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Landec Corporation (NASDAQ:LNDC)

F2Q 2014 Results Earnings Call

January 03, 2014, 11:00 AM ET

Executives

Gary T. Steele - Chairman and Chief Executive Officer

Gregory S. Skinner - Chief Financial Officer and Vice President of Administration

Analysts

Morris Ajzenman - Griffin Securities

Anton Brenner - ROTH Capital Partners

Reed Anderson - Northland Securities, Inc.

Daniel Rizzo - Sidoti & Company

Brent Rystrom - Feltl & Company

William Lauber - Sterling Capital Management

Operator

Good day, ladies and gentlemen and welcome to the Landec Second Quarter Fiscal 2014 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 Chief Executive Officer of Landec Corporation. Please go ahead.

Gary T. Steele

Good morning everyone, and thanks for joining Landec’s second quarter fiscal year 2014 earnings call. I am Gary Steele, Landec’s Chief Executive Officer and I have with me today, Greg Skinner, our 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 year 2013.

For the second quarter of fiscal year 2014 we exceeded our revenue plan with Apio value-added sales increasing 12% and Lifecore revenues increasing 13% but we missed our net income plan due to the weather related sourcing issues. During the second quarter total revenues increased a $120 million while net income decreased $3.5 million or $0.13 a share.

Gross profit of Apio’s value-added vegetable business was lower in the second quarter and first six months of fiscal 2014 compared to the same period last year because of severe shortages of certain key commodities mainly green beans and broccoli as a result of weather-related availability and quality issues. These shortages resulted in higher than projected produce cost which reduced Apio’s value-added gross profit by $4.4 million during the quarter and $6.8 million through the first six months of fiscal year 2014.

We had several positive financial trends to the first half which partially offset the weather related financial impact Greg will discuss these trends in a few minutes. The most important fundamental trend to note is that demand for our products across all of our businesses remained strong.

This was demonstrated by our continued progress advancing our growth plans during the second quarter and first six months of fiscal 2014. Apio continues to see revenue growth for its new higher margin super food salad products and Landec’s strategic partner Windset Farms is now harvesting from all 64 acres of its newly constructed hydroponic greenhouses in Santa Maria, California, several months ahead of its original plan. Additionally Lifecore Biomedical continues to increase sales and its capacity for its aseptic filling business.

I will now turn the call over to our CFO, Greg Skinner who will take us through the financial details for the quarter. Greg?

Gregory S. Skinner

Thank you, Gary. Good morning everyone. We reported yesterday that revenues for the second quarter of fiscal 2014 increased $5.4 million to a $120 million from a $114.7 million in the year-ago quarter. This increase was primarily due to a 12% or $9.5 million increase in Apio’s value-added businesses and a 1 million or 13% increase at Lifecore. These increases in revenue were partially offset by an expected $5.1 million decrease in Apio’s export business due to a decline in sales volumes primarily resulting from Indonesian import quotas on fruit.

Net income in the second quarter of fiscal 2014 was $3.5 million or $0.13 per share. This compares to 8.9 million or $0.34 per share in the year-ago quarter. It's important to note that the net income during the second quarter of last year was increased by $3.9 million or $0.15 per share due to an earn-out adjustment associated with the acquisition of GreenLine Foods. The decrease in net income in the second quarter of fiscal 2014 was primarily due to first, a $4.4 million reduction in gross profit because of severe produce shortages in Apio’s value-added vegetable businesses.

Second, a $264,000 reduction in gross profit from lower BreatheWay membrane sales, primarily due to the discontinuation of the Chiquita minimums in December 2012 when the agreement changed from an exclusive to non-exclusive rights for Landec’s BreatheWay packaging technology, and finally a $214,000 reduction in gross profit in Apio’s export business due to expected lower revenues. These decreases in net income were partially offset by first, a $1.3 million increase in the fair market value growth of the company’s investment in Windset over the $1 million growth recorded in the year-ago quarter.

Second, a $509,000 increase in gross profit at Lifecore. Third, a $741,000 decrease in ongoing operating expenses compared to the second quarter of last year. And lastly a $1 million decrease in income tax expense.

