Lifecore Biomedical Inc (LFCR) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec third quarter fiscal year 2013 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this program is being recorded.

I would now like to introduce your host for today's program Mr. Gary Steele, Chairman and CEO of Landec Corporation. Mr. Steele, you may begin.

Good morning and thank you for joining Landec's third quarter fiscal year 2013 earnings call. I have with me today Greg Skinner, our Chief Financial Officer.

This call is being webcast by NASDAQ and can be accessed at Landec's website at www.landec.com under the investors on the events and presentations page. The webcast will be available for 30 days through April 26, 2013. A replay of the teleconference will be available for one week until midnight Eastern Time Wednesday, April 3, 2013, by calling 888-266-2081 or 703-925-2533. The access code for the replay is 160-7492.

During today's call we may make forward-looking statements that involve certain risk and uncertainties that could cause actual results to differ materially. These risks are outlined in our filings with the Securities and Exchange Commission, including the Company's Form 10-K for the fiscal year 2012.

We reported another good quarter in yesterday's third quarter and nine months earnings release. Revenues for the quarter grew 47% to $117.9 million year-over-year. And even with adverse weather in our western US sourcing regions during the months of December and January, which reduced gross profits during the quarter by $3 million, we generated $4.8 million in net income, equal to the net income and earnings per share for the third quarter of the last year.

For the nine months, revenues grew 42% and net income grew 43% before including the $3.9 million nonrecurring earnout adjustment recorded during the second quarter of our fiscal year 2013.

Highlights of our strong operating results for the third quarter and nine months include, first, growing Lifecore revenues 57% and 20% respectively, and its net income by 98% and 16% respectively. Second, increasing revenues in our non-green bean Apio food business by 8% for the quarter and 12% for the nine months respectively, despite produce sourcing issues in California during the third quarter. Third, increasing Apio's export revenues by 8% and 15% respectively, while increasing margins during that quarter. And, fourth, exceeding our plan for GreenLine earnings for the quarter and nine months.

Fifth, we launched a family of superfood products with significant initial demand that exceeds our most optimistic forecast. And, six, benefiting from the advanced construction at our partner site, Windset Farms California location, where it is hydroponic greenhouse capacity is expected to double by calendar year-end. All in all, a very productive quarter and nine months.

In addition, we have reached a point in our integration project with GreenLine and Apio where we now have a common ERP system capability. So we can commence cross-selling activities to our respective customers.

The nine-month results put us well on track to achieve the best operating results in Landec's history, consistent with our strategic direction which has allowed us to steadily increase year-over-year revenues, gross profits and net income over the last six quarters.

Let me turn it over to Greg for details of the quarter.

Thanks, Gary. In yesterday's news release Landec reported for the third quarter of fiscal year 2013 that revenues increased 47% to $117.9 million versus revenues of $80.1 million for the third quarter of last year. The increase in total revenues during this year's third quarter compared to last year's third quarter was primarily due to, first, $26 million of revenues from GreenLine, which was acquired in April 2012; second, a $4.3 million increase in revenues in Apio's non-GreenLine value-added businesses, which includes Apio Cooling and Apio Packaging, as a result of an increase in new product offerings, unit volume sales increases and a favorable product mix change.

Third, a one point -- a $1 million increase in Apio's export revenues due to a 6% increase in export unit volume sales and also favorable pricing. And, fourth, a $6.3 million increase in revenues for Lifecore, due primarily to product shipments plan for the second quarter being delayed and shipped during the third quarter.

For the third quarter of fiscal year 2013, net income was equal to net income for the third quarter of last year at $4.8 million or $0.18 per share. Items that increased net income for the third quarter of fiscal year 2013 compared to the third quarter of last year were, first, $3.9 million increase in pretax income for Lifecore. Second, $2.2 million from GreenLine. And third, $381,000 decrease in the loss at corporate.

These increases in net income were offset by, first, a $3.5 million decrease in pretax income in Apio's non-GreenLine value-added businesses, primarily due to weather-related sourcing issues during the quarter. Second, a $2.5 million lower increase in the change of the fair market value of Windset during the third quarter of fiscal year 2013 compared to the fair market value change in third quarter of last year. And, third, $566,000 of interest and amortization expenses associated with the acquisition of GreenLine.

