Landec (LNDC) Q1 2019 Earnings Conference Call Transcript

Landec (LFCR -0.64%)
Q1 2019 Earnings Conference Call
Oct. 3, 2018 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen. We apologize for the technical difficulties. Welcome to the Landec Corporation's first-quarter fiscal 2019 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Molly Hemmeter, Landec Corporation president and CEO. Please go ahead.

Molly Hemmeter -- President and Chief Executive Officer

Good morning, and thank you for joining Landec's first-quarter fiscal year 2019 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 2018.

As a leading innovator in diversified health-and-wellness solutions, Landec is comprised of two businesses: Lifecore, our contract development and manufacturing, or CDMO, business; and our natural foods business, which includes three brands -- Eat Smart packaged fresh vegetables, O California-grown olive oils and vinegars, and our new brand called Now Planting, specifically targeted to the growing population of plant-forward consumers. Our Now Planting brand began shipping its new line of pure plant [Inaudible] to retailers last week. As expected, Landec's consolidated revenues in the first quarter of fiscal 2019 increased 8% compared to the first quarter of last year with the warning -- earnings of $0.01 per share. Lifecore's first-quarter results were consistent with plans, generating revenues of $12.6 million and a gross profit of $3.0 million.

Lifecore revenues increased slightly compared to the first quarter of last year and Lifecore gross profit was down $555,000 compared to the first quarter of last year, as a result of lower overhead absorption due to the timing of production and shipment within the year 2019. And Landec's natural foods business revenues were $112.1 million, an increase 8% in the first quarter, compared to the first quarter of last year, driven by an 8% increase in our Eat Smart business.The increase in East Smart revenues was primarily due to growth of Eat Smart salad sales, which increased 17% in the quarter compared to the first quarter of last year. Gross profit in our natural foods business was $13.4 million in the quarter, $1.9 million lower than the first quarter last year, due primarily to increased labor, freight, and packaging costs in our packaged fresh vegetable business. Landec continues to drive growth in each of its three strategic growth platforms, Lifecore, Eat Smart Salads, and our emerging natural foods product platform.

Our Lifecore strategy has been to accelerate growth and profitability by expanding the Lifecore business beyond its historical capabilities as a premium supplier of hyaluronic acid, or HA. We have achieved this with the completion of Lifecore's transition to a fully integrated CDMO, providing differentiated fermentation, formulation, aseptic filling and final packaging services for difficult-to-handle pharmaceutical products.We will continue to expand Lifecore's CDMO development pipeline, strive future commercial product sales. The installation of Lifecore's new $16 million multipurpose billing line was completed during the first quarter of fiscal 2019. A validation will begin during the second quarter, with commercial production projected to begin at fiscal 2020.

The new line will further enhance Lifecore's growth strategy as a CDMO, which is typically designed to align Lifecore capabilities with the growing needs and market expectations of its partner. This investment provides Lifecore the incremental capacity to build commercial quantities of drug products and vials, which expands the breadth of products and markets that Lifecore will be able to address. Although the new line will be primarily utilized to fill vials, it can also be used to fill syringes, which provide significant versatility and increased capacity utilization. At full capacity, the new dual-filling line has the potential to generate $40 million to $50 million of new product revenues annually.

Revenues the net income contribution will vary due to the product mix manufacturing on the new line during any given year.In our natural foods business, we are transforming our packaged fresh vegetable business into an innovative natural foods company comprised of three brands, Eat Smart, O, and the new Now Planting brand. The natural foods business has a unique combination of capabilities that makes it really differentiated in the market. First, we have proven internal innovation capabilities with the ability to launch new products and disrupt the market. Second, we have a refrigerated supply chain that allows us to rapidly deliver fresh natural foods throughout North America.

And third, our direct sales force works closely with our strategic customers to ensure our products reach the consumer. Together, these three capabilities make Landec uniquely positioned to deliver on-trend, fresh, and plant-based solutions to consumers. We continue to invest in development programs and capital to make this transformation successful.These investments will negatively impact profits in our natural business in the short term but are establishing a path to meaningful profit growth and enhanced shareholder value in the long term. Our O brand is off to a good start in fiscal 2019.

