Good morning, 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 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 U.S. dollars and are occasionally rounded to the nearest million.
Now I'd like to turn the conference over to SunOpta CEO, David Colo.
Good morning, 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 beverage and snacks platforms. Additionally, during the third quarter, we commercialized approximately 100 broth and frozen fruit SKUs. The result across the beverage, snack, and organic ingredient platforms, as well as a significant amount of sales opportunity 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 continued 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. 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 lower sales of organic feed due primarily to timing of crop availability, continued soft market conditions for sunflower, and the previously announced exit from certain domestically sourced grain varieties in 2017. The delayed roasted snack and ingredients project at our Crookston, Minnesota facility also weighed on revenue in the third quarter. We expect this to improve moving forward. We expect incremental operating costs in the fourth quarter as we finalize commissioning of the new roasting lines. Turning to Consumer Products, we had another good quarter in healthy beverage, generating 6.8% year-over-year revenue growth. This was driven by 11.1% growth in aseptic beverages, despite some timing-related impacts in non-dairy due to revisions in our customers' promotional activities and adjustments to inventory levels.
Aseptic broth continues to be a contributor to growth, especially following the commercialization of a significant number of new broth SKUs during the quarter. The successful commercialization of these products also demonstrates the Value Creation Plan is delivering on our objectives. We expect continued revenue growth in beverage through the fourth quarter. This growth is also helping to diversify our aseptic platform by both category and customer. Premium juice sales were modestly lower year-over-year as we rationalized unprofitable distribution points earlier in 2018. Overall profitability in beverage improved year-over-year as a result of our continued focus on operational efficiencies and improved capacity utilization. Healthy snacks also posted an exceptional third quarter. Excluding the resealable pouch and nutrition bar businesses that we exited last year, snack sales were up 53.9% and gross margins improved year-over-year.
Much of the top-line growth in the quarter was a result of the timing of a back-to-school program for a contract manufacturing customer. Volume is expected to moderate during the fourth quarter given this seasonal boost. Turning to the healthy fruit platform, we continue to experience revenue declines in the third quarter, with sales down 5.5% adjusted for commodity prices. The decline reflects our strategic decision to lower prices to regain lost distribution and stimulate category growth. On a volume basis, sales of frozen fruit were essentially flat in the third quarter of 2018 versus the prior year, and up 3.3% when looking specifically at sales to retail customers. Syndicated data for the 12 weeks ended October sixth indicated that overall IQF frozen fruit revenues increased 0.3% and volume increased 1.8%. The same data indicates that within the category, private label revenue increased 6.4% and volume increased 13.2%.
Gross margin in healthy fruit will take time to recover as we focus on building a consistent and reliable supply chain centered on product quality, innovation, customer service, and productivity improvements. Our pack plan for this year is now complete, with good fruit quality achieved during the season as a result of our improved food safety and quality programs. However, we experienced higher mango processing costs as a result of ensuring strict quality standards were maintained, which will temporarily weigh on margins until we get to next year's harvest. We are pleased that we have now won back more distribution than was lost in the middle of 2017, and we successfully commercialized a significant number of updated SKUs in the quarter for a large mass retailer.
It will take time to regain historical margins in the frozen fruit business, but we are confident in our ability to optimize the margin in this business. I will elaborate further on our plans as I provide the value creation plan update. As we've discussed over the last year, the first phase of the value creation plan is targeting implementation of $30 million of productivity driven annualized EBITDA enhancements over 2017 and 2018. Recall that for 2017, these EBITDA benefits were offset by structural investments made in the areas of quality, sales, marketing, operations, engineering, and other functional resources, as well as non-structural third party consulting support, severance, and recruiting costs. The plan also calls for increased investment in capital upgrades at several manufacturing facilities to enhance food safety and manufacturing efficiencies.