For the first six months of fiscal 2014 revenues increased $12.8 million to $229.5 million from $216.7 million in the same period last year. The increase is primarily due to a $20.3 million or 14% increase in revenues from Apio’s value-added businesses as well as a $1.7 million or 11% increase in revenues of Lifecore. These increases were partially offset by the expected $9 million decrease in revenues in Apio’s export business due to decline in volume sales primarily resulting from Indonesian import quotas on fruit.

Net income in the first six months of fiscal 2014 was $8.2 million or $0.30 per share. This compares to net income of $13.3 million or $0.50 per share in the first six months of last year. As with the second quarter the first - the net income in the first six months of last year was increased by $3.9 million or $0.15 per share due to the earn-out adjustment associated with the acquisition of GreenLine. The decrease in net income during the first six months of fiscal 2014 was primarily due to first, a $6.8 million [audio gap] severe produce shortages in Apio’s value-added vegetable businesses.

Second, a $600,000 reduction in gross profit from lower BreatheWay Membrane sales primarily due to lower revenues from membrane sales to Chiquita. And third a $351,000 reduction in gross profit in Apio’s export business due to expected lower revenues. These decreases in net income were partially offset by several positive financial results in the first half, including first, a $2.4 million increase in the fair market value growth of the company’s investment in Windset over the $5.3 million growth recorded in the first six months of last year.

Second, a $531,000 increase in gross profit at Lifecore. Third, a $945,000 increase -- decrease in ongoing operating expenses. And fourth, a $1.1 million decrease in income tax expense. Landec ended the second quarter with $5.8 million of cash and marketable securities. During the first six months of fiscal 2014 we generated $4.3 million in cash flow from operations and purchased $7.7 million of capital equipment for capacity expansion at both Apio and Lifecore.

We also paid down debt by $6.1 million during the first half of fiscal 2014. At the end of the second quarter we had $27.7 million available under our lines of credit.

That completes my financial summary. Now I’ll turn it back over to Gary.

Gary T. Steele

Thanks, Greg. Let's go in to some more detail about our businesses and how they are growing. We are encouraged by the sales growth of our value-added food business during the second quarter and the first six months of fiscal 2014. Apio’s value-added sales, as we said increased 12% during the quarter and 14% in the first half compared to the same period last year. Reception of our new products has been strong and we continue to add new retail customers for our vegetable salad lines. Additionally club store demand continues to be high for both of our new vegetable salad products and existing value-added produce products.

Under our Eat Smart brand we are introducing restaurant-inspired fresh vegetable salad kit products that deliver exceptional tasting experience with highly nutritious premium culinary recipes that include convenience for the consumer. We have launched two vegetable salad kits thus far nationwide and we have plans to have a line of at least six unique salads by the end of calendar year 2014.

In the overall produce world 71 new salad kits were launched in the U.S. over the past 12 months. Of these our Sweet Kale salad is the number one selling salad kit and is selling four times the unit volume of the most -- the next most popular Kale salad. Our newest just recently launched product called Ginger Bok Choy salad is already number 29 of 71 and rising very fast.

Just to show you how consumer tastes are changing and how health conscious our population is now becoming, 22% of consumers now eat Kale multiple times per month. A survey of restaurant show there was a 382% increase in Kale offerings on menus in the last five years and a 104% increase just in the last year.

Our goal is to see these new healthy eating trends first and to capitalize on changing patterns in healthy eating by offerings blends, mixtures and combinations of vegetables that just taste great. The first half of this fiscal year the new products launched in the last 18 months represent nearly 20% of all Apio’s value added revenues and their contributions to revenues are increasing.

Regarding our export business the Indonesian government’s restriction on produce imports continues. Indonesia has been a large buyer of North American produce products over the years. While their government restrictions have affected our export sales the impact on our export profits is much less as the lower volumes we are shipping are at higher prices.

