Lifecore Biomedical Inc (LFCR) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec first-quarter fiscal 2016 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, 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.

Good morning and thank you for joining Landec's first-quarter fiscal-year 2016 earnings call. I have with me today on the call Greg Skinner, our Chief Financial Officer, and Molly Hemmeter, our Chief Operating Officer and CEO-elect.

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 year 2015.

Consolidated revenues increased 1% to $135.4 million, operating income grew 11% to $3.9 million, and net income grew 25% to $0.11 per share. If you exclude the extra week in the first quarter of last year, revenues grew 9%, operating income grew 19%, and net income grew 36%.

Our Lifecore biomedical materials business had an excellent first quarter, with revenues growing 29%, reflecting the anticipated improvements for Lifecore's business in our current fiscal year. Apio's revenue in its fresh packaged vegetable business increased 4%, with an 89% increase in revenues from its Eat Smart salad kit products year over year. Revenues in Apio's export business decreased 16% due to the combination of a stronger dollar affecting demand for certain products and selective produce shortages for some other products.

Despite the produce shortages and pressures on revenue during the quarter, consolidated gross profit increased $3.7 million or 27%, while gross margin increased 270 basis points to 13.3% due to the favorable revenue mix to higher margin sales of salad kits and the increase in Lifecore's revenues from the sales of higher margin fermentation products.

At Apio, we had a challenging quarter for sourcing produce due to heavy rains in the Ohio Valley and recent heat in -- record heat, for that matter -- in California that negatively affected both Apio's packaged fresh veg business and its export business. Although some produce sourcing challenges are still continuing in September, we believe that these negative sourcing variances can be recovered in subsequent 2016 quarters and that our annual sourcing contingency plan and the guidance for fiscal year 2016 are still achievable.

Before Molly goes into more details concerning our operating results, let me turn the call over to Greg for some financial highlights.

Thank you, Gary. And good morning, everyone. Revenue in the first quarter of fiscal 2016 increased $1.8 million to $135.4 million compared to $133.6 million in the year-ago quarter. The increase in revenues were primarily due to a $3.6 million or 4% increase in revenues in Apio's packaged fresh vegetable business, a $2 million or 29% increase in revenues at Lifecore due to increased fermentation sales as a result of the key customer -- a key customer who reduced purchases last fiscal year, resuming historical order patterns, and from new business development revenues.

These increases in revenue were almost completely offset by a $4.3 million or 16% decrease in Apio's export business as a result of a 15% decrease in sales volumes due to the combination of a stronger dollar affecting demand for certain products and produce shortages for other products.

Net income in the first quarter of fiscal 2016 increased $599,000 or 25% to $3 million or $0.11 per share compared to $2.4 million or $0.09 per share in the year-ago quarter. The increase was primarily due to first, a $2 million increase in operating income at Lifecore due to a very favorable product mix change, which increased gross margin to 36.5% in this year's first quarter compared to 15.4% during the first quarter of last year.

Second, a $1.4 million increase in gross profit in Apio's packaged fresh vegetable business due to its gross margin increasing 100 basis points from 11.8% last year to 12.8% this year. And third, a $600,000 increase in the change in the fair market value of the Company's Windset investment [to an] $800,000 increase recognized in the first quarter of fiscal 2016 compared to $200,000 increase recognized in the year-ago quarter.

These increases in net income in the first quarter were partially offset by first, a $2.1 million planned increase in operating expenses at Apio due to increased sales and marketing expenses and the addition of two new executives. Second, a $1.1 million increase in G&A at corporate due to the $677,000 reversal of the long-term incentive program accrual in the first quarter of last year, and from an increase in the stock-based compensation expense. And third, from a $390,000 increase in the income tax expense.

Turning to our financial position, at the end of the first quarter of fiscal 2016, cash totaled $7.1 million after using $1.8 million in cash flow from operations, paying off $1.9 million in debt, and investing $3.5 million in property equipment, primarily for capacity expansion during the quarter.

The use of cash flow from operations during the quarter was primarily due to first, a $3.4 million increase in inventory, primarily at Lifecore for shipment later this fiscal year. Second, a $2.8 million decrease at accrued compensation due to the payments of the fiscal year 2015 bonuses during the first quarter of fiscal year 2016. And third, a $1.1 million decrease in income taxes payable for payments made during the first quarter for taxes due for fiscal year 2015. The Company had $33.2 million available under its lines of credit as of August 30, 2015.

