Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

SunOpta (NASDAQ:STKL)

Q3 2013 Earnings Call

November 06, 2013 10:00 am ET

Executives

Steven R. Bromley - Chief Executive Officer and Director

Robert McKeracher - Chief Financial Officer, Principal Accounting Officer and Vice President

Hendrik Jacobs - President and Chief Operating Officer

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

Analysts

Christine Healy - Scotiabank Global Banking and Markets, Research Division

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

Chris Krueger - Lake Street Capital Markets, LLC, Research Division

Scott Van Winkle - Canaccord Genuity, Research Division

Keith Howlett - Desjardins Securities Inc., Research Division

Operator

Good morning, and welcome to SunOpta Inc. 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 the business today and other filings with the Securities and Exchange Commission for a more detailed discussion 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 these non-GAAP financial measures was included in the company's press release issued yesterday.

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

Steven R. Bromley

Thank you. 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 continued 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 Food Ingredients.

This strong growth across our key product categories enabled 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 our revenue point of view. We continued to see strong growth in our value-added product offerings during the quarter and with a number of our expansion projects now coming online is 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 startup 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 non-core holdings, 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 3 food-based operating segments, Raw Material Sourcing and Supply, Value-added Ingredients and 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 3 core strategies, which form the basis of our ongoing initiatives. 1, the focus on becoming a pure play natural and organic foods company, 2, to aggressively grow our value-added consumer package, foods and ingredients portfolio, and 3, to leverage our integrated platform. We are progressing on all of these fronts and combined with growing interest in healthy eating and healthy living around the world, we believe we are well-positioned to capitalize on this long-term trend.

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

Robert McKeracher

Thanks, Steve, and good morning everyone. I'll take the next few minutes to review our financial results for the third quarter and 9-months ended September 28, 2013. Please note unless otherwise stated, all figures discussed today are in U.S. 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 is made in Ingredient and Consumer Product categories, we experienced an overall decline versus the third quarter of last year which can be explained by 3 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 later weak seeds put downward pressure on operating income in the Grain & Foods Group. And third, Opta Minerals continue 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 a positive side, 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 and receivable 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 SunOpta 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 for the third quarter is a non-cash loan impairment charge of $3.6 million related to Opta Minerals as well as severance facility restructuring along with 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 pre-tax startup, 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 3 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 0.57 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 3 quarters of 2012. The reduction in operating cash flows reflects 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 Valued-Added Ingredient operations. Our third quarter capital expenditures of $10.8 million and $32.8 million year-to-date includes spending on our new cocoa processing facility in Holland, expansion activities to install 3 new lines at our aseptic beverage facilities, processing and capabilities enhancements at our premium juice, snack and pouch businesses within the Consumer Products Group plus investment in maintenance spending across a number of other business units.

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

Hendrik Jacobs

Thanks, Rob, and good morning, everyone. In the third quarter we continued to focus on our strategy to expand on our hands -- our Value-Added Consumer Packaged and Ingredients capability. These efforts have enabled us to increase operating income in the Consumer Packaged and Ingredients segment for us to prior-year period. We believe that Consumer Packaged Goods and Value-Added Ingredients offer the strongest growth and profitability potential for the company and we will continue to invest in these areas long term. While we are still in the early stages, we've continued with our plan to leverage our integrated foods platform across the business, which will allow us to proactively share best practices from sales and administration through 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 & Foods Group, revenue increased compared to the same quarter last year. This was primarily due to sales of raw grains, including soy bean, corn and organic feed, as well as higher revenues in the packaged aseptic business. As Steve mentioned, we realized strong demand for our province. As a reminder, last year, we generated exceptional margins on organic feeds during Q2 and Q3 due to the drought conditions which drove our prices overall in food 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 for us. In 2014, we will once again leverage our unique international sourcing capabilities to somewhat offset North American supply.

Our aseptic packaged beverage platform continued to grow in the quarter and we continue to realize strength in this key segment of our Consumer Products portfolio. Last quarter, we announced 3 new lines and we began shipping new products 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 segments, 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 costs 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're 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 operations, 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 competitor 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 food 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 some of the fiber plants.