As you may recall, we completed the construction of a new in-house vinegar production facility located in Petaluma, California, at the end of fiscal-year 2018. The start of this new facility took longer than expected permitting delays in the impact of forest fires in northern California during the second half of last fiscal year. However, with the facility operational, O is now experiencing very positive results in the sale of its broad offering of premium wine vinegars with a modernized new bottle design that truly elevates the entire category on shelf. Leveraging this new facility, the O Olive innovation team has developed and introduced O organic apple cider vinegar during the first quarter of fiscal 2019.

O's apple cider vinegar is full of bright fresh apple flavor without a harsh aftertaste. With no artificial flavors or preservatives, O organic apples -- apple cider vinegar is raw, unfiltered, and contains live cultures. The market for apple cider vinegar in the U.S. retail -- in U.S.

retail has increased rapidly over the last three years, reaching $245 million in U.S. consumer retail sales according to Nielsen for the 52 weeks end of June 2018, and that market is growing at an average annual rate of 20%, driven by a 44% growth in organic products. O intends to penetrate this market with a better tasting organic products option.O begins shipping as organic apple cider vinegar to Safeway, Harris Teeter, and other accounts during the first quarter of fiscal 2019. As discussed in our last earnings release call, our Eat Smart salads delivered tremendous year-over-year growth of 23% during fiscal 2018 compared to fiscal 2017.

This growth was higher than we anticipated earlier there will 2018, as much as the new distribution actually occurred earlier than expected.In a short period of time, we have been able to demonstrate to retailers with data that Eat Smart salads are attracting a new consumer into the package salad category within the U.S. grocery channel. As such, we are focusing our efforts on building brand awareness and driving consumer trial in these stores. As previously stated, Eat Smart sales grew 17% in the first quarter of fiscal 2019 compared to first quarter of last year.

During the first quarter of this fiscal year, we have continued to gain new account and incremental salad sales to existing customer. For the next three quarters of fiscal 2019, growth in salad sales relative to year-ago quarter will be impacted simultaneously by, first, the significant growth salad sales in the last nine months of fiscal 2018. And second, certain account-specific headwinds in our salads business. There have been several strategic shifts regarding private-label assortment strategies among our customers in the mass channel, resulting in a gain of distribution in some accounts and a loss in others.

As a result, we are projecting a net reduction in salad sales in the mass channel in fiscal 2019, due to private-label initiatives in that channel. Our club customers have also reduced the number of their salad rotations this year, negatively impacting Eat Smart salad sales. Even with these reductions in distribution, however, we are currently estimating that our Eat Smart salads will grow about 2% to 4% this fiscal year compared to fiscal 2018 due to continued new business and other [Inaudible] and the launch of innovative salad items in the second half of this fiscal year. With a 2% to 4% growth in fiscal 2019, Eat Smart salads are projected to grow approximately 25% to 27% over two years for an average annual growth of 12.5% to 13.5% per year for fiscal 2018 and fiscal 2019.

We enter fiscal year 2019 with focus not only on top-line growth, but also on a strong and concentrated effort to reduce cost in our food operations. The entire food industry is facing considerable headwinds due to weather volatility and increasing cost in labor, freight, and packaging. Recent tariffs have also significantly increased the cost of select raw materials in our food business.We have engaged the Hackett Group, a third-party consulting firm with considerable experience in the produce industry, to identify cost reductions in our food operations above and beyond the cost savings that have already been identified by the Landec teams to offset these increasing costs. The Landec operations team is working diligently with the Hackett group to identify, quantify and implement cost savings initiatives beginning in fiscal 2019 with full-year impact in fiscal year 2020 and beyond.

Before I go into more detail about the launch of our Now Planting foods, for this -- occurring during the second quarter of fiscal 2019, let me turn the call over to Greg for some financial highlights from our first quarter of fiscal 2019.

Greg Skinner -- Chief Financial Officer

Thank you, Molly, and good morning, everyone. Revenues in the first quarter of fiscal 2019 increased 8% to $124.7 million, compared to $115.8 million in the year-ago quarter. The increase is primarily due to an $8.5 million, or 8%, increase in revenues in Apio's packaged fresh vegetables, driven by an increase in salad sales. Net income from continuing operations in the first quarter of fiscal 2019 decreased $2.2 million to $190,000, or $0.01, compared to $2.4 million, or $0.08 per share, in the year-ago quarter.

