SunOpta Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 8.13 | About: SunOpta, Inc. (STKL)

SunOpta (NASDAQ:STKL)

Q1 2013 Earnings Call

May 08, 2013 10:00 am ET

Executives

Steven R. Bromley - Chief Executive Officer and Director

Hendrik Jacobs - President and Chief Operating Officer

John M. Ruelle - Chief Administrative Officer, Senior Vice President of Corporate Development and Secretary

Analysts

Peter Prattas - Cantor Fitzgerald Canada Corporation, Research Division

Christine Healy - Scotiabank Global Banking and Markets, Research Division

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Chris Krueger - Northland Capital Markets, Research Division

Scott Van Winkle - Canaccord Genuity, Research Division

Keith Howlett - Desjardins Securities Inc., Research Division

Ron Reuven

Operator

Good morning, and welcome to SunOpta Inc.'s First Quarter Fiscal 2013 Earnings Conference Call. By now, everyone should have access to the earnings press release that was issued after the close of business yesterday. If you have not received the release, it is available on the Investor Relations portion of SunOpta's website at www.sunopta.com. This call is being webcast, and a transcription will be available on the company's website.

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

And now I'd like to turn the call over to SunOpta's CEO, Steve Bromley. You may begin.

Steven R. Bromley

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

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

On the call, I will provide you with a brief overview of our first quarter 2013 financial results and status of our key strategic initiatives, then Rik will provide an update on our segment operational developments and finally, I will provide a few closing remarks and then we'll open up the call to questions. Please note that unless otherwise mentioned, all figures discussed today are in U.S. dollars and are occasionally rounded to the nearest million.

We are pleased with our first quarter 2013 financial results, which were in line with our expectations. Our team continued to execute on our core strategies to leverage our integrated platform and to increase our value-added packaged foods and ingredients portfolio to grow sales, operating margins and profitability long-term. We increased revenues approximately 9% to a record $283 million, and this is on top of what was a record first quarter last year with $259 million in revenues. As we expected, the extremely dry conditions in 2012 influenced the volume and quality of grains-based product available for sale in 2013. Even so, on a like-for-like basis, our internal growth rate for the Food Group was 7.5% and 6% on a consolidated basis. The increase in consolidated revenues was driven by strong demand and increased prices for organic grains and feed products, continued growth in consumer packaged categories, including aseptic non-dairy beverages in resealable pouch products, as well as higher sales within Opta Minerals as a result of recent acquisitions.

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

On the positive side, we're pleased to see that our Consumer Products Group improved significantly in the first quarter and is now close to breakeven with an 80 basis point lift in operating margins versus Q4 of 2012. The Ingredients group turned the corner as we anticipated and realized operating margin improvement of 210 basis points versus Q4 of last year.

And finally, the Grains and Foods group had another strong quarter driven by organic feed and integrated aseptic non-dairy beverages.

However, similar to what was anticipated, our margins were impacted by crop quality associated with the drought-like conditions experienced in 2012, especially on our sunflower crop. Also, as we previously indicated, we did incur a number of expansion costs which impacted the operating margins in Consumer Products and International Foods. What we did not anticipate was the delay in our agronomy sales, the seeds and relevant inputs for growers. And that was as a result of inclement weather in the majority of our growing regions in the U.S.A. This impacted our operating results versus the prior year by roughly $800,000 before tax. Fortunately, this is merely a timing issue which should be recovered during the second quarter.

Earnings for the first quarter of 2013 were $5.1 million or $0.08 per diluted common share as compared to $5.9 million or $0.09 per diluted common share during the record first quarter of 2012. The effects of discontinued operations were not significant during the quarter. However, earnings for the first quarter included approximately $1.2 million in pretax severance, acquisition and start-up costs or approximately $0.7 million after tax and minority interest. As I mentioned, these costs related primarily to continued investments. To be a little more specific, investments in our Consumer Products Group where we incurred costs of approximately $600,000 related to the installation of our third and fourth pouch lines in Allentown, Pennsylvania, and the retrofit of our premium juice operation in San Bernardino, California. In the International Foods Group, we incurred cost of approximately $200,000, related to the commissioning of our new cocoa processing facility in Holland.

In addition, acquisition and severance costs with the purchase of -- relatable to the purchase of our Bulgarian grains processing facility acquired early in the first quarter and severance and other cost primarily of Opta Minerals as they integrate WGI, amounted to approximately $400,000.

