Lifecore Biomedical Inc (LFCR) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec Corporation Third Quarter Fiscal 2018 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.

Thank you, Jonathan.

Good morning, and thank you for joining Landec's Third Quarter Fiscal Year 2018 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 2017.

As a leading innovator in the diversified health and wellness solutions space, Landec continues to drive solid growth within its 3 strategic growth platforms: Eat Smart salads, natural food products and Lifecore biomaterials.

As a result of the strong performance from these growth platforms, Landec delivered record revenues this quarter, with consolidated third quarter revenues increasing 9% despite revenues from our food export business decreasing 39% on a year-over-year basis.

As mentioned in our press release on February 28, the food export business will be discontinued at the end of this fiscal year.

Extreme weather events this year have adversely impacted raw material sourcing costs at Apio, more than offsetting the positive contribution to earnings from the 9% increase in revenues.

As a result, we didn't meet our recently revised third quarter guidance of $0.09 per share, excluding the onetime tax benefit recorded during the quarter.

However, based on the impact from weather-related events and the discontinuation of the food export business, we are revising our annual EPS guidance from continuing operations to $0.40 to $0.42 per share.

At Apio, the Eat Smart salad business is demonstrating exceptionally strong performance this year as distribution and revenues are growing much more quickly than we had originally expected.

Revenues in our Eat Smart packaged fresh vegetable business increased 15% in the third quarter and 10% in the first 9 months of fiscal 2018 compared to the same periods last year.

This growth was due to increased sales of Eat Smart salads, which increased 27% in the third quarter and 24% in the first 9 months of fiscal 2018 compared to the same periods last year.

The growth in salad was primarily driven by a high 57% increase in salad revenues from the U.S. retail channel during the first 9 months of fiscal 2018.

The U.S. retail All Commodity Volume or ACV for Eat Smart multi-serve salad kits for the 52 weeks ending January 27, 2018 nearly doubled from 20% to 39% and was sequentially up by 500 basis points from 34% for the 52 weeks ended October 28, 2017.

This increase in ACV was driven by expanded distribution in key U.S. accounts such as Walmart, Kroger, Target and others.

The incremental distribution in U.S. retail occurred more rapidly than originally anticipated, leading to considerably higher-than-expected salad revenues this fiscal year and accelerating some of the salad growth expected to occur next year into this year.

We now expect Eat Smart salad revenues to grow 20% to 23% this fiscal year 2018 compared to last fiscal year, doubling the rate of growth that we projected in our original guidance of 10% to 12% at the beginning of this fiscal year.

Lifecore had a very profitable quarter with revenues of $23 million and a gross margin of 51%.

Revenues and gross profit are slightly lower than the third quarter of last year due to a timing shift in certain shipments typically recognized during the third quarter being shipped into the fourth quarter of this fiscal year.

On a year-to-date basis, Lifecore met expectations through the first 9 months of fiscal 2018 with revenues of $49.2 million and operating income of $11.9 million.

We expect Lifecore to exceed our original growth expectations for fiscal year 2018, with revenues projected to increase 10% to 11% compared to last year, up from our original projections of 6% to 8%.

Lifecore's growth is being fueled by the strategic expansion of its business beyond its historical capabilities as a premium supplier of hyaluronic acid or HA to become a fully integrated contract development and manufacturing organization or CDMO, providing differentiated fermentation, formulation and aseptic fill services for difficult-to-handle pharmaceutical and medical materials.

At O Olive, operating performance for the first 9 months of fiscal 2018 is slightly below expectations with revenues of $3.3 million and an operating loss of $441,000.

We are currently focused on integrating the Eat Smart sales force with the O Olive organization to leverage the Eat Smart customer base and relationships throughout North America to gain new customers and new distribution for O Olive.

Landec consolidated gross profit and net income were negatively impacted during the quarter by weather events that resulted in higher produce sourcing costs at Apio within our lower-margin fresh-cut vegetable bag business, resulting in $3.6 million of unexpected higher produce sourcing costs during our third fiscal quarter.

