Landec Corporation
Q1 2016 Earnings Call Transcript

Published: 30 Sep 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Landec’s 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.

[Gary Steele:]

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 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 revenues and 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 or 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, and 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 Greg for some financial highlights.

[Gregory Skinner:]

Thank you, Gary and 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 and Apio's packaged fresh vegetables business and a $2 million or 29% increase in revenues at Lifecore due to increased fermentation sales as a result of the 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 and 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 $3.0 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 vegetables 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

[Molly Hemmeter:]

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 of 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 for 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’s salad kits have grown from 0% to 14% market share in North American retail and club stores. This is about 200 basis points since last quarter. In the Canadian retail channel for salad kits. Eat Smart have reached a number one percent market leadership position with a 35% market share. In the U.S. retail market Eat Smart salad kits have gained a 3% of market share which is still significant given that is such a large category in the U.S., it also provides a tremendous opportunity for growth. The Eat Smart salad kits in the U.S. retail market have expands a 52-week volume growth rate of 80% over twice the 35% volume growth right of the market for the same 52-week period, demonstrating momentum and a significant opportunity for the future. We’ve planned to continue to grow our share in this category through innovation of Eat Smart salad kits that offers fresh, nutritious ingredients and combinations in flavors that make it easy and delicious for consumers to eat healthy. If you recall we test the consumer online marketing program last fall that resulted in a 20% left in Eat Smart sales in the Northeast which was well above the expected 4% to 4% less experienced for many consumer products foods company. 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 salad they will become repeat customers. We will report on these marketing efforts and 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 2015 with new processing lines up and running shortly thereafter. In parallel with a focus and growth in our salad kits we are continuing to selectively see price increases on certain lower margin core packaged vegetable products and response to rising labor and raw product sourcing cost 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 in our year-end fiscal 2015 reporting we are still projecting that the increased in the fair market value of our investment will be flat with last year. The detail surrounding the permitting issue which are delaying Windset 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. You’ll 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 of 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 U.S. retail. Four, advancing our Lifecore programs with key customers and development partners. And finally, number five supporting Windset and its expansion plans to build new hydroponic controlled atmosphere structures using new growing methods for new crops. The expected long-term benefit from these initiatives are sustainable and profitable double-digit growth in revenues and net income. Gary, back to you.

[Gary Steele:]

Thanks Molly. As previously announced I’ll be retiring after shareholders meeting in two weeks. The Board of Directors and I are excited about Molly becoming Landec’s new CEO upon my retirement. Our 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. In my honor and pleasure to have been Landec 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:]

[Operator Instructions] Our first question comes from the line of Tony Brenner from ROTH Capital Partners. Your question please.

[Tony Brenner:]

Thank you and congratulations Gary.

[Gary Steele:]

Thank you, Tony.

[Tony Brenner:]

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?

[Molly Hemmeter:]

Yes, Tony, first this is Molly hello.

[Tony Brenner:]

I knew it was you Molly.

[Molly Hemmeter:]

First of all, I want to remind you of the extra week in the quarter so….

[Tony Brenner:]

I understand.

[Molly Hemmeter:]

So that did have and effect on the numbers. Second, 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 is - 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 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.

[Tony Brenner:]

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

[Molly Hemmeter:]

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

[Tony Brenner:]

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

[Molly Hemmeter:]

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 have 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 program 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’re staying kind of the head of the category in our quality programs you know that at Apio’s, we actually have the brand that is always been the highest velocity at retail, which means consumers even if it’s bagged broccoli, bagged carrots, bagged whatever it is, they buy our – we have the highest velocity, which we believe its because of our quality, we have the highest quality, which we attribute to our quality programs, but also our BreatheWay membrane. We’ve 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.

[Tony Brenner:]

Great, 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 the third quarter income and this guidance just pretty significantly reversed, I wonder what’s behind that?

[Gregory Skinner:]

Most of it’s the timing of shipments at Lifecore. There’s shifts at Apio, there’s 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.

[Tony Brenner:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from the line of Brent Rystrom from Feltl. Your question please.

[Gary Steele:]

Hi Brent.

[Molly Hemmeter:]

Hi Brent.

[Brent Rystrom:]

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

[Gary Steele:]

Thank you, Brent. Appreciate it.

[Brent Rystrom:]

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?

[Gary Steele:]

That’s pretty good cap by the way, $9 million of that was the extra week from a year ago. So it's 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 somehow 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.