Now focusing on a few balance sheet highlights. We ended the first quarter of 2013 with total assets of $715 million and a net book value of $5 per outstanding common share. Total debt outstanding net of cash was $193 million, an increase of $17 million compared to December 29, 2012. The increase in debt in the first quarter is a normal trend for our company, as we generally pay for our product harvested late in the previous year during the first quarter. Even so, our net debt to equity remains well within our target range of 0.58:1, with roughly $100 million within our current debt facilities available for funding incremental growth projects, both internal and through acquisition.

Before I turn the call over to Rik, I would like to once again reiterate our 3 core strategies, which form the basis of our ongoing initiatives. One, to focus our development efforts on becoming a pure-play in natural and organic foods company; two, to aggressively grow our value-added packaged foods and ingredients portfolio; and three, to leverage our integrated platform. We are progressing in all these fronts and truly believe that we are well-positioned for the long-term.

And with that, I'll turn the call over to Rik to discuss our segment operational performance in the first quarter. Rik?

Hendrik Jacobs

Thanks, Steve, and good morning, everyone. In the first quarter, we remained focused on our strategy to expand and enhance that Consumer Products and Ingredient capabilities. These efforts have enabled us to generate improved margins in the Consumer Products and Ingredients segment versus the fourth quarter as Steve already mentioned. And as for our longer term strategy, we believe these categories offer the strongest growth and profitability potential for the company, and we will continue to invest in these areas going forward.

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

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

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

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

With the industry experiencing poor yields, the sunflower byproducts market has been flooded, so it has become a buyers market. Just as an example, bird food, a byproduct of our sunflower operations now sell for $0.25 a pound, while last year the price was around $0.32 a pound, a decrease of more than 20%.

The good news is that we're seeing the market for sunflower kernels, a key sunflower primary product, begin to increase due to a lack of supply.

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

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

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

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

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

On an absolute basis, pouches have taken the crown with a revenue increase of more than $5 million versus last year, mostly from our newly opened Allentown facility. The installation of 2 new lines should be complete early in the third quarter and as with our aseptic lines, we've already been able to contract some volume for these new lines. Again, importantly, the new contracts will expand our presence in new categories and with new customers.

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

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

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

In conclusion, our Consumer Products Group as a whole performed to expectation, and we have seen margin growth from Q4 of last year, and the group is now above breakeven if we exclude the start up cost of 600k that Steve mentioned earlier.

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

And finally, our International Foods Group continued to experience softness on the European side of the business, almost completely offset by strong demand from the North American business. However, the operating margin in Q1 also include startup costs for our cocoa facility, as well as margin contraction in the specialty coffee market, which is the result of a dramatic drop in worldwide coffee prices. With new crop coming in, we are starting to see the situation improve. Within the quarter, these 2 items combined, for a hit of about $500,000 to the group's operating earnings. We just visited the new cocoa facility on Monday and are excited about the prospects that this new venture will bring as the facility will allow us to exert greater control over product quality and provide us with the ability to enhance margins through further integration.

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

Steven R. Bromley

Thanks, Rik. As anticipated, the first quarter of 2013 included growth across our key product categories, and we're pleased with our overall results and remain optimistic that we will enjoy another record year. Going forward, we will continue to focus on our portfolio of natural and organic food offerings and are actively involved in a number of internal growth projects, as well as potential acquisition opportunities.

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

As I mentioned earlier, we remained focused on our 3 core strategies. One, to focus on becoming a pure-play natural and organic foods company, to simplify and streamline our business model for our customers and shareholders. Two, to aggressively grow our value-added packaged foods and ingredients portfolio to fully utilize our integrated field to table capabilities and offer improved margins as we add more value to customers. And three, to leverage our integrated platform to drive improved operating margins.

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

For example, despite Proposition 37 being narrowly defeated in California, there are now new efforts in several states that support the mandatory labeling of genetically modified engineered foods. And as many of you will know, Whole Foods Market announced that it will require GMO labeling in all of its stores within 5 years. In addition, we believe the introduction of the Genetically Engineered Food Right To Know Act will also be a potential catalyst for our industry. And so, we at SunOpta feel strongly that our business is well-positioned with the right products and people at the right time for future growth in the natural and organic food industry and are optimistic that 2013 will be a great year.

In closing, our confidence comes primarily from 2 areas. One, we're well positioned in the growing healthy food space; and two, we're making good progress in executing on our core strategies which will allow us to capitalize in this fast-growing market.

