Lifecore Biomedical Inc (LFCR) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Landec second quarter and first half 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 be given 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 second quarter fiscal year 2013 earnings call. I have with me today Greg Skinner, Landec's Chief Financial Officer. This call is being webcast by NASDAQ and can be accessed at Landec's website at www.Landec.com under Investors on the Events and Presentations page. The webcast will be available for 30 days through February 2, 2013. A replay of the teleconference will be available for one week until midnight Eastern time, Thursday, January 10, 2013 by calling 888-266-2081 or 703-925-2533. The access code for the replay is 1600693.

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 2012.

Our strategy of focusing on our two core businesses, food and biomedical materials, is paying off. We reported one of Landec's best quarters ever in yesterday's second quarter earnings release. Revenues for the quarter grew 41% year-over-year to $114.7 million. And net income grew year-over-year by 49% to $5 million before including the $3.9 million increase in income from the reversal of the earn-out liability associated with the GreenLine acquisition. We are increasing our guidance for the year for both revenues and net income, which I will talk about in more detail later in the call.

Our Apio food business grew revenues and profits in both our value-added specialty package business and our export business. Our growth was both organic growth and growth through our recent acquisition of GreenLine Holding Company in April 2012. Our second quarter milestones included -- first, growing our Apio specialty packaged produce business unit volumes by 20% compared to the industry category growth of 9%; second, increasing our overall food business gross margins by 530 basis points; third, completing our ERP systems integration work for GreenLine, which allows us to begin the cross-selling effort with Apio customers; fourth, completing our post-acquisition GreenLine operational synergy efforts, resulting in annual cost savings of approximately $1.5 million; fifth, increasing our export revenues by 16% while maintaining margins; sixth, launching the first of our family of vegetable super food products with significant initial demand nationally; seventh, initiating the expansion of hydroponic growing facilities at our partner Windset Farms, Santa Maria, California site, with doubling of production projected by year end 2013; and lastly, expanding Lifecore's biomedical sterile filling capacity for anticipated future growth with customers.

As disclosed in yesterday's earnings release, we will not be paying the $3.9 million earn-out to GreenLine's former owners, as revenue targets for calendar year 2012 that they established as part of our negotiations were not achieved, largely because of the under-performance of a few new products during the last six months of 2012. Our internal projections for GreenLine for fiscal year 2013 that ends May of 2013 are being met, and we expect GreenLine to achieve its earnings targets for fiscal year 2013. We are very pleased with the overall performance of GreenLine.

Also disclosed in yesterday's earnings release was that Chiquita has elected to go to a non-exclusive status starting January 1 of this year and as a result, Chiquita will not be required to pay the minimum gross profit for calendar year 2013. Therefore, Chiquita will pay the Company for packaging membrane products purchased on a per unit basis, and the Company is now entitled to sell its BreatheWay packaging technology for bananas, avocados and mangos to other partners. We will begin discussion with other potential partners early this year. However, if Chiquita continues to purchase membranes at its current rate, and we are not successful in adding new partners, this change will result in a net income reduction of approximately $200,000 in this fiscal year and approximately $750,000 in fiscal year 2014.

In a separate press release yesterday, we communicated that a restatement of our first-quarter earnings has been filed with the SEC because we miscalculated the fair market value of our investment in Windset Farms at the end of the first quarter of this fiscal year 2013. The $2.9 million correction and the restated financial statements for the first fiscal quarter reflects the miscalculation and also reflects a portion of the $500,000 increase in our share of the increased fair market value of Windset for fiscal year 2013. The Company has updated its policy and control surrounding its accounting for the change in fair market value of Windset to ensure that in the future such changes are recorded properly each quarter.

Let me turn it over to Greg for details of the quarter and the first six months' results.

