Landec's (LNDC) CEO Gary Steele on Q4 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Landec Corporation (LNDC)

Landec Corp. (NASDAQ:LNDC)

Q4 2014 Results Earnings Conference Call

July 30, 2014 11:00 AM ET

Executives

Gary Steele - Chairman and CEO

Greg Skinner - Chief Financial Officer

Analysts

Tony Brenner - ROTH Capital Partners

Mitch Pinheiro - Imperial Capital

Chris Krueger - Lake Street Capital Markets

Morris Ajzenman - Griffin Securities

Nelson Novus - Winfield

Daniel Rizzo - Sidoti & Company

Operator

Good day, ladies and gentlemen. And welcome to the Landec Fourth Quarter and Fiscal Year End 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 CEO of Landec Corporation. Please go ahead, sir.

Gary Steele

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

During today’s call, we may make forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially. These risks are outlined in our filings with the Securities and Exchange Commission, including the company’s Form 10-K for fiscal year 2013.

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

Our two core businesses grew at double-digit rates with our Apio value-added vegetable business, which includes Apio Packaging and Apio Cooling growing 13% and our Lifecore Biomedical business growing 11%.

Perhaps, most importantly, the 13% revenue increase in our largest business segment, our value-added vegetable business was due to increased volume sales and a favorable change in product mix to our higher margin specialty packaged superfood salad products. In fact, by fiscal year end, our newly launched salad line products were exceeding $1 million in sales per week.

This level of demand has stressed our organization and our operating facilities, and we’ve been capacity constrained now for several months. This situation will be limited by the end of August when a new salad processing line should be fully operational.

We managed through a challenging year where weather related produce quality and quantity affected our margins significantly. We worked hard to supply our customers and maintain our quality standards.

Perhaps the most important initiative this past fiscal year was the development of a new five-year strategic growth plan for our two core businesses. We believe we now have a pathway where we could come close to doubling Landec’s revenues in five years just from organic growth and achieve this growth while improving overall margins.

In order to accomplish this level of growth, fiscal year 2015, which we just began in June, is going to be a pivotal investment year. During fiscal year 2015 we will invest -- we will increase our investments at Apio, a new product development, marketing and product sales support, and processing capacity, including a new salad line in California and installing new processing capabilities at our Bowling Green, Ohio operations as well. In addition, we plan to continue to diversify our produce sourcing regions and increase our cross-selling activities between GreenLine and Apio customer base.

We expect to continue a product mix shift to more unique blends of vegetables in salad kit formats and other formats, and correspondingly begin the process of increasing gross margins.

Across Apio and Lifecore, we will spend up to $20 million in equipment and facilities, and we were adding organizational capabilities in operations, marketing, sales and procurement.

We believe our products are on trend as Americans increased their focus on healthy nutritious eating habits as a direct way to stay healthy. We expect to launch on average one new superfood product per quarter with a focus on nutrient rich blend of vegetables in salad, stir fry and smoothie product format.

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

For Lifecore, as previously mentioned in our third quarter release, fiscal 2015 is going to be a down year due to a major long-standing customer reducing their purchases by 50% this fiscal year in order to reduce their inventory levels. This impact while truly substantial to our fiscal 2013 results is a one-time non-recurring event.

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

Let me turn it over to Greg.

Greg Skinner

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

Net income in the fourth quarter of fiscal 2014 was flat at $4.5 million or $0.17 per share compared to the fourth quarter of last year.

Net income in the fourth quarter increased by $3.7 million increase in gross profit in Apio’s value-added businesses as a result of increase revenues and a favorable product mix resulting in gross margin improving to 12.2% in the fourth quarter of this year compared to 9.5% in a year ago quarter, and a $458,000 increase in gross profit in Apio’s export business due to increased revenues and a favorable product mix of sales of higher margin products resulting in gross margin improving to 9% in the fourth quarter of this year compared to $7.4 million in the year ago quarter.

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

For fiscal 2014 revenues increased 8% or $35.1 million to $476.8 million from $441.7 million in fiscal 2013. The increase was primarily due to a $40.3 million or 13% increase in revenue from Apio’s value-added businesses, as well as $4.4 million or 11% increase in revenue at Lifecore.

