Lifecore Biomedical Inc (LFCR) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec second-quarter fiscal 2015 earnings conference call.

(Operator Instructions).

As a reminder, today's program is being recorded.

I'd 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 2015 earnings call.

With me today is Greg Skinner, Landec's Chief Financial Officer; and Molly Hemmeter, Landec's Chief Operating Officer.

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 2014.

Our second-quarter results met our revenue and operating income expectations because of strong results at our Apio food business, driven by sales increases in our higher-margin vegetable salad kits and stir fry kids, which we collectively refer to as our Eat Smart superfood products.

Consolidated revenues increased 11% to $132.7 million during the quarter compared to the second quarter of last year, and operating income increased 23% to $3.9 million, primarily due to a 14% increase in gross profit.

Revenues for Apio's value-added packaged vegetable business increased 16% due to a 13% increase in unit volume sales.

The growth in revenues, combined with favorable product mix changes, resulted in 36% increase in gross profit in our value-added vegetable business.

We are on track for building a substantial leadership position for providing healthy superfood products to North American consumers.

Let me turn it over to Greg for some financial highlights, and then Molly for additional highlights regarding our progress and plans at Apio.

Thank you, Gary, and good morning, everyone.

We reported yesterday that revenues for the second quarter of fiscal 2015 increased 11% or $132.7 million from $120 million in the year-ago quarter.

The improvement was primarily due to a 16% or $14 million increase in revenues in Apio's value-added business, which includes its fresh-cut specialty packaged vegetable business, Apio Cooling and Apio Packaging.

This increase in revenue was partially offset by decreases in revenue in Apio's export business and at Lifecore.

Net income in the second quarter of fiscal 2015 was $3.2 million or $0.12 per share compared to $3.5 million or $0.13 per share in the year-ago quarter.

The decrease was primarily due to a $1.1 million decrease in the change in the fair market value of the Company's Windset investment and a $712,000 decrease in net income at Lifecore.

These decreases in net income in the second quarter were partially offset by 45% or $1.7 million increase in operating income at Apio due primarily to increased revenues and a favorable product mix change to higher-margin superfood products.

For the first six months of 2015, revenues increased 16% to $220 million and $266.3 million from $229.5 million in the same period last year.

The improvement was primarily due to a 21% or $34.7 million increase in revenues from Apio's value-added businesses and a 10% or $4.3 million increase in revenues at Apio's export business.

These increases were partially offset by a 13% or $2.2 million decrease in Lifecore's revenues.

Net income in the first six months of fiscal 2015 was $5.6 million or $0.20 per share compared to $8.2 million or $0.30 per share in the first six months of last year.

The decrease is primarily due to a $6.3 million decrease in the change in the fair market value of the Company's Windset investment, and a $2 million increase in operating income at Lifecore.

These decreases in net income in the first six months of fiscal 2015 were partially offset by 35% or $5.9 million increase in gross profit in Apio's value-added vegetable business and a $1.3 million decrease in income tax expense.

Landec ended the second quarter with $5 million of cash, which was a decrease of $9.2 million for fiscal year-end 2014.

During the first six months of fiscal 2015, Landec generated $3.4 million in cash flow from operations and increased net borrowings by $12.9 million.

These increases in cash were offset by the Company increasing its investment in Windset by $18 million and spending $7.1 million, primarily for capacity expansion.

As of November 30, 2014, the Company had $38.9 million available under its lines of credit.

Let me now turn the call over to Molly.

Thank you, Greg.

We continue to experience growth in Apio's value-added packaged food business as consumers seek out easy and delicious ways to eat healthy and add more vegetables to their diet.

The growth in Apio's value-added business is being fueled by Apio's Eat Smart superfood products.

This new product platform is now generating revenues of approximately $2 million per week on average, with gross margins more than double that of our historical core vegetable products.

We continue to meet our commitment of launching, on average, at least one new product each quarter.

During the second quarter, we added our sixth and seventh products to our superfood lineup.

Early in the quarter, we launched the Roasted Yam Salad Kit.

This product features eight super foods with a medley of fresh-cut vegetables, seeds, fruit, and cooked yams.

This salad is both gluten-free and preservative-free.

More recently we launched the Beets & Greens salad kit.

Beet lovers beware: this salad kit is gluten-free and contains a unique blend of healthy greens with cooked beets that are vacuum packed for freshness.

With the launch of this product, Eat Smart now offers five salad kits and two stir fry kits as a part of its innovative lineup of superfood products.

The Beets & Greens salad will be offered in Costco Canada on a rotational program starting this month, as well as in retailers throughout North America.

Historically we have provided market-sized statistics that included US retail only.

However, by combining data from multiple sources, we have estimated that the North American salad kit category, including both retail and club stores in the US and Canada, to be approximately $1.1 billion.

This is measured in consumer retail dollars for the 52-week period ending October 2014.

Although the Canadian salad kit market is much smaller than that of the US, Eat Smart salad kits have experienced incredible growth in this market, and are driving growth of the overall salad kit category in Canada.

During the same 52-week period ending in October, Eat Smart has an estimated 12% share of the North American salad kit market, including both retail and club stores, up from just zero 2.5 years ago.

Consumer awareness of our superfood products continues to grow as our online marketing efforts begin to demonstrate early but positive results.

Last quarter we launch the new EatSmart.net consumer website.

In November we launched a three-month online advertising and social media trial in 11 states throughout the northeastern and mid-Atlantic regions of the US to raise awareness of Eat Smart among consumers, and to incent consumers to purchase our products in-store.

Although this trial is not yet complete, initial results are showing a very positive consumer response.

As the word continues to spread about Eat Smart, the distribution of our products is also expanding.

Eat Smart superfood products are now being sold through over 100 food service, club, and retail customers throughout North America.