Thank you, Gary. In yesterday's news release, Landec reported for the second quarter of fiscal year 2013 revenue increase of 41% to $114.7 million, versus revenues of $81.6 million for the second quarter of last year. The increase in total revenues during this year's second quarter compared to last year's second quarter was primarily due to -- first, $24.3 million of revenue from GreenLine, which we acquired in April of 2012; second, a $7.6 million increase in revenues in Apio's non-GreenLine value-added businesses, which includes Apio Cooling and Apio Packaging, as a result of a 20% increase in unit volume sales of fresh-cut specialty-packaged products, due to new product offerings, new distribution gains, and overall growth in the fresh-cut vegetable category; and third, a $3.9 million increase in Apio's export revenues, due to a 3% increase in export unit volume sales and favorable pricing. These increases in revenue were partially offset by a $1.5 million decrease in revenues at Lifecore, due primarily to product shipments that had historically occurred during the Company's second quarter being delayed until the third quarter this year, and a $1.2 million decrease in corporate revenues, primarily due to the termination of the Monsanto licensing agreement at the end of the second quarter of fiscal year 2012.

For the second quarter of fiscal year 2013, net income increased 167% to $8.9 million, or $0.34 per share, compared to net income of $3.3 million, or $0.13 per share, for the second quarter of last year. The increase in net income during the second quarter of fiscal year 2013 compared to the second quarter last year was due to a $9.6 million net increase in Apio's pre-tax income. The increases in Apio's pre-tax income were comprised of -- first, the $3.9 million non-recurring reversal of the GreenLine earn-out liability; second, $5.3 million from GreenLine; and third, a $1.3 million increase from Apio's non-GreenLine value-added and export businesses, partially offset by interest and financing expenses and amortization expenses associated with the acquisition of GreenLine. The $9.6 million net increase in Apio's pre-tax income was partially offset by -- first, a $1.3 million reduction in license fees from the termination of the Monsanto license agreement; second, a $2.1 million decrease in pre-tax income at Lifecore due primarily to product shipments that have historically occurred during the Company's second quarter being delayed until the third quarter this year; and third, an $871,000 increase in the income tax expense.

For the first six months of fiscal year 2013, revenues increased 40% to $216.7 million versus revenues of $154.9 million for the same period last year. The increase in revenues during the first six months of fiscal year 2013 compared to the first six months of last year, was due -- first, $4.3 million of revenues from GreenLine; second, a $12.9 million increase in revenues in Apio's non-GreenLine value-added businesses; and third, a $7.9 million increase in Apio's export revenue. These increases in revenues were partially offset by a $643,000 decrease in revenues at Lifecore, a $2.6 million decrease in corporate revenues primarily due to the termination of the Monsanto licensing agreement.

For the first six months of fiscal year 2013, net income increased 158% to $13.3 million, or $0.50 per share, compared to net income of $5.2 million, or $0.20 per share, for the same period last year. The increase in net income during the first six months of fiscal year 2013 compared to the same period last year was due to a $15.4 million net increase in Apio's pre-tax income. The increases in Apio's pre-tax income were comprised of -- first, the $3.9 million non-recurring reversal of the GreenLine earn-out liability; second, $6.5 million from GreenLine; third, a $2.7 million increase from Apio's non-GreenLine value-added and export businesses; and fourth, a $4.1 million increase in the fair market value of our Windset investment compared to the increase in Windset's fair market value during the first six months of last year. These increases in Apio's pre-tax income were partially offset by interest and financing expenses and amortization expenses associated with the acquisition of GreenLine. The $15.4 million net increase in Apio's pre-tax income was partially offset by -- a $2.7 million reduction in license fees from the termination of the Monsanto agreement; second, a $2.7 million decrease in pre-tax income at Lifecore; and third, a $2.3 million increase in the income tax expense.