These increases were partially offset by the expected $8.7 million decrease in revenue and Apio’s export business, primarily due to an expected decline in volume, primarily a result of Indonesian import quotas on fruit.

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

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

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

We are able to meet our revised net income guidance for fiscal 2014 even though the change in the fair market value of our Windset investment was less than one we had been forecasting, because Apio’s value-added vegetable business exceeded our expectations during the second half of fiscal 2014.

The change in the fair market value of our Windset investment was lower than our forecast six months ago, because of the expected operational efficiency from the new 64 acres of greenhouse in California which became fully operational in just December 2013, do not happen as quickly as originally anticipated due to typical start-up issues which have now been resolved.

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

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

Gary, back to you.

Gary Steele

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

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

We believe $1 per share is reachable in our next fiscal year, fiscal year 2016 as Lifecore resumes its historical growth rate and as the Lifecore customer that reduced its inventory in fiscal year 2015 resumes its historical purchase volumes in 2016 and as our Apio value-added higher margin superfood product line continues to expand now without constraints on capacity and as Windset farms began its new expansion in its hydroponic greenhouse operations.

We are firmly committed to growing our core businesses with stepped up operating and capital investment this year and expanded staffing capabilities. You’ll note that we recently added to our Board of Directors, Al Bolles, the Executive Vice President, Chief Technical and Operations Officer at ConAgra Foods who leads their multibillion dollar research, quality and innovation and supply chain organizations for ConAgra Foods. Al brings considerable expertise to us in the food innovation field.

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

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

Question-and-Answer Session

Operator

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

Tony Brenner - ROTH Capital Partners

Thank you.

Gary Steele

Good morning, Tony.

Tony Brenner - ROTH Capital Partners

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

Gary Steele

A little bit of relaxation. They are starting to realize the Indonesia quota system a little hit Tony. I wouldn’t declare a victory yet. We are starting to see some progress there, but we’re just not sure how sustainable that is.

Tony Brenner - ROTH Capital Partners

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

Gary Steele

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

Tony Brenner - ROTH Capital Partners

Okay. Second question, for the first half of fiscal 2014, you had one of the worst product sourcing situation that I can recall and in your outlook you’re projecting higher sourcing costs in 2015. What’s the reason for that?

Gary Steele

As we go to and we talked about this a little bit I think in the past, one of the ways of trying to mitigate risk is to diversify your growing regions and go further away from Central Coast California. We are primarily in the vegetable sourcing business and then we process it and add value it as you know. And if you could get all of our produce from Central Coast California, we would do that, but that puts too many eggs in one basket from a weather risk point of view. As you move into other locations, their yields are lower, the transportation cost of getting the produce to our processing facilities is higher and so that’s one reason.

Secondly grower costs has been going up, labor has been going up in general and so they need to have their cost reimbursed. And so the propound cost for us is terms of contracts we’ve entered into are calling for higher prices. So it’s a combination of going further away to mitigate risk and also just dealing with inherent cost increases that we’ve really been holding a lid on for last four years, but this year we just had to work with the realities.

Greg Skinner

But I want to add, Tony, just because, I think there is where you are going to question. We are not anticipating in our guidance or our plan that we are going to have the sourcing issues that we had last year. We expect and had put in our plan a normalized contingency which is based on looking back three to five years where there is historically sourcing issues then and that’s is what’s in the plan which I could tell you is lest that we experienced last year.

What we are talking about. What Gary just mentioned is the known price increases that were going up $0.01 or $0.02 per pound because of new contracts that’s what we had factored into our guidance.

Gary Steele

$0.01 per pound increase on average is about a $1 million increase in our cost. So it’s substantial.

Tony Brenner - ROTH Capital Partners

Okay. One last question regarding Windset farms, mill capacity expansion this year and potential presumably it’s significant expansion in fiscal 2016. So we may do expand in fiscal 2016. I would guess that has to be approved by the Windset board earlier in your guidance for this year and next year. Did you assume that approval would not happen until next year? And what are the chances it could take place this year and you would wind up recognizing a bigger increase in fair market value than you have assumed?

