Lifecore Biomedical Inc (LFCR) 2017 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Landec first-quarter FY17 earnings conference call.

(Operator Instructions)

As reminder, today's program is being recorded. I would now like to introduce your host for today's program, Molly Hemmeter, Landec President and CEO. Please go ahead.

Good morning and thank you for joining Landec's first-quarter of FY17 earnings call. With me on the call today is Greg Skinner, Landec's Chief Financial 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 FY16.

Landec's first-quarter FY17 results were strong and put us well on our way to achieving our goals for FY17. Compared to the first quarter of last year, our consolidated first-quarter gross margin increased 270 basis points to 16%, resulting in a gross profit increase of 18% to $21.1 million.

Operating income grew 39% to $5.5 million, and net income grew 12% to $0.12 per share. As expected, Landec revenues declined 2% to $132.4 million due to the loss of an expected $30 million of nonstrategic core vegetable business during the second half of FY16.

The first quarter demonstrates the positive momentum we have been building in both of our healthy living businesses. Our Apio food business and our Lifecore biomaterials business. Both delivering notable progress in our ongoing focus on innovation and strategic shift to higher margin product sales.

Our Lifecore biomaterials business had another remarkable quarter. For the first quarter of FY16 Lifecore's gross margin increased 500 basis points to 41.5%. Lifecore revenues grew 40%, gross profit increased 59% and operating income increased an outstanding 219%.

Lifecore's growth has been fueled by a dramatic evolution of its business model from that of an HA supplier to a fully integrated contract development and manufacturing organization, or CDMO. As a fully integrated CDMO, Lifecore offers expertise and capabilities in fermentation, specialty formulations, aseptic filling and final packaging of both devices and drugs.

Lifecore's unique capabilities and dedication to creating a culture of farmer excellence has broadened its appeal to a much wider customer base. The evolution of Lifecore to a fully integrated CDMO has broadened its markets, materials, products and services to grow beyond the HA market. As such, revenues and operating income are expected to continue to grow on average at lower double-digits for the foreseeable future.

Apio also had a good first quarter. Gross margin in Apio's packaged fresh vegetable business increased 220 basis points to 15%, reflecting the shift in mix from lower margin nonstrategic products to the innovative higher margin products. Apio's salad business has grown at a three-year CAGR of 81% from FY13 to FY16. We are continuing to project lower double-digit growth in Apio's salad business this fiscal year.

As expected, Apio revenues in its packaged fresh vegetables business in the first quarter were down 7% from the year ago first quarter. And reflected the impact of the previously disclosed $30 million reduction of low margin nonstrategic products during the second half of FY16.

We have positioned both of our businesses to benefit from the favorable market trends, driven by people making choices to live healthier lives. Apio delivers packaged fresh vegetable products that make it convenient and delicious for consumers to eat healthy. Lifecore helps to bring FDA approved drugs and medical devices to market that enhance the ability to stay active.

We will continue to differentiate ourselves through innovation and to build internal innovation capabilities within our branded food products and biomaterials businesses. With a strong culture of innovation throughout the Company, we will continue to develop new products for consumers and customers' value.

Before I go into more detail about our progress, and plans for FY17 and our strategic objectives over the next three to five years, let me turn the call over to Greg for some financial highlights.

Thank you Molly and good morning everyone. Revenues in the first quarter of FY17 decreased 2% to $132.4 million, from $135.4 million in the year ago quarter. The decrease in revenues was primarily due to a $7.8 million or 7% decrease in revenues in Apio's packaged fresh vegetables business due to the strategic shift away from some low-margin business during the second half of FY16. This decrease in revenues was partially offset by $3.5 million or 40% increase in revenues at Lifecore that increased demand for higher margin fermentation products and a shift in timing of shipments within FY17 and from a $1 million or 4% increase it Apio's export business as a result of 11% increase in sales volume.

