Lifecore Biomedical Inc (LFCR) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec fourth-quarter and fiscal year-end 2014 earnings conference call. (Operator Instructions). As a reminder, today's 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. Please go ahead, Sir.

Good morning, and thank you for joining Landec's fourth-quarter and fiscal year-end 2014 earnings call. I have with me today Greg Skinner, Landec's Chief Financial Officer.

During today's call we may make forward-looking statements that involve certain risks 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 fiscal 2013.

For our fourth quarter of fiscal year 2014, we exceeded our revenue projections for the quarter and met our net income target. For the full fiscal year, our revenues increased 8% year over year to a record $476.8 million, driven by strong sales of our new EatSmart superfood products and Lifecore products.

Our two core businesses grew at double-digit rates with our Apio value-added vegetable business, which includes Apio Packaging and Apio Cooling, growing 13%, and our Lifecore Biomedical business growing 11%. Perhaps, most importantly, the 13% revenue increase in our largest business segment, our value-added vegetable business, was due to increased volume sales and a favorable change in product mix to our higher-margin, specialty package superfoods salad products. In fact, by fiscal year-end, our newly launched salad line products were exceeding $1 million in sales per week.

This level of demand has stretched our organization and our operating facility and we have been capacity-constrained now for several months. This situation will be remedied by the end of August when a new salad processing line should be fully operational.

We managed through a challenging year where weather-related produce quality and quantities affected our margins significantly. We worked hard to supply our customers and maintain our quality standards. Perhaps the most important initiative this past fiscal year was the development of a new five-year strategic growth plan for our two core businesses. We believe we now have a pathway where we could come close to doubling Landec's revenue in five years just from organic growth and achieve this growth while improving overall margins.

In order to accomplish this level of growth, fiscal year 2015, which we just began in June, is going to be a pivotal investment year. During fiscal year 2015, we will invest -- we will increase our investments at Apio in new product development, marketing and product sales support, and processing capacity including a new salad line in California and installing new processing capabilities at our Bowling Green, Ohio, operations as well.

In addition, we plan to continue to diversify our produce sourcing regions and increase our cross-selling activities between our GreenLine and Apio customer bases. We expect to continue a product mix shift to more unique blends of vegetables in salad kit formats and other formats and, correspondingly, begin the process of increasing gross margins.

Across Apio and Lifecore, we will spend up to $20 million in equipment and facilities and we are adding organizational capabilities in operations, marketing, sales, and procurement. We believe our products are on trend as Americans increase their focus on healthy nutritious eating habits as a direct way to stay healthy. We expect to launch on average one new superfood product per quarter with a focus on nutrient-rich blends of vegetables in salad, stir fry, and smoothie product formats.

Most of our new products along with our traditional value-added vegetable products utilize our BreatheWay packaging technology which provides for 17 to 20 days of shelf life. And we will continue to build our national brands, EatSmart and GreenLine.

For Lifecore, as previously mentioned in our third-quarter release, fiscal 2015 is going to be a down year due to a major long-standing customer reducing their purchases by 50% this fiscal year in order to reduce their inventory levels. This impact, while truly substantial to our fiscal 2015 results, is a one-time nonrecurring event.

Having said that, we see Lifecore making up nearly half of this shortfall in fiscal 2015 with growth in its aseptic filling business and new business development programs as well as continuing to serve most major ophthalmological companies with high-value hyaluronic acid products.

Let me turn it over to Greg.

Thank you, Gary, and good morning, everyone. We reported yesterday that revenues for the fourth quarter of fiscal 2014 increased 13% to $120.9 million from $107.1 million in the year ago quarter. This increase was primarily due to a 13% or $11.3 million increase in Apio's value-added businesses and a $3 million or 26% increase in Apio's export business.

Net income in the fourth quarter of fiscal 2014 was flat at $4.5 million or $0.17 per share compared to the fourth quarter last year. Net income in the fourth quarter increased by a three point -- by $3.7 million increase in gross profit and Apio's value-added businesses as a result of increased revenues and a favorable product mix, resulting in gross margin improving to 12.2% in the fourth quarter of this year compared to 9.5% in the year ago quarter, and a $450,000 increase in gross profit in Apio's export business due to increased revenues and a favorable product mix of sales of higher margin products resulting in gross margin improving to 9% in the fourth quarter of this year compared to $7.4 million in the year-ago quarter.