The decrease was primarily due to, first, $8.4 million decrease in operating income at Apio due to a $1.8 million decrease in gross profit from an increased labor, packaging, and freight costs and from a $664,000 increase in operating expenses. Second, a $475,000 decrease in operating income at Lifecore due to the timing of production and shipments within fiscal 2019. Third, a $339,000 increase in the net interest expense. Fourth, a $161,000 increase in operating loss at O.

And fifth, a pre-commercialization loss of $190,000 at Now Planting. These decreases in net income were partly offset by a $1 million increase in the fair market value of the company's Windset investment during the first quarter of fiscal 2019, compared to a $900,000 increase in the year-ago quarter, and from $1.2 million decrease in income taxes. We are reiterating our fiscal 2019 guidance. We continue to expect consolidated annual revenues to increase 5% to 7% in fiscal 2019 compared to fiscal 2018.

However, the mix of revenue growth has changed. We now expect Lifecore to grow 16% to 17%, versus 14% to 16%. In our natural foods business, we now expect Eat Smart salad products to grow 2% to 4%, versus 4% to 6%, our core bags and trays business to grow 2% to 3%, and O and Now Planting combined to generate $9 million to $11 million of revenues, versus $7 million to $9 million of revenues, resulting in an overall growth in our natural foods business of 3% to 5%. We continue to project consolidated net income from continuing operations to increase 10% to 20% in fiscal 2019 compared to fiscal 2018, resulting in an estimated earnings-per-share range of $0.45 to $0.50.

We expect consolidated cash flow from operations of $32 million to $36 million and capital expenditures of $45 million to $50 million. For the second quarter of fiscal 2019, we expect revenues to be in the range of $125 million to $129 million and net income to be breakeven to slightly positive. This guidance reflects the timing of production and shipments within the fiscal year for Lifecore, O and the recently launched line of Now Planting soups, and the seasonality of our Eat Smart revenues and margins. Let me return the call back to Molly.

Molly Hemmeter -- President and Chief Executive Officer

Thanks, Greg. The transformation of our foods business is evolving rapidly. We are quickly expanding our product lines from packaged fresh vegetables to include other fresh, natural food products that meet evolving consumer needs, and with a commitment to 100% clean ingredients. These natural products will have higher gross margins and exhibit less sourcing volatility than our historical produce vegetable product offering.We have been diligently working on multiple fronts to enable the realization of our vision for our natural foods business.

We launched the Eat Smart 100% clean-label initiative to ensure that all of our Eat Smart products, including salad toppings, dressings and dips, are made from all-natural ingredients with no artificials and preservatives -- artificial flavors or preservatives. Our commitment was to complete this transition by the end of calendar year 2018 and we are on track to meet that commitment. Through extensive research of consumer motivations lifestyle, eating purchasing behaviors throughout North America, the Landec New Ventures Group has identified a large underserved target group of consumers who define healthy eating primarily as plant-based. To meet the needs of these plant-forward consumers, Landec has launched Now Planting.

Now Planting raw, for pure plant meal solutions for the fresh and refrigerated sections of retail and club stores. Plant-forward consumers are eating less meat, with approximately 70% of their diet coming from plants. As this consumer segment continues to grow in both the U.S., where it represents approximately 17% of the population, and Canada, where it represents approximately 23% of the population, more people are searching for and finding pure-plant meal solutions outside of traditional grocery. They're shopping at fast-casual restaurants, [Inaudible] direct-to-consumer meal kit solutions and by cooking meals in their home.

Landec is uniquely qualified to partner with retail and club stores to deliver pure-plant meal solutions to these consumers. Landec's entrepreneurial innovation team, refrigerated supply chain, and direct produce sales force will develop and deliver fresh plant solutions to meet the needs of the plant-forward consumer and increase consumer foot traffic and retail and club stores over the coming years. Just last week, we began shipping Now Planting soups in Canada to Loblaws, one of our strategic innovation partners. Now Planting soups are extremely differentiated from anything currently in the market, but the nutritious ingredient profile that does not contain dairy or animal ingredients of any kind, and is naturally lower in sodium, sugar, and fat allowing you to celebrate the natural flavors of plants with a unique combination of ingredients.

