Q2 2012 Seneca Foods Corp Earnings Conference Call

Oct 28, 2011 AM EDT
Thomson Reuters StreetEvents Event Transcript
E D I T E D   V E R S I O N

SENEA - Seneca Foods Corp
Q2 2012 Seneca Foods Corp Earnings Conference Call
Oct 28, 2011 / 12:00PM GMT 

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Corporate Participants
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   *  Roland Breuning
      Seneca Foods Corporation - CFO
   *  Kraig Kayser
      Seneca Foods Corporation - President & CEO

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Conference Call Participants
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   *  Bryan Spillane
      BofA Merrill Lynch - Analyst
   *  Bruce Zessar
      Advisory Research - Analyst

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Presentation
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 Roland Breuning,  Seneca Foods Corporation - CFO   [1]
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 (audio in progress) quarter of the fiscal year 2012, but before we do let me first cover a few standard legal disclaimers.

 Information shared during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because such comments are subject to risks and uncertainties, our actual results may vary materially from those expressed or implied by such forward-looking statements.

 Investors are cautioned not to place undue reliance on such statements, which speak only as of the date the statements are made. Except for ongoing obligations to disclose material information as is required by the federal securities laws, the Company does not undertake any obligation to release publicly any revisions to any forward-looking statement to reflect events or circumstances after the date of this call or to reflect the occurrence of unanticipated events.

 Some of the comments that we will make refer to non-GAAP measures. The Company does not intend this information to be used in isolation or as a substitute for other measures that are prepared in accordance with GAAP. I refer you to our second-quarter press release which contains reconciliation of GAAP to non-GAAP measures and to the Investor Information section of our website which is located at www.senecafoods.com.

 Unless otherwise mentioned, references to current year and 2012 or to prior year and 2011 refer to the fiscal years that end on March 31, 2012 and 2011, respectively. Now let me turn the call over to Kraig Kayser to talk about our business.

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [2]
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 Thank you, Roland. Seneca reported second-quarter profit of $2.9 million, or $0.24 per diluted share, versus a profit of $2.8 million, or $0.23 per diluted share, in last year's second quarter. Sales for the quarter were $283.6 million, up from last year's $275.4 million due to improved selling prices over prior year.

 For the six months ended October 1 Seneca reported a net loss of $5.1 million, or $0.42 per share, versus a profit of $8.1 million, or $0.66 per share, in the same period prior year. Sales were $542.7 million, up from $495.4 million in the prior year.

 One of the key drivers in reported earnings for the quarter and the six months was the LIFO charge. During the quarter the Company recorded a pretax $12.8 million LIFO charge versus a credit of $645,000 during the prior-year quarter or a $13.4 million swing. While in the sixth-month period the Company recorded a LIFO charge of $19.3 million versus a credit of $4.8 million in the first six months of last fiscal year or a $24.1 million swing.

 The large impact on earnings is a result of the Company being on the LIFO, reflects the fact that costs are up significantly this year as a result of higher produce, steel, and fuel costs. Roland will review the non-GAAP earnings on a FIFO basis as well as more detail on the earnings statement and balance sheet later in the call.

 While the net earnings do not show it as a result of LIFO charges, our performance is improving. The prior quarter, the Company's first quarter of fiscal 2012 was the bottom of the commodity cycle that we have been battling for the past year. Our business is now on the upswing as a result of the inventory correction that has taken place.

 In the two years prior inventories of canned and frozen products have been building on our balance sheet, and presumably in the industry, as a result of strong growing seasons in both fruit and vegetable sides of our business. A combination of pack plan reductions, strong sales in advance of price increases, and less than favorable growing conditions have all combined to turn the markets around to more favorable selling conditions.

 One indication of the changing conditions is the reduced promotional activity by the Company in the quarter versus the prior year. Trade spending was down by almost a third for the quarter to $14.6 million from $20.9 million in the prior year.