I will turn the call over to Molly.

Thanks, Greg. Good morning, everyone. Lifecore had an excellent first quarter: revenues increased 29%, gross margin 207%, and operating income increased from a loss of $1.3 million in the first quarter last year to a profit of $747,000 this year. Lifecore is well on its way to meeting or exceeding its plan for the year.

At Apio, our investments over the last three years in new product development to create highly nutritious salad kits made from superfood vegetables, packaged in our BreatheWay technology, are paying off. Salad kit revenues increased 89% during the first quarter of fiscal year 2016.

As Greg mentioned, Apio's overall packaged fresh vegetables business realized an improvement in gross profit and gross margin during the first quarter, which is directly tied to our strategic initiatives to change our product mix to higher margin products. Approximately three years ago, we launched the sweet kale salad, which has become the number one selling salad kit among club and retail stores throughout North America.

Since that time, we have added several new salad kit products to the line. Combined, our salad kit products are now generating approximately $3 million of revenue per week, with margins considerably above our core vegetable products.

This month, we launched a new salad kit called the Southwest Salad Kit. This salad contains five superfoods and a zesty chipotle dressing and is also gluten-free. The Southwest Salad Kit is currently being offered on rotation in all Costco Canada warehouse locations. Our plan is to continue to innovate and to launch new products in order to advance and sustain our first-to-market competitive advantage.

We estimate the North American market for salad kits sold by club and retail stores to be approximately $1.4 billion in retail dollars, which are dollars received by the retailer. In a short three-year time period, Apio salad kits have grown from zero to 14% market share in North American retail and club stores. This is up 200 basis points since last quarter.

In the Canadian retail channel for salad kits, Eat Smart has reached a number 1% market leadership position with a 35% market share. In the US retail market, Eat Smart salad kits have gained a 3% market share, which is still significant, given that it is such a large category in the US. It also provides a tremendous opportunity for growth.

The Eat Smart salad kits in the US retail market have experienced a 52-week volume growth rate of 80%, over twice the 35% volume growth rate of the market for the same 52-week period, demonstrating momentum and a significant opportunity for the future. We plan to continue to grow our share in this category through innovation of Eat Smart salad kits that offer fresh, nutritious ingredients in combinations and flavors that make it easy and delicious for consumers to eat healthy.

If you recall, we tested a consumer online marketing program last fall that resulted in a 20% lift in Eat Smart sales in the Northeast, which was well above the expected 4% to 6% lift experienced by many consumer products goods companies. We launched a second campaign starting this month that will be lasting through mid December in the Northeastern and mid-Atlantic United States and throughout all of Canada. We will be advertising on a large variety of food and health websites and offering consumers coupons to purchase our Eat Smart salad kits.

Our intent is to drive consumer trial. We believe that once consumers try our salads, they will become repeat customers. We will report on these marketing efforts when the results are available.

In addition, we are significantly increasing capacity by more than tripling the size of our processing plant in Hanover, Pennsylvania. We expect the construction to be completed in early calendar 2016, with new processing lines up and running shortly thereafter.

In parallel with the focus and growth in our salad kits, we are continuing to selectively seek price increases on certain lower-margin core packaged vegetable products in response to rising labor and raw product sourcing costs and to selectively discontinue some products. In the short term, these efforts may adversely affect revenues and gross profit, but this should enhance Apio's margins longer term. We believe margin enhancement in our core Apio business is essential for the long-term growth and profitability of Landec.

Regarding Windset, our investment increased $800,000 during the first quarter of fiscal 2016 compared to an increase of $200,000 during the first quarter of last year. As previously disclosed in the guidance we gave for fiscal 2016 and our year-end fiscal 2015 reporting, we are still projecting that the increase in the fair market value of our investment will be flat with last year.

The details surrounding the permitting issue which are delaying Windset's expansion plans have not changed. And this issue is expected to delay Windset's initial harvest from the expansion by at least 12 months, until the fall of 2016. We will update you on this as well as we receive new information on the subject.

Our current priorities are one, investing in facility expansion and equipment to meet future anticipated demand at both Apio and Lifecore. Two, changing our product mix to higher margin products at both Apio and Lifecore. Three, innovating new salads to broaden and strengthen our product line, especially for US retail.