The weather events included freezing temperatures in Florida during January and unseasonably warm weather in the Western growing region, both of which exasperated the impact from hurricanes and tropical storms we experienced earlier in our fiscal year.

The Apio team is working on several fronts to mitigate future weather-related issues such as modifying sourcing contracts and geographic sourcing regions and shifting the product mix to reduce our reliance on certain difficult to economically source produce items.

It is important to note that there have been no unexpected raw material sourcing costs attributed to our salad business during the first 9 months of fiscal 2018, and Apio has been able to meet all customer demand for our salad products.

Before I go into more detail of our plans for fiscal year 2018 and beyond, let me turn the call over to Greg for some financial highlights.

Thank you, Molly, and good morning, everyone.

Revenue in the third quarter of fiscal 2018 increased 9% to $149.3 million compared to $136.6 million in the year-ago quarter.

The increase was primarily due to a $15.5 million or 15% increase in revenues in Apio's packaged fresh vegetables business.

This increase was partially offset by a $2.9 million or 39% decrease in revenues in Apio's lower-margin export business, which will be discontinued at the end of fiscal 2018.

Reported GAAP net income in the third quarter of fiscal 2018 was $16.1 million or $0.58 per share compared to $3.5 million or $0.13 per share in the year-ago quarter.

The increase was a result of: first, a $13.7 million or $0.49 per share onetime tax benefit from the new lower corporate income tax rate, primarily from a reduction in the company's deferred tax liability; second, a $2.2 million decrease in consolidated operating expenses due to legal settlement charges of $2.1 million incurred during the third quarter of last year; and third, a $761,000 decrease in income taxes prior to the onetime tax benefit.

These increases in net income were partially offset by: first, a $2.2 million decrease in gross profit in Apio's packaged fresh vegetable business primarily due to a $3.6 million of unplanned produce sourcing costs as a result of weather-related issues during the quarter; second, a $1 million decrease in gross profit at Lifecore due to the timing of shipments within the fiscal year; third, a $700,000 decrease in the change in the fair market value of our Windset investment from a $700,000 increase during the third quarter of last year compared to no change during the third quarter of this year; and fourth, a $240,000 decrease in export gross profit due to lower export revenues.

For the first 9 months of fiscal 2018, revenues increased 1% to $409.1 million from $404.8 million in the same period last year.

The increase was primarily due to a -- due to $31.3 million or 10% increase in revenues in Apio's packaged fresh vegetable business and from a $1.4 million or 3% increase in Lifecore revenues.

These increases were partially offset by $30.3 million or 54% decrease in Apio's lower-margin export business.

Reported GAAP income in the first 9 months of fiscal 2018 was $18.7 million or $0.67 per share compared to $8.1 million or $0.29 per share in the first 9 months of fiscal 2017.

The increase was a result of: first, a $3.7 million or 49% -- or $0.49 per share onetime tax benefit from the new lower corporate tax -- income tax rate; second, a $1.5 million increase in the change in the fair market value of the company's Windset investment from a $700,000 increase during the first 9 months of last year compared to a $2.2 million increase during the first 9 months of this year; third, a $476,000 decrease in consolidated operating expenses; fourth, a $1.2 million decrease from the loss on debt refinancing during the first 9 months of last year; and fifth, a $1.9 million decrease in income taxes prior to the onetime tax benefit.

These increases in net income were partially offset by: first, a $4.1 million decrease in gross profit in Apio's packaged fresh vegetable business primarily due to $7.7 million of unplanned produce sourcing costs as a result of weather-related issues during the first 9 months of fiscal 2018; second, a $2.3 million decrease in gross profit at Lifecore due to the timing of shipments within the fiscal year; and third, a $1.8 million decrease in export gross profit due to lower export revenue.

Turning to our financial position.

At the end of the third quarter of fiscal 2018, cash totaled $7.7 million after generating $18.1 million in cash flow from operations, receiving net borrowings of $5.2 million and investing $18.5 million in property and equipment.

