Lifecore Biomedical Inc (LFCR) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec Corporation fourth-quarter and fiscal year-end 2015 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 introduce your host for today's program, Mr. Gary Steele, Chairman and CEO of Landec Corporation. Please go ahead.

Good morning, thank you for joining Landec's fourth-quarter and fiscal year-end 2015 earnings call. I have with me today Greg Skinner, Landec's Chief Financial Officer, and Molly Hemmeter, Landec's Chief Operating Officer and CEO-elect, as announced in yesterday's press release.

Before we get into operating results, I want to congratulate Molly on her promotion to CEO when I retire at Landec's shareholders meeting in mid-October. Molly has clearly earned this promotion. She has all the credentials to succeed and continue our progress, and I look forward to working with her in my role as a Director of Landec.

During today's call, we may make forward-looking statements that involve certain risk 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 2014.

Operationally, we had a very good fourth quarter compared to last year's fourth quarter with consolidated revenues increasing 11%, gross profits increasing 16%, and operating profits increasing 17%. For all of fiscal 2015, our consolidated revenues increased 13% year over year to a record $539 million driven by strong sales of our Eat Smart salad kit products.

Apio's overall revenues during the fiscal year grew 16%, while its operating income grew 25%. The sale of salad kit products containing a mixture of nutrient-rich superfood vegetables increased 53% during the quarter and 88% for the year compared to the same periods last year.

We are very positive about the continued growth in our Apio business, particularly the expected continued growth in our salad kit line of products. Apio has recently reached an average weekly run rate of $2.9 million in revenues from its Eat Smart salad kit products.

We believe our Apio products are on trend as Americans increase their focus on healthy, nutritious eating as a direct way to stay healthy. We expect to launch on average one new salad kit product per quarter with a focus on nutrient-rich blends of superfood vegetables.

Most of our products utilize our BreatheWay packaging technology, which provides for 17 to 20 days of shelf life and we will continue to build our national brands, Eat Smart and GreenLine. During fiscal 2016, we expect to continue a product mix shift to more unique blends of vegetables in the salad Kit format and, correspondingly, continue to increase margins.

As expected in fiscal year 2015, Lifecore revenues for the year decreased 12% while its operating income decreased 50% due to the previously disclosed reduction in purchases by a key Lifecore customer due to a one-time inventory adjustment. In our current fiscal year 2016, the customer is resuming its historical purchasing levels. We expect Lifecore to be a major driver of growth this year and certainly a significant contributor to operating income and cash flow going forward.

Specifically, we expect Lifecore revenues to grow 20% to 25% and operating income to more than double in fiscal year 2016 as Lifecore continues to grow its HA and its partnering businesses. The key customer that cut its purchases in half in fiscal year 2015 in order to adjust its inventory levels have, as I said, returned to historical purchasing levels.

The plan at Lifecore is to continue to invest in its aseptic filling business to make the increasing demands of existing and new customers.

This filling business and the commercialization of product development programs are expected to begin generating meaningful revenues in late fiscal 2016 and help fuel Lifecore's growth over the next five years. Lifecore has committed a considerable amount of resources developing and advancing its aseptic filling capabilities, and after our Lifecore facility expansion this year, we will be well-positioned to meet anticipated increases in demand for the foreseeable future for both our core HA business as well as our new partnering collaborations with pharmaceutical companies that are seeking our expertise in process development, formulations and filling of aseptic-finished products.

Across Apio and Lifecore, we will spend up to $40 million to $45 million this year in new equipment and expanded facilities and we recently have added or will be adding organizational leadership capabilities in operations, marketing, sales and procurement. We are obviously investing for continued growth in people, products and facilities.

Our Windset investment continues to grow. In fact, our investment has grown every quarter since we first invested in Windset in February 2011. However, the change in the fair market value of our Windset investment in each quarter or fiscal year can be higher or it can be lower than the change in the fair market value recorded in the year ago period.

For the fiscal year 2015, we originally expected the change to be lower than the $10 million we recognized in fiscal 2014, because we knew at that time that Windset had decided to take a pause on further expansion during the fiscal year 2015. Due to recent unexpected permitting issues in California, Windset's new expansion plans have now been delayed. The permitting delay involves a new government jurisdiction which unexpectedly is requiring a new permitting process.

As a result, the increase in fair market value for the fourth quarter and the fiscal year 2015 was less than we had been projecting. The increase in fair market value of our Windset investment in the fourth quarter was $400,000 instead of approximately $2.5 million that had been expected in the fourth quarter. The difference negatively impacted net income in the fourth quarter by $0.05 a share. For all of fiscal year 2015 the increase in Windset investment was $0.07 per share lower than we had originally projected, again due to these permitting issues.

The permitting delay is also going to affect the increase in the fair market value of Windset for fiscal year 2016. That is why we expect the increase in fair market value of our Windset investment in fiscal year 2016 to be flat to slightly up compared with fiscal year 2015.

This new expectation is considerably lower than what we had originally been forecasting for fiscal year 2016. Again, all due to this permitting delay. This delay does not impact Windset's long-term trajectory.

Windset is committed to expansion plans at its Santa Maria, California location and plans to construct new hydroponic greenhouses with a new state-of-the-art design focus on new crop targets. Windset is one of the fastest-growing food companies in North America, growing on average by 21% per year over the past five years. Windset's 6 million square-foot hydroponic greenhouse facility in Santa Maria, California is one of the highest if not the highest yielding tomato greenhouses in the world.

They are one of the market leaders in innovation and new technologies for hydroponic growing in a highly controlled environment with the ability to grow produce year-round with exceptional yields and quality, and use very little water in doing so.

Let me turn it over to Greg to report more details on our financial results.

Thank you, Gary, and good morning, everyone. We reported yesterday that revenues for the fourth quarter of fiscal 2016 increased 11% to $134.4 million from $120.9 million in the year ago quarter. This increase was primarily due to a 15% or $15.1 million increase in Apio's value-added business, and a $2.3 million or 29% increase in revenues for Lifecore.

