Good morning, and welcome to SunOpta's Second Quarter Fiscal 2018 Earnings Conference Call. By now, everyone should have access to the earnings press release that was issued this morning and is available on the Investor Relations page on SunOpta's website at www.sunopta.com. This call is being webcast and its transcription will also be available on the company's website. As a reminder, please note that the prepared remarks, which will follow, contain forward-looking statements, and the 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 this morning, the company's annual report filed on Form 10-K and other filings with the Securities and Exchange Commission for more detailed discussion of the factors that could cause actual results to differ materially from those projections and any forward-looking statements. The company undertakes no obligation to publicly correct or update the forward-looking statements made during the presentation to reflect future events or circumstances, except as may be required under applicable securities laws. Finally, we'd like to remind listeners that the company may refer to certain non-GAAP financial measures during this teleconference. A reconciliation of these non-GAAP financial measures was included with the company's press release issued earlier today. Also, please note that unless otherwise stated, all figures discussed today are in US dollars and are occasionally rounded to the nearest million. And now, I'd like to turn the conference call over to SunOpta's CEO, David Colo.

Good morning, and thank you for joining us. With me this morning is Rob McKeracher, our Chief Financial Officer. During the second quarter, we continued to make progress with the Value Creation Plan, including additional conversions of our sales opportunity pipeline, strong performance in aseptic beverages and snacks and continued growth in organic ingredients. While challenges remain in frozen fruit, results improved sequentially, and we made good progress implementing our frozen food operational improvement plan. On an adjusted basis, revenue was close to flat with the prior year and adjusted EBITDA was in line with our expectations. We continue to capture incremental EBITDA improvements through the Value Creation Plan, much of which we have reinvested into pricing actions in the fruit platform. We also remain confident with our expectation of returning to consolidated revenue growth in the second half of the year. Let me review the second quarter highlights and then provide an update on the Value Creation Plan. Second quarter revenue was $319.3 million, down 5.1% as reported or down 0.6%, excluding the impact of commodities, currencies and removing the impact of the bar and pouch lines of business. Second quarter adjusted EBITDA was $14.8 million, an improvement from the first quarter and consistent with our expectations. In the Global Ingredients segment, we reported a 0.4% year-over-year revenue increase or 0.6% decline excluding the impact of commodities and currencies. We continue to see solid demand for internationally-sourced organic ingredients, including sales growth in the US and European markets, although sales growth in Europe moderated from the first quarter level. Growth of internationally-sourced organic ingredients continued to offset the anticipated reduction of sales in our North American grains business, which is still lapping sales related to specialty soy products that we exited last year. Rob will provide some color on…

Thanks, Dave. I'll take you to the rest of the financial results as well as balance sheet and cash flow metrics for the second quarter. As Dave mentioned, second quarter revenue was $319.3 million, a 5.1% year-over-year decline as reported. Excluding the impact on revenue from changes in commodity related pricing and foreign exchange rates, and removing the impact of the bar and pouch lines of business, revenue declined 0.6%. The Global Ingredients segment generated revenue from external customers of $146.7 million, an increase of 0.4%. Excluding the impact of changes in commodity related pricing and foreign exchange, revenue in Global Ingredients was relatively flat, decreasing by 0.6%. The second quarter revenue reflects 6.8% growth in internationally sourced organic ingredients, excluding the impact of commodity prices in foreign exchange, as we continue to experience increased demand for organic ingredients, including cocoa, oils, coffee, fruits and vegetables, which more than offset declines in organic feed. This growth is offset by lower volumes of North American sourced grains and seed projects, which declined 14.2% during the quarter, excluding the effect of commodity prices mainly as a result of our exit from certain specialty soy products in 2017 as well as softer market conditions for sunflower. The Consumer Products segment generated revenue of $172.6 million during the second quarter of 2018, a decrease of 9.3% compared to the second quarter of 2017. Excluding the impact of commodity prices and removing the impact of the bar and pouch lines of business, revenue in the second quarter decreased by 0.6%. The decline in revenue primarily reflects 3.3% lower sales in frozen fruit, which excludes the effect of changes in commodity pricing due to reduced distribution to certain retail customers. This decline was largely offset by 1.6% growth in our beverage platform driven by continued growth…

[Operator Instructions]. Our first question comes from the line of Amit Sharma with BMO Capital Markets. Your line is now open.

