Lifecore Biomedical Inc (LFCR) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec Corporation Third Quarter Fiscal Year 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Molly Hemmeter, President and CEO of Landec Corporation.

Please go ahead.

Thanks, Jonathan.

Good morning, and thank you for joining Landec's Third Quarter of Fiscal Year 2017 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 fiscal 2016.

We have been very active since our second quarter earnings release just 3 months ago with efforts to further position Landec as a true innovator in the health and wellness space.

We announced the Eat Smart 100% Clean Label initiative.

We acquired O Olive Oil, a branded all-natural and organic supplier of premium olive oils and wine vinegars.

We extended our minority investment agreement with Windset Farms for 5 more years.

We named Debbie Carosella to our Board of Directors, and we agreed to settle several labor-related legal actions that have been active for over 18 months, thus avoiding the unknown outcome of trial and the potential millions of dollars in cost for future legal fees associated with litigation.

Our results in the third quarter and first 9 months of fiscal 2017 demonstrate the benefits of our ongoing strategic commitment to innovation and to shifting our product mix to higher-margin products, resulting in a record quarter for Lifecore and improved operating results for Apio.

Our consolidated gross margin during the quarter increased 730 basis points to 17.2% compared to 9.9% in the third quarter of fiscal 2016.

Lifecore had a remarkable quarter, setting records for quarterly revenues of $23.5 million, a 50% increase compared to the third quarter of last year and operating income, which increased 92%, to $9.9 million compared to third quarter of last year.

The transition to a fully integrated contract development and manufacturing organization, or CDMO, is well underway and positions Lifecore to provide specialized outsourcing services for medical materials that are difficult to formulate or fill into a delivery device and require FDA approval.

These services address the entire product life cycle from early-stage development to later-stage development and throughout commercial production.

For the first 9 months of fiscal 2017 compared to the first 9 months of fiscal 2016, Lifecore revenues increased 38% and operating income increased 74% or $6.2 million due to a substantial increase in higher-margin fermentation sales and a 26% increase in aseptic sales.

Lifecore's revenues and operating income growth, both of which are expected to exceed our original expectations for fiscal 2017, reflect the results of the CDMO transition.

At Apio, we have been focused on transforming the business from a commodity to a branded packaged fresh vegetable business, differentiating the market through innovation.

Over the last several years, we have expanded our product segments from the traditional core vegetable bags and trays to the adjacent high-growth, more-profitable salad kit segment, thereby, increasing the size of the market in which we compete from $1.3 billion to $3.2 billion.

At Apio, even with revenues down 4%, gross margin was up 290 basis points; gross profit was up 30%; and operating income was up 17%, a considerable improvement during the first 9 months of fiscal 2017 compared to the same period last year, reflecting the continuing shift in product mix to innovative higher-margin products, more normal raw material sourcing conditions and increasing operating efficiencies.

We continue to pursue our strategy to expand the distribution of our Eat Smart salad kits in U.S. retail accounts.

In May of last year, Walmart agreed to test the Eat Smart Sweet Kale Salad in approximately 400 stores.

Due to the success of this test, the salad was expanded to approximately 1,400 doors in October.

We are currently waiting a final decision for Walmart on whether they will expand this product to all 4,000 Walmart doors next month.

That being said, the velocity data on Sweet Kale Salad in Walmart remains strong.

We have positioned both of our core businesses, Apio and Lifecore, 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 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 to deliver new products that consumers and customers value.

Before I go into more detail about our progress and plans for the rest of fiscal 2017 and our strategic objectives over the next 3 to 5 years, let me turn the call over to Greg for some financial highlights

Thank you, Molly, and good morning, everyone.

Revenues in the third quarter of fiscal 2017 increased 5% to $136.6 million compared to $130 million in the third quarter last year.

The increase was due to a $7.8 million or 50% increase in revenues at Lifecore and an $887,000 or 14% increase in revenues in Apio's export business.