And with that, thanks very much for joining us on the call today, and we'll now turn the call back to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Peter Prattas of Cantor Fitzgerald.

Peter Prattas - Cantor Fitzgerald Canada Corporation, Research Division

As you forewarned the yields on the soy and sunflower did impact you through Q1 and I'm just wondering, are you almost through that now? Or how long does that continue to play out for before you're through those batches and we see things normalize?

Steven R. Bromley

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

Peter Prattas - Cantor Fitzgerald Canada Corporation, Research Division

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

Hendrik Jacobs

We are still on track with the factory startup of July. As I mentioned, we just visited this factory on Monday and we're doing the testing of individual machines right now, getting all the certificates in place in July. And of course, we will first of all move our own products over there, so we already got a lift on the roughly 3,000 tons of product that we do already today that we're currently having contract that somewhere else. So we'll get that initial lift. And in the meantime, since we are the only factory in this important cocoa processing area in The Netherlands, that is purely focused on organic and other certified cocoa products, we think we can attract a lot of other volume from around Europe for that. That will take some time.

Peter Prattas - Cantor Fitzgerald Canada Corporation, Research Division

How big is that revenue-wise right now?

Steven R. Bromley

EUR 15 million?

Hendrik Jacobs

Yes.

Steven R. Bromley

Approximately around EUR 15 million.

Peter Prattas - Cantor Fitzgerald Canada Corporation, Research Division

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

Hendrik Jacobs

Well, I think, if you look on the fruit side, we are already seeing the affects over there. I mean, we're seeing double-digit growth and that double-digit is starting with a 2, so that's very, very good. It's in the food service business, it's in the yogurt business, which are the core categories of the food ingredient side. On the fiber ingredient side, we are continuing to explore new areas, and with the ball milling equipment, we've actually broadened, as I mentioned the array of product not only in bakery, but now also in meat, that's beyond and beyond. So fruit, very, very positive trend to continue Q2 and Q3. Fiber, we're continuing to chase the herd as I mentioned, and -- but we feel we're getting closer but quite honestly, I'm personally getting a little bit tired of telling you guys that. So we need to land 1.

Operator

Our next question comes from Christine Healy of Scotia Bank.

Christine Healy - Scotiabank Global Banking and Markets, Research Division

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

Hendrik Jacobs

I think to date, we probably -- and this is just an estimate right now, but we probably have about 10 to 15 different customers over there. But we have -- but it's very, very much dominated at the moment by the baby food category, right? That is the vast majority of what we do. Some of these new customers that we're bringing on board right now will take us into new categories, and I think I'm not at liberty to say right now what that is because they are yet to launch but that is exciting. And this baby food by the way continues to grow. If we look at our current, Allentown, we are having to run on Saturdays over there to just keep up it's production so some of that contracted volume is actually with current customers, but we're bringing new ones on stream as well.

Christine Healy - Scotiabank Global Banking and Markets, Research Division

And could you give us an idea on the magnitude of how much you've already precontracted?

Steven R. Bromley

This is on 3 and 4.

Hendrik Jacobs

The line 3 and 4. Let's put it this way, I think that 3 is pretty much full. So 50%. And with this -- by the way, I mean, when we install -- have new capital investments, like whether you talk about the aseptic or whether you talk about pouches, the way we obviously like to do is to fill at least 50% of that capacity so that we can get a very decent return initially already on our capital. And then it goes up from there. So on the aseptic side, it was also 50% when we started and I think it's beyond that now.

Christine Healy - Scotiabank Global Banking and Markets, Research Division

And Rik, can you remind us when is the line 3 and 4 going to be commissioning?

Hendrik Jacobs

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

Christine Healy - Scotiabank Global Banking and Markets, Research Division

Okay. Great. Okay, and next, I wanted to touch upon your Canadian growth strategy. There's a report that came out last month saying that Canadian organic food sales have tripled in the last 6 years. So this is far outpacing the growth in the U.S. right now and is expected to continue. So how can SunOpta take advantage of this growth in Canada? Can you do it with your U.S. operations? Or do you guys have plans to add some plants in Canada? Or do some acquisitions here? If you can talk about that, that would be great.

