Good morning, and welcome to SunOpta's Third 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 be -- 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 management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore, undue reliance should not be placed upon them. We refer you all to 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 discussions 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 would 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 teleconference over to SunOpta's CEO, David Colo.

Good morning, and thank you all for joining us. With me this morning is Rob McKeracher, our Chief Financial Officer. I am pleased to report that as expected, we returned to adjusted revenue growth during the third quarter and we expect this trend to continue into the fourth quarter. We continue to make progress with the Value Creation Plan, which we believe is reflected by the solid sales growth and gross margin expansion within our beverages and snack platforms. Additionally, during the third quarter, we commercialized approximately 100 broth and frozen fruit SKUs. The results across the beverage, snack and organic ingredient platforms as well as a significant amount of sales opportunity in pipeline conversions gives us confidence in our ability to deliver long-term shareholder value. Let me first review the third quarter highlights and then provide an update on the Value Creation Plan. Third quarter revenue was $308.4 million, down 3.8% as reported, or up 2% excluding the impact of commodities, currencies and removing the bar and pouch lines of business. In the Global Ingredients segment, we reported a 0.9% year-over-year revenue increase excluding the impact of commodities and currencies. We continue to see solid demand for internationally sourced ingredients, particularly in the U.S. market. In Europe, the impact of drought as well as a slowdown in certain dry categories, including nuts and seeds, partially offset the strong U.S. growth. We had a very strong quarter in organic cocoa, reflecting the final commissioning of our recent capacity expansion. We remain very pleased with our strong positioning and the market opportunity in organic cocoa. Additionally, our sales contract book is robust and we remain confident with the growth outlook in Organic Ingredients. Growth of internationally sourced Organic Ingredients continues to offset the reduced sales of domestically sourced ingredients, which experienced…

Thanks, Dave. Let me walk you through the rest of the third quarter financial results in greater detail. Unless otherwise noted, all growth percentages reflect the year-over-year change, as compared to the third quarter of 2017. As Dave mentioned, third quarter revenue was $308.4 million, a 3.8% decline as reported. However, excluding the impact on revenues from changes in commodity related pricing and foreign exchange rates, and removing the impact of the bar and pouch lines of business, that were exited last year, revenue increased 2% with both of our reportable segments posting year-over-year adjusted growth. The Global Ingredients segment generated revenues from external customers of $136.8 million, a decrease of 0.4% as reported, but an increase of 0.9% after excluding the impact of changes in commodity related pricing and foreign exchange. The revenue reflects 5.4% growth of internationally resourced organic ingredients, excluding the effect of commodity prices and foreign exchange, which was driven by strong demand in the U.S. market, while sales in Europe were under pressure. We expect a similar pattern in the fourth quarter with continued growth in the U.S. market, partially offset by competitive pressure on organic feed and a decline in prices of certain organic nuts and other dry commodities, which is leading to delayed purchasing on the part of buyers. Domestically-sourced ingredients decreased 9.6% excluding the impact of commodity prices. The decline was driven by lower sales of organic feed, continued soft conditions in the sunflower market and the exit from certain specialty soy products in 2017. The consumer product segment generated revenues of $171.6 million during the third quarter of 2018, a decrease of 6.5% as reported. Excluding the impact of commodity prices and removing the impact of the bar and pouch lines of business, revenues in the third quarter increased by 3%.…

[Operator Instructions]. Your first question comes from Amit Sharma with BMO Capital.

Dave, you listed a number of new wins for -- or revenues coming through in fourth quarter and next year. Can you just provide us a little bit more clarity on the size and the timing of these new wins?

Yes, the timing, some of those are shifting now and into the fourth quarter. Others will start shifting next year in fiscal '19. From an overall quantification of the dollar sales, on the new items that we've win I put it approximately in the $10 million category on a revenue basis.

Got it. And then, Rob, as we think about 4Q, looking at the estimates, it's still a pretty large ramp up in expectations for the fourth quarter, and Dave talked about maybe some incremental expense related to the Crookston facility. You talk about some puts and takes for what's coming up in the 4Q from a sequential perspective?

