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SunOpta, Inc. (NASDAQ:STKL)

Q1 2014 Earnings Conference Call

May 14, 2014 10:00 AM ET

Executives

Steven Bromley – CEO

Robert McKeracher – VP and CFO

Rik Jacobs – President and COO

John Ruelle – Chief Administrative Officer and SVP, Corporate Development

Analysts

Christine Healy – Scotiabank

Scott Van Winkle – Canaccord Genuity

Mitch Pinheiro – Imperial Capital

Tim Tiberio – Miller Tabak

Chris Krueger – Lake Street Capital Markets

Reed Anderson – Northland Securities

Operator

Good morning, and welcome to the SunOpta Inc.’s First Quarter Fiscal 2014 Earnings Conference Call. By now, everyone should have had access to the earnings press release that was issued after the close of business yesterday. The release 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.

As a reminder, please note that the prepared remarks, which will follow contains 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 2014 quarterly report on Form 10-K that is scheduled that will be issued at the close of business today and other filings with the Securities and Exchange Commission, for more detailed discussions on the factors that could cause actual results to differ materially from those projections and any forward-looking statements.

Finally, we would 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 with the company's press release issued yesterday. Also please note that unless otherwise stated, all figures discussed today are in U.S. dollars and are occasionally rounded to the nearest million.

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

Steven Bromley

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

Over the next couple of minutes, I will provide you with a brief overview of our first quarter 2014 financial results and status of our key strategic initiatives, then Rob will discuss our financial performance and Rik will provide an update on our operations. Finally, I will come back with a few closing remarks and then we will open up the call for questions.

So we are pleased to report a great start to the year driven by solid revenue and earnings growth. Both our first quarter revenues and first quarter earnings are a record for our company. All of our core foods operating segments generated increased revenues and operating income versus the prior year.

This is the largest revenue quarter in our company’s history and is indicative of the continued growth and healthy eating categories around the world. These record results are due to a number of factors including increased sales driven by new customers, new products and product extensions, our investments in growing our capabilities to address market opportunities, and our repositioned go-to-market strategy, combined with our focus on improving operating efficiencies, cost reduction and cost control.

Our realigned organization structure forms the backbone of all these efforts and we are really pleased to see the benefit with this realignment translate into accelerating revenue growth and improved financial results.

This was a good quarter and the good news is that we have many opportunities in the pipeline both from a customer and operational perspective that would drive further improvement, which makes us optimistic for the rest of the year.

We are clearly heading in the right direction and we feel we are well positioned to achieve continued top and bottom-line growth in fast-growing natural and organic foods categories.

Demand in these categories continues to grow. Healthy eating and healthy living are not a fad; they are our key long-term global trend. Many retailers and food manufacturers around the world are continually increasing their focus in this area and we feel this is very positive for us.

Recently, you would have heard that the largest retailer in the world wants to significantly increase their presence in this space validating our belief in the growth potential for healthy foods. And the recent Natural Products Expo West in Anaheim, California, which was attended by almost 70,000 industry participants, only furthers our conviction in this regard.

Combined this with growing interest in non-GMO foods, rising healthcare costs, obesity, allergen awareness and changing demographics with the boomers ageing and becoming much more aware of the linkage between diet and health and millennial is being the most socially aware consumer ever, all of this leads us excited and confident in the future of our integrated business model.

Before I turn the call over to Rob, I would like to reiterate our three core strategies which form the basis of our ongoing initiatives. One, to focus our development efforts on becoming a pure play natural and organic foods company, two, to aggressively grow our value-added packaged foods ingredients portfolio, and three, to leverage our integrated platform.

We have made progress on all these fronts and truly believe we are well positioned for the long-term. And with that, I will turn the call over to Rob to discuss our financial performance in more detail. Rob?

Robert McKeracher

Thanks, Steve, and good morning, everyone. I'll take the next few minutes to review our financial results for the first quarter and year ended April 5, 2014.

For the first quarter of 2014, we reported record revenues of $334 million, an increase of 17.9% compared to revenues of $283 million during the first quarter last year. Please note that fiscal 2014 will be a 53-week year and the actual weeks fell in the first quarter resulting in a 14-week quarter versus 13-weeks in the prior year.