At February 25, 2018, we had $88 million available to borrow under our line of credit.

Looking forward to the fourth quarter of fiscal 2018, we expect consolidated revenues from continuing operations, which exclude the food export business, to increase 13% to 16% compared to the fourth quarter of last year.

Key drivers of this growth include our Eat Smart salad product sales growth growing at 12% to 15%, Lifecore revenues growing 40% to 43% and O Olive recognizing revenues of between $1.4 million to $1.7 million in the fourth quarter.

And we expect that the fair market value change in our investment in Windset during the fourth quarter of fiscal 2018 to be between $600,000 to $800,000.

As a result, we are projecting consolidated net income from continuing operations for the fourth quarter to be $0.20 to $0.22 per share.

For the full year of fiscal 2018, we expect consolidated revenues from continuing operations to grow 10% to 12% compared to the prior year.

This growth is being driven by Lifecore revenues that are now projected to grow 10% to 11%, which is up from our original projection of 6% to 8%; and by Eat Smart salad sales that are now projected to grow 20% to 23%, which is up from our original projection of 10% to 12% and from our most recent projection in our February 28, 2018 press release of 15% to 18%.

O Olive revenues are expected to grow to $4.7 million to $5 million, which is below our original projections by approximately $1 million due primarily to construction delays and bringing our vinegar production in-house, which is now up and running.

We're projecting earnings per share from continuing operations for all of fiscal 2018 of $0.40 to $0.42, which excludes the favorable 49% earnings per share from the onetime tax benefit in fiscal 2018 and the results from the export business.

We're now projecting fiscal 2018 consolidated cash flow from operations of $28 million to $32 million and capital expenditures of $30 million to $34 million.

Let me turn the call back to Molly.

Thanks, Greg.

Now let me go into more detail about the progress we are making in our 3 continuing growth businesses: Lifecore, Eat Smart salad and natural food products, as we position each of these for growth and enhanced profitability.

Lifecore continues to evolve its business model from being a supplier of HA to a fully integrated CDMO.

Lifecore is benefiting from a growing trend among pharmaceutical and other medical material companies to outsource specialty services and manufacturing.

With a 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.

Due to stronger-than-expected performance of our Lifecore business, we have revised our revenue growth projections to 10% to 11% this year, implying a total fiscal year 2018 revenue projection of $65 million to $66 million.

We continue to aim a gross margin target between 40% and 45% and expect to realize an EBITDA of approximately $21 million in fiscal 2018.

We continue to expect Lifecore to generate double-digit revenue growth on average over the next 5 years as Lifecore expands sales to existing customers, adds new customers and commercializes products that are currently in its development pipeline.

The transformation of the Apio business is still in process but evolving rapidly.

This transformation is occurring in 2 distinct phases.

The first phase of transformation began in fiscal year 2012 and focused on transitioning Apio from a commodity produce company to a true innovation company with a focus on identifying consumer healthy eating trends and developing value-added products to support those trends.

Our Eat Smart salad kit business was launched during this first phase of transformation for an in-depth understanding of consumer healthy eating trend.

Key to our growth strategy for salads is penetration in the U.S. retail market, and we are making significant progress in our strategy to increase the Eat Smart share of multi-serve salad kits in this U.S. retail market.

The annual U.S. retail market for multi-serve salad kit is approximately $1.4 billion, representing over 75% of the approximate $1.8 billion North American multi-serve salad kit market, including Costco.

For the 52 weeks ended January 27, 2018, Eat Smart multi-serve salad kits in U.S. retail consumer dollars grew -- grew 61% in the U.S. retail market compared to a category growth rate of 15%.

For the same period, the market share of Eat Smart multi-serve salad kits in the U.S. retail market increased to 5.7% from 4.1%, an increase of 160 basis points, demonstrating continuous distribution gains as well as room for additional growth.

With continued innovation and expanded distribution, we expect revenues in our salad business to continue to grow over the next 5 years.

The second phase of transformation of our food business began last fiscal year.