These increases were partially offset by $3.8 million or 26% decrease in Apio's outsourced business.

Operating income increased 17% to $6.2 million from $5.3 million in last year's fourth quarter, primarily due to operating income at Lifecore, increasing nearly fourfold, partially offset by a 6% decrease in operating income at Apio that increased SG&A expenses to support our new line of salad kit products, including additional headcount.

Net income in the fourth quarter of fiscal 2015 was $4.2 million or $0.15 per share compared to $4.5 million or $0.17 per share in the year ago quarter. The $898,000 increase in operating income in the fourth quarter was more than offset by the $1.5 million lower increase in the fair market value of our Windset investment compared to the increase in the fair market value reported in last year's fourth quarter.

For fiscal 2015, revenues increased 13% or $62.4 million to $539.3 million, from $476.8 million in fiscal 2014. The increase was due to a $69.7 million or 19% increase in revenues from Apio's value-added business, primarily as a result of an 88% increase in salad kit sales. The increase in Apio's value-added revenues was partially offset by the expected $5.3 million or 12% decrease in Lifecore revenues due to lower purchases related to a one-time inventory adjustment by a key Lifecore customer and from a $2 million or 3% decrease in revenues in Apio's export business, primarily due to lower volume sales as a result of the West Coast longshoremen labor dispute during a portion of fiscal 2015.

Net income in fiscal 2015 was $13.5 million or $0.50 per share. This compares to net income of $19.1 million or $0.71 per share for fiscal 2014. The decrease in net income in fiscal 2015 compared to last year was primarily a result of a $6.9 million decrease in other income in fiscal 2015 from, first, a $6.1 million lower increase in the fair market value of our Windset investment, and second, from a $793,000 non-cash expense due to the write off of Landec's equity ownership in Aesthetic Sciences.

In addition to the $6.9 million decrease in other income, there were numerous operational items that impacted net income during fiscal 2015 compared to last year. Those primary areas of operation that increase net income were a $9.7 million increase in gross profit in Apio's value-added vegetable business and a $2.8 million decrease in the income tax expense.

These increases in operating income were offset by, first, a $5.7 million or 50% decrease in operating profit at Lifecore. Second, a $4.5 million or 20% increase in SG&A at Apio. And third, a $1.1 million decrease in gross profit in Apio's export business, and fourth, a $539,000 increase in operating expenses at corporate.

Turning to our financial position, cash totaled $14.1 million at fiscal year end 2015. Increases in cash included $26.2 million in cash flow from operations and increased net borrowings by $8.1 million. Decreases in cash included increase in the Company's investment in Windset by $18 million during fiscal 2015 and spending $17.5 million for capital expenditures, primarily for capacity expansion.

As of May 31, 2015, the Company had $39.7 million available under its lines of credit. Let me turn the call over to Molly now.

Thanks, 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 salad kit products, which contain a variety of super foods.

These products are currently being sold to more than 10,000 club and retail food service -- and food service locations throughout North America. During the fourth quarter of fiscal 2015, this new product platform reached an average weekly run rate of $2.9 million.

We estimate the North American salad kit category including both retail and club stores in the US and Canada to be approximately $1.2 billion, measured in consumer retail dollars. 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.

Eat Smart has an estimated 12% share of the North American salad kit market, including both retail and club stores, up from zero just a little more than 36 months ago. When combined with our historical core vegetable products, we are now in 70% of retail grocery store sites in the US and 75% of store sites in Canada, giving us a strong platform for future product expansion.

Consumer awareness of our salad kit products continues to grow, and our EatSmart.net consumer website that is compatible with mobile and phone and tablet has accelerated that awareness. In parallel with the focus and growth of our salad kit products, we have started to phase out specific lower margin core vegetable products and selectively seek price increases for other products.

We expect to begin seeing results of these efforts at fiscal year 2016. Revenues in our core vegetable products may decline slightly as a result, but Apio's gross margin should be enhanced.

Along with growing the sales of our higher margin salad kits, we believe margin enhancement in our core vegetable products at Apio is essential for the long-term growth and profitability of Landec.

Apio is an innovation leader in the packaged fresh-cut vegetable category. We invest in gaining a deep understanding of consumer trend 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. During fiscal year 2015, approximately 1/3 of Apio's value-added sales are being generated by new product 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. Increasingly, our focus going forward will be on margin improvement in our Apio food business and returning Lifecore margins to their historic levels. You will note that, during fiscal 2015, the gross margin and Apio's value-added vegetable business increased 60 basis points from the prior year. Margin improvement over the next 24 months will come from product mix changes at Apio, focusing on higher margin salad kit products, from operational cost reductions driven from capital expenditures to improve plant productivity and from selected price increases where possible and appropriate.

In fiscal 2016, we expect gross margin to increase in our Apio value-added business by approximately 150 to 200 basis points and in our Lifecore business by approximately 750 to 800 basis points. Looking to fiscal year 2016, we expect substantial growth at Lifecore and continued growth in Apio salad kit products, combining for an excellent year-over-year growth for Landec on a consolidated basis.

Specifically, we expect consolidated revenues to increase 7% to 9% compared to fiscal year 2015, consolidated operating income to increase 60% to 70%, consolidated net income to increase 60% to 65%, Apio revenues to grow 6% to 7% and operating income at Apio to grow 30% to 35%, Lifecore revenues to increase 20% to 25% and Lifecore operating income to more than double. And, new corporate partner-funded R&D and licensing revenues from two new licensing arrangements outside our food and medical businesses to be approximately $2.7 million to $3 million, and Windset fair market value increase to be flat to slightly up.

The increases in net income in fiscal 2016 compared to fiscal 2015 are expected to be due to, first, at Apio, increased sales in our higher margin salad kits. Second, at Lifecore, resumption of growth as its key customers restores its historical purchasing level, and from new business initiatives, advancing towards sustainable commercial products. Third, at Apio reducing unfavorable operating variances from the value-added vegetable business primarily by executing on improved strategies for produce sourcing and increased plant operational efficiencies.