Landec ended the second quarter of fiscal year 2013 with $6.8 million in cash and marketable securities. During the first six months of fiscal year 2013, cash and marketable securities decreased by $15.4 million due primarily to -- first, capital expenditures of $3.3 million for property, plant and equipment; second, principal debt payments of $7.3 million; and third, the full earn-out payment of $10 million related to the acquisition of Lifecore. These decreases were partially offset by cash flow from operations and the tax benefit from stock-based compensation. At November 25, 2012, the end of our second quarter, the Company had $19.7 million available to borrow under its line of credit.

Gary, back to you.

Thanks, Greg. Let's take a moment to talk about the outlook for the year and our priorities for sustaining growth. Our original guidance for the fiscal year 2013 was to grow revenues by approximately 30% and net income by 25% to 35% compared to fiscal year 2012. Based on the results of the first half of fiscal year 2013, and barring any major adverse financial impact from winter weather in our food business, we now expect revenues to grow 33% to 38% and net income to grow 60% to 70%, which includes the additional $3.9 million, or $0.15 per share, that comes from the non-recurring earn-out adjustment recorded in the second fiscal quarter. In addition, we expect to generate $20 million to $25 million in cash flow from operations and we expect to spend approximately $8 million to $9 million in capital expenditures. Our market focus is on healthy living through the development and commercialization of healthy pre-packaged foods and innovative materials for medical applications.

Looking ahead, we see a number of growth drivers for our two core businesses, with our goal to sustain very good annual revenue and earnings growth over the next five years. For our food business we see continuing category growth for the fresh-cut produce sector, as consumers seek healthy, fresh, and convenient food choices. We expect to continue to exceed the industry category growth by continually launching innovative new products and by commencing cross-selling activities between GreenLine and Apio. We also expect new growth by beginning to tap the foodservice market, which is new for us, such as restaurants, schools and hospitals. In addition, we expect earnings growth from our investment in Windset Farms, as they expand their California production facility and increase their sales.

For our medical materials business at Lifecore, we see the increased population of people over 50 driving market demand for surgeries in ophthalmology, such as cataract surgeries, and increases in orthopedic joint therapies. We also see growth coming from new Lifecore customers in new products, such as those that recently received FDA approval. Lifecore's ability to now sell our HA materials in powder, liquid, and filled sterile syringe format further expands Lifecore's customer base. In addition, Lifecore is pursuing growth through partnering in areas where partners can capitalize on Lifecore's expertise in fermentation, separation and sterile-filling capabilities. All-in all, an excellent quarter.

We are now ready for your questions.

(Operator Instructions)

Tony Brenner from ROTH Capital Partners.

A couple of things. You earlier had projected that Lifecore's revenues for the year would be up 15%. That now requires in excess of a 30% increase in the second half of the year. Is that still a realistic objective?

Yes.

Okay. And my second question has to do with your guidance. The increase in your earnings guidance, it appears, reflects only the $0.15 reversal of the GreenLine charge and the $0.01 for the full-year recalculation from Windset. But the operating outlook basically remains intact, even though in the first half of the year your operating earnings exceeded that growth rate that you're implying for the full year. I wonder if you could just expand on that a little bit because the implication is that the outlook, on an operating basis in the second half of the year is deteriorating, and that doesn't really appear to be the case.

Tony, this is Greg. Actually, we did increase our original guidance. If you do the math, the 25% to 35% would equate to about a $0.61 to $0.66 EPS. Take the $0.15 out of the equation for this earn-out and we're at $0.64 to $0.68. So we did actually increase the outlook for the year.

But as far as the second half goes, there's a few things going on here. A year ago, Windset was about $0.12 higher in the second half than it will be this year because last year the lion's share of the increase occurred in the third and fourth quarter, whereas this year, as you could see from this press release, it happened in the first and second quarters. So that's about $0.12 just comparative year-over-year. Second, we've got interest expense from all the debt incurred at GreenLine that we did not have in the second half of last year. Third, we've got amortization from loan amortization fees, along with amortization of the customer base that wasn't there last year. Gary mentioned that Chiquita has gone non-exclusive. That's going to be about $200,000. That's after tax for this year. So you start adding all those up, the one-offs, and I think the biggest change year-over-year, and what we're experiencing, as we speak, or at least we experienced it in December, is that it's rained a lot out here in California, so we're anticipating sourcing issues that we did not have a year ago. Year ago was perfect.

