Lifecore Biomedical Inc (LFCR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec Corporation fiscal year 2012 and fourth-quarter 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 follow at that time.

(Operator Instructions)

As a reminder, this program is being recorded.

I would now like to introduce your host for today's program, Mr. Gary Steele, Chairman and CEO of Landec Corporation.

Please go ahead, sir.

Good morning and thank you for joining Landec's fourth-quarter and fiscal year-end 2012 earnings call.

I have Greg Skinner with me, Landec's Chief Financial Officer.

This call is being webcast by Thomson Reuters and can be accessed at Landec's website at www.landec.com on the Investor Relations page.

The webcast will be available for 31 days through September 1, 2012.

A replay of the teleconference will be available for one week until midnight Eastern time, Wednesday, August 8, 2012, by calling 888-226-2081 or 703-925-2533.

The access code for the replay is 158-3900.

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 2011.

Yesterday in our earnings release, we reported very good fourth-quarter and fiscal year 2012 results.

During fiscal year 2012, we achieved record levels of revenues and strong earnings and cash flow from operations, along with substantial growth in overall unit volume sales.

As reported, we finished the year strong with the fourth-quarter revenues increasing 21% to $82.6 million and fourth-quarter net income increasing $5.5 million to $2.8 million compared to a loss of $2.7 million during the fourth quarter of last year.

For all of fiscal year 2012, revenues increased 15% to a record $317.6 million and net income of $12.7 million or $0.49 a share.

It grew 46% compared to the fiscal year 2011 and after excluding the $4.8 million goodwill write-off in fiscal year 2011 of our Landec Ag, our former seed subsidiary.

In addition, we increased cash flow from operations by 53% to $22.2 million.

Our results reflect the shift in our strategy starting several years ago, a shift to focus on core businesses built on our material science technology in ways where we can control our own success.

We are now focused on two core businesses, food and biomedical materials.

In the food business, we recognize substantial growth opportunities as consumers continue to seek healthy, convenient, fresh cut produce food choices.

In the biomedical materials area, we recognize opportunities for our using our polymer materials in high-margin, value-added biomedical materials applications.

To increase growth in revenues and margins in our food business, in April of this year, we acquired GreenLine Foods, which is an ideal synergistic match with our Apio food business.

In fiscal year 2013, the year that we started on June 1, GreenLine is projected to contribute $95 million to $100 million in revenues and $10 million to $11 million in EBITDA.

In 2011 we invested in Windset Farms as we saw advantages in using hydroponic greenhouse techniques to grow high-quality produce throughout the year with consistently high yields.

From our 20% ownership investment in Windset, we received 7.5% annual dividend and a 20% share of the increase in their fair market value, which, when combined, contributed approximately $7 million to pretax income in 2012, and that's on a $15 million original investment.

And to pursue opportunities in the biomedical materials sector, in 2010 we acquired Lifecore Biomedical, which in 2012 contributed $34 million in revenues and over 30% EBITDA margins.

With these investments, we are now focused on integrating GreenLine, assisting Windset Farms in doubling its California greenhouse growing capacity, and expanding Lifecore's customer base and product offerings.

We have taken steps to further focus and rationalize our business.

We recently announced the sale of our Landec Ag Seed Coating business to INCOTEC, a leading provider of seed and coating technology products and services to the seed industry.

While we plan to continue to support our licensing partner applications for our materials, we are directing most of our R&D spending in support of our core food and biomedical materials businesses.

As reflected in our financial and business results, we had a very good fiscal year 2012, and we plan to continue our growth path for fiscal year 2013.

For fiscal year 2013, we plan to grow Landec revenues by approximately 30% and net income by 25% to 35% compared to fiscal year 2012.

Let me turn it over to Greg for a discussion of the specific results.

Thank you, Gary, and good morning, everyone.

In yesterday's news release, Landec reported that for the fourth quarter of fiscal year 2012, revenues increased 21% to $82.6 million versus revenues of $68.1 million for the fourth quarter of last year.

The increase in total revenues during this year's fourth quarter, compared to last year's fourth quarter, was primarily due to, first, $9.1 million of revenues from GreenLine; second, a $5.2 million increase in revenues in Apio's non-GreenLine value-added businesses, which includes the fresh-cut specialty packaged vegetable business, Apio Cooling and Apio Packaging; and third, a $1.3 million increase in revenues at Lifecore.

The growth in Apio's non-GreenLine value-added vegetable businesses resulted from a combined year-over-year 14% increase in unit volume sales.

These increases in revenue were partially offset by a $1.3 million decrease in revenues in our technology licensing business, due to the termination of the Monsanto license agreement at the end of the second quarter of fiscal year 2012.