Net income in the fourth quarter was decreased by first, a $721,000 decrease in gross profit at LIBOR due to an unfavorable product mix compared to the fourth quarter of last year. Second, a $1.9 million increase in operating expenses due to higher sales and marketing expenses at Apio to promote and introduce our new line of products and from higher G&A expenses at corporate compared to the fourth quarter of last year. And third, a $1.3 million increase in the income tax expense.

For fiscal 2014, revenues increased 8% or $35.1 million to $476.8 million from $441.7 million in fiscal 2013. The increase was primarily due to a $40.3 million or 13% increase in revenue from Apio's value-added businesses as well as a $4.4 million or 11% increase in revenues at Lifecore. These increases were partially offset by the expected $8.7 million decrease in revenues in Apio's export business, primarily due to an expected decline in volume primarily as a result of Indonesian import quotas on fruit.

Net income in fiscal 2014 was $19.1 million or $0.71 per share. This compares to net income of $22.6 million or $0.85 per share in fiscal 2013. Net income in fiscal 2013 was increased by $3.9 million or $0.15 per share due to the one-time earnout adjustment associated with the acquisition of GreenLine.

The primary increases to net income during fiscal 2014 were from a $1.4 million increase in gross profit at Lifecore and from a $1.9 million increase in the fair market value growth of the Company's investment in Windset over the $8.1 million growth recorded last year.

These increases were offset by, first, a $3.9 million increase in net income in fiscal 2013 from the one-time earnout adjustment associated with the acquisition of GreenLine. Second, a $1.1 million increase in income tax expense. Third, an $857,000 decrease in gross profit at corporate due to revenues generated from R&D contracts that were started and completed during our last fiscal year. And fourth, a $759,000 decrease in gross profit in Apio's value-added vegetable business, due to operational variances primarily resulting from increased produce quality and yield issues, higher labor costs, and lower processing yields than originally expected.

We were able to meet our revised net income guidance for fiscal 2014 even though the change in the fair market value of our Windset investment was less than what we had been forecasting because Apio's value-added vegetable business exceeded our expectations during the second half of fiscal 2014. The change in the fair market value of our Windset investment was lower than our forecast from six months ago because of the expected operational efficiencies from the new 64 acres of greenhouses in California, which became fully operational in just December of 2012, did not happen as quickly as originally anticipated due to typical start-up issues which have now been resolved.

As a result, we did not reduce the discount rate for the fair market value calculation as rapidly as had been anticipated. Therefore the change in the fair market value of Windset was less than what we had been forecasting.

Landec ended the year was $14.2 million of cash. During fiscal 2014 we generated $21 million in cash flow from operations and purchased $14.9 million of capital equipment and facilities primarily for capacity expansion at both Apio and Lifecore. We also paid down debt by $9.9 million during fiscal 2014. At the end of the fourth quarter, we had $27.7 million available under our lines of credit.

Gary, back to you.

So where are we headed with our five-year plan? The Board and I are pleased with the outcome of our strategic planning process. Our key five-year financial goals are to grow revenues of our two core businesses which includes Apio's value-added vegetable business and Lifecore's biomaterials business by a combined 10% on average and to increase our overall margins each year for the next five years.

In fiscal year 2015, the year that we just started in June, we expect revenues to increase 7% to 8% and earnings to be flat compared to fiscal year 2014 because of previously mentioned increased investments and the diversification of produce sourcing, increases in direct labor costs and benefits, increased marketing and sales support, increases in overall headcount coupled with the one-time inventory adjustment by one of Lifecore's customers and Windset's one-year pause with expansion.

We believe $1.00 per share is reachable in our next fiscal year, fiscal year 2016, as Lifecore resumes its historical growth rate and as the Lifecore customer that reduced its inventory in fiscal year 2015 resumes its historical purchase volumes in 2016, and as our Apio value-added higher margin superfood product line continues to expand, now without constraints on capacity, and as Windset farms begins its new expansion in its hydroponic greenhouse operations. We are firmly committed to growing our core businesses with stepped-up operating and capital investments this year and expanded stacking capabilities.

You will note that we recently added to our board of directors, Al Bolles, the Executive Vice President, Chief Technical and Operations Officer at ConAgra Foods, who leaves their multibillion-dollar research quality and innovation and supply chain organization for ConAgra Foods. Al brings considerable expertise to us in the food innovation field.