Each soup contains plant-based toppings and delivers an amazing and unique-tasting experience. The Now Planting patented packaging design help these plant-based toppings within the lid, separate from the soup itself, to keep them fresh and crunchy, allowing the consumer to add toppings as desired. Now Planting will initially offer five 16-ounce soups -- red pepper bisque, sope verde, Cajun tomato rice, lemongrass curry, and hominy bean. Loblaw will initially be offering all five Now Planting soups in approximately 550 of their retail stores.

Our focus in our natural foods business is on developing and offering products that are on-trend with consumers and that deliver higher margins and a higher return on invested capital. We have successfully implemented this strategy with our entry in [Inaudible] multi-serve salad kit category, our recent disruption of the single-serve salad kit category, the addition of O California-grown olive oils and vinegars, including the no -- new O organic apple cider vinegar, and making its debut in fiscal year 2019, our Now Planting pure-plant food. The Landec New Ventures Group continues to focus on initiatives to grow our natural products offerings through acquisitions and additional internal innovation efforts. Its second natural foods initiative is scheduled to launch later in fiscal 2019.

More details of this initiative will be shared in the upcoming month. Switching to Lifecore. In our Lifecore CDMO business, we are experiencing strong double-digit annual growth and we are increasing our expectation for Lifecore in fiscal 2019 revenue growth to be 16% to 17% compared to fiscal year 2018, up from the previously expected [Inaudible] to 16%. Lifecore is benefiting from a growing trend among pharmaceutical and other medical material companies to outsource specialty services and manufacturing, especially for difficult-to-handle biomaterials.

With the growing number of products in the industry seeking FDA approval, Lifecore is well-positioned as a fully integrated CDMO to augment its pipeline with new projects to fuel its long-term growth. We continue to expect Lifecore to generate double-digit revenue growth on average over the next five years as Lifecore expands its sales to existing customers, adds new customers and commercialize these products that are currently in its development pipeline.Looking to fiscal 2019 and beyond, we will continue to innovate. At Eat Smart, we will continue to launch new packaged fresh vegetable products that make it easy and delicious for consumers to eat vegetables. We will continue to grow distribution of our O product, including the new O Organic Apple Cider Vinegar.

We will launch our Now Planting pure-plant soups focused on the plant-forward consumer. At Lifecore, we will continue to adjust new processes and capabilities to meet the needs of our customers for the difficult-to-handle pharmaceutical and medical materials, and we will begin filling products at vials in addition to syringes.We are also focused on increasing production volumes in each of our businesses to drive efficiencies and increase our return on invested capital. Finally and very importantly, we are focused on increasing efficiencies and driving down costs in our food business in order to offset the rising cost and continued weather volatility that is affecting that business.In summary, we will continue to focus on delivering value to our customers, consumers, and shareholders. As we continue to transform our businesses, we will focus on driving our three growth platforms, the Lifecore CDMO business, Eat Smart salads and our emerging Natural Foods products platform, while simultaneously reducing costs and increasing efficiencies.

Our balance sheet remains strong and provides us the resources for executing on our strategic objectives and reaching our financial goals We are now open for questions.

Questions and Answers:

Operator

Thank you. And our first question comes from Anthony Vendetti with Maxim Group.

Anthony Vendetti -- Maxim Group -- Analyst

Yeah, I was just wondering on Lifecore. Molly, if you could just talk a little bit about the process now that the -- now the installation is complete. I know you said there's a validation period, but is it possible that commercial production will begin before fiscal 2020? Or is it after the validation, there's a lag between that and getting new customers online for this? Or is there a pipeline ready to go?

Molly Hemmeter -- President and Chief Executive Officer

Hello, Anthony. So yes, the installation is complete, but the main milestone here is final FDA approval of the new drug that we will be manufacturing. So through the rest of this fiscal year, we're expecting to go through validation batches and supporting the company with the remaining clinical trials. But ultimately, we're expecting the FDA approval to become -- to come more toward the end of the fiscal year, so that we can start commercial production next fiscal year.