These increases in revenues were partially offset by a $1.9 million or 2% decrease in revenues in Apio's packaged fresh vegetable business.

Net income in the third quarter of fiscal 2017 was $3.5 million or $0.13 per share compared to a net loss of $21.2 million or $0.78 per share in the year-ago quarter.

The increase in net income was due to, first, the $21.5 million after-tax write-down of the GreenLine trademark in the third quarter of last year; second, a $4.7 million or 92% increase in operating income at Lifecore; third, a $5.8 million or 120% increase in gross profit at Apio; and fourth, a $700,000 increase in the change in the fair market value of our Windset investment.

These increases in net income were partially offset by, first, a $5.6 million or 76% increase in operating expenses at Apio, resulting from the company agreeing to settle several labor-related legal actions, which resulted in the company taking a $2.1 million charge during the quarter plus severance expenses and additional headcount hired during the past year in the areas of sales and financial analysis; second, a $743,000 increase in operating expenses at Corporate for new business development activities, expenses from the O Olive acquisition and an increase in stock-based compensation expenses; and third, a $1.5 million increase in income taxes, excluding the year-ago third quarter tax benefit from the GreenLine trade impairment charge.

Revenues in the first 9 months of fiscal 2017 were basically flat at $404.8 million compared to $405.8 million in the same period last year.

The slight [ change ] was primarily due to a 6% decrease in revenues in Apio's packaged fresh vegetable business, offset by a 38% increase in revenues at Lifecore and an 11% increase in Apio's export business.

Net income for the first 9 months of 2017 was $8.1 million or $0.29 per share compared to a net loss of $16.4 million or $0.61 per share in the first 9 months of fiscal 2016.

The increase in net income was due to, first, the $21.5 million after-tax write-down of the GreenLine trademark in the third quarter of last year; second, a $6.2 million or 74% increase in operating income at Lifecore; and third, a $9.2 million or 30% increase in gross profit at Apio.

These increases in net income were partially offset by, first, an $8.1 million or 33% increase in operating expenses at Apio, which includes the $2.1 million legal settlement charge; second, a $1.3 million increase in operating loss at Corporate, consisting of a $764,000 reduction in gross profit due to the completion of the licensing agreement during fiscal 2016 and $546,000 increase in operating expenses; and third, a $1.3 million increase in income taxes, excluding the year-ago 9-month tax benefit from the GreenLine trademark impairment charge.

Turning to our financial position.

At the end of the third quarter of fiscal 2017, cash totaled $12.7 million, up $2.8 million from fiscal year-end 2016.

Debt at the end of the third quarter was $52.2 million with a debt-to-equity ratio of 23% compared to debt of $61.1 million and a debt-to-equity ratio of 29% at fiscal year-end 2016.

Working capital improved to $39.4 million, up 31% compared to $30 million at fiscal year-end 2016.

And cash flow from operations for the first 9 months was $23.2 million, up from $6.4 million for the same period last year.

Capital expenditures for the first 9 months were $9.5 million, down from $26.2 million for the same period last year, thus, free cash flow was $13.7 million for the first 9 months of fiscal 2017 compared to a negative free cash flow of $19.8 million for the same period last year, an improvement of $33.5 million.

In February 26, 2017, we had $100 million available to borrow under our lines of credit.

Let me now turn the call back over to Molly.

Thanks, Greg.

We have made and will continue to make appropriate and timely investments to expand our higher-margin product portfolios through innovation in the coming years, at the same time maximizing returns on each capital investment by following a regimented capital allocation decision framework.

In February, we announced an initiative about which we have a great deal of passion throughout the company.

The Eat Smart 100% Clean Label initiative is the first in our category to commit to clean ingredients and transparent labeling in all of our nonorganic products by the end of fiscal 2018.

What does it mean to have a clean label?

At Eat Smart, clean products are free from high-fructose corn syrup, artificial preservatives, hydrogenated fats as well as artificial colors, flavors and sweeteners.