This phase involves expanding our product line from fresh packaged vegetables to include other fresh natural food products that meet consumers' evolving needs.

As the first step in the second phase, we launched the Eat Smart 100% Clean Label initiative to ensure that all of our Eat Smart products, including salad toppings, dressings and dips, are made from all-natural ingredients by the end of calendar year 2018.

We are on schedule to deliver this commitment.

In fiscal year 2017, we also created the Landec New Ventures Group to develop a natural food strategy and to lead new product development and acquisition initiatives in this area.

As the first step in the New Ventures effort, we acquired O Olive, a supplier of all-natural premium olive oils and vinegars.

This acquisition was timely as consumers are rapidly switching from traditional olive oils and vinegars to all-natural options.

The O Olive products also provide a unique opportunity for future innovation at Eat Smart, offering all-natural O Olive dressings within our growing salad kit business.

In March, we completed the construction of our vinegar facility in Petaluma, California.

We are now producing our own vinegars in-house, enabling internal oversight to ensure the highest quality product standards and ingredient sourcing transparency while simultaneously reducing cost and delivering higher gross margin.

During this fiscal year, the New Ventures Group accelerated its efforts in the development of a natural product strategy.

And through our research, we found that there's a rapidly growing number of consumers searching for plant-based meal solutions.

These consumers celebrate plant-based ingredients and view fruits, vegetables, grains and nuts as essential components of their eating experience.

This new plant-forward consumer could be, but is more likely not, a vegetarian or a vegan.

However, we found that plant-based ingredients make up at least 50% of the meals enjoyed by this consumer.

Based on a deep understanding of attitudes and behaviors of this new consumer target, we are developing products to meet the needs of this emerging segment.

In the first half of fiscal year 2019, the Landec New Ventures Group will launch our first internally developed product line within our natural foods initiative to meet the needs of this ever-growing segment of consumers.

We will share more about this initiative during our next earnings release call.

Our focus in our food business is on developing and offering products that are on trend with consumers and that deliver higher margins and a higher return on our invested capital.

We have successfully implemented this strategy with our entry into the multi-serve salad kit category, our recent launch into the single-serve salad kit category, the addition of O Olive oils and vinegars and with the recent launch of our Eat Smart timesavers and ready-to-wok products.

Eat Smart timesavers are in our core historical vegetable line offering fresh vegetable kits that make eating vegetables convenient and delicious.

The Eat Smart ready-to-wok product is a unique stir-fry product that includes fresh vegetables and noodles and is currently being offered within the produce department of all Sam's Club stores.

While we expand our higher-margin value-added products, we also continue to rightsize the lower-margin or more volatile parts of the business.

Currently, this includes the decision to discontinue our lower-margin food export business.

As seen by the effects that weather had on our business during the first 9 months of fiscal 2018, this had become an increasingly important strategic initiative.

We are excited to begin leveraging many of the investments we made over the past several years in both capital and personnel to create forward momentum.

This fiscal year, we have begun increasing production volumes of our higher-margin products at both Apio and Lifecore to start filling our expanded production capacity and increasing our gross margins over time.

Looking to fiscal 2019, we will continue to innovate.

At Apio, we will continue to launch new Eat Smart products that make it easy and delicious for consumers to eat healthy.

We will continue to grow our O Olive line of products and launch a new line of internally developed natural food products.

At Lifecore, we will continue to add new processes and capabilities to meet the needs of our customers for their difficult-to-handle pharmaceutical and medical materials, and we will begin selling products in vials in addition to syringes.

We are also focused on increasing production volumes in each of our facilities to drive efficiencies and increase our return on invested capital or ROIC.

Finally, we are focused on increasing efficiencies and driving cost down in our operations in order to offset the rising costs that are affecting our businesses.

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

As we continue to transform our businesses, we will focus on growing our 3 platforms, Lifecore, Eat Smart salads and our natural food products, while simultaneously reducing cost and increasing efficiencies.

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

We are now open for questions.

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

So good quarter all around.

I guess Lifecore, I thought this year was going to be a transition year, is outperforming.

