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Landec Corporation (NASDAQ:LNDC)

F2Q 2013 Earnings Call

January 3, 2013 11:00 am ET

Executives

Gary Steele - CEO

Greg Skinner - Vice President Finance and CFO

Analysts

Tony Brenner - Roth Capital Partners

Morris Ajzenman - Griffin

Chris Krueger - Northland

Peter Black - Wynnefield Capital

Rick Fetterman - Fetterman Investment

Will Lauber - Sterling Capital Management

Matt Sherwood - Cooper Creek

Jim Schwartz - Harvey Partners

Craig Pieringer - Wells Capital

Operator

Good day, ladies and gentlemen. Welcome to the Landec Second Quarter and First Half Fiscal Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this program is being recorded.

I would now like to introduce your host for today's program, Mr. Gary Steele, Chairman and CEO of Landec Corporation. Please go ahead, sir.

Gary Steele

Good morning and thank you for joining Landec second quarter fiscal year 2013 earnings call. I have with me today, Greg Skinner, Landec's Chief Financial Officer. This call is being webcast by NASDAQ and can be accessed at Landec's website at www.landec.com under Investors on the Events and Presentation's page. The webcast will be available for 30 days through February 2, 2013. A replay of the teleconference will be available for one week until midnight Eastern Time, Thursday, January 10, 2013 by calling 888-266-2081 or 703-925-2533. The access code for the replay is 1600693.

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 year 2012.

Our strategy of focusing on our two core businesses Food and Biomedical Materials is paying off. We reported one of Landec's best quarters ever in yesterday's second quarter earnings release.

Revenues for the quarter grew 41% year-over-year to $114.7 million and net income grew year-over-year by 49% to $5 million before including the $3.9 million increase in income from the reversal of the earn-out liability associated with the GreenLine acquisition. We are increasing our guidance for the year for both, revenues and net income which I will talk about in more detail later in the call.

Our Apio Food business grew revenues and profits in both, our value-added specialty packaged business and our export business. Our growth was both, organic growth and growth through our recent acquisition of GreenLine Holding Company in April 2012.

Our second quarter milestones included, first, growing our Apio specialty packaged produce business unit volumes by 20% compared to the industry category growth of 9%. Second, increasing our overall Food business gross margins by 530 basis points. Third, completing our ERP systems integration work for GreenLine, which allows us to begin the cross selling effort with Apio customers and fourth completing our post acquisition GreenLine operational synergy efforts resulting in annual costs savings of approximately $1.5 million. Fifth, increasing our export revenues by 16% while maintaining margins. Sixth, launching the first of our family of vegetable super food products with significant initial demand nationally. And seventh, initiating the expansion of hydroponic growing facilities at our partner Windset Farm's Santa Maria, California site with doubling our production projected by year end 2013. And lastly, expanding Lifecore's biomedical sterile filling capacity for anticipated future growth with customers.

As disclosed in the yesterday's earnings release, we will not be paying the $3.9 million earn-out to GreenLine former owners as revenue targets for calendar year 2012 that they establish as part of our negotiations were not achieved largely because of the underperformance of our few new products during the last six months of 2012. Our internal projections for GreenLine for fiscal year 2013 that ends May of 2013 are being met and we expect GreenLine to achieve its earnings targets for the fiscal year 2013. We are very pleased with the overall performance of GreenLine.

Also disclosed in the yesterday's earnings release was that Chiquita has elected to go to a non-exclusive status staring January 1st of this year. And as a result, Chiquita will not be required to pay the minimum gross profit for calendar year 2013. Therefore, Chiquita will pay the company for packaging membrane products purchased on a per unit basis and the company is now entitled to sell its BreatheWay packaging technology for bananas, avocados and mangos to others partners. We will begin discussion with other potential partners early this year.

However, if Chiquita continues to purchase membranes at its current rate and we are not successful in adding new partners, this change will result in a net income reduction of approximately $200,000 in this fiscal year and approximately $750,000 in fiscal year 2014.

In a separate press release yesterday, we communicated that a restatement of our first quarter earnings has been filed with the SEC, because we miscalculated the fair market value of our investment in Windset Farms at the end of the first quarter of this fiscal year 2013. The $2.9 million correction in the restated financial statements for the first fiscal quarter reflects the miscalculation and also reflects a portion of the $500,000 increase in our share of the increased fair market value of Windset for fiscal year 2013.