[Brent Rystrom:]

All right, that’s 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?

[Molly Hemmeter:]

Well, we have launched there about 2.5 years ago, 2.5 to 3 years ago and obviously it was zero at that time. And now we’re at 35% market share, and we are the number one salad kit provider in Canada. Now, that’s primarily because we have an 80% ACV in our salad kits in Canada. So, we are in every Costco store in Canada, we’re also in Loblaw, which has a large range and all the other major retailers Metro, Sobey’s, and Walmart. So we’ve been able to garner very high distribution there. We have a huge following on our brand all of these, 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’re going to try to raise the awareness of our brand even further among consumers to drive this numbers up even more.

[Brent Rystrom:]

And so I guess Canada 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% to 30%? How does that progress over the last three years?

[Molly Hemmeter:]

Well, I don’t have the breakdown of those numbers with me right now. We immediately I will tell you, we in our first year we were immediately in all of Costco Canada. So that was immediate and following that we ran Loblaw. So in our first year we ran both of those club and retail stores which garnered a huge market share. So I think in our first year, if I had to estimate that we were probably already double digits, but remember we only had one product. And so now we've 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 and I can get that to you later Brent.

[Brent Rystrom:]

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

[Molly Hemmeter:]

I’d say it was about split. Remember, the U.S is a much, much higher dollar market so it was about split and it’s probably 60-40 on the Canadian – favoring Canada. We had a lot of growth from Canada.

[Brent Rystrom:]

All right and then the U.S. versus Canada, what’s the major competitive difference. I would assume in Canada you are the largest – second largest participant who in the U.S. are you looking at catching?

[Molly Hemmeter:]

Yes, the U.S. has much, much stronger competition and there is a few things going on. First of all private-label is a much larger piece of U.S. business and we are not currently selling our salads in private-label. So that’s a big factor, that’s one competitive dynamic, although we are seeing the retailers because they’re seeing the velocity and the success of our kits. The retailers are starting to open up to the branded product and we saw that because recently at Safeway. So at Safeway, it was no, we won’t private-label, we showed on the data how fast our salad returning and we are now in Northern California Safeway. So we’re very excited to be there. The other dynamics are there are a lot more competitors that have bettering 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 will be Ready Pac and Taylor Farms.

[Brent Rystrom:]

All right and 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 released 80.5% in the fourth quarter about 89% now. Why is that growth so significant, do you planned to a certain level of business and then you kind of hold that business, do you get the next set of growth or what accounts for that growth rate being right around [80%] to 90%, why doesn’t it vary I guess that’s what I am asking?

[Molly Hemmeter:]

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 the supply Costco. So when those lines were up and running that the floodgates started to open and we started to supply all of retail. So that’s the dynamic that we’re starting to see, but I believe we still have a lot of growth left. Look at U.S. distribution we have a lot of momentum in the U.S., we also launching more salad kits so that we’ll get more SKUs per door in Canada. So I'm hoping this type of growth continues.

[Brent Rystrom:]

All right, thank you.

[Operator:]

Thank you. Our next question comes from the line of Chris Krueger from Lake Street Capital Markets. Your question please.

[Chris Krueger:]

Good morning.

[Molly Hemmeter:]

Good morning.

[Chris Krueger:]

Hi, I’m not sure if you stated this on a 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?

[Molly Hemmeter:]

Run rate is about $3 million a week number of doors I don’t have off the top of my head, our ACV is about 22% in the U.S. even and as 80% in Canada is that helps you.

[Chris Krueger:]

Yes, that helps. The next when you expand the Hanover I know it’s 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 then why not?

[Molly Hemmeter:]

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’ve got to class right.

[Chris Krueger:]

Okay and 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 are to become depleted, is there anyway of knowing or is it just simply they can grow it and that’s how you find out.

[Molly Hemmeter:]

Well, we’ll know a head of – we 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’ve been okay, we’ll see what El Nino bring, but right now we are been okay, we don’t see anything for this fiscal year that will affect us as far as the drought concern.

[Chris Krueger:]

Thank you. That’s all I got.

[Operator:]

Thank you. Our next question comes from the line of Richard Shuster from Boston Partners. Your question please.

[Richard Shuster:]

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

[Gary Steele:]

I think you are sticking with our original guidance which is about $40 million to $45 million for the year. The breakdown is about third of that is Lifecore and that's 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.

[Richard Shuster:]

Yes, okay. Thank you.

