Lifecore Biomedical Inc (LFCR) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec First Quarter Fiscal Year 2013 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.

Thanks, Jonathan.

Good morning and thank you for joining Landec's First Quarter Fiscal Year 2013 Earnings Call.

I have with me today Greg Skinner, our Chief Financial Officer.

This call is being webcast by Thomson Reuters and can be accessed at Landec's website at www.landec.com by selecting Investors and the Financial Release and Events page.

The webcast will be available for 30 days through October 27, 2012.

A replay of the teleconference will be available for one week until midnight Eastern time Thursday, October 4, 2012, by calling (888) 266-2081 or (703) 925-2533.

The access code for the replay is 1590087.

During today's call we can make forward-looking statements that involve certain risks and uncertainties that could actually cause the 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 from Fiscal Year 2012.

Yesterday in our earnings release, we reported a good first quarter 2013 results.

During the first quarter of 2013, revenues increased 39% to $102.1 million, compared to $73.3 million last year; and our net income increased 40% to $2.5 million or $0.10 per share, compared to $1.8 million, or $0.07 per share during the first quarter of last year.

In addition, we increased cash flow from operations by 17% to $5.1 million.

The integration of GreenLine Foods into our Apio food business is going well, and it's ahead of plan.

We were challenged during the first quarter with severe drought in the midwest, including the Ohio Valley, where we source the majority of our green beans during the summer months.

The drought resulted in approximately $1.2 million of incremental cost associated with sourcing green beans.

The good news is we have returned to normal sourcing patterns, and currently we have an adequate supply of green beans to meet customer demand.

We believe we have an appropriate sourcing plan for green beans for the remainder of our fiscal year and going forward.

Apio is on track for having another good year.

Our investment in Windset Farms continues to look good, with excellent quality products at remarkably good yields and good customer demand.

Windset has been in full production with its first 64 acres of greenhouses in Santa Maria since December of last year, with different varieties of tomatoes.

Production performance has been exceeding Windset's original expectations, and they recently completed their second planting of tomatoes in all 64 acres.

As we have experienced in the past, Lifecore periodically has shipments that move from one quarter to another quarter, which happened again in the first quarter.

The accelerated shipment resulted in a shift of $1.9 million of revenues and $1 million of pretax profit to the first quarter that had been planned for the second quarter.

Without this shift, revenues and profits for Lifecore would have been in line with our plan and guidance for the first quarter, in which we had expected Lifecore to record lower revenues and profits during the first quarter compared to the first quarter of last year.

Importantly, the shipment does not change the expected results for Lifecore for the first half, and Lifecore is on track for having another good year.

The drought issue in the first quarter and the shift in the shipment at Lifecore do not change our expected results for the first half or for the full fiscal year of 2013.

Let me turn it over to Greg.

Thank you Gary, and good morning everyone.

In yesterday's news release, Landec reported after the first quarter of fiscal year 2013 revenues increased 39% to $102.1 million, versus revenues of $73.3 million for the first quarter of last year.

The increase in total revenues during this year's first quarter compared to last year's first quarter was primarily due to; first, $19.9 million of revenues from GreenLine; second, a $5.4-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; third, a $4-million increase in Apio's export revenues; and fourth, an $851,000 increase in revenues at Lifecore.

The growth in Apio's non-GreenLine value-added vegetable businesses resulted from a year over year 22% increase in unit volume sales of fresh-cut specialty packaged products.

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

For the first quarter of fiscal year 2013, Landec's net income increased 40% to $2.5 million, or $0.10 per share, compared to net income of $1.8 million, or $0.07 per share, for the first quarter of last year.

The increase in net income during the first quarter of fiscal year 2013 compared to the first quarter last year was due to a $2.9-million net increase in Apio's pretax income.

The increases in Apio's pretax income were comprised of; first, $1.2 million from GreenLine; second, a $1.2-million increase from Apio's non-GreenLine value-added and export businesses; and third, a $1.3-million increase in the fair-market value of our Windset investment compared to the increase in Windset's fair-market value during the first quarter of last year.

These increases in Apio's pretax income were partially offset by new amortization expenses associated with the acquisition of GreenLine, and increased variable operating expenses from the increase in non-GreenLine revenues at Apio.

The net Apio increase in pretax income of $2.9 million was partially offset by; first, a $1.3-million reduction in license fees from our termination of, or from the termination of the Monsanto license agreement; second, a $593,000 decrease in pretax income at Lifecore, due primarily to the timing of production and operating expenses within the fiscal year; and third, a $382,000 increase in the income tax expense.