In parallel with the focus and growth of our superfood products, we also plan to phase out specific lower-margin core vegetable products and selectively seek price increases for other core vegetable products.

We expect to begin seeing results of these efforts take place in fiscal year 2016, which commences in June.

Revenues in our core product lines may decline slightly as a result, but Apio's gross margin should be enhanced longer-term.

We believe margin enhancement in our core Apio business is essential for the long-term growth and profitability of Landec.

Apio is the innovation leader in packaged fresh vegetable category.

We invest in gaining a deep understanding of consumer trends and strive to offer consumers easy and delicious ways to make vegetables an important part of their daily diet.

The results of these investments are showing.

Through the first six months of this fiscal year, approximately one-third of Apio's value-added sales are being generated by new products that Apio has launched within the last three years.

We are committed to continuing to invest in new product development so that we can offer fresh, easy, and delicious ways for consumers to eat healthy every day.

Let me turn it back to Gary.

Thanks, Molly.

Looking forward, Landec has five priorities it will be focusing on over the next two years.

First, we are conducting an extensive search for a new CEO to replace me when I retire at the end of fiscal year 2015.

The search is underway and we are evaluating candidates.

I will remain on the Board after my retirement and will remain active to ensure a smooth transition to the new CEO.

Second, we will continue to invest in innovation.

This is our lifeblood.

In our food business, the growth is driven by innovation in packaging and new product formulations which have higher margins and greater growth potential.

Our Eat Smart food brand is a strong national brand which is growing in recognition.

We are investing in innovation in order to build our fresh-cut specialty packaged produce business to take advantage of healthy eating trends.

Third priority is to invest in capacity expansion.

We intend to invest in expanding and/or upgrading our processing facilities in Ohio and Pennsylvania, and expanding our aseptic filling capabilities at Lifecore.

And you already know that we have doubled our salad capacity in California.

We also plan to invest in new equipment that will expand capacity, plus drive production efficiencies and help improve margins.

Fourth, we plan to continue to expand our partner relationships at Lifecore Biomedical, with emphasis on serving partners in the field of ophthalmology and orthopedics.

And fifth, continue to grow our investment in Windset Farms.

Our goal is to work closely with Windset to grow Windset's hydroponic greenhouse business while developing new growing methods and evaluating new crop targets.

Windset's approach leads to products of the highest quality and taste that can be supplied to retailers and club stores year-round.

Windset's state-of-the-art hydroponic greenhouse technology is, we believe, the future of agriculture, especially as abnormal and unpredictable weather patterns become the norm.

Looking to the second half of our current fiscal year, we will have better visibility regarding three important issues that could affect our outlook for the second half of this fiscal year.

One is the longer-term impact of recent December heavy rains and flooding in California, which affects planning schedules for our produce to be harvested in the spring, an issue our field personnel are closely monitoring.

We also will be looking at any changes to our assumptions about Windset Farms for the third and fourth quarters, based on an updated five-year set of projections which we anticipate receiving before the end of this month.

And third, we need to evaluate the impact of the West Coast longshoremen port slowdown which is affecting our export business.

Again, we'll know a lot more about these items and these issues by the end of the third quarter, and will report our thoughts.

Beyond fiscal year 2015, when we look to our fiscal year 2016 which begins June 1, we should be well positioned for a good year, as the investments in our food and medical business come to fruition.

We're now open for questions.

(Operator Instructions).

Tony Brenner, ROTH Capital Partners.

Molly, you said, I think, that in the first six months, one-third of Apio's value-added sales were from new products.

What portion of sales were from the Eat Smart salad and vegetable kits?

I'd say about over two-thirds of that, Tony, were from that.

We are obviously always launching new products that are requested by our customers: our seasonal items, maybe holiday trays, new SKUs, new products and new sizes.

But I'd say over two-thirds, maybe even four-fifths of that is due to superfoods.

So that's about 25%, roughly, of Apio's sales?

Yes, we're about 26% of sales right now in our superfood (multiple speakers).

A new line just came onstream, and you're suggesting that sales are running at about $2 million a week, which would imply in the second half roughly 25% of Apio's value-added.

Why wouldn't it be higher than that?

Well, we do have a peak over the holidays, so some of the $2 million will come from that, but I'm not sure -- does that answer your question?

No.

Are you asking, why is it not a higher percentage, Tony?

Yes.

Well, I think our total volume is also up very high.

And you got to remember, the core has a much, much higher base to begin with.

Right.

And so it takes a long time for something that was zero, 2.5 years ago, to go from that to 25% is actually pretty remarkable.

Right.

Last year, at the end of the year, our superfoods were about 19% of our overall VA sales; now we're seeing them about 26% of our overall (multiple speakers).

Well, I guess what I'm trying to get at is, in your release, you project a 150 to 170 point basis point sequential decline in Apio value-added margins in the second half.

And presumably the mix is changing sequentially in a way that would favorably impact margins.

And I'm wondering why they would be, given that assumption, such a significant sequential decline in margins.

All right.

Well, I'll answer that, Tony.

It's Greg.

You're right.

If it was just purely mix, then our overall gross margin for VA would be up in the second half.

But that's not the case.

In the second half, it cost us more for produce because (multiple speakers).

Sure, you're sourcing -- I understand the sourcing is greater, but wouldn't that mix offset that?

No, because you also have our labor rate is down 25% higher than it was a year ago.

And obviously it has increased throughout the year, so it's going to be higher than it was in the first half.

There's a whole litany.

The list is pretty long.

It's not just one thing I can nail and say, this is the reason.

But I can tell you, the cost to source our product, which is a huge input -- it's 60% of our cost of sales, is raw materials -- is much higher in the second half of the year than it is in the first.