Dave, let me start with the frozen fruit segment. Can you talk about the crop in California, how is it turning out to be? You said you're 85% through your price pack. Can you provide a little bit more color on what the pricing has been for you and inventory levels?

Sure. Yes, I think, we might have mentioned this on the previous call that the pack season had a little bit of a delayed start due to the extended fresh crop season. So the crop came delayed but then came hard, and we've been able to handle the crop. We're about 90% of the way through our anticipated receipts for the year. We expect to substantially wrap up the harvest season by the end of the third quarter. The quality of the fruits has been pretty good this year and pricing levels are fairly similar to where they were last year. So overall, we're pretty much in line with our expectations.

Can you also talk about the pipeline for perhaps new wins there, this is a good crop, your inventory levels are reset where you don't have to discount the product to move the inventory?

Yes, I think, a big part of what we're trying to do this year is rebalance our inventory and what we mean by that is basically put ourselves in a position where our supply and demand match on a crop year basis. So that's -- we're making pretty good progress against that Amit for the year. Just to put that in perspective and what's kind of -- put us in somewhat of a position that we're overcoming going forward is in the prior two years, we actually produced just north of 50 million more pounds than we actually sold. So you can see how that obviously puts you in a position where your inventories are not balanced from a supply and demand perspective. So that's been a big focus this year. And the team has done a very good job of putting all the tools and capabilities and then the plans they’ve executed to help us make that happen. So that's the -- put us in a good position as we go forward to have balanced inventories. On the pipeline, we've had some good success in converting sales wins, both with increases in distribution with some key accounts as well as gaining distribution with new customers. Some of that business will start shipping in Q4, other parts of that will start shipping as we go into next year. So overall, we're not where we want to be yet on this business, but we’ve made a pretty good progress over the last quarter.

With that in mind, Rob, your comment about sequential improvement in EBITDA next year or next quarter in Q3, from a year-over-year basis, we still expect it to be below year ago levels?

Yes. We -- obviously, we have a policy and we're not providing exclusive guidance. But I think what you see this quarter is our improvements in beverage and snacks went a long way to cover some of the decrease in fruit. I would expect a similar sort of thing next quarter, but perhaps not to the same extent. Last year, the third quarter for fruit was a sizable third quarter by way of revenue and production pounds. So you get the efficiency inside the plants at the same time as you're getting the contribution from higher volumes. So I would expect that the trend in fruit does continue in the third quarter, and it's really not till the fourth quarter that we start to see some noticeable improvements because of the efforts both top-line and bottom-line. So that, in that regard help you understand some of the trend line there in CPG that's what you would expect going forward. And then inside Global Ingredients, my comments were largely focused on the delays, the 90 day delay that is inside of the other roasting equipment so that obviously would weigh a little bit on our expectation in terms of the gross margin in that segment.

And last one. In the GI segment, the affect penalty of $8 million and maybe $6.4 million net, would you recover that in the back half or that may extend into 2019 as well?

Yes, no. It's obviously a noticeable swing quarter-over-quarter. You should associate most of the loss this quarter as the comeback from last year's gain, rather than something that reverses into the future.

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

On the Global Ingredient business, can you talk a little bit more about the domestic side? What the status of that business, your rationalization efforts in certain grain areas. I mean, how big is that business today as a percentage of your total Global Ingredient business. Where are you in terms of rationalization of certain grains and when do you lap some of that, such that you think you could see some stabilization overall or is that just a business that continues to kind of decline over time as you refocus resources on international organic?