 As we pack our product in a very short window during the summer and fall, we use price to manage the inventories to allow us to move through the pack and yet remain a 52-week supplier to our customers. Trade spending is one way we manage this.

 Not surprisingly, with reduced trade spending the improvement in sales for the quarter was due to higher selling prices partially offset by lower volumes. Sales for the quarter were up $24.6 million due to the higher prices, offset by a $16.4 million reduction in volumes for a net increase of $8.2 million. The lower volumes were also a reflection of the fact that our customers bought in heavily ahead of the pricing advances that were kicking in during the second quarter.

 In fact, for the six-month period the sales increase of $47.3 million over the prior year was almost evenly split between higher prices and higher volumes. Reduced volumes over prior year will likely continue for the next several quarters as Seneca adjusts from being in an inventory oversupply situation to a more balanced and even short situation in some commodities.

 For example, the Company's pea pack was one of the shortest in memory as a result of wet weather in the early part of the growing season followed by exceptionally hot weather. This combination is very bad for growing peas, and as a result, we are managing through this inventory very carefully.

 Also in the last quarterly call I was concerned about the size of the fruit crop as the industry association projections were calling for another large crop. However, hail and other weather-related issues shortened up the crop to a more normal size, while at the same time demand has improved somewhat as important competition has softened to allow us to return the fruit business to profitability in the second quarter for the first time in a year-and-a-half.

 As I have discussed in the past, the fruit business has been plagued with declining demand and oversupply. Over the past 12 months the Peach Growers Association has conducted tree pull programs to offset some of the oversupply, while at the same time promoting export programs. The combination of these efforts has made a meaningful impact on the oversupply situation which should lead to more stable conditions.

 A recent signing of free trade agreements with Korea, Panama, and Colombia were positive events for the future of our fruit and vegetable business. For example, canned peaches were subject to a 45% import duty in Korea and the FTA allows these to scale down to zero over the next five years.

 We are also seeing encouraging signs for our export business overall going forward. Were it not for the short pack this summer in corn, particularly in Minnesota, we were anticipating a 10% growth in our case sales in international. A combination of the weak dollar and increasing costs in countries like Thailand, who we compete with for export corn business, has led to significantly more interest in our products than in previous years.

 Our domestic business is also showing signs of strength. Despite planned reductions in our sales to General Mills, our retail and food service business has seen growth in the first six months of the year. And even in the second quarter where prices had advanced significantly, we saw a case growth in our private-label retail and food service businesses.

 Bottom line is that consumers continue to find our products good value, even at the higher prices, and sales volumes have been holding up. I will turn it over to Roland now to give you more perspective on the quarter and six months in detail.

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 Roland Breuning,  Seneca Foods Corporation - CFO   [3]
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 Thank you, Craig. As Craig mentioned, second-quarter fiscal 2012 sales were $283.6 million versus $275.5 million a year ago. This $8.1 million or 3% increase was attributable to a $24.5 million increase in sales price and mix, which was due both to increased selling prices and decreased promotional activity.

 Sales volume was down $16.4 million versus prior-year, due primarily to reduced sales volumes to General Mills caused by a smaller pea pack this year than last. Second-quarter fiscal 2012 USDA sales were $3.1 million less than a year ago. For the six months of our fiscal 2012 sales were $542.7 million versus $495.4 million during the same period last year.

 The $47.3 million or 9.5% increase is due to a $23.9 million increase in improved selling prices and sales mix and a $23.4 million increase in sales volume. We experienced increased sales volume in all areas but General Mills, where volume was down due to the shorter pea pack volume and reduced impact purchases of beans and corn.

 Frozen sales volume increased by $11.6 million versus prior year due in part to the Lebanon frozen business that we acquired in August 2010 midway through our second quarter of fiscal 2011. Year-to-date USDA sales increased by $4.4 million or 25.2% due to improved volume and prices.

