Good morning, and welcome to SunOpta's Second Quarter Fiscal 2019 Earnings Conference Call. By now, everyone should have access to their 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 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 10K 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 other 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 security laws. 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 earlier today. Also please note that unless otherwise stated, all figures discussed today are in US dollars are occasionally rounded to the nearest million. And now, I would like to turn the conference over to SunOpta's CEO, Joe Ennen.

Good morning and thank you for joining us today. With me on the call is Rob McKeracher, our Chief Financial officer. When I spoke on the first quarter call in May, I'd only been in the role for a month. I've now been leading the business for approximately 120 days and it has given me more time to evaluate our strategies, operations, competitive positioning, and capabilities. I've spent considerable time meeting with most of our top customers across all channels, visiting almost all of our production facilities, and meeting with our associates and our investors. I can tell you that I am more optimistic today than the day I joined about our core businesses and our ability to deliver strong top- and bottom-line results. We are well positioned for growth because our business aligns with what consumers are focused on, health and wellness and the sustainability of our planet. We have a wealth of talented people in the Company and I am confident we will unlock the potential of our on-trend category while driving margin enhancement and consistent operational excellence. Given the multitude of businesses SunOpta has, it's sometimes easy to overlook that three businesses represent over 90% of our sales. These three businesses are Plant-based Beverages, Healthy Fruit, and Tradin Organic. Within these businesses, we have some very strong competencies and capabilities. However, it is clear that we have not fully leveraged the potential to operate synergistically. We have significant opportunities to further integrate our operations, expand our sales activities, and better utilize our sourcing capabilities. We must also be relentless about driving cost out of the business. As I discussed last quarter, we have been developing three priorities. Portfolio prioritization, speed of customer-centric innovation, and productivity and pricing realization in frozen fruit. Let me touch on each of…

Thanks, Joe. Let me walk through gross profit and the rest of the income statement given Joe's discussion of the commercial activities and revenue during the quarter. I'll also cover our balance sheet and cash flow results. Gross profit was $27.3 million for the second quarter of 2019, a decrease of $7 million compared to $34.3 million during the second quarter of 2018. Consumer Product accounted for $5.3 million of the decrease in gross profit mainly reflecting the impact of the weather-related supply shortfall from the Freezer Fruit harvest in central Mexico and California. The supply shortfall resulted in unfavorable purchase price, substitution and material usage variance due in part to rework the bulk inventories to meet customer demand. In addition, we experienced unfavorable production variances and inefficiencies as a result of a significant drop in plant utilization. The year over year decrease in gross profit also reflected a $1.2 million gain related to a claim recovery from a third-party supplier that was recognized in the second quarter of 2018. Overall, all the Healthy Fruit platform contributed close to zero gross profit during the second quarter of 2019. The gross profit decline in the Healthy Fruit platform during the second quarter of 2019 was partially offset by increased gross profit within the Healthy Beverage and Snacks platforms due mainly to increased sales and production volumes and productivity-driven cost savings. In addition, during the second quarter, we recognized a $0.9 million expense in cost of goods sold related to an isolated raw material spoilage event in our aseptic beverage operations. As Joe mentioned, we expect this season's strawberry shortfall to continue to impact gross profit in the next three quarters. Given the unprecedented effect of the 2019 crop shortage, we are sharing details in a range on the estimated impact to…

While we've spent a significant portion of this call providing details on the challenges on Frozen Fruit and our commitment to correct the business, I want to remind everybody that approximately 70% of our portfolio is healthy, growing, structurally advantaged, and on-trend. We are a leader in plant-based beverages. We are a leader in global organic sourcing, and these businesses are poised for accelerated growth in the back half of 2019 and beyond. With that, I'd like to ask the operator to open it up for questions.

Thank you. [Operator Instructions] And our first question comes from Amit Sharma from BMO Capital Markets. Your line is now open.

I have a couple of questions for you and then two for Joe. You gave a really good commentary on the Frozen Fruit gross margin. Can you talk about the top line as well? We saw around a 5% decline in Frozen Fruit in the quarter. As you look to Q3 and Q4 how will the top line be?

Yes, sure. I mean, obviously, your question is in response to the crop shortage. One of the things that we're actively working on now and Joe made mention of this in his prepared remarks, looking for substitution fruit in places like South America, counter-cyclical supply. That's important because that's what would help us be in a position to kind of maintain those sales right now. So, as we think about the impact of the shortage potentially hitting the top line, it's probably more into the first quarter, maybe the start of the second quarter of next year. There could be some pressure depending on the amount of fruit we're able to service our customers with. We aren't seeing too big of an impact here in the back half necessarily. There's some seasonal business with a large foodservice customer that would lead me to believe that the fourth quarter would be a bit lighter. But that's not to do with the crop shortage. So, we're working hard to make sure we can maintain but there obviously is a risk in that in a shortage climate for revenue pressure. I think that would be more in Q1 and Q2 next year.