Steven R. Bromley

Yes, sure. So, look, we did have a really large presence in Canada, which was on the distribution side of natural and organic foods, which we sold off and are no longer in. So today, the bulk of our manufacturing operations are U.S.-based. You're quite right that the Canadian market is growing, it's a market that we're extremely interested in. Some of our products can travel to Canada and be cost effective, and that does happen on the aseptic beverages and pouches and snack bars and that sort of thing. But to your point, we are looking at the Canadian market. We are looking for complementary acquisitions that are complementary to our -- to what we have and to -- how we can also leverage Canadian facilities to serve certain parts of the U.S. So it's a big part of our strategy, not only from a business point of view, but from a tax efficiency point of view. There's a lot of reasons why Canadian assets make sense for us.

Hendrik Jacobs

But they have to be the right one.

Steven R. Bromley

They have to be the right ones, you don't do something just to save tax, you do it because it's the right business decision. But in making the decision about it being a good business decision, tax has come into play there. So that's also a reason. So it's high in our list, Christine, just have to find the right one at the right price.

John M. Ruelle

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

Christine Healy - Scotiabank Global Banking and Markets, Research Division

Okay. Just one last question for you guys, just, I want to get an update on the European situation. We all know that your sales have been weak in that market over the last, I guess, year, 1.5 years. Is the situation improving? Is it getting worse? Is it stable? I mean, if you can give us some color there, that would be great.

Hendrik Jacobs

Yes. I think that the situation is -- at the moment is fairly stable, so -- but, it's still, I mean, everybody's hoping for this euro crisis to go away, it isn't, new things keep popping up all the time. And I think what it's really leading to is insecurity in the market as a result of which, the buyers, if you like, that our International Foods Group deal with remain very, very careful. At the same time, we're seeing -- I mean, we're seeing pockets but then they're being offset by other pockets again. So you can't really say the entire business is down, I mean, some parts of the business here are way up and other parts are significantly down. The biggest one of that is what I mentioned already, is the coffee one. But if you have that Nymex, I think, going from $2,800 to $1,400 year-to-year on coffee, then that has also have significant impact on the specialty coffee market as well.

Operator

Our next question comes from Tim Tiberio of Miller Tabak.

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

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

Hendrik Jacobs

Yes, I think we said in the past and that is true and that is how we are tracking at the moment. When you have the first 2 lines filled, you are definitely breaking even, and you're covering all of the costs that that the facility is generating. As you start adding more and more lines, you obviously improve your operating margins, and with 3 and 4 up and running, 5% should definitely be doable. But if you look at the facility and you go through the facility, you'll note that we actually have a room for more lines, even more of the same or some different ones and that of course will then truly generating the kind of operating margins that we expect ultimately in this Consumer Products Group, which is in the 10% to 12% range.

Steven R. Bromley

Tim, the strategy at Allentown is that -- it's a carbon copy, copy paste of what we did in Modesto, California, where we built a facility, in that case for aseptic lines where you could put up to 8 lines in 5 and 6 are now going in and we're really starting to see the leverage off of that platform. So we expect to see the same thing over time. And to Rik's point, we'll see it this year, but like 3 and 4 are good, 5 and 6 are better and...

Hendrik Jacobs

7 and 8 are great.

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Is it fair to say that the margin uplift once you get the 3 and 4, so you have to get to 7, 8 lines before you start talking about the 10 to 20 or 12% target that you've been suggesting?

Hendrik Jacobs

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

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

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

Hendrik Jacobs

Sure. So we have our biggest customer in the food side business is a retailer, a very well known retailer, and this retailer had decided last year at a certain stage that the price point of what they were selling at was going to go above the $3 range. And we found out together with this retailer that, that was not necessarily the right strategy. It has led to reduced volumes and, therefore, margins to us, but also to the retailer. And so, together with us, we have now come to the conclusion that, that should be corrected, and that is exactly what's going to happen. But that's going to take some time, and it will happen in the second half of this year.

Operator

Our next question comes from Chris Krueger of Northland Capital.

Chris Krueger - Northland Capital Markets, Research Division

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

Hendrik Jacobs

Yes, I think I talked about this before. When we come out and we launch a product, then before you get a product like that actually integrated as an ingredient into a recipe of one of these big consumer packaged goods companies, if you have to go through an incredibly rigorous stage case [ph] process and so, we are progressing. But of course we would like to do that a lot quicker, but it can be up to 18 months before you start seeing any results. So the pipeline is there, but -- and we're moving through stage case, yes, of course gluten-free, being a very big attraction, but it's taking its time, especially if -- some of those, quite honestly, and I can't divulge the details, but some of them you end up reformulating halfway through and then you start at stage case 1 [ph] again.