Four, advancing our Lifecore programs with key customers and development partners. And finally, number five, supporting Windset in its expansion plans to build new hydroponic-controlled atmosphere structures using new growing methods for new crops. The expected long-term benefits from these initiatives are sustainable and profitable double-digit growth in revenues and net income.

Gary, back to you.

Thanks, Molly. As previously announced, I will be retiring at the shareholders meeting in two weeks. The Board of Directors and I are excited about Molly becoming Landec's new CEO upon my retirement. Her election ensures uninterrupted knowledge of Landec's businesses and uninterrupted progress in Landec's growth plans.

In addition to Molly's promotion, we have spent the last year significantly improving the depth and breadth of our management team by adding executives and senior management in the areas of marketing, procurement, quality, business development, and finance. As a continuing member of our Board of Directors, I feel quite confident in this management team to take Landec to the next level and successfully execute our current five-year plan.

It has been my honor and pleasure to have been Landec's CEO for the past 24 years, taking Landec from a private startup company to a public company with over $500 million in revenues. Our future is bright. I thank our employees, our partners, and our shareholders for their consistent support over the years. And I thank you for allowing me to serve you for all these years.

We are now open for questions.

(Operator Instructions) Tony Brenner, Roth Capital Partners.

Thank you and congratulations, Gary.

Thank you, Tony.

A couple of questions. First of all, I wonder if you could expand a little on the sales and margin metrics in the quarter of Apio's tray and bagged vegetable business and whether sourcing was the only problem in the quarter or whether your pricing strategy had an effect? Or whether there were any other influences there?

Yes, Tony. First, this is Molly. Hello.

I knew it was you, Molly.

First of all, I want to remind you of the extra week in the quarter. So that did have an effect on the numbers. Second off, we had two things going on. We have been selectively seeking price increases. Most of those price increases have been accepted, although we did walk away from some broccoli business in Costco Canada year over year, which is affecting some of our core volumes. But that was included in our guidance.

The second thing we saw in the first quarter was all over the category, we experienced lower volumes in the core business. So it wasn't just Apio; it was the entire core category. And this was attributed to the extreme heat. I guess people don't want to cook as much. These are cooking vegetables in the heat of the summer.

We have a lot of volume, actually, in Publix, which is in the southeast. And so we did see some decreased volumes in our core business. But those are already bouncing back. We did not see a dip in salad kit sales during the heat, however. So that was very fortunate. And in the retail business, our salad kit sales were making up for our dip in core sales.

Would you say that the -- those customers accepting a price increase is offsetting what you are walking away from or vice versa?

I wouldn't say that it's offsetting. I think we are looking at core being flat year over year and that is -- so in the end, I guess we are saying it is exactly offsetting, yes.

Okay. Could you elaborate a little on what the management additions that were made were?

Sure. Last year, we spent a lot of effort really recruiting some great talent in our marketing department. So we have a new VP of Marketing and we have several new people in marketing reporting to that VP, who has specialty in product innovation. So that was one area.

We also hired new people in procurement. We have a new VP of Procurement, who is putting in some great programs. Have -- his whole career has been in the produce industry and he is putting in some wonderful programs for diversification and managing our growers. We also have a new VP of Quality who came to us, and is excellent at working with our customers and making sure that we are staying kind of ahead of the category in our quality programs.

You know that Apio is -- we actually have the brand that has always been the highest velocity at retail, which means consumers -- even if it is bagged broccoli, bagged carrots, bagged whatever it is, they buy our -- we have the highest velocity, which -- and we believe it is because of our quality. We have the highest quality, which we attribute to our quality programs, but also our BreatheWay membrane.

We have also invested in business development. We have a new Head of Business Development at Lifecore, who is working on their five-year growth strategy and for Apio. And in addition, we have a new CFO at our Apio facility. And that was because our past CFO retired. So we have a lot of new people that are going to contribute to the future growth of Landec.

Okay. Thank you. My last question: in the previous quarter guidance, for net income, it was suggested that second-quarter income would be a little larger than third-quarter income. And in this guidance, that is pretty significantly reversed. I wonder what is behind that.

Most of it is the timing of shipments at Lifecore. There is shifts at Apio, there is shifts around other parts of the Company, but the lion's share of the change from the original guidance to the guidance that we just gave was Lifecore.