Gary Steele

Well, the answer to first question is yes. We have assumed that any increase for expansions will not occur in ‘15, they will occur in ‘16. To answer your second question if that is acceleration, if it is approved by the board, if it is put into there for projections this fiscal year will then yes. It will have a large impact on the changes this year than we are currently anticipating.

Tony Brenner - ROTH Capital Partners

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

Gary Steele

Right, correct.

Tony Brenner - ROTH Capital Partners

Okay. Thank you.

Gary Steele

Thank you, Tony.

Operator

Thank you. Our next question comes from the line of Mitch Pinheiro from Imperial Capital. Your question please.

Gary Steele

Good morning, Mitch.

Mitch Pinheiro - Imperial Capital

Good morning. So couple of questions. Just following up on Tony’s question there once that for fiscal ‘15, if you raise your percentage ownership, and their output sort of remains flat. So assume basically flat net income there, what are the other factors that would affect you’re the increase or decrease or increasing value in Windset for this year?

Gary Steele

Well, the primary driver has been just general is and by far the important is their forecast. So before assuming for now which we are is that their forecast that we have been from forecast we used to project the change at year end, we are assuming it’s not going to change throughout the course of FY ‘15. So the change that we will be recognizing is going to be based on the change in their discount rate. And that will change as a result of well one-time because as we get to closer to the put call date the which is February 2017, your discounts is gong to naturally declince as a result. As the operation continues improve California, the risks are reduced in California. Remember they have had the Canadian operation now for over 20 years. The discount will also decrease. So the primary reason for the change this year that we putting into guidance are two-fold. One, the result of the additional 6.8% and what impact that’s going to have for the rest of the year. Remember we did added fair value at the time. And therefore, the change in the discounts and that’s going to be the result of our forecasted change for fiscal ‘15. Now to change your forecast as a result of new expansion well then that will change it according but we are not anticipating that at this time.

Mitch Pinheiro - Imperial Capital

Okay. And your change in fair market value this year was about $10 million and in 40, and it will be a little lower than that as you guiding in ‘15, correct?

Gary Steele

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

Mitch Pinheiro - Imperial Capital

Less than?

Gary Steele

This year, this fiscal year. Fiscal ‘15 will be 10 to 15 less than fiscal ‘14

Mitch Pinheiro - Imperial Capital

Beautiful, okay. Second question is you certainly mentioned high labor cost, but I was wondering if you can talk about the California minimum wage increase and how that is gong to affect contract grower cost, are they being passed through to you? Are you passing them through to your customer, would love to get your color on that?

Gary Steele

Yeah, it’s -- so labor is critical for us. We have in our California facility depending on the time of the year and the season we can be as little as 200 people. We can be as high as 500 people. And we’re talking about close to 200,000 square foot operating facility in Central Coast, California.

So labor is very important to us. And we could see that we were having much more difficulty getting labor, keeping labor because as the economy starts to slowly come back here in California, there are other choices for people in terms of working opportunities et cetera et cetera.

And so went ahead and raised our labor rates ahead of California mandating minimum wage increases. So we’ve already done it. It’s roughly about -- I should have given exact numbers. It’s about $0.07 a share impact for us. But it’s critical especially as we are about to expand our capacity and expand our opportunities with our salad lines et cetera. So it is significant.

And we’ve already taken the steps. We are not waiting for Governor Brown to sign anything. We’ve already increased our rates. And we’ve also put in some incentives for continuity and continuous employment, those types of things. So that we can keep the good hardworking folks and keep them well paid and motivated.

Mitch Pinheiro - Imperial Capital

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

Gary Steele

The desired answer of course is yes, we could pass them along but real answer is I don’t need to tell you about the size and the consolidation of our customer base and the pressure they are feeling on their own margins and their stakeholders. So it’s very difficult to pass these on. We will attempt to in certain situations. The best way we’re trying to deal with it is frankly, increase our overall volumes and change our product mix.

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

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

Mitch Pinheiro - Imperial Capital

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

Gary Steele

Well, the -- actually I don’t want to talk about it in too much detail because we’re about to launch some of these things and for competitive reasons, I’d just as soon talk about it, when we’ve done it. But in general, let me just tell you the type of approach we’re taking with our newer products.