Tony, the only thing I would add is, let us get through the winter months, feel better about all that sourcing potential risk, and then update the guidance at the end of the third quarter. There may be some conservatism in this but the businesses are not deteriorating. They are actually doing well.

Fair enough. One last point. GreenLine -- part of the explanation for the GreenLine revenue shortfall versus the earn-out bar had to do with disappointing new product sales. What can you say about that?

Basically, in any negotiation between buyer and seller, there's different degrees of optimism and projections and things like that. The sellers believe that a series of about four new products would be gangbusters. We were a little bit more jaundiced about that and so the way we rectified that is we said let's put that in an earn-out mode. And we were more accurate in our thinking than they were and it fell short and therefore we don't pay the earn-out. But GreenLine is just hitting all cylinders in terms of earnings and we're very pleased with the business. It's just that, through that negotiation process, we came up with this earn-out mechanism to protect our interest in case those four new products that they were really bullish on weren't materializing.

Fair enough. Thank you very much.

Morris Ajzenman from Griffin.

Just a quick question here. I'm looking at the gross margins. They came in, if my numbers are right, at 16.1% for the quarter. With the revenues being up so strong, I guess part of the answer is going to be a mix. I would have thought the gross margins could have been better. I guess part of that is Lifecore. But do you want to just touch on gross margins and mix?

Yes, it's all Lifecore. It's not partially Lifecore, it is Lifecore. A year ago in the second quarter they did 57%. And it has to do with these shipments that were shifted from the second quarter to third quarter this year. They're very high-margin shipments. And last year, those shipments and revenues and corresponding gross profit was recognized in the second quarter. This year it's going to be in the third quarter. And, as a result, their overall margins went from 57% in the second quarter last year to 40% this year. So that's the entire explanation. And if you look at Apio, they went from 8.9% to 14.2%. So, a huge increase.

And would that imply, then, third-quarter gross margins up -- I use the word, materially, you can use whatever you want -- sequentially because of Lifecore now hitting in the third quarter much more materially?

Yes. Third quarter should be higher as a result of that. Now, keep in mind, I just mentioned this when I was answering Tony's question, is the third quarter is the risky sourcing quarter for us. It's also the quarter in which our sourcing costs the most during any other period of the year because, in the case of the value-added business out here in California, everything comes from basically the Mexican border. So we have to freight it up. That's extra cost. It cost more to grow it in the winter. And then green beans cost a lot more to grow in the winter. So the third quarter is typically going to be -- not typically, it's going to be the lowest margin quarter of the year for Apio.

Two questions. One is a quick follow-up to Tony's question asking about the disappointing new product sales, specifically GreenLine. Are those new products still in the offering? And is there any hope that that picks up?

I would say that no is the answer. By the way, their core business is strong. They're having a very good year. Their core products are good. We're extremely pleased with the Company. It's just that there was an effort to, under the older, the last ownership, to try out a few new products that had some complexity to it and it just didn't pan out. But we are heavy on new product development, as you know, Morris. So we'll be looking at new products at GreenLine and Apio continuously. It's just that this set of new products that were part of the earn-out just didn't pan out. Sometimes that happens. You regroup and move on. But GreenLine is having a pretty stellar year.

All right. And last question. Can you just talk with any granularity specifically into December, what you've seen so far this current quarter?

We're a little worried about some sourcing issues. And, Morris, if you'd been on the West Coast you'd know that there was a ton of rain throughout California in late November through until about a week ago. And so we don't have all of the numbers in, but we are concerned about some sourcing issues in December. But right now it's sunny skies. So we're hoping and have our fingers crossed that we'll get through this just fine. Nothing huge. It's just when you get all that rain, you get into some quality issues and we only deal with high-quality products. We're not going to ship something that's less than that meets our standards.

