Lifecore Biomedical, Inc. (LFCR) Q4 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Landec Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time [Operator Instructions] As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program Molly Hemmeter, President and CEO of Landec Corporation. Please go ahead.

Thank you. Good morning and thank you for joining Landec's fourth quarter and fiscal year end 2016 earnings call. With me on the call today is 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 2015. Landec's fiscal year 2016 fourth quarter results demonstrate positive momentum in both of our core healthy living businesses. Our Apio food business and our Lifecore bio materials business. Consolidated fourth quarter revenues grew slightly to $135.3 million and gross profit increased 22% to $22.8 million during the fourth quarter of fiscal year 2016 compared to the fourth quarter of last year. Lifecore had an extremely strong fourth quarter, with revenues and gross profit increasing 50% and 86% respectively and operating income increasing a 137% compared to fourth quarter of last year. These fourth quarter results contributed to Lifecore's total fiscal year 2016 achievement that included a record $50.5 million in revenue an increase of 25% and a record $40.1 million in operating income and even more impressive increase of 145%. Our Lifecore business has grown significantly since Landec's acquisition in April 2010. Lifecore's revenues have increased at an annual compounded rate of 16% from $20.3 million to $50.5 million in fiscal year 2016 and EBITDA has increased at an annual compounded rate of 34% from $2.8 million to $16.7 million in fiscal year 2016. Lifecore initially achieved this growth through a relentless pursuit to become the preferred viscoelastic supplier to global ophthalmic market leaders. This premium segment of Hyaluronic Acid or HA market requires medical grade non-animal sourced HA within a highly regulated FDA environment. Lifecore's commitment to working closely with its partners through product formulation technology transfer and regulatory approval has enabled Lifecore to grow its share of this market and expand into future new product opportunities with its customers. More recently, Lifecore's growth has been fueled by a dramatic evolution of it s business model from that of an HA supplier to a fully integrated Contract Development and Manufacturing Organization or CDMO. As a fully integrated CDMO, Lifecore offers expertise and capabilities in fermentation, specialty formulation, aseptic filling and final packaging of both devices and drugs. Lifecore's unique capabilities and dedication to creating the culture of formal excellence has broadened its appeal to a much wider customer base. The evolution of its business has impacted all aspects of Lifecore including, first Lifecore markets. Lifecore has expanded from the ophthalmic and orthopedic markets to now include oncology and potential markets. Second, Lifecore materials. Lifecore has applied and expanded its capability to include not only viscous HA, but also non-HA materials that are difficult to process. Third, Lifecore products. Lifecore's product offering has broadened from medical devices to include those drugs and devices. Fourth, Lifecore services, Lifecore's capability has significantly expanded from fermentation and filling to include specialty formulation and processing as well as aseptic filling and finished injectable dose form. Lifecore also offers products in both synergies and vials. Finally, Lifecore capacity. Lifecore's demand and capacity has expanded dramatically over the past six-years from manufacturing 1 million syringes per year to 3.5 million syringes per year today with projection of 7 million syringes in the next three-years. As a fully integrated CDMO, Lifecore has broadened its markets, materials, products, services and capacity to grow beyond the HA market. As such, revenues and operating income are expected to continue to grow on average at low double-digits for the foreseeable future. Now turning to Apio. Apio performed as expected during the fourth quarter. The beginning of the quarter was negatively impacted by the last remnants of El Nino, however, even though Apio revenues decreased 4% during the quarter, first half it was essentially flat compared to the fourth quarter of last year and gross margin and our packaged fresh vegetable business increased 50 basis points to 12.2%. With El Nino now behind us, we believe we are well positioned for renewed growth and increase profitability in our food business in fiscal year 2017. We continue to make progress on our long-term strategy of increasing margins and profitability through invitation in our food business. Thus far, we have been successful in this strategy, as we have significantly grown our high margin Eat Smart vegetable and salad revenues at an average annual compounded growth rate of over 80% from $26 million in fiscal year 2013 to $154 million in fiscal year 2016. Our Eat Smart salad products are clearly meeting consumers growing desires to eat healthy, fresh and convenient vegetable products. According to U.S. and Canadian, Nielsen Data for the 52 weeks ended May 28, 2016. The North American retail salad kit market category, which excludes Costco and food service grew 28% in consumer retail dollar, while our Eat Smart salad kits grew 36% in consumer retail dollar showing the same to time period. Eat Smart salads are currently well penetrated in North American club stories and Canadian retail grocery stores. The opportunity to grow Eat Smart salad is twofold. We must increase the number of Eat Smart salad being offered to our existing customers and we must gain new distribution in several major U.S. accounts that currently do not offer our Eat Smart salads. Wal-Mart is one of those accounts. In May of this year, we launched a test in 423 Wal-Mart stores with our Eat Smart's retail salad. Thus far, results have been extremely positive. We are supporting this test with geo targeted online consumer advertising on popular food and health website and social media, as well as through walmart.com. Beginning this week, we are funding in store demos to allow consumers to taste this sweet kale salad during their shopping experience at Wal-Mart. In the past, these demonstrations have proven to drive consumer adoption and we believe we will see similar results in Wal-Mart. In fiscal year 2016, in addition to the products we have made in Apio with these smart salad business and Lifecore’s record year. We have several other successes that significantly contributed to laying the groundwork with future growth in our business. First, we invested over $40 million to expand and equip our Lifecore and Apio facilities to support our growing business segments. Second, our Apio salad business revenues continue to generate growth and creating 18% during fiscal 2016 compared to last year with 27% growth in retail and 11% growth in club. We expect to maintain this momentum through the introduction of several more vegetable salads over the next year. Third, in our food business, we started exploring addition of innovative and convenient new products outside of produce. Particularly in the natural food space through both internal development programs and strategic acquisitions. Fourth, we added new capabilities at Apio and Lifecore by hiring several upper management level employees in the areas of product development , sales and business development. And lastly, Lifecore further deepened its products development pipeline there by creating new business opportunity for [Q2] years to come. Before I discuss the outlook for fiscal year 2017, and our strategic objectives over the next three to five-years, let me turn the call over to Greg for some financial highlights.

