Rik Jacobs - Chief Executive Officer Rob McKeracher - Chief Financial Officer

Scott Van Winkle - Canaccord Genuity Amit Sharma - BMO Capital Markets Jon Andersen - William Blair Eric Gottlieb - D.A. Davidson Chris Krueger - Lake Street Capital

Good morning and welcome to SunOpta's Third Quarter 2015 Earnings Conference Call. By now everyone should have access to the earnings press release that was issued last evening. The release, as well as the accompanying slides are available on the Investor Relations page of SunOpta's website at www.sunopta.com. This call is being webcast and its transcription will be available on the company’s website. As a reminder, please note that the prepared remarks which will follow contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them. We refer you to all risk factors contained in SunOpta's press release issued yesterday, the company's Annual Report filed on Form 10-K and other filings with the Securities and Exchange Commission for a more detailed discussion of the factors that could cause actual results to differ materially from those projections and any forward-looking statements. Finally, we would 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’d like to turn the conference call over to SunOpta's CEO, Rik Jacobs

Thank you and good morning and thanks for joining us today. With me on the call today is Rob McKeracher, our CFO. As this is my first call as a CEO and we have a lot of new shareholders, I would like to take this opportunity to spend some time discussing our business, our strategies, and our transformational acquisition of Sunrise Growers. I also want to set out some important milestones for the future. Goals that will help us deliver on the promise that we’ve been building with our investments in our production capacity, people and processes. After that Rob will take you through our third quarter results and then we will be happy to take your questions. I’d like to remind those on the call that there is an accompanying presentation on the Investor Relations page on our website. So referring to that presentation on slide two is regarding forward-looking statements which the operator already covered, so if you could kindly turn to slide number three. SunOpta has built a leading position in the fast growing organic and non-GMO markets, markets that are large, deep and growing at double digit rates. This growth is underpinned by persistent and powerful consumer trends, increasing awareness of the link between diet and health; think of the stories everyday in the newspaper or on the radio about the importance of eating well. In fact, the New York Times just on Sunday ran an article on what it called the seismic shift in the way people eat, highlighting that food companies will need to go more organic, use more fruit and generally be much more healthy; we are already there. Concerns about food additives, allergens and genetic modification, to my knowledge there are some form of activism requiring the labeling of GMO foods in more than 20 states at the moment. And most importantly emerging consumer demographics. Baby boomers like me want to live longer and are increasing the eating organic foods, while Millennials soon to be the largest buying group are the most food and health conscious generation ever. If my daughter is anything to go by, Millennials read every label and constantly share food facts and photos with friends. So please turn to slide number four. We have a unique, vertically integrated platform. Our Global Ingredients segment has grown to about $600 million in sales, about two-thirds of which is organic. Our buyers and agronomist source ingredients from over 65 countries. Global Ingredients primarily supplies the good industry in the USA and Europe, the biggest and richest global markets, and the segment also sources most of the ingredients for our own consumer product segments. Global Ingredients is a great business and hugely strategic as it is the basis for our vertical integration, a key competitive advantage in our mind. Our ability to source organic and non-GMO ingredients from around the world, which are often in short supply and transform these ingredients all the way into a consumer packaged product is what we refer to as our two-touch model. Of our three main consumer products categories healthy beverages is the most scaled, especially on non-dairy aseptic business. We put a lot of time and energy into building a truly national platform with three plants. We have a plant in California, we have a plant in Minnesota, and now we will also have one in Pennsylvania, where we just started producing commercial products a few days ago, on time and on budget, which is exciting for such an important project. Healthy Beverages currently accounts for over 40% of our consumer product sales and that scale makes it our most profitable category as well. With our acquisitions earlier this year of Citrusource, we now do roughly $50 million of business in the premium juice category and with a retrofit of San Bernardino now complete and production ramping up, this business should turn into a real contributor next year. Healthy Fruit today has two businesses; there is the Individually Quick Frozen or IQF, retail Polybag business and the Fruit Preps and Food Service business, each is about $50 million in size today. This is why we are so excited about the additional Sunrise Growers, because it gives us scale in a second category and creates that vertical integration or two touch opportunity. And finally we have the Healthy Snack business. It’s about a $100 million size. In Healthy Snacks we have one business where we primarily pack organic baby food in pouches for brand owners and retailers. We like this business, but we are allocating growth capital to more promising opportunities, where we have a better opportunity to make margin. We are really excited about our Fruit Snack business where we are the clear market leader, especially after completing the acquisition of Niagara Natural earlier this year. We see great opportunities here for further growth through innovation. Please turn to slide number five. So how do we maximize our business? The first leg of our strategy is to drive vertical integration to build competitive advantage around our unique global sourcing capabilities. We always say we don’t own farms and we don’t own brands, but we do everything in between. We mainly focus on customized solutions for retailers and food service operators, where we truly leverage our two-touch model. Today, that’s about 60% of our sales in the Consumer Products segment. We’ve invested a lot in our platforms and believe that we now have built a significant revenue runway in