Over time, these investments are expected to yield EBITDA improvements that go beyond the $30 million that is being targeted in the first phase. We expect to deliver ongoing productivity improvements as our go-to-market strategies drive revenue growth, which drives further higher utilization and improved profitability in our plants. We are on track to deliver $20 million of productivity driven EBITDA improvements this year. However, we continue to expect these improvements will be offset by the price and quality investments we have made in the frozen fruit platform, as well as increased operational costs that we are addressing as part of the improvement plan. Turning to portfolio optimization, recall that the aim of this pillar is to simplify the business, invest where structural advantages exist, and exit businesses or product lines where the company is not effectively positioned.
The company has exited three lines of business and closed or consolidated five facilities since the launch of the value creation plan. We continuously evaluate our portfolio to ensure all businesses are strategically aligned with our goal to drive long term shareholder value. Our portfolio optimization efforts during the third quarter included completing the commissioning of a second roasting and processing line at our organic cocoa facility in Holland. As I noted, we delivered strong sales growth as well as gross margin improvement this quarter in organic cocoa. We continue to make progress with our aseptic expansion project to add processing and packaging capacity and capabilities to our Allentown facility. This $22 million project is expected to come online in mid-2019 and adds mixing and processing capabilities to support further innovation to serve a variety of aseptic packaged solutions.
We also continued commissioning efforts of our new roasting equipment in Crookston. This new equipment is designed to increase production efficiencies and add incremental capacity and roasting capabilities in support of the growing market for healthy roasted snacks. We expect these lines to be fully operational by the end of the fourth quarter. The focus of our operational excellence pillar is to ensure food safety and quality, coupled with improved operational performance and efficiency. These efforts are expected to generate productivity improvements and cost savings in manufacturing, procurement, and logistics. During the third quarter, we continued to deliver strong operational performance across the network of aseptic facilities. We are on track to reach our target of approximately 85% capacity utilization by the end of 2018.
We expect our aseptic plant utilization to moderate in the first half of 2019 from Q4 levels and increase in the back half of fiscal 2019 due to the seasonality of the new broth business. As I noted, we completed the 2018 fruit pack season with high scores for fruit quality as a result of enhanced sorting and handling processes in both the U.S. and Mexico. During the quarter, we approved a significant capital enhancement project that will be implemented over the next two crop years to bring new automation and technology to our California facilities. As part of this, we also negotiated a long term lease at the Santa Maria location in exchange for landlord commitment to construct a new cold storage facility adjacent to our current plant.
These enhancements are an important step in our fruit margin optimization plan, which is a multifaceted program designed to drive profitability in the frozen fruit platform back to historical levels. At a high level, the plan is focused on four key areas to drive improved margins over time. First and foremost, we will continue to make food safety, quality, and customer service our top priorities. Second, we are focusing on volume growth. Our strategic decision to lower prices to win back distribution is evidence of this in action. Third, we are committed to driving costs out of the business. The capital enhancement project I just mentioned is the first step of many in this direction. Increasing automation with proven technology in our facilities, combined with the streamlined facility in Santa Maria, is expected to lower conversion expenses, improve yield, and increase productivity.
When coupled with an efficient supply chain, all aspects of the plan work to lower costs and help insulate this business from inflationary pressures on the horizon. Finally, we will bring innovation to the platform to increase the number of value-added products we offer to our customers. We also continue to advance food safety and quality efforts across the entire manufacturing footprint, leading to significant improvements in third-party food safety and quality audit scores, and significant reductions in customer and consumer quality complaints. Looking ahead in Q4 and into 2019, our SunOpta 360 continuous improvement initiative will continue to identify additional productivity improvement opportunities in areas of manufacturing, purchasing, and supply chain management. The focus of the go-to-market effectiveness pillar is to optimize customer and product mix in existing sales channels and to identify and penetrate new high-potential sales channels.