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

And so what we want to do is get the word out. There are lot of foodies in this country. And we want to be aligned with the leading nutritionist and the leading culinary people. We want them to know about these products. And we want to somehow get beyond just our buyer group to our consumer group.

So we will be deploying a number of different initiatives that we haven’t used before to support these products. Also keep in mind that the trend in the industry from our customers is to go to private label. We’re not offering these products in private label. These are each smart branded products. We’re going to stay with that as long as we can. And these are also typically when you move over into these salad world, historically there have been things called slotting fees. And we are not offering slotting fees.

We feel these products are unique and they speak for themselves. So -- but we do want to support them with marketing promotional activities and rather than going into any more detail as to exactly what we’re doing, let us just describe those as we go long. So that we’re not disclosing too much information today.

Mitch Pinheiro - Imperial Capital

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

Gary Steele

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

We also want to use the benefit of our new facilities that came to the Greenland acquisition. So that we will do additional processing not only just in California but we will -- we’re expanding and reconfiguring our Bowling Green operations to do with a wider array of products that we can sell.

We also were looking at long-term expansion of our Hanover, Pennsylvania facility to also take on more product lines. This helps some of our products get to our customer base on a next day basis as oppose to the four to five day track across Rockies. So it’s new channels of distribution, new sourcing partnerships.

We’re adding capability in terms of depth of our procurement organization because it’s so important to us. So it’s a multi-faceted approach.

Mitch Pinheiro - Imperial Capital

Okay. Well thanks for your time.

Gary Steele

Thanks.

Operator

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

Gary Steele

Good morning Chris.

Greg Skinner

Good morning, Chris.

Chris Krueger - Lake Street Capital Markets

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

Gary Steele

I don’t have that Chris and I -- we can get back to you on it but let me just tell you that the challenge has been that we’ve -- it’s primarily been rolled out through Costco U.S. and Costco Canada and then we started to hit. It went so well that we started to hit capacity constraints and we’ve really been capacity constrained for gosh months. And it is frustrating as all get out and you have to order equipment et cetera et cetera.

We are in some retailers as you’re now noticing. I would say give us, once you give us six months to a couple of quarters, where we really haven’t been capacity constrained and that starts at the end of August. And then let’s start talking about some of these specific metrics because I think it will be more meaningful.

By example, we’re up in Canada with Loblaw’s now. We are up in -- we are down in the South east with public. And there are other retailers where we can slowly start to roll this out. But it really doesn’t start to really roll out in the retail side until this fall.

Chris Krueger - Lake Street Capital Markets

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

Greg Skinner

No, not -- the sales don’t double in a couple of months, the capacity will double.

Chris Krueger - Lake Street Capital Markets

No, that’s okay.

Greg Skinner

Capacity will double in a couple of months, yes.

Chris Krueger - Lake Street Capital Markets

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

Gary Steele

I would love to be telling you that. Yes, that would be wonderful.

Chris Krueger - Lake Street Capital Markets

All right.

Gary Steele

Remember some of these salads, just so that everybody knows. Some of these salads like sweet kale salads could be, can be an anchor -- an anchor product line. It can be an all year around product line. It certainly looks like it has those types of legs to it. Others are going to be seasonal rotational items.

Some are better for the fall, some are better for the summer that kind of thing. And so the key here is getting slots, getting this shelve space. And once you get it, you want to fight like crazy not to let go of it. So we want to make sure there are enough products even if they are going to be rotated, we want that next rotational product to be ours, not someone elses.

Chris Krueger - Lake Street Capital Markets

All right. Thanks. That’s all I got.

Gary Steele

Thank you.

Operator

Thank you. Our next question comes from the line of Morris Ajzenman from Griffin Securities. Your question please.

Gary Steele

Hey Morris.

Greg Skinner

Hi Morris.

Morris Ajzenman - Griffin Securities

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

Greg Skinner

Morris, this is Greg. Yeah, I mean, they -- Lifecore achieved their topline and bottomline targets for the year. So yeah, once we left the third quarter, we had a pretty good indicator what the fourth quarter was going to be and they hit those numbers. If you recall and you’ll look back at history, their best quarter every year is always going to be the third quarter. And worse is their first quarter and the second quarter and fourth quarter results, somewhere in between.