Thank you, Molly and good morning, everyone. Revenues in the fourth quarter of fiscal year 2016 increased 1% to $135.3 million from $134.4 million in the prior year quarter. The increase was primarily due to a 50% or $5.2 million increase in Lifecore revenues and a 22% or $2.4 million increase in revenues in Apio's export business. These increases were partially offset by 6% or $7.2 million decrease in revenues in Apio's packaged fresh vegetables business. Net income in the fourth quarter of fiscal year 2016 was $4.7 million or $0.17 per share compared to $4.2 million or $0.15 per share in the year ago quarter. The increase in net income was due to a $3.2 million or 131% increase in pretax income at Lifecore which was driven by increased revenues and an increase in Lifecore's growth margin to 53% from 43% in the fourth quarter of last year as a result of a favorable product mix change and from a $355,000 increase in gross profit from corporate licensing agreements. These increases were partially offset by $2.2 million increase in operating expenses at Apio to drive sales of existing and new salad products along with additional headcount hired over the past year and from a $511,000 increase in operating expenses at corporate primarily from an increase in stock based compensation as a result of stock option and RSU grants in May of 2015 and an increase in accounting and tax fees. Revenues in fiscal year 2016 increased $1.8 million or to $541.1 million from $539.3 million last year. The increase was primarily due to 25% or $10 million increase in revenues at Lifecore and from a $2 million increase in licensing at Corporate. These increases were partially offset by 2% or $6.6 million decrease in revenue in Apio's packaged fresh vegetables business and a 5% or $3.7 million decrease in revenues in Apio's export business. We reported a net loss during fiscal year 2016 of $11.6 million or $0.43 per share compared to net income of $13.5 million or $0.50 per share last year. The net loss was primarily due to a write down on our GreenLine trade name. Excluding the impact from the GreenLine trade name write down, the company generated net income of $0.35 per share during fiscal year 2016. Operating income for the year was also impacted by first the excess costs related to the severe produce shortages at Apio of $15.6 million. Second, a $6 million increase in operating expenses at Apio to drive the growth of our existing and [indiscernible] products and from additional headcount hired over the past year. And third, a $2.7 million reduction in the increase in the fair market value of the company's Windset investment as a result of delays in their expansion plans. The loss during fiscal year 2016 was partially offset by first a $10 million increase in Apio's gross profit from primarily a favorable product mix change, the higher margin solid sales, second, an $8 million increase in pretax income at Lifecore due to higher revenues as well as their higher gross margins due to a favorable sales mix change compared to last year and from a $2.7 million decrease in income taxes excluding the tax benefit from a GreenLine trade name impairment charge. Turning to our financial position, at the end of fiscal year 2016, cash totaled $9.9 million after generating $21.8 million in cash flow from operations receiving $15.6 million in net borrowing and investing $40.9 million in property and equipment primarily for capacity expansions during the fiscal year 2016. The company had $32.2 million available under the lines of credit at May 29, 2016. Let me turn the call back to Molly.