Efforts under this pillar are expected to improve revenue growth and profitability over time. As I previously mentioned, during the third quarter, we commercialized approximately 100 new SKUs. Prior to the value creation plan, the organization did not have the capability to effectively bring so many new products to market in such a short window. I would like to thank our SunOpta team members for the effort and dedication that was required to achieve this significant accomplishment. The pipeline of commercial opportunities in consumer products remains strong, and the overall contract book for organic ingredients, both in Europe and the U.S., remains above last year's level.
Recent commercial wins include innovative oat-based non-dairy beverages into retail and industrial channels, traditional non-dairy SKUs into retail and broadline food service channels, expanded distribution of Everyday Broth with a large mass retailer, private label frozen fruit for a specialty retailer, and increased orders for private label frozen fruit items following a category reset by a large customer. The focus of the process sustainability pillar is to ensure the company has the infrastructure, systems, and skills to achieve and sustain the business improvements captured from the value creation plan. During the third quarter, we made significant advancements with the new demand planning system that is expected to enhance our sales and operations planning processes. The new tool is expected to go live during the fourth quarter of 2018.
We also improved capacity planning capabilities across the frozen fruit network, and new product commercialization capabilities were further refined and certainly put to the test during the third quarter. Combined with our R&D capabilities, our new product commercialization acumen is expected to pay increasing dividends looking forward as we bring new innovation to market. Finally, our enhancements to employee health and safety processes continue to result in a reduction in reportable incidents year to date in 2018 compared to 2017. To wrap it up, the positive impacts of the value creation plan are evident in the transformations of both our beverage and snacks platforms and continued strength in our organic ingredients business. However, we recognize there is much work ahead of us as we focus on improving profitability in our healthy fruit platform. We have a strong portfolio that is on trend with consumers and has competitive advantages.
We will continue to focus on our plan to deliver improved growth, profitability, and shareholder value, and we look forward to updating you on our continued progress. I will now turn the call over to Rob to provide additional details on the third quarter financial results. Rob?
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. Excluding 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 sourced 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 Products 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%. The increased revenue primarily reflects 53.9% growth in healthy snacks, 6.8% growth in healthy beverage, and a 5.5% adjusted decline in healthy fruit, all of which Dave discussed in detail. Let me note that the seasonal benefit in healthy snacks was significant in the third quarter in support of back-to-school promotional activity, and while the business is healthy and growing, the rates of growth are choppy. We expect a meaningful sequential decline in healthy snacks in the fourth quarter in terms of revenue and gross profit given the seasonality I just mentioned. Consolidated gross profit was $34.1 million for the third quarter of 2018, a $2.3 million decline from $36.5 million in the third quarter of last year.
Global Ingredients accounted for roughly half of the decrease in gross profit, which was largely due to start-up costs on the new roasting equipment in Crookston and lower volumes in pricing for domestically sourced grains and seeds, as well as the impact of foreign exchange movements on certain contracts within the Netherlands-based operations of our international organic ingredients platform. During the third quarter of 2018, we recognized a $0.7 million foreign exchange loss on U.S. dollar-denominated raw material purchase contracts, compared with a foreign exchange gain of $0.7 million in the third quarter of 2017, which reflected a strengthening of the U.S. dollar versus the euro in the third quarter of 2018, compared with the weakening of the U.S. dollar versus the euro in the third quarter of 2017.
These factors were partially offset by higher volumes and pricing spreads for certain internationally sourced organic ingredients, as well as a gain on commodity futures contracts used to hedge our organic cocoa position of $2.6 million in the third quarter of 2018, compared with a loss of $0.1 million in the third quarter of 2017. We enter into futures contracts to manage exposure to changes in cocoa prices on our physical organic cocoa position, which has increased due to the expansion of our cocoa processing operations. During the fourth quarter, we expect to realize additional start-up costs and inefficiencies as we commence production in roasted snacks that will impact ingredient gross margins.