Chris Krueger - Northland Capital Markets, Research Division

Okay. On the aseptic non-dairy beverage, I know you're increasing your capacity, and I believe it's to add a single serve line. Has that been largely driven by one customer? Or is there more demand potential from others?

Hendrik Jacobs

Well, in fact, we are increasing our capacity with 2 multi serve lines, 1 in our Alexandria facility and 1 at our Modesta facility, as well as a single serve Line in our Modesto facility. So that is driven by some of our current customers, but I find the most exciting is up until now, we have been very focused on non-dairy beverages. We're now expanding into dairy-based beverages. We're expanding into nutritional beverages, and we are having some prospects at the moment for fruit based beverages. So high acid beverages. So not only are we seeing that the capacity is being filled, I think it's a good thing that we are able to diversify as well. And again, there we are leveraging what we have built in Modesto and we're leveraging our entire, if you like, our integrated field to table capabilities again.

Chris Krueger - Northland Capital Markets, Research Division

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

Steven R. Bromley

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

Hendrik Jacobs

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

Steven R. Bromley

But it's a huge trend moving forward, and I think Whole Foods' decision to ensure that everything in the stores is labeled by '15 is indicative of -- '15 or '18, is really indicative of the desire for consumers to know that. And I mentioned a number of food acts and potential bills that are out there, which also are driving awareness. We're being approached by many, many food manufacturers who want to talk about kind of the plan and how would they would go about converting to all non-GMO, and it's great that they come in and speak with us early because you just don't turn it on. You've got to get it contracted and get growers converted, et cetera. So the sooner we can start working with customers as we are, the better.

Operator

Our next question comes from Scott Van Winkle of Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity, Research Division

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

Steven R. Bromley

Well, look, we've -- the sort of 2-level answer to that, Scott, is, look, we've been non-GMO and have to have the traceability standards in place for a long, long time and we've had a non-GMO program we called TRIP, it's Traceability/Identity Preserved, and that's been in place for a long time. Like organic, there's also a lot of documentation. So that's always been a place for us, but now you have the non-GMO project, which has a little bit different certification system and processes and paper, so that does create additional paperwork throughout the whole chain, not just for us but also whoever is going to take the product and brand it, and so there's more paperwork throughout, really created by having more than 1 methodology that's being followed.

Hendrik Jacobs

And there's also all kinds of different certifications at the moment that you're going to see. You have the Rainforest Alliance, you -- then you have the Organic, then you have fair share trade, et cetera, et cetera. So that actually does add a little bit of complexity when you can actually put 4 stamps on it if you like. Right?

Steven R. Bromley

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

Scott Van Winkle - Canaccord Genuity, Research Division

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

Hendrik Jacobs

Well, I think if you look over to last year, I think that our consumer packaged products have actually grown the fastest, especially if you compare on a like-for-like basis. And as I mentioned, I think the first quarter is a little bit clouded over there, just because there are some segments that we basically gotten out of, right, such as the industrial frozen food business, which was about $3 million, $4 million of revenue in the first quarter of last year, which we didn't repeat this year. So Consumer Packaged is growing the fastest and, as a result, that is basically also the one that has taken share from the others, if you like. And our ultimate goal is actually to be more like 60, 20, 20, right, Consumer Packaged to Ingredients and as we grow from a $1 billion to a $2 billion company. So it doesn't mean we won't see decline anywhere, it basically means that we want consumer packages to grow the fastest.

Steven R. Bromley

So just to clarify, Scott, it was 40-20-40.

40 in raw, 20 in ingredients and 40 in consumer and to Rik's points, consumer is where we've seen the highest levels of growth, so that is expanding. I think when we look at the numbers given that we don't have as much supply of raw, especially on the soy side, we'll see that. We'll see it move even a little bit quicker than we really would want -- make -- have it move, but it's moving in the right direction.

Scott Van Winkle - Canaccord Genuity, Research Division

Great. And then I missed the comment, there was -- I believe you're talking about was a sunflower pricing being down 20% year-over-year, is that right?

Hendrik Jacobs

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

Steven R. Bromley

There's only so many birds.

Hendrik Jacobs

There's only so many people that are going to feed the birds, too, so that's kind of what is impacting us. I mean, another thing that is happening in Q1 is that because there are so many small seeds around, some of the oil crushers have actually said, like "Well, we don't ever want to buy your byproducts anymore because there's so many small seeds, we can't get any oil out of it." So those are -- so some of these byproducts markets are being flooded or -- because of the poor yields, and that is and then having an impact on our ability to make enough or make a high enough margin on our primary products.