all three of the categories. It also means that we will continue to divest non-core businesses or ones that don’t fit our vertically integrated two-touch model. This is why we are actively trying to sell Opta Minerals and why we sold our fiber business last year. Secondly, we must continuously add value to our customers. We do this through category management, key account management and innovation. Innovation is an area where we’ve really ramped up our abilities. It wasn’t the real strength of the old decentralized SunOpta model. In our new centralized model it is a core strength. We recently opened our new innovation center, bringing together our R&D resources under a new leader. We are starting to see the benefits of this approach with new launches of products that we created, as well as technology developments to lower our costs. The third leg of our strategy is all about getting more leverage from the platform we’ve built. So please turn to slide number six. You can clearly understand why we are excited about the addition of Sunrise Growers. This business ticks every strategic box. Sunrise is fully vertically integrated. It has a focus on private label, great relationship with key retailers acting as a category captain in a number of them and we see good synergies in sourcing, as well as operations. Adding Sunrise to our existing healthy fruit category makes it the largest one with roughly $400 million in sales. As you can see on the right hand side of the slide, it also means that for the first time in our history the consumer product segment is now more than 50% of our sales and will be roughly 70% of our profits if we execute on the synergies we’ve identified. So when we turn to slide number seven, the acquisition gives us an immediate leadership position in frozen fruit. The segment is growing rapidly and currently 70% of sales are in private label. Sunrise Growers has the leading position in private label and its fastest growing sub-segment is organic, where SunOpta has more developed sourcing capabilities. Sunrise Growers has operations located in California, Kansas and Mexico. They are strategically located facilities, which contribute to an efficient supply chain and they freeze more than 160 million pounds of strawberries annually. They also freeze mango and pineapple two other cornerstone items inside the frozen fruit segments. Please turn to slid number eight. So Sunrise was a significant investment. As you would expect for the most transformative acquisition in our history and on this slide you can see how we paid for it. I’d like to take a moment to walk you through our financing and explain why we’re very comfortable with it. We use the combination of equity, new debt and existing credit facilities. We did not place the bottom portion of the financing as planned, because of market circumstances, but we have a bridge loan from our lenders. Our goal is still to term this out. What is really key here is that we have a cap on our interest rate exposure at 9.5%. Even if we have to go to market at a higher rate, our agreement with our banks limits the rate we pay to 9.5%. This rate back stop is something that we want to ensure the market appreciates. As far as leverage, we plan to bring that down from our current five times EBITDA to about three times EBITDA through a combination of EBITDA growth and cash generation. We believe we can de-lever about a term per year. SunOpta is significantly undervalued at present we believe. Accordingly, as you will have read in our press release, the Board has put in place a shareholder rights plan and advance notice bylaw, both of which align with current industry practice and for which we’ll be seeking shareholder approval at our next annual general meeting. This was done to enhance the Board’s ability to ensure the fair treatment of shareholders and not in response to any known or anticipated effort to acquire control of the company. It’s just good practice as we implement our plans to position SunOpta for enhanced growth and profitability. So please turn to slide nine. So now we’re at a part of the conversation that I believe is really key. It’s about how we deliver on our promises. Strategically we had a number of success in recent years. I’d count Sunrise, our investment in people and our investment in processes among them. For example, as we’ve transformed to a centralized operating company, from a de-centralized holding company we hired new leaders. As you can see on this slide, eight of the 12 senior leadership members have been recruited in the past three years and all have worked hard behind the scenes to improve the processes in their areas of expertise. Our team is made up of world class leaders in their respective areas of expertise and they are a critical part of delivering on what I’ve pointed as Excelution, which stands for Excellent Execution. So if you turn to slide number 10, Excelution in 2016 centers around improving our revenue and margin growth in the consumer product segment. This is why we’ve put in place milestones to measure our progress as a team in this area. So in healthy beverage we have to increase the gross margin into juice by at least $6 million and we have to convert our pipeline in aseptic non-dairy now that we’ve built and made all the investments. This means we must achieve double digit top line growth for healthy beverages. In healthy fruit, it is obviously paramount that we successfully integrate Sunrise Growers and provide support to the business, allowing them to continue growing at that current double digit rate, while maximizing the returns on their recent strategic investments. At the same time, we must capture the synergies we identify, so that we can add an extra $5 million to $7 million to the bottom line. In healthy snacks, we’ve identified fruit snacks as a key growth area, so that business must also grow at least 10%. For bars and pouches we have to fill the available capacity we have with maximum profitability, especially in bars. Now all three categories have to be supported by increased innovation. We are counting on at least $10 million in new product innovation hitting the market in 2016 and we have to do everything possible to reduce our cost of goods sold, now that we’ve made most of the requisite investments. Every time I walk through our innovation center, I am excited about the steps we’re taking to be a leader in our space. Finally, from an SG&A perspective we are committed to stay below our stated goal of 8%. These are some of our short term goals, my goals and I look forward to updating you in coming quarters on our progress. With that, Rob will walk you through the third quarter numbers. Rob, over to you.