If you look back historically, look at our margins in the first six months versus the second six months, you'll see pretty much year-in, year-out, they are lower.

So, it would be even worse than the 150-170 if it wasn't for the superfoods.

Okay.

One other question.

Again, Molly indicated that mix change as a result of your pricing strategy would be effective in fiscal 2016.

But when I go to Costco, a year ago I saw typically one bagged product and one salad kit, usually the Sweet Kale Salad.

Now when I go to Costco, I see zero bagged products and three kits.

Is this a result of that pricing strategy that you talked about?

No, I think that's unrelated.

I think both club and retailers are starting to see the success of these next-generation salad kits, which are serving a need that old salad kits were not.

And so they are actually providing more shelf space for these products, so I think that's what you're seeing in Costco, and even other retailers.

And our bagged products are still in almost all Costcos, Tony.

So I don't know what you're finding in your store, but we're still there.

Okay.

All except mine.

(laughter) All right, thank you.

Morris Ajzenman, Griffin Securities.

Your healthy salad line, your production capability, you're running at about $100 million per annum approximately, based on Molly's statement on $2 million per week.

What is your total production capability right now?

And based on the nuances, the tweaks you're going to be doing to increase their production over the next 12 months, what can be your total capacity 12 months out from now?

We've recently, just in the first quarter, we doubled our salad line capacity.

And so right now we have plenty of room for growth, and we don't see any problems with capacity in the foreseeable future.

No, my question is, can you put a number on that?

Are you running at 50% capacity now?

70%?

What now --?

Morris, we don't want to get into much detail, from a competitive point of view.

But we're probably around 60% capacity utilization, and we're making plans to expand and reconfigure our sites in Bowling Green and Hanover, Pennsylvania.

We are going to have plenty of capacity for salad growth.

We're not going to get bottlenecked like we did earlier in the year.

We'll have plenty of capacity.

And just to add to that, there's peak seasons through the year.

So sometimes it's hard to give a specific capacity number because of the holidays and the peak seasons.

It can vary considerably throughout the year.

All right.

So, looking at 12 months from now when you reconfigure and move things around, capacity could be north of $200 million.

Is that fair, or is that being too aggressive?

It could be.

Yes.

Okay.

You're saying capacity?

Capacity?

Capacity, yes.

Yes, we will be able to manage $200 million of business with our current equipment.

Yes, we could.

Okay, okay.

And just jumping over to Windset Farms, based on your projection, I think you said $8.5 million to $9.5 million increase in fair market value.

No, that includes dividends.

Oh, that includes dividends?

Yes, that was clear.

Okay.

So it would be about $7.5 million to $8.5 million without the dividends.

Basically you'll have a meaningful step-up in the second half versus the first half increase in fair market value.

And that's all based on this five-year projection that's being done by outside appraisers over the next month or two.

Is that what it's all based on?

Yes, well, it's based on Windset's projections, which we haven't received yet.

We're giving our best guesstimate in these numbers.

And I hope that came out clear in the press release, that we're very familiar with their business, but we're estimating at this point what we think we're going to see here in a month.

We had to put some number to it, for purposes of this quarter.

And when we did it, we'll obviously be updating it.

But we anticipate that we'll start seeing a much higher increase in the change in the second half than what we saw in the first half, as a result of these new projections.

Yes, it does go to an outside, independent appraiser, Morris.

Yes, right.

And last question on that, when will you be able to discuss new planned expansion of acreage with Windset?

Okay.

I guess I -- maybe you need to ask that a different way.

I didn't quite understand.

What does that mean?

(multiple speakers) In other words, I presume including a roadmap is to open up on new greenhouses with Windset.

Okay.

Boy, hopefully by year-end we'll have a good idea of what they intend to do with the land that they currently own that's sitting vacant.

Okay, so by year-end, hopefully you'll be able to give some sort of roadmap for the (multiple speakers).

Yes, yes.

Yes.

Okay.

Thank you.

Brent Rystrom, Feltl.

I've got a few follow-ups to the things that have just been asked.

From a simplistic perspective, the -- Molly, the $1.1 billion you cite for the salad kit category, do you know what rate of growth that has experienced over that corresponding 12 months?

I can break it down with some specifics.

We estimated that $1.1 billion to include US, Canada, retail, and club.

We have no growth statistics for club, okay?

So what I can do is I can give you growth statistics for the retail portion.

And in the US, we're seeing growth in the salad kit category of 34% in retail.

And in Canada it's pretty phenomenal; we're seeing growth of about 77%.

And we're the ones driving that.

Yes.

And we're driving that growth.

Now, remember, that's a much smaller market than the US, but it's growing rapidly.

So I don't have an overall growth number for the total $1.1 billion, but the majority of it is retail.

And so if you combine those two numbers it's about a 38% growth in North American retail.

And triangulating the data you gave, by implication you guys are growing that category closer to 80%.

Is that reasonable?

You were cutting out a little bit, Brent.

Can you --?

Yes, just using the numbers that you guys have furnished, to me it appears like the Eat Smart -- the line grew about 80%.

If I take the data you gave on what percentage of the growth was coming from the higher-end products, and then I apply that to a quarterly run rate of that $2 million per week, it implies that your sales grew high 70s to close to 80% year-over-year.

Is that reasonable?

Yes.

Actually, our sales have grown over the last 12 months -- if you look at our sales 12 months ago, it has grown about 180%.

Okay.

So we've grown pretty dramatically compared to the market, and we're driving the growth in the market.

These new products are.

And the kit growth is driven by the whole healthy eating trend, and the fact that we're delivering something that people want.

And secondly, it's the convenience.

It's a kit.

It's ready to go; you don't have to do any hard work.

From a simplistic perspective, I want to make sure I heard it right, also.