Thank you. Brent Rystrom, Feltl.

Good morning. Gary, my congratulations and good luck as well.

Thank you, sir. Appreciate it.

A couple quick questions for you. From my calculations, the non-Eat Smart business at Apio was down about $15 million. Can you give us a sense of where that came from? I know you mentioned the Ohio River Valley sourcing issues, some of the heat issues. Can you break that down a little bit more granularity?

That is a pretty good count, by the way. $9 million of that was the extra week from a year ago. So it is not apples to apples. The rest of it was a combination of sourcing issues. We didn't have enough product to meet full demand. And some of it was the fact that we said we would be walking away from lower margin business. Now can I tell you the exact breakdown between those two? No. But that makes up the rest.

All right. That is very helpful. Thank you. Out of curiosity, Molly, could you remind us of how Eat Smart's market share has changed in the three years in Canada since you launched there?

Well, we launched there about 2 1/2 years ago -- 2 1/2 to 3 years ago. And obviously, it was zero at that time. And now we are at 35% market share and we are the number one salad kit provider in Canada. Now, that is primarily before -- because we have an 80% ACV in our salad kits in Canada. So we are in every Costco store in Canada. We are also in Loblaw, which has a large reach and all the other major retailers -- Metro, Sobeys, and Walmart. So we have been able to garner very high distribution there.

We have a huge following on our brand. All of these -- you know, we only sell our salad kits in the Eat Smart brand. And so both Costco Canada and all the retailers have really embraced the Eat Smart brand. And with this new advertising we have just launched, we are going to try to raise the awareness of our brand even further among consumers to drive those numbers up even more.

And so I guess, kind of what I was wondering -- that's helpful. I was kind of thinking -- so you obviously start at zero. Two years ago, had you captured 10% of the market? Did you go right away to 25%, 30%? How did that progress over the last three years?

I don't have the breakdown on those numbers with me right now. We immediately -- I will tell you, in our first year, we were immediately in all of Costco Canada. So that was immediate, and following that, we were in Loblaw.

So in our first year, we were in both of those club and retail stores, which garner a huge market share. So I would say in our first year, we were -- if I had to estimate that we were probably already double digits. But remember, we only had one product. And so now we have increased our expansion to more accounts, but with three to six products in every door. I'll have to give you the breakdown on market share by year. I can do that. I can get that to you later, Brent.

That would be great. When you look at the 89% year-over-year growth, as a source of that growth, how much of that was Canada, how much US?

I would say it was about split. Remember, the US is a much, much higher dollar market. So it was about split. Probably 60%/40% on the Canadian -- favoring Canada. We had a lot a growth from Canada.

All right. And then US versus Canada, what is the major competitive difference? I would assume in Canada, you are a larger -- second-largest participant. Who in the US are you looking at catching?

Yes. You know, the US is much, much stronger competition and there is a few things going on. First of all, private label is much -- is a much larger piece of the US business. And we are not currently selling our salads in private label. So that is a big factor. That is one competitive dynamic, although we are seeing the retailers -- because they are seeing the velocity and the success of our kits, the retailers are starting to open up to the branded product. And we saw that just recently at Safeway.

So at Safeway, it was, no, we won't take private label. We showed them the data, how fast our salads were turning. And we are now in Northern California Safeway. So we are very excited to be there.

The other dynamics are there are a lot more competitors that have -- that are in the account. So you have the Fresh Express and Dole, although they are focused really on the leaf lettuce salads. And then the other competitors would be Ready Pac and Taylor Farms.

All right. Then my final question. When I look at the growth in this segment for the year and then I look at the prior few quarters, according to my calculations, you grew the Eat Smart business about 90% in the third quarter. I believe this is just today that you released 88.5% in the fourth quarter, about 89% now.

Why is that growth so significant? Do you plan to a certain level of business and then you kind of hold that business until you get the next set of growth? Or what accounts for that growth rate being right around 88%, 90%? Why doesn't it vary I guess is what I am asking?

Oh. Well, I think we had a big push into retail about a year and a half ago. If you remember when we launched the sweet kale salad, we had so much demand that we actually did not launch into retail for six months to a year because we had to build new equipment lines to just supply Costco.