I guess there's a possibility we could get early approval, but that's our expectation.

Anthony Vendetti -- Maxim Group -- Analyst

OK. And then is there -- I know you've put a number in the press release about the potential. Is that because there's a pipeline of customers that you have -- that are ready to start once you do have FDA approval?

Molly Hemmeter -- President and Chief Executive Officer

Yes, so we have -- we have a customer that is ready to start and also other ones that would come on a later date to be able to utilize that piece of equipment.

Anthony Vendetti -- Maxim Group -- Analyst

OK, great. And then just to switch gears to the O and Now Planting and particularly, Now Planting. Obviously, you had a lot of success with the Eat Smart salad kitchen, the Salad Shake Ups! And now, with the soup line, are you following the same rollout plan? How many SKUs do you think retails will initially carry? And do these have the same sort of margins as the Eat Smart salad kits and the Salad Shake Ups!?

Molly Hemmeter -- President and Chief Executive Officer

OK. Thank you. So we just started shipping our soup -- our pure-plant soups last week. Our first customer that we can start shipping to is Loblaws, that is in Canada.

We're launching five SKUs, and I think I gave the names when I read previously and I think they're in -- I don't pick what the names are, but we're launching five SKUs. There are actually 16-ounce tubs with a patented container because of the toppings. So we are launching five SKUs in Loblaws that's taking all five SKUs. I got confirmation this morning that I was allowed to talk about our second customer that we'll be launching them.

I have to get the OK from my sales team that has met with our customers. But we also started shipping Publix. And Publix is also going to be taking all 5 SKUs of the soups and 600 of their 1,100 doors. So we're going to be starting in Canada with Loblaws, and we're going to be starting in the U.S.

with Publix and Berries, both very strong partners of ours. And really, the process is about going out with these two strong partners of ours to really believe that there is this segment of plant-forward consumers they believe we're completely on-trend and we want to get out and ship these products out there. I remember something we're doing very different is we're going to be merchandising soups in the produce and grab-and-go categories -- departments of these stores. So we're very much partnering with these stores to go after the plant-based and plant-forward consumers and that's what we're testing with them together.

Anthony Vendetti -- Maxim Group -- Analyst

Now that's awesome, and if I could ask just one last question on the Hackett Group. Did you ask them to figure out and identify and implement some of these savings initiatives in fiscal 2019? And then you expect some of the savings in fiscal 2020 and beyond. Are they -- do they have like a specified end date? Or will they continue to be consulting beyond 2019?

Molly Hemmeter -- President and Chief Executive Officer

Our bigger and immediate goal is, first, just to get fresh eyes on costs. We've been working aggressively to -- internally to offset all the cost increases for weather volatility and raw materials over several years. But we continue to see cost size. And so I think we just wanted to get fresh eyes on it.

And our goal right now has been to come in, assess the situation, actually have very specific projects that we can target, we can quantify and we can start time-lining in order to execute them over the next several years. My hope is that we put these in place. Our team can, over time, execute these. But I think it's a good practice to continue to have fresh eyes on this.

It's a big part of our business. And so right now, the Hackett Group's involved. We'll probably be adding a couple of people internally to help execute some of the projects that we're coming up with. And we'll just see, after this set, if -- what Hackett's Group, their involvement will be ongoing.

But I think, fresh eyes, consistent fresh eyes is always a good thing.

Anthony Vendetti -- Maxim Group -- Analyst

Yes. OK. Perfect. Thanks, Molly.

I appreciate it.

Molly Hemmeter -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. And our next question comes from Gerry Sweeney with Roth Capital. Your line is now open.

Gerry Sweeney -- Roth Capital -- Analyst

Good morning, Molly and Greg.

Molly Hemmeter -- President and Chief Executive Officer

Hi, Gerry.

Greg Skinner -- Chief Financial Officer

Good morning, Gerry

Gerry Sweeney -- Roth Capital -- Analyst

A question on the salad side. You talked a little bit about the shift, I think, at some of the supermarkets. Is this an effort by the supermarkets to maybe fight some of your growth? Or is this just a standard sort of maybe repositioning of products? And any thoughts on how this may be moved forward into next year?