Thanks Rik and good morning everyone. Because we’re spending a bit more time than usual talking about strategy and execution, I’m going to try to keep this relatively quick. Slide 11 shows our revenue breakdown. Revenues for the third quarter of 2015 were $306 million, a decline of 0.6% from the year earlier quarter. After adjusting for the impact of changes, including commodity prices, foreign exchange rates, product rationalization and acquired businesses, consolidated revenues increased 1.5% with SunOpta’s foods revenues increasing 3.5% versus the prior year. On a normalized basis revenues in global ingredients grew 4.2%, reflecting stronger demand for organic ingredients in the U.S. and Europe. Focusing just on our internationally sourced organic raw materials, revenues grew 14.7% on a normalized basis, driven by higher volumes of organic fruits and vegetables, oils, coconut and seed, partially offset by lower volumes of coco and certain sweeteners. On the domestic side of global ingredients, revenues declined 5% on a normalized basis, due mainly to lower volume to sunflower products as the strong U.S. dollar put pressure on our export business. Within consumer products, revenues grew $11.1 million or 9.6% over the third quarter of 2014. On a normalized basis, mainly adjusting for the revenue of the businesses we acquired in 2015, Citrusource and Niagara Natural, revenues inside consumer products grew 2.7%. In healthy snacks we experienced higher volumes of both poach and fruit based snacks for both new and existing customers, partially offset by lower volumes in bars as we transitioned away from a contract with unfavorable terms. In healthy beverages, during the third quarter we made up for the decline of one of our largest aseptic customers with increased volume from new customers, thanks to our continued focus on filling the new processing and packaging capacity we added earlier this year. As a result, we realized sequential quarterly growth of 6.1% in aseptic beverages and approximately 9% in consumer products as a whole compared to the second quarter of 2015. However, this does come at a short term cost since every new customer we had requires qualification runs in our factories, which come at a cost of that immediately adding revenue. In healthy fruit we realized lower volumes of retail private label frozen food sales as a key customer in the organic and natural space faced increased competitions. That was partially offset by increased revenue from fruit toppings and bases for food service and industrial customers. Turning to slide 12, you’ll see that during the third quarter we generated gross margin of $30.6 million or 10% of revenues as compared to $36.1 million or 11.7% of revenues during the third quarter of 2014. Within SunOpta Food, the gross profit percentage is 9.5% compared with 11.3% for the third quarter of 2014. The gross profit percentage within SunOpta Foods for the third quarter of 2015 would have been approximately 10.7% if we exclude the impact of some non-recurring logistics costs, as well as the impact of expansion costs inside of our healthy beverage platform. During the quarter we faced approximately $1.9 million in additional logistics costs that stemmed from capacity constraints at ports on imports and exports of organic raw materials, leadings that emerged detention and other related expenses then in global ingredients. We also had approximately $1.5 million of costs related to the expansion of our East Coast aseptic facility and the ramp up of our premium juice facility to increase production levels we see coming in the fourth quarter. The 0.6% decrease in SunOpta Foods gross profit percentage on an adjusted basis mainly reflected lower capacity utilization and a higher cost basis than consumer product facilities, due in part to recent expansion activities. This was partially offset by improved performance in our rationalized sunflower operations and increased margin contribution from higher volumes of organic ingredients. Operating income for the third quarter of 2015 was $6.2 million as compared to $12.2 million in the third quarter of 2014. The decrease is primarily due to the climbing gross margin, as well as higher SG&A as a result of the incremental expenses related to the acquisitions of Citrusource and Niagara Natural and costs associated with ongoing litigation. Excluding the factors I just mentioned, operating income for the third quarter would have been approximately 2.7% inside SunOpta Foods. As a percentage of revenue the SG&A expenses were 7.8% on a consolidated basis and 7.4% within SunOpta Foods. Excluding other expense which primarily related to acquisition and severance cost, expenses related to an ongoing litigation and the previously mentioned logistics and start-up costs, adjusted earnings were $5.7 million or $0.08 per diluted share in the third quarter of 2015 on a consolidated basis and $4.7 million or $0.07 per diluted share within SunOpta Foods. We realized EBITDA of $13 million during the third quarter of 2015 as compared to $18.8 million in the third quarter of 2014. After giving effect to the previously mentioned items, adjusted EBITDA for the third quarter of 2015 was $16.8 million. Turning to slide 13, from a cash flow perspective, during the third quarter of 2015 we generated $22.7 million in cash from continuing operations, up $4.4 million from the third quarter of 2014 as a result of decreases in working capital during the period. We used $13.6 million in cash from investing activities during the third quarter, primarily to fund the upfront purchase price of Niagara Natural, as well as capital expenditures. In the prior year third quarter we collected $5.7 million in cash proceeds from the sale of certain sunflower facilities, which largely offset the capital spending during that quarter. Also during the quarter we raised $95.3 million in cash as a result of the issuance of 16.7 million common shares in support of the acquisition of Sunrise Growers, which explains the large increase in cash provided by financing activities. If you’ll please turn to slide 14, you’ll see our key balance sheet metrics. Our working capital which excludes all cash and forms of debt was $291.7 million at the end of the quarter, as compared to $280.4 million at the end of 2014. Total consolidated debt and bank indebtedness for the company was $148.5 million at the end of Q3 versus $131.3 million at the end of 2014. And total debt for SunOpta Foods is $110.2 million up $27.2 million since the end of 2014. The increase in SunOpta Foods debt reflects the upfront purchase price of Citrusource and Niagara Natural for $19.8 million in aggregate and capital expenditures of $22.8 million offset by cash generated by operations. In terms of liquidity, at October 3, 2015 we had aggregate availability under the two credit facilities that fund SunOpta Foods of approximately $111 million. On October 9, 2015 we entered into a loan agreement with a group of lenders borrowing $330 million for the acquisition of Sunrise Growers. This is second lien bank debt that will mature after one year and at that time if this debt remains outstanding, it will automatically convert into six year term debt. Subject to market conditions, it is expected that we will attempt to refinance this debt into seven year bonds during the first year. As Rik mentioned, the key feature of our agreement is that our interest rate is capped. Let me explain this in a little more detail. Under the loan agreement that we negotiated, interest on the second lien bank debt has been initially set at LIBOR subject to a 1% floor, plus a margin of 6%. The margin will increase by 50 basis points at the end of every three month period, up to the one year anniversary. In all cases the maximum interest the company will be subject to on this trench of debt is 9.5%. Because we negotiated fully committed financing in order to complete the acquisition of Sunrise Growers, we have certainty of financing on this debt for seven years from the date of execution. This debt along with the rest of our capital structure gives us certainty and flexibility to continue to invest in and grow our business. With that, I’ll turn it back to Rik.