Excluding the extra week of sale, as well as the impacts of changes in, commodity prices and foreign exchange rates, consolidated increased 13.8% and SunOpta foods revenues increased 16.4% versus the prior year. The increased revenues were led by accelerating sales in our Consumer Products segment, which, excluding the extra week grew 21% over the first quarter of 2013.

We generated operating income of $12.1 million in the first quarter up 13.2% from $10.7 million in the same period last year. The growth in operating income was driven by increased volume and margins on organic raw materials, increased volume of Consumer Products, as well as higher sales and margins of value-added ingredients.

This was partially offset by lower organic feed margins, increased corporate spending in areas such as IT and human resources, all of which are intended to drive efficiencies in our operating segments and margin pressure experienced in Opta Minerals.

As many of you will know, the winter just passed was a tough one and it should be noted that during the quarter a number of our operating facilities throughout the Midwest and eastern regions of the U.S. experienced incremental costs associated with the extreme weather, such as freight delays, temporary shutdowns and higher utility costs, totaling approximately $700,000 before tax and minority interest.

Earnings for the first quarter of 2014 were $6.6 million or $0.10 per diluted common share, as compared to $5.1 million or $0.08 per diluted common share during the first quarter of 2013.

The results include approximately $1.2 million in cost related to the retrofit of our premium juice facility which we have discussed in prior quarters, offset by approximately $1.1 million in other income, primarily related to a decrease in contingent consideration related to the previous acquisition.

During the first quarter of 2014, we realized EBITDA of $17.9 million as compared to $16.1 million during the first quarter of 2013. At April 5, 2014, we had total assets of $720 million and a net book value of $5 per outstanding common share.

And our balance sheet remains strong reflecting a net debt-to-equity ratio of 0.59 to 1. As it’s typical for our first quarter, we used $12.6 million in cash and operations, compared to $6.7 million used during the first quarter of 2013. The increase in cash used reflects higher working capital levels to fund our growth.

At April 5, 2014, we had approximately $105 million in unused capacity within our current debt facility. We are forecasting to generate positive operating cash flow over the course of 2014 and the cash generated along with the available capacity that it has mentioned, provide the company with sufficient resources to support our various growth projects.

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

Rik Jacobs

Thanks, Rob, and good morning everyone. I will now discuss the performance of the three segments within SunOpta Foods; global sourcing and supply, value-added ingredients and consumer products. And just as a reminder, the first quarter of 2014 include an extra week for sales, the normalized revenue growth percentages I refer to exclude this extra week as well as commodity and foreign exchange effects.

So, in the Global Sourcing and Supply segment, revenues increased 14.1% on that normalized basis and we reported an 80 basis point improvement in operating margin. Revenues were up due to higher sales in fruit, seeds and nuts products as well as a bounce back in our European sales of fruits, sunflower and seed products.

As growth is strong in both our European and North American businesses, our expertise in sourcing organic raw materials from all over the world is really starting to pay dividends. Not just in the sale of these raw materials to customers, but also in securing supply for our value-added ingredients in Consumer Products segments.

In our Value-Added Ingredient segment, revenues increased approximately 11.3% on a normalized basis while our operating earnings increased $300,000 however the operating margin basically remains flat versus prior year at 6.2%.

Our fruit ingredient side of the business again were very strong, driven by new customer and product introductions. Fiber and grains ingredients pipeline continues to grow on both current and new products but on part of our portfolio, we do have to offer more competitive pricing to gain or maintain the business.

Looking into Q2, we believe our food business will continue to be strong as many of our customers continue to use our capabilities to introduce new products in the market. As mentioned above, there is some margin pressure in our fiber and grains ingredients businesses which we are countering through innovation and the continued focus on cost.

In our Consumer Products segment, revenues increased 21.4% on a normalized basis and we add an extra $2 million to the operating income line versus last year. Our revenue increase was primarily driven by the sales of our aseptic frozen pulp and healthy snack products.

Our margin increase was primarily driven by continued strength in our aseptic business. We continue to see large opportunities and that's why we continue to invest in this business as announced earlier this year.

While our pouch business saw significant revenue growth versus prior year, margins here are not yet where we want them to be and we are focused on optimizing our factory performance and launching new products in new categories.

Finally, construction is now ongoing at the San Bernardino facility which has been a significant drag on earnings in the segment over the past year. Unfortunately, we do have some further delays in the start-up due to new permitting limitations which base upon us. Net-net though, we expect to see continued growth in our Consumer Products segment, both top-line and bottom-line.