Net income in the first quarter of FY17 increased $360,000 or 12% to $3.3 million or $0.12 per share, compared to $3 million or $0.11 per share in the year ago quarter. The increase was primarily due to $1.6 million increase in operating income at Lifecore due to a favorable product mix change which increased gross margin to 41.5% in this year's first quarter compared to 36.5% during the first quarter of last year. This increase in net income in the first quarter was partially offset by no increase in the fair market value of our Windset investment during this year's first quarter compared to an $800,000 increase in last year's first quarter and from a $198,000 increase in income taxes.

Turning to our financial position, at the end of the first quarter of FY17, cash totaled $8.6 million after generating $6.5 million in cash flow from operations, paying off $5.4 million of debt and investing $2.1 million in property and equipment primarily for capacity expansion during the quarter. As announced in our press release yesterday morning, we have successfully completed a syndicated credit facility with JPMorgan Chase, BMO Harris and City National Bank, a subsidiary of the Royal Bank of Canada.

This new credit facility will result in a lower interest expense and increased financial flexibility in support of our five year growth plan. We plan to use these funds to expand our existing operations and drive internal innovation initiatives.

The credit facility consisted a $50 million term loan that refinanced existing debt and a $100 million revolving credit facility. The $50 million term loan has a five-year term with a ten-year amortization and no prepayment penalties.

Our interest expense over the next 12 months is projected to decrease by approximately $400,000 compared to the interest expense the Company would have incurred on the previous loans that were refinanced. The interest rate is based on Landec's leverage ratio, and can range from LIBOR plus 1.25% to 2.5%.

The spread at close was 1.75%, thus an initial rate of approximately 2.3%. This initial rate is approximately 115 basis points lower than the average interest-rate the Company was paying on the refinanced debt.

The $100 million revolving credit facility, combined with our operating cash flow, will be used primarily to fund capacity expansion of our existing operations and new product development, plus other innovation efforts within the Company achieved our five-year growth plan and drive the growth of our overall returns on invested capital, one of the key financial metrics we are focused on improving. The funds also provide for potential merger and acquisition activity.

We're not anticipating any near-term merger and acquisition activity. However, this refinancing provides flexibility for Landec to pursue such activities if and when the opportunity arise.

We are very pleased to have been able to secure debt financing from this syndicate of three leading and highly regarded banks. Importantly, these banks understand our objectives to move to a cash flow loan structure with more favorable terms and financial flexibility compared to our prior asset-based debt financing loan structure which was more expensive and less flexible.

Let me turn the call back over to Molly.

Thanks Greg. Over the last five years we have invested in capacity and products that are the foundation for our current and future growth. We have doubled our processing capacity at Apio and tripled our aseptic filling capacity at Lifecore to meet existing product demand and in anticipation of growing demand for our products while simultaneously investing in product development at both Apio and Lifecore.

We are beginning to benefit from these investments. We have made and will continue to make appropriate and timely investments in both Apio and Lifecore to expand our higher-margin product portfolios through innovation in the coming years. We see considerable tailwinds that position Landec well for the future growth.

In our Apio business, we are benefiting from the continued shift among consumers to healthier eating as the categories in which we participate continue to grow. Our products are on trend and we are investing capital and adding resources to develop new products that continue to meet the needs of today's consumers. We are committed to deepening our innovation capabilities to ensure continued growth in this business.

We project that the Eat Smart salad business will continue to grow annually in the lower double-digits for several years as we continue to launch innovative new salads and penetrate the key retailers in the US. In the second half of FY16, we launched the Asian sesame salad and the Southwest salad.

Due to industrywide sourcing challenges from El Nino last fiscal year, customers were unwilling to commit to new products until sourcing returned to normal. As such, the selling of these new products was delayed. With the return of more predictable supply, customers are now starting to order new products once again.

During the current quarter, we've launched another new salad, the strawberry harvest. This salad and the others will be available in the coming months in retailers such as Walmart Canada, Loblaw, Giant Eagle, Sam's and several other retail and Club stores.