The company has updated its policy and control surrounding its accounting for the change in fair market value of Windset to ensure that in the future, such changes are reported properly each quarter.

Let me turn it over to Greg for details of the quarter and the first six months results.

Greg Skinner

Thank you, Gary. In yesterday's news release, Landec reported for the second quarter fiscal year 2013, revenue increase of 41% to $114.7 million versus revenues of $81.6 million for the second quarter of last year. The increase in total revenues during this year's second quarter compared to last year's second quarter was primarily due to, first, $24.3 million of revenues from GreenLine, which we acquired in April of 2012.

Second, a $7.6 million increase in revenues and Apio's non-GreenLine value-added business, which includes Apio Cooling and Apio Packaging, as a result of a 20% increase in unit volume sales of fresh-cut specialty packaged products due to new product offerings, new distribution gains and overall growth in the fresh-cut vegetable category. And third, a $3.9 million increase in Apio's export revenues due to a 3% increase in export unit volume sales and favorable pricing.

These increases in revenue were partially offset by $1.5 million decrease in revenues at Lifecore due primarily to product shipments that had historically occurred during the company's second quarter being delayed until the third quarter this year and a $1.2 million decrease in corporate revenues primarily due to the termination of the Monsanto licensing agreement at the end of the second quarter of fiscal year 2012.

For the second quarter of fiscal year 2013, net income increased by 167% to $8.9 million, or $0.34 per share compared to net income of $3.3 million, or $0.13 per share for the second quarter of last year. The increase in net income during the second quarter of fiscal year 2013, compared to the second quarter last year, was due to a $9.6 million net increase in Apio's pre-tax income.

The increases in Apio's pre-tax income were comprised of, first, the $3.9 million non-recurring reversal of the GreenLine earn-out liability. Second, $5.3 million from GreenLine. And third, a $1.3 million increase from Apio's non-GreenLine value-added and export businesses, partially offset by interest and financing expenses and amortization expenses associated with the acquisition of GreenLine.

The $9.6 million net increase in Apio's pre-tax income was partially offset by, first, a $1.3 million reduction in license fees from the termination of the Monsanto license agreement. Second, a $2.1 million decrease in pre-tax income at Lifecore due primarily to product shipments that had historically occurred during the company's second quarter being delayed until the third quarter this year. And, third, an $871,000 increase in the income tax expense.

For the first six months for fiscal year 2013, revenue is increased 40% to $216.7 million versus revenues of $154.9 million for the same period last year. The increase in revenues during the first six months of fiscal year 2013, compared to the first six months of last year was due, first, $44.3 million of revenues from GreenLine. Second, a $12.9 million increase in revenues in Apio's non-GreenLine value-added businesses and third a $7.9 million increase in Apio's export revenues. These increases in revenues were partially offset by $643,000 decrease in revenues at Lifecore and $2.6 million decrease in corporate revenues primarily due to the termination of the Monsanto license agreement.

For the first six months for fiscal year 2013, net income increased from 158% to $13.3 million, or $0.50 per share compared to net income of $5.2 million or $0.20 per share for the same period last year. The increase in net income during the first six months of fiscal year 2013, compared to the same period last year was due to $15.4 million net increase in Apio's pre-tax income.

The increase in Apio's pre-tax income were comprised of, first, the $3.9 million non-recurring reversal of the GreenLine earn-out liability. Second, $6.5 million from GreenLine. Third, a $2.7 million increase from Apio's non-GreenLine value-added and export businesses. And fourth, a $4.1 million increase in the fair market value of our Windset investment compared to the increase in Windset's fair market value during the first six months of last year. These increases in Apio's pre-tax income were partially offset by interest and financing expenses and amortization expenses associated with the acquisition of GreenLine.

The $15.4 million net increase in Apio's pre-tax income was partially offset by a $2.7 million reduction in license fees from the termination of the Monsanto agreement. Second, a $2.7 million decrease in pre-tax income at Lifecore. And, third, a $2.3 million increase in income tax expense. Landec ended the second quarter fiscal year 2013 with $6.8 million in cash and marketable securities.

During the first six months of fiscal year 2013, cash and marketable securities decreased by $15.4 million due primarily to, first, capital expenditures of $3.3 million for property, plant and equipment. Second, principle debt payments of $7.3 million and, third, the full earn-out payment of $10 million related to the acquisition of Lifecore. These decreases were partially offset by cash flow from operations and the tax benefits from stock-based compensation.