Yes, obviously, we've got a policy of not providing guidance but I think if you listened to our prepared remarks, there is a number of things that we spoke to, to kind of give a sense of what we see coming down the pipe, both favorable and potentially unfavorable. So as I think about some of the favorable things, as Dave just mentioned, we are commercializing quite a bit of the new products, especially broth, which got going later in the third quarter and we should see a ramp up of that in the fourth quarter and then into next year. So that is one area of, certainly, growth that I think is fair to have an expectation for. As I think about some of the other cost pressures that we called out there, we are focusing quite heavily on quality when it comes to fruit. As a result, the cost of the mango that we made this year and are coming out of Mexico is a little higher than we expected, so that's not going to get passed on to customers. So you'll see that weigh on margin a little bit in the fourth and really into next year until we get to the new mango season in 2019. And certainly, Amit, you call it out the roasting assets inside of the Crookston facility, we continue to make progress commercializing those, but we should expect to see some continued spend and costs there in the fourth quarter. I would say not bigger than what we experienced in the third quarter, but it could be in a similar range would be kind of how I'd position that.

So if you put it all together, would you expect a sizable jump in EBITDA, margins this quarter? Or that should be -- think about that as 2019 at this point?

Yes, I mean we expect to see EBITDA grow certainly over time as we execute against the Value Creation Plan. Obviously I'm not in a position to provide specific guidance on fourth quarter of '19, but the plan is designed to see growth and EBITDA enhancement over time.

All right. And the Dave, just going back to the frozen fruit, certainly, it continues to be the one, which is lagging from an improvement perspective. Is it -- do you feel like with the improvements that you made operationally and from your ability to win back some of these contracts as well, do you feel like this is now a matter of getting through the inventory that you're carrying? And as you go to next crop, the volume and the margin expansion improves dramatically or this is a longer improvement here?

Yes, it's a longer improvement process, Amit, and there's really -- we think of it in 4 key steps. So the first step that we've been executing against, let's call it, this past year was really to improve food safety and quality and our customer service to regain our customers' confidence. Because as you'd recall, we had some pretty significant issues in those key areas. We feel like we've got that work done at this point and we've put it in place in a sustainable way. The second step was, we have to win back volume. We'd lost volume over the last two years. We knew that we had to take pricing actions, which we did, so we invested in pricing, also known as lowering pricing to win back volume. We were successful there as well. We think that, as we commented in the prepared remarks, we think we've regained all of the lost volume from the last couple of years and expect to see some pretty good volume growth ahead of us. So those two are the first steps and we feel like we pretty much accomplished those. The next step is rebuilding the gross margins. So we've brought back this volume but we did it at much lower pricing, which has compressed margins. So the rebuilding of the gross margin is key, and there's a couple of things we're doing there, but there's -- it's a multifaceted approach, there's not a 1 silver bullet. So we announced in this earnings call that we were now proceeding with investing in automation in our California-based plants. That will happen over the new -- the next two crop years, so we'll start some of that work in preparation to have it in place for the 2019 crop year. Then we'll do the second phase to have that automation in place for the 2020 crop year. The other component of that is our Santa Maria facility, which is our -- one of our largest frozen fruit facilities. It's a leased facility, we signed a long-term lease to stay in that facility. As a result of signing that lease, the landlord is building a new frozen storage facility adjacent to the plant, which will improve our logistics efficiencies, if you will. So that's going to be a key part of it. And then we're also focusing on the traditional things improving overall effectiveness inside the plants, yield improvement, et cetera, but we do see the margin recovery occurring over the -- for the most part the next two crop years. And then of course the last thing is bringing margin accretive innovation to the market, which, as we lost business over the last couple of years, the majority of what we lost was some of the more margin-accretive SKUs, so we're working on bringing innovation types back into the market as -- also is a part of the margin recovery effort.

That's really helpful. Just one last one for me. As you look at this full year from a 2018, from a frozen fruit perspective, can you help us understand like what's the level of headwind you faced this year from a gross profit perspective or EBITDA, whichever way want to do? And how much of that goes away next year so that the $28 million VCP related savings start to show up on the EBITDA line?