Scott Van Winkle - Canaccord Genuity, Research Division

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

John M. Ruelle

Yes, this is John Ruelle. Yes. The way we do it is we do what are called acre contracts, so we fix the portion of the offtake at a price and then the overage, which could be as much as 1/3 of the output is kind of an arm's-length market transaction that occurs at a time of harvest in spot purchases thereafter. So about 1/3 of the exposure is mitigated by that market factor versus the fixed commitment.

Steven R. Bromley

Of course, we test all the incoming loads and boatloads get adjusted as well, but it's hard in this particular case to adjust the load for small seeds. It's just -- it's impossible -- it's very -- not impossible, but it's difficult for us to predict just how efficiently they can be processed and to Rik's point, the yields are a lot tougher this year with the quality and we're having to work really hard to get quality product. I think we experienced improved -- we're just getting better at handling this stuff and I'm sure everybody that's trying to deal with this crop this year is, we're getting better at it and the dynamics are improving. And one of the dynamics that you always expect is that at a point in time prices start to go up and we're starting to see selling prices go up on the primary products, which is what should happen here. So I look at it, it's going to get progressively better over the course of the year, but the reality is it's just not going to be as good of a year as other years

Hendrik Jacobs

And then we talk -- and just to be clear, we're talking about the crop here, were talking about crop here and so as of late Q3, we should start getting a new crop in which hopefully has more than the -- more than 2 towards average processing yields.

Steven R. Bromley

Yes. So we're halfway through this year already.

and we'll continue to get better. But reality is, sunflower just given the crop quality won't be as profitable as previous years.

Scott Van Winkle - Canaccord Genuity, Research Division

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

Steven R. Bromley

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

Scott Van Winkle - Canaccord Genuity, Research Division

Okay. And then lastly, everything integrated and set in Bulgaria on the acquisition a few months ago?

Steven R. Bromley

Yes. The acquisition is complete. The systems are integrated. Management teams have been integrated. Selling efforts have been integrated. There's a couple of where one of the sort of post-acquisition items that we wanted was to install an oil line there, which is really important because we're shifting that facility from primarily conventional over to organic. And part of making the organics quite profitable is having on oil crushing line there so you can crush the byproduct yourself and then sell the really high value crude oil off of that. So other than that, the system is integrated and performing as we would expect. And this harvest year, we've been contracting a lot more organic product. So we've got that facility which is primarily running non-GMO for us for servicing the European market. We'll be in a transition process this year, where we'll do both non-GMO and organic moving down the road to, if our projections are right, it will just do organic at a point in time or we'll expanded it to keep doing the non-GMO. We have to sort that out. But I'd say, Rik, all seems to be...

Hendrik Jacobs

[indiscernible]

Steven R. Bromley

Yes.

Scott Van Winkle - Canaccord Genuity, Research Division

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

Hendrik Jacobs

Yes, that. And as Steve mentioned, I think the big opportunity there is organic and including, if you buy your organic kernels and you don't have an oil line, then order organic seeds and you don't have an oil line, you're buying them obviously at a premium. And then if you don't have the oil line, you have to sell them to a conventional crusher. And that's kind of what kills everybody's economics. At the moment, the only organic oil that is being crushed is being crushed in the Western Europe. So they are shipping raw seed over to Western Europe. We will be able to process raw seed down to the small seeds, if you like, through an organic crushing process in Bulgaria that should be one of our U.S. piece.

Operator

Our next question comes from Keith Howlett of Desjardins Capital.

Keith Howlett - Desjardins Securities Inc., Research Division

Just wondering if you could talk a bit about the Healthy Snacks market overall and whether -- how you put together new product offerings for it and how you feel you're doing in terms of share? And I ask that because you are sort of soup to nuts as it were fiber and you've got all the components there, I would think to be a developer of new Healthy Snacks for your retail partners. So I'm just wondering sort of on the big picture where that's going?

Steven R. Bromley

Yes. Well, I'll let Rik talk about the innovation that we have in the category. I will tell you though that I read a research report yesterday that talked about the snack bar category, and it talked about sort of traditional snack bars, sort of the center of the plate bars growth slowing with specialty bars, i.e. the cliff bar type products and private label continuing to grow quite nicely. So the good news for us is that we are in the categories and then playing into the categories that are seeing growth, and we are seeing that there's a fair amount of innovation leveraging our integrated capabilities both on the fruit side and on the grains, protein side. Rik, do you want to comment a little bit on that?