Any specific contract or anything?

Any specific product?

Or what are they doing that's put them ahead of schedule?

And does it -- is that going to translate into 2019, getting off to a strong start, if the transition's over at Lifecore?

Well, it wasn't anything in particular, Anthony.

It's basically just higher sales volumes from our existing customers than we were expecting, which is good news.

And yes, it should carry over into '19.

And as we stated numerous times, we expect Lifecore to grow, on average, 10% to 15%, and I see no reason why that shouldn't be the range next year.

And if we just do the math, by fiscal year '21 or '22, Lifecore could be at $100 million-plus in terms of revenues.

At that point, will you make a decision as to whether or not Lifecore remains part of Landec?

Or how do you think about Lifecore once it gets to around $100 million in revenues?

Anthony, we're consistently looking at our strategic options with Lifecore.

So this isn't a "We're sitting around waiting to understand what that is." We're constantly evaluating what the right strategic decision is at any point in time.

And so right now, we strongly believe that it belongs as part of the Landec portfolio.

And one of the reasons is it needs to grow and grow bigger, and $100 million will provide a better opportunity for us to look at -- maybe it'll kind of shift the picture, and maybe at that time, it will be.

But we're going to continue to look at those options, and when the numbers make sense, we'll do whatever makes sense to maximize shareholder value.

Okay.

Great.

And then on the Eat Smart salad kits, obviously, that's growing significantly faster than you thought.

Obviously, when we were out there for the Analyst Day, we had a chance to try them personally, so I understand why they're doing well.

And I think you're right on trend with the consumers.

Can this much higher growth of 20%-plus -- do you see that as sustainable growth as we move through the next couple of years?

What we experienced this year was an accelerated distribution growth.

I mean, the new sales team is just doing amazingly well, and they were able to get new distribution much quicker than we had anticipated.

So I think a lot of the growth -- not a lot, but some of the growth from next year was pulled into this year.

So as you know, we added -- we increased our distribution at Walmart.

We added salads in Kroger.

We've recently also started selling our salads to Target.

I will say the one remaining account that we are trying to pursue is Meijer.

But after that, it's going to be more about -- as we start growing our relationships with these customers, it's going to be about ensuring that our salads that are on shelf are gaining consumer adoption and awareness and then increasing the number of SKUs in those customers.

So I do think some of the growth from next year was pulled into this year.

But we have been stating that we're trying to grow, on average, that 10% each year, and I think we can hold to that.

Next year might be lower than 10%, in the single digits, since we grew so much this year.

Okay.

But you're coming out with new products in that category, and right now, did you say about -- right now, you only have about 5.7% of the market?

That's right.

Exactly.

So there's lots of room to expand.

There's lots of room to add more SKUs in existing accounts, and we just have to keep innovating and fighting for that space.

And just to -- I know you're in Target, Walmart and Kroger, but where are you within the Target stores?

Are you rolled out into all of them at this point, all the ones that...

We're in about -- we're in approximately 330 doors at Target.

So that's another opportunity, is to grow and expand our doors at Target.

(Operator Instructions) Our next question comes from the line of Francesco Pellegrino from Sidoti & Company.

So I guess I'll start off with Apio.

If I look at the really strong performance for your salad kit product line during the quarter and then I just sort of peg it against what the Apio value-added segment did in regards to a gross profit -- I know we talked about salad kit margins ranging anywhere between 15% to 24%.

Single-pack salad kit product margins are probably maybe around like 10%.

If I apply a 15% gross margin to the salad kit product line this quarter, I sort of net out to around like $7 million in gross profit just for that product line.

And then I guess what I'm sort of backing into is did the rest of the core packaged fresh vegetable business, like was that operating at breakeven during the quarter?

Well, you've got to remember, one of the things -- and I can't verify your math.

I don't have that level of detail in front of me, but...

It was just -- yes, it was just hypothetical.

The $3.6 million in sourcing hits that we took during the quarter, that's all associated with the historical core -- primarily the historical core bag business.