 Trade promotions, which we deduct from sales when we report net sales, decreased by $6.3 million or 30.2% in the second quarter 2012 versus prior year. On a year-to-date basis trade promotions decreased by $9.3 million or 24.1% from prior year. As Kraig said, this is indicative of a more balanced inventory position versus prior year.

 As Kraig also talked about, we are experiencing significantly higher LIFO charges in fiscal 2012 versus prior year, reflecting the increased costs for produce another purchase materials and the fact that our short packs this year have resulted in higher unit costs. Our second-quarter fiscal 2012 results include a LIFO charge of $12.8 million versus a credit of $0.6 million in second quarter fiscal 2011.

 On a year-to-date basis fiscal 2012 results include a LIFO charge of $19.3 million versus a credit of $4.8 million in fiscal 2011. These year-over-year increases in LIFO charge of $13.4 million in the second quarter and $24.1 million in the first six months mitigated some of the favorable impact that improved selling price and sales mix had on gross margin.

 Second-quarter fiscal 2012 gross margin was 7.5% versus 6.9% in second quarter fiscal 2011 while year-to-date gross margins were 5.0% in fiscal 2012 and 9.0% in fiscal 2011. On a FIFO basis gross margins were 12% in the second quarter of fiscal 2012 versus 6.7% in second quarter fiscal 2011 and was 8.6% for the first six months of fiscal 2012 versus 8% for the same period last year.

 Second-quarter fiscal 2012 selling expenses as a percent of net sales was 3.0% compared to 2.9% a year ago. On a year-to-date basis selling expenses, as a percent of net sales, were 3.2% which is unchanged from the prior year.

 Second-quarter fiscal 2012 general and administrative expenses increased by $1 million from prior year due to higher employment costs and represent a 2.5% of sales versus 2.2% in fiscal 2011. Year-to-date fiscal 2012 general and administrative expenses were $0.6 million more than a year ago, but on a percent of sales basis decreased from 2.7% in fiscal 2011 to 2.6% in fiscal 2012 due to increased sales.

 Total second-quarter selling, general, and administrative expenses were 5.4% in fiscal 2012 versus 5.0% in fiscal 2011. For the year-to-date selling, general, and administrative expenses were 5.8% in both fiscal year 2012 and 2011.

 Second-quarter and year-to-date fiscal 2011 results included a restructuring charge of $1.2 million related to changes implemented at the Buhl, Idaho, and Mayville, Wisconsin, plants and headcount reductions at certain other locations. Fiscal 2012 results had immaterial restructuring amounts.

 Net interest expense decreased by $0.4 million in the second quarter and by $0.5 million in the first six months of fiscal 2012 compared to their respective periods a year ago. The decreases were due in part to scheduled long-term debt amortization and from interest income earned on the Allens credit facility.

 Average borrowings on the line of credit increased by approximately $9.4 million in the second quarter and by approximately $16 million for the six-month period compared to a year ago. The August 2010 acquisition of our Lebanon operations for $20.3 million in cash was the major reason for the increased line of credit borrowings.

 EBITDA increased from $9.5 million in second quarter fiscal 2011 to $11.5 million in second quarter 2012 due to increased gross margins. On a year-to-date basis the $24.1 million increase in our LIFO charge versus last year caused EBITDA to decrease from $25 million in the first six months of fiscal 2011 to $6.8 million in the first six months of fiscal 2012 despite improved selling prices.

 On a FIFO basis EBITDA increased from $8.8 million in second quarter fiscal 2011 to $24.2 million in second quarter fiscal 2012, and from $20.2 million in the first six months last year to $26.1 million for the first six months of fiscal 2012.

 Our fiscal 2012 year-to-date effective tax rate is a more normalized 35.1% versus 19.3% for the first half of fiscal 2011. This increase is due to a $1.5 million favorable settlement in the second quarter of last year due to the settlement of an Internal Revenue Service audit of the Company's fiscal 2006, 2007, and 2008 tax years.