The Indonesian restrictions on produce imports may be coming to an end. We will know much better about this in the next several months. We’ve made substantial progress in expanding our Apio California facilities, putting in additional capacity for our new salad lines, adding green bean processing capability on the West Coast in our Santa Maria facility and adding vegetable processing capacity in our Bowling Green, Ohio facility. These investments provide us with much more flexibility and scale for future growth.

Lifecore Biomedical is performing well thus far this fiscal year. Revenues have grown 13% during the second quarter and 11% in the first half compared to last year. Last quarter’s outlook for the year remained strong and in line with our expectations. We continue to add aseptic filling capacity in our Chaska, Minnesota facility. And this is allowing us to offer to our key customers the ability to fill and finish hyaluronan or non-hyaluronan products in a syringe device format that our customers can then sell directly to doctors and surgeons worldwide.

We continue to seek and find ways to move up the value added curve. Accordingly we’ve stepped up our effort to identify additional customers for our services, especially pharmaceutical companies that have drugs in development that are highly viscous and hard to fill in syringes. This is an area where Lifecore has very unique expertise.

As I mentioned earlier Windset Farms is now harvesting from all 64 acres which is equivalent to 6 million square feet of nearly constructed hydroponic greenhouses in Santa Maria, California. This expansion has doubled Windset’s capacity in California to 128 acres or 6 million square feet and we’re now -- they are now hydroponically growing not only tomatoes but also cucumbers in California and demand continues to exceed supply for their branded products.

As the adverse weather related issues continue to effect produce sourcing throughout the U.S. we increasingly believe that Windset’s hydroponic greenhouse expertise will be invaluable to customers who seek long-term stability in sourcing produce. We’re also excited to see Windset is now selling both packaged cucumbers and packaged peppers using our proprietary and patented BreatheWay packaging technology and sales of those products have rapidly expanded over the last six months -- last several months.

The produce sourcing challenges during the first half of fiscal 2014 resulted from a highly unusual combination of weather problems along the East Coast and in California and Mexico, the top three growing areas for vegetables in North America. Along the East Coast severe rain storms a few months ago negatively impacted our cost for green beans. In California there has been a series of produce growing problems. Through the summer and fall there have been persistent periods of mixed, hot and cold temperatures in California’s Central Coast growing region that have affected farmers’ yields.

At the same time since July and for reasons that are not totally clear to the farming community farmers have also experienced increased pest pressures resulting in lower yields and product quality issues. And to top it off Mexico had three severe tropical storms in the last six months.

Now looking ahead we have just entered the historically difficult to predict winter months. As of now we have adequate supply of produce from Southern California, Florida and Mexico and we’re hopeful that winter will be mild this year in those regions so that we can recapture some of the excess produce cost that we experienced during the first six months of this year.

We will continue to focus on managing and mitigating our sourcing risk by diversifying growing regions and modifying our contracting practices to deal with these challenges. Our top priority for the next several quarters is stabilizing our produce sourcing requirements and making sure we can deliver reliable quantities of healthy pre-packaged produce products to retailers, club stores and food service operators.

As mentioned in our press release December storms affected consumers’ ability to shop at their local grocery stores and club stores in many parts of the U.S. and Canada and thus have had an impact on our sales to customers during the month of December which is the first month of our third quarter, and it appears as though adverse weather is continuing this week as well in the Midwest and Northeast.

Also we still believe though that at this time the impact from lower volume sales in December can be made up in the remaining five months of fiscal year 2014 and therefore we continue to expect revenues to meet or exceed our original guidance of 6% growth and we are projecting net income to be flat to up 5% compared to fiscal 2013 after excluding the $3.9 million earn out adjustment that we made last year. That’s barring any significant negative weather related events beyond the normal historical levels during the remainder of this year.

Looking ahead we are encouraged that Americans are eating better as they seek better health in longevity and that the demand for our products are high. We believe we are well positioned to capitalize on the growth of this healthy eating trend long-term.

You will note that we announced this morning the promotion of Molly Hemmeter as Landec’s Chief Operating Officer. Molly’s contributions over the last four and half years as Head of Business Development and as Chief Commercial Officer are many. Molly’s promotion is well deserved and allows her to focus on growing our two core businesses and for me to concentrate on new growth platforms for Landec to move well past the $0.5 billion a year mark.