Hendrik Jacobs

Yes. I mean, on the fruit side, we have been working with an equipment manufacturer already that will allow us to do a lot more [indiscernible] solutions, so think about fruit and vegetable. We are thinking about doing different shapes, et cetera, et cetera. So think about that kind of innovation. When you're talking about on the nutritional side, I mean, we have like 4 R&D people on-site that are basically every single nutrition bar that comes out of that facility working with our customers, whether that be a retailer or be a brand owner, is really about customizing that bar to exact specifications and every single bar is basically put together in a different way so in a way every single bar is innovative.

Keith Howlett - Desjardins Securities Inc., Research Division

And then just on the number of -- well, they're already here, but the U.S. retailers in Canada, they're expanding, like, what costs has been here a long time but it's expanding target centered and Whole Foods, small but expanding, do you find that your products follow those retailers? Or do you have to deal with a whole new set of buyers so you won't necessarily transfer the border easily?

Hendrik Jacobs

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

Steven R. Bromley

They go across the border in a different package though.

Hendrik Jacobs

Yes, of course it's actually or... French.

Steven R. Bromley

Or whatever where we're going.

Keith Howlett - Desjardins Securities Inc., Research Division

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

Hendrik Jacobs

Well, I think it obviously as it is for everybody, it very much depends, because it depends on basically how far you can ship your products economically. So the lighter and more compact the product is, the further you can ship. And I think the best example of that is if you look at our fruit snacks business, we have some plant in Omak, Washington, and that goes all the way over to New York. But if you think about our aseptic business, well, we opened up a separate facility on the West Coast to service because that is not nearly as economical to ship those heavy multi-serve fluid fill packages across the entire nation.

Operator

[Operator Instructions] Our next question comes from Ron Reuven of Reuven Capital.

Ron Reuven

A couple of questions. You mentioned the -- regarding the resealable pouches that's dominated by the baby food category, it seems like Ella's Kitchen was purchased by Hain's recently. Does that have any effect in your business, improving or anything in any way?

Steven R. Bromley

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

Ron Reuven

As far as the consumer products business, it's -- you're saying that it's getting to a breakeven or almost breakeven with the exception of about $600,000. What do you see as the potential of the business as far as 1 year out, 2 years out, how big do you think this business will actually get?

Steven R. Bromley

Sure. So I'll let Rik deal with that, but just to be clear, we incurred $600,000 in costs related to the ramping up of the cost for Allentown, the pouch facility, and also, the costs for the retrofit that we're doing at the premium juice facility. So that was $600,000. Our operating loss in the group was I think $175,000 -- call it $200,000. So we were profitable excluding those onetime costs. But certainly not where we think we'll be and, Rik, I'll turn that over to you.

Hendrik Jacobs

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

Steven R. Bromley

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

Hendrik Jacobs

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

Ron Reuven

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

Hendrik Jacobs

Well, yes. I mean, I think Steve indicated that, I mean but if you say about why is the future going to be better? Well, it's because we want to be a pure-play natural and organic foods company. It simplifies our business for our customers and for our shareholders and potential shareholders. I think we want to grow that value-add business as part of our business, which we consider to be ingredients and consumer products. And like I said, longer-term, if we go from $1 billion to $2 billion, if we have a 60-20-20 split , that would mean that our consumer products goes, if you just call it $1 billion right now, goes from $400 million to $1.2 billion, that Ingredients goes from the current $200 million to $400 million and that our total raw material supply roughly stays at the $400 million as it is today. That's kind of what we're targeting. And I think as we move up that value chain and add more value to our customers through all the things that we do, from sourcing through to packaging for them, hopefully, they -- not only hopefully, we already know that and we have and we see that in some of our businesses already today, we will be able to retain more margin for ourselves. I think the large -- the third strategy that -- quite honestly, I've only been with the company for a fairly short time, as most people are aware, but it's fair to say that SunOpta has grown significantly as well through acquisitions. And I think there's a lot to be gained from basically leveraging the platform from sharing and standardizing best practices across the group. And that the journey has started right now as well, and we're already seeing some of the payback coming, and that is a very, very quick payback if you can make that happen.

Ron Reuven

And in regards to Opta Minerals group, I guess 2 questions about that is, number one, is it on the market yet as far as are you actively talking to any potential buyers? And the second question regards to that is, what does the potential buyer look like? Obviously, you can't name any names until the deal is done, but as far as what kind of companies would you say are interested in Opta Minerals? Would it be more of like a private equity type of name? Or would it be another competitor that's much larger?