Thanks, Greg. We entered fiscal year 2017 in a very strong position and are excited to begin leveraging many of the investments we made in fiscal year 2016. We have made and will make appropriate and timely investments in our healthy living businesses at Apio and Lifecore to continue expanding our higher margin product portfolios through innovation in the coming years. In fiscal year 2017, we expect consolidated revenues to grow 3% to 6% with Lifecore revenues and our salad products revenues going at lower double-digits whereas we expect the revenue growth in Apio to historical core and export businesses to be flat to slightly up. Notably, we expect consolidated net income to increase 50% to 70% in fiscal year 2017 compared to fiscal year 2016, resulting in an estimated EPS range of $0.53 to $0.60. This increase is based on the following. First, produce sourcing at Apio returning to historical levels. Second, our continued shift to higher margin products; and third, low double-digit revenue growth in Apio products and at Lifecore. We are currently not projecting any increase in our Windset investment in fiscal year 2017, due to the change in the method of calculating increases and fair market value of Landec’s ownership share. However, as stated in the yesterday's earnings release, we expect a significant increase in the value of our investment in Windset in fiscal year 2018. As for Windset expansion plan, Windset is nearing completion of a 10-acre facility on land Windset owns in the city of Santa Maria, using a new type of greenhouse structure for growing strawberries on a small commercial scale. They have also broken ground on a new 30-acre glass greenhouse, which is also on land they own in the City of Santa Maria, where they currently intend to grow peppers and/or cucumbers. Windset still expects that it will begin commercially harvesting crops with the next six months from these two new site expansions. Both of these projects are expected to contribute positive earnings Landec in fiscal year 2018. We see considerable tailwinds as both Apio and Lifecore that position Landec well for future growth. During fiscal year 2016, we set the stage for future growth by increasing our product offerings and innovation efforts and importantly by expanding facilities and production capacity at Apio's Hanover, Pennsylvania plant and of our Lifecore facilities in Chaska, Minnesota an anticipation of growing demands for our products. In our Apio business, we are benefitting from the continued shift among consumers through healthier eating as the categories in which we participate continue to grow. For the 12 months ending May 28, 2016, the North American category for retail which excludes Costco and food service where package fresh vegetable bags and trays grew 6% and salad kit grew 28%, with our Eat Smart salad continuing to grow the faster rate in category of 36%. We recently hired a new Chief Customer and Sales Officer, Parker Javid to continue to expansion of our salad offerings within existing accounts and to penetrate strategic new customers. In our Lifecore business we are continuing its successful entrances new market with an expanded product offering and service capabilities, although we have a strong pipeline of product development programs to form our basis of future commercial programs. We have positioned ourselves for growth and improved profitability and our lines of business by being market leaders and focusing on innovation in the following areas. First, our Apio packaged fresh vegetable products are on trend with the fast growing healthy leaving space and we are the market leaders in this category, which continues to grow double-digits annually. Second, our Lifecore bio materials business is growing at double-digit rates with new capacity that will come online in the next few months to support a deep pipeline of development programs and continuing growth from existing business. Third, our BreatheWay Packaging technology is increasingly being tested by new and existing partners for extending the shop like our produce outside of our packaged fresh vegetable business. And finally, we are significant shareholder in Windset Farms, which continues to grow rapidly based on growing produce hydroponically in state-of- the-art greenhouse facilities, where yield depending on the crop can exceed 30 times the productive capability per acre of field group crops and where they recover all the water not observed by the plants and make beneficial reuse of that water. Additionally, Windset is in the process of expanding its capacity in California by over 30% in the next six months. So, looking forward, Landec's top priorities for the next 12 to 24 months are. One, continuing to shift our product mix to high margin products at both Apio and Lifecore. Two, developing innovative new salad products to broaden and strengthen our offerings. Three, expanding our retail presence in the U.S. for gaining new customers and further penetrating existing customers. Four, increasing demand for both our packaged vegetable products and our bio materials products to fill the additional capacity added in fiscal year 2016. Five, increasing the return on invested capital by maximizing return on each capital allocation decision. Sixth, evaluating new fill products outside the produce that Landec can offer through the product development and our strategic acquisitions or investments. Seventh, advancing our Lifecore programs with key customers and development partners. Eight, supporting Windset and its expansion plans to build hydroponic controlled atmosphere structure, using new growing methods for new crops. In summary, our strategic initiatives to develop new and innovative products, expand capacity to meet and anticipated demand and change our product mix to higher margin products are working in Apio and Lifecore. Overtime, these charge sheets will continue to deliver value to our customers, consumers and shareholders. We are now opened for questions.