Eat Smart ingredient labels must also be easy to understand and only use recognizable ingredients that consumers can feel good about putting in their bodies and serving to their families.

Nearly 90% of Eat Smart products already contain a clean label, including all cut vegetable products, salad blends and our most popular nutrient-dense vegetable salad kits, including our Sweet Kale, Strawberry Harvest and Sunflower Kale products.

Apio's 100% Clean Label initiative is focused on reformulating salad dressings and toppings and vegetable tray dips that we source from other suppliers and include with our vegetable products to ensure they meet our new 100% clean label initiative specification.

Our innovation team has been working diligently to formulate these ingredients for approximately 2 years to ensure that products adhere to our new clean label standards but continue to meet shelf life requirements and to deliver great taste.

Select packages of Eat Smart salads and tray products with clean label will begin featuring a prominent burst on the front of the package that says, "100% Clean Label.

No artificial colors, flavors or preservatives." More information about Eat Smart's 100% Clean Label initiative can be found online at eatsmart.net.

In early March, Landec announced the acquisition of O Olive Oil, Inc., for $2.5 million in cash plus an opportunity for the seller to earn an additional $7.5 million over the next 3 years based upon O Olive achieving mutually agreed EBITDA targets.

O Olive, founded in 1995, is based in Petaluma, California, and is the premium producer of California's specialty olive oils and wine vinegars.

Its O-branded products are sold in over 4,600 natural food, conventional grocery and mass retail stores, primarily in the United States and Canada.

The oil and vinegar markets are currently experiencing a dramatic shift in consumer preference from conventional to natural and organic oils and vinegars, and O Olive is uniquely positioned to take advantage of this transition.

The market size for oils and vinegars sold in U.S. multichannel outlets is approximately $4.3 billion.

O Olive products compete in the specialty product segments of oils and vinegars that, combined, make up approximately $1.9 billion of the total $4.3 billion market.

Within the specialty oil market, natural oil products now comprise 43% of specialty oils with a growth rate of 24% versus conventional oil products that comprise 57% of the specialty oils market but are declining at a rate of 2% per year.

Within the specialty vinegar category, natural products are 60% of the market and are growing at 54% while conventional vinegar products are growing at only 13%.

Retailers across North America are making clean label and organic products a priority.

O Olive sells a variety of products, including certified organic options that are all-natural, high-quality, great tasting and with easily traceable agreements for retailers to offer their consumers.

O Olive has created a strong brand recognition and has been honored with 17 sofi awards by the Specialty Food Association, more than any other oil and vinegar company in the world.

By supporting O Olive products with growth capital and the strength of Apio's sales, customer service, procurement and logistics capabilities, O Olive can achieve its true potential and offer consumers a healthy and delicious option for everyday eating.

The acquisition of O Olive is the first step in our expansion into healthy food products adjacent to produce with higher gross margins that drive an increase in our return on invested capital.

The O Olive product has obvious synergies with our salad kit business that will provide opportunities for future innovation.

We plan to invest in O Olive to develop and grow their high-quality line of products while continuing to seek out and develop other natural products to add to our portfolio.

Also in March, Landec announced the addition of Ms. Debbie Carosella to the Landec Board of Directors, a strong food innovation leader in the natural and organic industry; most recently, CEO of Madhava and SVP of Innovation at WhiteWave Foods.

Ms. Carosella will serve with Director Al Bolles on our Food Innovation Committee of the Landec Board of Directors.

We look forward to working with Ms. Carosella and believe that she will bring insights and experience that will strengthen our internal innovation capabilities.

Lastly in March, Apio announced a 5-year extension of its minority investment in Windset Farms.

As a leader in innovation for fresh produce, Landec views Windset as the most advanced greenhouse operator in North America where the demand for greenhouse-grown products is rising rapidly.

The hydroponic process uses no soil and a fraction of the water required in field production.

Furthermore, the process results in higher yields per acre and is not burdened with traditional weather-related risks.

