RiceBran Technologies' (RIBT) CEO John Short on Q1 2016 Results - Earnings Call Transcript

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RiceBran Technologies (NASDAQ:RIBT)

Q1 2016 Results Earnings Conference Call

May 16, 2016 4:30 p.m. ET

Executives

John Short - Chief Executive Officer & President

Dale Belt - Chief Financial Officer

Robert Smith - Senior Vice President of Operations & Business Development

Mark McKnight - Senior Vice President of Sales & Marketing

Fred Sommer - Ascendant Partners, IR

Analysts

Anthony Vendetti - Maxim Group

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the RiceBran Technologies' 2016 First Quarter Results Conference Call. At that time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host, Mr. Fred Sommer of Ascendant Partners. Please go ahead, Mr. Sommer.

Fred Sommer

Thank you, operator. Good afternoon, listeners. Welcome to RiceBran Technologies 2016 Q1 financial results conference call. With us today are John Short, Chief Executive Officer and President of RiceBran Technologies; Dale Belt, Chief Financial Officer; Dr. Robert Smith, Senior VP of Operations; and Mark McKnight, Senior VP of Sales and Marketing.

Before I turn the call over to John, I want to remind listeners that during the call management's prepared remarks may contain forward-looking statements that are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today. Therefore, the company claims protection under Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today, and therefore we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the SEC. In addition, any projections as to the company's future performance represented by management include estimates as of today, May 16, 2016, and the company assumes no obligation to update these projections in the future as market conditions change.

This webcast and certain financial information provided in this call, including reconciliations of non-GAAP financial measures to comparable GAAP financial measures are available at www.ricebrantech.com on the Investor Relations page.

At this time, I would like to turn the call over to John Short, CEO and President of RiceBran Technologies. John, please go ahead.

John Short

Thanks, Fred, and thanks to all of our listeners for joining this call. During the first quarter of 2016, we achieved significant growth in our USA segment where revenues increased by 53% year-over-year to reach a record $7.8 million. This result was achieved while modestly reducing SG&A expenses.

A number of factors contributed to the strong revenue performance and I will highlight what I believe are the most important ones. First, as mentioned in our year-end call in March, our largest customer reformulated their products and rebranded and relaunched their business in the fourth quarter of 2015. Our first quarter volumes with that customer indicates that those efforts are proving to be successful.

Second, the supply and cooperation agreement signed at the end of last year with Kentucky Equine Research has driven a better than 50% increase in animal nutrition sales in our USA segment in the first quarter. Third, sales for two of our Healthy Natural, Inc. contract manufacturing customers that were small last year, started to grow significantly in Q1 with further growth anticipated throughout 2016.

While revenues in our USA segment reached record levels, we also saw strength in many other important areas as well. Gross profit at our USA segment increased by 49% and margins remained at about 32% in spite of the increase in lower margin animal nutrition product sales, reflecting the strength of margins in our functional food ingredient and packaged functional food sales. The upward momentum delivered in the last two quarters is continuing thus far in the second quarter of 2016.

With the addition of revenues related to the Narula Group's organic bran planned to come on line in the second half of this year, we expect to build on our positive momentum throughout 2016 and into 2017. With the acquisition of Healthy Natural in January 2014, we began the transformation of our company from an ingredient only supplier to a turnkey product solutions provider serving the natural organic and functional food markets.

We faced a number of challenges, including decline in sales from a large consumer packaged goods company, bran availability related to drought conditions in California, and longer than expected development cycles for certain production launches. However, we are invested in a platform in our USA segment that is capable of sustaining significant high margin revenue growth for several years.

The adjustments we made to our supply chain in 2015 should enable us to meet our operational requirements and we expect to continue to growth both top line revenue and bottom line performance at our USA segment in 2016 through organic growth, sales diversification and product innovation in order to unlock the economic value of the business platform we have built.

We are off to a good start this year and we are focused on maintaining the momentum our team has created over the last two quarters.