For the first nine months of fiscal year 2013, revenues increased 42% to $334.6 million versus revenues of $234.9 million for the same period last year. The increase in revenues during the first nine months compared to the first nine months of fiscal year 2012 was due to, first, $70.3 million of revenues from GreenLine. Second, a $17.1 million increase in revenues in Apio's non-GreenLine value-added businesses; third, an $8.9 million increase in Apio's export revenues; and, fourth, a $5.6 million increase in revenues from Lifecore.

These increases in revenue were partially offset by a $2.3 million decrease in corporate revenues, primarily due to the termination of the Monsanto license agreement last fiscal year.

For the first nine months of 2013, net income increased 82% to $18.1 million or $0.68 per share, compared to net income of $9.9 million or $0.38 per share for the same period last year. The increase in net income during the first nine months of fiscal year 2013 compared to the same period last year was due to an $11.1 million increase in Apio's pretax income and a $1.2 million increase in Lifecore's pretax income.

The increases in Apio's pretax income were comprised of, first, the $3.9 million nonrecurring reversal of the GreenLine earnout liability at the end of the second quarter; second, $8.6 million from GreenLine; and third, a $1.6 million increase in the fair market value of our Windset investment. These increases in Apio's pretax income were partially offset by a $1.3 million decrease in pretax income in Apio's non-GreenLine value-added businesses, primarily due to weather-related sourcing issues during the third quarter, and $1.7 million of interest and amortization expenses associated with the acquisition of GreenLine.

The $12.3 million net increase in the pretax income for Apio and Lifecore was partially offset by $2.3 million reduction in corporate license fees, primarily due to the termination of the Monsanto licensing agreement and a $2.2 million increase in income tax expense.

Landec ended the third quarter of fiscal year 2013 with $13.7 million in cash and marketable securities. During the first nine months of fiscal year 2013, cash and marketable securities decreased by $8.4 million due primarily to, first, capital expenditures of $4.5 million; second, principal debt payments of $12.1 million; and, third, the full earnout payment of $10 million related to the acquisition of Lifecore.

These decreases were partially offset by, first, $13.5 million in cash flow from operations; second, a $2.7 million tax benefit from stock-based compensation; and, third, $1.4 million in cash from employees exercising stock options. At the end of the third quarter, the Company had $26 million available to borrow under its line of credit. Gary?

Thanks, Greg. Let us talk about the outlook for the year and early thoughts on longer-term priorities and plans. In our green bean business, we have experienced weather-related shortfalls in produce sourcing in the month of March, primarily from freezes in Florida, which have impacted the first month of our fourth quarter. Suppliers have been scrambling to find enough supply of beans to serve market demand.

As the US market leader for green beans, our appetite is big and freezes have delayed the maturation of plants. And, accordingly, bean yields have been very low. We now expect the financial impact from these freezes during the fourth quarter could reduce pretax income by approximately $2 million, which is reflected in our fourth quarter guidance.

Offsetting the combined $5 million of impact from the $3 million unfavorable sourcing that happened in California during the third quarter, and now the $2 million sourcing issue in March related to green beans during the fourth quarter, that total of $5 million of adverse effects is essentially offset by the favorable sourcing we had during the first six months of our fiscal year. So it is pretty much a balance.

Notably for the full fiscal year, in spite of three separate and negative weather-related sourcing events, one associated with green beans from the summer drought in the Midwest, one in California affecting the third quarter and one in Florida affecting the fourth quarter, we expect a very good year.

As we get into April, produce sourcing generally becomes much more reliable, both in California for our value-added produce and in Eastern regions for green beans. Barring any surprises, we estimate year-over-year revenue growth of 37% to 38% and net income growth of 70% to 75%, which does include the $3.9 million one-time nonrecurring earnout adjustment.

For the year, we also project generating $20 million to $25 million in cash flow from operations and spending $8 million to $9 million in capital expenditures. And EBITDA should be on the high range of our guidance early in the year, towards the $40 million range.

Looking to the future, our priorities are clear. First, we need to continue the acceleration of new product introductions in both our food and medical businesses. We are known as innovators, and along with the strength in distribution and differentiation in material science polymer chemistry, innovation is what has provided us with leading marketshare positions in our two core businesses.