For the fourth quarter of fiscal year 2012, Landec's net income increased by $5.5 million to $2.8 million, or $0.11 per share, compared to a net loss of $2.7 million, or $0.10 per share, for the fourth quarter of last year.

The increase in net income during the fourth quarter of fiscal year 2012 compared to the fourth quarter last year was due to, first, a $4.8 million impairment charge during the fourth quarter of fiscal year 2011 from the write-off of goodwill at Landec Ag; second, a $3.3 million increase in Apio's operating income, which included $1.6 million from GreenLine, but excluded acquisition-related expenses of $1 million, which was recorded at Apio; and third, a $1.3 million increase in operating income of Lifecore.

These increases in net income in the fourth quarter were partially offset by, first, non-reoccurring acquisition-related expenses of $2 million, of which approximately $1 million -- what was reported at Apio -- $500,000 at Lifecore, and $500,000 at corporate; second, a $1.3 million reduction in license fees from the termination of the Monsanto license agreement; and third, an $836,000 increase in the income tax expense.

For fiscal year 2012, revenues increased 15% to $317.6 million versus revenues of $276.7 million for the same period a year ago.

The increase in revenues during fiscal year 2012, compared to fiscal year 2011, was due to, first, $9.1 million of revenues from GreenLine; second, a $22.8 million increase in revenues in Apio's non-GreenLine value-added businesses; third, a $9.8 million increase in Apio's export revenues, due to an 11% increase in export unit volume sales and favorable pricing; and fourth, a $1.8 million increase in revenues at Lifecore.

These increases in revenues were partially offset by $2.7 million decrease in revenues in our technology licensing business, due to the termination of the Monsanto license agreement.

For fiscal year 2012, net income increased 224% to $12.7 million, or $0.49 per share, compared to net income of $3.9 million, or $0.15 per share, for the same period last year.

After excluding the $4.8 million goodwill write-off in fiscal year 2011 at Landec Ag, the increase in net income was 46% year over year.

The $8.8 million increase in net income during fiscal year 2012, compared to fiscal year 2011, was due to, first, the $4.8 million impairment charge at Landec Ag in fiscal year 2011; second, a $5.2 million increase in operating income at Apio, which includes $1.6 million from GreenLine and excludes acquisition-related expenses; third, a $6 million increase in pretax income from our 20% investment in Windset Farms; and fourth, a $681,000 increase in operating income at Lifecore.

These increases in net income for fiscal year 2012 were partially offset by, first, non-reoccurring acquisition-related expenses of $2 million; second, a $2.7 million reduction in license fees from the termination of Monsanto license agreement; and third, a $3 million increase in income tax expense.

Turning to Landec's financial position, during fiscal year 2012, we generated $22.2 million of cash for our operations and incurred $5.4 million of capital expenditures.

We ended fiscal 2012 with $22.2 million in cash and cash equivalents.

Gary?

Yes.

Thanks, Greg.

We hold market leadership positions in specialty packaged fresh-cut produce and in the supply of hyaluronic acid-based materials in medical products to the ophthalmology market.

Building on our achievements in fiscal year 2012, we intend to continue advancing those market-leading positions.

Our integration work with GreenLine and Apio is going well with still much work to do.

We expect operating synergy savings in this acquisition to be between $1 million and $1.5 million this year, and we hope to see sales in customer synergies materializing later this fiscal year.

We do recognize that our food business is subject to supply risk related to the unpredictable development of adverse weather.

We are keeping a very close eye on the possible impact of the late spring/early summer drought in the Midwest, and through July, we were doing okay.

But obviously, it's a worry for everybody.

With the GreenLine acquisition, our combined customer and product placements give us 80% retail grocery store site penetration in the US.

Since shelf space is everything in the food business, this represents a strong basis for future growth.

We now have significant capacity in our food operations with five processing sites and seven distribution centers throughout the US.

We have nearly 300,000 total square feet of processing capacity for fresh-cut vegetables, and we own and sell products using the two leading fresh-cut brands, Eat Smart and GreenLine.

Our branded and private-label products use just under 100 million proprietary BreathWay packages -- packages that we have developed over the years through our R&D.

We use nearly 100 million packages a year to ensure high-quality products with extended shelf lifes and that these get delivered to retailers, club stores, and food service operators throughout North America.

For our Lifecore biomaterials business, we look to capitalize on the recent FDA clearances of products for two key customers that use our hyaluronic acid materials.

We have also devoted considerable capital dollars at Lifecore over the last couple of years in order to expand our production capacity and build sterile filling capability with pharmaceutical grade manufacturing capacity so that we can supply our materials as a powder or as liquids or as filled syringes.