So even though I don't have the math in front of me, it could play out exactly what you said, is that when you factor in the $3.6 million against the margins that, that business makes, it could put it -- or it probably did put it in a loss position for the quarter.

Well, the other part of that, too, right now, is that we're heavily promoting our salads because we're new into all these accounts.

We are putting a lot of promotional dollars behind these to ensure consumer adoption and grow awareness.

So that's going to be the other effect on your gross margins in addition to the sourcing hits.

Okay.

All the promotional activity, are we thinking like after 4 quarters, you'll pull back on it, and then all of a sudden, you get margin expansion or you get like more normalized margins for the salad kit product line?

Or do you think this competitive space is going to last for quite a bit of time?

No.

We'll pull back on the promotional spend after some time.

I can't say how long a time that will be, that we'll be through next year or how long.

But we won't keep at this rate forever.

It's just because we're so new in these accounts.

And when you look at the real estate on shelf, we still only have 1 to 3 to 5 SKUs in the sea of like 60, so we really need to make it pop for consumers and get them to try our salads.

Got it.

I guess just shifting over to Lifecore for a minute.

You guys provided some really great guidance in regards to each of your segments and just the overall business.

For Lifecore, I know historically, we should just think about Lifecore aiming for a 43% to 45% gross margin, but in the guidance, all we're really provided with is operating income growth.

What should we be thinking about for Lifecore's gross margin for the year?

Your range was pretty good.

Okay.

So if we're aiming for like 43% to 45%, we're having this issue where some higher-margin business is being shifted over to the fourth quarter.

I guess I was just a little bit more enthusiastic for the back half of the year, and I thought on the last earnings call, the -- what was being implied was we were going to be seeing Lifecore gross margins right around 55% for the second half.

And it just looks as if maybe some of the business that was pushed back wasn't really as high-margin as we necessarily thought was going to exist for the second half.

Or maybe there's timing things and some business isn't coming online because on the second quarter call, I thought there was a level of comfort that Lifecore was going to have a second half gross margin in excess of 50%.

And I think right now, based upon the guidance that you're providing us with, it's going to come out slightly below 50%.

And that's probably pretty accurate.

With Lifecore, it comes down to mix because they've got 3 distinct businesses.

The aseptic filling, which is the lower-margin business because that's where all the labor and overhead exist.

You got the fermentation, which is higher; and business development, which is higher.

And depending on that mix, in any given quarter, it's going to dramatically change their margins.

And if you look historically at the fourth quarter, the historical fourth quarter margins are usually in the 30s.

And so the fact that it's even nearing 50% tells you that the third quarter, where a lot of the high-margin business occurs, shifted to the fourth quarter, and they even get it close to 50%.

So this is actually within what we had expected for Lifecore for the year.

It makes sense that each of your product lines and the product mix is going to be creating these changes, but I thought there were going to be sub-product line product mix shifts as well.

For example, I thought within aseptic filling, it's the lowest-margin product line of the 3 product lines within Lifecore.

I thought we were also going to see this phenomenon of non-HA aseptic filling business coming online in the second half, which was actually going to increase the overall aseptic product line gross margin.

So I'm not sure, maybe aseptic filling -- that happened.

And that has happened.

Yes.

And that's one of the reasons their margins are nearing 50%, as you pointed out, in the fourth quarter.

Otherwise, even with the shift in some shipments from the third quarter to fourth quarter, it would have been less than that.

Okay.

And I guess maybe just the last question to sum this all up.

Is it better to think of full year gross margins for Lifecore at the lower end of the 43% to 45% range?

Yes.

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

Just a couple of quick questions.

You mentioned that your O Olive business is expected to grow to about $4.7 million to $5 million this year and that you're trying to get your Eat Smart people to start selling that.

If you were to land a couple of significant national retailers for that business, how big could that be in the next couple of years?

Could it be a $20 million business?

Or how do you look at that?

Well, we definitely think that one day, this business can be a $20 million business.

It comes back to exactly what you're saying, which is the timing of new distribution.