In closing, it’s great to see the momentum in Q1 after our organizational alignment efforts last year. Our segment teams are focused on our customers and growing the top-line while our newly formed operational teams are focused on improving our supply chain performance.

Based on the incremental investment and feet on the street, our ability to get incremental growth, especially in the Consumer Products segment is in large part only limited by how effectively and efficiently we can leverage and expand our capacity.

On the supply chain side, we have identified a number of significant savings to go after as we get better and better at leveraging our platform that makes us confident that we will see increased operating margin expansion sooner rather than later in the foods business.

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

Steven Bromley

Great, thanks, Rik. As the realignment is now behind us, we want to thank everyone within SunOpta for their contributions in transforming our business in such a short period of time. With our enhanced strategy, our new structure and everyone focused on their part in improving our top and bottom-line, we are confident we will achieve our targets.

Looking ahead, we will continue to focus on our portfolio of natural and organic food offerings, refine our cost structure to further drive operational improvements, and internally evaluate potential acquisition and internal growth opportunities.

For our non-core holdings, we continue to assess all options to maximize shareholder value and in doing so, create additional capital that could be reinvested in our global integrated natural and organic foods platform. We believe we are better positioned today than ever before to capitalize on the growth and the exciting natural and organic foods industry.

As we noted earlier, there are tremendous growth opportunities, both with new unit growth from supermarket retailers in the natural organic and specialty space as well as more organic natural SKUs being added in the conventional and mass retailers at a faster pace than we have historically seen.

We believe our integrated model, focused on value-added ingredients and consumer packaged products is well positioned to capitalize on these opportunities.

In closing, we are confident in our business, comfortable with consensus forecasts for this year and feel strongly that we are solidly positioned to take advantage of future growth. We believe in this for two reasons.

One we are in the right position to benefit from the growing healthy food space and two, we are making good progress and executing our core strategies. Well, thanks for joining us on the call today and with that, we now like to open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Christine Healy – Scotiabank. Your line is open.

Christine Healy – Scotiabank

Hi guys. Good morning. I guess, first just on Whole Foods, they reported weak results last week, they cited increased competitive pressures in the sector and that’s really the reason for their lower sales and margins. I am just curious from the manufacturer’s standpoint, are you guys seeing any increased pressure from retailers to reduce your pricing or from your angle is this just the same as usual?

Rik Jacobs

For us, Christine, this is Rik, it’s pretty much the same as usual and don’t forget that I think at the moment, in North America, demand is quickly outstripping in supply especially on the organic side. So, therefore, leveraging our global platform to prices and check for retailers is much appreciated.

Christine Healy – Scotiabank

Okay, and then, Rik, just moving on to the value-added ingredients to the fiber part of the business, can you tell us roughly, I guess, what is the plant utilization in the segment? How is that tracking? And I know you guys are focused on trying to win business in the Specialty Fibers, but would you also consider, compositing some of your plans to boost margins?

Rik Jacobs

Yes, so, I think our current utilization stands at about 65% and we have been very focused on innovation as you guys are hopefully aware, at least all of you that have visited us our booth at Expo West. So we have new insoluble fiber that just can be suspended in beverages which is a huge market for fiber.

You are seeing the new dietary guidelines come out and basically say we have to consume the fiber, the opportunities for fiber are there, Having said that, we are not fully utilizing our facilities and while we will continue to focus on the innovation, we have to also be realistic and so we must focus on cost and that means that utilization in our factories must go up easing up that leads to not having of many factories.

Christine Healy – Scotiabank

Okay, so it is something that you guys are considering. Okay, and then just lastly, just Opti Minerals, I mean, the segment has obviously reported weak results for last year. So it’s been a difficult one to model, two, just given that it’s volatile.

But I noticed in their press release this morning they mentioned that they’ve won some new business that's starting up in Q3. Is there any color at all that you can provide on the size of this business and have to move the needle, anything that you can do to help us.

Rik Jacobs

Yes, so, Opti Minerals had a pretty tough first quarter. They were really impacted by weather in all of the operations, our food operations were impacted, but weather was really – also a very big issue for Opti Minerals. So it did hit the results in the first quarter.