We believe that through our cost controls in this segment remains top priority, ultimately we have to attract new customers with new application for our pure products 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 this 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 growth margin is now north of 7%, while operating margins are at 1%. The target is for operating margins will ultimately be above 10% when we realized all the benefits of ongoing investments. While we're 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 Fruits business continues to outperform our internal expectations and revenue was up 14% on a 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 have reported last time, we had planned to bring our San Bernardino, California refrigerated premium juice facility fully on line in the 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 loss in that facility, which therefore also had a negative impact on our overall Consumer Products operating margins in the quarter.

We continue 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 will 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-digits 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 a segment where we add the most value to our customers, which should allow us to retain the highest margins of all the segments we do business in long term.

Finally, our International Foods Group, revenue performed well with an increase of approximately 15%, as demand remained strong in the North American business, while trends in Europe are improving. The increase in revenue was not matched by a similar increase in margin. One of the key factors was a startup and related inventory buildup for our cocoa factory. We built up stock in order to feed the new cocoa factory, and in the meantime, the price of cocoa has soared to new heights. Of course, we hedge 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. With positive sign on global customer deals and an overall improvement 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.

Steven R. Bromley

Thanks, Rik. In closing, we continue to believe that interest in healthy eating is a key long-term global trend and feel we are well-positioned to capitalize on future industry growth. We remain committed to our 3 core strategies of, 1, becoming a pure play natural and organics foods company, 2, aggressively growing our Value-Added Ingredients and Consumer Products portfolios; and 3, 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 non-core 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 necessary steps that will position our company well in the growing healthy food 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, I'll turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Christine Healy from Scotia Bank.

Christine Healy - Scotiabank Global Banking and Markets, Research Division

First question is just 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 when would you expect that those additional 2 lines could reach capacity?

Hendrik Jacobs

Yes, in the third quarter you mean and...

Christine Healy - Scotiabank Global Banking and Markets, Research Division

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

Hendrik Jacobs

Okay. So since commissioning, its doing well. We are now about 75% full on the 4 lines that we have there. And so we -- and we have a new customer in a new category coming onboard in Q4. So we expect to continue to fill up these lines over the course of the next 2 quarters, I would say.

Christine Healy - Scotiabank Global Banking and Markets, Research Division

Okay. And then in the International segment, you mentioned just that you're 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?

Hendrik Jacobs

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've been able to -- to make some deals for next year, that we haven't done in the last 2 years. So old customers are returning, so to speak, and that's 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.

Christine Healy - Scotiabank Global Banking and Markets, Research Division

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

Hendrik Jacobs

Absolutely in Europe, and as well as in 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. 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.

Christine Healy - Scotiabank Global Banking and Markets, Research Division

I guess just lastly, probably for Steve. On Opta Minerals, there is some negative headlines there, early this morning that they have breached some financial covenant, so just wanted to confirm with you that, that debt is fully nonrecourse to SunOpta?

Steven R. Bromley

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

Operator

Our next question comes from Tim Tiberio from Miller Tabak.

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

Can you maybe just give us a little bit more background of what's happening at San Bernardino. And did you have, I guess, 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 resolving the ramp issue?

Robert McKeracher

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 up this facility in the third quarter or in 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's causing a significant delay. Now when you look at this facility, it is made up of 2 parts really. It's the extraction, so we start with oranges, organic oranges, I would add, coming from Mexico and places in Southern California and a bottling side of it. So the major part of where we can -- the unique element of our facility is on the extraction side. And that's -- and so until we get that online and that we now expect to happen in the first quarter 2014 and that's when we will start making money. So we have the expecting customers lined up, we also have the bottling customers lined up. But without us extracting there's not much sense in bottling a whole bunch of customers, because it just leads to the incremental costs.

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

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

Hendrik Jacobs

Well, 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's leading to the losses that we're incurring over there. But we're fulfilling all of our commitments at present and -- but the real, as I said the real bang for our buck really comes once we're able to open the extraction side of the plant.