That has to do with us, first, even getting to know these new buyers and their different reset timings.

I would hope that in the next 1 to 2 years, that we can double the business and go from there.

But I mean, when we acquired this business, we definitely think -- believe it can be an over $20 million business.

If you were to land a couple of significant contracts, do you have the capacity to quickly meet that demand?

Yes.

So we have -- on the vinegar side of the business, we have plenty of capacity.

As we mentioned in the call, we just built our own vinegar facility, which has plenty of capacity for the growth projections that we have.

On the olive oil side of the business, we have -- we do have limited supply of olive oil and how quickly we can grow that business.

So right now, we're in the middle of sourcing new olive oil, partnering with new olive growers and -- to actually take our growth -- enable our growth to go over that $20 million in 3-plus years.

So vinegar, plenty of capacity, no issues on supply.

Olive oil, working on it, and we will have limited supply until we secure longer supply agreements.

All right.

And then my last question is do you have a kind of an internal pipeline of potential new brands or new acquisitions that you're evaluating right now?

And is that growing?

So we have a large initiative in the natural food space that we plan to bring to market in fiscal year '19, and I know we've been very vague about that.

But we've been doing a lot of research on this new plant-based consumer, and that's nothing new.

But I think what we found in our research and really getting down to attitudes and behaviors and beliefs and needs of this consumer, we found some unique insights.

And based on those insights, we're developing a new product line to launch this fall, this calendar year fall.

And so that product line will be out in around August or September area, and we're looking forward to sharing more about that in the next earnings release call.

Our next question comes from the line of Mitch Pinheiro from Costello Asset Management.

So just a couple of questions.

Any -- first, on Apio, have you seen any changes in the market or anything resulting from Fresh Del Monte's acquisition of Mann?

We have not seen anything yet.

I mean, it's a buzz and people know about it.

I haven't seen any shift or differences in our relationships or anything at this time.

Okay.

And then with sourcing, I've been hearing for years about how you've -- you're going to strategically change or try to mitigate the sourcing issues.

But at the end of the day, you're always going to have sourcing issues of some sort.

Or can you talk about like how confident or, really, if anything's changed dramatically in the sourcing that'll really mitigate the lots of downs that we've had in the last couple of years?

You are correct in the fact that, that portion of our business, that is highly volatile, and it's the vegetable bag portion we're always going to have sourcing risks.

It is the business we're in.

We are in produce business with short shelf lives, and it is what it is.

That being said, I do feel like we can do several things to mitigate that strategy.

First of all, when I look at that product line, that's the most volatile.

One thing we're trying to do is increase our gross margins of that line so that even when there is volatility, we have the profitability to absorb those extra costs.

And so when I look at that, how are we doing that?

One, we have been going out with price increases, and we have had some success for next fiscal year in gaining these price increases, which we haven't had in a while.

So we are seeing success finally in getting some price increases.

The third thing is innovation.

So we've started to -- the second thing is innovation.

We've started to innovate within our core line.

So I mentioned at the beginning of the call about products that we just launched, and they're really products within our core bag business.

But we're evolving like a bag of broccoli and a bag of cauliflower to actually -- to actual kits, which, as you know, consumers are looking for more and more convenience.

So in these kits, we're calling them timesavers, they come with sauces and different additions to make vegetables taste better.

And they make it easy.

It makes it easy for them to taste better.

These products that we still consider in our core line, we are adding margin to that line.

So we just launched -- one of the examples is cauliflower fried rice.

Another one is a green beans sauté.

And we just launched them, but they're doing rather well.

We also started a new line of -- we call it ready-to-wok.

And ready-to-wok is a line of stir-fry kits with noodles and vegetables in the produce department.

It's doing extremely well at Sam's.

And this fetches the higher margin.

So the second thing we're trying to do is innovate.

The third one is we're also shifting our channels a bit.

And we've been aggressively going after the direct-to-consumer market and creating small portion packs for the different meal kit companies, and this has been a profitable endeavor for us also.