Also in July, we increased our investment in Windset Farms from 20.1% ownership to 26.9% ownership. We believe that Windset's approach to growing high-quality produce products hydroponically in greenhouses using proprietary know-how with state-of-the-art facilities is the answer to the produce food industry's needs long-term for food safety, uniform quality, great taste, and year-round availability while deploying highly sustainable growing practices.

Given the opportunities that we see in our new five-year plan, we have expanded our borrowing capacities by $40 million to allow us to fuel growth not only by positive cash flow from operations, but also with debt. We look forward to updating you on our progress and plans as we proceed through this important investment year. And we are now ready for your questions.

(Operator Instructions). Tony Brenner, ROTH Capital Partners.

Good morning. Couple of questions. One of the things you indicated in your third-quarter conference call was that you expected export sales or Apio trading sales in the fourth quarter to decline year over year and instead they were up 26%. What happened there?

A little bit of relaxation. They are starting to relax the Indonesian quota system a little bit, Tony. I would not declare victory yet. But, we are starting to see some progress there. But we are just not sure how sustainable that is.

Okay. So no thoughts about the effect that might have on fiscal 2015 for that business?

We are going to -- if we see some real progress here we will declare it in one of our earnings calls. It's too -- we are dealing with politics in this case in Indonesia in terms of they are trying to protect their local and domestic growers. Which really makes no sense because they don't grow the kind of products that we are trying to export to them. So just stay tuned, Tony. I think it is too soon to declare anything. We are staying rather conservative in our estimates.

Okay. Second question. For the first half of fiscal 2014, you had one of the worst product sourcing situations that I can recall. And in your outlook, you are projecting higher sourcing costs in 2015. What is the reason for that?

As we go to -- and we have talked about this a little bit I think in the past. One of the ways of trying to mitigate risk is to diversify your growing regions and go further away from Central Coast California. We are in the -- primarily in the vegetable sourcing business and then we process and add value to it, as you know. And if we could get all of our produce from Central Coast California, we would do that, but that puts too many eggs in one basket from a weather risk point of view.

As you move into other locations, their yields are lower, the transportation cost of getting the produce to our processing facilities is higher. And so that's one reason. Secondly, growers costs have been going up, labor has been going up in general and so they needed to have their costs reimbursed and so the per pound cost for us in terms of contracts we have entered into are calling for higher prices.

So it's a combination of going further away to mitigate risk and also dealing with inherent cost increases that we have really been holding a lid on it the last four years, so this year we just had to work with the realities.

But I want to add, Tony, because I think that is where you are going with your question, we are not anticipating in our guidance or our plan that we are going to have those sourcing issues that we had last year. We expect and have put in a normalized contingency which is based on looking back three to five years was there historical sourcing issues then. And that is what is in the plan. Which I can tell you is less than what we experienced last year.

What we are talking about here and what Gary just mentioned is the known price increases. If we are going up $0.01 or $0.02 per pound because of new contracts, that is what we have factored into our guidance.

Yes. A $0.01 per pound increase on average is about a $1 million increase in our costs. So it is substantial.

Okay. One last question regarding Windset farms. No capacity expansion this year and potential -- presumably, a significant expansion in fiscal 2016. Assuming they do expand in fiscal 2016, I would guess that has to be approved by the Windset Board earlier.

In your guidance for this year and next year, did you assume that that approval would not happen until next year? And what are the chances it could take place this year and you would wind up recognizing a bigger increase in fair market value than you have assumed?

Well, to answer your first question, yes. We have assumed that any increase for you expansions will not occur in 2015. They will occur in 2016. To answer your second question, if that is accelerated, if it is approved by the Board, if it is put into their projections this fiscal year, well then, yes. It will have a larger impact on the change this year than what we are currently anticipating.

But there is no indication one way or the other at this point?

No. Right. Correct.

Okay. Thank you.

Mitch Pinheiro, Imperial Capital.

Good morning. A couple of questions. Following up on Tony's question there, Windset. For fiscal 2015, if you raise your percentage ownership and their output remains flat, so assume basically flattened net income there. What are the other factors that would affect your -- the increase or decrease or increase in value of Windset for this year?