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

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

Hendrik Jacobs

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

Robert McKeracher

Yes, EBITDA is generally about 2 percentage points higher on average above our operating income. So you will be looking at ramp up, but we can see the trajectory in that business fit into our overall target within the Consumer Products Group gradually getting to a double-digit EBITDA percentage, NOI.

Steven R. Bromley

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

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

And then just one follow-up question on Opta Minerals, I would assume that this is kind of 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?

Steven R. Bromley

Yes. So it doesn't change our position on the business at all, Tim. I've 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 we haven't exactly noted, but they have now completed the integration of WGI, which was the latest acquisition. So they are spending on that. Now, it's behind them and they have the savings. We've been pretty consistent around the fact that we wanted to see that completed and see that getting into their run rate, and then we'd be -- we look at moving forward. None of that has changed. Has this moved it around a couple of months? Sure. But we're still very consistent about our intentions and I wouldn’t call them long-term intentions because they are not long-term intentions. They're intentions -- we intend to move forward. The exact month, I wouldn't quote to you but nothing has changed, nothing.

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

Just one last question before I hand it back over. As far as the timing of line 5 and 6 in Allentown, you mention that you are roughly 75% full online for the first 4 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 if you can just provide a little bit more color over there?

Hendrik Jacobs

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 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 if you compare it to any other region in the world. This format is really way under its normal market share. So we should see continued growth in that format. I think, importantly it is also for us, we have a lot of our current volumes are in one category and I think that's the one category that you see that most penetration of these pounces are today, which is in baby food. As we go out and contract more volume, we also want to make sure that we get our -- get our spread across multiple categories. That's good for us and that's good for the pouch.

Operator

Our next question comes from Mitch from Imperial Capital.

Unknown Analyst

So Steve, can you talk maybe broadly about your -- the cost of goods inflation outlook for the next quarter and into '14?

Steven R. Bromley

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

Robert McKeracher

The drought crops.

Steven R. Bromley

Sort of the -- yes the drought crops. So corn and soy are down in price, so that's deflationary. We also see some deflation in some of the smaller grains and you see things like cocoa, organic cocoa way up in price. Rik, what else is way up? There is one more that...

Hendrik Jacobs

Coffee is at an all time low.

Steven R. Bromley

But I'd say generally deflationary versus inflationary.

Unknown Analyst

And is any feel for like can you put any sort of range percentage down on that relative to '13?

Steven R. Bromley

It varies by crop, and so that -- John can you think about an overall percentage?

John M. Ruelle

Obviously hard to say. On a specific basis overall because each crop is dependent on...

Steven R. Bromley

And traditionally mix as well, the organic and non-GMO crops don't move lock step with the conventional crop, so the decline would be less on those that are more supplier restricted.

Unknown Analyst

Okay. How about -- could you also explain on the sunflower business, you sort of with the later harvest, and I guess, I don't know if how the supply is looking. But you said that you should see significant improvement in '14. How does that come about?

Steven R. Bromley

Yes 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've made investments and changes in our processing capabilities that will improve our processing yield. 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.

John M. Ruelle

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

Steven R. Bromley

Correct, given some of the growth achievement.

Unknown Analyst

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

Hendrik Jacobs

When we're talking fruit ingredient, what that really is on the one hand side when all of your Greek yogurts that have the food on the bottom, and we are supplying a lot of that. Its basically on the branded side as well as on the private label side, and obviously mostly located on the West Coast because that's where our plant is. So that's the fruit ingredient in the fruit and berry industry, that's growing quite nicely and we're doing a fantastic job, as by the way evidenced by a press release that came out from IHOP and as well as ourselves, where we were made vendor of the year by them. So that's also a very important and growing part of our business which is the food service side of things.

Unknown Analyst

And how about on the Frozen Fruit side?