Molly Hemmeter -- President and Chief Executive Officer

Yes, so I think you're referring to the private-label trend we're seeing. And we're really seeing this mostly in the mass channel right now. So it's not all over, it's in the mass channel. And it's definitely not about fighting our growth because when we grow, our partners grow.

So we're in this together, sort of thing, with retailers. I think that the private-label trend is way -- I think a lot of retailers are looking to differentiate themselves against the Amazons. And in that world, and some people are employing, some accounts are employing a private-label strategy that they think can do that. Now, everybody's private-label strategy is different, right? Everything from, "We're going to 100% private label" to,"Oh, we're going to go half private label and then stick with two brands but go more heavily into -- with those brands." So there isn't just one strategy, and we're seeing, depending on the account, we're seeing in some cases, we're gaining distribution because they've decided to focus on our brand.

And in some other cases, we haven't lost it yet, but we're projecting that we will lose it. So it's a mismatch out there. Again, just in the mass channel, but that's what we're seeing. And these kinds of accounts try to differentiate themselves.

Gerry Sweeney -- Roth Capital -- Analyst

Got it. And then on the Now Planting. Obviously, I think you talked about before you had some focus group tests and the soup is very good, I tasted it, it's great. I mean, how does that play off in terms of leveraging your existing channel? Can you go to them and highlight these almost fights, some of the meal kits that are developing, that may be taking some other revenue, etc.? And what has been the response from the -- some of the channels beside Publix and the Canadian group?

Molly Hemmeter -- President and Chief Executive Officer

So we've been going out showing the soups to a wide variety of customers. And to your first question, how do we leverage our existing debt business to help us more efficiently launch these soups. We do have it in two ways. First of all, we can use our refrigerated supply chain.

So one of the things about these soups is that they are refrigerated, fresh, no preservatives. And so no artificial preservatives. So we can use our existing refrigerated supply chain, meaning our trucks mostly, to get these soups to our accounts, to get them on shelves with enough food date left, so that consumers can truly enjoy them. And so we're able to put the soups on the same truck with our salads, which is phenomenal from a logistics standpoint, right, and it also helps our overall business by utilizing our trucks.

So that's part of it. Also, our customers are totally on board and realize the impact of this plant-forward consumer. And they believe that that plant-forward consumer is shopping in produce, OK? And because that shoppers' shop is in produce, they really believe that these soups go in produce. And so we're working with our existing partners and buyers in the produce department to sell those in.

So it's another way we're getting leverage in our existing infrastructure business and relationship to launch something fresh to consumers.

Gerry Sweeney -- Roth Capital -- Analyst

Got it. OK. And then another question on the -- or at least the Natural Foods line. I think in the commentary, you mentioned there's going to be another launch of -- I'm assuming of Natural Foods.

Is this an add-on to Now Planting? Or is this a whole another type of brand that you're going to be pushing out there, if you want to discuss that far out?

Molly Hemmeter -- President and Chief Executive Officer

Yes. it's revealed, but it's not advancing, and it's not another brand either. It's a completely different initiative. I think the bigger message that I'm trying to send is that our new venture group is very busy and we're on the move and we have momentum and we're aggressively going after this consumer that's asking for fresh.

And so that was the nature of my comment.

Gerry Sweeney -- Roth Capital -- Analyst

OK. That's what I assumed. And the final question just around the costs. I know you have engaged the Hackett Group.

But maybe, can you talk a little bit about some of the initiatives that may already be in place or ideas that you have looked at in terms of mitigating some of the labor, freight and packaging?

Molly Hemmeter -- President and Chief Executive Officer

Yes, so the main thing is automation. So automation in the past hasn't always made sense when you pencil out to ROI. If you do the math with the cost of innovation and the labor, it's just -- in all honesty, the math just doesn't make sense. Now with labor costs continuing to rise, there is no doubt that the ROI is there on automation that we would not have considered before.

And so that's what we're looking into. And so that's some of the CAPEX we're seeing this year, too, is because of these cost-out initiatives. So that means you have to spend on automation to get the costs out. So we believe for the long term, it's the right thing to do.