The good news and if they have their press release out this morning, is they have won some new business and I would say it has move the needle kind of business. There are couple of big blocks of business that they have been successful in achieving and they don’t start right away because the equipment that needs to be moved around after the customer’s locations where they will be doing the business.

But it’s certainly improve the outlook, a great deal for that business and when you combine that with improving weather patterns and sort of some of the cyclical trends turning, they’ve done a really nice job in kind of weathering the storm, quite literally and they’ve got some new business coming on so it’s encouraging for them for sure.

Christine Healy – Scotiabank

Okay, great. Thanks a lot.

Rik Jacobs

All right, take care.

Operator

Our next question comes from the line of Scott Van Winkle of Canaccord Genuity. Your line is open.

Scott Van Winkle – Canaccord Genuity

Okay, Steve, you mentioned, obviously, Wal-Mart’s efforts in adding natural organic products. We are seeing distribution gains everywhere. How does that materialize when you see every super market in North America adding products? Does that materialize into more co-packing business for you or more enquiries on private-label? Where do you see that dynamic hitting?

Steven Bromley

I mean, we actually see that on all sides. Actually, now we do a lot of private-label and we do a lot of contract manufacturing. So, for us, that’s an if you like, some double good whammy.

The other thing that now that we have in the organizational structure sat up, whereby we have one consumer products group that focuses on selling our entire consumer products portfolio to all of our customers. There is a ton of white space still out there for us to basically sell more to our current customers as well.

Scott Van Winkle – Canaccord Genuity

Then on aseptic, noting the expansion plan for this year, where is the growth coming from in that space? Is it a product category or incremental brands or taking higher share of the existing customers’ packaging business?

Steven Bromley

You know, Scott, it looks like you know our business inside out, because again, I have to say, yes, yes and yes. I mean, on the one hand side, we are entering into new categories, that’s exciting for us. So, we are now in the dairy category in a fairly significant way. We are entering into the nutritional beverage categories; we are in the food categories who brought some things like that.

Think about peas as well that you can find at some of your favorite food service coffee restaurants. And then – but in the non-dairy category, which is obviously where we started this whole business, there is also continued strength over there. While everybody got through a very horrible winter it was actually for non-dairy, it was not a bad winter.

It was one of the best coffee winters that we’ve had in years, as many people say. So, in non-dairy we are taking share and we are entering into new categories and some of our customers continue to grow as well through expanded distribution.

Scott Van Winkle – Canaccord Genuity

Okay, and then, on the alignment, clearly seeing that, you are realigning after it have really benefited revenue. When you think about that, how much of your efforts kind of go towards margin versus demand creation and kind of where are you in realizing those benefits?

Steven Bromley

I am going to let – Scott, it’s Steve, I am going to let Rik to get into what we are doing to improve margins, but, couple of things that I’d like to point out. One is, these are the highest operating margins we’ve had since Q2 of last year.

So we are certainly seeing the benefit and the great news which I’ll let Rik, take more time on is that the efforts ongoing on the operating side are starting to pay dividend and now combined with the commercial side, so we’d expect to see some nice margin improvement in there and I’ll let Rik kind of talk about the things that are going on there.

Rik Jacobs

Yes, and as I mentioned in my remarks earlier, the segment things are focused on the customers and they are focused on the top-line, not just the top-line they are also focused on the contribution margins.

And I believe in the short-term where we have significant opportunities to improve our gross margin, by doing the better job in our factories. We have not done such a fantastic job up until now I don’t think by leveraging the platform.

But we’ve got thirty factories basically throughout North America and once they all get it and start working on the same KPIs et cetera, et cetera, there is – I think that that is at least two points versus margin to the bottom-line for us and they are relatively short-term.

Scott Van Winkle – Canaccord Genuity

And if I could take that in a little more detail into the pouch side, you said that, not happy with the margins you are seeing in that business, how much – what’s the magnitude of opportunity. We talked a lot about the pouch segment for a couple of years now, what’s the opportunity in incremental EBIT profit dollars if you kind of hit your targets?

Rik Jacobs

Yes, I think that has to have something to do with product mix/customer mix in the facility as well as factory performance. So, the magnitude of that, I can’t put a number on that right now off the top of my head, but it is significant. So, product mix what I mean by that is, we have been very much focused on the baby food category if you like. We got to get into other categories as well, very much similar to what we are doing on the aseptic side of things.