Growth in our salad business will come not only from innovation but also from expanded distribution in major US accounts. We are currently highly penetrated in US Club stores, Canadian Club stores, and in Canadian retail stores and we'll continue to grow within these accounts as we deliver more innovative products to them. However, penetrating key US accounts in the grocery and mass channels provides the most significant growth opportunity.

During our previous earnings release call, we shared that Walmart was testing our sweet kale salad in approximately 400 stores. The results from this test have been extremely positive. And Walmart has agreed to expand the sweet kale salad to 1400 stores starting next month.

To further differentiate Apio with strategic customers, we are investing in data analytics. Over the last several months, Apio has been converting to a new data analytics platform. This switch from meals and perishables Fresh Facts data to the Nielsen Answers data will significantly improve the insights we gather to manage and drive innovation as well as pricing, promotional and merchandising decisions with our customers.

Nielsen Answers provides many advantages over the previous system. Data is collected from approximately two times the number of stores. We also now have access to store specific products pricing and promotional data and can break that data down among different banners, geographies and stores to enable Apio to build a more effective pricing and promotional strategies.

Importantly, we have also added Nielsen home scan panel which provides consumers scan data and shopper insights for all stores including Costco. Apio is currently in the process of integrating the new database and investing in analytics and insights. Our goal is to share strategic trend and innovation data, market and product analytics, and shopper insight data with those strategic customers who choose Apio as their innovation partner to drive growth and profitability for both parties.

As Apio transitions to this new database we will be reporting market size, volume and growth numbers that differ from our previous report. Due to the significant increase in the number of stores included in the database, we expect that Apio market share numbers will decline and set a new baseline for moving forward. We will have more specifics during our next earnings report call.

In our Lifecore business we are further advancing the successful entry into new markets with expanded product offerings and service capabilities, while building a strong pipeline of product development programs to form the basis of future commercial programs. Lifecore's demand and capacity has expanded dramatically over the past six years. From manufacturing 1 million syringes per year to 3.5 million syringes per year today, with a projection of 7 million syringes in the next three years.

Lifecore continues to be the preferred Viscoelastic supplier to global ophthalmic market leaders, while now as a fully integrated CDMO, broadening its services to grow beyond the HA market. As such, revenues and operating income are expected to continue to grow on average at lower double-digits for the foreseeable future.

We've positioned ourselves for growth and improved profitability in our lines of business by being market leaders and focusing on innovation. Moving forward we are focused on three primary growth platforms.

First, our Lifecore biomaterials business is growing at double-digit rates with new capacity that will come online over the next several months and with a deep pipeline of development programs along with continuing growth from existing business. Second, our Eat Smart salad products are on trend in the fastest growing healthy living space, and we expect this product segment in Apio to continue to grow by lower double-digits annually as well. Third, we are exploring new ways to leverage the national refrigerated infrastructure network at Apio to bring new healthy food products to the market in the future outside of produce.

Landec's top priorities for the next 12 to 24 months are, one, developing innovative new salad products to broaden and strengthen our offering. Two, expanding our retail presence in the US through gaining new customers and further penetrating existing customers. Three, evaluating new food products outside of produce that Landec can offer through product development and/or strategic investments or investments.

Four, advancing our Lifecore programs with key customers and development partners. Five, increasing demand for both our packaged vegetable products and our biomaterial products to fill the additional capacity added in FY16. Six, increasing the return on invested capital by maximizing returns on each capital allocation decision. And seven, supporting Windset and its expansion plans to build new hydroponic controlled atmosphere structures using new growing methods for new crops.

In summary, our strategic initiative to develop new and innovative products, expand capacity to meet anticipated demand and change our product mix to higher margin products are working at Apio and Lifecore. Over time these strategies will continue to deliver value to our customers, consumers, and shareholders.

We are now open for questions.

(Operator Instructions)

Morris Ajzenman from Griffin Securities.