So when those lines were up and running, the floodgates started to open. And we started to supply all of retail. So that is the dynamic that we are starting to see. But I believe we still have a lot of growth left. Look at US distribution. We have a lot of momentum in the US. We are also launching more salad kits so that we will get more SKUs per door in Canada. So I am hoping this type of growth continues.

Chris Krueger, Lake Street Capital Markets.

Good morning. I am not sure if you stated this on the call, but can you tell us what the weekly run rate is for salads right now and how many doors in North America your salad kits are in?

Run rate is about $3 million. $3 million a week. Number of doors -- I don't have off the top of my head. Our ACV is about 22% in the US. Even -- and it is 80% in Canada, if that helps you.

Yes. That helps. Then next, when you expand in the Hanover -- I know it is primarily related to the salad kits, but is that facility also going to be able to produce your other older veggie products for next day delivery and whatnot?

Yes, it is. We are going to be shifting some of the volume of our core products to Hanover and adding salad lines so we can increase volume there. And it will be great for our customers in Canada on the East Coast so we can do next day delivery. You have got it exactly right.

Okay. Last question. As you look at the drought in California, I know you repeatedly state that you have growers that are irrigated using groundwater. How are you going to know if those sources start to become depleted? Is there any way of knowing or is it just simply they can't grow it and that is how you find out?

Well, we will know ahead of -- we will definitely know way ahead of just finding out. I mean, we are in constant communication with our growers and we are monitoring it. So far, we have been okay. We will see what El Nino brings, but right now, we are being okay and we don't see anything for this fiscal year that will affect us as far as the drought is concerned.

Richard Shuster, Boston Partners.

Yes. First of all, Gary, thank you for all the years. You have done a great job. And Molly, good luck. Quick question. Could you just talk about CapEx for the year or how much the CapEx will be and what the breakout of that CapEx actually is?

We are sticking with our original guidance, which is about $40 million to $45 million for the year. The breakdown is about a third of that is Lifecore and that is primarily due to the expansion of their building this year, which we plan to expand 20,000 square feet-plus. The rest being equipment. And then of course, at Apio, the major expenditure is the tripling of the Hanover plant.

(Operator Instructions) Nelson Obus, Wynnefield Capital.

Hey, Gary, hell of a run. Hey, I had two questions.

Thank you, sir.

First of all, I am very happy to see the increase in professionals in very critical parts of the operation. And I hope you integrate them well. But just want to put on my green hat for a minute. The $2.1 million in the quarter -- now, part of that is obviously salaries, but if you were to annualize it, you would get a number of about $8.1 million. So I wonder if you could kind of give us a sense of how about $2.1 million broke down, other than salaries and benefits?

Well, when you look at the breakdown of that, most of it is at the -- well, you are talking about Apio. Most of that is in the area of sales and marketing. I mean, we have obviously increased our promotions. That certainly is driving a lot of the growth in our salad business.

And so do I have the exact breakdown? No, but I would say it is probably about three-quarters of that increase is sales and marketing and the rest is G&A.

The online marketing --

Okay. So we're in the retail game where you have to do some promotional work at the beginning and that is a much bigger component. I'm sorry. I cut somebody off. Rather than the -- I am just trying to paraphrase what you are saying. Then the salaries, correct?

Yes.

I'm sorry. Who did I cut off there?

It was Molly, Nelson. Remember, I talked about we launched this week the online marketing program. So we actually increased our spend and you will see it in the next two quarters for this online marketing program.

Now, we are going to monitor that very closely. We had such amazing results last year that we wanted to repeat it this year and we are doing it in even a bigger way. But we will monitor the results and making sure we are getting the ROI in that program and we will adjust accordingly.

Of course. Great. I mean, that is a growth initiative.

Right.

I would like you to capitalize it, but I don't think you can do that. Secondly, the county in terms of Windset. We are talking Santa Barbara County, right?

Yes.

So Santa Barbara County is a county I know fairly well. It might as well be two different countries. And the actual (inaudible) of Santa Barbara is called the People's Republic of Santa Barbara. So without knowing the county commissioners are probably listening in, I just want to understand one little thing about this.

Is this overlooking of the permit -- does it have any broader political issues in terms of utilization of groundwater or -- you know, the kind of touchy-feely issues that liberals like to grab a hold of at everybody's expense. Or is it a -- or do you think it is being done in a -- I guess this really isn't appropriate for the call.