Yes, I can take that one, Amit, and when the Q comes out, of course you get the greater insight into that. But if you're looking at the MD&A, you'll see a $26 million year-to-date decrease in gross margin dollars from the fruit segment. So obviously that puts -- it puts it into perspective just how meaningful decline in that business is in the sense of profitability. The biggest chunk of that reflecting really the investment in price that Dave mentioned, that obviously we're doing with a -- for a specific reason to return that business to margin health over time, if you go back to historical levels. So that's the year-over-year delta through 9 months. As I think about costs, if you will, that exist in the business in '18, that mainly due to passage of time, or just not having as much inventory et cetera, that should go away next year. There's probably around $5 million phased in that doesn't really require a lot of action other than having less fruit and have less movements in terms of freight and things of that nature. But the bigger part of the lifting here is really the automation improvements and all the things that Dave has mentioned in terms of our 4-phase plan to drive costs out of that business and get margins back to more of a historical state.

So just to be clear, that $5 million is the headwind that goes away? Or that's the headwind that remains for next year?

That will be the headwind that goes away.

So you still face pretty large headwind, like to the magnitude of, let's just say, a 9-year -- 9-month basis, almost $20 million of headwind next year too?

That would be the -- I mean if you think about it in terms of what we need to overcome, that then is what we're tackling in terms of driving costs out of the business through actual action. So the $5 million is, it's an approximation, but I think that's a pretty fair estimate of what would happen just via passage of time. The $20 million is what we're taking action on now to eat further into that headwind, as you called out.

Your next question comes from Jon Andersen with William Blair.

I wanted to start on the Global Ingredients side of the business. And if you could talk a little bit about the international side, I think it grew mid-single digits in the quarter on an adjusted basis. I think in the past that business has grown high single, closer to double digits, given kind of the demand you've seen for organic ingredients in developed markets around the world. Can you talk a little bit about, I think you mentioned pressure in Europe, maybe some more specificity around that pressure in Europe and how long you expect that to persist? And then shifting over to the domestically sourced ingredients, that was down about 10% in the quarter. I know there have been some planned exits there, but when do we lap those planned exists of some of the specialty soy, and also, if you could talk a little bit about what's just going on in the sunflower market and the feed market that are kind of contributing to weakness there? Let's start with that.

Jon, this is Dave. So in the international Organic Ingredients, couple of primary factors that have kind of dampened the growth rates. One is, in the organic feed markets, there's been some pretty good competitive pressure in those markets, that's driven some compression in sales prices and margins. So that's one of the primary factors in the international market. The second is, we're a fairly large seller of organic nuts and cashews and almonds in particular, the pricing in those markets has come down very significantly over the last several months, and what happens in that kind of environment is the buyers of those particular items go into a spot buying mentality, waiting for the pricing to bottom out. So that's been impacting our, what we call our nut and seed basket, if you will, pretty significantly this year. The good news there is we are seeing signs now that those markets might be at the bottom and seeing some strength in pricing starting to return. So hopefully, over the next quarter or two, we'll see strength come back into the organic nut segment. Those are the two primary factors on the international market. On domestic, basically the -- as you well know, we are a large, one of the largest sunflower producers in the U.S. and we continue to see softness in the sunflower market. There's a situation, really on a global basis, where prices are quite low, a lot of competitors have too much capacity and it hasn't been rationalized out of the market, so that factors into it, and then demand for the product itself isn't as robust as we like as people are looking for alternatives to sunflower, and that's what led us, by the way, to make the investment in the roasted snacks platform in Crookston. So the sunflower business remains soft and then on the timing in the quarter, we had organic feed in our RMSS business that -- we still have the business, but due to the availability of new crop timing, we were not able to ship as much as we thought we were going to be able to ship in Q3 versus prior years. So the good news on that is that the harvest is underway, and we're we are now shipping that organic feed. So that should correct itself as we go into the fourth quarter.