And the ingredient shortage that you cited, is that just a quarterly phenomenon that could read into the second half as well?

The ingredient shortage is more on the Fruit Prep business where we provide the inputs that go into yogurt applications. That's a market that hasn't been growing. I'd assign that more to a demand phenomenon than anything to do with the shortage.

And then on the aseptic side, really solid growth in the quarter and Joe did talk about seasonal business coming in, acceleration in the back half. Most of the broth business still is yet to ship or maybe it will ship in Q3. So, you should see a bigger ramp-up in sales?

Correct. Yes. Correct. We're expecting accelerated growth into the double digits here in Q3 and Q4 over last year as a result of the wrap-around of a lot of that broth business as well as growth in our quarter plant-based operation.

And then, Joe, I think the tone is unmistakably upbeat for what is to come, right? You listed eight priorities that may seem like a lot but if you go through them, they all kind of make sense. What I want to get a little bit deeper from you is how much of that is aspirational versus something that you truly believe in the next two years or three years we will start to see tangible benefits both in top line and margins from some of these initiatives?

I absolutely believe we can make progress on everything that I outlined.

And that should start to come within the next two years or so? I mean, we can talk about specific things but generally speaking, you do see an inflection in margins not just in Frozen Fruit but aseptic beverages as well?

Yes. If you think about our plant-based beverage business and our ability to drive capacity utilization in that business, we're seeing basically a business where demand is outstripping supply. We're able to maximize our production facilities and we expect that in the short- to mid-term that that reality will continue to exist.

And the vital question is as you continue to exceed expectations on the aseptic side and you have really planned to delve deeper into it, maybe this is a difficult question to answer. But if Frozen Fruit remains challenged because of weather or other dynamics, is there a thought to maybe monetize the parts of businesses that are actually performing really well?

Are you referring to basically selling off pieces of the business? Is that the...

Yes. Look, the stock price is indicating that the market isn't willing to give you credit for parts of the business that are actually performing well and are on a really good trajectory. To you unburden then by displacing some of the businesses that are dragging the overall results down?

What I would say to that, Amit, is we've formed, and it's been in place for a period of time pre-dating me a strategic review committee of the board. That is an active committee where we're evaluating all the potential moves for the portfolio both in terms of what businesses we want to be in and what businesses we don't want to be in.

Thank you. Our next question comes from Jon Anderson from William Blair. Your line is now open.

I'm just trying to get a little bit better understanding of your expectations for the full year. The crop issue it sounds like has led to about $5 million in headwind to gross profit through the first half of the year. You expect kind of a full impact of $20 million to $30 million, the bulk of which will affect 2019 as I think I understand it as you laid it out. I guess my question is as we think about 2018 the EBITDA base was around $53 million. We've got a $20 million to $30 million headwind from Fruit it sounds like. So, on an adjusted base, it would be closer to $20 million to $30 million. Is that the right way to think about the year? I guess I'm not accounting for profit improvement in other parts of the business which should help to mitigate some of that Fruit margin headwind. But help us think through that a little bit more how you're seeing the full-year earnings power of the Company playing out in 2019 and then also your expectations for Fruit next year. Let's assume it's a more normal crop next year. Given the automation that you've put in place, I think you're standing up that new facility next to the Santa Maria processing facility next year. Do we see the full realization of the Fruit margin optimization program next year as opposed to a balanced step this year and next year? I know there is a lot there, but I'd appreciate any color.