But let me just ask this. Does it have any political overtones to play to a base that might not be particularly free-market-oriented or is this just sort of a regulatory oversight that you feel comfortable with?

From our understanding, it is the latter. We -- and we being Windset -- they were very confident these new structures did not fall under the building codes. And they were actually exempt structures under the building codes. And the commissioners of Santa Barbara County disagree.

And so that is where we are at now. In parallel, they are not sitting around just waiting for approval. They are also talking with the city of Santa Maria, which is where their current facility is at, to get approval for these structures on the land that they own there.

Ideally, they would rather put it on the county land. I mean, that is why they went out and leased that 100-plus acres. It was for these new structures. But if this looks like it is just going to keep getting delayed, they will end up putting them on the city land next to their current structure.

I think that is helpful. I might be wrong about this. I would have to go back and look. But I think there is a nuance that you talked about a year delay and now you are talking about at least a year delay. And there are people in the People's Republic that don't understand you are creating jobs or feel that jobs validate the free market and therefore are a horrible thing.

Are you doing any lobbying down there? I mean, to actually bring the people that might benefit from this down there and tell them to move this thing along? Or is that counterproductive?

No. Windset is doing that.

Okay. Good. All right. That is my final -- that's my question. Thanks.

(Operator Instructions) Brent Rystrom, Feltl.

Yes, could you give a quick thought on the license revenue? I believe it was $507,000 for the quarter. It was all gross margin, and you mentioned $2.5 million in revenue this year. Will the remaining quarters -- will it translate as flow-through gross margin as well?

Yes. You're going to have a slight uptick in -- there will be some cost of sales associated with it as we get more into the R&D portion of a couple of these deals. We just signed them in June, so a big chunk in the first quarter was just pure licensing.

But you will see that there will be a little bit of -- but it is a re-class. All it is is you are taking expenses that are now sitting in R&D and they are going to be re-classed as cost of sales. So it is not incremental dollars. So from an operating income standpoint, it all drops down to that line. It is 100% at the operating income level. All incremental.

And it is two new programs. We can't go into details for confidentiality reasons as to who our partners are or what the fields are. We will, once we get a commercial product. But they will bring in $2.5 million in revenues and profit -- pre-tax profit this year.

And thinking constructively long term, if these programs reach some sort of successful resolution, then will they become a source of revenue through product sales? Or will they continue to be a licensing sort of arrangement?

Well, one of them is a pretty much -- when we are done, we are done. So think of it as a paid up royalty concept. The other one, on the other hand, yes, there is a ongoing royalty component to it based on sales. And they are very attractive royalties. So it will not be a product sales. We are not involved in making the product. This is purely going to be a handoff of the technology to them and we are going to collect a check each quarter.

Will Lauber, Sterling Capital Management.

Hello. Molly, just for Safeway, you are currently just in Northern California? Is that correct?

No. I think we have two other DCs. But I am not sure which ones they are. I think we are in three total.

And earlier -- I am not sure if I heard you correct. Is that private label that you are doing in Safeway?

Oh, no. No, all Eat Smart.

Okay.

All Eat Smart. And I can email you right after the call what DCs we are in.

Okay. Thank you very much. And if you can help me explain the Costco rotation program, what exactly does that mean?

Oh, sure. Costco Canada is one of our very close partners. Obviously so is Costco US. And when we came out -- we have actually been doing this with Costco Canada for many years, where they really have a treasure hunt mentality. They want to create a treasure hunt mentality with their members. And so they want to always be offering something new. And of course, that is the ideal partner for Apio because we are all about innovation and coming up with new things.

So we work very closely with Costco Canada to have a new salad ready basically every quarter -- so four times a year we try to have a new salad. Now, if those salad do really well, like sweet kale salad, and it started breaking all records, they couldn't afford to take it out (inaudible). They left it in a permanent slot and they use the second slot to rotate other salads in. So right now, we have sweet kale salad and we have a second slot, and every 12 to 16 weeks, we put in a new salad.

And what is great about that is we use that as a market test for us to see how consumers respond and decide whether we launch it on a broader level. So Costco Canada does that. And just recently, Costco US has started entertaining doing a rotation on a longer time period, maybe every six months. But again, they want that treasure hunt mentality and it works great with our strategy of innovation.