At November 25, 2012, at the end of our second quarter, the company had $19.7 million available to borrow under its lines of credit.

Gary, back to you.

Gary Steele

Yes. Thanks Greg. And, let's take a moment to talk about the outlook for the year and our priority for sustaining growth. Our original guidance for the fiscal year 2013 was to grow revenues by approximately 13%. And net income by 25% to 35% compared to fiscal year 2012. Based on the results of the first half of fiscal year 2013, and borrowing any major adverse financial impact from winter weather in our food business, we expect revenues to grow 33% to 38% and net income to grow 60% to 70%, which includes the additional $3.9 million, or $0.15 per share that comes from the non-recurring earn-out adjustment recorded in the second fiscal quarter.

In addition, we expect to generate $20 million to $25 million in cash flow from operations and we expect to spend approximately $8 million to $9 million in capital expenditures. Our market focus is on healthy living through the development and commercialization of healthy, prepackaged foods and innovative materials for medical applications.

Looking ahead, we see a number of growth drivers for our two core businesses with our goal to sustain very good annual revenue and earnings growth over the next five years. For our Food business, we see continuing category growth for the fresh-cut produce sector as consumers seek healthy, fresh and convenient food choices.

We expect to continue to exceed the industry category growth by continually launching innovative new products and by commencing cross selling activities between GreenLine and Apio. We also expect new growth by beginning to tap the food service market, which is new for us such as restaurants, schools and hospitals. In addition, we expect earnings growth from our investment in Windset Farms as they expand their California production facility and increase their sales.

For our Medical Materials business at Lifecore, we see the increased population of people over 50 driving market demand for surgeries in ophthalmology such as cataract surgeries and increases in orthopedic joint therapies. We also see growth coming from new Lifecore customers and new products such as those that recently received FDA approval.

Lifecore's ability to now sell our HA materials in powder, liquid and filled sterile syringe format further expands Lifecore's customer base. In addition, Lifecore is pursuing growth through partnering in areas where partners can capitalize on Lifecore's expertise in fermentation, separation in sterile filling capabilities. All-in-all, an excellent quarter.

We are now ready for your questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). Our first question comes from the line of Tony Brenner from Roth Capital Partners.

Tony Brenner - Roth Capital Partners

Good morning. A couple of things. You earlier had projected that Lifecore's revenues for the year would be up 15%. That now requires in excess of 30% increase in the second half of the year. Is that still a realistic objective?

Greg Skinner

Yes.

Tony Brenner - Roth Capital Partners

Okay. My second question has to do with your guidance. The increase in your earnings guidance, it appears reflects only the $0.15 reversal of the GreenLine charge and the $0.01 for the full year recalculation from one set, but the operating outlook basically remains intact even though when the first half of the year your operating earnings exceeded that growth rate that you are implying for the full year.

I wonder if you could just expiate on that a little bit, because the implication is that the outlook on an operating basis in the second half of the year is deteriorating and that doesn't really appear to be the case.

Greg Skinner

Tony, this is Greg. Actually, we did increase our original guidance. You do the math, the 25% to 35% would equate to about $0.61 and $0.66 EPS. Take the $0.15 out of the equation, but for this earn-out and we are at $0.64 to $0.68, so we did actually increase the outlook for the year.

As far as the second half goes, there is a few things going on here. A year ago, the Windset was about $0.12 higher in the second half than it will be this year, because last year the lion share of the increase occurred in the third and fourth quarter whereas this year as you could see from those press release that happened in the first and second quarter. That's about $0.12 just compared to year-over-year.

Second, we got interest expense from all the debt incurred at GreenLine that we did not have in the second half of last year. Third, we got amortization from loan amortization fees along with amortization in the customer base that wasn't there last year.

Gary mentioned that Chiquita has gone exclusive that's going to be about $200,000. That's after-tax for this year. So, if you start adding all those up, the one-offs, I think the biggest change year-over-year and what works for instance as we speak or at least we experience that in December is that it's rained a lot here in out here in California, so we are anticipating sourcing issues that we did not have a year ago. Year ago was perfect.

Gary Steele

Tony, the only thing I would add is, let us get through the winter month, feel better about all that sourcing potential risk and then update the guidance at the end of the third quarter. So, there may be some conservatism in this, but the businesses are not deteriorating they are actually doing well.