 LIFO diluted earnings per share was up $0.24 in second quarter fiscal 2012 versus $0.23 in second quarter fiscal 2011. For the six-month periods we had a LIFO diluted loss per share of $0.42 compared to earnings of $0.66 per share in fiscal 2011.

 On a FIFO basis, however, diluted earnings per share were $0.91 in the second quarter of fiscal 2012 versus $0.20 in fiscal 2011. On a year-to-date basis FIFO diluted earnings were $0.61 in fiscal 2012 compared to $0.41 in fiscal 2011.

 Free cash flow, defined as cash from operations less CapEx, was a negative $120.2 million for second quarter fiscal 2012 versus negative $80.1 million for second quarter fiscal 2011. Second-quarter negative cash flow reflects the seasonal nature of our business and that we make significant payments to our growers during this period. The $40.1 million increase versus prior year is due to a $20.4 million increase in inventory and a $21.8 million reduction in accounts payable and accrued expenses.

 On a year-to-date basis, the Company had negative cash flow of $94.4 million in fiscal 2012 versus $60.5 million in fiscal 2011. This $33.9 million decrease is primarily attributable to the $13.2 million decrease in net earnings between years and decreased accounts payable and accrued expenses.

 CapEx was $3.7 million during the second quarter fiscal 2012 versus $3 million during the same period last year. For the first six months of fiscal 2012 CapEx was $9.2 million versus $9.6 million for the first half of last year.

 Inventory decreased by $24.6 million from the second quarter of fiscal 2011 to the second quarter of fiscal 2012. This consisted of a $44 million decrease in finished goods and work-in-process, which is a result of increased sales volume and the short packs discussed by Kraig. Raw materials and supplies inventory is up $19.4 million from last year due to increased can and steel quantities.

 We closed on a new five-year, $350 million seasonal ABL credit facility in July 2011. The interest rate on the facility is based upon LIBOR plus the spread. While the effective rate is somewhat higher than the previous five-year facility, we believe the terms are favorable to the market and that the facility, along cash from operations, will provide good liquidity and funding resources.

 Also during second quarter fiscal 2011, the Company announced the execution of a memorandum of understanding to merge with Allens, Inc. In connection with the planned merger we purchased a $10 million participation in Allens' line of credit facility which matures on March 30, 2012. Interest earned on this participation is recorded as interest income and netted against interest expense on the income statement.

 Although merger discussions were terminated in September of 2011, we have continued our participation in the Allens facility and include this on the balance sheet as a loan receivable.

 Now I would like to turn it back to Kraig for concluding comments.

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [4]
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 Bottom line, it was an improving quarter as selling prices advanced as predicted, as a result of the inventories getting back in line after one of those challenging periods that periodically occur in a business that rely on Mother Nature each year to deliver its crops. We are experienced in dealing with the inevitable cycles of our business and are looking forward to continued improvement going forward.

 I will be happy, and Roland will be happy, to answer any questions.



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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Brian Spillane, Bank of America.

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 Bryan Spillane,  BofA Merrill Lynch - Analyst   [2]
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 Good morning. Just I guess the first question just regarding the supply/demand situation or the improving supply/demand conditions. Kraig, are -- so if I -- I just want to make sure I understand it right. What has occurred so far is you have been able to move clear inventory without having to promote as much as you have done the last few years?

 Will you be able to actually raise list prices, given some of the supply shortages on some of our products? Is there a potential that you can actually have increases, price increases over the next 12 months?

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [3]
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 We have certainly been -- it's a combination of raising list prices and lower trade promotions, Brian. And with private-label and our non-branded businesses, like foodservice and international, those are all list price increases by and large. There is a little bit of trade promotions in the non-branded business, but mostly it's a list price business.

 On the branded side, list prices, I don't believe we have any intentions or have raised list prices significantly on our branded business. But we manage that through trade promotions.

