well together and there are some that do both. Some strategics that do both and would do more and more categories, then there are others who are primarily focused on one. But having the other is complementary.

Great. Thanks very much.

Brennan Matthews, Northland Securities.

I was just wondering, given the late crop this year from soy and corn, are you expecting quantities to be sufficient and do you expect any extra milling and drying costs?

Well, first off, what we said from the beginning is that in some of the growing areas that we grew in there was late harvest and in some areas there was -- they went to prevent plant or they didn't plant [well]. And so not all of the acres that we had contracted for got planted. And what we said from the beginning is that is why we have an international sourcing platform and we will utilize that international sourcing platform.

At this stage of the game there's no problem in doing all the value-added products that we do. But inevitably depending on how our sourcing goes on an international basis, we may have a little less to sell as raw commodity which is our lowest margin business. And, again, we may have -- it depends on how all of the global sourcing and growing that we have going on in other areas plays out, but we are not in a -- not being able to supply situation on soy, corn and that stuff.

And I'm sorry, Brennan, the other part of your question was --?

I was just wondering if you are expecting any extra milling or drying costs.

John, how have the [moistures] been? I think that they are pretty --

Yes, they are a little bit elevated, but it is not dramatic. Corn and soy are just pretty much all harvested at this point, and both yields and quality were good to average so we don't see any issues there. And sunflower is the last crop to be harvested and that is coming out of the fields now.

So time will tell on that one, but we should know on that one in a couple of weeks.

All right, fantastic. Thank you very much.

(Operator Instructions).

Operator, do we have any other questions?

One moment, please.

Operator?

(Operator Instructions). (technical difficulty), private investor.

Good morning. I have followed your company since early 2004. I think I bought stock in the first quarter and I could buy for the same price today. I will level with you guys when you are pushing beans around the upper Midwest and at one point I thought you had a clear field of opportunity. At that time the soy milk movement was getting off the ground and hold through its fresh market, buy locally, organic and you guys were in a sweet spot. Like, what is with these conference calls or whatever on and off, on the stock on and off, all that time recommended the stock to several other people and where do we sit today?

It is ongoing. It is always something. The contract in Spain with the biomaterials, the berries in Oregon.

Now I just can't believe -- it is hard to understand and I listen to this jargon about going to re-organize and going to restructure. They just did this in the last 18 months. I have been listening at this since 2004.

I just don't get it. Why you can't focus -- cocoa in Holland and something in Bulgaria or Hungary or some damn place. Why can't you just focus on what you have that is clear on your plate right in front of you and make it work? (multiple speakers).

And the people on the conference calls year after year come and go. They get a new crop of people. You have got this theoretical opportunity, and some people think your stock is worth $30. If execution were done right, I firmly believe it. What is going on?

Sure. Well thanks for your comments. A couple of things that

Yes. I will bet you are thanking me for my thoughts. (laughter)

I am. A couple of points that I would make and certainly we are more than willing to further the discussion (technical difficulty). The reality is --

No, no, I have made my case. It is up to you. It is up to you guys.

That's fine. If you would like a response I am more than happy to respond.

No, I don't need a response. It is more -- it is not a question. It is an observation.

Okay. Thanks for your comments, Sir.

Thank you.

I show no further questions at this time and would like to turn the conference back to Mr. Steven Bromley.

All right. Well, on that note, thanks everyone for joining today. I appreciate you joining the call and we look forward to talking with everybody over the next quarter. As always, if you have any questions please feel free to give us a call. Thanks, have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.