Robert McKeracher

Yes. On the Frozen Fruits side, most of what we do is actually on the private label and think about all the natural and organic private label that you see out there. And there again, we have -- that's where we actually no are longer really participating in a Food Service side but much more on the retail side, we have done significant upgrades to our facility over there in Buena Park and we have now actually, as of last week, we are SQF2 certified there now. So now with that means that we can also more aggressively after other bids that make sense to us.

Unknown Analyst

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

Robert McKeracher

Yes, as I mentioned, I think, during the remarks, the Frozen Fruit 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. In this quarter, Frozen Fruit is up 14%.

Operator

Our next question comes from Chris Krueger from Lake Street Capital.

Chris Krueger - Lake Street Capital Markets, LLC, Research Division

I notice a variety of startup 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?

Steven R. Bromley

So, Chris, as Rob commented on, the cocoa plant is now commissioned, so we will have some small trailing costs on the cocoa plant as we get into the fourth quarter, because that was commissioned right sort of on the border of the 2 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 smooth. So that's temporary, and we won't experience that again. There will be some costs, but don't look for the cocoa plant to be material. 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 is nothing more to come on those, same with the pouch line, they're all up and running. And we have these integration costs at Opta Minerals by integrating WGI and they should go away, they are done now. The one that will carryover 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 into 2014 based on the timing that we are seeing for the project now are the cost at San Bernardino for the premium juice facility. So to answer your question sort of the majors going away, all those are going away with the exception of costs that we will have at San Bernardino.

Chris Krueger - Lake Street Capital Markets, LLC, Research Division

On the -- 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?

Hendrik Jacobs

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 platforms, where that make sense. One of the smaller expansions that we are currently undergoing is for example in the ingredients side is on the new corn business that is seeing very, very good growth, and we just want to keep upwards that growth, so..

Steven R. Bromley

Being driven by demand for non-GMO.

Hendrik Jacobs

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's consistent with our strategy of continuously wanting to move up the value chain if you like.

Steven R. Bromley

But Chris, 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 3 aseptic lines going in, and then the processor going in, and I'm missing a couple of other and San Bernardino underway and there was a 5th project, which I just sort of off the top, I can't remember. We expect there will be -- it would be wonderful to have the demand to have the proceeding at that pace, but we don't have that in our budget, because we do have some capacity that's now being build that we can sell through. So should you expect more filling lines next year? Yes, at the pace that we've had in this year, that would be great, but I think we've got capacity to fill here, which is the good news.

Chris Krueger - Lake Street Capital Markets, LLC, Research Division

And one last question on the San Bernardino facility. How big is that business as far as whether its in terms of unit or sales or percent of group sales or something like that?

Steven R. Bromley

When fully sort of when fully in line and operating near sort of good capacity levels, it can generate around $30 million in revenues, its less than $10 million right now, and of course because of what we're doing and being shutdown and its even less than that. Right now.

Operator

Our next question comes Scott Van Winkle from Canaccord Genuity.

Scott Van Winkle - Canaccord Genuity, Research Division

So first question is a lot like the last one, but related to cocoa. You've 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?

Hendrik Jacobs

Yes, I would say so. I think, it's 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 its consistent with our strategies, we used to sell the raw beans or had it process 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 is -- even if you go to grocery stores in North America, you see all the specialty chocolate makers actually growing as well.

Scott Van Winkle - Canaccord Genuity, Research Division

Apologies, 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've seen over the last couple of quarters on the gross margin?

Hendrik Jacobs

I think on the gross margin side the -- so 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 gross margins. And I think, on the raw material side, obviously that was impacted by the Sunflower, which we talked about whole year. But also realize that we're now coming out of our inventory position that we had though at the end of the drought year.

Scott Van Winkle - Canaccord Genuity, Research Division

So while 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?

Robert McKeracher

No. This is Rob, Scott. It's not so much of a mix more than the cost that are putting the pressure on the margin. If you're looking top line and the mix across the various components, that was not very influential on driving the margins down, it's more about the costs, that we've mentioned.