Well, the primary drivers have been just general is and by far the most important is their forecast. So if we are assuming for now, which we are, that the forecast that we have been working from forecast we used to project the changes at year-end, we are assuming it is not going to change throughout the course of FY15. So the change that we will be recognizing is going to be based on the change in their discount rate. And that will change as a result of -- well, [well on time] because as we get closer to the football date which is February 2017, you are going to -- your discount is going to naturally decline as a result. As the operation continues to improve in California and the risks are reduced in California, remember they have had the Canadian operations now for over 20 years. The discount will also decrease. So the primary reason for the change this year that we are putting into our guidance are twofold.

One, the result of the additional 6.8% and what impact that is going to have for the rest of the year. Remember we did buy it at its fair value at the time. And then of course, the change in the discount. And that is going to be the result of our forecasted change for fiscal 2015.

Now if they change their forecast as a result of new expansions, well, then that will change it accordingly, but we are not anticipating that at this time.

Okay. And your change in fair market value this year was what? About $10 million?

Yes.

And it will be -- in 2014 it will be a little lower than that as you are guiding in 2015. Correct?

We expect that the combined -- we kind of look at it combined. Fair market value and dividend will be somewhere in the 10% to 15% less next year.

Less than?

This year. This fiscal year we are in.

Fiscal 2015 will be 10% to 15% less than fiscal 2014.

Beautiful. Okay. Second question is you mentioned higher labor cost, but I'm wondering if you can talk about the California minimum wage increase and how that is going to affect either contract grower costs -- are they being passed through to you? Are you passing them through to your customer? Would love to get your color on that.

Yes, it's -- so, labor is critical for us. We have in our California facility depending on the time of the year and the season, we can be as little as 200 people, we can be as high as 500 people. And we are talking about close to 200,000 square foot operating facility in Central Coast California. So labor is very important to us. And we could see that we were having much more difficulty getting labor, keeping labor, because as the economy starts to slowly come back here in California, there are other choices for people in terms of working opportunities et cetera, et cetera. And so we went ahead and raised our labor rates ahead of California mandating minimum wage increases. So we have already done it. It is roughly about -- I will give you an exact number. It is about a $0.07 per share impact for us, but it is critical especially as we are about to expand our capacity and expand our opportunities with our salad lines, et cetera. So it is significant.

And we have already taken the steps. We are not waiting for Governor Brown to sign anything. We have party increased our rates and we have also put in some incentives for continuity and continuous employment. Those types of things, so that we can keep the good hard-working folks and keep them well-paid and motivated.

Are you able to pass through these costs? How're you approaching that cost pressure?

The desired answer of course is, yes, we could pass them along, but the real answer is I don't need to tell you about the size and the consolidation of our customer base and the pressures they are feeling on their own margins and their stakeholders. So it is very difficult to pass these on. We will attempt to in certain situations.

The best way we are trying to deal with it is, frankly, increase our overall volumes and change our product mix. You may recall that our newer products that have been launched in the last 12 to 18 months are about twice the margins as our older core product lines. So change in product mix, improving volumes, and also operational efficiencies is the best way we can see in the shortest term pathway to more than overcoming these cost increases.

And the cost increases are not only in labor, but also we have said that we are stepping on the accelerator in terms of supporting and promoting these new products with marketing and sales promotional activities. Which we haven't had the luxury of doing in the past. So we have got -- we have those types of cost increases as well plus the increases in sourcing the produce which we talked about earlier.

Yes, thank you. And that is a great segue into my -- I have two more questions. What exactly are you doing in terms of marketing activities for Apio? Are we talking -- these are brand-building activities with media? Are we talking grocery circular stuff? What are you talking about?

Yes. Well, actually I don't want to talk about it in too much detail. Because we are about to launch some of these have things and for competitive reasons I would just as soon talk about it when we have done it. But in general, let me tell you the type of approach we are taking with our newer products.

First of all, because these are coming in the format of salads that are made of vegetable components, we are trying to create a new category of vegetable -- salads made from vegetables that are just absolutely loaded with these super food nutrients and products. And it is really catching on as you can tell from the $1 million a week with just sweet kale salad alone as of May. And so what we want to do is get the word out.

There are a lot of foodies in this country, and we want to be aligned with the leading nutritionists and the leading culinary people. We want them to know about these products. We want to somehow get beyond just our buyer group to our consumer group. So, we will be deploying a number of different initiatives that we haven't used before to support these products.

