Lifecore Biomedical Inc (LFCR) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec fourth-quarter and fiscal year-end 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, today's 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.

Good morning and thank you for joining Landec's fourth-quarter and fiscal year-end 2013 earnings call. I have with me today Greg Skinner, our Chief Financial Officer.

This call is being webcast by NASDAQ OMX and can be accessed at Landec's website at www.landec.com on our Investor Relations page. The webcast will be available for 30 days through August 31, 2013. A replay of the teleconference will be available for one week until midnight Eastern Time, Thursday, August 8, 2013, by calling 888-266-2081 or 703-925-2533. The access code for the replay is 1617672.

During today's call we may make forward-looking statements that involve certain risks and uncertainties that 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.

Fiscal year 2013 was an outstanding year for Landec. Our focus on Landec's two core businesses is paying off. For the year we achieved record revenues which grew 39% to $442 million. And before incurring the earnout adjustment, net income grew 47% to $18.7 million and earnings per share grew 43% to $0.70 per share.

Both our Food and Biomedical Materials businesses delivered strong revenues and earnings while continuing to advance market share and leadership in their respective markets, positioning Landec well for future growth providing products in the growing healthy living space.

Apio delivered total revenues for the fiscal year that grew 43% to $399 million, along with pretax income that increased 34% to $26.6 million before including the earnout adjustment. Apio's value-added food business revenues, including the benefit of acquiring GreenLine in April 2012, increased 54% to $320 million. The contribution to Apio's net income from the Windset investment increased 33% to $9.2 million.

Our Lifecore Biomedical business delivered revenues for the fiscal year that grew 20% to $41 million and pretax income that grew 23% to $9.4 million. Highlights of this important operational year include, first, generating $1.8 million in operational savings by integrating GreenLine Foods into our Apio food business.

Second, launching our first product in our Vegetable Salad product line and this first product we call Sweet Kale Salad. This product and others soon will be available nationwide and in Canada.

Third, adding several new food customers as part of our cross-selling effort between GreenLine and Apio customers. And fourth, adding significant sterile filling capacity at Lifecore Biomedical to support existing and new customers, which allows us to move up the value-added chain for supplying HA injectable products as well as non-HA products. Fifth, continuing to support new initiatives at Windset Farms where we own 20% of the Company, which includes the doubling of their California hydroponic greenhouse capacity from 3 million square feet to 6 million square feet.

All-in-all a very good year. Let me turn it over to Greg for financial details.

Thank you, Gary, and good morning, everyone. In yesterday's news release Landec reported that for the fourth quarter of fiscal year 2013 revenues increased 30% to $107.1 million compared to revenues of $82.6 million for the fourth quarter of last year.

The $24.5 million increase in revenues for the fourth quarter this year compared to the fourth quarter last year was primarily due to, first, a $15.7 million increase in revenues from GreenLine, which was acquired by Apio in April 2012. Second, a $9.7 million increase in revenues in Apio's non-GreenLine value-added businesses, which include the Apio fresh-cut specialty packaged vegetable business, Apio Cooling, and Apio Packaging. And third, a $1.4 million increase in revenues at Lifecore due to an increase in sales to existing customers.

The fourth quarter growth of $9.7 million in Apio's value-added non-GreenLine business was due to continued market share gains, which resulted in a 15% increase in sales volumes compared to the prior-year quarter from new product offerings, new distribution gains, and an overall growth in the fresh-cut vegetable category of 9.6%. These increases in revenue in the fourth quarter were partially offset by a $1.8 million decrease in revenues in Apio's export business due to a decrease in volume sales and from a $528,000 decrease in corporate licensing revenue.

For the fourth quarter, net income increased 63% to $4.5 million, or $0.17 per diluted share, compared to net income of $2.8 million, or $0.11 per share, for the fourth quarter of last year. The $1.7 million increase in net income during the fourth quarter of fiscal year 2013 compared to the fourth quarter of last year was due to, first, a $1.9 million increase in pretax income from Apio's non-GreenLine businesses.

Second, $1.4 million of operating expenses associated with the acquisition of GreenLine that occurred during last year's fourth quarter. Third, a $700,000 increase in the fair market value of our investment in Windset. And, fourth, a $543 increase in pretax income at Lifecore.

These increases in net income in the fourth quarter were partially offset by a $2.6 million decrease in pretax income in Apio's GreenLine business due to significant green bean sourcing issues during the fourth quarter compared to the year-ago fourth quarter when Apio owned the GreenLine business for only five weeks.