Let me start with that and then Joe if want to follow-up, go ahead. What you're seeing and I think we commented last quarter that we were anticipating second-quarter EBITDA to be roughly in line, give or take, with first. Obviously, we hit some headwinds in Fruit which we've described. It's not difficult to do the math to see that the benefits coming from the other parts of the portfolio help to offset that. I think that as a general theme is something we should expect moving forward as I think about either sequential and or -- Let's just talk sequentially. We're going to have additional headwinds. We've somewhat quantified it inside of the prepared remarks with the revenue in Fruit obviously deduced that it would be a gross margin loss in the third quarter and come back to positive in fourth. We are expecting that the growth in both revenue and profitability in Beverage and Snacks and Tradin Organics helps to offset a big piece of that possibly in the third quarter, not the entire amount. Which would put us into a spot where the third quarter could be a little pressured relative to where we just finished the second quarter. But then as we turn the corner into the fourth and we start getting the benefit to some of the pricing, I made the comments that the costs related to the crop shortfall we're not expecting them to be as heavy in the fourth quarter as it was the third. That's a start then to put us into a position where we can be delivering improved results on a sequential basis. I think that that's going to continue to next year. You asked, Jon, how do you step back and think about some of the ranges, the $20 million to $30 million overall cost which is of course part of this year. We talked about a carryover expectation into next year. As I step back and look at the business and all things equal, which is maybe a big statement, but in a situation where you've got a more typical harvest in California and more typical volume and timing in Mexico, the cost that we're referring to we wouldn't see as costs that continue. So, as I think about 2019 and 2020, I think that's the way to view the potential is if we can get back to normal and that on top with -- normal of course on the harvest -- and that on top of our productivity efforts and our pricing efforts the ability to generate the margin we're talking about in Fruit is there.

Okay. So, EBITDA -- Sorry for the detailed questions. EBITDA in the quarter was $10.1 million. That was down $3.7 million year over year. I think you said that the issues related to Fruit, the crop, cost about $3.6 million in the quarter. That would kind of bridge the gap between last year's EBITDA and this year's and it wouldn't suggest that there was much positive contribution from other parts of the business. Am I missing something there?

Keep in mind that our EBITDA reported last year has the Soy and Corn business in it which was profitable. So, in our prepared remarks, the last year EBITDA if you remove that you're starting point at Q2 of 2018 would be $12.7 million of EBITDA. So, compare that to the $10.1 of this year and you see the growth in the other parts of the business.

Okay. Maybe one for Joe. Joe, it sounds like the leadership team and the board has made a significant commitment to increase capability and capacity in the Beverage business. Could you talk a little bit more about what some of the dollars and cents are there? How much of a capital investment we're talking about? What kind of capacity and capability you plan to bring online and what timeframe and how that would be utilized?

Yes. So, just to unpack that a little bit further, we're making an investment in the extraction step which will allow us to basically take whole oats and convert it into oat milk. Also, importantly, as a product of that, you end up with oat solids which we also think there's a market for. That component ends up being 50% protein, 15% fiber and we have had initial discussions with many interested parties in the oat protein powder component of this as well as just the oat beverage side of it. We continue to see rapid growth in the oat beverage business. I believe there were 19 new oat beverage product launches in the first half of the year. So, we think there is a significant opportunity to capitalize on that. The investment that we're making represents a four-fold increase in our ability to basically produce oat milk. In terms of the total cost, we're in the kind of mid $20 million range for the total cost. We're still kind of finalizing some of the details there so there're some moving parts. But that would be a broad component of the cost. The vast, vast, vast majority of that will be expenses that hit in 2020 versus this year.

In what kind of capacity would that provide sales capacity for either oat milk or some of the solids, the protein, and the fiber?

When fully ramped up, we think it represents north of $50 million of revenue. And that would be just on the base. That would be just the value of the base. There's also then margin and profitability if we turn that oat base into oat milk and we sell both the concentrate, the base, as well as turning that base into oat milk. Some customers we supply the base, they add the water and package it themselves. Some customers we add the water and package it. So, there's the additional margin that isn't embedded in that $50 million that I just referenced if we're the ones who basically package and add the water. Does that make sense.

Thank you. And we have another follow-up question from Amit Sharma from BMO Capital. Your line is now open.

Thank you so much for taking the follow-up. Rob, I just want to cycle back on the second half ramp up for the aseptic beverage. Can you just remind us how much of incremental sales are we looking for? And generally, what's the margins for to occur on that so that as we look to offset the decline, we can be a little bit more accurate with our assessment for the back half?

Sure. I'll give you some direction. At the end of last year, we had commented about commercializing roughly $50 million of new broth business. I think we shipped somewhere between $15 million to $20 million of it in the fourth quarter of last year. So, the biggest piece of the revenue ramp you'll see is related to that. So, 50 minus that and you get $35 million overall across the two quarters is kind of the bump which should help you gage when I say we're in double-digit growth territory. That's the primary reason there.

And generally, what's the gross margin profile of this business?

It would be in the high teens.

And this is on top of whatever growth that you're seeing on your plant-based aseptic business, right?

Correct.

And that should continue in the back half as well?

Yes. We expect that to continue.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to CEO Joe Ennen for any further remarks.

Thank you, operator. And thank you all of you for participating in the second-quarter conference call. I look forward to speaking with you in the future and appreciate your interest and support in SunOpta. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.