Steven R. Bromley

Right, okay. So you asked a bunch of questions in there, Ron. So the first one is, is it formally on the market? We've made no announcement that it's formally on the market, it's a public company, it's for sale every day. And we've made it quite clear, as wonderful a company it is, it's not a long-term holding, and it's a business that needs to have a new owner. We've also been pretty clear about the fact that we wanted the business to have time to integrate the last acquisition, which has some significant synergies attached. They are working hard on that. Our take is that they need to better part of the second quarter before that's going to be demonstrably visible within the business, but they're making good progress in that regard. And what we've stated and where we are today is that we are going to get -- we're going to proceed with that when we feel we can create the most value. And I think we've been pretty clear about the fact that it's not a long-term plan and then we want to get on with that. So that's where we are currently. The guys there are working extremely hard on the integration and realizing the benefits. And by the way, I must say that the integration of WGI, which was the company that they acquired late last year is going really well and they're meeting all the targets that they had for that business. The business in general improved versus Q4, so some of the weakness that they saw in the steel industry bounced back. One area that didn't bounce back as quickly they'd expected was the infrastructure, kind of the abrasive side of the business. They see -- I'm going to try say this -- the sequestration in the U.S. has certainly delayed a number of large infrastructure projects. So if you went to Norfolk to the U.S. Naval shipyards, if you look at the number of ships that are actually in repair versus what would normally be the case, it's quite dramatic because a lot of those projects are on hold while all of the government funding get sorted there. Who are the typical buyers? Look, this is a really neat investment, and I can tell you from the past that there were very -- this is a unique investment for strategic, and it's a unique investment for private equity. From private equity point of view, it generates good cash flow. It's well-managed, and it's an industry that you can continue to consolidate. I mean if we were going to hold this business long-term, there's no reason why we wouldn't go on a large acquisition binge and grow this thing to $300 million, $400 million, $500 million. That's the type of opportunity that would be compelling for a private equity and was compelling for private equity when we chatted in the past, and then there are there strategics that are in the business. Certainly, don't want to mention any of the names, but people in the industrial minerals category around the world is of interest. And some who are more actively involved in complementary businesses in the steel and foundry, and infrastructure businesses. So it's a pretty diverse combination and it's interesting for not just North American players, but global players who want a bigger position in North America.

Ron Reuven

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

Hendrik Jacobs

I don't know if I can be...

Steven R. Bromley

Let me kick off with a couple of comments first of all. What has to happen is we got to go out and get a whole bunch of genetically modified growers and we got to get them to convert, okay. So the economic model has -- there has to be an incentive there for them. So read between the lines, we've got to pay them more to grow GMO. And I don't think there's any secret right now that people are getting paid a boatload of money for growing in North America, for growing genetically modified corn and soy for the biofuels industries. And so, the economics are interesting. And we do it today as we do like we have numerous non-GMO growers, but we've got to convince a lot more, and it's going to be a supply and demand, which is why we've told our major customers, if you're serious about this, like, please don't come knocking once the growing, like crops growing in the ground -- the crop is going in the ground now. So if a big customer comes along and says, "I want to convert " well they wouldn't be a customers of ours today, but somebody who's getting GMO products says, "I want to convert and I need 60,000 tons of whatever," that won't happen overnight. So it's a planning thing. The Whole Foods has done exactly the right thing by sort of drawing a line in the sand and then making the industry fall into line and figure it out. So we have lots of those conversations on the go, but it is economics.

Hendrik Jacobs

Well, I also think -- so it's going to take time, as just pointed out by Steve, and I also think let's not be confused too much about the non-GMO. I actually think that is only a step one towards actually a much more sustainable. Because non-GMO doesn't mean that it hasn't been completely sprayed foods pesticide and things like that, right. And ultimately, where we want to position ourselves is continuing to be more and more and also in the organic spectrum of this whole thing. And I think once consumers understand the difference between GMO and non-GMO, I think they are going to start asking questions about the non-GMO. And so I don't know when that's going to be, but that's kind of I think where I see it going long-term.

Steven R. Bromley

So, look, at the end of the day, Ron, it's a really good opportunity to quantify it, it would be such a guess, it's probably not fair to make it.

Operator

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

Steven R. Bromley

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

Operator

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

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SunOpta (STKL): Q1 EPS of $0.08 in-line. Revenue of $282.8M beats by $201.53M. (PR)