For fiscal year 2013 revenues increased 39% to $441.7 million versus revenues of $317.6 million for the same period a year ago. The $124.1 million increase in revenues in fiscal year 2013 compared to fiscal year 2012 result primarily from, first, an $85.8 million increase in revenues from GreenLine; second, a $27 million increase in revenues in Apio's non-GreenLine value-added businesses; third, a $7.1 million increase in Apio's export revenues due to favorable pricing and mix changes; and fourth, a $7 million increase in revenues at Lifecore due primarily to FDA product approvals and increased sales to existing customers.

The $27 million fiscal year growth in Apio's non-GreenLine value-added businesses was due to continuing market share gains which resulted in year-over-year 15% increase in sales volume from new product offerings, new distribution gains, and an overall growth in fresh-cut vegetable category of 10.6%. These increases in revenues were partially offset by a $2.8 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 fiscal year 2013 overall net income increased $9.9 million, or 78%, to $22.6 million, or $0.85 per share, compared to net income of $12.7 million, or $0.49 per share, for the same period last year. The $9.9 million increase in net income in fiscal year 2013 compared to last year was primarily due to a $10.8 million increase in Apio's pretax income and a $1.7 million increase in Lifecore's pretax income as a result of increased revenues.

The $12.5 million net increase in pretax income for Apio and Lifecore was partially offset by a $2.3 million increase in our income tax expense and a $342,000 increase in the pretax loss at corporate.

The $10.8 million increase in Apio's pretax income was comprised of, first, a $6.1 million increase in pretax income from GreenLine; second, a $2.3 million increase on a fair market value in our investment in Windset compared to the increase in Windset's fair market value during fiscal year 2012; and third, a $3.9 million non-recurring reversal of the GreenLine earnout liability at the end of the second quarter.

These increases in Apio's pretax income were partially offset by a $1.7 million of interest expense associated with the debt incurred to fund the acquisition of GreenLine. Excluding the $3.9 million earnout adjustment in fiscal year 2013, net income increased 47% to $18.7 million, or $0.70 per diluted share, compared to fiscal year 2012.

Landec ended fiscal year 2013 with $15.3 million in cash and marketable securities. During fiscal year 2013 cash and marketable securities decreased by $6.9 million due primarily to, first, capital expenditures of $8.9 million for property, plant, and equipment; second, principal debt payments of $14.7 million; and, third, the full earnout payment of $10 million related to the acquisition of Lifecore.

These decreases were partially offset by, first, $21.1 million in combined cash flow from operations and dividends from Windset; second, a $1.3 million tax benefit from stock-based compensation; and, third, $3.4 million in cash from employees exercising stock options. At May 26, 2013, the Company had approximately $22 million available to borrow under its lines of credit. Working capital at fiscal year-end 2013 was $34.9 million, a 141% increase compared to $14.5 million at the end of fiscal year 2013.

Gary?

Thanks, Greg. Looking ahead, through product and process innovation and development we will continue to support and advance the market leadership positions of our two core businesses -- our Apio food business and our Lifecore Biomedical business. In addition, we will be addressing two major challenges in our food business.

The first challenge is that more adverse weather seems to be occurring in North America. Weather events in the last several years point to the possibility of more severe and adverse weather regardless of the cost. Since we source most of our produce under third-party fixed-price contracts, we do suffer when there are severe shortages of produce.

We will work to mitigate these events by further broadening our geographic diversification, which we are doing right now, and increasing our mix of produce categories not to be reliant on just a few but many more, and modifying our grower contracting approach where necessary. Longer term we are exploring avenues to benefit from our partnership with Windset Farms, which we believe is the market and innovation leader in year-round hydroponic greenhouse growing of produce.

The second challenge is that we can see continued consolidation in our customer base of retail grocery chains; you can read about this. The consolidation presents challenges when ownerships change, but at the same time it can open up opportunities to continue to allow us to take further market share gains.

Our fiscal year 2014 guidance is detailed in our press release. Highlights are that we anticipate growth in both earnings and revenues. Our long-term goal is to generate average annual revenue growth of 10% a year and average annual net income growth of 20% a year over a five-year period.

In the fiscal year 2014 we expect our Apio value-added specialty package products business revenues to grow approximately 10% year over year due to the continued innovations and introductions of new products and further cross-selling between Apio and GreenLine customers. However, we expect Apio's overall revenue growth to be dampened somewhat by the decrease in revenues in our export business of approximately 10% due to new import quotas recently enacted by Indonesia. Importantly, earnings from Indonesia exports should remain approximately the same as the more restricted exports to Indonesia are expected to have higher margins.