Did you say the Eat Smart margins were double those of essentially the rest of Apio value-add?

Yes.

Yes.

All right.

And then on the outlook issues, two would be negative for the second half.

And based on what you were just responding to the previous questions, I would assume the implication for Windset would be to an upward revision.

There wouldn't be a reasonable expectation for a downward revision.

Is that reasonable?

From the $8.5 million to $9 million that we put out there?

Yes.

Yes, I think it will be in that range.

What he is saying is, he doesn't expect a downward revision.

If anything, it's going to be what we thought it was or slightly better.

And I would say, it's going to be in the $8.5 million to $9.5 million range for the year.

We don't have any reason to believe it's different, Brent.

But I would be surprised if it were downward.

And how often does Windset update their plans like this?

Is it a once-a-year thing?

Yes, pretty much.

They are on a calendar basis, so you do a budget cycle every year.

That's what most companies do.

That's what Windset does.

That's what they do.

All right.

And then from a simplistic perspective, when I'm visually thinking of Windset, when I think of the parking lot, turnaround, drop-off area -- where we were when the buses came in -- is it the land to the south of that that you would be expanding onto?

Yes.

Good memory.

Yes.

Yes, that's very good.

And if I recall, was that 100 and some acres?

120.

All right.

All right, thank you very much, guys.

Mitch Pinheiro, Imperial Capital.

So, couple questions here on then things.

Regarding guidance for third and fourth quarter, why is it -- again, if you asked this or answered this, I'm sorry -- but why would net income be substantially higher in the fourth quarter versus the second quarter as your base, even though the revenue won't be up as much as the third quarter?

Primarily Windset.

Okay, okay.

And when I'm modeling here, the revenue model, should we be assuming that the export business remain at the -- I know it goes down in the second half, but are we going to see declines?

Because you had mentioned this longshoreman issue.

That's probably one of the least predictable parts of your business, is this export business.

I would say, it's fair to say that if people knew about this longshoreman deal, it's a slowdown in all the West Coast ports.

We're big exporters out of Long Beach, for example, and so we're expecting that export is going to be slightly down.

Now, the other thing we have to keep in mind, Mitch, is -- a little bit longer-term -- is the currency.

The US dollar is getting awfully strong here, and that will affect exporters.

We're not factoring that in for this fiscal year, but something to think about for next year.

But anyway, to make a long story short, I don't see a dramatic decrease in exports this second half, but we will be down slightly.

And I don't see a pathway for them resolving this issue very quickly.

Okay.

And by down --.

I mean in --.

We're talking six months this year versus six months last year.

Yes.

Our second half of the year is always way less than our first half.

Right, right.

And then this should have -- I don't want to put words in your mouth.

But is this -- have a minimal impact on profitability because of the gross margins in that business, or --?

Yes, yes.

Minimal.

Okay, okay.

Moving on.

What is your -- do you have an update on CapEx for the full year?

I think it will be in line with our original projections, about $17 million to $20 million.

Okay.

And is any of that focused on Bowling Green or the Pennsylvania expansion within --?

Yes.

The way you ought to look at it is expansion in the salad lines in California, we've done that; reconfiguration of the Bowling Green operations to accommodate a wider product mix besides green beans; and then future growth, more growth and expansion of capacity starting in late this year in Pennsylvania.

And that is not only to accommodate growth, but also to better match some of the product needs of our East Coast customers who would like a shorter shipping time.

So it all makes sense, and so we're investing in all three sites.

Got you.

And I know it's early, but for fiscal 2016 would CapEx be higher, lower, or the same as fiscal 2015?

Very good question; an answer that I would love to have in detail for you right now.

We're going through that type of thought process.

But expect it to be higher because of the growth that we're going to invest in on the East Coast in Pennsylvania, so probably higher.

Okay.

A couple other odd and end things.

Eat Smart, what's the current ACV of Eat Smart?

I don't have that number, I'm sorry.

That's a good question, yes.

We should have that.

You can include that in the Q&A --.

We'll put that in the next Q&A (laughter).

No, no, you're right.

We should have that.

Your distribution story for Eat Smart, it's part of the story.

And it'd be nice to be able to quantify it a little bit.

(multiple speakers) The issue is the switch of private label.

We all have a pretty good idea of the sites that we're in.

It's just -- how much is still Eat Smart versus private label?

This may help.

We do in -- it's a different answer, but in the United States, we do still have about -- we have penetration of about 70% of doors, club and retail.

And in Canada we have a penetration of about 75% of doors.

Okay.

It's not the same, but hopefully that gives you some information.

Yes.

I was also trying to find the delta this year versus last year.

That increase stayed the same, and maybe where you expect it to go in a year or two.

Yes, I will tell you, this year, where we have grown considerably is in Canada.

We did not have 75% of doors in Canada last year.

Our superfoods are now in almost every major retailer in Canada.

And in some cases, they are only carrying our superfoods, not our core products, which is a new dynamic.

So I think that's a lot of the growth in new distribution we've experienced this year.

Okay.

And then the last question is, you talked about some phase-out of some vegetable products.

Could you quantify or give us a range of what that might be in terms of dollars or percentage?

That's hard to quantify, and here's why: we're obviously not going to just walk away from business.

What we're going to be doing is going through a process of defining where strategically we want to raise our prices.

We will offer those price increases to customers, and it will be their decision or not on whether they'll accept those.

So, it's hard to quantify what's going to be the result of those actions.

Okay.

All right.

Well, thank you very much.

Chris Krueger, Lake Street Capital.

Both of my questions have been answered, but just a couple more.

When you're looking at your superfood efforts in product development, is there any way to incorporate Windset's tomatoes and peppers and cucumbers, things like that?

Is there any collaboration with them on the kits?