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

Thank you very much. I have two questions. Molly you have just doubled the capacity - production capacity for your salad kits. You are growing or you grew last year at well over 30% rates. As I recall, your market share in U.S. grocery segment is lower mid single-digit and you are guiding to a low double-digit growth rate. Why shouldn't that be seen as a pretty conservative projection?

Hi Tony. So, as we mentioned, it's going to be really about penetrating the large accounts in the U.S. and growing our share in existing customers. So, what that growth implies for this year is really continuing to penetrate existing accounts and gaining some distribution in key accounts. So, we do not have in our projections any major sell in from a key customer, so that would be an upside. It's really hard to predict when that time will come and we are going after it, but that will be an upside to this year's guidance.

Okay got it. Second one, the other day you released an 8-K and declared that the Board has approved performance criteria for 2017 for management promises. Could you discuss what the sales and earnings operating earnings criteria actually are for the Corporation for Lifecore and for Apio?

We don’t want to go into that level of details Tony, but just say that the guidance that we gave that is what we are going to be judged on as a management team. So that is our plan.

So your guidance is approximately would be incentive.

Approximately, yes.

I see. Okay. Thank you.

Thank you. Our next question comes from the line of Anthony Vendetti from Maxim Group. Your question please.

Sure. Hi good morning.

Hey Anthony.

Hi Anthony.

Hi Greg and Molly.

Hi.

So, the Lifecore business has been growing obviously rapidly and its significantly higher margins and Greg mentioned on the call contributing to the outperformance on the EPS. I know one of your objectives or goals is to invest in that and grow that business, obviously it's the higher margin business. It looks like just from looking at the numbers about 10 times more profitable than the Apio line. I’m just trying to figure out what can we put our hands around or what exactly can you do to grow that business other than sign up new customers? Is there any other investments that you could make in that business to either increase distribution awareness or to make that business a much larger busyness?

Thanks Anthony. So you are right, we are putting a lot of efforts to see how we can grow that business anymore, it's a wonderful business. As I spoke about, the first thing we want to do is make our existing customers happy and we work closely with them on any new product development efforts they have in growing their existing business. The next big thing has really started to happen on and really broke out in fiscal year 2016 is looking at new markets. When we acquired Lifecore it was really an HA business and what we found is that Lifecore has some unique capabilities that apply outside of the HA market and our product development pipeline is now growing with those types of opportunities, which gives us access to a lot more, much larger customer base and a much larger market. The team at Lifecore has hired some new help in business development and they're actively going out right now and selling these new capabilities as a CDMO to new customers. And we already do have a couple of these opportunities in our pipeline and that’s why we feel confident about the future growth of Lifecore.

Okay and then just one quick question, the corporate division had a loss rate - can you explain what that entails and what that’s about?