At Lifecore for the fiscal year 2014 we expect double-digit, approximately 10% to 15% revenue growth as we rollout more products with customers and as we expand into new funded product development partnerships. Lastly, we expect to benefit from Windset's doubling of its California Santa Maria hydroponic greenhouse production facilities, which begins with its first harvest this late fall, several months ahead of schedule.

Looking at our financial position, we expect cash flow from operations to be approximately $30 million to $35 million due to growth in earnings and increase of 50% to 75% year over year. In addition, we plan to spend approximately $13 million to $15 million in capital expenditures in order to expand our capacity, both at Apio in Santa Maria, California, and at Lifecore up in Chaska, Minnesota, in order to meet current and future demand. We are also reconfiguring our operations in Bowling Green, Ohio.

Our charter is clear. We want to develop and commercialize new products for the healthy living applications in the food and biomedical materials markets. We want to bring healthy, nutritious, specialty-packaged, fresh-cut produce products to consumers in North America. We believe healthy eating leads to healthy living.

We also want to do our part to enable people to enjoy a higher quality of life as they age. Our polymer-based Lifecore injectable biomedical materials for ophthalmic and orthopedic markets enable people to stay more active as they age. We plan to leverage our leadership positions and provide improved products to meet the increasing demand and opportunities generated by the robust growth in healthy living markets.

We look forward to another good year and we are ready for your questions.

(Operator Instructions) Morris Ajzenman, Griffin Securities.

Just a couple of one-off things here in the most recent quarter. SG&A, maybe you can kind of talk about that, $6.3 million, down sequentially materially and down year over year. Then, clearly, you had I guess a step up in recognition of your investment in Windset. I guess more than what we might have thought in this current quarter.

Then I guess on the other side I guess offsetting that to some extent, I don't know how you can kind of talk about this or frame this, but you talked about higher sourcing costs of $3.5 million this quarter from GreenLine, specifically weather related. What -- you said weather going forward is adverse weather continuing.

What should we kind of model? What should be an adverse weather expense? Should it be anywhere near $3 million a quarter incremental this year? Should it be less than that? And, again, let's go back and touch on the SG&A and the Windset increase in fair market value in the quarter.

All right. Let me take them one at a time. SG&A -- this is Greg. Unfortunately, we put together plans where they are aggressive for management in order to achieve their bonuses and the goals were not met this year. As a result, we reversed the bonus that had been being accrued through the first three quarters of the year during the fourth quarter. And that is the primary reason for the year-over-year decrease in sales or SG&A, because last year a bonus was paid and this year it was not.

Secondly, on Windset, they continue to expand and increase their profits. As that occurs we recognized 20% in the increase in their market value and it continues to go up. We expect it to go up next year 35% to 40%. In fact, it is a part of our guidance. So with the addition of three and four, we feel pretty -- phases three and four, which is another 64 acres, we feel pretty confident in those projections for next year.

Lastly, on the sourcing front, we are doing everything possible that we can to geographically disperse where we get our produce from. But at the end of the day at certain times of the year, specifically the winter months, and that is what normally hits us. Now this year it was unusual that they had a freeze in Florida in March that affected the fourth quarter.

But typically from a how-you-plan-it-out basis -- and this is part of our guidance, so what we put into our guidance was this is what we think our quarterlies are going to turn out to be. We factored in to that guidance what we believe are reasonable contingencies for sourcing issues. You can't predict weather.

Hopefully that answers your question.

I will get back in queue. Thank you.

Daniel Rizzo, Sidoti & Company.

The new products you are introducing, the new salads, are they all going to be roughly the same size in terms of sales or was the first one bigger than the rest? Or is it something you think we can sustain?

I don't think realistically -- the Sweet Kale Salad was just hit it out of the ballpark kind of a first introductory product. We did a lot of market research. We hired culinary experts. We had nutritionists involved. We really thought this one through.

And we also, I think, got good fortune in that there is a health binge in the country right now and kale is on the lips of a lot of people. Years ago you wouldn't have even known how to spell kale.

I think it is an unusually successful product, Dan, and I wouldn't -- I think it would be unreasonable to assume that we are just going to keep hitting grand slam home runs. I think we will be hitting singles and doubles and occasionally hit a triple. Might even get lucky with another big one, but we don't expect a repeat of Sweet Kale Salad is what I would advise.

But expect a family of products that collectively are -- what we are doing is we are creating a new category. We are creating a category that no one has before, which is to create vegetable-based salads. Meaning we are not using baby lettuce and Romaine salads and things like that.