Turning to our Brazil segment. We continue to believe the capital investments made in the past two years to expand capacity and upgrade infrastructure at Brazil at Irgovel, represents significant long term strategic value for our shareholders despite the challenging situation that persists in Brazil. While Irgovel management endured many operational and market challenges over the last year and half associated with overhauling the plant. Capacity increases are complete and the plant has operated at and above the expansion target of 300 metric tons per day of raw rice bran processed. However, deteriorating economic and political conditions in Brazil continue to results in bran shortages, working capital deficiencies and logistics challenges.

Irgovel management's cost reduction efforts have minimized losses while they work to address those areas where they can improve performance. The plant operated at significantly reduced levels in Q1 of 2016, resulting in a 33% decline in revenue on a local currency basis and a 50% decline in U.S. dollars. In spite of this steep drop in revenue, Irgovel management was able to cut costs efficiently to reduce their operating loss and minimize cash requirements compared to the same quarter in 2015.

We completed installation and successful startup of our proprietary full fat rice bran extruders at a cooperative located about 500 kilometers northwest of our plant. Introducing our USA segment technologies into Brazil allow us to provide better quality rice bran for improved oil extraction efficiency at Irgovel. In addition, having stabilized full fat bran available in Brazil, gives Irgovel the ability to begin marketing higher value, higher margin, human grade ingredients and functional food products in the Brazil and Mercosur markets as market opportunities arise and conditions improve.

In the near-term, we are working closely with our private equity partners in Brazil to continuously evaluate a full range of tactical and strategic alternatives for Irgovel. Those alternatives include additional joint investment, investments from new strategic partners, idling the Irgovel facility until conditions improve or a sale of that business. While the full spectrum of options are being evaluated, we are trying to work toward a solution that would enable us to operate Irgovel at a proper production level with appropriate working capital. We believe this would be the best outcome to deliver long term value to our shareholders.

I will stop here and turn the call over to Dale to comment on our first quarter 2016 financial results.

Dale Belt

Thanks, John. For the first quarter of 2016, consolidated revenues totaled $10.1 million, compared to $9.7 million recorded in Q1 of 2015. Our operating loss narrowed by 49% to $1.5 million compared to an operating loss of $2.9 million last year. We recorded a net loss $0.03 per share during the quarter compared to a net loss of $0.33 per share in Q1 2015.

The modest improvement in consolidated revenues was the result of the 53% increase in USA segment revenues which rose to a record $7.8 million, which was offset by a 50% decline in revenues from our Brazil segment. For our USA segment, our record revenues represent not only a 53% increase over the same quarter in the prior year but also a 22% increase over the immediately preceding quarter. Growth was seen in both the human and animal nutrition categories.

As John mentioned earlier, these results were achieved while modestly reducing SG&A expenses compared to the same period in 2015. The revenue decline in Brazil resulted from reduced raw bran throughput combined with the 27% decline in the Brazilian real versus U.S. dollar exchange rate for Q1 of 2016. The exchange rate deterioration accounted for an $800,000 negative impacted on reported U.S. dollar results for Brazil.

Consolidated gross profit in Q1 2016 increased 112% to $2.2 million compared to $1.1 million in the same period last year. We achieved an 11% point improvement with the consolidated gross profit margin increasing to 22%. In our Brazil segment, the reduced raw bran processing level caused by bran availability issues and the persistent negative economic conditions resulted in negative adjusted EBITDA of $593,000. Irgovel management is continuing its efforts to cut cost and take all actions possible to simplify and streamline operations with the objective of reducing management complexity and working capital requirements.

For example, in the first quarter Irgovel idled its bagged animal nutrition plant to focus on bulk sales of defatted bran. This allowed management to reduce labor cost both operationally and administratively and reduce working capital requirements. Gross margins from our USA segment remained at the 32% level with gross profit dollars in Q1 2016 increasing 49% to $2.5 million compared to $1.7 million in Q1 2015.

Gross margin percentage improved modestly despite a shift in sales mix related to the success of our strategic supply agreement with Kentucky Equine Research. Margins remain very strong in our human nutrition, functional food ingredient and packaged functional food products. From a balance sheet and liquidity perspective, we ended the quarter with $2.3 million in total cash on hand compared to $1.1 million at year-end.