Scott Van Winkle - Canaccord Genuity, Research Division

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

Steven R. Bromley

Yes, sure. I appreciate the opportunity to do that. So our business model is based on an integrated platform that starts with raw material sourcing and supply, and you know those raw materials are both used internally or sold externally. The internal are moved through and transformed into Value-Added Ingredients, which are sold externally or used internally and moved right through into Consumer Packaged Products. And so as we describe our business and really what our business model is, is we are an integrated processor of natural and organic and natural foods, integrated from raw materials to ingredients and into packaged products. For those who have known this business for a period of time we had various operating segments, and today we operate in 4 operating segments, grains, foods, ingredients, Consumer Packaged Products and international. What there is in all of those business units while not in all of them, but across those business units is a lot of overlap. In grains, foods, they do raw, they do ingredients and 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 realign the business around raw material sourcing and supply, around Ingredients, and around Consumer Packaged Products. And it's really based on the customer. So for customers that are buying Consumer Packaged 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 not only 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 spot in our supply chain. And so, what we have been doing is realigning all 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're 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 whole 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've added support resources where we thought it was really important as we take our existing operating resources and get them realigned. A nice byproduct of that will be commencing this quarter, we'll report in those new segments. And 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's how you're going to see it reported. When we talk about Consumer Packaged Products, you're going to see all of our Consumer Packaged Products. So where are all of the aseptic business was sitting in Grains & Foods and then we had a Consumer Products business. We've now completed that realignment under one management structure. So we're 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 first quarter and we will issue an 8-K at the right time to go back and restate the historical, so all our users can see that information in a consistent format. So it's a big undertaking, Scott, across the organization, we've invested in it, I mean, we've 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're really excited about it.

Scott Van Winkle - Canaccord Genuity, Research Division

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

Steven R. Bromley

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, and many of our financial components are now centralized, I mean, there 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 will be coming -- you can't centralize the operations, but you can certainly standardize them and so there has been vast of push underway to do that. And then our go-to-market resources while not centralized are much more standardized than align within the operating groups. And those 3 food operating groups all report to Rik, who -- as well as the operations, all report to Rik, and so they are under direct control of one person. So what we're really attempting to do is gain and our 3rd 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, its going to free up resources to focus on the customer at a much more enhanced manner than we've been able to do in the past.

Operator

Our next question comes from Keith Howlett from Desjardins Capital.

Keith Howlett - Desjardins Securities Inc., Research Division

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

Steven R. Bromley

Yes.

Chris Krueger - Lake Street Capital Markets, LLC, Research Division

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

Steven R. Bromley

So just, I'm going to let Rik handle it, just to be clear, we've 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 used third-parties to do those. And the challenge -- and its a nice profitable and growing business, but as our business got bigger, the availability of reliable coprocessing for us became a challenge and we see good growth in this business. So we said, "well lets take the existing business and lets grow it." So that's -- so we've always been there. So I don't want you to think, all of a sudden, we're just moving in. We've had these butter, powder and liquor for some time. But now we see a real opportunity to grow, now that we have our own facility, because we have -- we have sources of supply. Rik, do you want to...?

Hendrik Jacobs

Yes, no I think you answered it. The only thing that I would add is, and 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 its kind of odd maybe that its build in the Netherlands to some of you, but from historical reasons, more than 60% of real cocoa bean actually go through the Port of Amsterdam.

Keith Howlett - Desjardins Securities Inc., Research Division

And so if I understand right, you are sort of internalizing margin that was elsewhere, I guess?

Steven R. Bromley

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

Keith Howlett - Desjardins Securities Inc., Research Division

Right now if I understand it, the business would be -- the cocoa business would be sort of around $15 million. Is that right?

Steven R. Bromley

Yes, I think that's right.

Keith Howlett - Desjardins Securities Inc., Research Division

And then just 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?

Robert McKeracher

Yes, in essence we've -- the whole point of entering the hedge is 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.

Keith Howlett - Desjardins Securities Inc., Research Division

And then just on the -- on the new segments, will you -- will it be show all the movements between the segments or will it be sort of based on third-party sales from each segment?