[Gary Steele:]

You’re welcome.

[Gregory Skinner:]

Thanks Rich.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Nelson Obus from Wynnefield Capital. Your question please.

[Nelson Obus:]

Hey, Gary.

[Gary Steele:]

Good morning, Nelson.

[Nelson Obus:]

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

[Gary Steele:]

Thank you, sir.

[Nelson Obus:]

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’s obviously salaries, but if you would annualize it, you would get a number for about $8.1 million. So I wonder if you could kind of give us a sense of how that $2.1 million broke down other than salaries and benefits?

[Gary Steele:]

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 there is sales and marketing I mean we have obviously increased our promotions that certainly driving a lot of the growth in our salad business and so you have the exact breakdown no, but I would say it’s probably about three quarters of that increase is sales and marketing and the rest is G&A.

[Nelson Obus:]

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

[Gary Steele:]

Yes.

[Nelson Obus:]

I’m sorry. Who did I cut off there?

[Molly Hemmeter:]

This is Molly. Nelson I remember I talked about we launched this week 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 have such amazing results last year that we wanted to repeat it this year and we’re doing it in an even bigger way, but we will monitor the results in making sure we are getting the ROI in that program and we will adjust accordingly.

[Nelson Obus:]

Of course great I mean that's a growth initiative.

[Molly Hemmeter:]

Right.

[Nelson Obus:]

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?

[Gregory Skinner:]

Yes.

[Nelson Obus:]

So Santa Barbara County is a County I know fairly well. It might as well be two different countries and the actual Santa Barbara is called the People's Republic of Santa Barbara. So without you know 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 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's 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?

[Gary Steele:]

From our understanding it is the latter. We being Windset was – 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’s where we’re at now. In parallel, they're not sitting around just waiting for approval they are all 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'd rather put it on the county land I mean that’s why they went out and leased that 100 plus acres. It was for these new structures. But if this looks like it just going to keep getting delayed, they’ll end up putting them on the city land next to their current structure.

[Nelson Obus:]

I’d say I think that’s helpful. I might be wrong about this I have to go back and look. But I think there is a nuance that you talked about a year delay and now you're talking about at least a year delay and there are people in the People's Republic that don't understand your creating jobs or feel that jobs validate the free market and therefore are a horrible thing. Are you doing any lobbing down there I mean to actually bring the people that might benefit from this down there and tell them to move this along? Or is that counterproductive?

[Gary Steele:]

No. Windset is doing that.

[Nelson Obus:]

Okay, good. All right that's my question. Thanks.

[Molly Hemmeter:]

Thanks Nelson.

[Gary Steele:]

Thank you Nelson.

[Operator:]

Thank you. [Operator Instructions] Our next question is a follow-up from the line of Brent Rystrom from Feltl. Your question please.

[Gary Steele:]

Hi, Brent.

[Brent Rystrom:]

Yes, thanks guys. 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?

[Gregory Skinner:]

Yes, you are going to have a slight uptick and there will be some cost of sales associated with it as we get more into the R&D portion of couple of these deals in it. We just signed them in June, so big chunk in this first quarter was just pure licensing. But you'll see that there will be a little bit of it, but it’s a re-class all it is as 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’s not an incremental dollars. So from an operating income standpoint it all dropped down to that line, it’s a 100% at the operating income level, all incremental. And its two new program, we can’t go into details for confidentiality reasons is that 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 pretax profit this year?

[Brent Rystrom:]

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?

[Gregory Skinner:]

One of them is a pretty much – when you are done, you 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 royalty 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 the check each quarter.

[Brent Rystrom:]

All right, thank you.

[Gregory Skinner:]

You are welcome.

[Operator:]

Thank you. Our next question comes from the line of Will Lauber from Sterling Capital Management. Your question please.

[Molly Hemmeter:]

Hi, Will.

[Gregory Skinner:]

Hey, Will.

[William Lauber:]

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

[Molly Hemmeter:]

No. I think we have two other DCs, but I’m not sure which one is there, I think we are in three total.

[William Lauber:]

Earlier, I’m not sure if I heard you correct, is that private label that you are doing in Safeway?

[Molly Hemmeter:]

No, no. All Eat Smart.

[William Lauber:]

Okay.

[Molly Hemmeter:]

And I can email you right after the call which DC we are in.

[William Lauber:]

Okay. Thank you very much.

[Molly Hemmeter:]

We expect to do that.