And outside of that, everything continues on track?

Yes. Good rollout of some new products at Apio. We're heavily invested in new product development now. That's our focus in our food business for the next year or two. We want to be market leaders in super foods that are extremely high in nutrition. And that's our new product development focus. We've got a team really doing a nice job there. We've got one lean new product that's rolling out very quickly and very well nationally. And we have others to follow.

Thank you.

Chris Krueger from Northland.

We haven't talked too much about Windset. I know they're planning to double their acreage. Can you give us some indication on the timing of that, when that should be finished? And when it should begin planting and harvesting?

They started, and their plan is to hopefully be up and running by the end of this calendar year. They did a good job of staying to their schedule on their first phase, and this is a doubling of that capacity. We believe they have the highest-yielding tomato facility in the world right now. They're rocking and rolling. They plan to double their capacity and it should be up and running by the end of this calendar year.

Okay. And can you remind us, on your ownership of Windset, does your percentage remain the same after they double that?

Yes. They're doing the second phase through debt financing. There was no capital call. We maintain no dilution of our 20% interest, no change in our 7.5% annual dividend.

All right. That's all I've got, thanks.

Peter Black from Wynnefield Capital.

Just a quick question on the accounting for the Windset investment. You give a chart on your questions-and-answers page where you show your revised projections for the change in the fair market value. How are you able to make a projection for what you think the fair market value, the appreciation, will be? And also, then why did you revise down, by about $1 million in the third quarter and slightly over that in the fourth quarter, the change in the fair market value?

Okay, Peter, this is Greg. A little bit complex. I'll try to make it as simple as possible. First off, let's talk about what resulted in the restatement, because I think that will probably pretty much answer most of it. What we did, what our interpretation was, the Company, was that you go out and you estimate. And, by the way, the way you get to the number is you use projections from the Company, Windset, in this case, and you do a discounted cash flow model. And you discount it back. You use the inputs from a third-party appraiser or you use the third-party appraiser, which we did in the second quarter. And that's how we came to the $6.5 million. They actually came up with that amount based on Windset's projections and their discount rates that were also approved by -- remember, the discounted cash flow is all based on an end date which is the put call date in the agreement, which is the end of our fiscal year '17.

So, all that's discounted back. The values derived, in this case, the original estimate was $6 million, it turned out to be $6.5 million when we did the official appraisal. And what the Company did, and our interpretation of the accounting rules, was you took that change, the $6 million, and you then discounted it back by quarter. So it's relatively flat over the years, kind of along the lines of our original plan -- $1.2 million, $1.4 million, $1.6 million, $1.8 million. That is an incorrect interpretation of the accounting rules. And these rules, if you want to read them, have a great time, they are very complicated. You're supposed to actually discount back the balance sheet value to the quarter in which you say there's a change, and in this case, the initial change was in the first quarter. And that's what we didn't do. And by doing that exercise, you'll find that, instead of recording what we did record in the first quarter, we should have recorded $2.9 million more. That may not have made any sense whatsoever, but that's the reality.

Okay. Yes, it's tough to comprehend but it does explain why the numbers were much higher in the first quarter, and that the revision downward in the latter part of the year doesn't have any reflection on the business trends turning south or anything like that.

Not at all. It's all timing here.

Okay, great. Thanks for that, appreciate it.

(Operator Instructions)

Rick Fetterman from Fetterman Investments.

Back to GreenLine for just a second. Was there any disagreement by the sellers or with the sellers regarding the decision on the earn-out or the method of calculation?

No.

I mean after the fact, when you said you didn't hit the number, we don't have to pay you?