So some of it is in automation. Other things are in continuous improvement activities. So it's not all in innovation, but those are a couple of examples.

Gerry Sweeney -- Roth Capital -- Analyst

Got it. Great. I appreciate it. I'll return back in line.

Thank you.

Operator

Thank you. And our next question comes from Chris Krueger with Lake Street Capital Markets. Your line is now open.

Chris Krueger -- Lake Street Capital Markets -- Analyst

Good morning.

Molly Hemmeter -- President and Chief Executive Officer

Good morning to you.

Greg Skinner -- Chief Financial Officer

Good morning, Chris.

Chris Krueger -- Lake Street Capital Markets -- Analyst

Hi. Looking at Now Planting, I know you said it's going to sell in the produce section. Where within the produce section would that be? Would it be like a special display? Or any kind of marketing plans to drive awareness of it?

Molly Hemmeter -- President and Chief Executive Officer

Yes. We're trying in a couple of places. And you know what? I'm not sure where Loblaws or Publix ended up. So I'm going to leave that.

Let me -- let's try to get it on shelf because I don't even think it's on shelf yet. It's getting delivered right now. So the account makes the final decision. We know it's being in produce.

But maybe next call, we can discuss more where it specifically is within the place.

Chris Krueger -- Lake Street Capital Markets -- Analyst

All right. Then looking at the Lifecore, your pipeline potential with new customers. If you look out like to the end of 2020, fiscal 2020, what kind of capacity utilization percentage do you think you can get to by then? And do you have any potential like large, like $10 million or more year type of customers in that pipeline?

Greg Skinner -- Chief Financial Officer

Yes. Hey, Chris, it's Greg. Potentially, we can't go on in any detail. It wouldn't be overnight.

But as we've said, just the one line alone, that should be up and operational in 2020 and bringing in a full capacity, an incremental $40 million to $50 million in revenues a year. And there is space because if you recall back in 2010, we significantly expanded the Lifecore building. There is space already set up within that building to actually add another one of these lines. So that's what you want to hear from us, is that we're going to be adding another line.

And I think that will tell you what we'd expect going forward.

Chris Krueger -- Lake Street Capital Markets -- Analyst

All right. There was your Windset investment. There's been some talk that greenhouses in Canada have been targeting the hamper cannabis or whatever, market. Is Windset able to gain some share there and take advantage of that?

Greg Skinner -- Chief Financial Officer

Yes. One of the advantages that this Windset business has no intent at this time to get into cannabis. But what is happening is a lot of their competition has moved wholeheartedly into marijuana. And as a result, there is somewhat under-capacity right now for greenhouse-grown products, specifically the products that Windset grows.

So they believe they're going to have some pricing power going forward as a result. I haven't mapped it yet, but we'll see. But that's their belief.

Chris Krueger -- Lake Street Capital Markets -- Analyst

All right. And last question, any impact in the Southeast U.S as far as the hurricane goes?

Molly Hemmeter -- President and Chief Executive Officer

We did -- we have minimal impact. The impact didn't affect any costs specifically, but it did increase our costs slightly because of the heavy rains. Some of it did get into Ohio and some of our plantings in North Carolina. We did anticipate it a bit and we're able to plant more beans in Texas and California.

So we were able to take care of our customers for the most part. But that did with some increase in costs. And that's what you see a little bit in the first quarter as part of that gross margin, that gross profit shortfall in the first quarter was due to higher green bean pricing.

Chris Krueger -- Lake Street Capital Markets -- Analyst

All right. Thank you.

Molly Hemmeter -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. [Operator instructions] Our next question comes from Mike Morales with Walthausen & Company. Your line is now open.

Mike Morales -- Walthausen & Company -- Analyst

Hi, Molly. Hi, Greg. Thanks for taking the question. One of the things that I noticed from the Now Planting soup line is it seems like it would certainly be a product that's used toward a younger customer base in my mind.

Has the company thought about maybe taking a more direct-to-consumer approach on marketing? Or maybe looking into the future, longer term potentially selling those products in a more direct-to-consumer way?