Turning to Landec's financial position, during the first quarter of fiscal year 2013 we generated $5.1 million of cash from operations, and ended the quarter with $10.8 million in cash and marketable securities.

We incurred $2 million of capital expenditures during the quarter.

In addition, the Company paid down debt by $5.5 million, and paid a $10-million earn-out payment related to the acquisition of Lifecore.

Gary?

Yes, thanks Greg.

Over the past three years, we have worked to focus on our two core businesses, namely our specialty packaged value-added produce business and our biomedical injectable materials business.

The word focus is the keyword, as we have reduced our complexity and deepened our market presence in two businesses that relate to enhancing the health of people.

Evidence of Landec's commitment to investing in its core businesses and in products that promote health and support the quality of life that results from a healthy lifestyle is demonstrated across our businesses, including Apio, with its use of our BreatheWay packaging technology, our acquisition of GreenLine Foods, our investment in Windset Farms, and the acquisition of Lifecore Biomedical, and our continuing investments in technology-based applications.

Apio, through our BreatheWay packaging technology that extends shelf life to preserve freshness for the consumer, has grown significantly in recent years to become the leader in the US fresh-cut vegetable market, and we continue to enjoy unit growth volume that far exceeds the overall fresh cut produce category growth itself.

The acquisition of GreenLine, the leading processor and marketer of value-added, fresh-cut green beans in North America, strengthens our position in the market place and broadens potential applications for BreatheWay packaging.

In addition, Apio has partnered with Windset Farms, a leading hydroponic grower of high-quality produce in North America, delivering high yields of high-quality produce during all 12 months of the year, where Windset uses only 1/28th of the water needed for soil-grown produce.

At Lifecore, Lifecore develops and manufactures products composed of bipolymer hyaluronan, also known as hyaluronic acid, or HA.

Hyaluronan compounds are important lubricating, connective, and shock-absorbing components that occur naturally in the human body.

We make HA in a fermentation process in our pharmaceutical-grade facility in Chaska, Minnesota.

Our HA is used in an ever-growing range of applications, including ophthalmic surgery, osteoarthritis treatments, and veterinary care.

Since 1986, over 50 million patients worldwide have benefited from Lifecore's innovations in Hyaluronan-based products.

Overall, we're more focused today, and better-positioned to capitalize on the growth in our two core businesses, with our focus on products for enhancing the health of people.

Our priorities going forward are to meet or surpass our financial plan for this fiscal year by successfully integrating GreenLine into Apio, thus allowing us to benefit from cross-selling into our now combined larger customer base; by continuing to launch newly specialty packaged food products; by growing Lifecore's business, allowing us to capitalize on higher capacity utilization of our Chaska, Minnesota, facility; and continuing to invest in new technology-based applications.

We are now ready for your questions.

(Operator Instructions)

Morris Ajzenman, Griffin Securities.

A question, Lifecore Biomedical -- last conference call it was discussed about what was particularly customers, two customers that have received clearance by the FDA for new products.

Just curious how that's playing out.

Any impact to revenues this year, and any color you can give to that?

Morris, it's Greg.

Yes, as we discussed this is going to be a second-half results for us.

It's not going to impact the first half.

The new clearances, they've got to work through their inventory, we've got to build inventory, and then we've got to start shipping it to them.

It's all based on order patterns, and right now, we don't have a clear crystal ball on that, so I can't give you the magnitude.

We'll know a lot more on our next conference call, but view this as a second-half event.

Unrelated to this, any comment, any target on debt reduction for the remainder of the fiscal year?

Well, we'll definitely pay off the $7 million current.

That's not an issue.

Our goal is to try to pay off the line of credit at Apio.

What would preclude us from doing that, if there's a better use for that cash.

This is debt that's at 2.25%, and if it makes more sense to put money into equipment for productivity at GreenLine or Apio or at Lifecore, then that's what we'll use the money for, but our ultimate goal is to try to pay off the line before the end of the fiscal year.

Last question on the GreenLine acquisition, you say things have come along pretty well, and maybe better than initially expected.

Any upside to where you initially looked at for this fiscal year as far as synergies, cost reduction, et cetera, beyond what initially you had thought was the case?

I'd say in the cost reduction side probably not.

We took steps early in the first quarter in terms of streamlining some head count that was redundant.

There are some opportunities later in the year in terms of cross-selling.

Hard to put those in the plan because you just have to get at it.

Before we did that, we wanted to have our systems, our ERP system, totally synchronized and integrated.

That was a massive effort on both GreenLine and Apio's part to have that happen and that came together Sunday night.