Since Landec's initial investment 6 years ago, Windset has significantly grown its business as demand continues to outpace supply.

This growth has delivered to Landec an average annual return on invested capital of approximately 20%.

We estimate, based on Windset's growth plans of its greenhouse capacity in Santa Maria that the return on invested capital over the next 5 years will continue to approximate the strong returns we realized during the first 6 years of our investment and that extending our investment in Windset is a wise and prudent use of our capital.

Since the beginning, our interest in Windset has been motivated by 3 primary objectives: first, to realize a significant financial return on our invested capital; second, to be the strategic partner with the industry leader in sustainable hydroponic year-round growing of fruit and vegetables through packaging technologies and sourcing synergies; and three, to explore new crop targets, new growing techniques and/or new technologies with Windset that could benefit Apio's business and create potential competitive advantage in the future.

With our ongoing strategic relationship, we look forward to supporting Windset in their future growth plans.

Each one of these strategic initiatives announced during the last 3 months broadens and deepens the foundation for Landec's ongoing commitment to innovation and expansion of its food business.

As our food business continues to benefit from tailwinds of positive healthy eating trends, Lifecore is also benefiting from a growing trend among those mature and start-up pharmaceutical and other medical material companies to outsource specialty services and manufacturing.

With the growing number of products in the industry seeking FDA approval, Lifecore is well positioned as a fully integrated CDMO to augment its pipeline with new projects to fuel its long-term growth.

Moving forward, we are focused on 3 primary growth platforms.

First, in our Lifecore biomaterials business, we expect revenues to grow, on average, at double-digit rates over the next 5 years.

As part of the transition to a CDMO business, Lifecore is adding new syringe-filling capacity over the next several months and new vial-filling capabilities within the next 12 to 15 months, both of which will be needed in the future to meet the demand we expect from our deep pipeline of development programs along with continuing growth from existing customers.

Second, our Eat Smart salad products are on trend within the fast-growing healthy eating space.

We expect revenues in our salad business to begin growing again in fiscal 2018 and generate double-digit growth, on average, over the next 5 years as we continue to offer innovative new salads and expand our distribution.

Third, along with exploring expansion into higher-margin healthy food products adjacent to produce, we are exploring new ways to leverage Apio's national fresh food supply chain to bring additional all-natural food products to the market.

As the first of these endeavors, we are committed to investing and growing O Olive by leveraging the sales, customer service, logistics and procurement capabilities of Apio to ensure we realize high returns on our investment.

In summary, our focus is on developing innovative products to deliver value to our customers, consumers and shareholders.

Our balance sheet remains strong and provides the resources for executing on our strategic objectives.

We are now open for questions.

(Operator Instructions) Our first question comes from the line of Anthony Vendetti from Maxim Group.

Just on Lifecore.

Obviously, it was up strong.

Could you tell us a little bit the breakout between the core HA business and the non-HA business?

Yes.

Well, on a year-to-date basis, Anthony, approximately 15% of their business is non-HA.

It's primarily the new business with a new customer that -- whose product was approved back in August.

And that's the lion's share, that 15%, along with other business development revenues for customers that we've not named.

So about 15% of their business is non-HA.

The rest of it is the historical HA.

I mean, this quarter certainly benefited from very high fermentation sales, which is one of the higher-margin products within the company.

And has some of the growth in the non-HA business that -- when you're talking about double digits over the next 5 years in terms of growth in the Lifecore business, the non-HA business, does that represent a significant part of the expected growth?

Yes, it does.

You can look at the base business in HA, and that still is a great growth platform.

We're expecting that to grow in the mid-single digits.

So when we say we're going up to double digits with growth, that's due to the non-HA business.

Okay.

And then just switching gears to Apio.

I know the decision is looming for Walmart.

I think it's -- by the end of this month, they'll make a decision.

I was wondering if they have provided any color on the decision to go forward to roll it out into all 4,700 Walmart stores, or you just have to kind of wait to hear.