During the quarter, we successfully obtained release of the $1.9 million of restricted cash related to our Irgovel acquisition that was previously held in an escrow account at a U.S. bank. We utilized those funds to pay down $1.3 million of debt and increase cash for USA segment working capital. In February of this year, we completed an equity offering that netted proceeds of $2.6 million. Upon closing of the offering, we contributed $500,000 of additional capital to our Brazil subsidiary to support operating and working capital needs there. We intend to use the remaining funds to provide working capital to support the growth in revenues occurring in our USA segment, including the launch of our supply and distribution agreement with the Narula Group as well as working capital needs at Irgovel.

And with that I will stop here and turn the call over to Mark McKnight who will discuss sales and marketing. Mark?

Mark McKnight

Thanks, Dale. As John mentioned earlier, the work we did in 2015 to expand our sales force, increase our marketing effort and increase in our trade show presence to fill our sales and product development pipeline and bring on new customers, began to produce significant results in the first quarter of 2016.

Revenues for the quarter in our USA segment increased by 53% compared to the same period in 2015. Those of you who joined our call in March will recall that the Q1 2016 increase followed a 15.5% quarter-over-quarter increase in the last quarter of 2015. So in general, we are excited about the growing sales momentum we are seeing as more customers, large, medium and small are adopting our proprietary and patented ingredients and formulated blended products for a range of applications from packaged functional foods to functional ingredients to nutricosmetics and even animal nutrition.

For purposes of clarity, I want to spend a few minutes explaining how we manage our sales and product development pipeline and our definition of new customers. As mentioned on prior calls, we have inhouse sales staff and commission sales reps that cover the U.S. and many international markets. We have strategic team members located throughout the United States with extensive experience in the markets for human food ingredient, functional food ingredients, sports nutrition, non-dairy beverages, finished functional foods and animal nutrition products.

The appropriate sales team members attend numerous trade shows and industry events across the country and across the world. In the first quarter of 2016, our team members attended 14 trade shows and events. We have a total of 20 more booked in Q2 and a total of 58 trade shows and industry events on our calendar for full year 2016. That is more than one a week. At trade shows and through referrals and other introductions, we meet numerous prospects and regularly provide samples and materials to interested parties. When discussions with a prospect intensify and we begin to move towards a specific sales opportunity, we add that customer to our sales and product development pipeline report. We track activity with that customer, updating our pipeline report regularly.

A potential customer moves from our pipeline report to our new customer if that customer has not made a purchase in the last three years and gives us a purchase order, no matter how large or small. We currently have a 131 customers and customer projects in our sales pipeline. We received initial purchase orders from 20 of our pipeline target customers in the first quarter of [2016] [ph], effectively converting them into new customers under our definition. Those of you who know the industry, appreciate that an initial purchase order is often small and supports a product trial or market [ed] [ph]. That if successful, leads to larger orders in the future.

As an example, in late 2014 and early 2015, we converted two separate pipeline products into new customers. One of them has grown much more than expected and will likely purchase more than $1 million worth of products from us in 2016. One of them has not grown much at all and will likely only purchase $50,000 worth of products from us this year. With some of the larger multibillion dollar CPG companies, product development and marketing adoption cycles are longer. One of our successful product launches in the meat area took two full years from initial meetings until our ingredients were included in product launches at retail, including a full year of shelf life test by the brand owner to confirm the product would be shelf stable.

Other distribution channels, both domestically and internationally, can provide opportunities for shorter total cycle times. This is especially true with functional food products we formulate at Healthy Natural for sales to companies who sell their products over the Internet, through infomercials or through multi-level marketing. Cycle times from introduction to initial purchase order for those channels can be as short as six months but are most often in the nine to 15 month range. While most new customers start small and grow over time if their own product launches are successful, it is notable that some of our medium and smaller total revenue customers can become significant even faster than the multibillion dollar CPG company.

Our sales pipeline helps us effectively manage the large, long sales cycle CPG companies as well as the smaller, shorter sales cycle finished functional food opportunities that have the potential to ramp up very quickly. As mentioned on our November 2015 conference call, October was at that time the largest sales month in the history of our USA segment. I am pleased to report that we followed that up by beating that record in February and again in March, contributing to the best first quarter performance in the history of our company.