Thanks Rob. If I can leave you all with four key takeaways as we look ahead, it will be the ones laid out on slide 15. We operate in great markets. We have a well defined strategy to drive our business to higher margin. Sunrise Growers make sense both strategically and financially and Excelution has to be paramount, especially in our consumer product segment. So with that, I’d ask the operator to please open up the floor for questions.

[Operator Instructions] Our first question comes from the line of Scott Van Winkle with Canaccord Genuity. Your line is now open.

Hi, thanks. Rob, can you go deeper into that port capacity issue. Kind of what was it and why doesn’t it repeat going forward?

Yes, sure. So it’s really a combination of two things Scott, import and export, all organic soy and corn. You might recall back earlier this year, mainly in the west port there were issues at the ports regarding labor, which certainly from our perspective slowed down some of our exports. We did get them to their eventual destination, but as you could appreciate not all on time and now at this quarter what we’re seeing is some of the penalizing effect of that, meaning we’re losing some of the performance bonds that we have to put up in order to do that business, so that hit us now. It’s really – but the real impact or the real catalyst for that was certainly earlier in the year. But then on the flip side, on the import side, mainly on the East Coast we encountered issues this quarter really with availability and the arrangement of timely freight to move the products that we were importing through the East Coast ports out of the port. So from that perspective we’re incurring more demurrage and detention costs there, that we don’t see now reoccurring going forward, because we’re mapping out the timing of those receipts a little better to make sure we can avoid those as best we can.

Okay, great. And then on the ingredients side, can you talk about kind of where we should expect margins. Over the last 12 months you’ve had the deflating commodities and that’s impacted the dollar revenue growth, but you picked up a little bit on the margin percent. Kind of where do we stand today going into kind of the next crop cycle? Are we more normalized on pricing, what does that margin look like, anything you have in that regard?

Sure. I think what you’ve seen even bigger picture, certainly the commodities are down right now and they are hitting lows from the – if you look back to the three to five year period we’re certainly at the bottom end right now, so we do expect this to kind of be the bottom of the commodity prices, but I think when you look back in time, what you really see in our global ingredients business is a steady step up to more predictable and more acceptable margins and we think with our shift to having a bigger proportion of that business being more tied into the international organic side, we’re going to continue to see this level of predictability and stability in our margin rates going forward. So really I look at it as much as anything as the mix Scott. Commodity still does influence us a bit. As prices go up, we could see compression, but I do think that with the mix towards more of the organic and then leveraging that business more and more for our internal sourcing, we should see good stability inside of Global Ingredients.

Okay, and then on the consumer products, nice to see some recovery on the volume on the aseptic non-dairy side and you mentioned there was new customers. What do we think about the roster of new business for the Allentown facility, and the expansion in Modesto. Are you going to see expanded business with existing customers or a lot of new customers coming through? I’m wondering, think about qualification cost and the time to start up a new customer relative to adding capacity from the existing customer or how that will play out, because you are looking for a lot of new volume obviously on aseptic non-dairy.

Yes. Hey Scott, this is Rik. We are obviously looking for new customers, as well as increased business with our current customs now that we have that national footprint in place. We will be able to provide the lowest landed cost across the country that should benefit us with our existing customers. But as we laid out last quarter, we have really had a high concentration with a few customers in our aseptic business. So that’s why we need to grow our existing, but also definitely add in new customers and also go into new categories with those new customers. And you are absolutely right, as we bring those new customs on, which we did a lot of in the third quarter, there are costs associated with that, because every single time we will need to do quantification runs which you know eats into capacity, right.

So you’d expect to see more that in Q4 I would assume, both as you kind of do your last ramp-up on the juice side, as well as non-dairy. When we think about looking at the real earnings power of the healthy beverage portfolio, is that a Q1 ’16 event timing wise?