We haven't actually closed the calendar year yet. We will be closing December here, actually probably this week. But we send them a quarterly report, every quarter. Through September it was short, but there was still a shot to make it up in the last quarter of the year, calendar year. But it was pretty dependent on these new products, and they knew that. It was their projection, and it didn't materialize. So this should not be a surprise at all.

Yes, Rick, this is black and white. There's no gray here.

Okay, all right. With regard to Windset in the spring, I think it's spring of '17 put-call date, if nothing happens there, is that a perpetual put call? Or what happens?

Yes. It just keeps going.

Okay. At the end of this year, do you still anticipate the gross profit margins at Lifecore to still be in the 50% range?

Yes, or higher.

Or higher, yes.

With de-emphasizing the technology, as you've mentioned the technology side of the business, you had mentioned awhile back, or a little while ago, concentrating more on Apio and Lifecore, should we expect any decline in the level of R&D? If so, to what extent?

Okay, fair question. Let me make a distinction. What I've mentioned in the recent months is a decision on our part to really focus on our two core businesses and de-emphasize and minimize the effort regarding licensing agreements. So we're not walking away from technology. If anything, we're innovators. We're innovative in our food business, we're innovators at Lifecore. So technology is still important to us. But there are less licensing deals for us because it's too hit and miss, and we're too dependent on partners to fulfill our dreams. In our two core businesses we're more in control of our destiny. So we are looking at the overall R&D levels that we will be using going forward. There will probably be some modest reductions but nothing huge, Rick.

Okay. Two more quick questions. Can you give us an estimate as to the level of debt you expect to repay in the second half based on what you know today? Something can happen between now and the end of May, I realize.

Yes, there's a set principal amount that is going to be reduced each quarter as a result of just having to pay the principal. The key is going to be how much of the line that we're into right now for $7.5 million that we could pay off between now and year end. A lot of that has to do with, is there a better use of the cash. Remember, this is a line where we pay LIBOR plus 2%, so about 2.25% on. If we can get a much better return by using cash to buy equipment, for instance, or to automate something at GreenLine or Apio or Lifecore, that cash is better used there than to pay down the line. So at the very minimum we'll pay off the -- what is it -- the $4.5 million, $5 million in principal in the second half, and then we'll just see how much of the line it makes sense to pay down.

Okay. My last question is, I wonder if you could give us a quick update on the adhesive technology you had mentioned in the release that you're developing with -- is it Nitta? Is that how you pronounce it?

Yes. Nitta Corporation, yes. Nitta is a publicly-traded company, headquartered in Osaka. They've been a long-term partner of ours. We had licensed to them a number of years ago on an exclusive basis the use of our adhesive technology in the field of electronics. And what our adhesive technology does, Rick, you may recall that we can impose a temperature switch in our materials, and around that temperature switch, by cooling or heating the materials, we can change their properties rather dramatically.

And what we're able to do with adhesives is they can make, for example, a tape for electronics purposes, for making semiconductors, whatever, and that tape can be extremely adhesive. And I mean it will make duct tape look like a weak adhesive. And then by heating it or cooling it, it will release. It just loses its adhesiveness just by changing the temperature. So they approached us and said that there are some expanded markets that they are interested in. They needed to make some modifications and improvements in their technology that they were developing using our core technology, and we're assisting them. So it's not really a new licensing partner. It's a new licensing deal with an existing partner. And that's why we went forward with it. And they compensate us for doing that and we get a royalty from them every quarter.

All right, thank you very much. Appreciate it.

Will Lauber from Sterling Capital Management.

With the Chiquita license agreement, it is no longer non-exclusive. But you wouldn't be able to make exclusive deals with other companies?

Right. They are able to maintain a non-exclusive. They're going through some challenges, as you may know if you follow Chiquita. Changes in CEO and layoffs and all that stuff. So they're struggling to move on to a better plane. But they have been a good partner over the years. They've paid us substantial sums of money, not only in terms of purchasing a product but also in terms of rights to maintain exclusivity. So they maintain those rights but we have the ability now to go to others and approach them, and see if they're interested in licensing this technology on a non-exclusive basis.