In addition, we delivered another all time high sales month for this past month of April and we have a strong order book for May and June. Our recent performance bodes well for the future in great part because where we have positioned the business. According to the next forecast 2016, published by New Hope Natural Media, sales of natural, organic and functional foods reached $110 billion in 2014 or 15% of total U.S. food and beverage sales, are the fastest growing segment in the U.S. food and beverage market and are experiencing double digit growth.

Within the natural, organic and functional food segment, non-GMO products are gaining ground even faster. Our proprietary and patented products are non-allergenic, gluten and soy free, minimally processed, all natural, non-genetically modified and vegetarian vegan. Meeting all of the major criteria demanded by consumers in the fastest growing segments of the U.S. food market. We believe this puts RiceBran Technologies in the right place at the right time to take advantage of these rapidly growing markets. We are confident that as we keep pushing new opportunities and new projects into our sales and product development pipeline, we will continue to add new customers and revenue growth for our company based on strong consumer demand for natural, organic and functional foods as well as nutricosmetics.

I will stop here and pass the call to Robert to discuss operations and R&D.

Robert Smith

Thanks, Mark. The addition of the Kentucky Equine Research animal nutrition business launched in December last year, combined with increased demand for food grade stabilized rice bran in Europe and Australia, has placed additional demands on production at our stage one stabilization facilities in California and Louisiana. Despite the typical seasonal up and down milling schedules and disruptions at the Louisiana and California rice mills, we were able to secure and stabilize sufficient rice bran in Q1 to meet customer orders, supply our stage two derivatives facility in Dillon, Montana, and build inventories in both Louisiana and California.

The outlook for raw bran supplies in California for the reminder of the year and into 2017 is improving. The multiyear drought conditions that plagues rice growers and other farmers in the Sacramento Valley are essentially over, following a heavier than normal rainy season caused by the El Nino event. Reservoirs at Shasta Lake which feeds the Sacramento River and Orville which feeds the American River, are full and have had to recently release water for flood control purposes.

During the drought, planted rice acreage dropped from a high of 620,000 acres to a low of about 400,000 planted acres last year due to reductions in water availability. With reservoirs full, our milling partners tell us they expect planting this year to be about 540,000 acres, a 35% increase. That bodes well for both rice milling and for bran availability and prices in the Sacramento Valley for this year and next. In the mid-south, our milling partners tell us that plantings are also expected to increase and that a large harvest is expected this year.

As a result these positive developments in both of our USA segment's sourcing markets, we don’t foresee [indiscernible] in supply of rice bran to meet our processing needs in 2016. In February, we signed a deal with the Narula Group to add organic rice bran to our product mix. As with any new relationship, we need to work through the startup phase which includes our new partner working their way out of the old contracts and then redirecting all of their organic bran to us.

We expect the first shipment of organic rice bran to land in California by the end of this month, a significant portion of that initial shipment will be transferred to our Dillon, Montana facility for processing into organic derivatives for distributions to customers. Samples of organic stabilized rice bran and organic rice bran derivatives have been placed with a number of interested customers for evaluation and we anticipate filling orders beginning late in the second quarter or early third quarter.

As part of the agreement Narula Group, we are planning to install one of our proprietary extruders in the Chiang Rai Thailand rice mill to provide optimal stabilization and increased capacity of organic rice bran. We anticipate that our extruder will be installed and operational late in the third quarter or early in the fourth quarter of 2016.

While the El Nino event in the northern hemisphere has gone a long way towards improving conditions for our rice growing suppliers, in California it has had the opposite effect of Brazil where the weather system has produced significant flooding during the current 2016 harvest. Heavy rains have inundated the rice fields and prevented farmers from harvesting their crop. The Brazil rice harvest was pushed back several weeks and yields in the affected areas are expected to decline significantly, resulting in reduced rice production, reduced raw rice bran availability and upward pressure on both rice and raw rice bran prices. The combination of these factors has put enormous pressure on operations at Irgovel and at Irgovel's rice milling suppliers.