Yes, I mean I would say that sequentially we should continue to see growth in our healthy beverages, both top line, as well as bottom line. I’ve laid out in my remarks that next year basically the chilled juice must be margin positive, which it hasn’t been for the last two years as we all know. And aseptic is our expectation that that’s going to grow at double digit rates from out top line and obviously that’s going to really help our bottom-line, because we are going to fill up the capacity more and more.

Great. Thank you.

Our next question comes from the line of Amit Sharma with BMO Capital Markets. Your line is now open.

Hi, good morning everyone.

Good morning Amit.

Rob, a quick question for you. First, you called out $1.5 million of plant expansion expenses in the quarter. Could you please help us understand overall the last 12 months, what were some of the expansion and start-up costs and when do we start to lap those?

Yes, sure. So this quarter it’s really two facilities to which those are related. So of the $1.5 million, roughly $900,000 to $1 million is starting up the East Cost aseptic operation and Allentown with the balance being a ramp-up inside San Bernardino now that we are at a spot where we’re going to be significantly increasing the capacity and the volumes, not capacity, but the volumes that we are running through that capacity there at San Bernardino. In terms of looking back over let’s just say even year-to-date this year that same plant expansion start-up cost is about $2.2 million and the delta between the 2.2 and 1.5 is really all East Cost related. So it’s really in earnest this quarter that we’ve been really doing the ramp-up cost activity at San Bernardino, so that would be kind of this year depending [indiscernible] Amit and then as we look forward to next, well not even next year, I mean this quarter, there will be the kind of completion if you will of the ramp-up of costs in Allentown of course. We are only now just starting to make the commercial products, revenues will follow shortly after that. But the biggest piece of these start up if will at Allentown should come this quarter and then start to evaporate as we get to Q1 of ’16.

Got it, and San Bernardino?

San Bernardino we are there now. So we have repatriated essentially all of our volume going into that facility as of today. And so with the volume facilities running at good levels, the next step is to – and the ramp-up is really to a great extent in relation to our extraction side, which of course is the ingredient side of that facility in bringing more fresh citrus to the facility, so we can start generating greater volumes there.

All right. And any sense of what is the excess cost associated with starting new customers in the aseptic beverage segment. A - Rik Jacobs: I mean the way we look at it, Amit is like every day or every shift I should say that we don’t produce in our factory, but we use that for brining a customer online. It’s costing us about $30,000, so that’s kind of your cost of goods that you have replace them, right. So and we brought on a lot. So we had at least I would say seven or eight qualification runs in the quarter. So you can do the math on that, that’s more than $200,000 which by the way we didn’t adjust for.

Got it, but those will go away as you establish these new investments.

Yes, they will go away to some degree. Having said that, I think we need to continuously innovate, innovate, innovative and continuously launch new products, hopefully more and more of those are the ones that we help create because that obviously gives us a lot more intellectual property protection.

Sure and just on the same line of thought, you talked about double digit growth in aseptic beverages next year. And if look at the category, at least the measure of channel data that we are tracking is still growing by low to mid teens. So do you feel pretty confident with that double digit number going into next year from a capacity – not a capacity, but a volume expansion perspective?

I think what’s important to note is that even though we always call it our aseptic non-dairy platform, we do a lot more than just non-dairy. Right, so non-dairy we are continuing to expand with coconut, almonds, now we are even getting into oat and others. So that’s I expect some growth from, but we are also in the food category we are doing Broth now, we are doing Nutritional Beverages now; we are doing dairy now, in single served packages. So our growth rate should exceed what is growing in the growth rate of aseptic non-dairy.

And you are margin agnostic when you call from non-based dairy to other like juices or nutrition drinks or dairy, are you?

Well what we’d really like as we like working with retailers and food service operators because of our two touch model over there right. So we are margin agnostic as long as we are offering customized turnkey solutions. We are not margin agnostic when we switch between turnkey customized solutions and tolling business. So our key is really and our focus for the future continues to be working on the private label and the food service side of the business.

And Rik, last question from me, and you touched on that in the presentation about the new centralized model and also the new management that you are putting in place. Could you just help us a little bit understand, like what’s happening within the organization that should give us more confidence that this is going to lead to a faster realization of underline value of the portfolio and the platform going forward?

Yes look, I mean I think you it’s important to note that most of the new leaders have now been in place for about two years, as you can see on the slide. So over the last couple of years they’ve worked very hard on streamlining all the processes, making sure that all the organizations are set, have to be honest as well. It hasn’t yet resulted in the bottom line growth that I have put forward now for 2016 and that’s what that is going to be all about. So while I think over the last two years we have improved all the individual functions. What it is really all about now is as one team improved bottom line performance of the business.

Okay. Thank you very much.

Thanks.

Our next question comes from the line of Jon Andersen with William Blair. Your line is now open.

Hi, good morning Rik and Rob.

Good morning, John.

I wanted to ask about Sunrise Growers. First, on the synergies that you defined for 2016 of $5 million to $7 million. Can you talk a little bit about your level of confidence, visibility into those specific synergies and then are there opportunities beyond the $5 million to $7 million that could materialize in ’16 or beyond.