Let me kick it off Jon. I think it's fair to expect that it largely now laps the declines from the rationalization of certain varieties of soy. So I think this will be the last quarter that really stands out and that starts to taper off in the third and going forward. Inside of that, North American piece, which is now obviously the smaller component of the overall Global Ingredients, the bigger piece being your internationally sourced organic, which is now north of 75% of what we handle is the certified organic in that segment. The go-forward focus really is on the parts of that North American business where we do our structural right to win and the investment we're making into some off the roasted snacking capabilities. So we're expecting is to gradually see over time growth as a build out that side of the platform. And really the other factor I guess in play inside of North American ingredients is, we're seeing somewhat of a soft sunflower market right now. So our traditional business it's co-located with the roasting operations also processes sunflower, lot of kernel and the ingredients kind of based on sunflower products, so we're seeing that soften up as demand isn't where it once was.

On the commentary around EBITDA productivity improvements of $20 million with an offset this year resulting from increased pricing investments and higher costs in frozen fruit. I guess I'm trying to understand how to read that, is that a -- are you calling out an incremental – like incremental investments, incremental costs, is it different than how you thought about it and communicated in the past. What should we make of that when we think about the earnings of the company I guess in '18 and is there any implication here for '19 as well?

Yes, I mean, in real simple terms, we remain confident in getting the $20 million of productivity, but that will be offset and potentially slightly higher than offset by the declines in fruit. So what you'll see in fruit is gross margins have deteriorated compared to the prior year and a big factor in that deterioration is the pricing that we had to concede to our customers as well as the increased costs inside the platform. So those two things taken as a whole, I mean that in essence is our investment in pricing. We lost distribution as we were maintaining price last year, and this year we're extending price reductions as a result and that's what is hitting the margins. So I look at the implication is certainly on fiscal '18, the productivity there, fruit and the year-over-year decrease in margin there will offset it but that doesn't mean that the structure of investments and improvement we've made in the business as a result of those productivity efforts isn't there, right? So it remains and then our focus is on improving and restoring our fruit business back to kind of first acceptable, and then after that targeted gross margin levels. So I don't see this having a long-term implication, but it certainly stands out as far as our ability to all things equal add $20 million to the P&L in 2018, fruit, eat it up.

Okay. But you earned, let's call it $67 million in EBITDA in 2017. Are you suggesting that the $20 million in productivity improvement will completely be enough I guess by investments in the frozen fruit such that we should expect little or no EBITDA growth in '18 or '17 or are there other parts of the business that is growth in international organic, growth in beverages, growth in snacks that are accretive to earnings in 2018?

Yes, no. The fruit certainly does consume the $20 million of productivity. We are seeing benefits inside of beverage and snacks, not to a magnitude that can offset fruit, but sizable step ups there. As I look towards the time we’ve got left, I think that it's reasonable that we can perhaps come out ahead of last year on a net basis, but there is only half a year left in 2018. So what we are focused on is exiting this year with trajectory we intended to exit at and then have a step up inside of 2019 and then 2020. So hopefully that helps to answer your question, Jon given that I don't have a policy of providing guidance.

Yes, it does and that helps. And then I know intra-quarter you talked about -- at some Investor events, talked about a longer-term earnings algorithm that I think gets you to closer to $150 million of EBITDA by 2020. Is that still applicable or does that -- do we need to think about that getting pushed out a bit, given some of the issues here in the near term that you're discussing?

Yes, no. I mean, the ultimate target that I think about, and that we've been public about focusing on a 10% to 11% EBITDA as a percentage of revenue, and we still are firmly committed to, and have line of sight to achieving that, a very important job that we got in our hands in order to get there is of course correcting fruit. So that's the focus of the company, and we expect to see meaningful step improvements as we exit this year with an inventory position that's same or in equilibrium with the need of the business. And then new go-to-market focus that is going to help to return that business to growth, in addition to the investments that we are putting in when it comes to things like automation and investing in Mexico. So a big, big factor getting back there is definitely getting fruit back to the healthy margins that we expect from it. And then a lot of the new business wins I guess that I -- you heard Dave speak about in his prepared remarks, where a lot of that’s coming through our innovation efforts. And those innovation efforts are intended to drive revenue that is margin accretive.

Okay. And in the beverage business, the -- can you talk a little bit more about the incremental capital? You talked about $22 million previously, what the incremental like 12% or 13% you talked about is going to, and is this just a pure kind of capacity expansion of your existing product lines or is there a capability element to it as well that might allow you to participate in more categories on the beverage side?