Morris Ajzenman - Griffin Securities

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

Greg Skinner

It’s -- I haven’t done that math. Let’s see what does that translate into $0.12 and $0.27.

Morris Ajzenman - Griffin Securities

Yeah.

Greg Skinner

That’s right there, yeah.

Morris Ajzenman - Griffin Securities

Okay. And I’m just curious, going back last year in the fourth quarter this reversal of this bonus clearly helped EPS last year in the fourth quarter. What was the impact of EPS last year, what was the beneficial about to get to $0.17?

Gary Steele

Last year it was probably around $0.04 to $0.05.

Morris Ajzenman - Griffin Securities

Okay. So $0.04 to $0.05 in that time we need…

Gary Steele

We are coming back into this year because if you recall a year ago in FY ‘13, going -- leaving the third quarter, we are doing very well. We were ahead of our internal plan. We’re certainly ahead on guidance and that all reversed in the fourth quarter. It was very bad weather quarter. It was a multitude of things that occurred. And as a result we did not hit out internal plan. And therefore Apio and corporate did not hit the bonus targets and it was reversed in the fourth quarter of last year.

Morris Ajzenman - Griffin Securities

Generally, switch issues again we have gone through and you said (Indiscernible) previous questions when we are talking about sourcing costs. You gave an example there. I think, Gary, you gave the example of $0.01 per pound increase raises costs by $1 million and then questions were on the ability to pass through all cost increases including labor. What about specific costs that relate to your sourcing? Can that be passed through easier than labor impact cost do you, or is there no difference?

Gary Steele

No. No difference.

Morris Ajzenman - Griffin Securities

No difference. Okay.

Gary Steele

No difference

Morris Ajzenman - Griffin Securities

All right guys. Thank you.

Gary Steele

As you know, well, let just leave it that. No, there is no difference, Morris.

Morris Ajzenman - Griffin Securities

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

Gary Steele

Okay. Thanks.

Operator

(Operator Instructions) Our next question comes from the line of Nelson Novus from Winfield. Your question please.

Nelson Novus - Winfield

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

Gary Steele

Nelson, let me hit repeat see if I have got it right. We have processing, our main processing facilities is in Central Coast, California; Santa Maria, California. We also have, as you know, processing facilities in Bowling Green, Ohio and Hanover Pennsylvania, very small processing facilities in Burbage, Florida. Is your question, are we looking for new sites beyond those, Is that your question.

Nelson Novus - Winfield

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

Gary Steele

Okay. Now that I can hear, all right. So the answer is yes and the first place where we’re taking West Coast vegetable-like core and new salad line products. We want to make those as well in Bowling Green, Ohio, that’s first and foremost. So we’re doing that now. As we speak we’re reconfiguring that plan. We’ll be adding some capacity capabilities there. And then longer term, we have more land, we’re kind of landlocked in Bowling Green.

Longer term, we see Hanover, Pennsylvania being a primary area for growth and expansion. And we’re already starting to start preliminary planning for that as well. So rather than go to a new greenfield site, we believe that we should be expanding in Ohio and Pennsylvania in their near major markets.

You are well positioned in terms of distribution lanes. So that’s where we’re putting our bucks. And we said we’ll spend up to $20 million this year in capital expansion, part of that is to do a Bowling Green expansion and also anticipate looking at Hanover, Pennsylvania for expansion.

Nelson Novus - Winfield

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

Gary Steele

Correct.

Nelson Novus - Winfield

Okay. I would imagine at the end of the day that would be a larger expansion based on ….

Gary Steele

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

Nelson Novus - Winfield

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

Gary Steele

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

Nelson Novus - Winfield

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

Gary Steele

Not a lot. It is processing entity, since you are asking is that have the potential being a big geographic sourcing area for us and I respond it too quickly but let me just…

Nelson Novus - Winfield

Well, you were interrelated obviously, if you can much…

Gary Steele

It’s not, its great for green beans, its great for tomatoes things like that, but it’s not a great place for many of the types of products that are going into our core and new salad product.