And Jon, just to answer I think the last element to your question there, there's probably been $1 million delta between the exited lines of business, so because we got out of that and that we're now in the new crop, that would be the last quarter you'd see the -- it was really the bin cleanout, the bottom of the bin that we would've sold and reported revenue on last year, at the Moorhead facility that you're no longer seeing this year. So it was about $1 million of that 9% in that -- in that domestic side of the business.

Okay. Shifting gears to the beverage business, which continues to perform well. Where -- the 11% growth in aseptic, high single digit overall, is that -- I know you've got new capacity coming online next year, I think maybe some capacity coming on late this year, or new capability. But what is your visibility into the continued growth of that business at kind of these rates that we've seen over the past few quarters? The reason I ask is, we have fruit, which is lagging and it sounds like frankly it's going to continue to be a headwind for some period of time now, so we really need businesses, right, like beverages, which seem to have a little bit more momentum behind them to continue to exhibit that momentum. So again, if you could talk about the pipeline, your visibility in -- as you bring on more capability and capacity to continue to drive strong growth out of that beverage business?

Yes, sure, I'll try and take one, Jon. I think as I think about beverages, if you even contrast it with a year ago, we weren't really in the broth side of -- the broth category really at all. So here we sit today now, firmly implanted in that category. Revenue started to ramp towards the end of the third quarter. We expect more to come and are shipping more in this fourth quarter. So if I think about maybe what does that mean to that overall beverage portfolio, I think the broth business we brought could kind of support a 10% growth rate on the beverage portfolio on its own. And then what we do, of course, with nondairy and other things would be above and beyond that. So to give you a sense, it is a very sizable piece of business for us and that's why we're adding the capacity because we see such growth potential, both now with won awards and other awards that we think could drive more growth, and not to mention the category itself, in broth and private label in particular, we continue to see upwards trends there. So think of it as a 10% -- or plus 10% over the course of the next year.

Jon, from a pipeline perspective in beverage, we continue to have a pretty strong pipeline and also from an innovation and new product point of view, we'd mentioned it in our prepared remarks that we are now getting interest in selling oat milk. So oat milk, we think and has a pretty bright future in the aseptic format and we also have a pretty robust pipeline of opportunities with customers as well. So we continue to feel pretty confident in the ability to grow the beverage platform.

And is the beverage platform -- are there other areas that you're exploring beyond, let's say, the aseptic and nut-based beverages, there's been a migration, right, to the refrigerated case. Is that something that you would even consider or is that just non-core? And then are there other categories around the store where your aseptic capability might apply beyond nut-based beverages, beyond broth that we could get kind of excited about as another kind of whitespace for that business?

Yes, Jon, our -- as you know, our core is plant based beverages. So almond milk, coconut milk, soy milk, et cetera. However, having said that, we do see additional category potential within the aseptic format. There is the protein category, the protein drink category, nutritional drinks. We see those as a potential area to pursue with our -- some of the new capabilities we're adding as part of the $22 million expansion that we spoke of allows us to have the process capability now to start producing those types of items. It would require potentially additional investment in fillers to accommodate the actual package types that those product types are typically sold in, but we have interest in that area, we think it's a high growth sustainable area. So yes, there's other areas that we're looking at, but our core in this business is plant based, but we do see some adjacent categories that make sense for us.

And in the gross -- I don't think you mentioned in the prepared comments, were gross margins higher in aseptic in the quarter? I think you mentioned that snack gross margins were up year-over-year. How about the beverage business?

Yes, no, the beverage business and the snack business were up, but certainly on a combined basis, they weren't up enough to offset the headwind in fruit.

Okay. Are both -- are the beverage and snack business operating at levels, gross margin levels, that are consistent with your 3-year plan to get to 10% EBITDA margin?

They're certainly making strides in that direction and I'd say they're closer to that profile that we're targeting. It is really fruit that is, obviously, the furthest from it, so we have sight lines for beverage and snacks to certainly get to the range we set out.

And how far is fruit off? Like order of magnitude, if you can talk about it. I don't know where you sit today relative to where you want that business to be or need it to be to hit your kind of longer-term objectives?