Hi, Chris, this is Molly.

We do collaborate them to some degree.

For example, we use their tomatoes in our trays, but that's the biggest place we use them right now.

We're always looking for opportunities, and if we find those we'll definitely pursue them in products that make sense.

But right now, it's pretty much more the tomatoes.

And we -- my bad, we also use their peppers in our trays.

So, those two items we are currently using.

That's the short-term perspective.

Longer-term perspective, and we're not going to go into details at this call, but we have told you that we've made some recent investments in Windset.

And they're are highly motivated to not only look at improved and different and unique growing methodologies using hydroponic greenhouses, but we're also going to look at new targets.

And over the long-term, I would guess that some of those new targets will directly affect the superfood line of input products that go into our superfood products.

But in the short-term, it's more what Molly said.

Okay, that's helpful.

My other question is, any update on your efforts to get more next-day delivery in the Eastern region for your products?

Yes.

Hanover, Pennsylvania.

And that's going well?

Well, we're just starting that process, but that's a big part of getting a bigger presence and quicker delivery times on the East Coast.

Bowling Green, obviously, we've obviously done some reconfiguration; and then Hanover is really where we have the acreage and the ability to expand for our East Coast customers.

Okay.

That's all I got.

Thanks.

Nelson Obus, Wynnefield Capital.

I had a series of questions related to some of your businesses.

Why don't we start with your caveat about the weather, and there being too much rain?

I just want to put this in the context of this situation versus what might have happened a couple of years ago, just to make sure I've got this right.

If I understand it, you've contracted for more than what you think your needs are.

So a shortfall in production should not have the same effect that it had, say, a couple of years ago, before you went into this mode.

So that's a very general statement.

Could you comment on whether that's correct or not?

We're hopeful that you're correct.

It was pretty broad range here in California.

As you know, we source not only in the Salinas Valley and the Santa Maria Valley, but we go to down into the southern part of California, the deserts.

A lot of rain in all areas.

And you have to worry about two things: you have to worry about what is called pin rot, where you just -- it's so waterlogged, it just goes bad on you.

You can't even harvest it.

And, secondly, you've got to worry about when you can plant, when you can get in the field and plant.

So we're assessing that right now, Nelson.

But because of some of these modifications in contracting strategy, we're hopeful at this point -- hopeful -- that the impact will be modest as opposed to significant, which it was a couple years ago.

So we're hopeful that you're right.

So if you look at how you -- when you decided to increase the volume on so-called the take-or-pay aspect of your growing subcontractors, did you increase your geographical footprint, or did you just go deeper within the same geographical footprint?

In other words, are you going to get some protection from the fact that you've reached areas that are beyond the areas that got a lot of rain?

Some geographical extension, such as Texas and Mexico, Nelson.

You've got to be careful that when you go too far from California, you're losing yield and you're adding to transportation costs.

So we did do some geographical expansion just to hedge our bets.

But at the end of the day, the vast majority is still coming from California, which got -- we really had tons and tons of rain.

So, we're monitoring closely.

We'll have a better sense of this in about a month.

And I don't think it's going to be as severe as a couple years ago.

Well, if the weather were as severe as it were a couple of years ago, it's correct to say the effects might not be, because -- they better not be, because that was the whole point of the strategy, unless you really got -- unless something really quirky happened within that mix.

Does that --?

The strategy, as you know, was to broaden geography and to do some contracting changes to protect ourselves.

So you've got to be conservative, but generally we are set up to have less of an effect.

I just want to clarify that.

We're hopeful.

So getting to Lifecore -- now, with Lifecore, there's always two parts.

One is the legacy business, which I think we all understand, although they're going to come back -- there was something in the press release about them maybe not coming back quite as early as you thought.

So I guess that's part of it, in terms of the legacy products.

Nelson, that's not correct.

Okay, okay.

They are going to come back at the beginning of 2016.

Okay, so we got that straight.

That hasn't changed.

Can we talk about the other part of Lifecore, which has to do with using the product in a new and innovative manner, and getting approvals from a customer who's working through all this?

Is that still on track, and just a quick update on that?

Yes.

So, there's two pieces.

One is to use their capabilities in fermenting, separating, purifying, vialing, and sterile filling hyaluronic acid, which is their main product line.

They are terrific at it; they are the cream of the crop in terms of the industry in terms of molecular weight, in terms of purity, et cetera, et cetera.

So how do we find new applications for that, and new customers?

And remember, their strength is in ophthalmology, less so in orthopedics.

So obviously they are looking for new business there, and new customers.

And the second is, how do we use those capabilities that I just described for working with partners who need those capabilities?

They need formulation capabilities.

They need fermentation capabilities.

They need sterile filling into syringe capability.

And so we have brought on a couple of partners.

And they're typically going to be, as you know, in the pharmaceutical space.

And so we are -- our business model there is that everything we do is funded as we go by the partner.

And then when they get approval, then we are the manufacturer and supplier.

So those are the two legs to the stool.

And so that's what we're working on.

We want more of those partners.

We're in the process of adding one right now that will be new to us, and that starts to have an impact in late fiscal year 2016.

So that's the -- those are the growth drivers for Lifecore.

And our -- the way you ought to think about Lifecore is it's not only a growth engine for us in the future, it's a cash generator.

And our goal is to grow that business without sacrificing the margins that we have enjoyed since we purchased the company in 2010.

Okay, so you just said something pretty interesting, which is really what I wanted to zero in on.

I think what you said was that the new partnership arrangements should have an impact by the end of fiscal 2016.

Now, when you talk about an impact, you put a number out there at the high end, a dollar, I assume we're talking about that particular initiative will be part of that dollar, as small as it is.