Irogvel management responded in 2015 by significantly reducing operational cost to minimize the impact of external events on operation. They continue to look for additional cost reduction opportunities as they work to ride out the difficult economic political situation plaguing the entire country of Brazil. I will stop here and hand the call over to John for closing comments.

John Short

Thanks, Robert. Before opening the floor to questions, I want to make a few summary comments on each of our operating segments. Our Brazil segment will continue to be a challenge in 2016. We will have to carefully manage our way through the complex economic and political environment. We will continue to explore a full range of possible solutions to the challenges at Irgovel. We are in talks with our minority partner in Brazil regarding a combined capital contribution, while we pursue other options including new strategic partnerships, idling the facility or a sale.

While we continue to believe the best outcome would be maintaining operations and identifying sources of working capital to profitably process 300 tons per day of bran at Irgovel, the situation in Brazil is very fluid and all options are on the table. Our USA segment on the other hand has reached record revenue levels and improved margins while reducing expenses. With the U.S. drought now largely behind us and the double digit growth in the natural, organic and functional food segments of U.S. food market, we feel we are very well positioned for continued growth.

The agreement with Kentucky Equine Research has proven to be a very positive development and we are optimistic that the addition of organic rice bran to our product offering through the Narula Group agreement will prove to be equally as important. In conclusion, the momentum in our USA segment in the fourth quarter of 2015 accelerated in the first quarter of 201 and is beginning to flow through our income statement, validating the strategic decision to position our business to take advantage of rapidly growing market opportunities in natural, organic and functional foods, as well as nutricosmetics.

That momentum is continuing thus far in the second quarter and our goal is to sustain these record sales trends through the remainder of 2016. Before I open things up for questions, I want to make a final comment. As many of you know, our Form 13-D was filed with the SEC by a group of RiceBran Technologies shareholders proposing a number of changes that they believe are for the betterment of the company. While we agree with some of the 13-D group's recommendations and disagree with others, our board and management also want what is best for the company and all of its shareholders, including the members of the 13-D filing group.

To that end, we will continue to maintain an open dialog with that group and with all other interested shareholders as we work to accomplish our common goal of increasing shareholder value at RiceBran Technologies. That concludes our prepared comments. Operator, at this time please open the call for questions. Note that we will limit callers to one initial question and one follow-up.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from [Harry Goldsholl] [ph] Private Investor. Please proceed.

Unidentified Analyst

I had thought that the Brazilian currency had about a 20% increase in value during the first quarter and you guys have stated that it had a significant decline. How are you and I so far apart with that and secondly I would like to know how the nutraceutical customer had continued or not continued since it was hyped about nine months ago.

Dale Belt

I will answer the first.

John Short

Dale, you do the first one and Mark, will you talk about the [other] [ph].

Mark McKnight

Harry, I think you were talking about nutricosmetics, right?

Unidentified Analyst

Right. Yes.

Mark McKnight

Perfect. Okay.

Dale Belt

Harry, this is Dale. Your first question, if I am understanding it correctly, is if you look quarter-over-quarter, 2015 versus 2016, the exchange rate declined. I think what you are seeing and referring to though is that the beginning of this year, I won't say the exchange rate -- I know in January it was over 4...

John Short

It bottomed at at 4.17, right.

Dale Belt

Yes. 4.17 to 1 at the beginning of January in that period. And it actually did improve down to 3.50 range by the end of the quarter. So it did improve during the quarter but on quarter-over-quarter comparison basis, it actually did decline. So I think that’s what you are seeing, again if I understand your question.

Unidentified Analyst

Yes.

John Short

Harry, does that answer your question, Brazil exchange rate issue.

Unidentified Analyst

Yes. It does. And in regard to that, given that’s the state of things in Brazil and the total revenue is very close to the total loss there and I understand that some drastic changes need to take place there.