And when you are talking about factory performance, this is a factory that we started less than 18 months ago, I guess and we still have significant room for improvement over there in terms of utilizing the equipment properly but also adding more capacity over there so we get about an overall recovery.

Scott Van Winkle – Canaccord Genuity

Great, thank you.

Rik Jacobs

Thanks, Scott.

Operator

Our next question comes from the line of Mitch Pinheiro of Imperial Capital. Your line is open.

Mitch Pinheiro – Imperial Capital

Hey, good morning.

Steven Bromley

Hi, Mitch.

Mitch Pinheiro – Imperial Capital

So, sort of some housekeeping questions to start. With the tax rate, if I did my calculations a little higher than it’s been, I mean is that in the 40% area, is that the level we should use for the remaining part of the year and sort of coinciding with sort of your view of guidance – not guidance, of concern to this?

Robert McKeracher

Hey Mitch, this is Rob.

Steven Bromley

Yes, Rob will take that one.

Robert McKeracher

Yes, it was a little higher in the quarter, what really that is, we have guided before to be in the 38% to 39% range. And that would be sort of the normal effective rate that I would expect to be used.

But in the quarter, the one thing that caused the rate higher or some changes in foreign exchange on the Canadian dollar and just the non-cash impact that has on some of the tax assets we have. So, the 40.2% is a couple of points higher than I had expected.

Mitch Pinheiro – Imperial Capital

So, for the remainder of the year, where do you think we should be at this point?

Robert McKeracher

I’d expect it kind of be in the 39-ish range that as a safe guess based on the mix of our earnings. We have a high propensity for taxable earnings in the U.S. jurisdictions that explains the high rates.

Mitch Pinheiro – Imperial Capital

Okay, thanks and then on the accounts receivable, it was up a little ahead of sales, is that mix and if there is any detail around that, that would be appreciated?

Robert McKeracher

Yes, sure, it’s part mix. But the bigger part to be honest is the higher sales level. So you can see the normalized basis 16.4% revenue growth coming through in the food business that price has not more of that lift in AR just really supporting the growth in the business and the other half is customer mix.

Especially, on the Global Sourcing and Supply side, where there is a greater mix of some longer term higher specialty product sales in there this year versus last. So, that’s what explains that, but from my perspective it’s nothing really anything ordinary there. The first quarter is typically is use of working capital as it was this quarter.

Mitch Pinheiro – Imperial Capital

Okay, and then, looking at commodities, it’s like a mix bag, I mean, you are getting a little more into dairy and dairy is going up. How should we think about commodity costs across your three segments this year?

Robert McKeracher

Yes, I think if you look at Consumer Products and you look at Value-added Ingredients, I really think that most of those are either flat or on a pass through basis and when it comes to the Global Sourcing and Supply, I mean, that’s where we have actually – the commodity price has gone down quite a bit on the domestic side, right?

If you look at corn and soy at least, some of the international commodities, the organic commodities that we trade in of course, there are – coco as we know as stayed at near all time high is coffee has rebounded tremendously. In all of those, we feel that we are well positioned to take advantage of what’s going on in the markets, that’s kind of our business. Right, but we think we’ve got it right now.

Mitch Pinheiro – Imperial Capital

Yes, so as we model this out, I mean, on corn and soy for instance, you are making the same penny profit I presume, therefore on a lower revenue is that would be a higher margin, is that higher gross margin in the Global Sourcing side? Or net-net, is there things netting that out that make it flattish?

Robert McKeracher

Well, I mean yes, in principle you are correct. Having said that and we refer to that in our Q4 presentation, we did guess last year caught into a bit of a long position, right when the markets went down.

So, obviously, when markets go down you want to be short, and when markets go up you want to be long and what you are seeing right now is the fact that the markets are all trending back up again.

So, the long position while the market was going down part as a little bit last year and have a little bit of a carryover into the first quarter, but net-net, as the penny profits should stay flat and then your percentage margin will be higher.