Thanks, good morning. Can you maybe give us a little better handle on how to think about the impact of Eat Smart's Walmart store rollout in more of a quantitative way?

Let's see. For this year as we expand from 400 to 1400 doors, that is still going to result in the same low double-digit kind of numbers that we talked about for the forecast because we have built that into our forecast. So this year I don't see any effect on guidance.

As far as the opportunity long-term, just for this one SKU I'd say it's a $5 million to $7 million opportunity. I don't want to talk about the gross margin and the effect on profitability because we have not yet outlined our promotional strategies for this SKU yet.

Okay, cool and one more follow-up on Eat Smart. Does this lower double-digit growth in the coming years contemplate new customer wins and ongoing penetration in mass US channels?

Yes, it does.

Okay and one more. This one probably for you Greg. Based on the terminology in your release projecting a substantial change in fair market value for Windset in FY18, can you provide a little more color around the timing or what quarter we should begin to think about and model incremental contributions for Windset?

I would love to be able to be that specific as to what quarter. I just can't tell you at this point in time. It's the driver and why we anticipate a substantial change next year is a result of the expansions that they are in the process of completing, as we speak. And those new products coming online, early next calendar year, and then obviously the EBITDA that will be generated from those which is the key driver to our fair market value.

And that's why we expect that next year we will have an increase in our fair market value of Windset. So it's the timing of windows expansions come online, how fast they come online, and obviously the corresponding results.

Got it, thanks.

Tony Brenner from Roth Capital Partners.

Thank you. The shift, or could you quantify the sales mix shift for Lifecore to non-HA products and the implication on gross profit margin from that shift in mix?

Last year the non-HA represented about 25% of our revenues. It is not expected to have an overall impact on their margins, which are averaging around 45%. So this business is approximately -- that level of margin.

Okay but presumably the sales mix would increase going forward. Is that correct?

Yes, it should. It's going to depend on how quickly new commercial products roll out, how fast those sales increase in comparison to our existing business. But yes, it should become a larger percent.

Okay. Molly, are there reasonable prospects for new domestic chain account grocery account wins for vegetable salads beyond Walmart?

There are. We're knocking on doors. We are knocking on doors at Target, we are knocking on doors at Kroger and Meyer, and it's just going to take time.

We actually I think in our last earnings release call we talked about hiring a new chief customer and sales officer and in turn, he has hired a couple senior salespeople with experience, specific experience in these accounts. Those gentlemen have just come on board, and we are putting together our strategies to go over -- after those accounts more aggressively.

So the stage you're at is that you're knocking on doors or you're negotiating shelf space?

We're knocking on doors and having meetings.

Okay. So any win that you get from this point presumably is not in your previous guidance right?

That is true.

Regarding sourcing. So far pretty good for four months. At the beginning of the year, there was an expectation, a broad expectation that there might be a La Nina effect, that concern appears to be dissipating.

What have you assumed for sourcing problems going forward in your guidance? And what are the chances that's proven to be conservative?

We are very happy to report, knock on wood, that we have had several months of favorable sourcing conditions and as we start into Q2 it is looking favorable as well. Now as we head towards the latter part of Q2, we get into our transition and shoulder seasons as we switch our growing regions for the winter. So there's a little bit more volatility.

But right now, things are looking good and we have built contingencies into our plan in the event that there are issues. So, as long as there aren't any extraordinary issues, our guidance does cover any kind of normal variances in sourcing conditions over the winter.

Okay, thank you.

You're welcome. Thanks Tony.

Mitch Pinheiro from Wunderlich.

Hey, good morning.

Good morning Mitch.

First a question on the quarter. The gross margin at Apio. The 200 some odd basis point increase in the gross margin. How much of that was favorable produce sourcing costs versus the revenue mix?

Most of it was favorable sourcing cost. There was a positive mix because we lost -- strategically, lower margin business. So the sales that we realized during the quarter were higher margin products. But if you were to break it down, I don't have the exact percentage, but a higher percentage was driven from better sourcing.