This all results in an expected earnings per share for fiscal year 2016 of $0.80 to $0.83 per diluted share. Our capital allocation priorities over the next 24 months are continuing new product development of our salad kit product line at Apio with the launch of one new product record on average; second, expansion of our Hanover, Pennsylvania food processing facility; third, investments in facilities for productivity improvements at all three of our Apio processing facilities; and fourth, expansion of our Lifecore facility adding aseptic filling capability and equipment. A

s a result of these priorities, as stated earlier, we expect capital expenditures to be between $40 million and $45 million in this fiscal year 2016, more than double fiscal year 2015.

In summary, the Board and I feel very positive about Landec's future. Landec has a seasoned leadership team, market leadership in the markets we serve with innovative products and growing markets with good tailwinds. The election of Molly as CEO ensures uninterrupted knowledge of Landec's businesses and uninterrupted progress towards the next level of growth and profitability.

We are now ready for your questions.

(Operator Instructions) Tony Brenner, ROTH Capital Partners.

Congratulations, Molly.

Thank you, Tony.

You're welcome. Couple questions, all regarding Apio. Could you tell us what the salad kit revenues were in fiscal 2015?

They were approximately between $125 million and $130 million.

Okay. And then, in the fourth quarter, Apio's operating income declined as a result, you say, of higher SG&A, mainly headcount. Yet, your projected -- I mean that appears to be now a one quarter phenomenon, even though those costs will remain in place. Why just a one-quarter impact from that?

Well, we had a lot of hirings that occurred late in the fiscal year, a lot of them at the beginning of the fourth quarter. Plus, there was a big push during the fourth quarter on the marketing side.

Now looking forward, we expect sales and marketing at Apio to continue to grow year over year, probably at about the same rate as a grew last year for similar reasons.

Did that answer your question, Tony?

Well, sort of, but will there not be a big push in marketing going forward? Is this -- again, you hired a lot of people but they're still going to be on board. I'm still puzzled as to why this is -- just had an impact in the fourth quarter and not going forward.

Yes, so the other things that are going on next year, Tony, is that we will continue to increase the sales of our salad kits, which will contribute more profitability and we -- and we are focused on a lot of cost reduction initiatives as well. So those are going to counteract some of those increases next year.

This year, the year we are in.

Right, the year we are in.

The year we are in that we just started.

Okay.

Does that make sense?

Right. And last question, the release you refer to quote-unquote improved strategies for Apio sourcing. Are there other things that you have not talked about previously that are now in place?

The things that we talked about previously are in place. But nothing new that we haven't already talked about.

Okay. Thank you.

Mitchell Pinheiro, Imperial Capital.

Congratulations, Molly. So a couple questions, first, when you are looking at sort of the produce category and the produce industry generally a lower margin business and I get it that you are moving out of some of the lower margin more commodity type items. But I'm curious how Molly or everybody would view the ability to sustain your gross margins in salad kits, which are double, triple what your normal margins are with the influx of competitors, it is a very strong category. How long do you have these advantageous margins?

And I know you continue to move with new products keep the margins up, but wouldn't we expect these margin over time to get whittled down a little bit?

Mitch, this is Molly. I think the challenge will be there, that there will continue to be pricing pressures. But right now, the category still shows extremely strong growth. The category is growing over 30%, and retailers and consumers are looking for new products.

So I think the focus is on continuing to launch new and innovative things out in the market, keep those margins as high as possible. That's what we need to do.

Mitch, that is a fair question. It has been true for the industry that you've got some lifecycle issues. Molly and her team have just launched this Protein Salad business which adds a new dimension, a new platform of adding protein -- non-meat protein to the products. And that is more value, so you can start to think about good margins in that product line as well.

So, I guess our view is is that so long as we continue to innovate and launch new products, that will help maintain margins. And secondly, we are seeing -- knock on wood -- we are seeing first to market advantages. This week, kale salad being first in has really made a difference for us and we are seeing good traction with the wild greens and quinoa salad. We are seeing good traction with the beet salads.

So, being first seems to really give us at least a several-year advantage. So we will hope to maintain that as we launch new products.

Okay, that's helpful. And then speaking of new products, where are you in terms of distribution of the new -- with the salad protein salad kits?

We are on -- in Costco, we have been on a rotation program in both Costco US and Costco Canada. So I believe right now we have a product that is the protein barbecue ranch in Costco US and Canada, but that will be rotated out soon for other products. But I believe right now you should be able to find it in almost any Costco store.

We have just launched three single-serve versions of the protein salads in a few retailers. We will be scaling that up more in the fall.

Okay, so right now, small distribution. Where do you think you'd be by year end in a perfect world, ACV wise or --?

We'll be in five to 10 retailers by the end of the calendar year is my expectation.

Okay, that's helpful, thank you. And then the capacity you're adding on the East Coast, when do you think that's complete? And does that have any margin drag while sort of ramping up the capacity there?

The completion is scheduled for early next calendar year to begin using that new capacity. We don't expect any margin drag just because of the margins of the products we are putting through there.

Okay, did you already have it sort of presold, some of the capacity?

Yes, so we are adding approximately 44,000 square feet in our Hanover facility. We are building the walls and the foundation to enable long-term growth, but we are only installing equipment as we need that capacity.

Okay.

And keep in mind, we are not just adding salad kit capacity there. We are shifting some of our bag capacity, our vegetable bag capacity, from the West Coast to the East Coast and this is going to enable us to service our East Coast customers more readily. Right to be closer to them. And so we will be adding a new salad line in Hanover, Pennsylvania. And as our salad kits continue to grow, we have capacity to continue to add more lines.

Okay, and then I really appreciate the detail in the Q&A part of your press release. But particularly, on the produce programs, I appreciate the detail. I was curious -- you say you are sourcing more from Texas and Mexico. Where -- how much --? What percentage roughly do you source from those two geographies? When you think that's heading?

Pretty small. It's typically 10% to 20% and it's more to give us a diversity, to reduce our risk against weather in the more prolific areas of California and where we would typically grow. So, it's a small amount, but at the same time it helps us diversify our risk and serve our customers when we do have weather issues in other areas.