Mitch Pinheiro – Imperial Capital

Okay, and jus last question, it gets back to some of the comments you have made regarding the factory and factory efficiency, I mean, you’ve done a lot of adding in the last two years, pouch, aseptic, coco, you are working on San Bernardino, is there just a long tail of inefficiency in the other 25 facilities and why would that be? Why wouldn’t there be some sort of continuous improvements at these manufacturing and processing areas? Is it all volume or I mean has…

Steven Bromley

I think, what I’ll try to make clear is, in the past, when we had all of our divisional leaders, before the organizational realignment, they had to focus basically on the factories and they have to focus on the customers and they have to focus along with the board,

What we are doing now right now is, we are taking our continuous improvements in the next level by having out segment leaders focused on contribution in revenue and their sales teams and by having our operational teams focus – not just on the factories but on the entire supply chain, I mean, one of the key areas for us to focus on is actually outside of the factories which is in freight and logistics which as many of you may know has been fairly challenging over the last six months or so.

So that’s an area where we are saying, okay, we are also have to bring that leverage where in our own structure, we weren’t necessarily looking across all 30 plants on all of the divisions in our new structure having people that are squarely focused against that is going to take our continuous improvement to the next level.

Mitch Pinheiro – Imperial Capital

So, the last question, so I lied I guess, but just as a follow-up to that, can you, Rik, could you just provide a couple of examples as to what you are attacking on the supply chain that would be a meaningful?

Rik Jacobs

Well, I mean, you are safe about it, if you look at our foods business, if you just look at our freight cost and the warehousing cost, and I am talking about the costs from us going to the customer, that’s about 4% of our revenues, that’s $40 million, If you are going to save 5% of that, that's a meaningful number.

Mitch Pinheiro – Imperial Capital

Okay, that’s helpful. Thank you very much. Really appreciated.

Operator

Our next question comes from the line of Tim Tiberio of Miller Tabak. Your line is open.

Tim Tiberio – Miller Tabak

Good morning. Congratulations on a great quarter.

Steven Bromley

Thanks, Tim.

Tim Tiberio – Miller Tabak

I guess, my question is little bit more strategic in nature. With one of the largest box retailers suggesting that they are planning to move into the space, I guess, in most of the conversation it’s been around, how this is going to impact pricing and the margin structure longer term, but I guess, when I think about not just only a value-added consumer product company, you really have build out a substantial global sourcing capability over the last 10 to 15 years.

And it seems to me, as demand increasingly is outstripping supply, and you are seeing someone who is more volume-oriented really stressing the supply chain, that is really exacerbates the inherent value not only in your consumer products group, but also within your supply chain.

So, I guess, my question is, in light of this announcement, what can SunOpta do from a growth standpoint and expanding the supply chain to be prepared for this? Are there opportunities potentially to lock in long-term contracts to really position yourself potentially for the volume opportunity which maybe able to mute some of the margin impact over time?

Steven Bromley

Yes, obviously, that is exactly what we are working on. On the one hand side, when it comes to the customers that we are dealing with, we are getting more and more strategically aligned with them rather than just effectively aligned meaning longer term contracts which have impacts on both parties I would say those good and where we have to improve.

I think the other thing that we’ve been working on and on, while we always say, yes we want to continue to go up the value chain, what we truly believe in is our integrated vertical model and we are making continuous improvements and continuous investments also in our global supply chain.

Just as a reminder, we just started up with a – so as opposed to just buying their coco beans and having them full processed somewhere else, we are now doing that. We are doing the same with – in Ethiopia, with the coco not sure where that’s coming out of Indonesia.

The projects that we got going on in Vietnam, I mean we got things going on all over the world. So, one of the key focus areas for us is, making sure that we stay in extremely relevant parking in the supply chain and bringing that added value even if it is on the selling on an organic raw material to a customer.

Tim Tiberio – Miller Tabak

So, I mean, would that make sense for SunOpta to start thinking about trying to lock in some of your larger suppliers?

Steven Bromley

Tim, there is a number of different types of suppliers we have and many suppliers don’t want to lock in and they are going to be in annual contract, some of them can’t provide you with product every year because of the grain, you may go in out of their rotation and they maybe growing something that isn’t really a fit with the portfolio of products that we are streaming to market.

But, we also have and Rik talked about the number of these global sourcing and supply sources. Those are projects that we developed with small growers, small holders and we prepay them and so we do have longer-term commitments, everybody, and so, long-term commitments always have to be variable enough that as the price of commodities go up and down one party or the other isn’t losing it.

So I don’t want to leave you with the impression that we don’t have longer term arrangements. We do and then also at times, we don’t want them to be longer term and those relationships are year-to-year, but we have very little churn if you will in the grower base that we have.