Also, keep in mind that the trend in the industry from our customers is to go to private label. We are not offering these products in private label. These are EatSmart-branded products. We are going to stay with that as long as we can. And these also typically when you move over into this salad world, historically, there have been things called slotting fees. And we are not offering slotting fees.

We feel these products are unique and they speak for themselves. So, but we do want to support them with marketing promotional activities.

And rather than going into any more detail as to exactly what we're doing, let us just describe those as we go along so that we are not disclosing too much information today.

Okay. That's fair. Last question is so when you talk about investments in your produce sourcing, are you building new distribution centers or redistribution centers? What else -- what other kinds of investments would you have in sourcing?

Well, the first is to go to some new locations and to work with some new partners. We have a new partner down in Mexico that we have groomed for a number of years. We have been always hesitant to go south of the border because of certain quality issues. This is somebody that we really trust and know. So we want to make those types of investments and it has been a multiyear investment. And our head of procurement has done a wonderful job in that regard.

We also want to use the benefit of our new facilities that came to the GreenLine acquisition so that we will do additional processing, not only just in California, but we will -- we are expanding and reconfiguring our Bowling Green operation to deal with the wider array of products that we can sell. We also are looking at long-term expansion of our Hanover, Pennsylvania facility to also take on more product lines. This helps some of our products get to our customer base on a next day basis as opposed to the four- to five-day trek across the Rockies.

So it is through channels of distribution, you new sourcing partnerships. We are adding capability in terms of depth of our procurement organization because it is so important to us. So it is a multifaceted approach.

Okay. Thanks. Much appreciated.

Chris Krueger, Lake Street Capital Markets.

Good morning. Couple questions on the salad kits. I notice here in Minnesota very recently your first two products, the bok choy and the kale products have both started to appear on store shelves beyond just Costco. I was wondering nationally if you have kind of like an ACV figure like what percentage of stores are you in with those products? And just a penetration overview.

I don't have that, Chris, and we can get back to you on it, but let me tell you that the challenge has been that we -- it has primarily been rolled out through Costco US and Costco Canada. And then we started to hit -- it went so well that we started to hit capacity constraint and we have really been capacity constrained for, gosh, months. And it is frustrating as all get out and you have to order equipment, et cetera, et cetera. We are in some retailers as you are now noticing.

I would say give us why don't you give us six months, a couple of quarters where we really haven't been capacity constrained and that starts at the end of August. And then let's start talking about some of these specific metrics. Because I think it will be more meaningful.

But by example, we are up in Canada with Loblaw's now. We are up in -- down in the Southeast with Publix. And there are other retailers where we can slowly start to roll this out. But it really doesn't start to really roll out in the retail side until this fall.

Okay. So now currently your capacity is to do roughly $1 million a week in sales. If I read it right is that going to roughly double in a couple of months?

No, not -- the sales won't double in a couple of months. The capacity will double.

(multiple speakers)

Now capacity will double in a couple of months, yes.

Potentially a year from now you could be doing up to $2 million a week on this expansion.

I would love to be telling you that, yes. That would be wonderful.

All right. (multiple speakers)

Remember some of these salads -- just so that everybody knows, some of these salads like sweet kale salad could be -- can be an anchor product line. It can be an all-year-round product line. It certainly looks like it has those types of legs to it. Others are going to be seasonal rotational items. Some are better for the fall. Some are better for the summer. That kind of thing.

And, so, it's -- the key here is getting slots. Getting this shelf space. And once you get it you want to fight like crazy not to let go of it. So we want to make sure there are enough products that even if they are going to be rotated, we want that next rotational product to be ours. Not someone else's.

All right. Thanks. That's all I got.

Morris Ajzenman, Griffin Securities.

Lifecore Biomedical, the fourth-quarter revenues were (inaudible) modestly down and gross profits increased $720,000 due to more favorable product mix. Was this something you had expected to go into the fourth quarter and can you talk about that a little more?

Yes. Lifecore achieved their topline and bottom line target for the year. So, yes, once we left the third quarter we had a pretty good indicator of what the fourth quarter was going to be and they hit those numbers.

If you recall and you will look back at history, their best quarter every year is always going to be the third quarter. Yes and the worst is there first quarter and the second quarter and fourth quarter fall somewhere in between.