Yes, we don't -- I steer clear of giving specific margin ranges by the sub platforms, Jon, but I did mention, and Amit asked the question, about the overall decrease. And that's a $26 million drop in dollars this year versus last year so I think that should probably help to give you perspective on the quantum.

Okay. Okay. And am I right to -- I kind of feel like the discussion today suggests that you're thinking about the recovery in fruit as a longer-term process, perhaps than you -- were thinking even a quarter or two ago. Is that a fair statement or not a fair statement, at this point? And nuts -- because I of fruit, if it's a longer-term proposition to kind of get the margin recovery. I think, maybe David, you mentioned 2 seasons now that might push out some of the financial objectives that you've talked about previously in terms of where you'd like to be from an EBITDA standpoint by 2020? How should we be thinking about that? Is it fair to say that we should be thinking longer-term now towards objectives or still on track?

Let me try and start there. Jon, I think from my perspective, the objectives are unchanged, the 10% to 11%. And I think on last quarter's call we gave a bit of a breakdown on how the Value Creation Plan drives sustained improvements to get the profiles of our businesses to that level. When it comes to fruits, specifically, as we step back and look at the work that's got to get done there, and if you look at the nature of the business where it's very seasonal, right, you're really talking May 1, give or take, is the start, if you will, to each primary crop season, running through to August. In order to make and give effect to the change that we're going to do to drive costs out of there, it's going to take two crop seasons. So I don't think that's -- that's not necessarily unchanged from where we were at or our heads were at last call. That just is the reality of that business. So we'll get to work ahead of the '19 crop, bringing automation in and streamlining parts of the businesses. We'll go through that crop. We should have the new facility up and running for -- in time for the 2020 season up in Santa Maria, along with another wave, if you will, of cost reduction and efficiency enhancements, and, I mean at that point in 2020, we'll certainly know where we're sitting in terms of what we've accomplished to drive costs out of the business.

Jon there is two -- the CapEx that we just outlined. That does require implementation over the next two crop years. If you think about that, we do have to do that in a way that we don't risk the season. In other words, these plants are heavily manual today. As we put automation into the facilities, it kind of needs to be staged so that we don't disrupt production during the season, so that's the CapEx is what will be installed over the next two crop cycles, if you will. However, on the -- there's other parts of marginal recovery that we're working on that aren't necessarily CapEx dependent, so those are the things that we can do to try to increase margin while we are implementing the CapEx and the automation over the next two crop cycles.

Okay. Since it's just 2 of us, sell-siders I -- can I ask a couple more questions, I hope. Rob, coming back to, I think Amit tried to ask this earlier. How would you like us to think about the sequential improvement in the business from Q3 to Q4? You haven't really given -- I think the last quarter you give some bounds on how to think about Q3, like what I'm digging for here is how you'd like us to think about sequential improvement or lack thereof in Q4 this year and then I have a follow-up on 2019.

Yes, sure. And as I mentioned,=, I think, when I was answering Amit's questions, we're not in a position to give guidance, that's our policy. So in the prepared remarks, I've given some -- and part of Dave's section as well we gave a bunch of indications on what we see coming essentially within each of the platforms. So we do expect to see more growth. We're expecting growth in beverage really driven by broth, we're expecting volume growth in fruit, but as we described there is -- we've taken price out, so that the revenue growth would be muted. In terms of the snacks platform, seasonally, we had quite a big promotion back at school for one of our contract manufacturing customers, so you're going to see that sequentially change, and that was in the remarks we made. We talked about the roasted snack platform and that we expect to be finalizing commissioning of those new assets here in the fourth quarter, but that, along with the commissioning activities and then beginning to commercialize new business off of it, there will be costs there. I'm missing one here -- and then we talked about the costs inside of fruit, mainly focused on mango. And so what does that really mean? It means we took extra care this season to ensure the highest of really fruit quality coming out of Mexico and as a result of that, we did incur slightly higher yield loss, which drives the cost of the fruit up a bit. So those, I think, are the indicators, Jon, that I think you can go on it if you're thinking about what fourth quarter looks like and in some cases into next year.