Our second priority is moving towards a focus on facility and capacity expansion. We need to expand our California food operations and reconfigure our Ohio and possibly our Pennsylvania facilities. We also need to expand our sterile filling unit operations at Lifecore as more and more customers are requesting that we move up the value chain by performing the sterile filling function using our HA materials or, in some cases, using a partner's materials that are non-HA materials.

A third priority is to look very hard at our food customer base and be willing to make tough decisions when needed. Because of immense treasures pressures on one or two fairly sizable retail grocery chains in the US to improve their financial performance in the short term, we and other suppliers are beginning to feel pressures from several retailers to commoditize our products and lower our prices.

We will likely choose to resist these pressures in these cases where margins would go below our acceptable thresholds. We want to serve customers with high quality, differentiable products along with excellent service. Most customers recognize value and appreciate our value proposition.

The fourth priority is we want to step up our cross-selling efforts between Apio and GreenLine customers. Now that our ERP system is up and running and integrated, we want to do this based on providing two great leading national brands, Eat Smart and GreenLine, from one supplier. That is us.

Last, but not least, we want to continue to grow Lifecore Biomedical business by focusing on the high-margin ophthalmology sector and by continuing to add new partners who could benefit from our unique capabilities in fermentation, separation, purification and sterile filling of highly viscous materials.

Landec's business and market focus is on healthy living through the development commercialization of healthy prepackaged foods and innovative materials for medical applications.

Our food and medical businesses address substantial and growing markets. We do have periodic weather-related risk in our food business, as experienced so far this year. But as this fiscal year shows, we can offset those weather-related risks through continued product innovation and strong operations from both our food and medical businesses.

We are ready for your questions.

(Operator Instructions). Morris Ajzenman, Griffin Securities.

First question, I have a couple questions here. The $1.5 million operating synergies you touched on, specifically with integration of GreenLine with Apio, and you talk about additional savings, cost savings going forward, do you care to put an approximate range of number -- or numbers that could equate to over the next 12 months, 18 months that could be realized?

Well, we haven't up until now. I can tell you why; because the operating synergies, of the $1.5 million, those were realized right -- literally within 30 days of closing the deal. The next round of synergies, it is hard to quantify, because it has to do with production efficiencies. And this is the expansion of the facilities and new layouts of the facilities back east and then the cross-selling.

So, I --.

We just don't know.

It is hard to estimate what that means.

We would be doing you a disservice to throw out some numbers. We got the, pardon the expression, low-hanging fruit, and now I think it is going to be a little bit more challenging to quantify this. But we know they're out there. But we will, as we do it, we will report it on a quarterly basis, but we just don't know right now.

And just a quick follow-on then, $1.5 million in savings; SG&A was $8.5 million the past quarter. Should it be that run rate or slightly lower going forward?

No, I think that operating expenses for the fourth quarter should be equivalent to the third.

Okay, and two other quickies here. You talked about the $3 million incremental cost to hit the gross margins, the sourcing for Apio and the non-green bean. Then you talk about the fourth quarter sourcing for the green bean GreenLine, the $2 million pretax hit.

I did the quick math. It is not too calculated, but am I in-line here that this current quarter was about a $0.07 per share after-tax impact and will probably be about a $0.05 net after-tax impact for the fourth quarter, approximately, for any additional sourcing costs?

Yes, you got it right.

Okay. And then last question and I will get back in queue here. You talk about production -- [we are not -- we're] talking about Windset now, production performance exceeding the original expectations. You talk about that on and on.

And you had us out there about six months ago, and things really looked great there. But what does that mean, exceeding -- production 20% more than you usually expected, 40% more, 10%? I don't know what that exactly means, exceeding initial expectations.

When we were talking about it, I know I said that GreenLine was exceeding our expectations. I didn't remember commenting on Windset. Are you talking about on this call today?

I'm sorry, if you look at the back of the release, what is the status of Windset? And then in that answer you guys [anticipated questions] that we might ask. You answered production performance has exceeded Windset's original expectations.

Okay.

So I am just curious what that means by exceeded?

We were talking about yields. When they originally were putting their plan together for the new California operation, they estimated what they thought their yields would be from that plant, and it has turned out that their yields have exceeded those original plans. And that is what we meant.

