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Landec Corporation (NASDAQ:LNDC)

F2Q2012 Earnings Call

January 04, 2012 11:00 am ET

Executives

Gary T. Steele – Chief Executive Officer

Gregory S. Skinner – Chief Financial Officer

Analysts

Tony Brenner – ROTH Capital Partners

Peter Black – Winfield Capital Corporation

Morris Ajzenman – Griffin Securities

Chris Krueger – Northland Capital Markets

Warrick Jervis – Trailhead Asset Management, LLC.

Michael Needleman – Preservation Asset Management

William Lauber – Sterling Capital Management

Rick Federman – Federman Investments

Peter Black – Winfield Capital

Nelson Obis – Winfield Capital

Operator

Good day, ladies and gentlemen, and welcome to the Landec Second Quarter Fiscal Year 2012 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 follow 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 T. Steele

Good morning, and welcome to Landec’s second quarter fiscal year 2012 earnings call. I have with me today Gregory Skinner, our Chief Financial Officer.

This call is being webcast by Thomson Reuters and can be accessed at Landec’s website at www.landec.com on the Investor Relations page. The webcast will be available for 30 days through February 3, 2012. A replay of the teleconference will be available for one week until midnight Eastern Time Wednesday, January 11, 2012 by calling 888-266-2081 or 703-925-2533. The access code for the replay is 1561486.

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 2011.

As reported in yesterday’s earnings release, for the second quarter of fiscal year 2012, revenues increased 16% and net income increased 63% compared to the second quarter of fiscal year 2011. Notably, our Apio food subsidiary had a very good quarter with revenues increasing $10.6 million or 18%, resulting in a $2.3 million or 155% increase in pre-tax income.

For our Lifecore subsidiary, revenues increased 10%, while pre-tax income was flat compared to the second quarter of last year due to the timing of production, which resulted in reduced overhead absorption. We do expect production at Lifecore to be greater in the second half of fiscal year 2012, resulting in higher absorption.

For the first six months of fiscal year 2012, revenues increased $19.8 million, or 15%, and net income increased $793,000, or 18%, compared to the first six months of last year. In addition, during the first six months of fiscal year 2012, we paid down debt by $2.3 million to $17.5 million, resulting in a debt-to-equity ratio of 12% at the end of the second quarter. Also in the quarter, we purchased 880,060 shares of our stock in the open market under our stock buyback plan at a total cost of $4.8 million.

Let me turn the discussion of our financial results and the details of that over to Greg.

Gregory S. Skinner

Thank you, Gary, and good morning everyone. In yesterday’s news release, Landec reported that for the second quarter of fiscal year 2012, revenues increased 16% to $81.6 million versus revenues of $70.2 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, a $6 million increase in Apio’s value-added businesses, which includes the fresh-cut specialty packaged vegetable business, Apio Cooling, and Apio Packaging; second, a $4.6 million increase in Apio’s export business; and third, an $813,000 increase in Lifecore’s biomaterials business.

For the second quarter of fiscal year 2012, Landec’s net income increased 63% to $3.3 million or $0.13 share compared to $2.1 million or $0.08 per share for the second quarter of last year. The increase in net income during the second quarter of fiscal year 2012 compared to the second quarter last year was due to $1.4 million of pre-tax income from our investment in Windset Farms and a $1.1 million increase in pre-tax income from Apio’s value-added and export businesses. These increases were partially offset by an $840,000 increase in the income tax expense due to higher pre-tax income and by an increase of approximately $400,000 in marketing and business development expenses.

For the first six months of the year 2012, revenues increased 15% to $154.9 million versus revenues of $135.1 million for the same period a year ago. The increase in revenues during the first six months of fiscal year 2012 compared to the first six months of fiscal year 2011 was due to first, an $8.8 million increase in Apio’s value-added business; second, a $9.5 million increase in Apio’s export business; and third, a $1.6 million increase in Lifecore’s biomaterials business.

For the first six months of fiscal year 2012, net income increased 18% to $5.2 million or $0.20 per share compared to net income of $4.4 million or $0.16 per share for the same period last year. The increase in net income during the first six months of fiscal year 2012 compared to the same period last year was due to $1.7 million of pre-tax income from our investment in Windset Farms and a $679,000 increase in pre-tax income from our Apio’s value-added and export businesses.

These increases were partially offset by first, a $650,000 decrease in pre-tax income as a result of accruing performance-based bonuses at Apio and Corporate which were not accrued during the first six months of last year; second, a $598,000 increase in the income tax expense due to higher pre-tax income; and third, a $236,000 decrease in pre-tax income for Lifecore due to the timing of production, which resulted in reduced overhead absorption.

Turning to Landec’s financial position during the first six months of fiscal year 2012, cash decreased by $7.8 million due to; first, the purchase of $4.8 million of our common stock on the open market through our stock buyback plan; second, the pay back of $2.3 million of debt; third, the purchase of $3 million of equipment; and fourth, a $7.4 million increase in trade receivables due to shipments of product in late November. These decreases in cash were partially offset by generating $5.2 million of net income and from $5 million of non-cash expenses items such as depreciation and amortization and the tax benefit from stock-based compensation.

Gary, back to you.

Gary T. Steele

Thanks, Greg. Let’s discuss the substantial progress achieved in the second quarter and the first six months of fiscal year 2012 and our outlook for the company overall.

Apio has experienced an increase in demand for not only its fresh-cut vegetable products and bags, but also more recently even trade products have shown a slight increase in demand. The value-added fresh-cut vegetable category has resumed volume growth with the overall industry category growing now at 5% over the last six months. Apio’s growth for fresh-cut vegetable products during the last six months has been more than double the industry category growth, while at the same time slightly increasing gross margins in our value-added business.

Lifecore continues to perform well. As a reminder, Lifecore’s biomaterials are directed towards ophthalmic, orthopedic and veterinary medical applications, which command high margins. Lifecore continues to realize gains and productivity in its manufacturing process at its facility in Chaska, Minnesota.

Consistent with our plan, Lifecore is expanding its customer base and also expanding product sales to existing customers. In addition, we’ve identified new investment opportunities in the hyaluronic acid biomaterials arena, which we will be focusing on in the upcoming quarters. We see Lifecore continuing to realize an annual gross margin of approximately 50%, though it may fluctuate quarter-to-quarter due to product mix and an annual EBITDA margin of around 30%.

In the licensing area, we continue to support Chiquita in its Chiquita-to-Go banana program and in its Fresh and Ready avocado program, both of which use our BreatheWay packaging technology. More recently, we’ve been working with Chiquita to create an optimal atmosphere within shipping containers in the field of global transport of bananas.

Chiquita has a sizeable shipping container technology business that fits well with Landec’s long-term interest in using modified atmosphere technology for preserving produce during global transport. Chiquita purchased their first order of BreatheWay membranes for containers during the second quarter of fiscal year 2012. The container program is in the initial commercial testing phase.

In the Ag arena, now that the Monsanto agreement has terminated, we’ve been working with an Ag consulting firm to investigate strategic options for our Intellicoat seed coating technology. We’ve had discussions with several crop seed treatment and crop protection companies who so far are expressing interest in our technology. We’ll just keep you appraised of that. Bottom line, we’re making substantial progress in our existing core businesses.

Looking to the future, we’re focused on six primary goals. First, grow Lifecore revenues and earnings by adding new customers and expanding business with existing customers based on Lifecore’s strengths in ophthalmology, viscoelastic materials and sterile filling, plus investigating new applications for HA materials in the form of new medical devises or adjuvant therapies. Lifecore has a track record of retaining customers as our biomaterials are spec into customer FDA filings and manufacturing processes.

Second priority is to grow Apio’s food business and maintain Apio’s margins by demonstrating superior product quality and customer service, while continuing to develop new innovative products and enhancing our operating efficiencies. We’re developing several new specialty package product platforms for launch beginning in the spring of 2012, which will broaden our product line and help increase margins overall. The future growth of our Apio food business will come from continuing to increase market share, from the launch of new products, from increasing sales of BreatheWay packaging technology, and expanding opportunities in hydroponic greenhouse grown.

Third priority, investigate our strategic options in the agricultural space, as I mentioned earlier. We are advancing several discussions and we’re expanding our work in the Ag applications area, both efforts working to determine the level of interest that others have in our technology and to gauge the likelihood of entering into collaboration with one or more Ag companies and we hope to make some decisions by the end of this fiscal year.

Fourth, find new applications for BreatheWay packaging technology, such as what we’ve done with Chiquita for transporting bananas globally in containers using BreatheWay technology.

Fifth priority, find new investment opportunities for growth and margin enhancement by identifying potential investment targets that have technology or commercial products that are synergistic with our materials and our channels of distribution.

Last, but not least, we’re working to maintain a strong balance sheet and we currently have over $200 million in assets, over $46 million in working capital, and over $28 million in cash and marketable securities.

In summary, we’ve had a good second quarter and a very good first six months of the year. Barring any adverse weather events during the winter months, we expect to meet or exceed our fiscal year 2012 guidance of 5% or more better revenue growth and net income growth of 30% to 40% after adding back the one-time impairment charge of $4.8 million to net income for fiscal year 2011.

We welcome your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Tony Brenner from ROTH Capital Partners. Your question, please?

Tony Brenner – ROTH Capital Partners

Thank you.

Gary T. Steele

Good morning, Tony.

Tony Brenner – ROTH Capital Partners

Good morning. Couple of questions. Could you remind me what Apio’s tray business is as a percent of value-added mix?

Gary T. Steele

The tray business right now is about 35%, bags about 65% revenues, we’re talking about dollars.

Tony Brenner – ROTH Capital Partners

Right, okay. And Gary, in the release, particularly you alluded to recent rainfall in the desert that that might become a problem, but as I recall last year in December and January the weather was pretty miserable in the desert. Is there any reason as you look at the situation today to think that sourcing a handful of margins won’t be much improved versus a year ago in the third quarter?

Gary T. Steele

No reason to believe that. I mean, last year was just as you know just a disaster weather-wise and we’re in much better shape this year, Tony, at this point.

Tony Brenner – ROTH Capital Partners

Okay. Was that just a cautionary comment or…

Gary T. Steele

No. I mean, it’s just, I mean, there have been, in December there were heavy rains down in Southern California, et cetera, et cetera, we’re worried about it. But I think we’re okay, I think we’re okay, Tony. You don’t want to jinx anything here, but we got to get it through January and February and early March, and then after that we should be in good shape. But so far, things are pretty good.

Tony Brenner – ROTH Capital Partners

Okay. And lastly with Windset new capacity coming on stream and continuing to come on stream, I guess, should that portend an increasing income contribution from Windset incrementally over the next several quarters?

Gary T. Steele

Yeah, the second phase, that was a two-phased project, it’s 64 acres altogether greenhouse. The first 32 acres started in late October, early November. The second 32 acre phase started in well, few weeks ago. And so you should start seeing the benefit from all 64 starting really more in our fourth quarter. You’ll see some, you know, slight pick up in the third quarter, but the lion’s share of the – the largest corridor for this year at least will be in our fourth quarter, Tony.

Tony Brenner – ROTH Capital Partners

Okay, so a step up. Third quarter would be bigger than the second, fourth quarter bigger than the third?

Gary T. Steele

I’d say the third quarter to be close to the second, I don’t think you are going to see the full impact. Where you’re really going to see is when you get into the fourth quarter, because the problem with the current quarter is you’re really not getting any production out of Canada right now, whereas when you get to the fourth quarter, not only will you have the U.S. fully online but you’ll have Canada online also.

Tony Brenner – ROTH Capital Partners

Well, this is the seasonal or just...

Gary T. Steele

Well, they can’t fold during the winter months up in Canada because of the lack of sun.

Gregory S. Skinner

And that was one of the many reasons that it came to San Marino, California ideal weather and you can grow through the winter months, Tony, so you – now they’ll have all the benefits of California and Canada in the fourth quarter.

Tony Brenner – ROTH Capital Partners

Got it, okay, thank you.

Gary T. Steele

Thank you, Tony.

Operator

Our next question comes from the line of Peter Black from Winfield Capital. Your question, please?

Gary T. Steele

Good morning, Peter.

Peter Black – Winfield Capital Corporation

Gary and Greg, how are you doing?

Gary T. Steele

Fine,

Gregory S. Skinner

Good.

Peter Black – Winfield Capital Corporation

Just two questions. I was just wondering if you could reconcile the 10% revenue growth that you saw at, I’m forgetting the name of the acquisition.

Gary T. Steele

Lifecore?

Peter Black – Winfield Capital Corporation

Lifecore, yeah, with the statement that you saw less overhead absorption, I guess I would intuitively expect that if your revenues are going, you would absorb your fixed costs. So I’m just wondering if you could explain that.

Gregory S. Skinner

Well, simply they had inventory coming into the year. And as a result, if you look at their FY year-end ‘10, versus FY year-end ‘11, they grew inventory by about $1.6 million. A lot of that inventory was used in the first half of this year. So you didn’t require the production needs during the first half, but you will need them in the second half. And we spread our overhead evenly over the year. So the production shifts from one quarter or one half to the other half, then your overhead absorption will be lower in one half and higher in the next, but the over the course of the year we should fully absorb our overhead.

Gary T. Steele

And Peter, just, not to get too lost in the quarters, they are having a good year and we are expecting them to hit their plan this year.

Peter Black – Winfield Capital Corporation

Okay, all right, that makes sense. And you referenced it in the Q&A that you put together with the press release, about, I guess, a little bit slower than expected uptake in the avocado business, does that have anything to do with potentially higher price points than consumers are willing to pay or are there still wrinkles in the distribution or sourcing of avocado to Chiquita to work through?

Gary T. Steele

Yeah, two things; one is they really beefed up their inventory prior to launch and so they really had a lot of inventory to start with and so they are working off the inventory, so that’s one factor. And other is and this is a little bit of conjuncture in our part, Peter, we don’t have the interview in detail. But I still think they have a quite lined up all the year round sourcing with fixed contracts that assure them of competitor pricing on the sourcing side. So I think it’s a combination.

And third I think they are working to find out how to communicate the value of the technology, its how do you explain and express the technology component to a consumer when it’s in a 10 pound bag and it’s opened up in the backroom and placed down on display. So there is a variety of things they are working on from the sourcing point of view, looking at other types of packaging formats that will help them and obviously they are working off their inventory. So I think it’s a combination of those three things.

Peter Black – Winfield Capital Corporation

Okay, great. Thank you very much.

Gary T. Steele

Thank you, Peter.

Peter Black – Winfield Capital Corporation

Appreciate it.

Operator

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

Gary T. Steele

Good morning, Morris.

Gregory S. Skinner

Good morning.

Morris Ajzenman – Griffin Securities

Hi, guys. I just need a little more clarity up on the Lifecore and again the numbers that are servicing here, just getting little confused here. In your first – one of your early statements in the presentation, I think you said your target of gross margins for Lifecore is 50%. And then I’m looking the most recent quarter, gross margins were 57%, now that is down from 64.3% a year ago in the same quarter, but yet you’ve talked about insufficient overhead absorption and that improves into the second half. But if we were 57% gross margin in the most recent quarter, you target of 50%, I’m not sure what that plays out into the third and fourth fiscal quarters?

Gregory S. Skinner

There is a pretty big mix change at Lifecore, Morris, between the first and the fourth quarter and the second and the third quarter. The second and third quarter are historically and this year is going to end up being true to history, are high margin quarters, where you can recognize margins in the 57% range, whereas the first and fourth quarters because the mix are typically lower margin quarters, if you look at on a year-to-date basis, their margins are about 49%. And we expect that to be slightly higher in the second half, maybe low 50%, so that the average for the year is 50% and all has to do with mix.

Morris Ajzenman – Griffin Securities

Okay. And then switching gears here to cash flow, in the first half there was a use of cash flow, share repurchase, talking about purchase of equipment, how does that fair to the second half? Should we finish a major reversal and that we start generating cash again?

Gregory S. Skinner

Yeah, you’ll see a very large increase in cash in the second half compared to the first half, specifically because the second quarter is a heavy quarter for the shipments of product late in the quarter hence that receivables up. We advanced to growers quite a bit during the second quarter, because that’s a winter months leading up to December, January and February. So it’s a big cash usage quarter. And therefore it drags down the first half of the year, whereas in the second half of the year, not only do you get your monies back from your advances as you collect your receivables, but in this particular year, we collected our $4 million from Monsanto slightly after the end of the quarter. So that’s obviously going to benefit the second half also.

Morris Ajzenman – Griffin Securities

Okay. And CapEx about $6 million or so for this fiscal year?

Gregory S. Skinner

Yes

Gary T. Steele

Yeah

Morris Ajzenman – Griffin Securities

Okay. Thank you.

Gary T. Steele

Thank you, Morris.

Operator

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

Gary T. Steele

Good morning Chris.

Chris Krueger – Northland Capital Markets

Good morning. You indicated that at least in the current quarter or recent weeks or something like that that you’ve seen some growth return to your tray business. When was the last time you had a full quarter of positive growth for the tray business?

Gary T. Steele

Couple of years, it’s been at least two years, Chris, and it’s a long time and coming. And I can’t tell you that this return to growth is sustainable, let’s see after a few quarters, but it’s been a long time.

Gregory S. Skinner

Yeah, September 2008 was the last.

Chris Krueger – Northland Capital Markets

2008, okay

Gregory S. Skinner

Third quarter.

Chris Krueger – Northland Capital Markets

Okay, all right. In your core Apio fresh vege business you’re outperforming the market, again has there been new distribution gains or new chains you’ve entered or what do you think is driving that?