Consumer products accounted for the other half of the decrease in gross profit, reflecting our investment into sales prices to gain back volume, combined with unfavorable product mix for frozen fruit, as well as costs related to the introduction of new beverage and frozen fruit products. These factors were partially offset by the favorable impact within the healthy beverage and snack platforms of improved plant utilization due to higher production volumes to meet sales demand and productivity-driven cost savings. In addition, we gained operational savings following the discontinuance of flexible resealable pouch and nutrition bar production in the fourth quarter of 2017. We expect to continue to see soft gross margin in the frozen fruit platform as we have strategically invested in price while adding to quality and customer service.
We will see increased costs on certain fruit varieties following the completion of the 2018 Mexican mango season, as we took additional steps to assure food quality. As a percentage of revenues, gross profit for the third quarter of 2018 was 11.1%, compared to 11.4% in the prior year. The gross margin would have been approximately 11.7% in the third quarter of 2018, excluding start-up costs of $1.5 million related to new roasting equipment and $0.4 million of costs associated with the commercialization of new beverage and frozen fruit SKUs. This compares to an adjusted gross margin of 11.8% in the prior year, excluding the impact of write-downs in the flexible resealable pouch and nutrition bar businesses. Operating income was $4.5 million or 1.5% of revenue, compared to $5 million or 1.5% of revenue in the prior year period.
Excluding SG&A costs related to the Value Creation Plan, as well as those items I previously mentioned that affected gross profit, segment operating income as a percentage of revenues on an adjusted basis would've been 2.1% for the third quarter of 2018, compared with 2.7% for the third quarter of 2017. On a GAAP basis for the third quarter, we reported a loss attributable to common shareholders of $6.6 million or $0.08 per common share, compared to a loss of $8 million or $0.09 per common share during the third quarter of 2017. On an adjusted basis, we reported a loss of $3.8 million or $0.04 per common share, compared to an adjusted loss of $1.9 million or $0.02 per common share in the third quarter of 2017.
Adjusted EBITDA for the third quarter of 2018 was $16.7 million or 5.4% of revenue, compared to $19.1 million or 6% of revenue in the prior year period. I'd like to remind listeners that adjusted EBITDA and adjusted earnings are non-GAAP measures and a reconciliation of these measures to GAAP can be found towards the back of the press release issued earlier this morning. From a cash flow perspective, during the third quarter, cash generated by operating activities was $10.5 million, compared to cash used in operating activities of $11.1 million in the third quarter of 2017. We invested $7.8 million in capital expenditures during the third quarter and continue to anticipate CapEx of approximately $30 million for the full year of 2018.
At the end of the third quarter, total debt was $505.7 million, reflecting $216.7 million net of issuance costs of 9.5% senior secured second lien notes due in 2022, $274.3 million drawn on our first lien global asset-based credit facility with the balance representing smaller credit facilities, lease, and other financing arrangements. The global asset-based credit facility is a syndicated credit agreement maturing in February of 2021 with an aggregate commitment of up to $370 million. With that, let me turn the call over to the operator to facilitate Q&A. Operator?
Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. Again, that is star, then one on your telephone keypad to ask a question. We'll pause for a brief moment to compile the Q&A roster. Your first question comes from Amit Sharma with BMO Capital. Your line is open.
Hi, good morning, everyone. Morning.
Dave, you listed a number of new wins for revenues coming through in fourth quarter next year. Can you just provide us a little bit more clarity on the size and the timing of these new wins?
Yeah. The timing, some of those are shipping now and into the fourth quarter. Others will start shipping next year in fiscal 2019. From an overall quantification of the dollar sales on the new items that we've won, I'd put it approximately in the $10 million category on a revenue basis.
Got it. Rob, as we think about 4Q, looking at the estimates, still a pretty large ramp-up in expectations for the fourth quarter. Dave talked about maybe some incremental expense related to the Crookston facility. Can you talk about some puts and takes for what's coming up in 4Q from a sequential perspective?