And as a private company they guard that very carefully, so (multiple speakers) we are not disclosing that. But it is rather remarkable. Clearly they are the highest yielding tomato facility in the world right now. So we hope that will continue as they move into the next phase.

Yes, it would be helpful maybe next time if you can just give some sort of a handle. I know they're private; they don't want to reveal a handle. What does that mean? Maybe from production perspective, something that wouldn't compromise their competitiveness, but give us an idea of what this means as far as better efficiencies, better yields, et cetera, et cetera.

Anyhow, I will get back in line.

Let us think about it. We will think about it. Yes.

Tony Brenner, ROTH Capital Partners.

I have two subjects. First of all, I wonder if you could drill down a little bit on the outlook, at least the short-term outlook, for a Lifecore given that -- given the unevenness of the quarterly run rate, and in addition, the recent approval by the FDA of new products. How quickly might that kick in and how long does it take to ramp that up?

Let's go really short-term. I'll just talk about the fourth quarter. We expect the fourth quarter to be in line with the first and second quarter. Obviously, the big quarter this year was the third quarter.

Going forward, our goal is to grow the topline 15% and the bottom line 20%. And that is going to come from a variety of new products, greater sales to existing customers, new customers. And so it is that mix that is going to result in those increases.

That was your goal before these new products came on stream, was it not? So there is no impact?

It is still our goal.

Okay. Second question has to do with Windset. Your equity in the fair market value of Windset as reported was significantly higher in the third quarter than you had guided a few months ago, and the outlook in the fourth quarter is also higher. What was the justification for that?

Just new information from Windset. They put together their FY13 plan, their five-year forecast based on that new information. We obtained a new appraisal, and the new appraisal shows that the value had increased. And we recorded it accordingly.

Okay, so (multiple speakers) as we look to --.

It is a matter of timing of when this happens. If you look at this year, the lion's share of the increase occurred in our first quarter, whereas last year, and you could see it reflected in the result, it happened in the third quarter.

It doesn't include (inaudible).

Okay. So as we look into fiscal 2014, in the middle of the year at the end of this calendar year, they doubled their capacity -- their production capacity. So what does that mean in terms of the impact that has on Windset's fair market value? And from a quarterly standpoint, when would that increase -- the bulk of that increase likely be recognized?

Well, I will answer the last question first. I believe, assuming that we have new knowledge and we get updated numbers, it will probably occur in the first quarter again.

As far as the increase, and I just want to make sure it is clear, they are not doubly their capacity overall. They're just doubling their California capacity. So it is going from 64 acres [that are] 128 acres. They have got 84 acres up in Canada, got like 40 over in Nevada, so it is not doubling their overall capacity.

But the increase should be similar to what you witnessed when one and two came online. So if you go back and you look at the increase from last year, the increase from this year, it may not be quite that high, but it is going to be in that ballpark. And if all the numbers come in, in FY14, you should see that whole increase in FY14. So (multiple speakers).

And most of it for the first quarter, right?

Yes, the lion's share of it in the first quarter. It should be a higher increase next year than it was this year.

Thank you.

Peter Black, Wynnefield Capital.

Actually it is Nelson Obus. You talked about a lot of uses of capital, even though you're generating a lot of free cash flow. And you don't know what is going to happen. There could be an opportunistic investment that would pop up like GreenLine.

I am curious that -- you state that on February 24 you only had $26 million available to borrow under your lines of credit. Is that something -- it is a little bit incongruous that you wouldn't have more opportunity to borrow against the line, should something very attractive come up. Do you want to comment on that?

Yes.

Yes, the line is just based on AR and inventory. So it is those balances that are what the line is based on at Apio and at Lifecore. That doesn't include the full potential borrowing capacity of the Company. It is just of the current lines that are in place.

And they're also capped at both places. So the availability or the -- when you do the math could actually be higher than the maximum amount of our line. And we haven't felt the need to go back into any renegotiation.

There is probably another $30 million of borrowing capacity that is not even -- that we didn't even mention.

Okay, I got the picture, then. The other question is related to the third-quarter results here. When you talk about some of the delta, this [number 2], with $2.5 million lower fair market value change in the third quarter of Windset vis-a-vis the third quarter of last year, now I think what you just said was that was a timing issue, that the general evaluation of Windset is going up.