And I guess what I'm really asking for is an update on whether that seems to be on track, if my assumptions are right in terms of what I just said.

On track as of right now.

Okay, so you have a specific -- there's a specific customer going through a -- or a joint partner going through a series of qualification tests that you are confident will begin to participate -- begin to help top and bottom line by the end of fiscal 2016.

And that's what I'm trying to monitor, and you say that's on track, right?

That's correct.

That's on track.

Okay.

Last thing is GreenLine.

Just want to try and understand -- by the way, have you broken ground in Hanover?

No.

Okay.

But there's two parts to GreenLine, too, obviously.

There is the utilization of the footprint for the Apio business, and then there's the GreenLine business.

You haven't mentioned too much about the GreenLine business.

But I sort of had a feeling that the GreenLine business was pretty much at capacity even before you -- and certainly at capacity in Hanover, and would require some reconfiguration.

And I assume there was some excess capacity in Bowling Green, but how are the two going to work together?

Are you going to actually build in more capacity for GreenLine, too?

How are the two product categories going to share that space, and just a little color on that.

Hi, Nelson, Molly.

On the GreenLine front, we really don't think of it as two separate businesses anymore.

I was wondering about that, okay.

Good.

We don't even report them separately.

We have truly integrated the Apio business with the GreenLine business.

Interesting.

And so we've brought some of that green bean production to California, and we're actually processing green beans in California.

We're also starting to process the rest of our vegetable products and salads in Bowling Green.

And then Gary has already talked about our future plans of expanding Hanover, and then we -- which is now producing green beans, but will at that time be producing all of our products.

So, when we bought GreenLine, actually, they weren't at capacity.

We had some room to grow.

And then with these reconfigurations, the plan is we will continue to have room for them to grow.

And a lot of our efforts have been about balancing our East and West Coast production so that we can best service our customers.

All right, so let me zero in on one more thing, and that's my last question, which is when you say we don't even look at these two as being distinct, I think what you're talking about now is how you report it, how to budget it, correct?

You've basically put GreenLine --.

But we do keep both brands.

Right, I know.

Both are well-known, national brands.

Okay, good.

So --.

Any smaller basis, right, we look at every product line on a daily basis.

We manage every product line, every product, every customer.

But on a reporting basis, which we've said, we have integrated that, and we've integrated our [manufacturing].

I understand.

All right, so let me turn to another issue: cross-selling.

When we bought GreenLine, we thought there would be an opportunity for cross-selling.

So now that we've merged the two from an operational perspective, have we fully mined all the cross-selling opportunities there?

What inning are we in, in terms of that effort?

No, we haven't fully mined it.

But as opposed to a year ago when we were sourcing-constrained, and we didn't want to start aggressively cross-selling when we couldn't deliver the product because of shortages, we can now.

And so the cross-selling is paying off.

We are doing it; it's not fully mined; it's an opportunity for us to continue to do it.

Molly is leading a two-day sales meeting here to capitalize on the number of doors that we're in, and to do more cross-selling, and to really push out the superfood products.

So we have that in front of us, Nelson.

You may have gone over this, but are GreenLine products now being integrated within the high-price-point Apio salad products?

Are you using part of them, or are they kept separate?

No, we consider them.

When we're going through product development, we do see if there's formulations to include the green beans.

Thus far, we have not --.

Yes, that's what I thought.

We have not put them in any of the salad products --.

No, I couldn't see them on the website.

But that's a possibility, right?

I mean, going forward.

Sure, we're always looking at that.

But, to date, we have not.

Do you think, in the long run, that the green bean business, if it doesn't find its way into the upper price point products, would carry with it margins that were equal to or greater than the old Apio salad margins?

(multiple speakers)

The old --?

Apio.

What are the old Apio?

You mean --.

(multiple speakers) Oh, you mean before we went to branded.

Before we've created this new value-added brand with it.

We see green beans as more in our core business, which are not as high margin as the superfood salads.

And we just want to keep -- they're good; they're not great, but we want to keep them good and make sure -- Molly has already mentioned to you that we're doing some real hard looking here at SKU pruning.

We're looking at some selective price increases.

We're looking at some migration of some of our customers that we feel need to -- something has got to change.

So that's all part of our valuation right now.

But I see green beans as just being rock solid, core business.

And I don't see it being in the superfood margin.

Okay, I wasn't clear.

You've set it up so I could ask it more clear.

Within the core universe, is it in the middle of the pack?

Is it a little more favorable?

Or is it -- just fits right in there with everybody else?

If you compare them among all what of we call our core, which is our broccoli and our trays and beans, they're in the higher range.

That's what I thought.

Okay.

Yes.

They're a nice, solid-margin product.

Okay.

Well, we'll see how you work it out.

I just wanted to get some color on some of these ancillary businesses.

Well, not ancillary; they cover a lot of property.

Okay, thanks.

Gregg Hillman, First Wilshire Securities Management.

First of all, for the Apio salad kit products, are you just competing on innovation and marketing?

Or are you also competing on packaging, since they're unique, oxygen something-or-other packaging?

Well, we do always use -- well, when it's appropriate, we do use BreatheWay on our packaging.

So in that way, we are competing because we believe that BreatheWay improves the quality and shelf life of our products.

But I would say, at the core of it, it's really about competing on innovation, understanding consumer trends, and delivering products that are convenient to eat and taste good.

And what's really special about these products are that they're complex, and that means these aren't products that you can easily make in your home.

If you see a Caesar salad kit, those people can make a Caesar salad in their home.

These are products with eight different ingredients that you wouldn't go buy in bulk and have in your pantry, and it just makes them a special treat to have at home.

Last but not least, we're competing on speed.

We're fast.

One product a quarter; it's very difficult for others to do that.

Okay.