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 Bryan Spillane,  BofA Merrill Lynch - Analyst   [4]
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 Okay. And then as you have moved more inventory out, is your channel mix improving? I guess the perception that I had when there was too much inventory, not only was it -- do you have to discount more to move the product but also the channel mix gets skewed because you are having to find maybe less profitable channels to move product into.

 So A) is that true? And then I guess next is there sort of a channel mix benefit that you should see or that you are seeing now, because you just have less inventory to move?

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [5]
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 That is a good question and I think that is absolutely true. When we have too much inventory we are evaluating any and all opportunities to move that inventory, and when inventories are more balanced you have more of an approach of finding the most profitable channels to move that inventory.

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 Bryan Spillane,  BofA Merrill Lynch - Analyst   [6]
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 And then in terms of the rising raw material costs and I guess the effect that will have I guess on this year's pack and I guess potentially next year's pack, is the -- just if you could give us some color in terms of which inputs are more troublesome. Is it packaging cans, is it the actual cost of the produce?

 Just trying to get a sense for as we are trying to think about next year's pack even at this point, just where the areas of potential concern are.

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [7]
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 In this current pack season, which is just about over, the price of everything went up -- produce, fuel. More petroleum and gas as opposed to natural gas. We fuel our plants with natural gas, but we use a lot of gasoline in moving our product around the country.

 And so we had increases in fuel, we had increases in steel, and then produce went up quite a bit year over year. So that is the reason for the significant increase in the LIFO charges.

 As you look out next year it's obviously pretty early to predict. I can only tell you that the commodity prices for field corn and soy beans are higher now than they were when we contracted for our acreage last year. So if all things being equal, we will, in all likelihood, have to pay more for produce this coming season next summer. But we don't know that yet because markets move up and down.

 Steel and fuel, it seems like things are settling down on the fuel side but again we are a long way off from there. And on steel, we haven't begun any discussions yet regarding what next year's steel costs are going to be.

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 Bryan Spillane,  BofA Merrill Lynch - Analyst   [8]
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 Okay. And then I guess just trying to get a gauge of -- in terms of profitability, I guess the best scenario in your industry is you have priced and then you actually see it decline in input costs. And there is a window of time when margins can be -- I don't know how to best way to describe it -- well above the mean.

 This scenario right now is sort of a middle scenario, I guess, in terms of coming out of the worst part of the industry. Now you have got prices -- you are covering your costs, or more than covering your costs, but you still have rising costs. So I guess just looking back historically at sort of peaks and troughs in your earnings, is this -- just if you could give some color in terms of what the current sort of upswing looks like relative to the past.

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [9]
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 Well, I think that is a fair summation. Clearly, being on LIFO increasing costs has a significant impact on our GAAP reported earnings. The prior year, for example, we had a LIFO credit against earnings because costs had decreased. So there is no question that by and large that has a huge impact on our reported earnings.

 I would say that as we look out very much earnings are dependent on the industry's and Seneca's own inventory balance. As long as inventories are balanced or even short, the outlook is positive. The issues that existed for the last two years were a result of inventory oversupply.

 And because we pack in a short window of 60 to 90 days each year, you really have to move whatever you pack as an industry and as a company so that you can run your plants efficiently the following year. So that puts a lot of pressure on companies like Seneca to move their pack and reduce prices in an inventory oversupply situation.

 That is, hopefully, in the rearview mirror. And that going forward, and certainly this coming year, things are in much more balanced and favorable conditions.

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 Bryan Spillane,  BofA Merrill Lynch - Analyst   [10]
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 And then, Kraig, if you could just give us some thoughts on the thinking behind the proposal to merge with Allens. Just some color on what happened and what was attractive about it and why it ultimately didn't happen.

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [11]
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 Allens is a company that is in the same space that we are in. Seneca has been acquisitive over the years. We have made over 50 acquisitions in our history. And we saw an opportunity to get into southern vegetables, which we are not in, and grow larger in the frozen vegetable business, which has been one of our objectives.