Yeah. Obviously, we've got a policy not providing guidance, I think if you listen to the prepared remarks, there's a number of things that we spoke to give a sense of what we see coming down the pipe, both favorable and potentially unfavorable. 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. 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 out of Mexico is a little higher than we expected. That's not going to get passed on to customers. 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. Certainly, Amit, you called it out, the roasting assets inside of the Crookston facility, we continue to make progress commercializing those. We should expect to see some continued spend and cost 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 how I'd position that.
If you put it all together, would you expect a sizable jump in EBITDA margins this quarter or should we think about that's 2019 at this point?
Yeah. 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 or 2019, the plan is designed to see growth and EBITDA enhancement over time.
Got it. Dave, just going back to frozen fruit, certainly it continues to be the one which is lagging from an improvement perspective. 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?
It's a longer improvement process, Amit. We think of it in four key steps. The first step that we've been executing against, let's call it this past year, was really to improve food safety, quality and our customer service to regain our customers' confidence because as you'll 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. We invested in pricing, also known as lowering pricing to win back volume. We were successful there as well.
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. Those two are the first steps and we feel like we've pretty much accomplished those. The next step is rebuilding the gross margin. We've brought back this volume, but we did it at much lower pricing, which is compressed margins. The rebuilding of the gross margin is key and there's a couple things we're doing there. It's a multifaceted approach. There's not a one silver bullet. We announced in this earnings call that we're now proceeding with investing in automation in our California-based plants. That will happen over the next two crop years.
We'll start some of that work in preparation to have it in place for the 2019 crop year. 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 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. That's going to be a key part of it. We're also focusing on the traditional things, improving overall effectiveness inside of the plants, yield improvement, et cetera. We do see the margin recovery occurring over the, for the most part, the next two crop years.
Of course, the last thing is bringing margin and creative 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. We're working on bringing new innovation types back into the market also as a part of the margin recovery effort.
That's very helpful. Just one last one from me. As you look at this full year from a 2018, from a frozen food perspective, can you help us understand what's the level of headwind you face this year from a gross profit perspective or EBITDA, whichever way you want to do? How much of that goes away next year so that the $28 million VCP- related savings start to show up on the EBITDA line?
Yeah, I can take that one, Amit. When the Q comes out, of course, you get the greater insight into that. 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. Obviously, that puts into perspective just how meaningful the decline in that business is in the sense of profitability. The biggest chunk of that and reflecting really the investment in price that Dave mentioned that obviously we're doing for a specific reason to return that business to margin health over time, if you will, back to historical levels. That's the year-over-year delta through nine months. As I think about costs, if you will, that exist in the business in 2018 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 having less movements in terms of freight and things of that nature. The bigger part of the lifting here is really the automation improvements and all the things that Dave has mentioned in terms of our four-phase plan to drive cost out of that business and get margins back to more of a historical state.
Just to be clear, that $5 million is the headwind that goes away, or that's the headwind that remains for next year?
That would be the headwind that goes away.
You still face pretty large headwind, like to the magnitude of, let's say, on a nine-month basis, almost $20 million of headwind next year, too?
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. The $5 million is 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 call that.
Got it. Thank you so much.
Your next question comes from Jon Andersen from William Blair. Your line is open.
Hey, good morning, everybody.
Good morning.
Hey, Jon.
I wanted to start on the global ingredients side of the business. 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 the demand you've seen for organic ingredients in developed markets around the world. Could 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. Shifting over to the domestically sourced ingredients, that was down about 10% in the quarter. I know there have been some planned exits there. When do we lap those planned exits of some of the specialty soy?
Also, if you can 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. Start with that.
Hi, Jon, this is Dave. On the international organic ingredients, a couple of primary factors that have 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. That's one of the primary factors in the international market. The second is we're a fairly large seller of organic nuts. In cashews and almonds in particular, the pricing in those markets has come down pretty significantly over the last several months. What happens in that kind of environment is the buyers of those particular items go into a spot buy mentality, waiting for the pricing to bottom out. That's been impacting our, what we call our nut and seed desk, 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. 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, as you well know, we're one of the largest sunflower producers in the U.S. 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. It hasn't been rationalized out of the market. That factors into it. Demand for the product itself isn't as robust as we'd like as people are looking for alternatives to sunflower.