Rik Jacobs

Especially on the organic side, and so we don’t get a lot of churn there and we are continuing to develop and build that out. I said for a long time and I am on record that I think one of the most strategically significant parts of our company is our global supply base.

And while, we get the lowest margins, all we do is sell the raw material, the reality is this that I think it’s what strategically differentiates us and so as we move up our value chain into value-added ingredients where the margins are getting higher and we are most significant in relative to customer.

And then moving through with the consumer products where again, we are adding more value. It’s really important and so that supply base is essential and we are continuing to grow and we have more and more growers for a year that are growers or suppliers that are part of that chain and it’s strategically very important for us.

Steven Bromley

And especially, by the way, especially when you see people want to move into the space, I’ve also been on record for a long time that one of the key challenges of our industry over the next 30 years will be to around supply at the pace required here. And so we are very busy in that regard.

Tim Tiberio – Miller Tabak

Great, and just one last question, when we are thinking about growth in the Consumer Products group, you obviously announced an expansion project at Modesto again on the aseptic beverage lines, should we still think about your growth velocity as primarily organic or is SunOpta at some point thinking about becoming more aggressive on the M&A side?

Steven Bromley

Sure, we’ve obviously had good internal growth and we have a little saying around here that we’ve been drinking through a fire hose which means there has been a lot to swallow.

And so those – most of those efforts have been around internal growth projects. I can assure you that we’re active and interested in acquisition opportunities. We’ve been involved – we are also quite disciplined and we are believers in – we are not believers in diluting yourself as you acquire based on future synergies that are – so, net-net we are not going to over pay and the markets are pretty heated.

But we are involved and you should expect us to be acquisitors, but responsible acquisitors. I don’t want to suggest that anybody in our space that's been acquiring hasn't been responsible. But, we got to be able make these work.

The good news for us is that, irrespective of acquisitions, we had a 16.4% internal growth rate in our foods business and so there is lots of growth opportunities and we will continue to seize on those and we’ll look for those acquisitions that make the most sense for us and that are out there and we have discussions going with a number of different parties.

But, again I emphasize we are going to be disciplined about this and when the – eat up that multiples get up into the double-digits, one needs to be quite careful not to regret what you do.

Tim Tiberio – Miller Tabak

Great, thanks for your time.

Steven Bromley

Thanks a lot, Tim, Take care.

Operator

Our next question comes from the line of Chris Krueger of Lake Street Capital. Your line is open.

Chris Krueger – Lake Street Capital

Great, good morning. Kind of following up on the last question about sourcing, what are you seeing as far as – at the farmer level, are more farmers joining the organic trend and converting or I know the last few years, commodities got high, it’s tougher to get them to convert. Just want – what’s your thoughts are there?

Steven Bromley

So I am going to turn that over to John Ruelle.

John Ruelle

Yes, so I guess, the first thing to become organic and convert at the three year journey, you can’t just one year plant the conventional crop and the next year plant organic. For the acre it has to get certified as organic as the three year transition.

So, when we look at the macroeconomics of some retailers’ announcements of late, the journey to get a significant move in the supply side is a three year journey. So in the near-term, we are seeing some positive in that as far as non-GMO goes with core – historic highs and settling back to reasonable levels in the last 12 months.

We are – our phone is ringing a lot more from those that are interested in specialty crops, but the journey to get a significant move in the North American supply side on organic is a three year journey.

Steven Bromley

I’d say as well, Chris, is we are having more success internationally and that's why having the global footprint becomes so important.

Chris Krueger – Lake Street Capital

Great, the weather impact, now your Opta Minerals investment was impacted by the weather in the first quarter, was it much of an impact on the food business?

Steven Bromley

Yes, I’d say it’s about 50:50. 50% of the number that we disclose would be on the minerals side and about 50% on the food side, The big food impacts were – well, other than the fact that trucks were supposed to arrive on a Tuesday and they show up on Thursday, because they just went through the largest ice storm or blizzard that they’ve been in, in a long time.

That was one of the impacts, natural gas was a major impact. There was a pipeline problem in Manitoba which really impacted a lot of the Midwest and we have facilities that were curtailed and so we had an option one was the flip over to propane which went up about massively.

So it was very inefficient and costly and for those facilities where we had no choice and we had to get our customers served and there was no vigor room then we went on propane and paid the extra cost. Other times, we shut the plants down for a couple of days, so it was about 50:50.