As stated earlier, for fiscal year 2013, which began May 28, 2012, we plan to grow revenues approximately 30% year over year and increase net income 25% to 35%.

We believe we have aligned our strategy, our management team, and our infrastructure to generate continued growth in revenues, earnings, and free cash flow.

We are very clear about pursuing growth in our core businesses and capitalizing on our unique polymer technology and by using our strong channels of distribution in order to drive growth.

Our long-term goals going forward are to continue to grow topline revenues, while growing net income by 20% per year on average for the next five years and, in parallel, continue to generate substantial free cash flow, further strengthening our balance sheet, and allowing us to opportunistically make investments in the food and biomaterials space in the future.

We are now ready for your questions.

(Operator Instructions) Tony Brenner, ROTH Capital Partners.

Good morning.

I had three things I wanted to ask about.

The 14% volume increase in Apio.

Is that a pretty sharp step-up, and is that an aberration, or do you see a significant strengthening in the end market?

It's a combination of things.

We definitely have seen, as you know, from the very difficult recession years of 2009 and 2010, we've certainly seen a category growth increase, and it is running about 7% now.

Recall, Tony, in the shock of the recession, consumer was fleeing and really struggling, and it was like negative 10% growth.

So we're seeing category growth, so that certainly helps the cost, but we are certainly doing better than the category growth.

And I think it's just launching -- we continue to launch new products.

And the brand, the Eat Smart brand, is very strong.

And, as I mentioned to you, looking forward, we are in 80% of all retail grocery stores now with some form of product now that we have GreenLine in our family.

So it's a combination.

Okay.

Second, in your guidance you suggest a much greater variance, particularly in net income, than you've ever had before.

Is that reflective of GreenLine or some other factor?

Well, I think we just have to say it is GreenLine.

We have to be cautious.

It's our first year of ownership.

We're learning about the business.

It should be a natural for us, but we just don't have enough time with them to really get the band down very narrow in terms of ranges.

So it really is GreenLine.

Is GreenLine unprofitable for portions of the year?

I'm sorry?

Is GreenLine unprofitable at various times of the year?

No.

It's profitable throughout the year.

Now keep in mind, as I said, we're watching this drought very closely, and we're trying to dodge bullets back there.

They have had some rain in the Ohio Valley, but there were times in recent months where farmers literally could not plant because there was no moisture in the soil.

So there could be some spotty times when product is short and you're buying on the spot market.

But, no, they're profitable in each quarter.

Okay.

Lastly, Windset Farms, you think the market value is calculated, as I understand it, on a discounted cash flow basis.

Is it correct that, as Windset Farms' earnings increases, that market value presumably increases along with it?

Yes.

Tony, this is Greg.

That's exactly how it works.

It's on a discounting cash flow model, looking out over projections through the put call date, which is basically the end of our fiscal year 2017, so five years from now.

And, yes, as their EBITDA or the value goes up, the value of the overall Company goes up, and we recognize 20% of that increase.

Okay.

So as Windset is now beginning to market additional crops growing in that greenhouse, your projection seems conservative, to say the least.

Is that fair?

Well, their original projections factored in they were going to have 64 acres of production coming out of those greenhouses in 2013 -- well, certainly by 2013, even within 2012.

Where you'll see an incremental pop is when the next two phases, the next 64 acres comes on line.

And they've begun the ground work of that, Tony.

So obviously we will have to update our projections when they come on line.

But we already anticipated in the projections the rollout of their volumes in the first 64 acres, which translates to 3 million square feet of greenhouses.

I see.

And then the next section comes on when?

2014, probably.

Yes, early.

Probably early in 2014.

These guys, they are not timid.

They are moving and shaking, so they're already breaking ground for this next 3 million square feet of hydroponic greenhouse.

Thank you.

Thank you, Tony.

(Operator Instructions) Morris Ajzenman, Griffin Securities.

Hey, guys.

Question on Lifecore Biomedical, obviously, you have had some good traction there, and you've got some approvals here most recently projecting [15%] revenue increase.

What can you tell us about EBITDA margins?

They are at 30% plus.

Any thought to can that be driven higher?

How does that play out as this rolls out with revenues, and anything else in the hopper as far as new product offerings?

So, Boris, basically over the next five years, we expect EBITDA margins at Lifecore to go up.

But there will be a fairly sizable change in product mix along the way.

Recall in my comments, we have added sterile filling capacity capabilities so that -- in the old days, they would just sell a powder or they'd sell liquid.

And now we'll be able to offer powder, liquid, or we can actually fill the syringes for them, and it's put it in a box, and it's ready for them to ship to customers.