 It was -- Allens is a private company and so I really can't really discuss the financial situation, but I can tell you that one of the challenges that we faced as we tried to put this transaction together was what I would describe as the more difficult financing environment. Challenges are going on in Europe among lenders and the costs associated with putting a transaction together were greater than we expected, and that was a big factor in our decision not to proceed.

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 Bryan Spillane,  BofA Merrill Lynch - Analyst   [12]
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 Thank you again.

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Operator   [13]
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 Bruce Zessar, Advisory Research.

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 Bruce Zessar,  Advisory Research - Analyst   [14]
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 I have two questions; one related to Allens. On the balance sheet you have a loan receivable to them of $10 million and I just wanted to understand why you chose to become a creditor to Allens.

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [15]
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 That is a good question. In the negotiations with Allens the Company had some creditors that were interested in exiting. We were in the midst of negotiations and we decided that it made sense for the Company to invest and take those investors out to keep the transaction moving along.

 Later on we decided not to proceed, but at the time it was a decision to allow us to continue the negotiations and due diligence.

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 Bruce Zessar,  Advisory Research - Analyst   [16]
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 Okay. And you fully expect that Allens will pay off this $10 million loan at March 31, 2012?

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [17]
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 Yes.

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 Bruce Zessar,  Advisory Research - Analyst   [18]
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 Okay. Then I wanted to turn to a question relating to the litigation that is disclosed in the 10-Q, the California litigation relating to lead. What exactly is the nature of that claim? Do you view it as just a nuisance suit? And who are some of the other companies named as defendants?

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [19]
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 Well, Proposition 65 is a law on the books of California related to labeling. The litigation relates to the fact that the companies named in the suit are not labeling the fact that there are minute particles of lead which are, in the Company's opinion, naturally occurring, which is an exemption under the law.

 But there are large multinational companies, like Coke is named, and so there is -- of the 28 companies there are large juice and fruit processing companies and smaller ones as well. We do not believe it is a material issue for the Company, but nevertheless it is something that we are going to have to deal with.

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 Bruce Zessar,  Advisory Research - Analyst   [20]
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 Okay. And then in coming back to the loan receivable just for a second, why is it that you felt you had to do this to keep the transaction going? And have you ever been in a position before where you have been a creditor to a company that you were seeking to acquire?

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [21]
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 Well, I have not in my years as President. I can't speak for the Company prior to that. But every transaction has its own set of dynamics and this particular transaction the dynamics were such that it was our opinion and decision that it made sense for the Company to make the investment.

 I really don't want to get into more detail than that.

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 Bruce Zessar,  Advisory Research - Analyst   [22]
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 All right. So I guess, I mean was it a concern that these other investors wanted to get out. Were they concerned about the financial position of Allens and you were comfortable that if you closed the transaction it was a nonissue, is that what was going on here?

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [23]
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 I don't necessarily believe that it was a -- that was the concern. I think it had to do more with the fact of the -- a new facility or an amended facility was being put in place and they were not necessarily in favor of that. It was a small piece of the overall transaction where the other lenders were all in favor of it, and so we decided to move it along.

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 Bruce Zessar,  Advisory Research - Analyst   [24]
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 So when you say the new facility, you are talking about Allens was negotiating a new credit facility at about the same time that Seneca was entering its own new credit facility?

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [25]
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 That is correct.

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 Bruce Zessar,  Advisory Research - Analyst   [26]
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 Okay. All right, thanks a lot. I appreciate it.

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Operator   [27]
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 (Operator Instructions) There appear to be no further questions at this time.

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 Kraig Kayser,  Seneca Foods Corporation - President & CEO   [28]
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 All right. Well, thank you very much, everyone.

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Operator   [29]
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 Ladies and gentlemen, this does conclude the conference for today. We thank you for your participation and ask that you please disconnect your lines.






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