Yes, Jon, the incremental capital is designed to do a couple of things. First, kind of de-bottleneck our existing plants in areas primarily in processing related issues, which will free up additional capacity and give us more flexibility to utilize our existing fillers, that's the first component. The second piece is actually adding another filler line to support both business we've already won as part of our go-to-market plans as well as give us some headroom for additional growth in the next 24 months. From a capability point of view, the project that we approved for $22 million, that project gives us some enhanced capability to make products that we currently can't produce today that are higher solid content products, we call them hard-to-batch products which basically allows us capabilities to enter some new product categories that we don't have the capability today. And then of course the balance of that project is adding new processing and filling capacity in the Allentown plant to support growth.

Okay, that's helpful. Last one from me, I guess, is on the -- well two quickies. So when you talk about Crookston and putting more capability into that facility to assist with roasted snacks, where does the benefit ultimately from that show up, is that revenue accounted for within your Global Ingredient business, is that accounted for within the snack business, is it a Consumer Products sale? And then the last question I have is just on fruit and whether you are seeing any kind of trend improvement in a category. I know you have done some things with I think a natural retailer that where you kind of took more control of the offering and the merchandising at the shelf, and I think saw some decent results from that. So if you can just talk about what you are seeing some from a market perspective in frozen fruit on the retail side?

Hey Jon, this is Rob, I'll take the first question and hand it over to Dave. So you're correct, there’s roasting investments, the capital what we expect to come by way of revenue enhance margin, that will also show up in the Global Ingredients segment. A portion of the sale there and the effort is certainly consumer in nature. And to that extent, we leverage the consumer sales group and marketing group to help grow that business. But the facility itself resides in the Global Ingredients footprint. So it’s -- we reported there because of shared assets.

On the category trends Jon, the category as a whole for frozen fruit, it's showing some small growth overall as a category, based on the last syndicated data read. But inside of that, private label is actually starting to show some decent strength. I think the last quarter [we created] which was mid-July, I think private label was up between 4% to 5% on a dollar basis and I think close to 10% on a volume basis. So it looks like one data point doesn't make a trend, but it looks like the category has stabilized and it's starting to return to growth. We also see that private label is growing at a greater rate than branded within the category, which is historically kind of in the norm. So I think we're getting back to some of the historical tendencies of the category, which is a good thing. As far as with our retail accounts, the accounts that we've worked with that we've done some category management type work, we continue to see growth with those retail accounts. And again, it's just taking advantage of some of the insights that we gained studying this category and the consumer trends and positioning ourselves to take advantage of some of those -- the growth that comes with those trends. So overall, again, as Rob said, our plan remains the same on fruit. We know that we've got to bring accretive margin, accretive innovation to the retail customer base. We got to continue to take costs out of our supply chain and manufacturing network and we think the combination of those two factors will get us back to the margin structure that we’ve planned for this business.

Hey, David, if I can just squeeze in one more. When you think about frozen fruit today, where it sits today and you are looking out over the next six to 12 to 18 months, I mean, I know when I talked to you early in the year, I sensed some obviously disappointment with where that business was. Six to eight months later now in the year, you've done a lot of work, right? I mean you've put a lot of investment at the facilities kind of taking the medicine in terms of I think balancing the pack plan, built it sounds like a more robust new product pipeline. But there are still challenges. So are you more optimistic, less optimistic, kind of stay the same in terms of your kind of your outlook, your attitude, your expectations for that business today relative to where we were kind of six months ago?

Yes, definitely more optimistic versus six months ago. I think six months ago -- the kind of way I’d categorize it is, we feel like we’ve found the bottom of this business and are rebuilding it from the base, and doing all the foundational things that you need to do in a business to support long-term, profitable, sustainable growth. And we've said all along in this business as a whole that this is a turnaround, it's not linear, we're going to experience bumps in the road as we go and I’d classify fruit as one of those bumps. But we’ve definitely made significant improvements over the last six months, primarily, again, in just taking the medicine to use your term Jon on correcting a lot of the fundamental gaps that we have in this business that we now have very good plans in place. So going forward, I think we're in a much stronger position than we've been -- since I've been here to really position this particular business for growth going forward.