It looks like it's seamless now and working very well.

We can go to customers now and we know that our order entry system and our tracking systems are all integrated and up and running.

I'd say if there's any upside, it's in the cross selling side, Morris.

As each quarter goes by, we'll have more visibility on that.

Thank you.

Tony Brenner, Roth Capital Partners.

Good morning.

A couple of things.

Apio value-added unit volume was up 22%, and it looks like those related revenues are ahead by 12%.

Where is the disparity?

It's product mix.

As you shift more, as the volume increase in retail versus club, you're going to have a shift in sales price.

Your volume can still be up, but your revenue doesn't necessarily track exactly the volume, because of product mix changes.

Last year, it kind of went the other way, where you had volumes that the revenues were higher in volumes, because the shift was more toward club.

That could shift quite a bit quarter to quarter.

In other words, there was a tilt towards club versus retail, is that what you're saying?

No, the other way around.

Opposite.

The other way around?

Yes, because we have a much higher ring at club than we do at retail.

You're selling mostly two- and three-pound product at club and 12-ounce in retail.

I see.

But there's been no favorable shift towards trades from bag to products, right?

No, it's pretty stable.

Okay.

Last quarter, your guidance was to look for a pretty healthy decline in export sales and it was exactly the opposite.

This quarter which I think is the biggest quarter for exports, so what's going on there?

Very favorable volume and pricing in export, higher than we anticipated, but we never declare victory in export until we get through the winter months.

The winter months are always the trickiest.

It did surprise us in a pleasant way in the first quarter.

Okay.

On Lifecore, what portion of sales at this point does your largest customer account for?

Let me do the math in my head -- about a third.

Has that declined since you acquired Lifecore?

The percentage?

Yes, because the rest of the business has grown.

Right.

Okay, thank you.

(Operator Instructions)

Chris Krueger, Northland Capital Management.

Hi.

First on the numbers, looking at your SG&A expense for the Apio business, which now includes GreenLine of course.

That $5.5 million, is that a decent run rate going forward?

Yes, that should be.

Okay, and then on your Windset investment, I know you don't provide specific sales or numbers like that.

I know it's just income.

Can you give us an idea of what Windset sales growth has been in recent quarters?

Well their primary growth -- no, I can't give you numbers because they're a private company and obviously we've been asked not to share that information, but their main growth is last year was the fact that the US operation came on line.

That started up in -- well the full 64 acres -- in December.

You've got a big pop this first eight months of this year because of that new operation being on line.

Okay, and I'm not sure if you put it in your commentary but the next 64 acres, what's the outlook for that to come on line?

They're looking at it right now, Chris.

You've got to go through permitting and planning and stuff like that, but we're not going to see any of that this fiscal year, and if it happens we'll see it next fiscal year.

Okay.

Lastly, I don't believe you commented on any of your efforts with Chiquita, whether it's the existing business or the potential for the shipping container business.

Can you update us on that?

The two active programs there are the Chiquita To Go program -- that's going strong, they like it, they make money from it.

We like it, we make money from it.

The shipping container, more tests, more containers being tested around the world.

Nothing more to say about that except that it's in the testing phase.

If you follow Chiquita, you know that there are a lot of changes going on in that company, change in CEO, change in their headquarters, change with a lot of changes with people, so we just are watching it closely, but it looks like the two programs we're doing with them are -- seem to be very secure, and are working for them.

We really do owe you some more information on the shipping container program at the next call and we'll make a note of that to have more details.

Okay, thank you.

Rick Fetterman, Fetterman Investments.

Thank you, good morning, everyone.

I'd like to circle back and ask a question another way regarding the Lifecore and the products that have recently gotten FDA approval from a couple of your customers.

Has there been any indication from those folks as to what their requirements might be going forward after whatever the ramp-up period is?

Yes, they give rolling forecast.

We're now receiving those rolling forecasts.

As Greg mentioned, they start to kick in in our second half.

Our fiscal year is May, so those start to materialize in the second half, so we are starting to see, with three-month updated forecasts, we're starting to see some visibility on those volumes.

Are there any numbers you can share with us?

Wouldn't want to share them with you.

There is some competition in this field, and we hold those numbers near and dear to us, but they are material, they reached the materiality level for sure.

On our growth for the year, our guidance is 15%.

For Lifecore.

Let's just say a good chunk of that growth is coming from these new products.

My other question was regarding the Clearly Fresh bag test.

Is there anything new there, or is it still in the test marketing phase?

There is a test that's starting shortly using infomercials.