So as we look through the rest of the year we will still see that favorable sourcing cost, and as the Eat Smart -- the new products kick in, as the Walmart expansion continues, we would see that continue to have a favorable effect on the gross margin at Apio, is that fair?

Yes, that is fair. Assuming we have favorable produce sourcing costs for the rest of the year. But it should just be noted that the 15% that we realized in the first quarter is -- you won't see similar margins, well at least we are not expecting to see similar margins in the second and third, just because our sourcing costs go up in those quarter, you have higher freight to bring it up from the desert, usually produce costs more down in the desert than in the central Valley and so on and so forth. But it could return to those levels going forward.

Thank you and then when you look at Walmart going from the 400 tests to 1400 stores why wouldn't they go -- it seems more than a test at this point. It seems like it is a slow rollout. Why would Walmart only go to 1400 stores versus 3000?

We started, if you recall we started the test and it truly was a test in May. In all honesty they very quickly it hasn't been too much time, our results were very strong and I will just say that the sweet kale salad was in the top quartile of sales of all salad kits pretty quickly. So they have rolled it out to 1400 stores in a pretty aggressive fashion and this is when -- the time of year when they are doing a minor reset. So you really can't expand until more stores until there is a major reset in the account.

So we just have to wait and see how it performs in these 1400 stores and see if we can get to the next level with them. When the timing is right.

That was hopeful and then staying with Eat Smart for a second for the rest of the year, if Eat Smart double-digit kind of growth for the remaining nine months this year, or how should we look at that?

For the Eat Smart salads, for that segment of the business, we are looking at a low double-digit growth rate.

Okay and then is the converting the green beans to the Eat Smart brand, is that obviously the piece that doesn't grow as fast?

It's not really the green beans actually, and actually thanks for bringing up that question. Our conversion from GreenLine to Eat Smart in our green been products is going very well and is being very well received with our customers.

Green beans is actually a part of our business that is higher margin and is showing some growth potential. So when I think of the core nonstrategic products it's mostly in our other core bagged vegetable items. But not specifically in green beans.

Okay and then speaking of the whole conversion, or your new East Coast capacity, can you talk to any -- anything specific, any tangible positives coming out of your East Coast facility? The ability, things like have you been able to secure East Coast distribution as a result? Is there anything you can talk about there?

We are starting to shift some of the production from a couple of key customers from our California facility to Hanover. And this will be great both for us and for our customers because their customer service and delivery is going to be much more effective. So we've already started that transition on a couple of very key accounts and we are working closely with them during that transition.

The other big play is Walmart. This is where we'd be producing the Walmart salads and it's why we expanded the facility. So we specifically told them that we need them to start ordering to fill our plants.

Okay thank you, and two more quick questions, first Windset. So, if all of their expansion comes up online, and using the current run rate of their revenue now, what type of increase in revenue does the totality of their expansions bring if you are able to give it on an annualized basis?

Since we never really disclosed, well, not really, we have never disclosed their revenues, think this is for them. Given their past history, this is a relatively small expansion. When they started in California, zero, and they put in 128 acres. This is only adding 40 acres. So from that perspective it's relatively small.

I think it would add maybe 10% to their revenue base. But this is their first round of expansions. They have acquired land, substantial amount of land, around their facility in Santa Maria, specifically for future expansion. So this round, call it round two in California.

So round two, but it's a modest as you said 10% type of growth?

Yes.

Okay and then the final question is just maybe more for Molly on acquisition strategy. Having just attended the Expo East in Baltimore last week, there are so many different ways for you to go in terms of leveraging your cold chain, leveraging your strengths, and seeing all these various new products out there, have you begun to narrow things down? Is there any more specific categories? Anything more specific you can say about your acquisition strategy and/or what your pipeline might look like?