Yes, at corporate Anthony, that’s where all the taxes are recorded, eventually all the day, the one, next by far the biggest number. Plus you have the all of the corporate expenses, all that’s the collect or stock base compensation is recorded at the corporate level. All the accounting fees, all the tax fees everything, all those are recorded at the corporate level. And the revenues are very small, I mean we had a couple of license deals last year, one was a one year deal. So it is just out of lot of revenues to offset the corporate for us.

Okay, I understood. And just being number one in package fresh vegetable is a enviable position to be in. With some of the consolidation going on in the business, how do you see the Apio business moving forward? Is that something you are looking - I mean obviously in the Southern area that’s a high growth, higher margin business? It's look like you are looking to focus more on, but is there anything else other than increasing the investment in Windset forms and expanding that relationship that you can do to medicate the effects of another El Nino that obviously you can’t predict?

Yes we have a couple different ways to our strategy at Apio. First of all, we are the number one branded packaged produce company in all if North America, that is an enviable position. And we are focusing our strategy on brand and on innovation, which truly is differentiated in our space. So we are looking at most of our products remaining branded and what is otherwise a very private label industry where about 70% of our business is branded, where about 30% is private label, most competitors are flopped on those percentages. So we are going to continue to invest in innovation and bring products in market as do have higher margins and that consumer's value. One of those segments is our salad kits but we are looking another innovation in vegetable package, vegetable offer bring to market. The other part of the strategy is looking at products outside of produce, we have an amazing infrastructure that we have focused on building over the last three to four years at Apio. We now have facilities that are on the West Coast as well as the East Coast is expanded this year, our facility and Hanover Pennsylvania that’s gone from 19,000 square feet to 64,000 square feet. And we have our own refrigerated trucks, so we have a logistics in manufacturing network that we believe we can leverage into other products. And when I say of other products, we haven't define this, this is one of our longer term strategy. But we are looking at refrigerated products that we can bring to market that solid the trend on healthy, convenient any pressures, but are non-encoded. And this production have higher gross margin that also have less volatility than the produce segment. And by diversifying our product line we are going to try to get some way to parking about, we are going to follow the trends of the consumer, but also try to mediate the risks that we have in our current business or volatility.

Okay great that’s very helpful. Thanks.

You are welcome.

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

Hey Molly, hey Greg.

Hi Morris.

Hey good morning.

First question you always give some sort of idea or number how much business you walked away from all loss vis-à-vis sourcing issues. Can you discuss some in this fiscal year how that played out and what your best guess is for this coming fiscal year?

Yes, let us give a little more color on that. If you remember in our last call we really didn’t have the details, because things were so volatile and we really wanted to wait until thing settled down and so they have settled down now, so we can share some more detail on that. So we launched approximately $30 million worth of business at Apio. And I can put that into three different categories. 60% to 70% of that loss was business we actually walked away from, because it was lower margin business. The remaining portion of that was split into two sections, which is basically we lost some business due to the dual sourcing strategies that we talked about in our previous calls, where some of our largest customers wanted to hedged the risks and the future with not having product on shelf by going to multiple suppliers on their highest value items. So we were a sole producer and supplier in several instances and we are now splitting that business. The Third area as we lost some of our business to customers, who we did short or pro-rate during the times of produce shortages however this business is very low margin business. Obviously, we had to make choices during a very difficult time of shortages and we are supplying customers who were paying higher prices. So all in all on an annual basis we lost - year-over-year annual basis we lost about $30 million of revenue but most this is all very low margin business, and our gross margin percentages actually will benefit from the loss of the business. I hope that provide some color.

Yes, that does detail there. Second, thing is jumping over the Windset. Where do we stand now in your Q&A that you provide for us, you talked about the plant, I sent to Barbara How does that play out this year, I know you are still going through the different issues on [Indiscernible] is that something where you might hit something shortly this year or that's just help us understand what's going on there?

Well, Morris I could tell you they based on recent discussions with Windset. They are continuing work to permit with the county. They don’t have in their plans that they will be adding any new structures or any structures for that matter. On county land for the next 12 months. So they expect this permitting process to last at least that long. In the meantime, all of the growth that they are forecasting all their expansions, they are doing on city land. So they are not sitting still, they are not waiting on the county, they have got plenty of land that they own on in this city and that's where they are expanding. With hopes for the next round of expansions 12 months plus out being on county.