But it sounds like the metrics you gave out last time as well shows that Sweet Kale Salad is one of the top-selling salad kits.

Correct?

Right.

I won't try to speculate on the decisions one of our customers is going to make.

But I do know that the data that we're seeing with Sweet Kale Salad and the velocity data, as it expanded from 400 to 1,400 stores, has remained very strong, so -- and also, Walmart has a total of about 4,000 doors.

And we're only going to look at those to see if we do get the answer to be expanded, which ones of those make sense for salad kits.

So we don't know the decision, but again, the data looks strong.

And then just lastly on Kroger.

I know you mentioned last quarter you're in discussions with them.

Any update on that?

We're continuing to engage with Kroger in discussions.

So again, no immediate decisions, but we are now -- we weren't engaged at the corporate level as we now are engaged with them and having meetings.

So that's about as much as I can tell you.

Our next question comes from the line of Morris Ajzenman from Griffin Securities.

Just as a follow-up to the question on Lifecore.

Can you give us some examples?

I know you've talked about in the past that it's closer to the horizon for non-HA applications.

Ask that one more time.

I want to make sure I'm answering it correctly.

And -- the specific non-HA applications that you're talking about or actually do work on existing customers.

Without naming customers, can you just have us some examples of the type of end treatments that we're referring to?

Sure.

So Morris, we're looking in different verticals within the medical industry and pharmaceutical industries.

I'll just give you some examples of the types of verticals that Lifecore is exploring.

Typically, within HA products, we're focused on ophthalmic and orthopedic.

By going into non-HA products, we're looking at treatments in oncology, ENT, pulmonary, neurology and general surgery, to name a few.

So it becomes rather broad in where we can focus our efforts.

And what would you expect 5 years from now the percent of revenues of Lifecore?

Assuming mid-single growth -- mid-single-digit growth in HA, what percent of revenues that could be of this vision?

Well, at 15% now, if you assume going forward, as Molly said earlier, the HA to grow at mid-single digits, which is kind of the growth in the market, and we're expecting more than double-digit growth or a minimum of double-digit growth in top line, you could see where the non-HA business 5 years from now could be 40% of their revenue.

Okay.

Switching gears to Windset.

Now that Windset has the ability to become more aggressive going forward and building the facilities based on your 5-year extension, any thoughts you want to share with us.

I'm sure Windset is back there making their plans but how more aggressive we can see new groundbreakings over the next 24 months?

Can't really go into details now, but they have to finish up with what they're working on now.

They finished the strawberry expansion, the 10 acres.

They're working on the 30-acre new glass greenhouse that'll be for either peppers or cucumbers.

That's expected to be completed sometime this summer.

They are obviously sitting there, looking -- putting plans together for expansion.

One of the things that this extension allowed is now that the -- they no longer have to reserve for a potential put by Landec against their lines, that now frees up $60-plus million for them to be able to accelerate their expansion plan.

So we'll be able to report on that more in, probably -- maybe even next conference call.

Certainly, by the first quarter of next year, we'll have a better idea.

Okay.

Our last question.

I get back in queue here.

Can you talk more about how the second sourcing with Costco, how that's playing out?

And is that fully integrated from their perspective?

And are you seeing, best way of putting it, comparable growth when you account for that?

How is that playing out for you guys?

Yes.

I'd say it's stabilized.

It has stabilized.

So we have transitioned that business.

And moving forward, the good news is we've been able to grow our retail business to compensate for a lot of those losses.

And I don't see much change.

We're still seeing year-over-year increases in Sweet Kale Salad in both -- in our club channel.

So I think stabilization is the word that would best describe it.

Our next question comes from the line of Colin Radke from Wedbush Securities.

So on Lifecore, you've talked about double-digit annual revenue and operating income growth, on average, over the next 5 years.

Just given the strong year that Lifecore is having here in FY '17, is that still a realistic expectation as you look out to FY '18 as well?

Over -- average over the 5 years, that's what we expect, but yes, you're right.