So we did have -- we were also attending Expo East and we are keeping ourselves very close to that market and all that activity. We are starting to narrow down the different categories in which we are interested. We're also have a very specific set of criteria that we are starting to develop.

That being said we are looking at two things. We're looking at both internal innovation and opportunistic M&A. So we are really focusing on what can we do internally as well.

As you know, compared to acquisitional growth, organic growth has a much higher return. We have proven that we have innovation capabilities and we are focused on both of those things, but primarily organic growth. So we are starting to narrow things down, but we are not quite ready to share it, Mitch.

All right, thank you very much. I appreciate your time.

Thank you.

Chris Cooper from Lake Street Capital.

Hi Chris.

Just a couple quick ones. On your vegetable sourcing, I know you said it's been favorable or adequate so far in this fiscal year. Just looking back I recall six to nine months ago or whatever, you specifically had mentioned broccoli, cauliflower and I believe green beans as areas that were really having a tough time. Is there any particular vegetable that are still having a rougher time than the rest? Or what can you say about that?

We are actually in good position on all our high-volume commodities right now. It's a good year so far, knock on wood.

And then I had a question, I don't know if you have Nielsen data on your retail penetration of super salad kits but if you do, where does that stand now and where did it stand a year ago?

As we mentioned in our comments upfront, we are in the middle of a transitioning to a new database. I have what I shared last quarter.

For North American retail the market was growing at 28% and we were growing at 36%. But I don't want to share anything else because I have two sets of data right now that are being validated and I really want to come back next quarter and look at volume sizing market share and ACV in our next earnings release call, and kind of share what we had before versus what we will have going forward and why those changes occurred.

Okay and then as far as the ACV, without getting specific, are there still a lot of retail chains that have yet to take on your product?

Yes, let me answer you in a little bit more specifically. In Costco -- in Canada, we are very well penetrated, obviously we're in every Costco Canada store, and in retail we have over 40% market share and 80% ACV. So we're very well, and these are again our old database numbers then they may all change next quarter, but we are very strong in Canada.

In the US, in club stores, we are also highly penetrated. We have a product in every club store in the US. Probably about 90% penetrated with our salads in club stores in the US.

Now, where the opportunity is, is US Retail. Our old database would say we only have about a 3% to 4% market share in US Retail. There is a lot of -- you can either look at that as a negative or positive really, 3% share but to me that says, wow, we have a lot of growth potential ahead of us and we just have to get in front of these key accounts, really talk to them in a more strategic nature, talking about our long-term growth potential. Our long-term innovation capabilities and the data analytics that we can help them with to drive a bit more profitable programs in their store.

All right, thank you.

You're welcome.

Nelson Obus from Wynnefield Partners.

I think you're doing a great job but obviously, this Company from the perspective of capital structure has entered into a whole another environment. I wanted to run through couple of number here.

You have right now $44 million of net debt and when your free cash flow is -- I'm sorry, when your CapEx is subtracted from your free cash flow for this fiscal year you wind up with about $34 million of net debt. So now you have $150 million line out there of which we subtract $34 million so we have $115 million of potential liquidity to utilize either through organic, as you just pointed out, was generally more profitable and safe and then of course there is the wild card in Windset should you decide to cash that in.

But when you are done with it, darn it, you are looking at something approaching $200 million of optional utilization towards internal growth or acquisition. That is an enormous number in relationship to any number that you would have quantified over the last 10 or 12 years when you looked at this Company. So I realize you want to keep your options going and optionality out there. And I know you've answered part of this with Mitch.

But the enormity of the number -- it creates all sorts of opportunities and I'm just wondering can you give us some sense of what you think the organic -- some span of what you think of this, I believe almost approaching $200 million of capability, and that doesn't include additional cash flow that you might spinoff in 2018. Where you might see that going? And, and combine that also with something in the press release which talks about putting this liquidity to work in FY18 as opposed to FY17. Easy question, right?