Across our businesses our charter is clear. We want to develop and commercialize new products for healthy living applications in both the food and biomaterials market. We want to bring healthy, nutritious especially packaged fresh produce to consumers in North America.

We believe healthy eating leads to healthy living. Through our Apio food business we want to do our part to enable people to enjoy a healthy active lifestyle. To our polymer-based Lifecore business our injectable biomedical materials for ophthalmology and orthopedics markets enabled people to stay more active and healthy throughout their lives.

We hold market leadership positions in the markets we serve. We plan to leverage our market leadership and provide improved products to meet increasing demand and opportunities generated by robust growth in healthy living markets. Landec is profitable with a strong balance sheet enabling us to take advantage of growth opportunities in the markets we serve. We’d like to open it up to your questions now. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from Morris Ajzenman from Griffin Securities. Please go ahead.

Gary T. Steele

Hey, Morris.

Gregory S. Skinner

Hey Morris.

Morris Ajzenman - Griffin Securities

Hey, I am going to ask a question, I’ve kind of asked you guys in the past. But I was out to your facility, your hydroponic in Santa Maria in last year and everything clearly looked state-of-the-art, hearing good things about it from other sources. And the question I have for you which I have asked in the past is what additional data can you give us? I know it’s difficult because you only own 20%, and there is other issues out there as far as the other 80% owner won’t reveal more than they have to for competitive issues but again what’s in 10-Q and 10-K at times is, I believe misleading to what is the opportunity for this operation to really grow and expand. What information can you provide us to give us a better sense for the growth opportunities that have been happening there?

Gary T. Steele

We can -- well, Morris the same answer we’ve given you in the past, which is they are a private company. They are very sensitive about revealing their confidential information. What we have said and can say is that the revenues are well north of $200 million, so highly profitable. Their demand exceeds their ability to produce right now and they are able to grow year around. So beyond that, their mix of products in California are now tomatoes and cucumbers. Peppers come from their Canadian operations and some cucumbers come from up in Nevada. They have tied up or bought land all around their facilities so they can keep expanding and they intend to.

So beyond that I don’t know what we are able to share with you except that it’s -- they are hitting the ball out of the park, their yields in terms of tomato production are the highest. They have the highest yielding facility in the world. They believe and we concur with them that, the key factors for success in the hydroponic area are the right location, meaning having the right weather where the days are warm but not hot and the nights are cool but not cold, it [helps] [ph].

But they also believe that scale and technology are important. They’ve got state-of-the-art technology in those facilities in terms of how they treat water, how they create the atmosphere, how they dispense the nutrients and minerals. Their tomato plants grow to 70 feet in length, their new cucumber plants, the plant, not the cucumbers but the plants are growing six inches per 24 hour, the yields are phenomenal. The quality is top-notch.

They have -- their largest customer is publicly known as Costco. They are very strong in Canada, they are very strong in the Western United States and they are expanding. So beyond that I don’t know what else we can tell you in terms of metrics because it’s a private company.

Morris Ajzenman - Griffin Securities

All right, and when would a third 64 acre site be up and running, how does that all play out?

Gary T. Steele

Not for sure yet but now I am going to give you kind of a guess, okay. I would guess two years. And the advantage of that is they now have 6 million square feet, gives them some time to digest and really consolidate the benefits, gives them some time for plan -- planning the next activity. But if I -- just a wild guess, I would guess two years.

Morris Ajzenman - Griffin Securities

Last question and I will get in queue. The super food salad, is about 20% revenues now, can you give us some sort of a handle what sort of gross margins, assuming there is no sourcing issues, what margins you have in that versus, versus the value added?

Gary T. Steele

I am going to -- let me just say Morris we don’t talk about the margins publicly for obvious reasons but the new products have higher margins than our tried and true core cut veg products and we’re going to have to leave it at that.

Morris Ajzenman - Griffin Securities

Thank you.

Gary T. Steele

Thank you.