So it might be just a small bag of green beans or a small bag of broccoli, but those are fetching -- because it's such convenience for these meal kit companies, those are fetching a higher margin.

And I'd say the fourth thing is all about cost reduction.

We have to continue to get aggressive in reducing the costs in our plant side and gaining efficiencies and taking out costs wherever we can.

And through these 4 initiatives, you hope that over time, we do increase the profitability.

And if we would not have had the hurricanes this year, you would have actually seen an increase in margin in that core vegetable bag business, if I would have taken out the sourcing hits.

So the standard margin that we see has increased, but this year was an awful sourcing year, and it's completely hiding the fact that we are increasing the margin in that business slightly over time.

Yes.

That's helpful, Molly.

And then it just seems like you've never been able to get paid for the sourcing risk.

You're the ones -- and other companies such as yourselves are the ones that bear the brunt of sourcing risk, and it's never the consumer or the retailer -- or rarely the consumer or the retailer.

But -- so you just got to do what you got to do to work around that.

But what about the labor?

You pointed out labor going up.

Is that something that you can -- you think you can take pricing for?

I mean -- or are you just trying to take out costs in the plant faster than labor rises?

Both.

Both.

That's why all 4 of those initiatives that I just outlined to increase the profitability in core are trying to offset labor price increases and the volatility that we're seeing with weather.

So there's a lot going on to try to counteract those.

And you're right, we have borne the brunt of those cost increases.

And we have to start passing pricing along, and we have to start getting our cost down.

And it's a major initiative going to fiscal year '19 to do just that.

Just a couple of other questions.

One is like with the M&A pipeline.

How does that look and how do M&A valuations look?

Are they trending up, down or flat, in your view?

So we have a long list of M&A companies that we are reviewing and we're constantly reviewing.

I will say that the multiples are still extremely high.

You've probably seen that for companies that have been acquired.

We have not found an acquisition target right now that makes sense from an ROI standpoint.

It just doesn't make sense to pay the high multiples we're seeing in the market.

If we find an acquisition that we believe we can deliver an ROI and it's strategic, we'll be right on it.

Until then, we're not sitting back.

We're going to develop our own products because I think there's a higher ROI on internally developing products for the natural food space.

And I think it's a core competency that we have at Apio is our consumer insight and our internal innovation engine, and I think we can do -- we can launch new products that will deliver a much higher ROI right now compared to acquisitions.

Now if that changes and the market for acquisitions changes and those multiples come down, we can shift immediately.

Okay.

And then last on CapEx.

Greg, can you delineate what the CapEx will be, the buckets of the spending?

Buckets being between Apio and Lifecore or buildings and equipment?

Yes.

And maybe just within that, what exactly -- I mean, a little more specificity, like the type of project.

Well, this year -- yes.

This year, with the revised guidance, the majority of that this year is Lifecore.

And most of that's their new bio filling line, which should be up and running in June, which we're very excited about.

Some of the projects at Lifecore -- I mean, at Apio were delayed.

And so we originally thought this year would be in the mid-40s, and now it looks like it's going to be in the low 30s.

A lot of that difference is going to roll into next year.

They were just delayed projects.

They still need to get done.

And so we had expected this being a big year, big drop next year.

I think they're going to be pretty close year-over-year.

So this year, in the low 30s.

Next year is going to be close to that.

Okay.

And you have good visibility...

Most of it is in the area of equipment.

There is some buildings, but most of it is equipment for capacity.

And you have good visibility with Lifecore, the new customer and the new customer pipeline.

Or would that -- is that anywhere part of the spending at Lifecore?

Or is there then potential for additional CapEx if the pipeline performs better at Lifecore?

Yes and yes.

We obviously built the bio filling line in anticipation of filling customer needs.

And if those needs become much greater than what we're currently forecasting, we're fully prepared to add another line.

(Operator Instructions) 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.

Thank you, everyone, for joining us today to talk about Landec.

We look forward to our next call with you to update you further on our initiatives.

Thanks so much.

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

This does conclude the program.

You may now disconnect.

Good day.