Molly Hemmeter -- President and Chief Executive Officer

I wasn't looking at that. I'm not sure specifically know what you're talking about. But you can buy Eat Smart -- on the West Coast, you can buy Eat Smart products online now, so we could put Now Planting soups on that same system. We're already selling through direct meal kit company companies, including companies like HelloFresh.

But we're also selling our vegetables to meal kit companies to retailers. So a lot of retailers are starting their own meal kit companies, and we're already selling our vegetables to those companies. So I think what we want to do is get these soups out there, start to build awareness. And as we see where the business is coming from, we can definitely include it in those programs.

I will say though that it does -- it is for younger consumers, but it's not really about the demographic of it being younger. It's more about the psychographic. And what we found is that there's a psychographic in this plant-forward consumer that's kind of transformed the age. And it's about a kind of eating lifestyle and belief system where you do want to eat most of your meals that are plant-based.

So not all. It doesn't mean you're a vegan. It doesn't mean you're a vegetarian. But about 70% of what people are eating in the plant-forward segment are plant-based ingredients and food.

And so I just want to emphasize, it really isn't just the millennium population. It really is across age demographic.

Mike Morales -- Walthausen & Company -- Analyst

Sure. That's helpful. And then I think one of the comments that you had made was that you're looking to take some efforts to remove sourcing volatility through new products in packaged fresh vegetables. Can you just refresh us on maybe what some of the details on those initiatives to remove that volatility might be?

Molly Hemmeter -- President and Chief Executive Officer

So our biggest initiatives to do that is to move into other products and shift our product mix. So the way we're removing some of the volatility is shifting our products from just being about fresh vegetables to other products that still use plants and vegetables in a base that have longer shelf life. And so the foods, because they are cooked even though they're still fully refrigerated, they are cooked, they have a slightly longer shelf life of 45 to 55 days and they have ingredients that can be stored on a longer basis. And someone asked earlier, I didn't think I got to that answer about our margins on the soups.

The target as we gain volumes, so we have to get volumes to get there, was over 30% gross margin, which is obviously higher than any of the products we have today in Fresh. So -- and our O Olive products are the same way. We're moving away from kind of the daily volatility of the fresh vegetable line. In O Olive, target margins there, again, they have to get some volumes to get there first, is also over 30% gross margin.

And they also have much less volatility on the supply side. So that's our main strategy, is to continue to add products to our portfolio to collect volatility. I will say our salad business has not had much volatility either. Our salad business has been pretty consistent ever since we entered the salad business about five years ago.

We -- I don't think we've ever shorted a customer on salads or have experienced much volatility with mother nature with those types of vegetables. Most of the volatility is in our bag vegetables business.

Mike Morales -- Walthausen & Company -- Analyst

Sure. And then just last one for me. One of the levers that you were looking forward to mitigate some of these rising costs would call that as price. Is there any detail that you can give on the magnitude of what you're contemplating for that?

Molly Hemmeter -- President and Chief Executive Officer

Right now, we're going out with price increases through this year in our core bag business. I'd say, we typically don't go out with how much we're doing price increases for. But we are actively, and we set a target for price increases this year. And we've already gotten about 75% of that target, and we're working on the remaining 25%.

Mike Morales -- Walthausen & Company -- Analyst

Gotcha. Thank you very much, Molly, that's very helpful. That's all for me.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session for today's call. I would like to turn the call back over to Molly Hemmeter for any further remarks.

Molly Hemmeter -- President and Chief Executive Officer

I just want to thank everyone for joining us on the call today. We are working aggressively on continuing to grow our three platforms: Lifecore, salads and our emerging Natural Foods products. But I also want to emphasize that we are very focused on reducing costs in our food business. This has become an ever-increasing focus of ours, and we know it's essential to the fundamentals of the business.

So we'll be giving updates on that on each call. Thanks for joining us today.

Operator

[Operator signoff]

Duration: 45 minutes

Call Participants:

Molly Hemmeter -- President and Chief Executive Officer

Greg Skinner -- Chief Financial Officer

Anthony Vendetti -- Maxim Group -- Analyst

Gerry Sweeney -- Roth Capital -- Analyst

Chris Krueger -- Lake Street Capital Markets -- Analyst

Greg Skinner -- Chief Financial Officer

Mike Morales -- Walthausen & Company -- Analyst

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