We are not going into the leaf lettuce world. We are staying with vegetables and mixtures that are in a salad format and that are extremely healthy. They are all loaded with super foods and I think that category can really grow. So collectively I think our new products will be very robust.

Okay. Then the new products with Lifecore, the ones that are in clinical trials and the ones that are commercialized already, is that all focused on ophthalmology or you going to be moving into -- I think HA is also used for joints? Is it all focused on ophthalmology?

Yes, the near-term new products are ophthalmology-based. That is our sweet spot; that is where our channels of distribution are extremely strong. Our customer relationships are strong. The margins are very attractive etc., etc.

Longer-term we are entertaining and beginning to work with development partners where they provide us with development funding and a number of these programs are outside of ophthalmology. But that is longer term, Dan.

Okay. Then last question. With the expansion at Windset Farms is that also going to be a different vegetable or is that going to be more tomatoes?

The mixes are going to change. Have they stated --?

Not to my knowledge.

They have not stated publicly what those mixtures are, but it will involve tomatoes plus other things.

Okay. All right, thank you.

Just so you know, as a company their main product lines are in the tomato family -- the high-end tomatoes, the grape, the camparies, the Romans, the cherries, those kind of things. They are also strong in peppers and they are also strong in cucumbers.

Okay, all right. Thank you.

Brent Rystrom, Feltl.

Good morning. A couple of quick questions. To follow-up on that last comment about the cucumbers and tomatoes, are the revenue and profitability going to be similar on those relative to tomatoes as those layer in to the expansion?

Sorry, Brent, I didn't catch that.

Is the profitability and margins for cucumbers and peppers comparable to tomatoes?

Yes, actually slightly higher.

All right. Then from a simplistic perspective, I'm hearing from a couple of retailers, particularly here in the Midwest and the Northeast, that is late blight is hitting a lot of the field-grown tomatoes here in the Midwest and East. Also hearing the frost in Canada on May 29 hit them a lot and so there is some pricing pressure higher. Are you guys seeing that at Windset?

I have to confess, and Greg will confess, we don't know. It may happen; we are just not aware of that. But the beauty of their approach, as you well know -- you are talking about there was some real bad weather up in the Leamington, Ontario, area.

Exactly. It was a May 29 frost that wiped out about 30% of the crop.

So anyway, to make a long story short, they are immune to that. The weather in Santa Maria, California, is very stable. Good sunlight, good heat units year round and so as those things do occur -- and I'm sorry we just don't know if the pricing pressures are moving up quite yet -- they are going to be in great shape. Absolutely in great shape.

And let me remind you that with their second phase, what they call phase three and four -- we just call it the next 3 million square feet -- they are ahead by a couple of months. And if they can catch some volume, some new volume, incremental volume during the winter months that is a real plus, because that is generally the highest price, highest margin season for them.

And do they have what we call an OND season, that October/November/December where parties and other holiday things kind of lift pricing margin as well seasonally?

I don't know it if it is specifically related to that, but there is no doubt that what they -- from a pricing standpoint and a margin standpoint it goes up in the winter because you are not really competing against field tomatoes anymore. Other than those that are coming up from Mexico.

And some out of Florida. We know the supply/demand situation is much better in the winter months -- prices go up -- so that has been historically true from them. That is their sweet spot is -- boy, if they can have more square footage, more acreage for these winter months it will be a real benefit for them.

My final question would be can you give us a sense on Apio and Lifecore how to think about growth throughout the year? Do you view it as fairly stable growth rates for both businesses or will there be better or worse quarters?

Well, there is going to be some seasonality, there is no doubt about it. If you look at, I think it is Q&A two in our press release, we kind of laid out by quarter what we thought the revenues would be and the profits. Just as a reminder, about three-quarters of our revenues in our export business occurs in the first six months of our fiscal year and only 25% in the last six months. That is because during the first six months you have got the summer and fall, so obviously you have a lot more produce to export.

In the Lifecore business their biggest quarter from a revenue and profit standpoint is going to be the third quarter, which is similar to last year. And that is because that is when they ship the lion's share of their powder sales for the year occur during the third quarter. And that is their very high margin product.

That is where you see the skew where we say our breakout for the year is 29% in the first quarter, then 21% in the second, jumping to 31% in the third -- that is the Lifecore effect --- and then 19% in the fourth. The big increase in the first quarter is because we expect that the lion's share of the increase in our fair market value next year for Windset will occur in the first quarter.

Thank you very much.

You are welcome.

[Rob Schwartz], [TCP].