I mean, they just came off a huge growth year last year, another huge growth year this year.

They are, as we announced several months ago, going to be focusing on bringing in vial-filling capabilities next year.

So a lot of the efforts are going to be getting that new capability up and running.

So yes, it would be very difficult for them to certainly continue at the pace of the last 2 years.

Next year could actually be a year where they don't quite hit the double-digit growth.

But over the 5-year period, we expect that.

Got it.

And so you mentioned you expect a significant increase in O Olive revenues in FY '18.

Are you able to maybe provide a little bit more color in terms of exactly what type of increase you're expecting and maybe where you see the biggest customer opportunities and what visibility you sort of have in expanding the distribution and penetrating some new accounts?

Can we defer that to the fourth quarter?

We're in the process.

I mean, we just acquired them a month ago.

We're going through the first budget process.

This is a small organization, so this is all new to them.

We'll have a lot better answers to that question come July.

Okay.

Fair enough.

Maybe just last one from me.

Just on Canada and the salad kit market there.

Looked like the -- your ACV declined slightly this quarter.

What was the cause of that?

And is that something you expect to continue?

And maybe just broader, what gives you confidence that Canada is more macro related and not just the category is starting to hit maturity there?

Right.

So in Canada, there's a lot of macroeconomic issues going on.

They -- just especially with the exchange rate and the oil economy, they are having a lot of pricing wars, and it's taking its effect on all retail and club environments.

I mean, this is not just an Apio or salad issue.

So what we're seeing is really -- what's going on is retailers are not growing right now or they're growing slightly, and they are fighting to get consumers into their door.

And they're doing that through choosing specific items and going through price wars.

It's a very difficult environment right now in Canada.

And so that's what I would attribute a lot of this to.

I don't see any diminishing of our brand strength or our share as far as the long term.

But as they're going through these price wars, we're seeing a little volatility there, and we're not seeing the growth in dollars that we expected to see this year.

Okay.

And just in terms of the ACV, I know the -- a slight decline.

But is there anything in particular to call out there?

And is that something you might expect to continue?

No.

You know what, it's not a customer loss issue.

I think maybe some other -- it's just a couple points.

We're still up -- our ACV is still extremely high.

It's in the 80s.

I believe it's 83% still in Canada.

So it's probably more the volatility, or it could -- or -- but there isn't any significant customer loss I can point to.

Our next question comes from the line of Chris Krueger from Lake Street Capital.

Most of my questions have been answered, but I just had one more kind of following up on Lifecore.

I know it's growing very nicely right now with some new business.

Can you somehow quantify like the number of development stakes, projects or your pipeline of discussions you're having like a growth rate where you're at now versus a year ago?

Just trying to get an idea of what -- where that could be and what it could lead to in the coming years.

Well, we -- there's always new customers, new products in the pipeline, but we've never disclosed what those are, who they are.

This is an area -- as you know, it requires FDA approval.

There's a lot of, let's say, confidentiality around these type of projects.

So we would rather keep that to ourselves and announce them as they materialize as commercial products.

Just -- let's just say they have many products and customers in the pipeline for the future, and let's leave it at that.

Yes.

I mean, that's why we're able to project the growth that we're projecting because they have a strong development pipeline.

It's giving us the confidence to give the growth projections that we have over the next 5 years.

Our next question comes from the line of Tom Erickson from Craig-Hallum.

I just had a few -- so just a few follow-ups relative to the model.

On Lifecore, I know that's typically lumpy from a gross product margin rate perspective, especially when you have a high fermentation quarter.

So is it logical to expect gross profit margin rates then to drop in fiscal Q4 coming into the May quarter?

Oh, yes significantly, in fact.

The lion's share of their fermentation sales for the year occurs in the third quarter, and that's -- with the exception of last year, where some of it actually chipped out in the fourth quarter.

You look back at the history of Lifecore since we acquired them, you'll see that their third quarter is always their best quarter.