That's what led us, by the way, to make the investment in the roasted snacks platform in Crookston. The sunflower business remains soft. 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. The good news on that is that the harvest is underway and we're now shipping that organic feed. That should correct itself as we go into the fourth quarter.
Jon, just to answer, I think the last element to your question there. There's probably been a $1 million delta between the exited line of the business. Because we got out of that and that we're now in a new crop, that would be the last quarter you'd see it was really the bin clean out, the bottom of the bin that we would have sold and recorded revenue on last year out of the Moorhead facility that you're no longer seeing this year. It was about $1 million of that 9% 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, 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 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. We really need businesses, right, like beverages, which seem to have a little bit more momentum behind them to continue to exhibit that momentum.
Again, if you could talk about the pipeline, your visibility as you bring on more capability and capacity to continue to drive strong growth out of that beverage business.
Yeah, sure. I'll try and take that one, Jon. I think as I think about beverage, if you even contrast it with a year ago, we weren't really in the broth side of the broth category at all. 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. We are shipping more in this fourth quarter. If I think about maybe what does that mean to that overall beverage portfolio, I think the broth business we brought on can support a 10% growth rate on the beverage portfolio on its own. What we do, of course, with non-dairy and other things would be above and beyond that.
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 upward trends there. Think of it as a +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've mentioned in our prepared remarks that we're now getting interest in selling oat milk. Oat milk, we think, has a pretty bright future in the aseptic format. We also have pretty robust pipeline of opportunities with customers as well. We continue to feel pretty confident in the ability to grow the beverage platform.
Is the beverage platform, are there other areas that you're exploring beyond, let's say, the aseptic in nut-based beverages? There's been a migration to the refrigerated case. Is that something that you would even consider or is that just non-core? Are there other categories around the store where your aseptic capability might apply beyond nut-based beverages, beyond a broth that we could get excited about as another kind of white space for that business?
Jon, as you know, our core is plant-based beverages, so the almond milk, coconut milk, soy milk, et cetera. Having said that, we do see additional category potential within the aseptic format. There's the protein category, the protein drink category, nutritional drinks. We see those as a potential area to pursue with 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 type that those product types are typically sold in. We have interest in that area. We think it's a high growth, sustainable area.
Yes, there's other areas that we're looking at. Our core in this business is plant-based, but we do see some adjacent categories that make sense for us.
The growth, I don't think you mentioned in the prepared comments, were gross margins higher in aseptic in the quarter? I think you'd mentioned that snack gross margins were up year-over-year. How about the beverage business?
Yeah, no, the beverage business and the snack business were up. Certainly on a combined basis, they weren't up enough to offset the headwind in fruit.
Okay. Are the beverage and snack businesses operating at gross margin levels that are consistent with your three-year plan to get to 10% EBITDA margin?
They're certainly making strides in that direction, and I'd say that they're closer to that profile that we're targeting. It really is fruit that is obviously the furthest from it. We have sight lines for beverage and snacks to certainly get to the range we set out.
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 longer term objectives.
Yeah. I steer clear of giving specific margin ranges by the sub-platforms, Jon, I did mention, and Amit asked a question about the overall decrease, and it's a $26 million drop in dollars this year versus last year. I think that should probably help to give you perspective on the quantum.
Okay. Am I right to, I 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? I think if fruit, if it's a longer-term proposition to get the margin recovery, I think maybe, David, you mentioned two 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 those objectives or still on track?
Let me try and start there, Jon. From my perspective, the objectives are unchanged, the 10%-11%. 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 fruit 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 1st, 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 cost out of there, it's going to take two crop seasons.
Yeah.
That's not necessarily unchanged from where we were at or as we're at last call. That just is a reality of that business. We'll get to work ahead of the 2019 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 in time for the 2020 season up in Santa Maria, along with another wave, if you will, of cost reduction and efficiency enhancements.
At that point in 2020, we'll certainly know where we're sitting in terms of what we've accomplished to drive costs through the business. Jon, there's 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 needs to be staged so that we don't disrupt production during the season. The CapEx is what will be installed over the next two crop cycles, if you will. However, there's other parts of margin recovery that we're working on that aren't necessarily CapEx dependent.
Those are the things that we can do to try to increase margin while we're implementing the CapEx and the automation over the next two crop cycles.
Okay. Since it's just two of us sell-siders, I can 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? I think last quarter you gave some bounds on how to think about Q3. I guess what I'm digging for here is how you'd like us to think about sequential improvement or lack thereof in Q4 this year. Then I have a follow-up on 2019.
Yeah, sure. 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. 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. We do expect to see more growth. We're expecting growth in beverage, really driven by broth. We are expecting volume growth in fruit. As we've described, 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 to school for one of our contract manufacturing customers. 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, that along with the commissioning activities and then beginning to commercialize new business off it, there will be cost there. I missed someone here. Then we talked about the costs inside of fruit, mainly focused on mango, 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. As a result of that, we did incur slightly higher yield loss, which drives the cost of the fruit up a bit. Those I think are the indicators, Jon, that I think you can go on if you're thinking about what fourth quarter looks like and in some cases into next year.
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. I guess I'll give it a stab and this will be the last one. In 2019, it 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-$150 million, do we see material progress towards that goal, which I think was a 2020 goal, in 2019? 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 2019?
Yeah, I think, I made this comment, we are focused on executing the Value Creation Plan. What really is the biggest amount of heavy lifting we have, I think it comes through on most of the calls I take, and certainly on this call, it's inside of fruit. We think we're right where we'd want to be when it comes to beverage and snacks. Certainly our trot in our organic ingredient business. We're seeing the growth rate there hold. The contract book remains strong. As you describe a year of investments, the entire plan itself is an investment, I think it's really fruit that, as we've been talking about, here's the four steps we're going to go through to drive more margin back into that business, we're certainly confident in our ability to do that.
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.
Those are all important things, quality of product, they're paramount, right? Quality of product, the variety that you can offer your customer, the efficiency with which you can process and produce it. It sounds like it's winning you volume, but it doesn't necessarily get you margin, right? 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 going to not just deliver the volume, but the overall value, I guess, in terms of margin rates that you're kind of targeting?
I think, the four-step process we outlined earlier, Jon. Steps one and two, which was improving food safety and quality, getting our credibility back with the customers, and then the investment in pricing, those have paid off, to your point. We've gotten the volume back. Rebuilding the margin structure, that takes more time because there's not one lever you can pull and increase margins overnight. 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 two, 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 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 can be changes that could lead to the opportunity on pricing. The approach we're taking is pricing is certainly one 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.
Again, there's not one single item. It's multifaceted, this is not new work. This is what it takes to get margin back into businesses of this nature, that's the exact approach we're going to take, I'm very confident that we can rebuild the margin structure.
Okay. Would you still characterize Q3 as kind of the bottom in the margin performance for fruit? 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, we make steady sequential improvement from here?
Yeah, no, we're certainly in the trough now. Q3, Q4, would I suggest you're going to see a massive step-up in the fourth quarter? No. We're certainly not seeing any further deterioration from an overall margin profile perspective from where we sit right now.
Okay. All right, thanks. You guys have been really generous with your time, appreciate that, good luck going forward.
Thanks, Jon.
Thanks.
Thanks.
Your next question comes from Amit Sharma with BMO Capital. Your line is open.
Thank you so much. Just a very quick one 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?
Yeah, for those particular items, that was an annualized number.
Okay, got it. That's it. Thank you so much.
Thank you.
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.