I just had a quick two-part question. It looks to me like over the past year or so the tax rate was about 36.5% and this quarter it was 20.9%. So I would just like to know what resulted in that change.

Then if I look at the core business, ex the tax rate benefit and the bonus accrual reversal, it looks like the quarter was about $0.11 not $0.17. So I just wanted to know what -- within the core business where that shortfall came from.

Well, the $3.9 million was actually recorded, what was it, last quarter or the -- no, at the end of the second quarter, so that did not impact our fourth quarter at all. So the fourth quarter is just based on operations.

No, I am sorry, I am sorry. You are misunderstanding. I am talking about the bonus accrual that resulted in a much lower corporate SG&A.

Oh, yes. So that was about a probably $1 million reversal in the fourth quarter, hence the change year over year about $1 million.

The tax decrease for the year in comparison to the prior year, the combination of the $3.9 million is not tax affected because it is a goodwill type of item, so it was never tax affected to begin with so the reversal was not tax affected. So that has a big impact on your effective tax rate, because it's sitting in your income and you are not having to take a tax provision against it.

Secondly, we finished our tax returns for GreenLine. We were able to do some state apportionment planning, if you will, and strategies behind state apportionment of your income and revenues. That reduced our rate.

We had quite a bit of employee activity in the fourth quarter where we had a lot of stock option exercises, which is a tax benefit to the Company. Then, lastly, the R&D credit was renewed and we finished the analysis during the fourth quarter. And it turned out to be better than we originally anticipated.

So all-in-all that resulted in a large decrease in the fourth quarter. However, we expect going forward that this was a one-time pick up, a nice benefit that resulted in us overpaying taxes to the tune of $5 million, which will benefit us next year. But next year we should be back at the 37% rate that we have been at for the last few years.

Right. I guess sort of what I'm asking is that is great tax planning, but it seems like before the quarter started you didn't know that the tax rate was going to be this beneficial, you didn't know much about the $1 million bonus accrual add back. So I'm just trying to understand what part of the core business was materially worse than you thought. Was it weather-related beans or broccoli or --?

Sourcing, sourcing. We had severe sourcing shortages in the fourth quarter with green beans.

Right. Is that the right -- so the core business, as we look forward to next year and to the model, from core operations ex these tax benefits is that $0.11 the right number?

For the fourth quarter of this year?

Right, ex the tax benefit and the bonus accrual add back?

Haven't done the math, but if you have done it then I can't argue that. There is no doubt our margins were down during the quarter as a result of sourcing. So I mean you could go the opposite way and say, well, if we didn't have the $3.5 million green bean hit for the quarter then we would have been up $0.10 more. So it depends on if the glass is half empty or half full.

Okay. Last question, just with that green bean issue that hit you fourth quarter, how is weather so far this quarter?

Mixed, mixed. You probably have been following the heavy rains that came up through the Georgia, South Carolina -- first of all, our new year started June 1, so we are early into this. What, eight weeks? But it is mixed.

California weather is generally okay. You get some heat spells, but we have contingencies for that. But the green bean side has been mixed so far, but we are doing okay. I mean nothing catastrophic, but you guys are reading the same papers we are. You got heavy rains, you got heat, etc., etc., and that is why I made the comments that I did.

There seems to be some climate change issues going on in North America and that is why we are diversifying our sourcing regions. That is what we are looking at modifying our contract approach. That is why we are expanding our product lines so that we are not just dependent on broccoli and green beans and things like that.

So we have to be proactive. We have to anticipate this and we do build in contingencies for weather into our planning. It is just that for green beans it has been mixed in the first eight weeks.

Okay. But you don't expect any type of hit as dramatic as the Q4 impact from sourcing?

God willing, you are right. Yes, we don't.

Thanks, guys.

Thank you.

Morris Ajzenman, Griffin Securities.

Just curious how much sourcing, how much do you actually buy from this point from Windset? What percent of your Apio revenues? So whatever color you can put on that.

Not material.

Very small.

It is not material. It's tomatoes for our trays. You have seen our trays, Morris, and they use the cherries and the grapes, and on a dollar and poundage basis it would be very small. We can see that increasing over time.

But what you will also be seeing is you will start to see some Windset products coming out this year that have our BreatheWay technology on them, so we are very excited about that and we will keep you posted on that. But in terms of our purchasing from them tomatoes, it is pretty small.

Thank you.

You are welcome.

(Operator Instructions) I am not showing any further questions at this time.

Just want to thank everybody for being on the call today and thank you for your ongoing interest in Landec. We will keep you posted on our progress and plans. 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.