Okay. And then, just last question on Lifecore; so, with 25% growth, call it $50 million kind of range, that is up about 9% from where you were in fiscal 2014, which -- obviously takeaway last year which was an unusual year because of the inventory customers slowing down orders. But that's only 9% growth over a two-year period. I thought the growth rate at Lifecore would be a little bit higher. Is there anything that happened in those two years besides the obvious that would have slowed down what I would have thought would be a typically a 9% or 10% type of growth rate?

We've got a fairly significant effort with some collaborative partners who are pharmaceutical companies. They've got the FDA clinical trial gauntlet to run. And so, we've had a lot of development work with them, development revenues. And the first partnership is expected to have FDA approval and launch of their products, which really we will be the exclusive manufacturer. That won't come until very late in FY 2016.

So we were hoping that would come faster. You know as well as I do you've got clinical trial data, you've got FDA reviews, things like that. But that big uptick really doesn't start to kick in until late FY 2016. So that is a big factor in the revenue curve.

Okay, thank you. That was very helpful.

Morris Ajzenman, Griffin Securities.

Molly, congratulations. Turning to Windset, the firming issue. You touched on it earlier in the call and, clearly, it has an impact on the nonoperational side, nonoperating income. Can you just put a little more meat on -- you touched on it, but again, why a 12-month delay? What is it more specifically? Again, you touched on it, but just kind of bring us more up to speed.

And then, a question for Greg. We've talked about it in the past, but again the fair market value accounting for the investment of Windset, when do you think that is going to change as far as accounting in that manner down the road? Those are my two questions there.

Morris, there are two parts to that question. I will do the first, Greg will do the second. You have been to the facility. You've seen the state-of-the-art facilities. You are familiar with the landmass around it, etc., etc.

So this -- they were anticipating building these new facilities -- this new capability. Land contiguous to the land that they are on. But instead of being in the city of Santa Maria, it moved into the County of Santa Barbara and they anticipated that there would be no new permitting requirements, etc.

And they were unpleasantly surprised to learn that, with this new government jurisdiction of the county, they -- late in the game they learned that extensive permitting was required. So that's what we're dealing with. You can't argue with the government officials. The way they want to do it, that's the way we have to do it.

And it's a -- that county is particularly noted for a long, lengthy permitting process. So that's what we're living with, that's what they're living with.

Wish I could tell you that we could move this forward much faster, but they don't anticipate they can. So that's the permitting issue. It's a new jurisdiction, a new body of people and they are doing some new approaches in terms of physical structures, new approaches in terms of hydroponic growing. As you know, we've been stating for some time that that was one of the objectives, was to look at a totally new state-of-the-art approach and look at some new crop targets.

So the reality is, you know, it's going to be a year delay and there's not much we can do about it. So I will give the second part over to Greg.

Yes, Morris, this will be the last year, FY 2016 will be the last year that we will be using projections to determine our fair market value of our Windset investment. If you recall, there is a foot call associated with our agreement with Windset that is effective on or after February 15, 2017.

At that point in time, the value of our Windset investment is going to be based on a formula that is predetermined in the agreement. Think of it along the lines of a 12-month look back at EBITDA, times a multiple, plus cash minus debt and equity. That establishes the value of Windset total.

Then you times that value by our 27% ownership, that then is the value of our investment.

So once we get to that point in time, which would be the third quarter of fiscal 2017, the volatility on a quarter-to-quarter basis is going to drop dramatically. And you should see a fairly steady increase or -- I can't say increase quarter-over-quarter, but increase each quarter at a fairly steady rate at that time and going forward.

Does that answer your question?

Yes it does, and so I'm just curious. I don't know how you can answer this question. But if you had to move to that sort of change now, would the value change materially from the fair market value accounting you are doing now?

Well, it would just from the aspect that the numbers that we are currently using are still the 12 months ended February 2017 but they are based on a projection. Because it's a projection, you have heavy discounts against it.

So if you were to value it today, the discount would go away completely. So you would automatically get a pickup in the current value because the current value is a present value of future cash flows.

Okay. One last question; just a little thing you mentioned here in your release, I think, for fiscal 2016, new licensing revenue from two partners using the Intelimer. Anything more you can tell us about that? Any (multiple speakers) potential ventures from there?

I couldn't hear the last part. Say that last part?

And any incremental partners you are looking at?

Okay, so a number of years ago, Morris if you remember or tracking us, about four or five years ago we were doing a lot of licensing deals. It was really stretching us in many different directions and we were dependent on the partners for commercialization, etc.

Yes, you had the gain of short-term licensing revenues. That kind of thing. And we kind of went cold turkey. We stopped looking for licensing partners, stopped doing it and a couple of these -- in the last year, a couple of companies approached us, made compelling arguments for us to work with them on this, one of which is just a straight licensing deal. We transferred technology and get a license fee and do some work and then we're done.

The other one, we do have some ongoing R&D work for which they compensate us. Let me just say that they are in areas outside of our core food and medical business. They are -- one of them has some very good long-term prospects in terms of royalties that would be generated. The other one isn't, it's just a paid-up royalty.

We just feel it's better that as we make progress and move towards commercialization with this one partner, we will let you know what's going on. We will tell you what's it's all about.

But at this point we've been a little bit reticent to talk much about these, because who knows, who knows how well they are going to go? It does represent a couple million dollars of licensing and R&D fees here this year, so it is pretty lucrative.

But we are not proactively looking for -- outside of our core businesses, we are not looking for licensing partners. They tend to stretches in different directions. We are glad to have these two.

Let me also mention to you that in our BreatheWay business, remember the packaging technology, there is quite a bit of activity right now in terms of new licensing opportunities for BreatheWay technology in generally fruit applications. As you know, we focus on vegetables. And we will talk more about that as that happens.

But we've got -- boy, we've got about five or six collaborative partners that are testing and looking to commercialize their products using our BreatheWay packaging technology. That, we are very interested in. That, we are actively pursuing. But these other applications, these other partnerships came to us, they are going to be few and far between over the next few years.