As far as guidance, few questions (inaudible) some help on a fair market value changing year-over-year for Windset including dividends being down 10%, 15%. Can you give us some sort of help on, again Lifecore Biomedical with reduction of one customer cutting in towards 50%. I took a rough stab and came out with approximately $0.12 hit to the bottom line on this reduction. Was that in the ballpark?

I haven't done that math, let's see what does that translate into? $0.12 and -- [27]? Yes that's right there. Yes.

Okay. And statistic -- going back last year in the fourth quarter this reversal of this bonus clearly helped EPS last year in the fourth quarter. Can you -- what was the impact of EPS last year, what was the beneficial about to get to $0.17?

Last year was probably around $0.04 or $0.05.

Okay. So $0.04 or $0.05 (multiple speakers)

Back into this year because if you (multiple speakers) a year ago in FY13 going leaving the third quarter we were doing very well. We were ahead of our internal plan. We were certainly ahead on the guidance and that all reversed in the fourth quarter. It was a very bad weather quarter. It was a multitude of things that occurred and as a result, we did not hit our internal plan and therefore Apio and corporate did not hit their bonus targets and it was reversed in the fourth quarter. Of last year.

It doesn't have (multiple speakers)

(inaudible) switch issues again we have gone through and you said (inaudible) previous questions when we are talking about sourcing costs. You gave an example there. I think, Gary, you gave the example of $0.01 per pound increase raises costs by $1 million and questions were on the ability to pass through all cost increases including labor.

What about specific costs that relate to your sourcing? Can that be passed through easier than labor impact cost do you, or is there no difference?

No. No difference.

No difference. Okay.

No difference.

All right, guys. Thank you.

Yes. We are -- as you know well let's just leave it at that. No, there's no difference.

Okay. I'll get back in queue. Thank you.

(Operator Instructions). [Nelson Novus], Winfield.

Just to return to this issue about processing facility. Is it just from a logistics perspective in terms of increasing the geographical footprint of your sourcing. Is that in the cards possibly or is that not a smart -- there really are no suitable alternatives to where you have it now?

Nelson, let me hit repeat see if I have got it right. We have processing -- our main processing facility is in Central Coast California, [San Rio], California, we also have, as you know, processing facilities in Bowling Green, Ohio, and Hanover, Pennsylvania. A very small processing facility in Vera Beach, Florida. Is your question are we looking for new sites beyond those, is that your question?

Well, actually, maybe the real question should be can you take the Apio product and process it in the GreenLine facility.

Oh. Okay. Now that I can answer. All right. So the answer is yes. And the first place where we are taking West Coast vegetable-like core and new solid line products, we want to make those as well in Bowling Green, Ohio. That is first and foremost. So we will -- we are doing that now as we speak. We are reconfiguring that plant. We will be adding some capacity capabilities there.

And then longer term, we have more land. We are kind of landlocked in Bowling Green. Longer term we see Hanover, Pennsylvania, being a primary area for growth and expansion and we are already starting to start preliminary planning for that as well.

So, rather than go to a new greenfield site, we believe that we should be expanding in Ohio and Pennsylvania. They are near major markets. You are well-positioned in terms of distribution lines. So that is where we are putting our bucks and we said we will spend up to $20 million this year in capital expansion. Part of that is to deal with Bowling Green expansion and also anticipate looking at Hanover, Pennsylvania, for expansion.

Okay. So the Hanover thing is not a done deal, but you conceptually sort of realized what it could do or --

Correct. Correct.

Okay. I would imagine at the end of the day that would be a larger expansion base on (multiple speakers)

It is because of the land availability and we just like the location.

How are you going to go about deciding whether to go -- how big to make it or -- at what stage is the Hanover deliberation?

By the end of this fiscal year, we will have a definitive plan, facilities plan for the next five years. I mentioned you that we have -- we have gone to a five-year planning process. It is mostly driven by product and customer opportunities more than it has been by facility. And we want to match the reality of what run rate we think we are on with facilities. And so we will have a better sense of that about three quarters for now so by the end of this fiscal year, we should have that facility expansion plan well in hand.

The Florida plan, I mean just in terms of, I mean not that I know for sure that you might actually source be able to make that a secondary source area, but just because of where it is meteorologically it would be conceivable that there would be some products there that you could source. I mean, does that have any potential as a processing entity?