It's their highest-margin quarter.

And typically, the fourth quarter, as a result of the great third quarter, is typically their lowest-revenue and lowest-margin quarter.

So yes, you will see a significant drop in both.

Got it.

And I know you issued a press release relative to May quarter expectations with good guidance there.

And I'm just curious if you've seen any change relative to the growing patterns or what we might expect with regard to Apio?

Is that -- any change relative to Q4?

No change from what -- the guidance we provided in the press release, Tom.

We had the heavy rains happening last quarter, which are going to affect us in April and May of this quarter.

And that's all rolled up into the guidance we provided.

Yes.

Perfect.

And then on the operating expense dollars, you had a big bump-up from November to February.

And is it fair to assume that this new $17 million run rate, $15 million for SG&A and R&D, is going to carry forward?

No.

We -- in the third quarter, we had $3.5 million, what I would say, nonreoccurring expenses that hit SG&A.

It's the legal settlement.

It's the legal fees associated with those claims.

And then we had some severance for restructuring our sales group down at Apio.

Perfect.

And then just 2 more quick ones.

CapEx and depreciation.

Do we need to wait for the Q there?

Or can you give us those numbers now?

It's about $7.8 million, $8 million for year-to-date.

I think our run rate at probably be about $10 million to $10.5 million for the year.

Got it.

And tax rate?

36%.

(Operator Instructions) Our next question comes from the line of Rob Straus from Wynnefield Capital.

Greg, probably just a couple questions for you and focused on Lifecore.

I know that you made a couple of different statements on the difficulty of continuing the growth of the last 2 years in particular.

But just a few questions on some numbers here.

First, when I take a look at the operating income to net income, can you just explain the difference that we see in the quarter between those 2 lines for Lifecore?

The net income and operating income?

Yes.

Well, for -- boy, I mean, it's...

Because if I'm not mistaken, it looks like there was something added back to get down to the net income line, and maybe -- I could be looking at these numbers incorrectly, but I just went through the P&L.

Yes.

Maybe if we take a look -- why don't I walk you through offline because I don't think there's any difference between the operating income and net income of Lifecore.

I mean, they really have nothing below the line.

I mean, there's no -- all the debt now is at the corporate level, so all the interest expense is showing up at Corporate.

At least in our disclosures, in our press release, the taxes show up at Corporate.

So why don't I -- we can talk offline, but there should be no difference.

Okay.

And then also, have you considered using an EBITDA metric that, I don't know, might be cleaner and maybe just a better gauge of the operations?

Have you ever considered that?

Considered it.

The one thing about doing that in our press release is obviously that it's non-GAAP, and then you've got to go through all the non-GAAP disclosures.

And since our financial is relatively straightforward, it doesn't take a lot to calculate EBITDA on your own, but that's certainly something we could consider doing going forward.

I mean, we certainly calculate internally.

I -- we just elected not to put it in the press release because it's non-GAAP.

And just to review the profitability of Lifecore itself.

I know that there is a step-up in the business during the third quarter if I'm not mistaken, and I think you reiterated that on the call today.

Is there any sense that you can give us going forward on what you think the appropriate run rate is for that business' run rate on profitability itself?

Is there any incremental kind of, I don't want to say guidance but commentary that you can make regarding that?

From just an annual standpoint, as I've mentioned earlier, we think like next year, right, the growth is going to be in the single digits, not the extreme high growth we've had on the top line over the last couple years, but we see them maintaining their gross margins of about 45%.

And their bottom line -- and this is where you can calculate yourself EBITDA margins of about 33%.

So other than that, unless you -- not quite sure if that answers your question, but that's about the guidance I can give at this point.

And 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.

Thank you all for joining us today.

As we look at all the activities that we have going on Landec, we look out into the future and really see that we have these 3 primary growth platforms that set us up for growth on both the top line and bottom line going forward.

So I just appreciate you joining the call, and thank you.

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

This does conclude the program.

You may now disconnect.

Good day.