[William Lauber:]

And if you can help me explain the Costco, the rotation program what exactly is that mean?

[Molly Hemmeter:]

Oh, sure. Costco Canada is one of our very close partners obviously instead of Costco U.S. and when we came out, we’ve 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’s the ideal partner for Apio because we’re 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 tried to – we had a new salad, now if salads do really well like Sweet Kale Salad and it started breaking all records, they couldn’t afford to take it out there. They left it in a permanent slot and they use the second slot to rotate other salad in. So right now we have Sweet Kale Salad and we have a second slot in every 12 to 16 weeks we put in a new salad. And what's great about that is we use that as a market test for us to see how consumers respond and whether we re-launch it on a broader level. So Costco Canada does that just recently Costco U.S. has started entertaining doing a rotation on a longer time period maybe every six months. But again they want that treasure mentality and it works great with our strategy of innovation.

[William Lauber:]

Is it still barbecue ranch is most locations?

[Molly Hemmeter:]

No. So all the barbecue ranch is off rotation now and now in Costco Canada we actually have our new Southwest salad and that’s in every door right now. And then in Costco U.S., we don't have it in every DC. But I think in the five of the DC 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’s only been in a week we are extremely positive. So we’re in about half of the DCs in Costco U.S. with that one.

[William Lauber:]

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

[Molly Hemmeter:]

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 branch and a couple of our other SKUs and we’re testing that assets Sweet Kale Salad, but with a power of seed blend that gives it – I think it’s about 10 grams you are on the website so you know better than me. I think about 10 grams of protein with it that’s all plant based protein. So you can add you Sweet Kale salad and how much is it?

[William Lauber:]

It’s a 11.

[Molly Hemmeter:]

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

[William Lauber:]

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, it’s been already sold have you been I guess losing business from our national retailers because you haven’t had the capacity on the East Coast so you are only able to ship you know say west the Mississippi or I guess what kind of sales are already sold – would have been sold in the past?

[Molly Hemmeter:]

Sure, so we haven’t lost any business because of that and there are two things going on with the Hanover expansion. The first thing is we are trying to kind of equilibrate our customer service. So we are over capacity and we are stretching a 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’s a win-win. We will be able to serve our customers better and have current better productivity in Guadalupe, California. So that’s the first thing. The second thing is the salad production and we have, we’ll be able to start producing some salads there for East Coast customers, but it also allows for future growth. So the answer is a little bit of both, we will take some existing volume that are also provide volume for future growth.

[William Lauber:]

So what percent capacity when it’s completed would you think you would start off within that Hanover facility?

[Gregory Skinner:]

Probably in the 50% range as we are going to have plenty of room to add more lines, it’s lot cheaper to build out all at once and leave a good portion of it somewhat vacant then as they come back in and add later.

[Molly Hemmeter:]

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

[William Lauber:]

Okay, all right. Well, thank you very much.

[Molly Hemmeter:]

You are welcome.

[Gregory Skinner:]

Thanks Will.

[Gary Steele:]

Thanks Will.

[Operator:]

Thank you. And we have another follow-up from the line of Brent Rystrom from Feltl.

[Brent Rystrom:]

Hi, real quick question that the last question caused me to think of when are you going to open Hanover’s expansion?

[Molly Hemmeter:]

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

[Brent Rystrom:]

All right. And then one final question and it’s kind of a messy question from the perspective of that will be hard to answer, but obviously we have fairly high likelihood of El Niño which is expected to really start to impact us in the U.S. here in the next couple of months and maybe run through January, February and then with a high how would El Niño typically that's followed by a La Niña in the following summer. So historically can you remind us how El Niño's might impact your winter sourcing in calendar winter and then how La Niña can impact your summer sourcing?

[Molly Hemmeter:]

You are right that’s hard to answer, but let me give you some things we are going to mitigate the risks of a strong El Niño. So we’re 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 plantings so what we are going to do is we are going to transplant, were going to plant seeds in other areas and be ready to have bring the transplants in the spring so that won’t ensure that we don't miss any season. The other thing we are doing is we are adjusting our planning regions and we were going to plan for more volume out of other areas. We have a lot of things for doing particularly two other primary things that we are doing to mitigate risk.

[Brent Rystrom:]

Excellent, thank you very much.

[Molly Hemmeter:]

You are welcome.

[Gary Steele:]

Thanks Brent. End of Q&A

[Operator:]

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.

[Gary Steele:]

I just want to 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 everyone.

[Operator:]

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