Tony Brenner - Roth Capital Partners

Fair enough. One last point. GreenLine or part of your explanation for the GreenLine revenue shortfall versus the earn-out bar had to do with the disappointing new product sales. What can you say about that?

Greg Skinner

Basically, in any negotiation between buyer and seller there's different degrees of optimism in projections and things like that. The sellers believe that a series of about four new products would be gangbusters. We were a little bit jaundiced about that. And, from the way we rectify that is, we said let's put that in an earn-out mode and we were more accurate I guess in our thinking than they were and it fell short and therefore we don't pay the earn-out, but GreenLine is just hitting all cylinders in terms of earnings and we are very pleased with the business.

It's just that, through that negotiation process, we came up with this earn-out mechanism to protect our interest in case those four new products that they were really bullish weren't materialized.

Tony Brenner - Roth Capital Partners

Fair enough. Thank you very much.

Greg Skinner

Thank you, Tony.

Operator

Thank you. Our next question comes from the line of Morris Ajzenman from Griffin. Your question please?

Morris Ajzenman - Griffin

Hi, guys. Just a quick question here on, I am looking at the gross margins. They came in, if my numbers are right, 16.1% for the quarter. With the revenues being up so strong, I guess part of the answer will be a mix. I would have thought the gross margins could have been better. I guess part of that is Lifecore, but you maybe just touch on gross margins and mix?

Gary Steele

Yes. It's all Lifecore. I mean, it's not partially Lifecore. It is Lifecore. I mean, a year ago in the second quarter they did 57%, and it has to do with the shipments that were shifted from the second quarter to third quarter this year. They are very high margin shipments. And, last year, those shipments in revenues and corresponding gross profit was recognized in the second quarter. This year it's going to be in the third quarter. And, as a result, their overall margins went from 57% in the second quarter last year to 40% this year, so that's the entire explanation. And if you look at Apio, they went from 8.9 to 14.2, so a huge increase.

Morris Ajzenman - Griffin

And, would that imply then third quarter gross margins up, I'd use the word materially. You can use whatever you want sequentially because of Lifecore now heading in the third quarter much more materially?

Gary Steele

Yes. Third quarter should be higher as result of that. Now, keep in mind. I just mentioned this one of the answer to Tony's question that the third quarter is that the risky sourcing quarter for us. It's also the quarter in which our sourcing cost the most during any other period of the year, because in the case of the value-added business out here in California, everything comes from basically the Mexican border, so we had to freight it up that's actual cost, it cost more to grow it in the winter and then green beans cost a lot more to grow in the winter. So, the third quarter is typically going to be. Not typically, it's going to be the lowest margin quarter of the year for Apio.

Morris Ajzenman - Griffin

Two quick questions. One is a quick follow-up to Tony's question asking about the disappointing new product sales, specifically GreenLine. Are those new products still in the offering and is there any hope that that picks up?

Gary Steele

I would say that no is the answer. By the way, their core business is strong. I mean, they are having a very good year, their core products are good. We are extremely pleased with the company. It's just that there was an effort to under the last ownership to try out a few new products that had some complexity to it and it just didn't pan out, but we are heavy on new product development as you know Morris, and so we'll be looking at new products at GreenLine and Apio continuously just that this set of new product set that were part of the earn-out just didn't pan out. So, sometimes that happens. You regroup and move on, but GreenLine's having a pretty stellar year.

Morris Ajzenman - Griffin

Last question. Can you just talk any sort of granularity, specifically into December, what seem so far in this current quarter?

Gary Steele

Well, we are a little worried about some sourcing issues and Morris if you had been on the west coast, you would know that there was ton of rain throughout California in late November through till about a week ago and so we don't have all the numbers in, but we are concerned about some sourcing issues in December, but right now it's sunny sky, so we are hoping and have our fingers crossed that we'll get through get through this just fine, but nothing huge. It's just when you get all that rain you get into some quality issues and we only deal with high quality products. We are not going to ship something that's less than that meets our standards.

Morris Ajzenman - Griffin

And outside of that everything continues on track?

Gary Steele

Yes. Good rollout of some new products at Apio. We are heavily invested in new product development now. That's our focus in our food business for the next year or two. We want to be market leaders in super foods that are extremely high in nutrition and that's our new product development focus. We've got a team really doing a nice job. We've got one lean new product that's rolling out very quickly and very well nationally and we have others to follow.