Not a lot. Oh and as a processing entity. What I thought you were asking is does it have the potential of being a big geographic sourcing area for us and I responded too quickly. But let me just -- (multiple speakers)

Well you were interrelated obviously maybe (multiple speakers)

It is not -- it is great for green beans. It is great for tomatoes and things like that. But it is not a great place for many of the types of products that are going into our core and use solid products. In terms of expanding it, in terms of expanding that site, it may not be the best place from a distribution channels and distribution lanes point of view. I would say Hanover and Bowling Green are going to get first prize on that. Not to rule out expansion in Vero Beach, but I just think that would come secondarily.

And just last question. As far as Bowling Green is concerned, we are talking about reconfiguring, not expanding, right? The footprint.

Right. Correct.

What is your utilization there now?

Oh boy. I would be giving you a number that is off the top of my head and I would hate to --

Well, where I'm -- obviously where I am coming from you have got I know you have got a good utilization number in Hanover. So reconfiguring that would have limited value (multiple speakers).

Probably about 60% (multiple speakers)

Okay so you got a lot more access capacity in Bowling Green than you do and Hanover which is why reconfiguring could really --

Absolutely.

I got it. That's all I want to know. Thanks.

Daniel Rizzo, Sidoti & Company.

We talked a lot about sourcing. And just for right now, we are in the middle of the summer here, is there any potential issues with green bean sourcing? It doesn't seem so, but I just want to know your take.

Well let's put it this way, it is all quiet on the Eastern front from what I can tell. I am knocking on wood as I say this. I don't want to hex or jinx anything, but to the best of my knowledge and I think we are reasonably current, I think we are okay. Right now we are up in the Ohio Valley area and they have had a lot of rain up there, all that kind of stuff. But I think we are okay. I think things are fine.

Okay. And then one other question. Sweet kale salad was the first package superfood and it was basically a home run. These other products you are introducing, does anything have that kind of potential? Is it more of a steady grower type thing?

If I were guessing and we are in baseball season, I would say these others range -- they are more in the singles and doubles. And they will take a seasonal profile to them. The apple fennel may be better in the summer and the -- we have some stir fried products by example that actually is my favorite product of ours is the stir fried product line. And but people tend to cook more in the fall and winter and not -- and less so in the summer. So that may be a fall winter more format. So I think you are looking at -- I think we will occasionally maybe get lucky and have a triple, but this sweet kale salad is rather unprecedented. I mean it's the talk of the industry and we didn't forecast this. It just took off.

It really -- but what it says is that American consumers are waking up, waking up to the issues of obesity and diabetes and healthier eating and this new generation, you know, my kids they are vitamixing, they are blending, they're cleansing, they are doing all these things that I can't even tell you about. And they really were about things that are going into their bodies. And they are talking to each other and the word -- and this sweet kale salad, it is word-of-mouth. It wasn't because we were heavily promoting this.

So I -- in a lifetime, you might get one of these. I don't think it would be realistic to expect that we are going to be launching anything like this in the next year or two. But I do think we have got singles, doubles and maybe even a triple in there in the next year or two.

Okay. Thank you.

Morris Ajzenman, Griffin Securities.

A question that wasn't touched on and actually last couple of years you had not been getting any questions which I actually I think you are kind of happy about, but what is going on with your iced tea? I mean in the past you always look to sort of venture with others. And I know it's still on a back burner, things might be happening, but is there anything that we should be aware of (inaudible) fronts?

Yes, we are still spending millions of dollars in R&D. More of it is D than R. In the earlier days it was mostly R. Now it is more D. We still file patents. We still prosecute patents. They are still important to us. Especially to protect our BreatheWay packaging technology. But we are -- and by the way, last quarter is not patent-oriented as much as it is intellectual know-how oriented. The things that we do -- I don't know if you have been to Lifecore, but the way we scale up fermentation, the way we actually separate, isolate, purify and final fill is there's some real know-how intellectual property there. So we also are big on trademarking.

So we believe in kind of the three-legged stool that we care about and invest in is patents, know-how, and trademarking. And we intend to protect our IP.

So it's -- it doesn't get -- in the days when we had all these licensing deals and R&D funding and licensing fees and all that, we talked more about it. And yes there was probably more drafting of patents at that point, but it is still very much important to us.

Thank you.

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

Just want to thank everybody for being with us today. Thank you for your ongoing support. We are excited about this year and we look forward to keeping you up-to-date.

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