Operator

Thank you. And our next question comes from Tony Brenner from ROTH Capital Partners. Please go ahead.

Anton Brenner - ROTH Capital Partners

Good morning, gentlemen.

Gary T. Steele

Good morning, Tony.

Anton Brenner - ROTH Capital Partners

I have three questions. First I am still a little unclear why after December volume was below your expectations, you remain confident that this should not affect your full year guidance.

Gary T. Steele

So that’s -- maybe there is some, a little bit of hopefulness on that in our response here but in December you have that privilege and pleasure of living in Southern California but for folks who’ve been living in the Northeast and the mid-west during the holidays, which you know, is prime time for us, we had all of our sourcing available, everything’s ready but customers were having great difficulty getting to the stores and correspondingly produce buyers were calling the industry and saying hey our volumes are down we can’t get people in the store.

And my understanding we have folks on the call that can probably verify this is that some of this terrible weather is continuing in the mid-west and the Northeast in the early parts of January. So we are hoping that -- we believe that if we can get through some of that stuff, remember it's not sourcing issues now it's consumers’ ability to get to stores, where it’s our belief that we can make that up for the remaining five months of the year. Also there is a chance that…

Anton Brenner - ROTH Capital Partners

But why?

Gary T. Steele

Because we have plenty of source because our sourcing is in such good shape right now. So we have the availability and we can do a variety of promotions and work with partners to really let it rip so to speak.

We also have – there is reason to believe and I wouldn’t bet on it yet but there is reason to believe that Indonesia is rethinking its export -- its import restrictions, excuse me, and that could be helpful to us as well.

Anton Brenner - ROTH Capital Partners

But would that happen in time to impact this fiscal year?

Gary T. Steele

It could, yes.

Anton Brenner - ROTH Capital Partners

Okay, second question. One of your strategies to improve your sourcing and alleviate the commodity risk is to increase your sourcing for Mexico and other parts of Latin America. For the third quarter what portion of your sourcing comes from outside the United States?

Gary T. Steele

Can I get back to you on that? I would hate to give you a bad answer, Tony, can we get back to you on that? I can give you a more precise answer.

Anton Brenner - ROTH Capital Partners

Okay.

Gary T. Steele

But I’ll have to do it after the call.

Anton Brenner - ROTH Capital Partners

Okay, then last question. My understanding is that the aseptic filling business for Lifecore is a lower margin business than the traditional HA business, yet Life and that’s what drove the sales increase this quarter, yet gross margins were higher. Can you explain what we might expect from margins from Lifecore?

Gregory S. Skinner

Yeah, the margins, now this is Greg, the margins in those two areas it stayed fairly stable. So it is just a mix. The revenue increase was actually in both the areas for the quarter and therefore that’s why you are seeing that the margins are same at historical levels, if not slightly higher.

Anton Brenner - ROTH Capital Partners

Is it correct that…?

Gary T. Steele

But Tony one thing that’s important here is recall that prior to our buying Lifecore we were not capturing any of that filling margin. That was -- we would be shipping powder and fluid Hyaluronic acid to the customers and they would take that stuff and do it or have somebody else to do it. So this is -- the margin percentage is lower for aseptic filling than it is for powder but in terms of incremental margin this is all incremental for us and that’s why we are making these investments.

Anton Brenner - ROTH Capital Partners

Okay, thank you very much.

Gary T. Steele

Thank you, Tony.

Operator

Thank you, and our next question comes from Reed Anderson from Northland Securities. Please go ahead.

Reed Anderson - Northland Securities, Inc.

Good morning, thanks for taking my questions. Maybe for Gary, Gary on the new products, you’ve talked a bit about, but I am just curious how should we think about the ramp of some of the new things you got coming up here over the near term in terms of breadth of distribution, pricing that kind of thing?

Gary T. Steele

You know we mentioned to you that we have a number of new products coming out in the next couple of quarters, both in the vegetable salad areas as well as non-salads. And you ought to be think -- kind of roughly speaking think of it as one new significant product per quarter on average and these generally go out at higher margins than our historical core margins. And so -- and we are already up to about 20% of our overall revenues in our value-added business for now from these new products. So we want that trend to continue.