We hadn't done any marketing at all around that product, and so the infomercial test will be going on in the next three months.

Next quarter we should have something to tell you.

Okay, thank you very much.

Will Lauber, Sterling Capital Management.

Can you tell me -- I don't know if you addressed this before, but in your guidance at the beginning of the year, did you bake in anything for any kind of synergies or revenue opportunities between Apio traditional and the GreenLine?

Yes, what we did is we firmly baked in operational synergies, cost savings.

That was definitely in our plan.

We have realized at least $1 million already in those synergies, and we expect to see some more, because there is some synergy in what I call purchasing power of cartons and films and things like that, so that's definitely in the plan.

What is not as fully put into the plan is customer synergy -- meaning GreenLine gets a customer that we had that they didn't have, or Apio gets a customer that GreenLine has that we didn't have, that kind of thing.

Those are much more speculative, Will.

It's hard to hard wire those into a plan, but certainly we are bound and determined to get those, but those would be -- except for one target -- that would be upside to our plan.

Okay, and as far as the cost synergies from your release, I take it that you're ahead of plan on the cost synergies side?

No.

We're ahead of plan on the integration, not the synergies, and that's primarily associated with the system conversion.

We did this much quicker than we thought we would be able to.

We can't even start the cross-selling until you have the systems in place, because you need the one-stop shop.

You need to have the distribution set up, the freight set up --

Order entry --

Order entry, everything, and so systems have to come first.

As Gary mentioned, we flipped the switch this Sunday.

We're going to run parallel for a month, and hopefully by the end of October, the old system's gone, the new system's up, and we're off and running.

But in terms of operational synergies, they're right on plan.

What was the original plan for getting rid of the old system, you said it's coming on?

Several months down the road.

Yes, we were hoping we would have it done before the end of November, so we're pleasantly surprised with how quickly and how well this has gone.

You could credit the Apio team.

They have busted their tails to get here.

Yes, the GreenLine Apio team did a super job.

You're a month or two ahead in that area, and then that allows you an extra month or two to pursue revenue synergies?

That's right.

Okay.

Thank you.

Morris Ajzenman, Griffin Securities.

Hi.

In the conversation with Chiquita, the avocados was not brought up.

Is that a moot issue at this point?

I think so.

I think it's in no-man's land for right now.

You might recall from our last call there was a request on their part to have some more time to explore different options, different alternatives for them.

They had difficulties sourcing avocados on a year-round basis.

It made it very difficult to compete in a marketplace where there are suppliers that can source reliably around.

We were using our packaging technology to allow you to buy a ripe and ready-to-eat product.

That value is clearly there, but if you lose that incremental value on having sourcing costs that are too high, then it's not going to work.

They're asking us to have some time, give some time to them for them to come back to us with some of their alternative thoughts.

We don't have those yet, and with their massive changes in their organization, we're a little bit hard-pressed to know who to talk to and when this is going to get decided.

They operate under some minimums right now, so we will be revisiting with them in the next quarter or two where they stand on that, Morris.

One scenario is we just take it back and we do something else, so it's limbo time for that right now.

I presume in the other technology, licensing, you didn't mention anything, that nothing's really going on at this point?

No.

What I will tell you is that our focus is on the two core businesses.

We've made our investments there.

We see the growth there.

We see the earnings there.

We will not rule out doing other licensing deals, but they're going to be very few and far between.

They're going to be very selective.

When and if we do any of them, we probably won't even talk about them, because we don't want to get back into a situation where we all get excited about a licensing deal, and you have that up and down and often you're disappointed because the partner changes his mind or isn't able to fulfill the promises, et cetera.

There really is a major focusing effort going on in the Company, and we think focusing on the two core businesses is the right way to go.

Thank you.

I agree, thank you.

(Operator Instructions)

Will Lauber, Sterling Capital.

On the avocados, can you say whether you had talked to any of the major avocado companies before you originally signed the deal with Chiquita?

Yes, we did.

Okay.

I guess you're not, you cannot be talking with them now with your current contract with Chiquita?

We currently cannot be talking with them now.

Okay.

All right, thanks.

Thank you.

This does conclude the question-and-answer session of today's program.

I'd like to hand the program back to Management for any further remarks.

Just want to thank you all for being on this call today.

As you can see, we're in a process where the Company has made some significant investments in the last few years.

These are starting to come to fruition.

Our job is to stay highly focused on our two core businesses and deliver the numbers, and so you know that's where we're putting our time and attention.

Many thanks for being with us this morning.

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

This does conclude the program.

You may now disconnect.

Good day.