But let me ask you a bigger question. When you have bad -- just looking out when Windset is all up and running, and I know they're mostly in tomatoes. But if we had another bad year of weather or another bad six months of weather in California, to what degree could Windset improve that situation and give you better sourcing? Or are you really going down two parallel paths as far as the vegetables involved?

We are going down the two parallel paths. We source tomatoes from Windset for our trays, but they're a very minor supplier to us, because the vast majority of the products that we are delivering to customers involve products that Windset is not growing in greenhouses hydroponically. So we go down parallel paths.

But one of the reasons we are interested in Windset is, if you have a long-term view, I mean 10 years plus view, more and more types of produce categories should be grown the way they are trying to grow things in greenhouses. It is just that people haven't done it before just outside of peppers, cucumbers, eggplant and tomatoes.

So that is one of our goals, is to figure out what else can be grown the way they grow it, because it really minimizes, if not eliminates, weather-related risk. But we are -- our sourcing is pretty much in parallel with what they do. It is not -- they're not going to save us, so to speak, if we have a bad winter.

So we just have to deal with that reality for now, Nelson.

Have you done any preliminary analysis of what the results would be where you try to go vertical with your legacy green product?

Go vertical? Could you explain that a little bit? I am not understanding -- go vertical (multiple speakers)?

I mean that you would control at all. In other words, (multiple speakers) just what you described that you are looking at over a many-year period. You were implying that that was a goal that might make economic sense, and I'm just asking whether or not that is a thought or whether you have put a pencil to paper and (multiple speakers)

No, no, pencil to paper; we are actually -- we are doing some preliminary work with them to look at some alternative targets. Those may or may not pan out, Nelson, and they're going to take quite a while to figure out. But, no, it is more than just a casual thought.

Okay, more than a pipe dream. Okay. Good.

Chris Krueger, Northland.

I think in your press release you talked about that you're going to introduce more salad kit type of products. Can you talk about timing of this and if you have already secured any retail chains for distribution?

Yes, the answer is yes to your last question. The Sweet Kale Salad and is obviously consumed -- it is literally all-consuming us. We just had no idea that the demand could be as significant as it is for Sweet Kale Salad.

And so it is being sold primarily in Costco and a couple of retailers. There is interest from food service operators as well, and we are just scrambling like crazy to build our capacity to deal with this.

And we view it, don't just think of it as Sweet Kale Salad; view it as Landec's commitment to delivering to customers a new category of salads that are made out of vegetables. There is no -- this is not a leaf lettuce product line. This is a vegetable line that is made in the form of salads with good mixtures, superfoods, really tasty -- that whole kind of thing.

And so we have a family that is right behind with Sweet Kale Salad. And so we have customers lining up for not only Sweet Kale Salad, but for the next one and the next one and the next one. So we intend to launch a new product in this category pretty much every quarter, Chris.

And so -- but right now, our focus is catching up on the demand for Sweet Kale Salad. It is really -- I just got to tell you, no one had any idea how big the demand would be. But right behind it is our other products that follow on.

Okay. Then another new product was the Beneforte Broccoli. Can you talk about the demand for that and I think there might have been some growing issues with that?

Right. Yes, there were some growing issues with it. It is just -- so for people who want to know, we have an exclusive relationship with Monsanto. It is a seed variety that was a unique variety that came from southern Italy, and it was tested for years.

And in this first year of commercial launch there were some times of the year in which the yields were not as good as we wanted. And the quality was not as good as we wanted. It was -- it would be fine for most of the year, but there were some months when it was struggling.

And so we have come to basically an approach where we know when it is hearty and healthy and strong and all that, and that is when we will sell it. We will sell during those times of the year. And then in other times of year when we are not so sure, we are going to substitute it with our normal broccoli.

And Beneforte has, boy, I think it is like three times the level of vitamins and antioxidants of normal broccoli, so it is, again, it is a superfood. It is not -- there is no genetic and engineering, by the way, this is all traditional hybriding.

So we figured it out, how to make this work, and turns out that the customer really likes it. The consumers like it. So we will continue it, but it will be more of a seasonal product line than an all year round product line, Chris.

Okay, last question; I think I know the answer, but can you -- I know it is the weather issues in California impacting sourcing. Can you confirm that the Windset facilities felt no impact from the weather?

