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Landec, hurt by soaring vegetable prices, flags boost from US tax rate cut

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Landec Corp flagged a boost from US President Donald Trump’s tax overhaul as it restated forecasts for full-year profits, despite a dent from tumbling exports adding to a setback from soaring vegetable prices.


The branded salads and vegetables group stood by expectations that it will in the year to the end of May report earnings of $0.52-0.58 per share, up from the $0.38 per share reported for its last financial year.


The move came despite the group raising to $25m-30m, from $20m-25m, its forecast for its decline in export revenues at its Apio business from during the year - after a near-halving, to $13.9m, in export sales in the quarter to November 26.


This export revenue decline “was greater than originally planned”, Landec said.


Tax rate reduction


However, the group highlighted a better-than-expected performance by its Eat Smart brand, including a 64% surge in takings from salad sales through US retailers such a Walmart, Kroger and Market Fresh.


This helped Landec hold revenues at $136.5m for the quarter despite the drop in export sales.


The company also flagged a boost from the tax cuts cleared by the US Senate two weeks ago, which reduced to 21%, from 35%, the federal tax rate on corporates from the start of this year.


“Our net income guidance for fiscal 2018 assumes an effective income tax rate of approximately 31-32%, versus historical rates of approximately 36%, as a result of the new corporate income tax rates that became effective on January 1,” said Greg Skinner, the Landec chief financial officer.


‘Losing certain tax benefits’


The maintenance of the tax rate above the 21% headline level represents in part the introduction of the new rate most of the way through the group’s fiscal year.


“We will have a lower tax rate in both our third and fourth fiscal quarters,” Landec added.


However, the group highlighted that its tax rate would remain above 21% ahead, “as we will be losing certain tax benefits the company has been able to utilise to reduce its overall effective rate during past years, such as the domestic manufacturing tax deduction to name one”.


For the 2019 financial year, it forecast a tax rate of 24-26%.


Furthermore, the group said it would be recording a one-time hit of $7m-9m in its results for the year to May from the loss in value of tax credits, or “deferred tax” assets, prompted by the reduced headline tax rate.


Tax reform impacts


The comments represent among the first in the agriculture sector on the impact of President Trump’s tax reforms, but follow on from cautions by some multinational groups, such as Goldman Sachs, that a “repatriation tax” included in the reforms will mean a large hit to earnings.


The likes of Bank of America and Barclays have also warned that the tax changes mean writedowns the value of deferred tax assets saved up from past losses, benefits worth less when the tax rate drops.


On Wednesday, American Express said that the initial impact of the tax changes would be drive it into a loss for the fourth quarter, but added that “the lower corporate rate is expected to be a significant ongoing benefit to us”.


‘Extensive shortages’


Landec reported earnings down 63% at $487,000 for its latest quarter, undermined by a triple whammy of weather setbacks to crops, raising the cost of bought-in vegetables.


After hurricanes Harvey and Irma damaged US vegetable crops – leading to “extensive green bean shortages”, which sent procurement costs to their highest in more than 15 years – efforts to fill the supply gap through fresh plantings in the south eastern US fell foul of storms too.


“In addition, the extreme heat and tropical storms in the western US and Mexico have impacted yields, and thus the company’s cost of procurement, for several west coast produce items such as brussel sprouts and broccoli.”


The US Department of Agriculture last week reported US broccoli prices at $54.80 per hundredweight, up 53% year on year.


Other vegetables seeing large price rises included cucumbers, up 33% year on year at $34.50 per hundredweight, sweet corn, up 46% at $54.70 per hundredweight, and onions, up 131% at $15.60 per hundredweight.

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