And there are different margins between the sterile filling and the powder and the liquid.

But, in general, I'd say this year the EBITDA margins are going to be essentially the same as they were this last year, but over the next five years, what happens is we start to better utilize the excess capacity up there.

That's why we got that tremendous pop in our first year, if you recall, when we went from $2.9 million to $9.9 million in EBITDA in one year.

So it's all about capacity utilization.

So better capacity utilization, change in product mix.

We expect EBITDA margins, year over year, to be pretty much the same this year, but over the next five years, they're going to go up.

What is your current capacity utilization, and where do you expect it to move to over the next handful of years?

I couldn't hear the second question.

Say it again.

Current capacity utilization and you say move up.

Where do you ultimately target it to move up to?

Oh, yes, okay.

Current capacity utilization is about 50%.

Ideally, you want a capacity utilization at 90%, but that's not in our plan.

If we can move it from 50% to 75%, there's a lot of incremental margin there.

So that's our goal.

Thank you.

Thank you.

(Operator Instructions) Will Lauber, Sterling Capital Management.

Yes, just had a question on the finances.

Your accounts receivable were up quite a bit.

I guess you also had that fairly high Accounts Receivable, I guess, two quarters ago.

What drives that?

Well, at the year end, it is the addition of GreenLine.

I mean, we brought on their receivables.

Plus, May tends to be our best month of the year in our value-added business.

And, granted, if you compare it to year over year, it should be comparable.

But our revenues are up quite a bit this year in our value-added business, so a combination of increased revenues, this May versus prior year May, plus GreenLine, is the reason for the increase.

Will, we've been blessed over the years, I think as you know, with no receivables issues.

We work with top notch companies that are in strong positions, etc.

So fortunately receivables has just not been a worry.

Okay.

I mean, I was looking at it as a percent of sales, and it was up closer to 40%, I guess, as opposed to year over year of about 33%.

So that is mainly due to the GreenLine?

Yes.

Okay.

And then your assumptions for your guidance, could you give a little bit more color on that?

I mean, do you have anything baked in there for the weather impacts, whether it's the drought here or unforeseen things in California?

Yes, that's a superb question.

As you know, that's the risk in the Company is weather.

Yes, we have baked in both for GreenLine and for Apio some weather-related risk, but not catastrophic risk.

If there is massive floods in California or if this drought were to continue for any considerable period of time, that would be above and beyond what we are anticipating.

So a very fair question.

And I guess along with that, in the past, you had talked about closing what you had I think referred to as the Monsanto gap.

Do you have any -- in your guidance, do you have anything in there for any new deals or anything that -- ?

Yes.

Good question.

No.

None.

Zero.

And anything that we would do would be upside.

So the spirit of what you are hearing today -- which you've been hearing for some time, is a real focus on our two core businesses.

Plenty of growth there, investments in those two core businesses.

If we were to do R&D and consummate new licensing deals, that would be all upside.

And, Will, since you brought up Monsanto, just you could do the math, but I just want to note that if Monsanto -- if we did not have the $2.7 million in FY 12 -- I mean, obviously we did -- but had we not, the growth year over year, excluding that $2.7 million as pretax, obviously, in 2012 would have been 45% to 55% guidance instead of 25% to 35% that we have in here.

Okay.

And then my last question.

It looked like in the press release that there was a slight change with the avocados that Chiquita is now a partner.

If you can explain that a little bit further.

Yes.

They have another year of exclusivity.

They've asked -- they've invested a lot.

They struggled with -- the technology work absolutely as advertised.

They struggled with, since they hadn't been in the avocado business, they struggled with sourcing and logistics and just couldn't get it right in the timeframe that we are talking about.

And so they've asked if they could have the flexibility to talk to some additional partners and players that could utilize the technology where they could work together and we would be the beneficiary under a supply agreement.

So we're going to give them another year.

Let's see how it goes, Will.

If it's not going well, they are not going progress, then the technology returns to us.

So when you say you give them another year, is that some kind of an extension that you guys agree to?

No.

And they pay annual minimums, Will.

And they paid the minimum for this calendar year, and they have an opportunity to step up and pay the minimum for 2013.

And as long as they pay those minimums, they have the exclusive rights.

Okay.

So it's completely their option?

You don't have the option to --

Yes.

That's right.

But one more year.

Okay.

So that would be through the calendar year of 2013?

Only 2012 is signed up right now.

They can do it through fiscal year 2013, or is it calendar year?

I'm trying to remember.

It's calendar year.

Calendar year 2013.

And that's the last option?

Yes, that's it.

Okay.

All right.