John Short

Harry, as we commented in the prepared remarks, all options are on the table. We idled the branded animal nutrition plant in the first quarter because of bran availability issues and cost management issues. If you notice at a dramatically lower level of throughput, the management team at Irgovel was able to actually reduce the loss. That doesn’t help. We want the business to make money and we will actually perform well and provide both positive EBITDA and profit is at the 300 ton a day level and that’s the level the plant was expanded to accomplish. Right now the economic situation in Brazil is a mess. I think everybody saw that the senate voted to pursue the impeachment trial against the President. While all of that is going on, the environment reminds me a lot of the financial situation in banking environment, reminds me a lot of 2008-2009 in the U.S. As the banks are experiencing losses, many of them related to those Petrobras bribery scandals and events, and they are reducing their capital, they are also having to reduce their own portfolios to stay within their capital adequacy guidelines. And they are running for the hills, they are collecting everything they can, they are not giving loans.

We all know from the press that Hong Kong Bank has left the country. So there is a real banking crisis there which complicates things even further for Irgovel. Having said that, the team is working hard to ride through what is a real, real rough patch and from our perspective, with our partners at [Althon] [ph], we are pursuing, as we described earlier, a full range of strategic options. At this point in time, the biggest challenge is adequate working capital to buy bran and we don’t know, as we sit here today, what the solution to that problem is. But we have the same kind of heartburn that you do, Harry, over the situation there and we spend a lot of time on it every day looking for a solution that can turn that investment into positive return for our shareholders. Let me stop there and let Mark answer your second question which is really I think about nutricosmetics. Is that right, Harry?

Unidentified Analyst

That is correct.

Mark McKnight

So the large store that we manufactured the nutricosmetic orders for, I believe that that has gone well. They have placed three separate orders with us. They don’t give us visibility into how much product is sold by store but they did let us know that the sales were strong enough in their own corporate owned stores that they have had us over the last three months develop three additional SKUs along that same product family and we anticipate receiving purchase orders for those new SKUs sometime in late Q2 or early Q3. That would bring us up to a total of five different formulas and ten possible packaging options for that particular nutricosmetic account.

The important part -- so from my perspective that has gone well although not necessarily large amounts of revenue because their individual per store sales for something to be successful, this store carries several thousand SKUs and they don’t necessarily have to sell hundreds of any particular SKU for them to think of it as successful. But our nutricosmetic business as a whole is also doing well because we have a number of new nutricosmetic customers that we shipped product in the first quarter.

Unidentified Analyst

Is there going to be any kind of a growth in the rice bran oil for human consumption in this country? Are you going to have a product for that or are we going to let that that opportunity fall by the wayside.

John Short

Well, one of the challenges, Harry, as I think we have discussed in the past, is there are two plants in the western hemisphere, significant plants that make large quantities of human grade rice bran oil and that is our plant in Irgovel and Riceland Foods plant in Stuttgart, Arkansas. There are some smaller guys like [indiscernible] in the Sacramento Valley who cold press some very small quantities of rice oil along with other things that they do. But the two plants that really compares quantities are ours and Riceland. We understand, but don’t quote me on this, we understand that Riceland is effectively sold out and our challenge down in Brazil today is to get access to bran. You guys may or may not have seen an article that was published in [Barron's] [ph] a couple of weeks ago that was kindly passed along to us by one of our shareholders. But that article starts, I will read you this, droughts leads an historic low global inventories have rice market experts worried that the price of the grain can double. Right?

And they mention the fact that down in Brazil, the flooding that Robert mentioned is the worst in 30 years and these guys estimate that it has destroyed 30% of the rice crop. So rice down, milling is down, rice prices are up, rice bran prices are up. And with that, we are not getting the bran we need to run the plant at 300 tons a day. So we are struggling to service the edible rice bran oil customers that we have in Brazil. We would love to be in a position to bring human grade rice bran oil into the U.S. market. We believe there is a real opportunity to do that. If Irgovel were producing 300 tons a day, we would be in a good position to do that. We would be generating cash and making money down there and have oil that we could bring in to this market.

We are gently putting that out in the market here as a possibility but until the situation in Brazil improves, Harry, it's not something we can push because we don’t have the product to back it up.

Unidentified Analyst

Are there shortages of bran in this country or has that been alleviated by the adequate rainfall in the west?