Have you been able to incorporate sprouts into your superfood salad products (multiple speakers)?

Sprouts are a concern of ours.

They have a blemished history in terms of safety issues, and so we kind of stay away from sprouts.

Sprouts -- if you go back and look at some of food safety issues over the years, green onions and sprouts are kind of bad culprits, so we stay away from them.

Okay.

And just a general question about the greenhouse business in general.

Is there like a tendency towards overcapacity in the industry?

Like, for example, are any new greenhouses being built in British Columbia that would affect your operations up there?

I haven't heard of any major new capacity.

You'll hear, from time to time in the New York Times and stuff like that, somebody's going to build a hydroponic greenhouse on the top of the building in Manhattan and that kind of stuff.

But in terms of major expansion, I don't think -- we're not aware of it.

The Windset team has not made us aware of any major expansion, so we don't know of any.

How is Windset differentiated from other greenhouse companies?

Okay, well let me give you the short answer.

First of all, they have put together the know-how of how to grow things hydroponically in greenhouses that is unmatched.

By the way, let me start by saying their California facility, which has 6 million square feet, is the highest-yielding tomato facility in the world.

If they were measuring the cucumber yields, I would bet you they would probably be the highest in the world.

So, anyway, they have figured out how to combine the right construction of the facility, the right use of water, the right mix of temperature and carbon dioxide in pure water and minerals and stuff like that, to just have phenomenal yields.

So, number one is they know how to have high yields, and it's through know-how.

None of it is patented; it's know-how.

The second is they have found the right location in California that is superb for getting these types of yields.

It's the central coast of California, Santa Maria -- where they're located, and why they've bought up all these acreage -- is known for warm but not hot days, cool but not cold nights.

And that weather it is critically important to getting these types of yields.

Last but not least, they really have the scale.

Greenhouses that are several acres or 50 acres or whatever, you're just limited -- scale really does come into play here, because these investments are not -- they're not small, on a per-acre basis.

And so they've got -- how many acres is it down there now?

Well, they have 128 acres in California.

In California.

And then they've got another 60 -- they have 208 acres in total that they own.

And then they are the grower-marketers, and they market for other growers on another 550 acres.

So, it's scale; it's location; and it's know-how.

Those are the three things that drive their distinctive capabilities.

They are clearly the market leader, and they intend to sustain that.

And we've made investments in the company in the last 12 months that tell you that we believe that they are the future, really.

Okay.

Thanks for your comments.

Rick Fetterman, Fetterman Investments.

I've got, Greg, a couple of just hopefully pretty simple balance sheet questions.

Do you want to take a stab at where you see the debt, say, 12 months from now, the end of this calendar year?

Well, at this point, we still have the equipment line in place.

We've spent about 12 of the 25.

Dependent on what the rate is at the time that we potentially will draw it, we may go ahead and utilize the rest of that line, just because it is very cheap debt.

But, absent that, we will be out of the line here by the end of -- the working capital line.

And then the rest of it is term, so we would just be paying it down.

So I would guess from now to a year from now, we'd be about $8 million less than where we are now.

Okay.

Assuming we don't draw on the equipment line.

Are you taking into account the Hanover expansion?

No, I am not taking into account any potential use for expansion.

Okay.

My other question is, if for some reason the Company decided to exercise the put with Windset a couple years down the road, do they have the wherewithal, the financial ability to pay for that?

Their projections, or the last ones we saw, which are a little stale now -- that's pretty sad -- the answer is yes.

Just given that, I'm just wondering why they continue to pay you 7.5% for new money.

Well, that was the rate we agreed to four years ago, and so we maintain that.

No, I (multiple speakers).

That's a fair question.

The likelihood of them exercising their right, or us exercising our right, is very, very -- I mean, so low I can hardly think of it.

They see, and I don't -- if they were on the call, I think they would say this -- is that they see a lot of benefit from this investment and this partnership.

And examples of this are that the parents -- for example, there's four owners, the Newell family -- the parents wanted some liquidity, and we became a liquidity source for them when they sold us some shares.

What was the month?

Was that --.

July.

July.

And so we want them to know that we are their -- not a liquidity source; we are the liquidity source for them, so there's an advantage there.

Secondly, we just made a $7 million investment to help them in some new investigative areas.

And we can do it quickly and smartly.

We know each other.

So, I just think -- and by the way, we do collaborative things in terms of purchasing.

We do collaborative things in terms of new product development.

It's just mutually beneficial.

Why would they want to take us out?

And, while they could take us out, from a balance sheet point of view, it would still be stretching them.

I didn't ask the question clearly, apparently.

I was more curious as to the new money, the recent money that has gone in.

In today's world, 7.5% is a home run for the lender.

I'm just wondering why they wouldn't be able to go somewhere else for probably half that.

Well, because they want, one, they wanted to raise equity, not debt.

They were in the process of doing a new syndication of their debt, were basically refinancing all their debt at much more favorable terms, by the way.

And that hopefully will close in the next couple weeks for them.

They didn't want to complicate the whole discussion with five banks that are part of the syndication, and they needed these monies in order to invest in Nevada.

They needed to make that decision and have the monies by the end of October.

And they wanted to also look at expanding into new areas, of which they needed to secure the ground for that.

So that was the need for the cash.

And by the way, 7.5% rate on an equity investment in a private company is market.

I will just tell you that right now.

Okay.

That is market.

So we're not gouging them.

They're not overpaying.

Fair enough.

Thank you very much.

Will Lauber, Sterling Capital Management.

That union voted Apio -- they voted it down.

Is that correct?

Yes.

Okay.

Yes.

The union movement -- which a lot of this is going on in California, with lots of people -- it was voted down.

Right.

And then the next question.

Molly, I think back in October you had mentioned that the lead time that you have for new products is about -- I think you had said either six or nine months.