Sure. I mean what we pointed out in our initial press releases is that by the end of 2017 we wanted to realize $10 million versus synergies. We now have basically work streams going on that are being populated by people from Sunrise as well as from SunOpta in the area of logistics and operations in the areas of sourcing, in the areas of human resources, you name it, commercial etcetera. So all the synergies that we pointed out were really cost base synergies, because those are the only ones we want have to count on. But we really see the next opportunity is revenue based synergies, because we have a much more developed organic platform, which is about 10% of the Frozen Food category today. For us as previous SunOpta it was more like 50% of sales. It is the fastest growing sub segment and that’s where we see revenue opportunities that we haven’t yet counted as our synergy. So we are confident in the numbers that I’ve given. We have opportunity for more. We don’t want to count those as synergies until they land basically, when it comes to the revenue side.

Fair point. Let me ask you on the top line though, so because you haven’t really commented on growth expectations for Sunrise I guess over and above to the $300 million that was announced as the annual revenue at the acquisition timeframe, how should we think about the opportunity to grow that business top line over the next two to three years. I know revenue synergies are often, there are longer type coming, but can you talk about some of the opportunities you mentioned organic where you expect to kind of place your bets or grow that business in specific segments.

Yes, I mean look, the Sunrise Growers business and first of all they are totally vertically integrated, right. So they buy the strawberries from the growers and they freeze them themselves, yes and they do that at a scale that nobody else can match in North America. That’s what gives them the real competitive advantage. Now, by freezing all of these berries we need to recognize that two-thirds of their business is retail business, right, and they have the largest retailers in the country, are there customers because of that scale that they offer. So in the retail side of the business we really continue to see this frozen fruit segment growing at double digit rate, especially on the organic side. One-third of their business, because when you freeze all of these berries, you not only get nice large ones that you put in polybags, you also get the small ones that you can puree or do whatever and sell into food service, that’s one-third of that business that’s not growing at double digit rates. So you got to think about that mix a little bit. So, overall growth rates are probably around the 10% mark.

Okay, that’s helpful, thanks. My last question is just on kind of the balance sheet and leverage. So Rob, you talked about being at about 5 times pro forma today and bringing that level down I think in the press releases 1 to 1.5 turns a year. Is that primarily driven by EBITDA growth, at least as you look at out over the next 12 to 18 months, as opposed to free cash flow generation and debt pay down. Thank you.

Yes, and so it is a combination, you are right, that we are sitting for a run rate perspective today obviously post acquisition around five times. The acquisition itself of Sunrise is cash flow accretive immediately for us. So there will be an element of debt reduction that lends towards the deleveraging, but I suggest that in the first 12 to 18 months EBITDA will be the bigger catalyst towards the decrease in leverage and then in the following let’s say 12 months you kind of now balance more over to the combination of the EBITDA growth and debt reduction still. So what you see is real opportunity, where both Sunrise and SunOpta and you heard in some of Rik’s prepared remarks, we’ve done a lot of investments into our platforms and into capacity which we are now executing on filling. So of course as we fill that EBITDA, we will accelerate here over the first 12 months.

Thanks guys, and Rob I’ll look forward to seeing you at Illinois next week.

Yes, look forward to it. Thanks.

Our next question comes from the line of Eric Gottlieb with Davidson. Your line is now open.

Good morning everyone. I want to talk a little bit more about aseptic beverages and almond milk. I believe in the last couple of times we spoke there’s a sort of difference in pricing on shelf due to a sourcing disadvantage. I’m wondering, has that changed at all and when that will grow out.

No, that has not changed. What has changed is that we now have capacity that we can fill with new customers and at a time that significant decrease happens, we did not have that pipeline of new customers. So the almond milk is still not growing versus prior year, it’s still declining.

When will we wrap the cost of advantage? Like when is the new crop coming?

On what, on the almonds?

Yes.

Well, the crop has already happened. I think it is more about the quantity of the crop has really gone down in California, because these things are grown in the valley and almonds are very thirsty. Those two things didn’t go well together in 2014, ’15 crop year. So that is really why almond prices have been going up. But you got to remember, we are not the ones buying these almonds, right. This is one of those businesses that is more on a tolling basis rather than on turnkey basis. Our customer buys the almonds. We just make them into almond milk for them.

Right, right, I got it. And then as far as utilization at the aseptic facilities, what is the utilization rate right now and then given the new customers coming on and expectations for them ramping up, where do you see that going?

Well, I mean look when we were, I mean as I just take you guys back to the second quarter of last year, we had 80% plus utilization in our facilities and fantastic profitability as a result. Right now we are not yet at an 80%. I would say we are more between 50% and 60%, so that’s what. What we’ve really done now – I mean we got about $250 million business in aseptic beverage. We build about $120 million runway and that runway needs to start getting filled. If I say I need to get double digit growth rate next year, that means I got to grow somewhere between $30 million, $40 million in terms of top line revenue. That still will leave some sort of a runway to go, but that will get us into much more acceptable profitability levels as well.