Morris Ajzenman - Griffin

Thank you, Morris.

Operator

Thank you. Our next question comes from the line of Chris Krueger from Northland. Your question please?

Chris Krueger - Northland

Hi. Didn't talk too much about Windset. I know they are planning to double their acreage. Can you give us some indication on the timing of that? When that should be finished and when it should begin planting and harvesting?

Gary Steele

They started and their plan is to hopefully be up and running by the end of this calendar year and they did a good job of staying to their schedule on their first phase, and this is a doubling of that capacity and we believe they have the highest yielding tomato facility in the world right now. And, they are rocking and rolling, so they plan to double their capacity and it should be up running by the end of this calendar year.

Chris Krueger - Northland

Okay. Can you remind on your ownership of Windset? Does your percentage remains the same after they double that?

Greg Skinner

Yes. They are doing the second phase through debt financing. There was no capital call; we maintain no dilution of our 20% interest, no change in our 7.5% annual dividend.

Chris Krueger - Northland

All right. That's all I got. Thanks.

Greg Skinner

Yes. Thanks, Chris.

Operator

Thank you. Our next question comes from the line of Peter Black from Wynnefield Capital. Your question please?

Peter Black - Wynnefield Capital

Just a quick question on the accounting for the Windset investment. You gave a chart on your sort of questions and answers, page where you show your revised projections for the change in the fair market value. How are you able to make a projection for what you think the fair market value, the depreciation will be? And, also and then why did you revise down about $1 million in a third quarter slightly over that in the fourth quarter the changes in fair market value.

Gary Steele

Okay, Peter. This is Greg. It's little bit complex. I'll try to make it as simple as possible. First off, let's talk about what result in the restatement, because I think that will probably pretty much answer most of it.

What we did, what our interpretation was, the company was that you go out and you estimate. And by the way, the way you get to the number is you use projections from the company Windset in this case and you do a discounted cash flow model, and you discount it back. You used the inputs from a third-party appraiser or you use a third-party appraiser which we did in the second quarter and that's how we came to the $6.25 million actually came up with that amount based on Windset projections and their discount rates that were also approved by. Remember, the discounted cash flow is all based on an in-day which is the put/call date in the agreement which is the end of our fiscal year 2017.

So, all that's discounted back, the value is derived. In this case, the original estimate was $6 million and turned out to be $6.5 when we did the official appraisal. And what the company did in our interpretation of the accounting rules was you took that change, the $6 million and you then discounted it back by quarter, so it's relatively flat over the years is kind of along the lines of our original plans of $1.2 million, $1.4 million, $1.6 million, $1.8 million. That is an incorrect interpretation of the accounting rules.

And these rules, if you want to read them, I have a great time. They are very complicated. You're supposed to actually discount back the balance sheet value to the quarter in which you say there's a change in this case the initial change is the first quarter and that's what we didn't do. And by doing that exercise you will find that instead of reporting what we did report in the first quarter we should have recorded $2.9 million more. That may not have made any sense whatsoever, but that's the reality.

Peter Black - Wynnefield Capital

That's okay. Yes. It's tough to comprehend, but it does explain why the numbers were much higher in the first quarter and that the revision downward in the latter part of the year, doesn't have any reflection on the business trend turning south or anything like that.

Gary Steele

Not at all. It's all timing here.

Peter Black - Wynnefield Capital

Yes. Okay. Great. Well, thanks for that. Appreciate it.

Gary Steele

Yes. Okay. Great, Peter. Thanks.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Rick Fetterman from Fetterman Investment. Your question please?

Rick Fetterman - Fetterman Investment

Good morning. Back to GreenLine for just a second, was there any disagreement by the sellers or with the sellers regarding the decision on the earn-out or the method of calculation?

Gary Steele

No.

Rick Fetterman - Fetterman Investment

I mean after the fact when you said you didn't hit the number we don't have to pay you?

Greg Skinner

Well, we haven't actually closed the calendar year yet. We will be closing December here, well actually probably this week. But we send them a quarterly report every quarter. Through September, it was short but there was still a shot to make it up in the last quarter of the year, calendar year. But they were pretty dependent on these new products and they knew that. It was their projection and they didn't materialize, so this should not be a surprise at all.

Gary Steele

Yes. Rick just in black and white. There is no grey here.

Rick Fetterman - Fetterman Investment

Okay. All right. With regard to Windset spring, I think it's the spring of 17 put/call date is. If nothing happens there, is that a perpetual put/call or what have you?