Fine, thanks that's a great question. First of all we wanted to take advantage of the low cost of money right now in the debt market. This was a fabulous opportunity to refinance our Company using an entirely different method that would give us more flexibility and a much lower rate.

At the very base of this, we are saving money. We are saving $400,000 of interest payments a year and yet it gives us full flexibility for any opportunities that might come forward. So to just with that, it is just a smart finance decision.

Now the obvious question to your point, is then how are we going to use that cash? I think three ways to use that cash. First and foremost it's going to be on existing operations. We still in order -- we still have investments to make at both Lifecore and Apio with the growth we see in our future.

At Apio, we see again 3% market share in the US. If that continues to grow how we hope it does, we have to have cash on hand and we will need to expand Guadalupe, Hanover, and Bowling Green in order to keep up with the long-term growth. We will not spend that money until we have the volume. We will use triggers to actually deploy that money. But that is one way.

As Lifecore is growing quickly, it is adding new capabilities and it has new opportunities coming to it and we want to make sure we have cash on hand to quickly invest in those growth opportunities. So both of our operating businesses have a lot of potential we believe for growth and we want to make sure that we can in a fiscally responsible way support that growth. So that was the number one reason for this refinancing.

The second one is, new kind of what we talked about earlier which is organic growth product development initiatives that we are looking at. So again I don't want to share those right now but we do have other initiatives going on within the Company that we would like to use capital for. That our adjacencies to our current businesses.

And then the third opportunity to use the cash will be in M&A. And obviously if we do find an M&A target we want to be able to jump on it immediately and have the cash available. So that would be the priority of the way we use our cash. And again, it's just a smart refinancing to save us money on an annual basis.

Is it conceivable, we all know that Lifecore would be probably -- if you had $100 million Company there with the same margins, obviously the valuation would be significantly greater. Just how it works. Is that an area that is getting any focus in terms of a potential acquisition?

We're always looking at acquisitions at Lifecore but I've got to tell you most of our focus is on their growth. They have a strong pipeline of development products right now. And we are going to focus on making sure those products come to commercialization and we are able to invest in them to take advantage of that growth. That's our primary focus. Again if there is an M&A opportunity we will go after it but it's not an priority at Lifecore.

Correct me if I'm wrong because I'm trying to find it. It was either in the finance -- the refinance or in the annual -- the quarterly report. But I believe you talked about the increase in liquidity that will allow you to move forward, but you focused on 2018 rather than 2017. Which indicates that you have done a fair amount of thinking and I'm just wondering what was behind that?

I guess what we wanted to do is make sure that people knew that just because we were setting up our cash coffers of $150 million we didn't want people to jump to the conclusion that we were sitting on an M&A opportunity and we were ready to deploy the cash immediately, because we are not.

Fair enough I'm sorry.

We definitely just didn't want to do this. It's more for internal innovation projects which will take at least this year to get to and hopefully we will have some that we will want to invest in next year. It was more about just setting expectations for the use of the cash.

Personally I think that's a great answer because as you know many acquisitions go awry. So the more time you have to think about it and -- the better. And as you articulated internal improvement is the highest percentage of positive outcome. Thanks.

Okay you're welcome.

(Operator Instructions)

Mitch Pinheiro of Wunderlich Securities.

Just a follow-up, clarification on the guidance to make sure I got this right. For the second quarter, that $0.05 to $0.07 earnings-per-share range, that includes a $0.03 charge, so it would be $0.08 to $0.10 excluding the non-cash financing expense?

Yes.

Okay. When I look at that, that way and assume that -- looking at the guidance around Lifecore, which will have a sequentially down quarter, it is sort of for me to get to these numbers, I've got to up my Apio numbers, but I'm trying to stay conservative in terms of margins, knowing that you are in that shoulder season. Where -- is there additional benefit anywhere in terms of the licensing business? Is there anything else happening in the second quarter that I need to understand better?