John Short

Yes. Two things going on. The rainfall, as Robert mentioned, Sacramento Valley is full of water, right. So they are looking to increase the plantings by 35% and that is a positive. But remember we don’t extract oil from bran here in the U.S. Our only oil extraction facility is in Brazil so we need access to adequate amounts of bran in Brazil to be able to expand sales of human grade oil.

Unidentified Analyst

I guess, or move that equipment here where you get the product.

Mark McKnight

[Immutably] [ph].

John Short

Yes, Harry, that plant, just to give you a sense, covers most of 20 acres. It looks lot like a mini-version of a crude oil, petroleum refinery and costs about $45 million or $50 million to replace. I guess you could pack it up and move it because those sorts of things are possible, but it would be more attractive to purse a greenfield build here then to try to pack that up and move it, I think. That would be my reaction.

Operator

[Operator Instructions] Our next question comes from Anthony Vendetti with Maxim Group.

Anthony Vendetti

Just a couple of questions on the nice ramp from the largest customer. That’s the same customer that went through some repositioning in the fourth quarter. Is that correct? And then is the reformulation that has helped revenues from that customer come back in the first quarter, is everything done for them that needs to be done to continue to get that to grow revenues throughout 2016?

John Short

Anthony, yes. If you recall, we had a couple of glitches with our largest customer last year. In August and September they were moving facilities to support what they projected as significant growth. And they kind of wound down into and out of inventory levels, that sort of thing. And as we moved into the end of the year, they reformulated. Mark and his team developed updated formulations of product to allow them to sort of, I will describe it this way, to sort of harmonize their product offerings as they enter new markets internationally.

At the same time, they totally rebranded their product. And I have to say the job they did is beautiful. They did a fabulous job repositioning and remarketing their business. I say that is our consumer who has been in the retail for a long time. But I think they did a great job and they are getting good traction. We believe they have got a base in their business that will allow that to continue as we move through 2016 and into 2017. Anthony, did that answer your question or?

Anthony Vendetti

Yes. That’s great. And I just had a follow-up. On the animal nutrition that grew 50%, can you just talk about how do you quantify that number? Is that due to what you are doing in Kentucky? And then the other segments, human ingredients and functional foods, can you break out the growth there?

John Short

Yes. Anthony, you know we don’t breakout specifically the growth numbers in those areas but to answer your question to the extent we can. You know we signed an exclusive supply and product development agreement Kentucky Equine Research back in December. As we had mentioned previously, Joe Pagan, who is the founder there is the Head Equine Nutritionist for global Olympics, U.S. Olympics, United States
Equestrian Federation and he is sort of the man globally. The initial pop that we got in the animal nutrition space was with a series of Joe's existing customers to whom we have become the exclusive suppliers of rice bran.

Just to be clear, KER is not the customer. They have co-branding and marketing arrangements with a whole variety of feed mills that we have been given access to. So we now have access to those guys. In addition, Joe Pagan is down in Brazil right now working on the nutrition arrangements for the Olympic equestrian events and he has operations and relationships in Australia, in Europe etcetera. So the first bump that we got was really related to relationships that they had in the U.S. that have now converted us. This has some interesting advantages because those of you who have run manufacturing operations understand the value of running greater volume over existing equipment. So to the extent that we can spread the cost of a plant over a lot more volume, there are unit cost savings to be had and we are seeing some of that.

But we also have opportunities that have emerged from the relationship on the animal nutrition side in Europe, in Australia and other parts of the world that we think will provide some benefits to us going forward. When you look at our human ingredient, the functional food ingredient and packaged functional foods, Mark mentioned in his comments -- you know some of our shareholders had shared us over the last few weeks, that they were a little bit confused by this whole story of, you have all these guys in the pipeline and have all these new customers, why aren't you getting traction faster in your business? And the answer is, there is a lead time to get these guys up and running. Mark and his team and fro the domestic stuff and Robert working with some of our international guys have done a great job of filling that product development pipeline. And in the first quarter we are starting to see the results of a number of those projects coming on line. As Mark said, we had a relatively small customer that’s surprising us and will probably do more than a million dollars with us this year. That’s a nice bump for a small startup customer. But we have a whole bunch of other products in the pipeline that we are very excited about, Anthony.

So they will come on as they come on. You know, one of the things I hope everybody appreciates is, we are not the brand owner and we are not the final customer. One of the things that we did is we developed a product application for the meat industry and we spent much more than a year trying to sell it into a very very large player. We made the grade with their R&D guys, got the product approved and their marketing guys killed it after more than a year and a half. And the product, interestingly, as a product that would reduce oil uptake in fried products. So think about a chicken nugget that when you deep fry it, it picks up 25% less oil. Their marketing guys said, well, we can't put that up in the market because it will make the rest of our products look bad. What are we going to tell people, cannibalize our own sales.

Maybe we should have thought about that before spending so much time on the application. What we have done with that application is we have taken it off to ten or 15 other people who we think might be able to use it. But it's interesting that we develop solutions for customers and with customers but we are reliant upon them to then actually turn that into, as Mark said earlier, an initial purchase order for a test market and if that test market is successful, turning into bigger things.

So on the ingredient side, that’s the world we live in. One of the reasons we acquired Healthy Natural in 2014 is because that gives us the capability by having Mark and his team join but also the scope to formulate specific financial finished, packaged functional food products that are less reliant on somebody's internal R&D team. And by going to some of the smaller and the mid-sized customers, we think we have a faster path to market than through the big CPG companies. We are not suggesting by any stretch of imagination that we are ignoring the big CPG companies, we are not. We have a number of major products underway, but for purposes of speed to market and growing our revenues, we are seeing that come faster from the medium-sized and smaller companies, especially on the packaged functional food segment.

Anthony Vendetti

Okay. So just lastly, last year you added 80 new customers. Mark talked about the sales pipeline of 131. If we annualize the 20 orders here, you would be on page to match that. Is that the way to look at it or is there a greater likelihood that you turn that that pipeline could continue to grow and your conversion of those 131 could also grow so that could exit the year with more than 80 new customers this year.

John Short

So Anthony, one of the things Mark mentioned is that we are investing, we added sales people, and we are investing much more heavily in trade shows and industry events. And he mentioned that we have 58 on the calendar for this year. We are doing more than one a weeks. So we are very focused on getting out there. And Anthony you have been at our Expo West at our booth and kind of see what happens. So what happens at those trade shows is we maybe there for one, two or three days and we may have 5, 10, 15, 2, 25 people come by, pick up the materials, ask for sample etcetera.

Let's say there is 20 people who come by the booth at a show, ten of them may want samples. We send them the samples. Of the ten who want samples, two or three or four may follow up. Of the two or three or four that may follow up, we may get one, two or three who actually move into a product development effort with us and eventually make it into their sales pipeline report. What's happening now is we are adding sales staff and we are adding numbers of events. So there is no perfect conversion math there. Some shows, you go spend two days and you meet all these folks and you send all the samples and none of them convert. At another show you have the same thing happen and you have three or four or five go live at the same time. And it really depends on who the customers are, what the interaction is, what the customer need is, what markets they are pursuing and whether or not there is a fit. But there is not a algorithm that gives you the answer I think you are asking for.

Anthony Vendetti

Okay. But it sounds like -- just to follow up real quick -- it sounds like the supply situation in the U.S. with the drought situation being mitigated or solved in Eastern California, it's not a supply issue now in the U.S. It's going out there and converting these customers, this pipeline to customers. Correct?

John Short

That's right. That is right. And we have a full pipeline. We have got a huge amount of work going on and I think we are starting to see the kinds of results that we would have liked to see in the last half of last year. We were clearly slower than we would have liked to have been in seeing the ramp. But we are starting to see it and we know we are in the right spot from a market point of view and so our challenge is to take advantage of that market opportunity. There is lots of interest.

Operator

Mr. Short, there are no further questions at this time. Please continue with your closing remarks.

John Short

Operator, let's give 30 seconds in case anybody else would like to jump in with questions and if not we will wrap up the call.

Operator

[Operator Instructions]

John Short

Stacy, I think that’s a wrap. Thank you for organizing the call for us and thanks to all of our shareholders, investors and listeners for joining the call today. Thank you.

Operator

Thank you as well. This ends today's call.

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