Okay, great. Moving on the Premium Juice, so real contributions next year and then also $10 million in new products. There’s all these targets that you’ve listed, SG&A at below right. Can we consider these guidance or more targets.

No, these are all targets for ourselves.

These are goals. I mean these are what I’ve set out for the team to achieve and there are goals on our way to reaching our overall goal obviously, right. So we, as you know we don’t give guidance, but I wanted to give all of our investors and you guys a better view of… For me 2015 is all about, we got to focus on consumer products, because ultimately as we add more value for our customers, we should be able to retain more value for ourselves. And right now because of all the investments we’ve made in our platforms and some factors outside of our control, I’ll be the first to say there’s a lot of factors inside of our control that we didn’t execute on, but because of that right now we are seeing a situation where actually consume products is at a margin, gross margin level that’s below our egregious levels and that’s as far as I’m concerned, that’s an upside down world.

Right, that makes sense. And then just housekeeping lastly, the tax rate, could you go over if there is anything in there to make it so low and then expectations going forward?

Yes sure, let me start backwards. The expectation going forward I suggest to be in the kind of 34% to 35% range. What you really see this quarter is the effect of having a net pretax income of such a low level. Often when that happens, and you are looking at the jurisdictional mix of where we are earnings our profits, the tax rate becomes a little bit – I mean it’s tough to recognize it as a rate. So I mean there’s a little bit in there of benefit. You go through your normal third quarter true-ups as the tax returns are done, but net-net what you see is the effect of not having a meaningful pre-tax number and what that can do to your overall tax. I mean you’re talking about 411,000 recovery on what is a pre-tax number of 253. So it wouldn’t be fair to just apply a rate against the 253, because there is big mix effect inside of that.

Great. Thank you for the clarification. Okay, I’ll pass it on. Thank you very much.

Thank you.

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

Yes, good morning.

Good morning.

Hey Chris.

I just got a question on your aseptic expansions and your Allentown expansion, as well as the San Bernardino juice facility. If you look out the next call it 15 months or throughout the end of fiscal 2016, is this shift focusing away from kind of the start up expenses and more towards just driving higher sales growth and capacity utilization and ultimately margins, or is it going to be more – do you anticipate more expansion activity in 2016.

No, I think you are absolutely right. 2016 is about getting juice margin positive and growing a top line now that we built a revenue runway inside of aseptic. We have obviously the capacity now to basically add some more filling lines as and when we need them in the Allentown facility. I mean we started with one high speed line over there. We have laid the ground work for adding more lines as and when we need, but for me and for the team its really all about, lets fill that revenue runway.

Okay. And then a quick question on the soybean crop this year. Does that seem to be fairly to normal here. How does that look?

I think this year we were actually in one of the better spots in the nation inside of where we grow most of our non-GMO beans or we don’t grow them, our farmers do obviously, but well not our farmers, but well the contract farmers. So I think Minnesota was – we had a very good planting, we had the right amount of rain. The crop came off the field later than normal because the frost stayed away. So net-net, we had a good crop.

Okay good. And then my last question is on the Sunrise acquisition, which I believe closed in kind of mid-October. Can you refresh our memory as far as the seasonality of that business and how the fourth quarter is compared to the rest of the year?

Yes, I mean look, today in the frozen food category, which is why we are so excited about it, you got less than 30% household penetration right. So who are the ones that are using it the most, it is all the Millennials that are making their smoothies on their kitchen counters like my daughter does every day and that’s really the usage. It will basically – they have national programs year around. What really is going to drive the growth of that category further is I think it is a very nice profitable category for retailers as they start to merchandize these frozen fruits more and more, next to categories that have a higher household penetration, that’s where frozen food is going to benefit the most. Its year around programs gives us some seasonality. Do people make more smoothies at Christmas? Maybe, I would say they probably and I’m just saying this out of my intuition right now. The most smoothies will be made in the New Year, after New Year’s resolutions take effect.

Okay, thank you.

[Operator Instructions]. We have a follow-up question from the line of Scott Van Winkle with Canaccord Genuity. Your line is now open.

Hi, thanks. We talked about Sunrise earlier, growth exceptions. Can we talk a little bit about margins? One of the things that investors saw in the prospectus when you won the equity deal was that Sunrise has some challenged margins in the first half of this year relative to prior year run rates, because of that fruit crop yield. Can you give us an idea of kind of where it stands today? When you would expect to see more normal margins and then I know some companies have been talking about a bad berry harvest in the Pacific Northwest. Can you talk a little bit about cost expectations on those inputs?

Yes, so you are right, Scott they did buy a lot of fruit externally, because 2014 crop was not as good as 2015. So they’ve frozen a lot more berries themselves than they have last year. That really impacted margins in the first half of 2015, because of course they get a cost advantage when they freeze it themselves versus when they have to purchase it on the outside market. That is an issue that will not be recurring this year. I think from an overall margin perspective, mid-to-high teens is what should be expected of there and that is very consistent with other platforms where we have scale.

Got you, and that’s the type of result we should see when that company gets consolidated here in the fourth quarter.

Yes.

Great. And then Rob the 8% SG&A target, it really doesn’t sound like that much of a hurdle. I mean you haven’t had an 8% SG&A number in a couple of years. I’m wondering why that target and is there opportunity to come in a little more meaningfully below on SG&A run rate?