None, none. I don't -- no, no impact at all.

Yes, just wanted to confirm that. Thank you.

No, they are rather immune to -- by the way, the adverse weather in California -- you go down into Southern California and Arizona, you might have watched the golf tournament that was down in Tucson and it got canceled because of snow. That is the kind of thing we are dealing with. And that is where the growing was going on, whereas Windset is up here in the central coastal region of Santa Maria and, boy, they didn't -- nothing bothered them. They are fine.

All right. That is all I got. Thanks.

Daniel Rizzo, Sidoti.

Just a couple of quick questions. In terms of the launch of the new products, after you catch up with the Sweet Kale Salad demand, when do you think that is going to be? I mean do you think is it going to be another couple of months before you think you can kind of -- where you should be in terms of looking for other new products?

We already know what the other new products are that we are planning to launch, so it is not like we're looking for them. But I would -- we are going to be launching them in our first quarter of our new fiscal year, which begins June. So they will be ready to go in the first quarter.

Okay, and then you indicated that you're getting some pressure from a supermarket chain just trying to commoditize the business, which is not a commodity business. So are you willing, I guess, to walk away? Or is that something that would be -- that you considered, the walking away from a customer?

Yes, you read it right. Let's face it; there are a couple of retailers that are under the gun. They are really struggling with some of their financial performance. And you can understand it at a high-level, and this is not just for produce. This is across the board in terms of suppliers.

And we are just at a point in our lives, in our corporate lives, where if we are already wondering about capacity constraints and all that stuff, should we be willing to go down and get dirty and some of this pricing that really is not -- doesn't work for our shareholders and for us, in terms of having the types of returns and margins that make sense. We are prepared to walk. Yes, we are.

And maybe that is a revenue hit in the short term, but we think it is in our best interest and shareholders' best interest to get compensated for the unique value that we bring. So, yes, we are prepared to do that. I don't know that we will have to, but I'm just saying it is a possibility that we will have some of those situations in the next 6 to 12 months.

Okay, all right, thank you, guys.

Morris Ajzenman, Griffin Securities.

Again, as a follow-up on the question earlier about your line of credit and looking out at acquisitions. Over the last two, three, four years, actually, you have redeploy capital pretty successfully by last call -- GreenLine, the Windset investment.

It is still, if you look back, if we look back you have a number of balls in the air. You have really done some really good things here. But do you feel comfortable at this point in time to go forward and, again, further redeploy capital into new [capital] investments, or would it be add-on investments? First touch on that and then I have a quick follow-on related to that.

Our capital deployment focused is changing, Morris, as you may know. Last three years it was purchasing Lifecore. It was the investment in the Windset farm. It was the acquisition of GreenLine, et cetera, et cetera.

Our outlook for the next 24 months is that our capital deployment priorities are, first and foremost, to get facilities expanded to accommodate our growth. We are catching a little bit of the tiger by the tail here as Americans are now more conscious of what they eat.

They have calorie counts in restaurants and fast food chains. We are dealing with the crisis in diabetes and obesity. So we want to make sure that we can ride that tiger. And that is why we feel that we need to expand our Apio facilities in California and reconfigure them in Ohio and maybe Pennsylvania. So that, first and foremost is our CapEx priorities.

And that includes expanding our sterile filling and operations in Lifecore. So that is number one. Number two priority, of course, is principal repayment for some of the debt that we have, which is obligatory, and we will do that. And then the third priority is new product development.

We want more of the Sweet Kale Salads to be identified, discovered and launched. And so those are our three priorities. And never say never, but right now I think we would be better served to really focus on these two core businesses, implement well, really drive earnings and sales growth.

And now we will always have our eyes open for new acquisitions, but right now I don't contemplate a new acquisition in the next couple of years.

All right, so, thereby, the line of credit you have established right now is more than sufficient based on the strategies for next 12 to 24 months?

It is and we think it is. But on the other hand, as I said, we have got some unused borrowing capacity that is there for us, that we mentioned earlier. But we have been fortunate by keeping your eyes open to see things, and if they come our way, and then I'm going to change my mind and tell you that maybe it is not. But for right now we are okay.

And, hypothetically, if this opportunity was to come along, is there a preference towards Lifecore or a preference towards the consumer Apio franchise?