No, you've got it. It's got to come from Apio. We want to be more specific surrounding Lifecore just given their fantastic first quarter. We just didn't want people to think replicate that for each of the out quarters.

A lot of Lifecore is based on timing of shipment and the product mix within a quarter. So we just want to give everyone a heads up that don't expect a repeat of quarter one in quarter two.

The yes, the difference is obvious. There's nothing coming out of corporate. We have you the Lifecore numbers. By process of elimination that would be Apio.

Okay, terrific, thank you very much, appreciate it.

Thanks Mitch.

Anthony Vendetti from Maxim Group.

Thank you. Just wanted to -- I know you can't say too much more about Walmart, but just in terms of how you're looking at it. 400 have gone well. You're going to be at 1400 beginning some point next month.

What sort of -- obviously you are prepared for that. But what is the next step? What do you foresee the next step being an are you prepared to quickly go to a national rollout? Do have all the product necessary to do that if Walmart were to quickly move from 1400 to a national rollout in November or December? I don't know if they would move that fast but are you ready?

Yes first of all they will not move that fast. So just to set expectations there, we need to gather many months of data and then we need to -- we would only be able to expand, one, if the data still holds strong and two, during a major reset that they have. And so the timing is not in our control obviously.

But the short answer to your question is yes, we are ready. The goal would be to get -- go from 1400 doors to all 4000, 3500 to 4000 Walmart doors and it is exactly why we tripled the size of the Hanover facility, period.

We wanted -- you have to build a little before the volume, and that's exactly why we did it. We were very thoughtful about when we expanded our facilities versus when we brought on a new head of sales. We wanted to make sure that when we went strong into these key accounts, that we had the capacity to manage the volume, and we do.

Okay, great. And then Greg, on the debt. There was a $1.2 million charge that you are going to take in the current quarter here. Which is I guess $0.03. What does the charge encompass? Was it early extinguishment of past debt, or just the underwriting of this debt? And then are we looking at -- I just want to be clear that we are looking at about $100,000 decrease in interest expense due to the lower interest rate per quarter right?

Yes for the next year, I'll answer the last question first, yes, for the next year that's about right. It was the early extinguishment of previous debt.

As you know, whenever you enter into debt arrangements there are legal fees, there's upfront fees, and if you end up paying off that debt before maturity, which we did in all cases here because of the refinancing, then you have to write off that capitalized loan origination fees that were on your books and that is the large majority of the $1.2 million. So it's not cash.

Okay that makes sense. And maybe as I'm thinking about the Walmart situation, I know you have the sweet kale salad that you are in right now and that is what is being expanded. But since that has gone well, can you talk about the opportunity to do even more with Walmart? Not just with the national, potential national rollout down the road of the sweet kale salad, but what is the receptivity to other Apio products?

You are right, there is more opportunity and we are just beginning those discussions. So obviously we are going to be trying to go for as much shelf space as possible. We are just going to see what Walmart's appetite is and how much and how fast.

Right now we're focusing on making the sweet kale salad a successful rollout and giving them the numbers that they want to be happy. If we do that and we can get sweet kale salad expanded and show high velocities and show that it can make them profitable, at that point we can start talking about more.

Okay and just lastly on the BreatheWay membranes for products, any update that you can give us on that?

Not really, we still have a licensing deal with them, they are a startup Company and so I think they are going through their start up, and they are using our membrane on every pouch. There is no really update on that.

Great, thank you so much.

You're welcome.

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

Thanks Jonathan. Thanks everyone for joining us this morning to talk about Landec. Just a reminder, as we look into Landec's future, we have very strong tailwinds and a healthy space that are driving growth in both of our businesses at Apio and Lifecore.

We look at three primary growth platforms. The first one is in the Apio salad business. The second one is expanding into new food products outside of produce and leveraging Landec's infrastructure. And then the third one is Lifecore, Lifecore's business continues to remain strong and we see a growing double digits for the next several years. Thanks for joining us today.

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