Yes, I mean look, as we ramp-up obviously our revenue, all I wanted to get clear is that we are not going to grow our SG&A in line with our revenue, so we want to be below 8%. We’ve looking around the industry, especially at those people who serve as the retailers and food service operators. We believe that below 8%, we probably have the lowest SG&A. I mean look at people in our space on the beverages side that does private label or somebody who just made a very large acquisition that does private label. I mean their SG&A is higher, okay. The fair point there is there margins are also higher. I just want to be on record to say that we need to be the most efficient company out there when it comes to SG&A as a percentage of revenue. So that’s early, and you’re right. Our internal targets are sharper than below 8%. I just want to give everybody the message that we will continue to be as efficient as need be.

All right. And then Rik I think on the juice margins, the $6 million juice margin kind of goal for next year that also seems relatively easy to achieve, given the acquisition of Citrusource. Am I missing something there? I mean I would assume that Citrusource brought more than $6 million of gross profit with it.

Well. For me again it’s margin positive. That is what we need to achieve there, and you got to remember Scott two things; that business consists of two elements. It consist on the one hand side of the bottling and your absolutely right, that’s where we bring in Citrusource bottling and all that. So that alone should already drive us to positive. What is really the key for the sustainable future longer term profitable there is we got to fill out the extraction sides. So the more we are able to start with oranges, make those into orange juice as opposed to providing with field oranges. It’s going to be beneficial to us.

And Scott, keep in mind that as we set these objectives that we are kind of keeping an eye to the year-over-year change. I think we bought Citrusource back March 2, so there is 10 out of 12 months of them in there, and of course we are going to lap a lot of burden that was just our juice facility on its own. So we set that $6 million to really return that to profitability and continue to grow Citrusource.

Got you. Thank you very much.

Thanks.

At this time we have time for one more question. Our final question is a follow-up from the line of Amit Sharma with BMO Capital Markets. Your line is now open.

Hi there, thanks for taking the follow-up. Two questions here, one I just wanted to quickly go back to the Sunrise and you talked about difficulties is sourcing, its impact to your margin earlier this year. Is there anything you can do structurally to the business to avoid this type of short falls in the future? Is it from a hedging perspective or how you source or how you price? Is there anything else that you could do separately, differently that may lessen the volatility margins in that business?

Yes, I mean look, they’ve already being doing it. Traditionally they source all their berries, strawberries out of California. They have invested in the facility in the Ancho Valley, Mexico where we are or they have been expanding in capacity and we will be continuing that. So more and more of the berries will be coming from Mexico. By the way, they are exactly the same berries. This is called the camarosa strawberry. Having said that, so that’s one thing – they’ve invested in more. There’s other areas in the world where they grow the same strawberry and that is where SunOpta then comes in to play, because from an international perspective, we are also by the way, almost all of the organic fruit that is being solid in the United States is sourced internationally. That’s where we have boots on the ground on every single continent, whether you are talking berries out Serbia or Chili or out of the Pacific Northwest or out of Canada, I mean that is where the organization, the vertical integrated organization of SunOpta’s build comes into play, to basically diversify away from any kind of crop risk in a certain geographic area.

So we should expect less volatility in margins going forward, in the Sunrise business. Is that fair and reasonable to expect.

That’s fair. It’s important to keep in mind Amit that Sunrise has been growing at north of 20% internal growth and organic growth CAGR and so part of that shortness if you will in having to buy more outside fruit was one of those nice to have problems in their eyes. I guess you could say in that their growth required them to go outside more than they otherwise would have and that’s why they’ve been so ahead of the curve here in adding more capacity to do their own freezing.

Okay, and then last one of the global ingredients side of the business Rik you talked about shifting more of your mix towards organic fruits, sweeteners, all the other nut’s and you talked about how that a might be a margin enhancement as well. Could you talk just about that a little bit more? Is that simply a greater advantage or is it a commoditized grain, sunflower or corn here. Is that to play here or is there anything else that you would like to highlight?

That is defiantly. I mean look, $400 million out of the roughly $600 million platform is organic, and that’s $400 million, that’s probably more than $300 million of that $400 million is what we sourced internationally, where we have built-up supply change, where we have the organic exports of different goods, etcetera, etcetera, etcetera and that has indeed a higher margin potential for us that the corn, the soil and the sunflower, whether that be non-GMO or organic.

Are you able to quantify what the differential is in margin between those two different type of businesses?

I think it’s probably about 4 or 5 points of margin.

Thank you very much.

Okay, so thanks everybody. Is there any other calls operator?

I’m showing no further questions in queue at this time.

Okay, well thanks for joining us this morning and just as a reminder, I think some on you already pointed it out. If you happen to be in the Chicago area next week, please stop by our booth that we have over there. There is a Sunrise booth and a SunOpta booth, by the way that will be the last time you will see two booths. That’s one of the synergies that we are going after. And it’s at the Private Label Manufacturers Association show which is from the 15th to 17th. So look forward to seeing you there if you are in the area. Bye-bye.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone have a great day.