Thanks.

Thanks, Will.

Rick Fetterman, Fetterman Investments.

Good morning.

In your estimate range for this year, the 15% increase in revenues at Lifecore, what percent -- are you assuming -- I don't know how to ask this -- full revenue from the two new FDA-approved applications all year or six months of the year, or what are your thoughts on, say, full-year revenues from these two new (multiple speakers)?

(multiple speakers) a half a year, but even at the half-year mark, it probably isn't going to be a full, annual rate at that point.

It will definitely be a contributor, but they have to work through their current inventory from their past suppliers.

And once that inventory is worked through, then we'll start supplying them.

So think more along the lines of a third to a half of a year this year.

So we should get an incremental pop from those new products next year when we have a full year under our belt.

Do you have any thoughts on what kind of revenues that might represent?

We have not disclosed that, and we have some thoughts.

But, at this point, we'd rather not share those.

Okay.

Regarding royalties from INCOTEC, is the arrangement -- do you expect anything this year?

Is that something that's likely to really start playing out next year?

No.

We expect it this year.

They've taken over the Pollinator Plus business.

That is a business that coats and ships their products basically in our fourth quarter, and INCOTEC is stepping into our shoes.

So they will be doing in the spring of next year what we've been doing, and that should bring in royalties around $200,000.

I mean, that's $1 million business.

We get 20% of that.

We are hoping, because they're a worldwide company, they can grow that and introduce that internationally because currently it's only sold in the US.

But right now I expect about $200,000 for FY 2013.

And two things were going on here, Rick.

One was our need to focus.

We have a lot on our plate, as you can tell.

Secondly, we just had no way of accessing international ag markets.

They are well positioned in 17 countries, and they are strong in Brazil and Argentina and India and places like that.

So over time, I'd say over time, it really represents a growth opportunity for us.

But this year, I think they are focusing primarily on the US.

So the numbers that Greg gave are pretty realistic.

Okay.

Is the commercial testing for shipping bananas with Chiquita expected to be complete in the next 12 months, or is that -- take longer?

Yes.

In the next 12 months, the testing should be complete, the business plan analysis in terms of what's the business model, what are the economics, how does this make sense, how big can this business be, should all be completed in the next 12 months.

Absolutely.

Okay.

Do you have an expected debt level for the end of this year, 2013?

Yes.

We plan to play off our line of credit at Apio before the end of the year.

It will be zero.

So that was almost $12 million at the end of 2012.

And then the average maturities are about 12 -- I mean, 10 years at Apio, four years at Lifecore.

I'm trying to do the math in my head.

So Lifecore will pay it down $3 million, and at Apio, we should pay it down about $4 million.

So all total, if you throw in the line, we should pay down debt somewhere around $18 million to $20 million this year.

Yes, and we are about little under, what, $60 million?

In total?

Yes.

Yes.

A little under $60 million, so does that give you a sense of our plan?

Yes.

Absolutely.

Thank you.

And last question.

Anything from Air Products, or is that just sort of out there and kind of keep wishing and hoping?

Wishing and hoping and out there.

They bought a company and -- you know, there are big plants that entice us to get together once to make a big footprint acquisition of somebody that was already a worldwide player in the personal care cosmetics supply arena.

They tried a couple of times; were not able to succeed.

They made a small acquisition of a German company; nothing to write home about.

To be honest with you, for me, it's out of sight and out of mind, and if they're pleasantly surprise us when this new product that we worked on with them for a couple of years starts to become -- gets through the testing and toxicology work that customers tend to go through, if that comes out with a roar, we will certainly let you know.

But right now we're just not anticipating much.

All right.

My last question is regarding estimated tax rate for this year.

That will be about 37%.

Thank you very much.

Appreciate your time.

Thanks, Rick.

Peter Black, Wynnefield Capital.

Hey, Peter.

Hey, guys.

How are you doing?

Good.

The last gentleman actually asked my question.

It related to Air Products.

I guess just one follow-up on that.

Do you have any ongoing costs associated with that licensing deal?

Zero, zero, zero, which is good.

We were able to redirect our R&D.

We spent quite a bit of time with them, as you know.

They were funding it.

I mean, you know, they paid us $2.5 million upfront license fees.

They funded the R&D and all that.

But, no, we are done, and we wish them the best.

Okay.

All right.

Thanks.

Appreciate it.

(Operator Instructions) I do believe this does conclude the question and answer session of today's program.

I'd like to turn the program back to you for any further remarks.

Well, just in summary, we're very pleased with the year we just ended and quite excited about the year that we are in, and we thank you all for being on the call today, and thank you for your ongoing support.

All the best.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.