That is an excellent question, Morris, and the answer is there was -- before GreenLine there was a very strong -- very strong preference and intent to further invest in the food business and really establish East Coast presence. And so we had a clear preference for investing on the food side. Right now I would say either side would be good, because we like both businesses.

Lifecore is a nice cash generator for us. It helps us fund the growth of our overall business and our food business. But right now I would say either side would be fine. We would welcome either.

Thank you.

Matt Sherwood, Cooper Creek Partners.

Congrats on a strong quarter in a tough sourcing environment. Just wanted to follow up on the customer loss potential. It seems like supermarkets have been trying to cut costs for years and years and years. Why is this commentary coming up now? That is the question.

It is a degree. It is not black and white. It is more of a degree. I think there is -- and I said, this is not systemic. This is just one or two of the larger guys out there that -- we are not going to mention any names.

But they are just -- by the way, it is with all kinds of products, not just produce. But there is an attempt to commoditize under the spirit of serving their customer well and delivering low as possible prices, there is an increased trend -- let us just put it this way. There is an increased trend in recent quarters to really get suppliers to bend and to lower prices.

And we are very accommodating. We love our customers. But we have a threshold of which we just feel like there may be a time in the next year where we are being asked to go below that threshold in terms of margins and returns on investment.

And I just want to give people a heads-up that trend that has been going on for some time now, as you suggest, I think within a couple of retailers it has really gotten pretty severe.

Yes, it seems like you're doing the right thing to hold the line on price. But is this something like -- what is your customer concentration here? What percentage of revenues is the max that could be affected?

I think we are talking -- if you really want to -- max would be 5% to 10%.

Okay, great.

It is in that category. But I don't want to alarm anybody. We are just saying, hey, that is the environment we're in, and we certainly have weather risk and then we have this thing going on.

But we have so many positive trends going on with our industries that we serve, and the momentum we have and the innovation that we are bringing, our focus is on the positives. We just want to alert customers that we do have certain thresholds in which we will be prepared to walk if we have to.

Sounds like you're doing the right thing.

(Operator Instructions). Will Lauber, Sterling Capital Management.

Just a question on the Sweet Kale Salad; mentioned the both of you here at the local Costcos they get their shipments on Saturday, and then either Wednesday or Thursday that they're sold out, so there is, I guess, an awful lot of opportunity there. Is this -- is it a sourcing issue? Is it a capacity issue?

If you can just touch on what you can do to, I guess, reach more stores and as well as keep the stores that you already have fully stocked throughout the week.

It is not sourcing; it is operations. We are, you know, very strong operators. We pride ourselves with that. But none of us, none of us had any idea of the substantial demand and so we are scrambling to add lines.

Basically it is -- I am oversimplifying, Will, but it is on the operations side. It is the production side. And so we are scrambling to add lines and increase throughput and capacity. So that -- it is hard to do that overnight.

But I will tell you our folks in the facilities down in Guadalupe are working enormous hours, and we just have to catch up to demand. We just had no idea that something like this -- it is breaking records basically at Costco. And, gosh, I hate to see stock outs, but give us a little bit more time and we will be up to speed, and you won't see that happening.

I guess in conjunction with that, as well as -- along with the previous question -- I am looking here at the St. Louis market, and the major grocery store that you are in is Supervalu based, which I am guessing it might be the customer that you're referring to that is trying to commoditize things. But there is also two private chains, I know you know one of them here, that are more upscale that would probably love to have products like the Sweet Kale Salad in there.

Yes.

So how does that work? If you would maybe lose some revenue but pick up some higher margin products, is that what you're thinking, if you do have to (multiple speakers) business?

Yes (multiple speakers) right. If you lose a low margin -- if you choose to walk away from a low-margin customer then, man, you're going after gap fillers and you would like to replace it with people who tend to be at a higher end, and value the type of things that we bring to the party that are unique. So you've got it exactly right, Will.

Okay, all right. Thank you.

This does conclude the question-and-answer session of today's program. I would like to hand program back to management for any further remarks.

Well, we just wanted to thank everybody for being on the call today. And we look forward to reporting to you on not only our fourth-quarter results, but in June we should be able to report to you on our guidance for the new fiscal year that we'll be entering. But we appreciate your support and we're glad to have the momentum that we have right now. So, many thanks.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.