Chris Krueger – Lake Street Capital

Okay. Last question, I think it was about two years that you introduced rice fiber and that was to be used in gluten free products. Just wondering has there been much progress with the rice fiber and are there any other areas of gluten-free that you're able to try to go after?

Steven Bromley

There has been progress, Rik will be doing that.

Rik Jacobs

Yes, we are, our rice fiber is now on a number of products that are up in –out in the market. Some of them being – I don’t really feel comfortable talking about the brands that are taking this rice fiber but there are brands that are definitely buying our large fibers.

Steven Bromley

And known brands.

Rik Jacobs

Known brands, yes, big brands. So, we are happy with the launch of that one and there is more and more people interested in that. Even our oat fibers are kind of starting to make a pretty good bounce back.

There was some pretty good diary company that announced something yesterday that was interesting for us as well. So, yes, we are seeing good progress on organic oat fiber, rice fiber and we are very excited about our latest product which is the Opta Smooth product, because it actually provides a health benefit as well as a cost benefit to switch from the soluble fiber foods, because many people use right now in bars and in beverages the insoluble one that we are offering.

Chris Krueger – Lake Street Capital

All right, thanks. That's all I got.

Rik Jacobs

Take care Chris.

Operator

Our next question comes from Reed Anderson of Northland. Your line is open.

Reed Anderson – Northland Securities

Good morning. And let me also add my congratulations on a nice start to the year.

Steven Bromley

Good morning and thanks.

Reed Anderson – Northland Securities

Just a couple follow-ups, mainly, but first before, Rob, just curious, I mean, what was the rough impact of that extra week on the quarter in terms of sales and profit, ballpark, what would you think that would be?

Robert McKeracher

Yes, I mean, and of course it is a ballpark guess, because we don’t know that that’s a timing kind of fell both at the front-end and the back-end of the quarter. But the easiest math to do it would be to take 140 through the sales. So which is roughly $21 million.

Reed Anderson – Northland Securities

Okay, good. That's helpful. Thank you. And then, Rik, you had commented about margins in pouch and there was a question on that and you had some more commentary. My follow-up to that is simply, from a timing standpoint, to get to what you today might consider to be more or less optimal margins.

And obviously, it's always a moving target, but to get to something that's reasonable, what is a rough timeframe for that? What are you thinking today? Is that a several year process? Can you get there in 18 months quicker than? Give us a frame for how to look at that please?

Rik Jacobs

So, I’ll go back to our three strategies, right? And I basically say, if I start with the leverage of the platform for me that is the shortest term opportunity to make some meaningful impact into our operating margins. And what I mean by meaningful impact that is in a shorter term I think that should be within the 12 months timeframe.

Of course, it won’t be finished within 12 months, but that's when you should start seeing the timeframe, so in this calendar year. The second strategy being going up the value chain, I think that's, you are starting to see the effects of that, that’s a little bit longer term.

So it will be about the 12 to 18 months and the last strategy which is actually our first one, which is becoming a pure play natural and organic foods company which is not only about selling our non-core assets.

But it’s also about as Steve has already alluded to making the right investments for internal growth, but also the right mergers and acquisitions that will be accretive, I guess with the longer timeframe.

Reed Anderson – Northland Securities

Great, that's helpful too. Thank you. And then Steve, more of a high level question, just going around this sourcing discussion, but if you look at your sourcing today in the current year, I mean, ballpark, what is the non-North America portion of sourcing and today what do you think it will be this year? What does it look like versus a year ago?

Steven Bromley

Well, I mean the non-North American part is representing probably about 50% of it, at least and it is growing the most rapidly. So, I think that they’ve been on a pair, our non-North American part is probably growing upwards of 30% in the quarter.

Reed Anderson – Northland Securities

Thank you. That's exactly what I needed. I think that's it for me. I'll let somebody else jump in. Best of luck, guys.

Steven Bromley

Thanks a lot to you.

Operator

And I am showing no further questions in the queue at this time. I would like to turn the call back over to Steve Bromley for closing remarks.

Steven Bromley

Well, great, thanks very much. It was nice to chat with everybody this morning. We appreciate you joining us for the call and as always we will look forward to keeping in touch. Have a great day and we’ll talk to everyone soon.

Operator

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

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