How long can they stop you from entering an exclusive relationship with someone else?

It's a one year.

One year?

Yes.

Is there any options or that's just it?

They can always come back to us at the end of the year and say we would like to take exclusivity for next year. And in all honesty, and I guess I should have looked this up in the agreement prior to this call, I don't know if that's a unilateral or that's an option we could give.

We can get back to you on that, Will. I'm a little fuzzy on that one, too.

Okay. You guys said that you will be starting contacting people? Are you optimistic on this at all?

I have absolutely no expectations on this because we haven't been talking to other people for a number of years so have no idea, Will, really. Honest answer is no idea.

Okay. And what kind of priority is this going to be? I know you've been de-emphasizing this. Would this still fall under Molly?

Yes, this with Molly and Ron and that team. This would be in what I'd call the medium priority. We are, frankly, challenged by the success of some of these super food products that we're rolling out. It's got that team really focused and busy right now. So it's certainly in the medium high priority but it's not the top of our list.

Okay, thanks a lot.

(Operator Instructions)

Matt Sherwood of Cooper Creek.

Congrats on a great quarter. Just had a quick question on the accounting. You went into it a bit. I was just trying to understand one issue. If Windset never increased their projections, I guess there's a component of the valuation change that's just the accretion of the discount rate. Were you able to unpack the earnings between the accretion of the discount rate versus the increase in the projections?

I can't tell you exactly what that percentage is but I could tell you virtually most of the increase was the result of an increase in projections.

Okay, fair enough. Great. Then on GreenLine, basically if you look at the year-to-date, your revenue, as you've said, on the earn-out is below what you thought it would be. It's running well below $100 million annualized but the EBITDA is running above $11 million annualized. Can you walk through how the margins have been outperforming your expectations there?

Absent the summer drought, July and August were a little tough on the sourcing side. The third quarter was fantastic from a sourcing of green bean standpoint, but we're moving into the winter months. And when you get into the winter months, the sourcing basically comes from primarily Florida, but also Mexico. And it just costs a lot more to grow and source green beans in the winter months than it does in the summer months when it's literally in your backyard. Because the lion's share of green beans are grown in the Ohio Valley, and that's where GreenLine is based. So the third quarter, particularly, is a much lower margin quarter for the green bean business, and we obviously didn't experience that last year because we didn't buy them until April. And we know that and we're throwing that into the projections.

As far as revenues go, our original guidance was $95 million to $100 million. Our projections are to be in that range, It'll probably be at the lower end of the range. And a lot of that has to do with what Gary had already mentioned, is that some new products that were in the plan, that the former owners were pretty bullish on, have just not materialized.

Matt, let me just remind you also, the other benefits besides the quantitative benefits that we're seeing with GreenLine is that we now have five sites in the Midwest and East Coast that we didn't have before. We're now starting to make product that has been an Apio type of product in the Midwest now, so that we can serve the East Coast on next-day deliveries, those types of things. We also have, for the first time, an inroad into foodservice. 30% of GreenLine's revenues come from the foodservice sector. That's all new for us. So that gives us an opportunity with some very talented salespeople to approach foodservice operators and begin to design products that are not only GreenLine products but are more traditional fresh-cut veg products to go into foodservice. So we've got the benefit of logistics, now market presence, inroads to foodservice, and, as we mentioned in our comments, we also were able to get some operating synergies in the first half of owning them. The first half of this year in terms of reducing some of our operating expenses by $1.5 million. So, so far so good with GreenLine.

That's great. Final question, the export side. You said, when you gave guidance originally, last year was just a once-in-a-lifetime year. It's way above trend. And then this year is better than that. Has that business structurally changed? Or do you think at some point it's just going to normalize and you won't know when or why?