In terms of expanding it -- in terms of expanding that site, it may not be the best place from a distribution channels and distribution lanes point of view. I would say, Hanover and Bowling Green are going to get first prize on that. Not to rule out expansion in Vero Beach, but I just think that would come secondarily.

Nelson Novus - Winfield

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

Gary Steele

Right.

Nelson Novus - Winfield

Now what’s…

Gary Steele

That’s right.

Nelson Novus - Winfield

What’s your utilization there now?

Gary Steele

Oh! boy. I would be given you a number that is of the top of my head and I take …

Nelson Novus - Winfield

Well, obviously, where I am coming from you’ve got, I know you’ve got a good utilization, give number at -- in Hanover. So, reconfiguring that would have limited value but…

Gary Steele

Probably about 60% Nelson….

Nelson Novus - Winfield

Oh! Okay. So you got a lot more access capacity in Bowling Green than you do in Hanover…

Gary Steele

Yeah.

Nelson Novus - Winfield

… which is why reconfiguring could really …

Gary Steele

Absolutely.

Nelson Novus - Winfield

I got it. That’s what I wanted to know. Thanks.

Gary Steele

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Daniel Rizzo from Sidoti & Company. Your question please.

Gary Steele

Yeah. Hi, Dan.

Greg Skinner

Hi, Dan.

Daniel Rizzo - Sidoti & Company

Hi guys. How are you doing? We talked a lot about sourcing and just for right now, we are in the middle of the summer here? Is there any potential issues with green bean sourcing, it doesn’t seem so, but I just want to know your take?

Gary Steele

Let’s put this way, its all plan on the eastern front from what I can tell, I’m knocking on what as I say this. I don’t want to hex or jinx anything, but to the best of my knowledge and I think we are reasonably current, I think we’re okay. Right now we’re up in the Ohio Valley area and they have had a lot of rain up there, all that kind of stuff. But I think we’re okay. I think things are fine.

Daniel Rizzo - Sidoti & Company

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

Gary Steele

I were guessing, we are in the baseball season. I would say these are the range and they are more in the singles and doubles. And they will take kind of seasonal profiles to them. The apple funnel maybe better in the summer and we have some stir fry products by example that actually is my favorite product of ours is the stir fried product line. And but people tend to cook more in the fall and winter, and not and less so in the summer. So that maybe a fall winter more format.

So, I think you’re looking at, I think, well, occasionally maybe get lucky and have a triple, but this sweet kale salad is rather unprecedented, Dan. I mean, it’s a talk of the industry, we didn’t forecast this, it just took off. But what it says is that Americans consumer’s are waking up to the issues of obesity and diabetes and healthier eating and this new generation, my kids, they’re vitamixing, they’re blending, they’re cleansing, they’re doing all this things that I can’t tell you about.

And they really worry about things that are going into their bodies and they’re talking to each other and the word -- this sweet kale salad, it is word of mouth. It wasn’t because we’re heavily promoting this.

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

Daniel Rizzo - Sidoti & Company

Okay. Thank you, guys.

Operator

Thank you. Our next question is a follow-up question from the line of Morris Ajzenman from Griffin Securities.

Morris Ajzenman - Griffin Securities

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

Gary Steele

Yeah. We still spending millions of dollars in R&D, more of it is Ds and R. In the early days it was mostly R and now it’s more D. We still file patents. We still prosecute patents. They are still important to us, especially to protect our BreatheWay packaging technology. But, we are -- and by the way Lifecore is not patent oriented as much as it is intellectual know-how oriented.

The things that we do, I don’t, Morris, if you have been the Lifecore, but the way we scale up fermentation, the way we actually separate, isolate, purify and final fill is there is some real know-how intellectual property there so. We also are big on trade-marking. So we believe kind of the three-legged stool that we care about investing is patents, know-how and trade-marking and we intend to protect your IP.

So it doesn’t get, in the days when we had all these licensing deals and in R&D funding and licensing fees and all that. We talked more about it. Yes, there is probably more drafting of patents at that point. But it is still very much important to us.

Morris Ajzenman - Griffin Securities

Thank you.

Operator

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

Gary Steele

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

Operator

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

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