Okay, then you discuss no change of fair market value to this fiscal year with the substantial change next fiscal year. Based on the 30% increase in acreage or what are the number you quoted you release capacity. Can you give us, assuming that all plays out as planned, what does substantial change mean?

Well, going from zero that could be a lot. Let's just say the peak that we ever received year-over-year was $10 million so can I give you the ballpark that will be somewhere between zero and 10, can't be more specific at this point. We've got to see now these expansions go, the timing of when they start production and one area is new crop for them. So, we are going to have to see how sales go, how their yields go. So there is still a lot of questions, we are just very confident, because we know there will be increased EBITDA next year, they are not going to be incurring the debt that they are referring this year that we will definitely have an increase in our fair market value next year I just can't quantify that at this time.

Fair enough. Last question, I'll get back in queue. You mentioned Wal-Mart as testing as a new customer which you are not going to doors with, any others that you are not in a doors with, not necessarily to your customer, but any other major out there on that customers that would be something on your radar?

Yes, so the other larger customers that this year we will be going after or Target, also not Myer and we are not Kroger. So those are three big accounts that we currently do not have those customers that we need to penetrate.

Thank you.

You are welcome.

Thank you. Our next question comes from the line of Mitch Pinheiro from Wunderlich Securities.

Yes, hi good morning.

Hey Mitch.

Hi Mitch.

I apologize, I've been struggling tow conference calls here. So I apologize if I'm asking a duplicate question here. But, first, where are you with expansion into the East Coast right now, is it just starting, because you now finally have capacity and what are your expectations for East Coast expansions with like current and new customers in 2017?

Well, first we did expand, I’m not sure if you are meaning expand of facilities or expansion of customers?

Customers.

Customers. Okay.

Now that you have the better East Coast.

Right. So now that we have expanded our Hanover facilities, I said we've gone from 19,000 square feet to 64,000 square feet. The first thing we are going to be able to do is rebalance our production and what I mean by that is that in California we are at full capacity. And so we have been just working three shifts and working seven days a week to produce salads and what this will enable us to do is move some of our existing volumes to the East Coast. And the results of our customers is tremendous, because what that does is it allows better quality and better service to our East Cost customers. So, we already have customers on the East Coast and this will give them kind of next stage service and other quality benefits by producing closer to their facility. I also just mentioned some new customers that we are going after and it's always the chicken and the egg, right. So, we can't go after big new customers if we don't have the capacity to deliver the products if they agree to move forward. So some of those new customers we just mentioned will required East Coast production and now we are ready for that.

Yes, so I’m not sure who those the customer were, I wasn’t on the call. So in 2017, I mean I just going to be a gradual build of new customers, you already have new customers lined up to fill Hanover, were is it all sort of to happening now just to sales process takes time?

No it will take time, first we are going to rebalance the network and we are going to optimize our current volumes on production and get some relief to our California facility. And then what we are projecting right now is more growth in the second half of this year as we bring on some new business. But overtime, the customers I mentioned were Wal-mart, Target, Myer and Kroger. I can't predict when we will able to land in those customers. So to me I would say this is more as a overtime process as we begin to penetrate those customers and did test with those customers in store like I mentioned earlier that were currently doing test in Wal-mart that’s going extremely well with our sweet kale salad. And so I see overtime hopefully getting test in more customers and bringing more their business online.

Okay thank you.

You are welcome.

Then you look at labor or labor issues that you are going to facing and the higher cost of the growers you going to test through, that’s an industry wide issue, correct?

Yes.

And would you be taking any pricing actions to offset those cost to maintain margins, have you talked about that?

No I haven't talked about that yet, it's a big question. We will be taking pricing increases we actually already have on some of our core product line. And again, on those that we can't get price increases, we may continue to walk away from some of that business and that’s why we are not projecting growth in our core line. And I do want to reiterate though, not all of our corporate business is little our margin business. We have different segment, we have a tray business, we have green bean business, we have vegetable bag, there is always a portion of that that we feel true pricing pressures. And in that portion of business if we are not able to increase pricing at the margins we need overtime, we will continue to walk away just like we did this year. And we walk away from that $20 million plus business this year due to customer is not excepting price increase, and we have shifted that volume over to salad where we do make money.