John M. Ruelle

Yes. We're going to recast for everyone via an 8-K what the new segments are. At this stage, what you will see is very similar, so now we're 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.

Keith Howlett - Desjardins Securities Inc., Research Division

And then just, as we move forward next -- could you see providing guidance in the future or not?

Steven R. Bromley

We evaluate it every year, Keith, and as we get larger, it's a topic that we have all the time. We're not prepared to commit for providing guidance, but I can assure you its on our agenda.

Keith Howlett - Desjardins Securities Inc., Research Division

And then maybe just lastly on the Opta Minerals, do you think it's the WGI 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'm asking, do you have to wait for the results to improve or could you sell it because everyone who would buy it already knows that its a cyclical business?

Steven R. Bromley

Sure. Look, Keith, the strategics that the buyers for this business all understand the cyclicality. So there is really not an issue there. People do understand that. To the point that you're asking, what's really caused some of the downturn in the business, and its 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 things has slowed that down. The good news for them is that be it a bridge, be it a ship, its got to get cleaned up over a period of time. So you can delay it but you can't stop it. Its got to get down there or things start to crumble. So no, the strategics that would buy it understand the cyclicality, that's why I don't think, we're in a position where we're going to wait for 2 years let the cyclicality wash its way through.

Keith Howlett - Desjardins Securities Inc., Research Division

And do the 2 components -- the 2 segments of Opta Minerals, are they typically bound together amongst the perspective purchasers sort of thing?

Steven R. Bromley

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

Operator

Our next question comes from Brandon Matthews from Northland Securities.

Unknown Analyst

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?

Steven R. Bromley

Well, first off, what we've said from the beginning is that in some of the growing areas that we grew -- and it was late harvest and in some areas that we went to prevent plant or they didn't plant at all. And so not all of the acres that we had contracted for got planted. And what we said from the beginning is, that's why we have an international sourcing platform and we will utilize that international sourcing platform. At this stage of the game there is no problem in doing all the value-added products that we do. But inevitably depending on how our sourcing goes on international basis, we may have a little less sell as raw commodity, which is our lowest margin business. And again, we may have -- it depends on how well the sort of global sourcing and growing, that we have going on in other areas plays out, but we're not in a -- not being able to supply situation on soy, corn and that stuff. And I'm sorry, Brendon, the other part of your question was?

Unknown Analyst

I was just wondering if you're expecting any extra milling or drying costs?

Steven R. Bromley

John, how has the moisture been? I think that they're pretty...

John M. Ruelle

Yes, they are a little bit elevated, but its not dramatic. Corn and soy are just pretty much all harvested at this point. And 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's coming off the field now. So time will tell on that one, but we should know on that one, like a couple of weeks.

Operator

[Operator Instructions] Private investor.

Unknown Analyst

Yes. I followed your company since early 2004. I think, I bought stock in the first quarter and I can buy it for the same price today. I was familiar with you guys when you're 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 the ground and the whole Whole Foods Market, buy locally organic, and you guys were in the sweet spot. I listen to these conference calls 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? This ongoing, its always something. The contract in Spain with the biomaterials the berries in Oregon I just can't believe, its hard to understand and I listen to this jargon about going to reorganized and going to restructured. We just did this in the last 18 months, I have been listening to this since 2004. I just don’t get it, why you can't focus, don’t grow cocoa in Holland and something in Bulgaria or Hungary or some damn place. Why can't you just focus on what you have, that's clear on the plate right in front of you and make it work. Lets say, and the people on the conference calls year-after-year come and go, and get a new crop of people and you've got this ready opportunities, some people think your stocks worth $30, if execution were done right, I firmly believe. What's going on?

Steven R. Bromley

Sure. A couple of points that I would make and certainly we are more than willing to further the discussion. The reality is...

Unknown Analyst

No I've made my case, it's up to you guys.

Steven R. Bromley

Okay that's fine, if you'd like a response then I'm more than happy to...

Operator

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

Steven R. Bromley

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.

Operator

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: SunOpta Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts