Earnings Call: Q2 2018

Aug 8, 2018

Good morning, and welcome to SunOpta's Second Quarter Fiscal 2018 Earnings Conference Call. By now, everyone should have access to the earnings press release that was issued this morning and is available on the Investor Relations page on SunOpta's website atwww.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 10 ks and other filings with the Securities and Exchange Commission for more detailed discussion of the factors that could cause actual results to differ materially from those projections and any forward looking statements. The company undertakes no obligation to publicly correct or update the forward looking statements made during the presentation to reflect future events or circumstances, except as may be required under applicable securities laws. Finally, we 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 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. And now I'd like to turn the conference call over to SunOpta's CEO, David Colo. Good morning and thank you for joining us. With me this morning is Rob McCaricker, our Chief Financial Officer. During the Q2 we continue to make progress with the value creation plan including additional conversions of our sales opportunity pipeline, strong performance in aseptic beverages and snacks and continued growth in organic ingredients. While challenges remain in frozen fruit, results improved sequentially and we made good progress implementing our frozen fruit operational improvement plan. On an adjusted basis, revenue was close to prior year and adjusted EBITDA was in line with our expectations. We continue to capture incremental EBITDA improvements through the value creation plan much of which we have reinvested into pricing actions in the fruit platform. We also remain confident with our expectation of returning to consolidated revenue growth in the second half of the year. Let me review the 2nd quarter highlights and then provide an update on the value creation plan. 2nd quarter revenue was $319,300,000 down 5.1% as reported or down 0.6% excluding the impact of commodities, currencies and removing the impact of the bar and pouch lines of business. 2nd quarter adjusted EBITDA was $14,800,000 an improvement from the Q1 and consistent with our expectations. In the Global Ingredients segment we reported a 0.4% year over year revenue increase or a 0.6% decline excluding the impact of commodities and currencies. We continue to see solid demand for internationally sourced organic ingredients including sales growth in the U. S. And European markets, although sales growth in Europe moderated from the Q1 level. Growth of internationally sourced organic ingredients continued to offset the anticipated reduction of sales in our North American grains business which is still lapping sales related to specialty soy products that we exited last year. Rob will provide some color on timing related non cash foreign exchange as well as commodity items that impacted gross margin inside Global Ingredients in the quarter, but the business is healthy and we remain committed to our strategic focus that's designed to leverage structural advantages in Global Ingredients. Turning to consumer products, we had another good quarter in healthy beverage generating 1.6% year over year revenue growth. This growth was driven by strong performance in aseptic beverages, while premium juice sales were lower year over year as we rationalized unprofitable points of distribution. Aseptic sales were up 6% despite still lapping 1 month of sales to a large private label account that ended at the end of April last year. Our go to market effectiveness strategies continue to build a robust sales opportunity pipeline in the healthy beverage platform and we saw several conversions of this pipeline during the quarter which I will discuss in a moment. Margin performance continued to improve reflecting increased capacity utilization and productivity improvements in our aseptic platform. Healthy snacks also posted a good second quarter excluding the resealable pouch and nutrition bar businesses that we exited last year, snack sales were up 7.6% and gross margins were higher year over year. Turning to the healthy fruit platform, we continued to experience revenue declines in the Q2 however the decline narrowed to 3.3% during the quarter after adjusting for commodity prices as compared to a 17.1% decline in the Q1. As expected gross margin continues to trail the prior year reflecting lower pricing and increased manufacturing costs driven by a reduced pack plan and excess costs associated with inventories including transportation, storage and obsolescence. We are making steady progress on our plan to turn around frozen fruit and are 90% through our pack plan for this year which will substantially wrap up in the Q3. Recall that our plan is for a reduced pack plan this year in order to rebalance our inventory levels to our refined demand plan. This initiative is designed to improve matching of pricing to input costs while ensuring optimal inventory levels. We are leveraging our expanded procurement and processing capabilities at our Mexico facility and have utilized a more cost effective combination of our California based facilities to process this year's crop. We will continue to optimize our frozen fruit supply chain and production processes as we evaluate investments in automation and technology to enable improved product quality, productivity and costs. We also continue to win new business that includes additional SKUs and broader distribution some of which we expect to ship during the Q4. I am pleased with our investments in quality, customer service and innovation and encouraged by our progress within this important platform. We remain confident with the long term outlook for this healthy food category and our competitive positioning. Now let me turn to an update on the value creation plan. As we have discussed over the last year, the first phase of the value creation plan is targeting implementation of $30,000,000 of productivity driven annualized EBITDA enhancements over 2017 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 in several manufacturing facilities to enhance food safety and manufacturing efficiencies. Over time these investments are expected to yield EBITDA improvements that go beyond the $30,000,000 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 higher capacity utilization and improved profitability. We are on track to deliver $20,000,000 of productivity driven EBITDA improvements this year. However as we just discussed these improvements are expected to be offset by pricing investments and increased operational costs in healthy fruit that we are addressing as part of the improvement plan. We have largely cleaned up our portfolio and are now focused on strategically investing in key areas to drive growth and margin expansion. Our portfolio optimization efforts during the Q2 included advancing the commercial production of the 2nd roasting and processing line at our organic cocoa facility in Holland. We are currently at 80% of design throughput at targeted yields. Our plan is to reach design capacity by the end of the Q3. We continue commissioning efforts on a new oil processing line at our Bulgarian sunflower facility which is expected to drive incremental margins through growth and production efficiency. We also began the commissioning efforts of our new roasting equipment in Crookston. As a reminder, we added 2 new blanching and roasting lines in Crookston as a result of the closure of our Wahpeton facility. Due to delays in the timing of equipment deliveries as well as a longer than planned commissioning schedule, we now expect these lines to be fully operational in the Q4 approximately 90 days later than our original plan. Finally as we announced last quarter we have now initiated our plans to expand aseptic processing and packaging capacity and capabilities at Allentown, Pennsylvania beverage facility. This $22,000,000 project will add capacity, additional capabilities and further cost advantages to our national footprint of aseptic plants. In addition to the $22,000,000 project we have initiated during the Q2 we identified and approved another $13,000,000 of capital spending to enhance efficiency and increase capacity in our aseptic business over the next 24 months. In total these investments will expand our aseptic capacity by approximately 25% once fully operational. The focus of the 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 Q2 we continued to generate strong operational performance across the network of aseptic facilities. We are now targeting capacity utilization to be approximately 85% by the end of 2018. As I noted in our fruit discussion, completed approximately 90% of the 2018 pack season at targeted fruit recovery rates and recently implemented sorting and handling enhancements that have resulted in improved fruit quality. We also continue to advance food safety and quality efforts across the entire manufacturing footprint leading to significant improvements in 3rd party food safety and quality audit scores and significant reductions in customer and consumer quality complaints. We also identified additional productivity improvement opportunities as the SunOpta 360 continuous improvement initiative progresses within our aseptic facilities. 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. The pipeline of commercial opportunities in consumer products remain strong and the overall contract book for organic ingredients both in Europe and the U. S. Exceeds prior year levels. Recent commercial wins include additional private label broth into the traditional and specialty retail channels, expanded distribution and additional SKUs of frozen fruit into the mass, grocery and limited assortment channels, incremental frozen fruit offering servicing the food service channel that are expected to ship in the Q4 and increased sales of co manufactured fruit snacks that are expected to ship in the Q3. We continue to convert our sales opportunity pipeline at a rate sufficient to meet our expectations of accelerating revenue growth in the back half of the year. We will be commercializing approximately 100 new SKUs in the second half of the year resulting in 120,000 new points of distribution across multiple channels. As you would expect this is what drives our confidence in our expectation for consolidated revenue growth in the second half of the year. We are pleased with the level of commercial activity and feel confident that these wins will drive profitability over time. 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 Q2 we went live with a new specification system for ingredients which is designed to drive improved food safety and quality in addition to improved research and development efficiencies. We advanced our aseptic capacity planning capabilities to support the expanded volume increase I just mentioned over the next 12 to 18 months. As part of our frozen fruit improvement plan we have significantly improved our demand planning, fruit utilization planning and inventory management practices which will lead to improvements in working capital and inventory turns in this business. We also made further enhancements to employee health and safety processes which continue to result in a reduction in recordable incidents year to date in 2018 compared to 2017. As we discussed last quarter, we have begun to see the positive impacts of the value creation plan on several of our business platforms. Our success in the transformations of both our aseptic beverage and snack platforms is the roadmap to improve growth and margin across the consolidated business. We have a strong portfolio that is on trend with competitive advantages and we will continue to focus on our plan to deliver improved growth and profitability. We look forward to updating you on our continued progress. I will now turn the call over to Rob to go through the 2nd quarter financial results. Rob? Thanks Dave. I'll take you through the rest of the financial results as well as balance sheet and cash flow metrics for the Q2. As Dave mentioned, Q2 revenue was $319,300,000 a 5.1% year over year decline as reported. Excluding the impact on revenue from changes in commodity related pricing and foreign exchange rates and removing the impact of the bar and pouch lines of business, revenue declined 0.6%. The Global Ingredients segment generated revenue from external customers of 146,700,000 dollars an increase of 0.4%. Excluding the impact of changes in commodity related pricing and foreign exchange, revenue in Global Ingredients was relatively flat, decreasing by 0.6%. The 2nd quarter revenue reflects 6.8% growth in internationally sourced organic ingredients excluding the effect of commodity prices and foreign exchange as we continue to experience increased demand for organic ingredients including cocoa, oils, coffee, fruits and vegetables which more than offset declines in organic feed. This growth was offset by lower volumes of North American sourced grain and seed products, which declined 14 point 2% during the quarter excluding the effect of commodity prices mainly as a result of our exit from certain specialty soy products in 2017 as well as softer market conditions for sunflower. The Consumer Products segment generated revenue of $172,600,000 during the Q2 of 2018, a decrease of 9.3% compared to the Q2 of 2017. Excluding the impact of commodity prices and removing the impact of the bar and pouch lines of business, revenue in the 2nd quarter decreased by 0.6%. The decline in revenue primarily reflects 3.3% lower sales in frozen fruit, which excludes the effect of changes in commodity pricing due to reduced distribution to certain retail customers. This decline was largely offset by 1.6% growth in our beverage driven by continued growth of aseptic nondairy and broth products, partially offset by lower sales of premium juice compared to the prior year, mainly due to a reduced private label juice program as we exited certain unprofitable regions. Excluding sales related to a large private label account that we stopped servicing at the end of April of 2017, aseptic beverage volume would have been up approximately 12.5% during the Q2. In our snacks platform, excluding sales of nutrition bar and pouch products, revenue grew 7.6% in the 2nd quarter, driven by increased contract manufacturing volume in FruitSneX. Consolidated gross profit was 34.3 $1,000,000 for the Q2 of 2018 compared to $41,700,000 for the Q2 of 2017. Global Ingredients accounted for $6,800,000 of the decrease in gross profit, which was largely due to the impact foreign exchange and commodity price movements had on certain contracts within our European operations. During the Q2 of 2018, we recognized a non cash $4,300,000 foreign exchange loss on U. S. Dollar denominated raw material purchase contracts compared with a non cash foreign exchange gain of $3,700,000 in the Q2 of 2017. This reflects the significant strengthening of the the U. S. Dollar versus the euro in the Q2 of last year. This was partially offset by a gain of $1,800,000 on commodity futures contracts used to hedge our organic cocoa position compared to a gain of $200,000 last year. These foreign exchange and commodity driven items account $6,400,000 of the $6,800,000 decline in gross profit. It's important to note that inside Global Ingredients we employ a variety of financial instruments to proactively manage exposures related to foreign currency and commodity price with the objective of protecting margins and ultimately cash flow. These efforts are designed to de risk our business over the entire length of a transaction cycle, which occasionally can lead to temporary P and L effects when we report our financials as many of the contracts in Global Ingredients span multiple quarters. Consumer Products accounted for $500,000 of the decrease in gross profit as increased volumes and margins in our beverage and snack platforms largely offset the lower sales volumes and pricing of frozen fruit along with higher processing and handling costs reflecting our fruit inventory position. As a percentage of revenue, gross profit for the Q2 of 2018 was 10.8% compared to 12.4% in the prior year. The gross margin would have been approximately 10.6% in the Q2 of 2018, excluding the recovery of $1,200,000 of previously incurred product withdrawal costs from a 3rd party supplier, partially offset by startup costs of $700,000 related to new roasting equipment at our Crookston facility. This compares to an adjusted gross margin of 12.5% in the prior year with the impact of the previously mentioned foreign exchange and commodity related items driving the majority of the rate decline. Operating income was $4,600,000 or 1.5 percent of revenue compared to $2,600,000 or 0.8 percent of revenue in the Q2 of 2017. The increase in operating income primarily reflects lower non structural SG and A costs when compared to the prior year. For the Q2 of 2018 operating income would have been $4,500,000 or 1.4 percent of revenue excluding the $1,200,000 recovery of product withdrawal costs offset by $300,000 of non structural costs and SG and A related to the value creation plan and $700,000 of costs related to equipment startup as compared to a normalized operating income of $9,900,000 or 2.9 percent of revenue in the Q2 of 2017. On a GAAP basis for the Q2, we reported a loss attributable to common shareholders of $5,100,000 or $0.06 per common share compared to a loss of $2,400,000 or $0.03 per common share during the Q2 of 2017. On an adjusted basis, we reported a loss of 5,000,000 dollars or $0.06 per common share compared to an adjusted loss of $700,000 or $0.01 per common share in the Q2 of 2017. 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. For the Q2 of 2018, we realized adjusted EBITDA of $14,800,000 compared to $19,400,000 during the Q2 of 2017. As Dave has already touched on, our investments in fruit pricing and the ongoing costs in the fruit platform are expected to offset productivity gains driven by the value creation plan. We also expect some inefficiencies during our Crookston facility commissioning in addition to startup costs associated with the commercialization of new SKUs in the coming two quarters. Taking these items into account looking towards the back half of twenty eighteen, we anticipate consolidated revenue growth and sequential quarterly improvements in adjusted EBITDA. From a cash flow perspective, during the Q2, cash used in operating activities was $34,200,000 compared to $25,800,000 in the Q2 of 20 17. The increase in cash used reflects purchases of inventory to support growth in Global Ingredients and the timing of this year's fruit harvest. During the quarter, we spent $10,400,000 on capital expenditures compared to $7,100,000 a year ago. Spending in the 2nd quarter focused on growth capital inside our aseptic network, completion of the build out and system upgrade our Mexican frozen fruit facility and spending related to the roasting enhancements and global ingredients in addition to ongoing maintenance capital. We continue to anticipate CapEx of $25,000,000 to $30,000,000 for the full year of 2018. Seasonally, our debt peaks over the summer months as this is when the majority of the fruit is harvested. At the end of the second quarter, total debt was $509,100,000 reflecting $216,400,000 net of issuance costs of 9.5% senior secured second lien notes due in 2022, $277,300,000 drawn in our 1st 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 $365,000,000 With that, let me turn the call over to the operator to facilitate Q and A. Operator? Our first question comes from the line of Amit Sharma with BMO Capital Markets. Your line is now open. Hi, good morning everyone. Good morning. Dale, let me start with the frozen fruit segment. Can you talk about the crop in California? How is it turning out to be? You said you're 85% through your price pack. Can you provide a little bit more color on what the pricing has been for you and inventory levels? Sure. Yes, I think we might have mentioned this on the previous call, but the pack season had a little bit of a delayed start due to the extended fresh crop season. So the crop came delayed, but then came hard and we've been able to handle the crop. We're about 90% of the way through our anticipated receipts for the year. We expect to substantially wrap up the harvest season by the end of Q3. The quality of the fruit has been pretty good this year and pricing levels are fairly similar to where they were last year. So overall, we're pretty much in line with our expectations. Can you also talk about the pipeline for perhaps new wins there? This is a good crop. Your inventory levels are reset where you don't have to discount the product to move inventory? Yes, I think a big part of what we're trying to do this year is rebalance our inventories and what we mean by that is basically put ourselves in a position where our supply and demand match on a crop year basis. So that's we're making pretty good progress against that, Amit, for the year. Just to put that in perspective and what's kind of put us in somewhat of a position that we're overcoming going forward is in the prior 2 years, we actually produced just north of £50,000,000 more pounds than we actually sold. So you can see how that obviously puts you in a position where your inventories are not balanced from a supply and demand perspective. So that's been a big focus this year. And the team's done a very good job of putting all the tools and capabilities and then the plants have executed to help us make that happen. So that's the put us in a good position as we go forward to have balanced inventories. On the pipeline, we've had some good success in converting sales wins both with increases in distribution with some key accounts as well as gaining distribution with new customers. Some of that business will start shipping in Q4, Other parts of that will start shipping as we go into next year. So overall, we're not where we want to be yet on this business, but we've made pretty good progress over the last quarter. With that in mind, Rob, your comment about sequential improvement in EBITDA next year or next quarter in Q3, from a year over year basis, we still expect it to be below year ago levels? Yes, we obviously we have a policy of not providing explicit guidance, but I think what you see this quarter is our improvements in beverage and snacks went a long way to cover some of the decrease in fruit. I would expect a similar sort of thing next quarter but perhaps not to the same Last year the Q3 for fruit was a sizable Q3 by way of revenue and production pounds. So you get the efficiency inside the plants at the same time as you're getting the contribution from higher volumes. So I would expect that the trend in fruit does continue in the Q3 and it's really not till the Q4 that we start to see some noticeable improvements because of the efforts both top line and bottom line. So that in that regard help you understand some of the trend line there in CPG, that's what you would expect going forward. And then inside of Global Ingredients my comments were largely focused on the delays, the 90 day delay that is inside of the roasting equipment. So that obviously would weigh a little bit on our expectation in terms of the gross margin in that segment. And last one, in the GI segment, the FX penalty of $8,000,000 maybe $6,400,000 net, would you recover that in the back half or that may extend into 2019 as well? Yes. No, it's obviously a noticeable swing quarter over quarter. You should associate most of the loss this quarter as the comeback from last year's gain rather than something that reverses into the future. Okay, got it. Thank you so much. Our next question comes line of John Anderson with William Blair. Your line is now open. Good morning, everybody. Hey, John. Thanks. On the Global Ingredient business, can you talk a little bit more about the domestic side? The status of that business, your rationalization efforts in certain grain areas? I mean, how big is that business today as a percentage of your total global ingredient business? Where are you in terms of rationalization of certain grains? And when do you lap some of that such that you think you could see some stabilization overall? Or is that just a business that continues to kind of decline over time as you refocus resources on international organic? Let me kick it off then, Jon. I think it's fair to expect that we've largely now lapsed the declines from the rationalization of certain varieties of soy. So I think this will be the last quarter that really stands out and that starts to taper off in the 3rd and going forward. Inside of that North American piece, which is now obviously the smaller component of the overall Global Ingredients, the bigger piece being your internationally sourced organic, which is now north of 75% of what we handle is certified organic in that segment. The go forward focus really is on the parts of that North American business where we do have a structural right to win and the investment we're making into some of the roasted snacking capabilities. So we're expecting is to gradually see over time growth as we build out that side of the platform. And really the other factor I guess in play inside the North American ingredients is we are seeing somewhat of a soft sunflower market right now. So our traditional business that's co located with the roasting operations also processes sunflower, a lot of kernel and ingredient kind of based sunflower products. So we are seeing that soften up as demand isn't where it once was. Okay. On the commentary around EBITDA productivity improvements of $20,000,000 with an offset this year resulting from increased pricing investments and higher costs in frozen fruit. I guess I'm trying to understand how to read that. Is that a are you calling out an incremental, like incremental investments, incremental costs, is it different than how you've thought about it and communicated in the past? What should we make of that when we think about the earnings of the company, I guess, in 'eighteen? And is there any implication here for 'nineteen as well? Yes. I mean, in real simple terms, we remain confident in getting the $20,000,000 of productivity, but that will be offset and potentially slightly higher than offset by the declines in fruit. So what you'll see in fruit is gross margins deteriorated compared to the prior year and a big factor in that deterioration is the pricing that we had to concede to our customers as well as the increased cost inside the platform. So those two things taken as a whole, I mean that in essence is our investment in pricing. We lost distribution as we were maintaining price last year and this year we're extending price reductions as a result and that's what's hitting the margins. So I look at it as the implication is certainly on fiscal 2018. The productivity is there, fruit and the year over year decrease in margin there will offset it. But that doesn't mean that the structural investment and improvement we've made in the business as a result of those productivity efforts isn't there, right. So it remains and then our focus is on improving and restoring that fruit business back to kind of first acceptable and then after that targeted gross margin levels. So I don't see us having a long term implication but it certainly stands out as far as our ability to all things equal add $20,000,000 to the P and L in 2018 fruit eats it up. Okay. But you earned, let's call it $67,000,000 in EBITDA in 2017. Are you suggesting that the $20,000,000 in productivity improvement will completely be eaten up, I guess, by investments frozen fruit such that we should expect little or no EBITDA growth in 2018 over 2017? Or are there other parts of the business that is growth in international organic, growth in beverages, growth in snacks that are accretive to earnings in 2018? Yes, the fruit certainly does consume the $20,000,000 of productivity. We are seeing benefits inside of beverage and snacks, not to a magnitude that can offset fruit, but sizable step ups there. As I look towards the time we've got left, I think that it's reasonable that we can perhaps come out ahead of last year on a net basis, but there is only half a year left 2018. So what we're focused on is exiting this year the trajectory we intended to exit at and then have a step up inside of 2019 and then 2020. So hopefully that helps to answer your question, John, given that I don't have a policy of providing guidance. Yes, it does. That helps. And then I know intra quarter you talked about at some investor events, talked about a longer term earnings algorithm that I think gets you to closer to $150,000,000 of EBITDA by 2020. Is that still applicable or does that do we need to think about that getting pushed out a bit given some of the issues here near term that you're discussing? No, I mean the ultimate targets that I think about and that we've been public about are focusing on a 10% to 11% EBITDA as a percentage of revenue and we still are firmly committed to and have line of sight to achieving that, a very important job that we've got in our hands in order to get there is of course correcting fruit. So that's the focus of the company and we expect to see meaningful step improvements as we exit this year with an inventory position that's let's say more in equilibrium with the needs of the business and then new go to market focus that is going to help to return that business to growth in addition to the investments that we're putting in when it comes to things like automation and investing in Mexico. So a big, big factor of getting back there is definitely getting fruit back to the healthy margins that we expect from it. And then a lot of the new business wins, I guess, that you've heard Dave speak about in the prepared remarks, a lot of that's coming through our innovation efforts and those innovation efforts are intended to drive revenue that is margin accretive. Okay. In the beverage business, can you talk a little bit more about the incremental capital? You talked about $22,000,000 previously, what the incremental, I think, $12,000,000 or $13,000,000 you talked about is going to? And is this just a pure kind of capacity expansion of your existing kind of product lines? Or is there a capability element to it as well that might allow you to participate in more categories on the beverage side? John, the incremental capital is designed to do a couple of things. 1st, kind of debottleneck our existing plants in the areas of primarily in processing related issues, which will free up additional capacity and give us more flexibility to utilize our existing fillers. That's the first component. The second piece is actually adding another filler line to support both business we've already won as part of our go to market plans as well as give us some headroom for additional growth in the next 24 months. From a capability point of view, the project that we approved for 22,000,000 dollars that project gives us some enhanced capability to make products that we currently can't produce today that are higher solid content products. We call them hard to batch products, which basically allows us capabilities to enter some new product categories that we don't have the capability today and then of course the balance of that project is adding new processing and filling capacity in the Allentown plant to support growth. Okay, that's helpful. Last one for me I guess is on the well, 2 quickies. So when you talk about Crookston and putting more capability into that facility to assist with roasted snacks, Where does the benefit ultimately from that show up? Is that revenue accounted for within your Global Ingredient business? Is that accounted for within the snack business as a consumer product sale? And then the last question I have is just on fruit and whether you're seeing any kind of trend improvement in the category? I know you've done some things with, I think, a natural retailer that where you kind of took more control of the offering and the merchandising at the shelf and I think saw some decent results from that. So if you can just talk about what you're seeing from a market perspective in frozen fruit on the retail side? Thanks. Hey, John, it's Rob. I'll take the first question and hand it over to Dave. So you're correct that the roasting investments, the capital, what we expect to come by way of revenue and enhanced margin that will all show up in the global ingredients segment. A portion of the sales there and the effort is certainly consumer in nature and to that extent we leverage the consumer sales group and marketing group to help grow that business, but the facility itself resides in the Global Ingredients footprint. So it's we reported there because they're shared assets. On the category trends John, the category as a whole for frozen fruit, it's showing some small growth overall as a category based on the last syndicated data read. But inside of that private label is actually starting to show some decent strength. I think the last quarter week read, which was mid July, I think private label was up between 4% to 5% on a dollar basis and up I think close to 10% on a volume basis. So it looks like not one data point doesn't make a trend, but it looks like the category has stabilized and it's starting to return to growth. We also see that private label is growing at a greater rate than branded within the category, which is historically kind of in the norm. So I think we're getting back to some of the historical tendencies of the category, which is a good thing. As far as with our retail accounts, the accounts that we've worked with that we've done some category management type work, we continue to see growth with those retail accounts. And again, it's just taking advantage of some of the insights that we've gained studying this category and the consumer trends and positioning ourselves to take advantage of some of those the growth that comes with those trends. So overall, again, as Rob said, our plan remains the same on fruit. We know that we've got to bring accretive margin accretive innovation to the retail customer base. We've got to continue to take costs out of our supply chain and manufacturing network and we think the combination of those two factors will get us back to the margin structure that we'd planned for this business. Hey David, if I could just squeeze in one more. When you think about frozen fruit today, where it sits today, and you're looking out over the next 6 to 12 to 18 months. I mean, I know when I talked to you early in the year, I sense some obviously disappointment with where that business was. 6 to 8 months later now in the year, you've done a lot of work, right? I mean, you've put a lot of investment into the facilities. You kind of taken the medicine in terms of, I think, balancing the PAC plan, Delta, it sounds like a more robust new product pipeline, but there are still challenges. So are you more optimistic, less optimistic, kind of stay the same in terms of your kind of your outlook, your attitude, your expectations for that business today relative to where we were kind of 6 months ago? Yes, definitely more optimistic versus 6 months ago. I think 6 months ago, the kind of the way I categorize it is we feel like we found the bottom of this business and are rebuilding it from the base and doing all the foundational things that you need to do in a business to support long term profitable sustainable growth. And we've said all along in this business as a whole that this is a turnaround. It's not linear. We're going to experience bumps in the road as we go and I'd classify fruit is one of those bumps. But we've definitely made significant improvements over the last 6 months, primarily again and just taking the medicine to use your term John on correcting a lot of the fundamental gaps that we had in this business that we now have very good plans in place. So going forward, I think we're in a much stronger position than we've been since I've been here to really position this particular business for growth going forward. Have a follow-up question from the line of Amit Sharma with BMO Capital Markets. Your line is now open. Hi. Thank you so much for taking the follow-up guys. A couple for me. In the aseptic beverages, 12.5% ex Costco growth, is that a good run rate for the back half and in 2019 as well, especially as you add up more capacity? Yes, obviously we did lose that large club accounts. So I think it's not a bad run rate on it in the sense that a lot of the new business we're commercializing it's going to ramp here in the starting Q3 and then into the 4th. It would be reasonable to expect that that's of a magnitude that it can offset that large account that we lost. Okay. And then just thinking about the margin structure. I mean, obviously, 2018 EBITDA and gross margins probably need to come down where consensus is today. But as we look to 2019, Dave and Rob both, I mean, you talk about taking some of the lumps this year. If you look to 2019 and perhaps 2020 as well, structurally, are there any other large items on your to do list? Or are we in a position where the heavy lifting is done? And obviously, you have quarter to quarter volatility, but from a structural perspective, anything else that's on your plate, Dave, that needs to be tackled later this year or in 2019? I think from a structural perspective, and as we've kind of laid out this turnaround process that Phase 1 is clean it up, Phase 2 is tune it up, Phase 3 is turn it up. I think for the most part, we're through the clean it up phase, right, in all of these businesses. And now we're definitely focused on tuning it up with the most tune up work, obviously, in the frozen fruit business. But that's work that we have well underway. We have good line of sight to the actions that we need to take. A lot of them we've already taken and we'll continue to build on. So I think overall from a structural foundational point of view, I think we've done a lot of the heavy lifting and now it's focusing on how do we continue to refine and improve our opportunities to grow these business as profitably across all of the business categories that we participate in. On fruit in particular, that's going to be it's not a 1 year fix. I mean that as we look to improve the margin structure, a big piece of that improvement is going to come from automation in our facilities, improving overall supply chain optimization. And I think to be prudent in that, we're not going to take a big bang approach and try to do that all in one bite. We're going to phase it over time. I'd say that's the business where there's still probably the most infrastructure rebuilding within our physical asset base. The rest of the businesses, I think, foundationally are set and we're and capital that we're investing there will be similar to what you see us doing in both our organic ingredients platform as well as aseptic, where we're investing capital more for growth to support the growth of the business and we'll continue obviously to spend maintenance capital. And then just to put some quantitative framework around this discussion, Dave. If we look at the gross margin either at consolidated level or at segment level, can you provide us some visibility or a pathway to where those margins are? And how far are they within a reasonable timeframe, let's say 18 months, where they could be? Yes. I think if you want to think about maybe the destination, Amit, I guess if I start there, we're targeting a gross margin in the range of 16% to 17% as a consolidated business with consumer of course contributing proportionately more than Global Ingredients. If I look at where Global Ingredients is today and then obviously you have to remove some of the non cash noise and other things, it's sitting around 11.4%. And so it's got kind of 100 basis points to 150 basis points really to step up to get to where it needs to go. And I do think that if we're successful in executing that roasting project as well as doing what we have been doing all along and trodden our organic ingredients business and investing there. That should certainly be there in the timeframe we've set out. If I move on to consumer, consumer put up I guess 12.5 percentage if you remove some of the noise this quarter. And so it's obviously got a larger step up to get to the high teens and so I think what you'll see is that we're basically there when it comes to beverage and snacks with line of sight, it's the fruit step up. And so I guess I'm almost using numbers backing into the same thing that Dave just said where we don't see it as a 1 year, but is it reasonable that doing the investments in fruit both this season and in a phased approach into the following season, could it get to that destined margin target? I think that's reasonable. Got it. So fruit is farther away from where you want your target margins to be, right? And the beverages are far closer and you see a line of sight for them to get better next year? Correct. Okay. Thank you so much. Thanks. I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Colo for closing remarks. Thank you, operator, and thank you all for participating in our Q2 conference call. We look forward to speaking with you in the future and updating you each quarter on our progress as we unlock the opportunity and value in SunOpta. Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.