And in roughly speaking what is long labor cost as a percentage of Apio either cost of goods or revenue, roughly.

It's 10% to 12%.

Of revenue?

Of our cost of sales.

Of cost of sales.

Value added business.

Okay.

Remember export is purely commission business, you got to take that out a total off you, before you factor in your cost of sales, because they are cost of sales basically cost of the produce, very little labor, almost no labor.

So it’s like you know this not sliver, but y 10% to 12% is moving up at double-digit rate, I mean, you are pricing, what do you need, you need a couple of percent to cover this cost, you know all things being equal or more than that.

Well the bigger thing is going to be the mix change. As the mix changes in more higher margins salad that would more than offset the increase for labor.

Okay, and roughly how much pricing would you try to get or you think industry is going to get this year any ideas?

None.

No. We typically don’t give our price increase percentages.

Okay, and then I just have one other question is, when you look at Windset every time I'm looking at various trade magazines and one line sources. There seem to be a lot of greenhouse capacity expansion going on industry wide. And I'm just curious, I know Windset they have remarkable facilities, state-of-the-art, but as more and more capacity is built there will be other state-of-the-art facilities being built. And is there is Windset falling behind, because of this recent constraints at all in terms of its brand, it's marketing value, it's structure, is that possible and then B as part two is I mean would you want to be involved with other greenhouse grown sort of companies with capacity. I mean Is that a potential growth strategy for you or is Windset's growth enough.

Well I will answer that last one first. Windset growth is enough right, we are back in the best player in the industry. they by far have the highest margins and they increase profit of any of the greenhouse company that I'm aware of greenhouse growers. And you could see from a fact that if you look at their structure, their sales structure they have about 208 prior to this expansion 208-acres of greenhouse under glass that they own and they produce product from. But they market anywhere between 500 to 600-acres under glass from other greenhouse growers and that is a stable but relatively low margins especially in comparison to what they make and what they grow. So as they add expansion, there is a reason they are buying land all the way around and they have leased 100-acres over in the county, is they want move more towards production, their own production, because their margins are considerably higher than what they make on selling others. but that's how they are filling the gap right now in the demand, their demand far out strips their supply and so they has to fill that through these grower marketing arrangements and by field arrangement. But they would like overtime to move to doing less of those and more of their own.

Okay, where do you think if this 208-acres under glass is now. Where do you think that number ends that's the end of 12 months from now?

12 months from now, they will add 40.

Okay.

Now after that I can't tell you, I know their plans are to continue to grow. That's why they are buying land all the way around their Santa Maria facility.

Okay, and then just final question and you may have talked about this. But just in terms of acquisitions, can you add color to like may be what your pipeline looks like or what you are seeing. Is it a whole variety of different things, I’m just curious as to if there is any - I know you are looking to move into higher margin more stable type of product line, but I didn't know if you have had any other color around that?

Sure. So, our strategy from moving into other products is twofold, it's both looking at acquisitions and its developing new products internally. I mean we have a extremely strong culture of innovation, we want to build on that. It will take us time to ramp up on products outside of produce, because we need to add capabilities and be able to look in other markets which we traditionally have not done. So we want to innovate internally, so obviously whenever you can innovate internally you are going to have a higher ROI on our investments than through acquisitions. That being said, we are also very active in the acquisition space. It's a tough time for acquisitions for multiples being paid especially in the food market are extremely high. So we are not going to go out lay money down that doesn't give us the ROI we need on those investments. So, we are looking at all sizes, we are looking at the larger acquisitions, but we are also looking at small acquisitions that we may be able to grow overtime giving our expertise. So, right now we are just getting into the space, we are putting resources behind it and we are learning and the objective is to launch new products whether through kind of smaller acquisitions or through product development ourselves.

It seems like these each smart brand certainly has sort of like some cross category potential. So I guess so you would be looking more for capabilities than probably brands, is that fair?

Either, I agree with you, East Smart has a lot of elasticity and we want to be able to leverage that. That being said, if we bought something that had a currently extremely strong brand we want to honor that as well and the brand that that company as built. But, East Smart is the great brand and we would be able to leverage that on products that might be great products but haven't been able to brand them.