Is it still barbecue ranch in most locations for --?

No. So the barbecue ranch is off rotation now. And now in Costco Canada, we actually have our new southwest salad. And that is in every door right now. And then in Costco US, we don't have it in every DC, but I think in five of the DCs, so about half of the country.

We have a new salad called wild greens and quinoa, which is similar to the one that we have had for quite some time that is doing extremely well. But it has a different dressing. It actually has a strawberry dressing. The first week of sales -- it has only been in a week -- were extremely positive. So we are in about half the DCs in Costco US with that one.

Okay. And I am looking at your website now. You have a new one for the plant power protein sweet kale. Is that the same as the other sweet kale or is there some change to that?

It actually has a power blend of nuts in there -- seeds, basically. A power blend of seeds. And we launched that into retail just a few weeks ago with our barbecue ranch and our -- a couple of our other SKUs. And we are testing that out.

So it is sweet kale salad, but with a power seed blend that gives it -- I think it is about 10 grams. You are on the website, so you know better than me. I think about 10 grams of protein with it and that is all plant-based protein. So you can have your sweet kale salad and -- how much is it?

It is 11 grams.

Okay. 11. I was close. And it can provide you the protein you want through plants. And you can use it as a meal, basically, at that point.

Okay. And my final question, I know Windset usually has most of their, I guess, capacity sold before they are building the facility. Do you have much capacity of the increase in Hanover? Is it already sold or have you been -- I guess losing business from national retailers because you haven't had the capacity on the East Coast. So you are only able to ship, say, west of the Mississippi or -- I guess what kind of sales are already sold or would be -- would have been sold in the past?

Sure. So we haven't lost any business because of that. And a lot -- there's two things going on with the Hanover expansion. The first thing is we are trying to kind of collaborate our customer service. So we are at overcapacity in Guad. We are stretching the limit. So we are going to be able to move some of that volume to the East Coast for our East Coast customers. So it is a win-win.

We will be able to serve our customers better and have better productivity in Guadalupe, California. So that is the first thing. The second thing is the salad production and we have -- we will be able to start producing some salads there for our East Coast customers. But it also allows for future growth.

So the answer is a little bit of both. It will take some existing volume, but it will also provide volume for future growth.

What percent capacity when it is completed would you think you would start off with in that Hanover facility?

Probably in that 60 -- 50%, 60% range. Because we are going to have plenty of room to add more lines. It is a lot cheaper to build out all at once and leave a good portion of it somewhat vacant than to have to come back in and add later.

Right. So we will have extra space to add salad lines as that volume grows. And I think you saw in our Q&A, we have the capacity -- we will have the capacity to add another $100 million to $150 million in revenue of salads.

Brent Rystrom, Feltl.

Real quick question that the last question caused me to think of. When are you going to open Hanover's expansion?

We are going to be opening it right in the beginning of calendar year 2016, but we will be staging bringing different product lines in capacity. So that will go for about through January through, let's say, April, we'll be gradually bringing different products online.

All right. And then one final question and then it is kind of a messy question from the perspective that it will be hard to answer. But obviously, we have a fairly high level likelihood of El Nino, which is expected to really start to impact us in the US here in the next couple of months and maybe run through January, February.

And then with a high powered El Nino, typically that is followed by a La Nina in the following summer. So historically, can you remind us how El Ninos might impact your winter sourcing -- calendar winter. And then how La Nina can impact your summer sourcing.

You are right. That is hard to answer. But let me give you some things we are doing to mitigate the risks of a strong El Nino. So we are doing two things. First of all, we're going to be utilizing more transplants in the spring. And what that means is we are going to be assuming that there is going to be a lot of wet and muddy fields January through March. And so there is a chance we might have to miss planting.

So what we are going to do is we are going to transplant -- we are going to plant seed in other areas and be ready to have -- bring the transplants in in the spring. So that will ensure that we don't miss any season.

The other thing we are doing is we are adjusting our planting regions and we were going to plan for more volume out of our desert areas. So those are two -- we have a lot of lists of things we are doing, but those are two of the primary things that we are doing to mitigate risks.

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

Just want to just thank everybody for being with us today. And we look forward to keeping you apprised of our progress as we get through the year. Many thanks, everybody.

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