And these five discussions you just referred to now, you said fiscal 2016 or 2017?

2017. 2017, yes. This is the development phase. This is when they could start commercializing in this fiscal year late in the year. But in terms of material impact it wouldn't be until FY 2017.

Thank you.

Brent Rystrom, Feltl and Company.

Kind of a couple of follow-ons to a few of the previous questions. So have you kind of said what at present you're discounting the Windset Farms back from what you think the end value is going to be in February of 2017?

Well, it will certainly be in our K that is going to go out tomorrow, so I don't think I'm disclosing any -- no different than third quarter. It weighted at 21%. And then on top of that, (multiple speakers) the discount rate, the overall weighted discount -- there's a lot of components that add up. The overall weighted average is 21%.

And then after you apply that, then you apply a lack of liquidity discount, which I think is around 15%. At this point. Both of those will go away when we get to February 2017 your discount rates are going to be zero.

And then, post the February 2017, you will continue to have a formula calculate the value of that business and then your ownership? Or will you have equity in the earnings?

No, it will continue to be under fair market value accounting, and it will be using the contractual formula in the agreement.

All right. Can you kind of characterize -- you mentioned in your prepared comments that Windset was a $0.05 impact on the fourth quarter and $0.07 impact on the year. For the forward year, would you characterize that impact as $0.07 again? Or would you characterize it more like $0.10 if you account for what could have been the growth?

It's $0.10 plus.

How about higher?

Yes, we had anticipated returning to $0.14 if not higher levels in 2016 and that is just not going to happen now.

It's significant, Brent.

All right, thank you. On sourcing, a lot of this is new for me timing wise, since I've known you, because I've not known you through an El Nino cycle. What are your people telling you as far as what typically happens in California and now your alternate sourcing market of Mexico and Texas and then Florida, when it comes to sourcing in a heavy El Nino? Supposedly we are in the heaviest El Nino since 1998, 1999. Can you give us some thought of the impact El Nino weather typically has on your sourcing?

Yes, you can have flooded fields. And first of all, every Californian is praying for a big El Nino year. But it can adversely affect us. And the El Nino we are talking about would be West Coast. It wouldn't affect, we don't think it's going to affect Florida. But you're right (multiple speakers)

Well, in theory, Florida gets fewer hurricanes, so --.

Well, that's good. Okay, that's good. But they are projecting that this could be the big El Nino year and so anyway, we -- again you've got to have diversity in sourcing. You have to be prepared for this. And it could adversely affect us.

There's just no question about it. We shouldn't dance around the problem.

But we did have challenges in the last El Nino year, which I can barely remember because it's been so long ago. But it would affect everybody -- everybody -- on the West Coast in agriculture if there were torrential rains. You just know that. You can't -- what can you do about it?

That's why, long term, Windset has the answer. That's the long-term answer, is to move things inside and do it the way they do it. But we are -- we are preparing for it. We are anticipating it might happen. So we just have to brace for it.

Different topic, the expectations for debt growth in 2016, do you see debt continuing to grow faster than the balance sheet in equity? Or do you see that slowing a bit?

Well, we are going -- we still have lines. It will grow basically with the growth of our CapEx. We intend, given the current interest rate environment and how cheap debt is, to go ahead and borrow the monies we need to cover our CapEx. So it could go up $40 million, $45 million.

Okay. And as previously stated, Brent, we have a good cash flow from operations year that we are anticipating.

All right. And just a couple of technical questions, probably more for Molly on the salad kit side. Do you know what the mix of the $1.2 billion of sales for these kits is by channel?

I do.

And just a rough idea, and I'm just trying to -- thinking of the margins of different categories, trying to back in then what the purchasing is as opposed to the selling side of the market.

Right. Well, we typically look at it -- those numbers, the $1.2 billion, includes US, Canada, club stores and retail. Okay? So we can look at a couple different ways. We can look at it on retail and club. The retail, well, let's look at North America and divide it by US and Canada first.

Of that, most of this, almost all of it is, for salad kits, is in the US. So if you look at the salad kit market, I'm going to estimate -- I am talking off the top of my head from memory here, I am going to have about $900 million of the salad kit market is actually in the US with the other $300 million being in Canada. Does that help?

And the split between club stores and retail?

So, if you give me a second here, I have it written down.

Brent, as you know, the food service is not a user of salad kits so we are not counting that. This is strictly club store and retail. And if Moll --, if you can't find it, we can get back to Brent.

It's mostly all in retail. So, the club salad kit business might be around [$60] million. It's that small and retail dollars, where the retail business is really driving a lot of those dollars.

Okay, and then by implication, Molly, Canada is about 10% of the US population. So is Canada, in your mind, a mature market now? Or is it growing as fast as the US is? (multiple speakers) and does that imply (multiple speakers) $3 billion market?

I'm sorry, go ahead.

Does that imply, the $300 million, that it is a $3 billion US market if Canada is indeed a measure of maturation?

Well, it's been pretty incredible what's been happening in Canada and the growth we have seen. So the salad kits are growing in the high 30s and 40s in Canada. And to tell you the truth, Eat Smart is driving all of that growth.

Of course it's a much lower base, right, so you have $300 million, so that growth isn't going to be as much of the impact as you're going to see in the US.

I hope that that is a measure of what can continue to happen in the US, and we can continue to grow in awareness of salad kits, even the category that we can continue to grow the category in the US. That's what I would hope happens, is that awareness continues to grow and we bring more consumers into the salad kit category as people are looking to eat healthier.

And my final question, Molly, is could you define for us any broader sense what that $1.2 billion -- is the $1.2 billion part of a broader packaged produce category? Or what is the parent category above that and how would you describe it?

Well, the $1.2 billion represents specifically salad kits and that includes vegetable salad kits as well as lettuce salad kits, so a Caesar salad kit, okay, would be in that $1.2 billion. And a kit is defined as something that has a master pack in it, if that helps.