Gary Steele

Yes. This keeps going.

Rick Fetterman - Fetterman Investment

Okay. At the end of this year, do you still anticipate the gross profit margins at Lifecore to still be in the 50% range?

Greg Skinner

Yes, or higher. Yes.

Rick Fetterman - Fetterman Investment

Okay. With deemphasizing the technology as you've mentioned, technology side of the business, you had mentioned a while back or a little while ago and concentrating more on Apio and Lifecore, should we expect any decline in the level of R&D? If so, to what extent?

Gary Steele

Okay. Fair question. Let me make the distinction. What I had mentioned in recent months is a decision on our part to really focus on our two core businesses and deemphasize and minimize the effort regarding licensing agreements. So, we are not walking away from technology. If anything, we are innovators. We are innovative in our food business, we are innovators at Lifecore. So, technology is still important to us, but there are less licensing deals for us because it's too hit and miss and we are too dependent on partners to fulfill our dreams.

In our two core businesses we are more in control of our destiny, so we are looking at the overall R&D levels that we will be using going forward. There will probably be some modest reductions, but nothing huge, Rick.

Rick Fetterman - Fetterman Investment

Okay. Two more quick questions. Can you give us an estimate as to the level of debt you expect to repay in the second half based on what you know today? I mean, something can happen between now and the end of May, I realize.

Gary Steele

Yes. Well, as I said, there is a set principle amount that is going to be reduced each quarter as a result of just have them pay the principle. The key is going to be how much of the line that we are into right now for $7.5 million that we could it off between now and year-end a lot of it has to do with is there a better use of the cash. Remember, this is a line where we pay LIBOR plus two, so about 2.25 on.

If we can get a much better return by using cash to buy equipment for instance, or to automate something at GreenLine or Apio or Lifecore that cash is better used there than to pay down the line. So, they are very minimum. We'll pay off the what is it? $4.5 million to $5 million in principle in the second half and then we'll just see how much of the line it makes sense to pay down.

Rick Fetterman - Fetterman Investment

My last question is, I wonder if you could give us a quick update on the adhesive technology. You had mentioned in the release that you are developing, what? Is it Nitta, is that how you pronounce that?

Gary Steele

Yes. Nitta Corporation. Yes. Nitta is a publically traded company headquartered in Osaka. They've been a long-term partner of ours. We had licensed to them a number of years ago on an exclusive basis, the use of our adhesive technology in the field of electronics. And, what our adhesive technology does?

Rick, you may recall that we can impose a temperature switch in our materials and around that temperature switch by cooling or heating the materials we can change their properties rather dramatically. And what we are able to do with adhesives is, they can make for example a tape for electronics purposes for making semiconductors whatever and that tape can be extremely adhesive.

I mean it will make duct tape look like a weak adhesive and then by heating it or cooling it, it will release. It just loses its adhesiveness just by changing the temperature. And so, they approached us and said that there are some expanded markets that they are interested in they needed to make some modifications and improvements in their technology that they were developing using our core technology and we are assisting them.

So, it's not really a new licensing partners, it's a new licensing deal with an existing partner and that's why we went forward with it and they compensate us for doing that and we get a royalty from them every quarter.

Rick Fetterman - Fetterman Investment

All right. Thank you very much. Appreciate it.

Gary Steele

Thank you. Thanks, Rick.

Operator

Thank you. Our next question comes from the line of Will Lauber from Sterling Capital Management. You question?

Will Lauber - Sterling Capital Management

Good morning.

Greg Skinner

Good morning, Will.

Will Lauber - Sterling Capital Management

Good morning. With the Chiquita, the license agreement, there's no longer non-exclusive, but you wouldn't be able to make exclusive deals with other companies that.

Gary Steele

Right. Yes, they are able to maintain a non-exclusive and they are going through some challenges as you may know if you follow Chiquita changes CEO and layoffs and all that kind of stuff, so they are struggling to move on to a better plank, but they've been a good partner over the years, they've paid us substantial sums of money, not only in terms of purchasing a product, but also in terms of rights to maintain exclusivity. So, they maintain those rights, but we have the ability now to go to others and approach them and see if they are interested in licensing this technology on a non-exclusive basis.

Will Lauber - Sterling Capital Management

How long can they stop you from entering an exclusive relationship with someone else?

Gary Steele

It's a one year.