We are investing heavily Reed in new product development. It's a big deal for us, it's our future and we want to be the innovative leader in our space.

Reed Anderson - Northland Securities, Inc.

And just as a follow-up, would the distribution be - is relatively as broad as your customer base for the other similar products or will it be a little narrower out of the gate?

Gary T. Steele

It's probably going to be narrower out of the gate, probably narrower because there are a couple of reasons. One is you want to not get ahead of your supply line so to speak and you want to make sure that you've got it all under control, that your lines are working well, your sourcing is lined up. Secondly sometimes we will give some lead time advantages to a couple of key customers as a thank you for taking it on and trying it.

So it's probably going to start out a little bit narrowly and then in short order we will expand it nationwide.

Reed Anderson - Northland Securities, Inc.

Then Greg, on the value add side on the margin, I mean you should get a nice lift there in the second half. I am just curious though if you look at the third quarter I mean would it make sense that third quarter margins in value add could be at or better than what we saw in 2Q or is it little early yet to tell?

Gregory S. Skinner

Well, the short answer is it is a little too early to tell. But in theory yes, it should be but it's going to be based on sourcing. I mean we had $4.4 million in sourcing as in the second quarter which we hopefully will not occur in the third quarter. There is one thing to note though in the third quarter historically our margins are lower in that quarter because we are sourcing most of our products from Mexico or Southern California. We have to obviously get that up to our plant on the Central Coast. So you are adding freight cost, incoming freight cost during the third quarter which you really don't experience during the other nine months. So it's historically a lower margin quarter but should it be better than the second quarter, yes.

Reed Anderson - Northland Securities, Inc.

Okay. That's good. Good, that's it from me now. I'll let somebody else jump in. Thanks. Good luck guys.

Gary T. Steele

Thanks, Reed.

Gregory S. Skinner

Yeah, thank you.

Operator

Thank you. And our next question comes from Daniel Rizzo from Sidoti & Company. Please go ahead.

Gary T. Steele

Good morning, Dan.

Daniel Rizzo - Sidoti & Company

Good morning, guys. How are you?

Gary T. Steele

Good, Dan.

Daniel Rizzo - Sidoti & Company

When would you know if, I mean you see ample sourcing now, when would you know it's not going to be a problem, would it be like by the end of January is your timeframe you have in mind, where those…?

Gary T. Steele

Well, I will tell said, yeah. I would, in past years I probably would have told you that by the end of January or early February we know we've gotten through the winter months. We said we thought that last year you may recall that we had some adverse weather in the March-April timeframes. So I don't want to jinx this year but I sure would like to get through February and you want mild weather in Florida for the beans and you want decent weather down in Southern California and Mexico and right now those are the -- that’s true and then we got to keep an eye on the other side, that is the ability of the consumers.

We are big on the East-Coast and Midwest so we want to make sure that consumers can get to the grocery stores and buy the product. So I'd say through February we'll know.

Daniel Rizzo - Sidoti & Company

All right. And then I would like to see that -- I feel the value added news product is still progressing, did you -- I see in the past that you indicated that we might have had three or four products by the end of fiscal -- of the end of calendar 2013 or did I mis-remember that, are we on schedule I guess is the direct question?

Gary T. Steele

Yeah, I think we are on schedule. Maybe we are a quarter late, Dan but it's not material, it's maybe we're off by one, by one quarter but I think we did have some capacity start-up issues in the Sweet Kale salad line that delayed us a quarter, so we are probably off by about a quarter.

Daniel Rizzo - Sidoti & Company

Okay. And then finally I know cross-selling has been kind of the thing that you want to focus on but it’s been a little tough, has there been any headway there between you guys and GreenLine?

Gary T. Steele

Could you be more -- I am sorry, say the question, again.

Daniel Rizzo - Sidoti & Company

In the past, I think we have talked about you potentially cross-selling your products to GreenLine’s customer, restaurant customer?