So if you have a dressing or you have something in the kit, in addition to toppings, salad toppings and dressing. So that is the salad kit market.

There is a much broader market out there within produce and fresh-cut vegetables that we measure around more of the $2.4 billion. And that is going to include everything from all our fresh-cut vegetable bags and our trays, and our green beans.

Thank you very much. That helps.

Nelson Obus, Wynnefield Partners.

I just had a couple of questions. Going back to the first question that was asked on the call, I believe by Tony, in regard to the SG&A increase, I am assuming what you put in place here is the capability to grow beyond fiscal 2016. Is that fair to say, that you have created a capability that will take us beyond the current fiscal year and we won't see that kind of gearing up again?

That's correct, Nelson. We -- that SG&A increase comes in two parts. One is an increased spend in our innovation to work on new products and do consumer testing and to market directly to consumers online. So you have higher expense.

But we've also added people. Just a year ago, we hired a new VP of Marketing. We've added a couple new people in the Marketing department to be able to help with all these projects. We've also added a new VP of Procurement and a new VP of Quality.

So we are really trying to staff up to add the capabilities, like you said, going forward to take us to the next stage of growth.

Okay, good. There are a couple of things that were thrown around. Maybe I am mixing some metrics here. Let me just get it straight.

We have a 12% market share in the salad kit area, which I think you described as a $1.2 billion entity. But somewhere else it says that we are the market share leader throughout North America in branded fresh-cut packaged vegetables. And also on the conference call it says that we are an emerging participant. So my question is, does the 12% make us number one?

Okay, so (multiple speakers)

Or am I mixing apples and oranges in here?

A little bit, so let's talk about actually what Brent brought up before is, we are participating in a larger market in fresh-cut vegetables. And that's about -- I think I said 2.4 -- it's $2.4 billion to $2.7 billion in that market.

So let me describe what that market includes. It includes the US, it includes Canada and it includes our specific product lines in which we compete, which are salad kits, green beans, bagged vegetables and trays. So that is the larger value-added fresh-cut vegetable market of about $2.7 billion.

In that market, we are the leading branded player. We have about -- Apio has about 18% share in the total market, and this includes both club stores and retail stores.

Including the legacy business, I got it.

Yes, so it's all the product segments we are in. One segment of that is obviously the salad kit market. That is $1.2 billion of that $2.7 billion. And that's why entering this market was such a big deal for us, because we considerably added to our market opportunity. So just the salad kit market in North America in club and retail is $1.2 billion. That is the market where we are a new entrant and we are currently about 12% and we are going to be striving to increase our share in that.

Nelson, our angle for entering that salad kit segment as you probably know, the vast majority of that $1.2 billion is made from lettuce-based -- leaf lettuce-based products. Go into the store, they all look pretty much the same. You've got lower nutrition levels.

We've come in with salads made from vegetable components, nutrient-rich. We've had unique and interesting mixology in terms of the mixture of these vegetables. We combine it with the BreatheWay packaging technology and we are using our platform of being in 70% of retail stores as our launching platform. And if I had to tell you what the stunning surprises then, we've been surprised by how fast this has been taken up and also how fast Canada has grown. Canada is just shockingly high-growth area.

And so -- but I think it's this unique approach of really being focused on the nutrient part of this, and vegetables. Vegetables are in favor these days.

So a net subcategory, we have a much higher market share.

Yes.

Just to clarify one thing with Windset, did they expand into an area that they weren't in before? Or was a whole new jurisdiction created?

So you know the site. You could literally, if you are standing on their tower, you can see the property. It is adjacent. But it moved them from city jurisdiction to county jurisdiction and let's just say that there's different players, different procedures, different permitting. What should have been straightforward in our minds, in their minds, evidently isn't in the eyes of the county.

So it's close by. It was an obvious place to expand. But it moved them into a different jurisdiction.

Just because that is where the property was.

Yes, it was across the street.

I understand -- I know that county and you have got a lot of pie in the sky liberals down in Santa Barbara, and then up where you guys are there are some real entrepreneurs. So it is a bad neighborhood to have walked into. I hope that when you say a year, because I mean these guys don't understand business, and they are able to kick it around forever, particularly if there is water involved or whatever. Do you feel pretty comfortable a year is what you need? Or do you have a lobbyist down in Santa Barbara or somebody there?

Oh yes. So, our comfort has to be based on their comfort. We met with them extensively. Obviously we were planning on this being in the fair market value calculations. And when we were talking about higher expectations for our earnings per share, this was all a go.

They're confident that a year is appropriate and realistic. So, (multiple speakers)

(multiple speakers) problem with your operation up in Santa Ana is that it creates jobs, it's in the private sector. That's a bad thing for the people down south. Anyway, the R&D partner funding, okay, that comes in here, I am a little bit -- obviously it's not licensing. Just what part of the Company is that coming out of?

Okay, let me make sure I understand. We have a (multiple speakers)

$2.3 million of quote R&D partner funding and I have a feeling that doesn't have much to do with Intelicode or whatever. It's separate.

So these two new partnerships I think you are referring to, which could generate $2.5 million to $3 million, is that what we said -- $2.7 million -- these are two companies, neither of whom are in the food or the injectable medical materials business. So therefore they are outside our core business.

They approached us. One of which we agreed to license them the Intelimer technology. Remember, that is the side chain crystallizable polymers that have temperature activation, the stuff that we were founded on. So it's a straight royalty -- a prepaid royalty license. One set of dollars sent to us, we are done.

The other is an ongoing collaboration, where they are funding R&D. They are paying us upfront exclusive licensing dollars. We have defined an exclusive field in which they can use our technology in that field, and so it involves upfront license fees, R&D payments and, eventually, royalties. So there are two different approaches, two different companies, both outside.

We didn't -- we were not seeking these partnerships. They came to us. They made sense for us. It's -- they are not hugely distractive. We can still focus on our core businesses and that's why we did it.