Will Lauber - Sterling Capital Management

One year?

Greg Skinner

One year. Yes.

Will Lauber - Sterling Capital Management

Is there any options or that's just it?

Gary Steele

Well, they can always come back at the end of the year and say we've like to take exclusivity for next year and I guess I should look this up in the agreement prior to this call. I don't know if that's a unilateral or that's an option we could give them.

Greg Skinner

We'll get back to you on that, Will. I am little fussy on that one too.

Will Lauber - Sterling Capital Management

Okay. You guys say that you will be starting contacting people. Are you optimistic on this at all, or and then.

Gary Steele

Yes. I have absolutely no expectations on this, because we haven't been talking to other people for a number of years. So, have no idea. Well, really, honest answer is no idea.

Will Lauber - Sterling Capital Management

Okay. What kind of priority is this going to be? I know you've been kind of deemphasizing this. Would this still fall under molly?

Gary Steele

Yeah. This would Molly and Ron in that team. This would be then what I'd would call the medium priority. We are frankly challenged by the success of some of these super food products that we are rolling out. It's got that team really focused and busy right now. So, it's certainly in the medium-high priority, but it's not at the top of our list.

Will Lauber - Sterling Capital Management

Okay. All right. Thanks a lot.

Gary Steele

Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Matt Sherwood from Cooper Creek. Your question please?

Matt Sherwood - Cooper Creek

Just had a quick question on the accounting and you went into a bit. Just trying to understand one issue, so if Windset never increase their projections, I guess there was a component of the valuation change that's just the accretion of the discount rate? I mean, were you able to unpack the earnings between the accretions of the discount rate versus the sort of increase in projections?

Gary Steele

I can't tell you exactly what that percentage is, but I could tell you that virtually most of the increase was a result of increase in projection.

Matt Sherwood - Cooper Creek

Okay.. Fair enough. Great. Then on GreenLine, so basically if you look at year-to-date your revenue as you've said on the earn-out is below what you thought it would be. It's running well below $100 million annualized, but the EBITDA is running above $11 million annualized. Can you sort of walk through how the margins have been outperforming your expectation there?

Greg Skinner

Well, absent the summer drought, July and August were little tough on the sourcing side. The third quarter was fantastic from a sourcing of green bean standpoint, but we are moving into the winter month and when you get into the winter month the sourcing basically comes from both, primarily Florida but also Mexico and it just costs a lot more to grow and source green beans in the winter month than it does in the summer months when its literally in your backyard, because the lion share of green beans are grown in Ohio Valley and that's where GreenLine's. So it's the third quarter particularly is a much lower margin quarter for the green bean business and we obviously didn't experience that last year, because we didn't buy them until April and we know that were throwing that into the projections.

As far as revenues go, our original guidance was $95 million to $100 million. Our projections are to be in that range. It will probably be at the lower end of the range and a lot of that has to do with what Gary had already mentioned is that some new products that were in the plan that the former owners were pretty bullish on have just not materialized.

Gary Steele

Matt, let me just remind you also the other benefits besides the quantitative benefits that we are seeing with GreenLine is that we now have five sites in the Midwest and East Coast that we didn't have before. We are now starting to make product that has been an Apio type of product in the Midwest now so that we can serve the East Coast on next day delivery those type of things.

We also have for the first time an inroad into food service, 30% of GreenLine's revenues come from the food revenue sector. That's all new for us, so that gives us an opportunity with some very talented sales people to approach food service, operators and begin to design products that are not only GreenLine products but are more traditional fresh-cut veg products to go in the food service and so we have got the benefit of logistics.

Now market presence, inroads to food service, and as we mentioned in our comments, we also were able to get some synergy operating synergies in the first half of owning them first half of this year in terms of reducing some of our operating expenses by $1.5 million. So, so far so good with GreenLine.

Matt Sherwood - Cooper Creek

Great. That's just great. I guess final question the export side, so you sort of said hey when we gave guidance originally last year was just a once in a lifetime. Here it's way above trend and then this year is better than that so has that business structurally changed or do you think at some point it's just going to normalize and you won't know when or why?

Gary Steele

Would you accept an answer I am not sure? That's a very good question. You know one year you say okay. That could be an aberration. One-and-a-half years you're going umm, well maybe there is something fundamental here but this thing export does go in cycles and but maybe there is a fundamental shift here but it would be too soon and be premature to declare victory here but they did have a very good first half. No question about it. Let's see what they do in the second half.