Gary T. Steele

Well, I think the issue there we have been cross-selling, that is going, okay. The reason it’s not going great is we've had, since we bought them we first had a drought, then we had freezes in Florida and then we had these heavy rains in the Carolinas. So it's hard to be aggressive in cross-selling when you are worried about your supply. So I think that it's going to come, it's just coming a little bit slower than we had hoped for because of the sourcing issue.

Daniel Rizzo - Sidoti & Company

All right. Great. Thank you guys.

Gary T. Steele

Thank you.

Operator

Thank you. (Operator Instructions). And our next question comes from Brent Rystrom from Feltl. Please go ahead.

Gary T. Steele

Good morning Brent.

Gregory S. Skinner

Hey, Brent.

Brent Rystrom - Feltl & Company

Good morning, guys. Just out of curiosity, last year could you remind us of the timing of the issue with GreenLine down in Florida, was that a January-February kind of timing issue as far as weather impact?

Gary T. Steele

It went later. It was more, we were lulled into thinking everything was okay in January and then towards the end of February and through March or early April they had some record freezes. And so little surprising how late that came but the New Yorkers were -- who were vacationing down there were just stunned, what was going on and so it was latter than you might imagine. It was in the March timeframe especially.

Brent Rystrom - Feltl & Company

Great, so the kind of the Western part obviously because a lot of this produce is supposed to get a freeze …

Gary T. Steele

Yeah, you are right down in the Homestead area.

Brent Rystrom - Feltl & Company

Yeah.

Gary T. Steele

Yeah, it is -- well no actually it's the eastern, eastern, actually. It's all over the state. It's Eastern and Western but it was the Homestead area which is on the Eastern side.

Brent Rystrom - Feltl & Company

What I am saying is on Monday, Tuesday next week they are supposed to get a freeze, would that impact you or is it too early in the quarter?

Gary T. Steele

You know it's too early in the quarter to say. Right now we are doing just fine, so.

Brent Rystrom - Feltl & Company

As far as the previous question, the previous person asking, I believed at the annual meeting you did say you would have another product out by the end of the calendar year. Have you given any further thoughts as far as some of the new super foods you are looking at?

Gary T. Steele

That product by the way was Ginger Bok Choy, Brent. So that is now launched.

Brent Rystrom - Feltl & Company

Okay.

Gary T. Steele

And there are -- we’ll be announcing one in the third quarter and we’ll be announcing one in the fourth quarter.

Brent Rystrom - Feltl & Company

Okay.

Gary T. Steele

And we are in the third quarter now, as you know.

Brent Rystrom - Feltl & Company

Okay. And as you look at some of these, would some of these -- I am thinking of like one of the hot fast coming ones right now is Chia. As you look at some of these do they offer you some sourcing opportunities, particularly if you might be able to go to more to Australia or someplace like that, are you looking at those sort of things or not really?

Gary T. Steele

I am not sure if we are looking at that or not, to be honest with you. And I couldn’t spell Kale five years ago. I didn’t even know what it was. So we are looking at things that are coming down the pathway. We have access to culinary experts, nutritionists, we want to know the nutrients first and whether or not we are looking at sourcing in Australia, I just couldn’t tell you. But we are certainly looking far and wide.

Brent Rystrom - Feltl & Company

Have you thought about -- when I think about Chia, I think of it more as a green and so have you thought about maybe migrating some of your business more to some of the green derived super foods, you are not as exposed.

Gary T. Steele

Absolutely, yes.

Brent Rystrom - Feltl & Company

All right, thanks guys.

Gary T. Steele

Thanks Brent.

Operator

Thank you. And our next question comes from Will Lauber from Sterling Capital Management. Please go ahead.

Gary T. Steele

Good morning, Will.

Gregory S. Skinner

Hey, Will.

William Lauber - Sterling Capital Management

Good morning. In the release you had said that you are working with some new partners on several high volume fruit items. I had noted that, I guess one of those partners Agro Export had announced a deal on avocado, so wonder if you could touch on that at all.