My specific question had to do at page 5 (technical difficulty) number 4 towards the top, new licensing revenue from two new partners using our Intelimer polymer technologies in two new fields of use. Very clear. Then, a couple of sentences below it talks about a balance off here in terms of recent equity grants from increased salaries and bonuses, partially offset by an approximate $2.3 million increase in partner-funded R&D and licensing revenues. Those are both referring to the same thing that you just did, that's apples and apples, right?

Apples and apples.

It will all fall under corporate in our segment reporting.

Okay, I just wanted to -- I think I had one last question, and I don't want you to go into a whole lot of -- I'm just kind of reading this between the lines. But it looks as though your new procurement guy is doing a lot of meteorological data dump, and it sounds like a lot of complicated metrics that he's feeding into this -- is this sort of what -- does he wear a pointed hat and have a lot of data that he puts into machines and comes out with thoughts of where you should be putting your relationships, because there seem to be a number of variables that you're looking at historical, meteorological patterns, etc. that weren't being done before. Am I on the right track?

You said you wanted a short answer, and the answer is no. He doesn't wear a pointed hat. He is not doing that. What he is doing is he has questioned and has challenged us on the contractual approaches we have with growers so that our incentives and outcomes are better aligned with growers. And so when we win, the growers win, etc., etc. So that's the main change he is making in terms of looking at different approaches to grower relationships and contracts.

In terms of using data and state-of-the-art techniques, everybody is trying to do that. So it's not as though he's doing something different and unique there. It's just that he's bringing good business practices to Apio and we are benefiting from it so far. If we have El Nino, he will certainly be challenged by that.

Got it, thanks. That's all I got.

Rick Fetterman, Fetterman Investments.

Congratulations, Molly. A couple of questions, Greg, for you. Everything else has been answered. But can you tell me what the average rate on your debt is and is it fixed rate?

Yes, virtually all of it is fixed. Lifecore is not. It's a floater, but it's around 2%. We will have it paid off in a year. The average is high 3%, if you were to blend all the debt that we have.

And my other question was also regarding the debt, but you said you might borrow some additional funds to grow with -- to fund the CapEx. And debt, did you say, could grow to $40 million or $45 million? Or you didn't say buy at $40 million or $45 million. You said to $40 million or $45 million.

No, it could grow by that amount (multiple speakers),

We decided that we wanted to keep our powder dry, keep our cash, better opportunities for our cash then to put it into equipment, and you could borrow the money at 3% rate, which after-tax is -- you're in the 1's, that seems like a good use of your money is to borrow the money to fund your future.

And as you know Rick, we have lots of unused debt capacity.

My last question is if, in fact, the hope that the issues with Santa Barbara County are resolved within 12 months, is it correct? The press release said you expected production to be in October 2015. So is it reasonable to say late third or fourth quarter of 2016 at this point?

Yes, that is exactly what the thought process is right now.

Okay. All right, everything else I had had already been asked. Thank you very much.

Chris Kruger, Lake Street Capital.

Two quick questions. Earlier, you mentioned that Costco -- that the new protein salads are on a rotation plan. Can you update us on the Sweet Kale kits? Are they permanent at Costco?

They are. They've been in two to three years now, probably two years in almost all stores. We started three years ago and they gradually ramped up. So yes, they have a permanent slot at Costco.

Okay, and my other question is on Windset. Last quarter, I think on the call you guys mentioned -- I can't remember if it was some kind of investment in Nevada or some kind of plan there. Can you update us on that?

Yes, they've been leasing a facility in Nevada for years. And they got an opportunity to buy it. And they jumped on it. That's one of the reasons why we gave them $7 million a year ago. Or almost a year ago.

And they are in the process of doing renovations that are required so they can grow there year-round and when they are releasing it they were only growing there seasonally. They were not growing there in the summer. You can imagine why. But they are now putting in basically new equipment, new technology so they can grow year-round. That should go live and start producing product sometime this fall.

All right, all my other questions have been answered. Thanks.

Craig Pieringer. Wells Capital Management.

Two quick questions. Of course, you mentioned 2017 date for the change of fair market accounting. But you also mentioned that put-call feature of that date for coincident with that date. Wouldn't that be the right time to discuss with the elder Newells your percentage ownership at Windset and can you give us any color on that?

Yes, and we will just see how things go. As many of people on this call may know, we had the opportunity to provide some liquidity for the senior Newells and they took that opportunity and we bought -- what was it?

About 7%.

7% more. We went from 20% to 27%, win for them, win for us. They still have ownership in the Company and so is the kind of thing where it's an ongoing thought process, and you want to -- we want to respect what they want to accomplish but that would not -- that would be a logical conversation to continue to have with them.

So if they're interested, they will approach us. We will continue to indicate our interest in increasing ownership without tempering their ability to continue to grow the Company. They are doing a good job. We are happy with them. So, absolutely.

Let me also mention that if anybody have any doubts, the likelihood of anybody exercising this put or call at this point is close to zero. We want to stay in. They want us to stay in. So I see us continuing our partnership.

Great. Thanks. And given your projections for radically increasing revenue is in profitability at Lifecore, but also combined with the lack of overlap of your Intelimer technology at Lifecore, probably contrary to what you thought maybe going into that business? Wouldn't the Board consider some sort of action to become more of a food products company, a pure food product company, much along the lines as Doc Resins and Fielders Choice? And I date myself here.

Sure. Yes, I mean it's a conversation the Board and the management team, including the management of Lifecore, has on an ongoing basis. But you also have noted how much we've been investing in the business in the last couple of years and we are adding 20,000, 30,000 square feet of formulation and finishing capabilities. We are about to lease significant warehousing space.

So they have presented to us as recently as a month -- a couple weeks ago, a vision plan of very impressive growth over the next five years while maintaining these very attractive margins.

And right now, they throw off a lot of cash for us. They helped us in a sense buy GreenLine. They have excellent margins. We like their growth prospects.

We like the fact that they are diversifying in terms of these new partnering arrangements. We like the fact that they are moving up the value-added chain by not just selling HA powder and liquids, but now finished products to some of these -- just to the most major and largest pharmaceutical ophthalmic companies in the world. So we do have that conversation periodically.