Matt Sherwood - Cooper Creek

Okay. Sorry. One last final question. The sourcing issues, what's your base case expectation for? Are you assuming a little disruption, but not much? I mean, is there a risk if the disruption comes out worse than you think? Is there a risk to the guidance? The guidance is contingent on a relatively stable sourcing profile, but with some minor hiccups?

Greg Skinner

I think, we are going to have some bumps, but I think we are ok. So you know borrowing in a flooding out here or freezes in Florida, there were some rough spots in December on the weather, but we are assuming will be okay.

Matt Sherwood - Cooper Creek

Fair enough. Great. Thanks a lot.

Gary Steele

Thank you.

Operator

Thank you. Our next question comes from a line of Jim Schwartz from Harvey Partners. Your question please?

Jim Schwartz - Harvey Partners

When you talked about the one-stop shopping between GreenLine and Apio, can you kind of quantify that opportunity going forward? I mean, how many customers of GreenLine are desiring eat smart and the other way around. I mean how big could that potentially be?

Gary Steele

Don't know is the honest answer. I know you don't like that answer but that is the answer. It could be substantial if you give us a few years to do this. Remember, the first thing we had to do is get our house in order. We were in different systems Apio and GreenLine were on different systems. We couldn't talk to each other really well. We couldn't have one system for order entry et cetera, tracking shipment et cetera. It's mostly finished, we stopped working on that over the holidays, because the holidays were so demanding.

We'll finish this up real soon and then it gives the ability to cross-sell, and remember they were in bad, I am giving you rough numbers if you accept rough numbers. They were about 70% of retail stores. We were in about 35% to 40% of retail stores. Then when we combined the two, we now have a physical presence of some type of product now as a combined company in 80% of retail stores.

So, we really think there is a substantial opportunity over the next several years. Not several quarters, but next several years. And the reason it takes few years, because some of these customers were on multi-year contracts, some of them need to be veined away from long-term alliances with others that kind of thing. But, it could be substantially Jimmy. It's just that we don't know how to quantify it yet.

Give us a little bit of time where we can show some successes and then we can maybe start to put some quantification to this, but actually that was one of the major driving forces for our acquisition strategy was to combine our customer base and cross-sell, so we'll see.

Jim Schwartz - Harvey Partners

Great. And, also I am sure you will figure it out. The FDA approval by Lifecore's customer, did that FDA approval happened recently and then you are gearing up for the next few quarters? How long did the ramp up take for FDA approval and how big is that?

Gary Steele

Yes. It happened right at the end of our last fiscal year, which you know is May year end, and it takes time to ramp up. That's what we have been doing is ramping up. It can be immaterial. It is material in terms of as things get fully get rolled out and launched and everything gets in place. It's going to take this year to really ramp it up.

Jim Schwartz - Harvey Partners

Great. Okay. Thanks, guys. Great job.

Gary Steele

Yes. Thanks, Jimmy.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Craig Pieringer from Wells Capital. Your questions please?

Craig Pieringer - Wells Capital

Gary, how are you? I have to admit since I came to your Analyst Day, my family has become a fan of sweet kale salad, so that's been a.

Gary Steele

Glad to hear it.

Craig Pieringer - Wells Capital

Yes. And of course, your food focus has always been on healthy, fresh and convenient, but I think Gary you mentioned earlier something about a new lean product initiative. Is that something truly different or can you characterize what do you mean by that?

Gary Steele

I think you misheard. Our focus is where our technology can make a difference in that's in respiring produce, living respiring produce, so that's where we had value so that would be the vegetable family, that could be the salad family, it could be the fruit family and that's our focus. So, no I didn't mean to say or didn't say lean, what did I say we believe that an emphasis on super foods that are loaded with nutrients that have vitamins and the antioxidants and things like that and labeling it that way. You will see in this, I think you know Craig in a sweet kale salad the label right in the front says seven super foods. And so we also enjoy that over the holiday as well and it was a big hit. So, no it's still our focus on fresh-cut produce that's in our specialty package.

Craig Pieringer - Wells Capital

Okay. Good. Thanks for the clarification.

Operator

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

Gary Steele

Just appreciate everybody's interest in Landec and what we are doing and thank you for being on this call today. And we look forward to keeping you apprised of our progress and our plans as we go forward. Many thanks.

Operator

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

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