Gary T. Steele

You know, what we can tell you about that is that they are a sizable player in the avocado business. I think they are number three or four, they’re looking for product differentiation. They are looking -- they came to us and said they were interested in both extension of shelf life of avocados. As you know they -- once they go ripe they go sour pretty quickly. And they were also interested in just being able to market avocados in a ripe state, ready-to-eat and so they are looking at both and we are working with them in terms of packaging development right now and we are doing some trials.

So a little bit early on but they are pretty jazzed about this as are we, so stay tuned.

William Lauber - Sterling Capital Management

And then I guess, you had mentioned several, can you give any other color as what type of fruits they are or when you might be announcing something?

Gary T. Steele

We are interested in the citrus area. I’ll leave it at that broadly without getting too specific, but there are some things that we can do with citrus where we can hold certain types of citrus products in a really stable state for 30, 40 days. So those are areas as well.

William Lauber - Sterling Capital Management

Okay. And my next question was what exactly is in the Nielsen category that you are using, I guess specifically is Wal-Mart, Sam’s and/or Costco in there?

Gary T. Steele

So here -- this is a long answer. Can I give you a short one, which is to say that what’s not in there is there is no Costco. I don’t believe there is any Trader Joe’s, I don’t think there is any -- Sam’s in there?

Gregory S. Skinner

Sam’s is there, I mean it’s a -- this is in, that’s out, it’s a strange…

Gary T. Steele

So it’s a little bit challenging, Will, as you know to be -- because a big customer of ours are Trader Joe’s and it’s Costco and folks like that. I am trying to remember -- I don’t think Wal -- is Wal-Mart in it?

Gregory S. Skinner

Yeah, Wal-Mart and Sam’s are in there.

Gary T. Steele

Wal-Mart and Sam’s is in. Okay, so anyway so it’s unfortunately putting the pineapples with oranges. And all I know is that when you look at all of our categories we are growing at or above the Nielsen category growth. But it’s kind of a mish-mash of comparisons.

William Lauber - Sterling Capital Management

Because I guess I was asking, ever since I can remember, I don’t know if it goes back five, six, seven years or something that usually in the release it’s you are out growing the category and this one it looks like that you are not…

Gary T. Steele

Well, what we found this quarter and that was -- it’s somewhat of a new phenomenon to us and that’s why we expanded the definition is we noticed because of the percentage of our revenues from salads are now so high versus historically it has kind of caused that comparison to be out of whack as far as what we’ve shown historically.

Gregory S. Skinner

Because our salads are not in those Nielsen numbers.

Gary T. Steele

Yeah, they are in the salad category. They are not in the category that our historical products are in.

William Lauber - Sterling Capital Management

Okay. And would it have anything to do -- I know a couple of calls ago you had mentioned about the possibility of walking away from low margin business, would that be affecting this at all?

Gary T. Steele

Yeah, there is some of that going on. I think the biggest is that salads in the club stores are not in the Nielsen numbers but yeah there is some of that going on and we are going to continue to do that. It’s -- there is some, there is business we want and there is some business we don’t want. Hence there is some of that in there.

William Lauber - Sterling Capital Management

Then, I guess leaving out the weather issues, looking forward maybe three years what do you think is a realistic gross margin for the Apio business, I would assume it will be higher as you give more and more salads and other items like that new products?

Gary T. Steele

Well, that’s -- with a lot of moving parts, I would say 10% to 12% Will, if we can continue to change the mix with new products.

William Lauber - Sterling Capital Management

Okay. And then here in the Midwest we’re expecting below zero temperatures over the weekend and early next week. So that’s your update from Midwest.

Gary T. Steele

Well, sorry to hear that. I hope that will change.

William Lauber - Sterling Capital Management

Okay, all right. Thanks guys.

Gary T. Steele

All right, thank you.

Operator

Thank you. And this does conclude the question-and-answer session of today’s program. I would now like to hand the call back to management for any further remarks.

Gary T. Steele

I want to thank everybody for being in our call today. And we look forward to keeping you apprised of our progress, especially as we get through the winter month. And many thanks for being with us today.

Operator

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

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