But at this point, we are investing and I would say I don't see any motivation on our part to do anything differently in the next couple years. We like what they're doing and these investments really start to kick in big-time in FY 2017.

So yes, we will keep talking. Certainly we have a fiduciary responsibility to our shareholders to look at a pure play in the food business and we will continue to have those conversations. But right now, I don't us changing.

Great, thanks. And then finally, of course congratulations to you, Molly. But you may remember me mentioning you as a strong contender to be CEO as long as three years ago. You may or may not remember that.

I do, thank you.

All right, thank you very much.

Will Lauber, Sterling Capital Management.

First question is for Molly. What are you guys getting on your end customers? Because just with the salad kits, obviously, it's a lot different than filling a bag of cutup broccoli. So how are you getting information on the end customers?

So on the consumers, how are we growing? So we -- that is a major initiative for us. Just I say even last year -- well, let's say two years ago we weren't collecting any money on the consumer. We are very much a trade marketing organization, really only putting our marketing in relationships through the trade. Over the last couple of years we realized we really need to focus on the consumer, on consumer trends, on food trends and be on top of those things to further our innovation.

So, we have several programs going on this year. Obviously we launched our new consumer website for Eat Smart and that is at EatSmart.net and we are starting to get a lot more traffic on that website. We are having a lot more personal interactions through our website. We have a Facebook page, we have Twitter.

We also have a large blogger program we are starting, so we are actually in contact with over 200 bloggers throughout North America. And as we launch products, we are shipping product samples to those bloggers and asking them to write about us.

Our PR efforts in other areas are also being increased.

Obviously, we're going to start doing more banner advertising. If you recall, we did a banner advertising pilot last year. It had incredible statistics. We gained a brand lift in the Northeast of 20% which was much higher than any of us expected.

So we have not started that this year. We are going to look to start that in the October/November timeframe, again this year, to help push sales.

We are also doing a lot to gain more consumer insights through market research. We are starting to do a lot more consumer tasting, we are doing consumer segmentation work. And this is all a result because we've been able to bring in that new talent in the marketing department with our new VP of Marketing and a couple of our product managers that have been able to bring in that talent and lead the way in this area.

I would imagine that would be something that would not be easily copied by your competitors, if you build up that knowledge base.

Right. So we are the brand in the market that is focused on innovation. It's all about growing your gross margins. So you have more money to invest in these activities and it's a self-fulfilling prophecy.

One of the reasons Molly is doing this is we are really starting to better understand the value of our trademark. This Eat Smart trademark have a lot of cachet to it and the question is how useful might it be in other food products that are not necessarily respiring perishable produce. So this initiative has more value than just supporting our current business.

All right. The next thing was on Windset. I saw that, I guess they were working, I guess with the good government guys out there in Santa Maria to open a local customs office. Can you provide any update on that?

I have no idea. A customs office? No, I don't know.

At the public airport there.

Thanks for the information.

You are again ahead of us. We will look into it but that's news for us, so thanks for giving us a heads up.

I'll send you something but (multiple speakers) last and just a comment on the county of Santa Barbara, I can understand why there, less water, less electricity and more jobs must be a bad thing.

It's a head scratcher, Will. It's a head scratcher.

Nelson Obus.

I'm just wondering the structure now that Molly has moved on to CEO, what the team looks like in the Eat Smart packaging arena. Because clearly, the spectrum of her responsibilities are going to be much wider and just how have you restructured that?

Okay, Nelson, so first of all the new organization will take effect, as we said in the press release, October 15, just as a reminder.

We are going to be flattening the organization a bit. So I will take on the CEO of Landec role but I will be having four of the lead executives at Apio reporting directly to me. As well as Lifecore, as well as obviously the corporate functions with Greg and our new VP of Business Development.

And so, where will Ron fit into all this?

Ron is my new next COO, so he is -- well, so I should have included him in the Landec. He will be reporting directly to me as well and then three other Apio executives. I will have Sales reporting to me, Marketing reporting to me, and Finance reporting to me.

Ron will be sort of really the operating guy.

He is going to take care of everything in the supply chain, continue to be our representative on the Windset Board and he has very important relationships throughout the industry, in the produce industry and with the trade organizations and he will continue to play that role.

And as announced, he is -- he will become Landec's COO.

I got it, Chief Operating Officer. My last question, I don't want to run into the rapids here with accounting, but it strikes me that what you've been doing in Windset is, you have been present-valuing a future assumption of growth and then putting a discount in addition to some of the double discount, because when you present-value it, it implies a discount. And then you're putting a discount on that. Is that correct?

That is exactly correct.

So, but, here's where I'm having trouble. You implied that we will likely see an increase valuation strictly from doing things on a historical basis. But since we've been discounting future growth to begin with, and even though we put an additional discount on that, why should going to historical lead to any kind of a step-up? If you are not sure where it's going to end up, that's fine. But I thought you said you were pretty sure there would be a step-up just from that accounting treatment which left me a little confused.

No, yes, I may have misspoke or maybe people didn't understand. I said that I expected the increase to continue. I didn't say it was going to increase year-over-year higher. Just that our value, our investment will continue to increase, but it would be much more stable quarter to quarter. You wouldn't have swings that we have right now.

The initial transition, do you have any opinion on that? That is a nit but I am just curious how that works, when you (multiple speakers)

Not at this point, because one, they've got a lot of expansion plans that currently aren't factored into their forecast. So it would be -- I would be completely guessing at this point.

Okay, well, I do certainly -- I would be very happy to put things on a historical basis. I think it simplifies it.

So would we. It will make life a lot easier.

This is the accounting that is appropriate for this transaction at the time. NY supported this, so we are looking forward to that transition ourselves.

It's unusual, it's the accounting -- I wouldn't say from hell but from the border of hell. Anyway, I will be glad to see a goodbye. Thank you.

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to management for any further remarks.

Yes, very much appreciate you being on the call today. We look forward to keeping you apprised and thanks for your ongoing support.

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