Well, thank you for the questions.

Thank you.

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

Hi good morning.

Good morning, Chris.

Hi Chris.

Just couple of quick ones. Can you please repeat the Wal-Mart comments when the timing of the testing began and the number of stores?

Sure. The testing began in May and the stores are little over 400, 423 to be exact.

Is that in the recent region or.

Actually, that's a good question, they are spread all over, but very disbursed and what we try to do is we try to get - we work with Wal-Mart and they want to take a variety of stores, stores that they have very high salad kit sales and other stores that actually don’t do well in salad kits. So they want to really understand the impact of sweet kale salad in all different type of stores. And what we've been able to do is I talked about supporting this test with online marketing we've been able to geo target those stores. So we are able to look at the zip codes of each store that is now carrying sweet kale salad and advertise to consumers in those zip codes specifically about sweet kale salad in Wal-mart.

Okay. One other question, I think I know the answer. But have been able fully source for the salad kits in last quarter, when they are going through weather issues?

100%. As a matter of fact, last year when we were having all the produce sourcing issues, we were still able to supply our customers with 100% of those salad kits need. So we haven't had any shortage issues in our salad business.

Okay. Thanks. That’s all I got.

Thank you.

Thank you. our next question comes from the line of Phil Terpolilli from Wedbush securities. Your question please.

Hey, guy this actually Dominic Ruccella on the line for Phil Terpolilli. Thanks for taking the call. First of congrats on completion of the Hanover facility, I think you guys did a good job of explaining why this will significant going in to FY 2017, but looking more at the margin benefit you guys can expecting and kind of trying to hone down on the EPS range for 2017. Is there anymore color that you guys are going to be able to provide on kind of what you had right on the bottom line from the Hanover facility?

More color other than - I guess I’m not quite clear to what you are looking for from your question.

Sure. You guys kind of went over in terms of how that’s going to help gain some of the new business from Kroger, Target, et cetera, as well as kind of take off some of the capacity, you guys running at full capacity and west coast, pick up some of that capacity on the east coast. Are you guys kind of see a margin benefits from that at all? Or can you guys clarify a little bit on the cost structure of kind of what you guys are expecting at?

Well you know not immediately because of the fact that, we built that facility for future growth. So if you want to look at it today, as we sit here the capacity, we are only at 30% capacity. So you may have somewhat of an overhead drag for a while, that was a lot cheaper and less expensive in a long run to go for 19 to 64 versus going from 19 to 45 and then a year or two later to 64. We decided to do the full build out all at once and be prepared as demand comes, we go out and have the equipment, put it into that facility and we would transfer yet more of the business from the west coast to the east coast. So at least in the interim, we are not expecting a margin pick up as a result of the facility but certain in a long run.

Okay thank you that does help. And then, Molly I think kind of going through the Apio business and kind of going through what the permanent losses may be from lower margin business for supply shortages. If we can expect more that 60% to 70% of the 30 million to be loss of this lower margin and that was on purpose. How much of the business could we expect to come back from the remaining 30% to 40% of that 30 million in fiscal 2017.

Well, I don’t think any of the dual sourcing business is going to come back, I think that’s a long term strategic shift of customers to reduce their exposures during really tough weather time. So I don’t see that coming back, so the smallest portion of that 30 million where customers had left because of pro rates. And it is a pretty small amount, they may come back, we hope they do, as long as they come back with a right price points. But we do not have that business factored into our guidance that we gave for fiscal year 2017, we don’t have any expectations that they will come back this year in our guidance.

Got you, okay. Okay well I think that that takes care of my questions, I appreciate it. Thanks guys.

Thank you [Operator Instructions] And this does conclude the question-and-answer session of today's program. I would like to hand the program back to management for any further remarks.

Thank you, Jonathan. Again, we are very happy to be through our [Indiscernible] year. We did use last year to build for our future. We think we have amazing growth opportunities in our future. Our salad business continues to grow at double-digit, Lifecore continues to grow at double-digits, we are seeing some additional pipeline work in our BreatheWay technology and we are exploring other products segments to enter in addition to the produce phase in our food business. So the outlook for Landec is very positive and we are looking forward to a great fiscal year 2017. Thanks for joining the call.

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