[Operator Instructions]. We have a follow-up question from line of Amit Sharma with BMO Capital Markets.

A couple from me. In the aseptic beverages, 12.5% ex-Costco growth, is that a good run rate for the back half and in 2019 as well, especially as you add up more capacity?

Yes, obviously, we did lose that large club accounts. So I think, it's probably not a bad run rate, I mean in the sense that a lot of the new business we're commercializing is going to ramp here starting in the third quarter and then into the fourth. It would be reasonable to expect that as a magnitude that it can offset that large account that we lost.

Okay. And then just thinking about the margin structure, I mean obviously 2018 EBITDA and gross margins probably need to come down vis-à-vis consensus yesterday. But as we look to '19 Dave and Rob, both, I mean you talk about taking some of the lumps this year. If you look to '19 and perhaps '20 as well, structurally, are there any other large items on your to-do list or are we in a position where the heavy lifting is done, and obviously, you have quarter-to-quarter volatility, but from a structural perspective anything else that's on your plate Dave, that needs to be tackled later this year or in 2019?

I think from a structural perspective and as we’ve kind of laid out this turnaround process that phase one has clean it up, phase two is tune it up, phase three is turn it up. I think for the most part, we're through that clean it up phase, right, in all of these businesses. And now we're definitely focused on tuning it up with the most tune-up work obviously in the frozen fruit business. But that -- that's work that we have well underway, we have good line of sight to the actions that we need to take, a lot of them we've already taken and we'll continue to build on. So I think overall from a structural foundational point of view, I think we've done a lot of the heavy lifting. And now, it's focusing on how do we continue to refine and improve our opportunities to grow these businesses profitably across all of the business categories that we participate in. On fruit, in particular, that's going to be -- it's not a one year fix, I mean as we look to improve the margin structure, a big piece of that improvement is going to come from automation in our facilities, improving overall supply chain optimization. And I think to be prudent in that, we're not going to take a big bang approach and try to do that all in one bite; we're going to phase it over time. I'd say that's the business where there is still probably the most infrastructure rebuilding within our physical asset base. The rest of the businesses I think foundationally are set and we’re -- capital that we're investing there will be similar to what you see us doing in both our Organic Ingredients platform as well as aseptic, where we're investing capital more for growth -- to support the growth of the business and we'll continue obviously to spend maintenance capital.

And then just to put some qualitative framework around the discussion Dave, if we look at the gross margin, either at consolidated level or at segment level, can you provide us some visibility or a pathway to where those margins are and how far are they, within a reasonable time frame let's say 18 month, where they could be?

Yes, I guess if you want to think about maybe the destination ...

And I guess if I start there, we're targeting a gross margin in the range of 16% to 17% as a consolidated business with consumer, of course, contributing proportionally more than Global Ingredients. If I look at where Global Ingredients is today and then obviously if you remove some of the non-cash noise and other things, it's sitting around 11.4%. And so, it's got kind of 100 to 150 basis points really to step up to get to where it needs to go and I do think that if we’re successful in executing that roasting project as well as doing what we have been doing all along in Tradin, our organic ingredients business, and investing there, that will certainly be there in the time frame we set out. If I move on to consumer, consumer put up I guess 12.5% if you remove some of the noise this quarter. And so, it's obviously got a larger step up to get to the high-teens. And so, I think what you'll see is that we're basically there when it comes to beverage and snacks with line of sight, if the fruit step up. And so, I guess I'm almost using numbers backing the same thing that Dave just said, where we don't see it as one year, but is it reasonable to doing the investments in fruit both this season and in a phased approach into the following season, could it get to that destined margin target? I think that's reasonable.

Got it. So fruit is farther away from where you want your target margins should be, right? And the beverages are far closer, and you see a line of sight for them to get better next year?

Correct.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Colo for closing remarks.

Thank you, operator. And thank you all for participating in our second quarter conference call. We look forward to speaking with you in the future and updating you each quarter on our progress as we unlock the opportunity and value in SunOpta. Thank you.

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.