Can you walk us through that process quickly, just a little more in-depth?

Sure.

I'd say the process can range anywhere from nine months to a year and a half, Will.

And first of all, the difference in that range depends on if we need to create new molds for packaging, or install new equipment.

So I think the fastest we could get to market, from beginning to end, is nine months.

And just a quick overview of that process: we start every year, even more frequently than that, we start looking at consumer trends and restaurant trends and food trends in the US and Canada, and globally.

And we initiate -- we have third parties that help us with this -- and we initiate that type of market research.

That helps us look for opportunity spaces and new breakthrough ingredients we could add to our salad kits, or flavor profiles, or just needs that the consumer may have.

So from that, we develop white spaces or what we would call opportunity spaces, and we start to craft product concepts, and that goes on for several months.

And we have a dedicated culinary team now that works through different product ideas.

And we begin -- it is kind of a funnel system.

We have different stage gates.

And we get concepts, and then we go through tasting.

And once they pass the tasting, you've got to engineer the back end.

So the trick comes in when you start to create a product concept.

There's a lot of variables you have to balance.

We never want to give up on taste, but there's also cost, the cost/price equation, making sure both Apio will benefit from it as well as the consumer.

There's enough value there for the consumer and the retailer.

There's also nutritional values that we're always considering.

So we have to balance the amount of maybe sodium in it, or the amount of fat that we want to have in it.

And all those variables take time to create the right value proposition for the end product.

And then we go through several rounds of tastings.

And then we start pre-selling them and taking them out to key customers, and the winners survive.

I think what I like to pride ourselves on is we do the thinking upfront so that we have a high success rate of products that we take to market.

And we go through these stage gates very rapidly, very rapidly.

We're very good at killing ideas that don't look like they're going to work early, and taking the winners through quickly.

I guess what I was more getting to is, how fast can your competitors respond?

So if you come out with a new salad today that starts flying off the shelves, how long until Taylor Farms or another competitor can get a new product or a -- into market?

The answer to that really varies.

There's some products that are very easy to copy, and other products that we're putting in very high barriers for them to copy and it's going to take them longer.

For example, in some of our products, we are now using new suppliers and have formed exclusive agreements with those suppliers, that they cannot sell to our competitors.

And they are maybe the only supplier that provides those ingredients.

So, wherever we can, we're trying to raise barriers to entry.

But I'll tell you what, in the end we're forming extremely strong strategic relationships with key retailers.

We have a list of various high-volume customers that depend on us for innovation and are loyal to us, and are not -- even if a competitor does compete, I don't believe they're going to turn over the business to them for a slightly cheaper price.

I'm not saying all accounts are like that, but we have a list of very strategic accounts that have verbally articulated that to us.

And then my final question is, say, six months ago, when your capacity was going up against the capacity on the salads, what -- there was probably a lot of retailers or potential customers that were coming to you, and one of the product -- and you just didn't have the product to ship to them, and they might have gone to someone else.

What is the contract length for salads, as opposed to the broccoli packages or green beans or something like that?

Are they years in length, or what's the typical length of those?

I wouldn't characterize -- we don't really have contracts on our salads, or any time.

Again, it goes to they're placing your bet -- you need to get those products in store and you need to start promoting, and you've got to wait for them to turn.

They're not going to turn on -- so there's not really a contract issue here, Will.

But I will say, we didn't really have a big issue of retailers turning to competitors when we were out of capacity.

Most of the retailers waited.

We gave them the timeframe in which they needed to wait.

It was 4 to 6 months, and they were fine with waiting.

You have your innovative customers that are strategic that want it the second it comes out, and then you have your fast followers.

And if it's a couple months, they're willing to wait for it.

All right.

Thank you very much.

Craig Pieringer, Wells Capital Management.

Gary, will you expand a little bit on the status of the CEO search?

You say you're evaluating candidates.

Does that mean you've had some face-to-face meetings already?

We have a search firm that we are using, very professional people, professional senior person; C level searches only.

We were meeting with our candidates face-to-face.

It's the normal process, and it is still on the early side, Craig, but it's a good process.

And the search committee is deeply engaged.

Four of our Board members are leading the search effort, and I participate.

And forgive me if you've already put this out, but in very broad terms, what kind of person are you looking for?

Is it a food person?

Is it a consumer packaged goods guy or girl?

Is it a polymer chemist?

What kind of person are you looking for?

We could care less if they took organic chemistry in college.

It would be nice if they did, but it's not critical.

We think that experience in consumer packaged products is helpful.

We think that, since our main business is food, experience in the food area is helpful.

P&L experience is extremely helpful.

And we're looking outside, inside.

There is a practical issue -- I don't need to tell you, since you live on the West Coast -- but trying to relocate somebody from the Midwest and East Coast to the San Francisco or the California area is not a small task.

Housing out here has gone from the insane to the absurd.

And so those are things we just have to take into account.

But it's a very thorough search, and it's going to be a smooth transition.

And timing; the end of fiscal 2015 is not that far away.

And do you think that's --.

Right.

The announcement will come sooner, or closer to May?

Yes, so, look, you know how this works.

I've told people that's when I plan to retire, when I want to retire.

I will stay on the Board, et cetera, et cetera.

If it takes a little bit longer, I'm not -- I've got a lot invested in Landec.

So I will stay until we have this process completed in a satisfactory way.

Great.

And of course we'll all be sorry to see you go, but we'll look forward to the outcome of the search.

Thanks, Craig.

Thank you.

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

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

We appreciate your being with us today.

And we look forward to updating you, as we go through our third quarter, on our progress and our plans.

And very much appreciate the time you gave us today.

All the best.

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

This does conclude the program.

You may now disconnect.

Good day.