Would you accept an answer of not sure? That's a very good question. One year you say -- okay, that could be an aberration. One-and-a-half years you're going -- hmm, maybe there's something fundamental here. But export does go in cycles. But maybe there's a fundamental shift here, but it would be premature to declare victory here but they did have a very good first half. No question about it. Let's see what they do in the second half.

Okay. Sorry, one last final question. The sourcing issues -- what's your base case expectation for are you assuming a little disruption but not much? Is there a risk if the disruption comes out worse than you think, is there a risk -- the guidance is contingent on a relatively stable sourcing profile but with some minor hiccups?

I think we're going to have some bumps but I think we're okay. Barring any flooding out here or freezes in Florida. There was some rough spots in December on the weather but we're assuming we'll be okay.

Fair enough. Great, thanks a lot.

Jim Schwartz from Harvey Partners.

When you talked about the one-stop shopping between GreenLine and Apio, can you quantify that opportunity going forward? How many customers of GreenLine are desiring EatSmart, and the other way around? How big could that potentially be?

Don't know is the honest answer. I know you don't like that answer but that is the answer. It could be substantial if you give us a few years to do this. Remember, the first thing we had to do was get our house in order. We were on different systems. Apio and GreenLine were on different systems. We couldn't talk to each other really well. We couldn't have one system for order entry, et cetera, tracking shipments, et cetera. That just finished -- it's mostly finished. We stopped working on that over the holidays because the holidays are so demanding. We'll finish this up real soon. And then that gives us the ability to cross-sell.

And, remember, they were in about -- I'm giving you rough numbers, if you accept rough numbers -- they were in about 70% of retail stores. We were in about 35% to 40% of retail stores. Then when we combined the two, we now have a physical presence of some type of product now as a combined company in 80% of retail stores. So we really think there's substantial opportunity over the next several years. Not several quarters but next several years. And the reason it takes a few years is because some of these customers were on multi-year contracts. Some of them need to be weaned away from long-term alliances with others, that kind of thing. But it could be substantial, Jimmy, it's just that we don't know how to quantify it yet. Give us a little bit of time where we can show some successes, and then we can maybe start to put some quantification to this. But obviously that was one of the major driving forces of our acquisition strategy, was to combine our customer base and cross sell. So, we'll see.

Great. I'm sure you'll figure it out. The FDA approval by Lifecore's customer, did that FDA approval happen recently and then you're gearing up for the next few quarters? How long does the ramp-up take from FDA approval? And how big is that?

It happened right at the end of our last fiscal year which, as you know, is a May year end. And it takes time to ramp up. That's what we've been doing, is ramping up. It can be material. It is material in terms of, as things get fully rolled out and launched, and everything gets in place. It's going to take this year to really ramp it up.

Right, okay. Thanks guys, great job.

(Operator Instructions)

Craig Pieringer from Wells Fargo.

I have to admit, since I came to your Analyst Day my family has become a fan of sweet kale salad. So that's been a --

Glad to hear it.

And, of course, your food focus has always been on healthy, fresh and convenience. But I think, Gary, you mentioned earlier something about a new lean product initiative. Is that something totally different, or can you characterize what you mean by that?

No, I think you mis-heard. Our focus is where our technology can make a difference, and that's in respiring produce. Living, respiring produce. That's where we add value. So that would be the vegetable family. That could be the salad family. It could be the fruit family. And that's our focus. So, no, I didn't mean to say, or didn't say, lean. What I did say is we believe an emphasis on super foods that are loaded with nutrients, that have vitamins and antioxidants and things like that. And labeling it that way. I think you know, Craig, in the sweet kale salad, the label right on the front says seven super foods. We also enjoyed that over the holidays, as well, and it was a big hit. So, no, it's still our focus on fresh-cut produce that's in our specialty package.

Good. Thanks for the clarification.

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 appreciate everybody's interest in Landec and what we're doing. And thank you for being on this call today. We look forward to keeping you apprised of our progress and our plans as we go forward. Many thanks.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.