And mango is how big of -- how much of the fruit that you sell is mango?

This year it's going to be about 5%, on a volume basis.

All right, and I guess I'll give it a stab and just -- this we'll be the last one. In 2019, looks like you'll come in this year around $60 million, $65 million of EBITDA. Do we, on a path to something like $120 million to $150 million, do we see material progress towards that goal, which I think was a 2020 goal in 2019 or I could read all of the comments here and say we have another kind of investment year in 2019 to kind of work through. Any thoughts on how we can try and put that picture together for '19?

Yes, I think -- I've made this comment, we are focused on executing the Value Creation Plan. What really is the biggest amount of heavy lifting we have and I think it comes through on most of the calls we take and certainly on this call, it's inside of fruit. We think we're right where we want to be when it comes to beverage and snacks. Certainly, our Trading or our organic ingredient business, we're seeing the growth rate there hold, the contract book remains strong. So as you describe a year of investments, I mean, the entire plan itself is an investment but I think it's really fruit that, as we've been talking about, here is the 4 steps we're going to go through to drive more margin back into that business and we're certainly confident in our ability to do that, and we're seeing the proof of some of the early activities now in terms of driving higher quality, higher customer service, now volume growth back to that business, it's playing out. So it would I'd say...

But those are all -- those are all important things, quality of product -- I mean, they're paramount, right? Quality of product, and the variety that you can offer your customer, the efficiency with which you can process and produce it, it sounds like it's winning new volume. But it doesn't necessarily get you margin, right? I mean the customer will take all of that and they'll take it at the lowest price possible. How do you have conviction that all of these investments are actually, not just deliver the volume, but the overall value, I guess, in terms of margin rates that you're kind of targeting?

Yes, I think, the 4-step process we outlined earlier, Jon. Steps 1 and 2, which was improving food safety and quality getting our credibility back with the customers and then the investment in pricing. That -- those have paid off, to your point. We've gotten the volume back. Rebuilding the margin structure, that takes more time because it's -- there's not just 1 lever you can pull and increase margins overnight. So it's, again, it's why we're working on it from multiple angles and making sure that as we progress here over the next year or 2, if you will, that we take advantage of the fact that we now have good volumes back in these businesses and we drive margin improvement basically through a reduction in cost. The other thing that we haven't spoken of is, these businesses can change very quickly from a market dynamics point of view, right? Crop year to crop year, there could be changes. That could lead to the opportunity on pricing and the kind of the approach we're taking is, pricing is certainly 1 option that we have over time, but our initial process is trying to rebuild margin through all these enhancement projects, both from a CapEx investment point of view as well as just taking the actions that are necessary to improve overall plant efficiencies as well as our total supply chain efficiencies. So there is, it's -- again, there's not 1 single item, it's multifaceted. But this is not new work. This is what it takes to get margin back into businesses of this nature, and that's the exact approach we're going to take and I'm very confident that we can rebuild the margin structure.

Okay. And would you still characterize Q3 as kind of the bottom in the margin performance for fruit? You have -- the inventory, I think is worked down by year-end or better aligned, the bagging operation is up and running. You've got new volume that you're shipping. Is Q3 kind of the trough, if you will, and we make study sequential improvement from year?

Yes, no, we're certainly the trough now, Q3, Q4. Would I suggest you're going to see a massive step up in the fourth quarter? No, but we're not -- certainly not seeing any further deterioration from an overall margin profile perspective from where we sit right now.

Your next question comes from Amit Sharma with BMO Capital.

Just a very quick 1 for me. Dave, when you said $10 million incremental sales from new wins, were you talking about a quarterly run rate or for the full year 2019?

Yes, so those particular items, that was an annualized number.

There are no further questions at this time. I will now turn the call back over to David Colo for closing remarks.

Thank you, Operator, and thank you all for participating in our third quarter conference call. I 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. Have a great day.

This concludes today's conference call. You may now disconnect.