Gary T. Steele

I think it’s a combination of – we’ve launched some new products. We’re the innovators in the industry. And we’ve also picked up a couple of new accounts and that combination is material for us. And there is an overall theme here if it’s not clear enough and that is we’re really hunkering down and focusing on our core businesses, because we believe in those, they’re in our control and that’s where we’re making our investments. And we’re really good operators. We’re close to our customers and so you will be hearing much more about our core businesses and less about trying to pursue some licensing deal that’s not really central to what we’re really trying to do.

We might do those occasionally, but our core businesses are what we believe in and they’re starting to – and without the adverse weather, we had bad – by the way, last year would have been a very good year as well except for the weather. So we have the good fortune of good weather as well as performing well. So that’s what’s going on, new products and we mentioned that in the spring we will start launching couple of new products in our value-added food business.

Chris Krueger – Northland Capital Markets

All right. Last question, in your Windset investment, I know you indicated in your press release that in early months that it’s meeting expectations. But can you talk a little bit about actual yields versus what the Windset guys maybe have experienced in the past and what they’re seeing so far?

Gary T. Steele

We can’t – let’s just say that we’re very pleased with how things are going. We don’t want to be talking about that level of detail, if you can understand. But let’s just say that it looks like the combination of their citing of their 3 million square feet of hydroponic greenhouse space in Santa Maria California that was a real good location. Combined with their operating knowledge of how to do this using technology and experience is really paying off. Let me just say without talking about yields that it is going very well, but I think it’s too early to declare much of anything, you know a quarter doesn’t make the whole story complete. So we’ll keep you appraised on that, but so far we’re really pleased and so are they.

Chris Krueger – Northland Capital Markets

All right. Very good. Thank you.

Gary T. Steele

Thank you, Chris.

Operator

Thank you. Our next question comes from the line of Warrick Jervis from Trailhead Asset Management. Your question, please?

Gary T. Steele

Good morning.

Gregory S. Skinner

Good morning.

Warrick Jervis – Trailhead Asset Management, LLC.

Good morning. Congratulations on a good quarter. I wonder if you could give us a little bit of an update of what’s going on with the air product lines and what we should expect there?

Gary T. Steele

Slow and frankly disappointing for us, they’re working to expand the product lines, there was a launch of a new product platform that we’ve developed with them and for them at the Milan cosmetics show in April, it takes a year or two and they’re very excited about this platform, it takes a year or two for that to work through the toxicology and acceptance phase of the cosmetic companies. And it’s a nice business for us, we get 40% of the gross profits, but it’s just frankly not hugely material for us and while we’re in over 50 products, we need to be in hundreds of products and so we’re hoping for better, but I wouldn’t want to mislead you in telling you that that’s going to change anytime soon.

Warrick Jervis – Trailhead Asset Management, LLC.

Gary, thank you. Any update on the pharmaceuticals?

Gary T. Steele

Well, we have a couple of initiatives in the drug delivery area and it looks as though our HA materials may be used by a significant customer or emerging significant customer as a complimentary material in the delivery of a drug. We’re looking at an other drug program where hyaluronic acid or HA or Lifecore materials might be differentiating drug as an adjuvant therapy. We’re also talking to people about using our Intelimer materials as a delivery system. So you have to be a little patient on this one, but it’s an area of great interest to us and it’s in our R&D priority list.

Warrick Jervis – Trailhead Asset Management, LLC.

Okay, thanks very much.

Gary T. Steele

Thank you.

Operator

Thank you. Our next question comes from the line of Michael Needleman from Preservation Asset Management. Your question, please?

Gary T. Steele

Yeah, good morning, Michael.

Michael Needleman – Preservation Asset Management

Hi, good morning. Thank you for taking the question here. A couple of questions. If you can help me out a little bit, in your prepared announcement you talk about that the first half you see almost two-thirds of the revenue from the export being received, did you experience that same two-thirds last year in your export business?

Gregory S. Skinner

Yeah, that’s a historical average, Michael. We are more produce to export in the first half of the year than you do on.

Michael Needleman – Preservation Asset Management

So apples-to-apples, you experienced that basically year-end basis, correct?

Gregory S. Skinner

Yeah, it can be as high as 70-30, but two-thirds, one-third, I think if you went back 10 years and average it, I think that would be a pretty good number.

Michael Needleman – Preservation Asset Management

And I understand the mix from the standpoint of the Lifecore area, but I don’t understand the absorption and maybe you can help me out. Currently, what you guys running as far as capacity utilization and what do you think that’s going to be if you had the inventory, what do you think that’s going to be in the second half?

Gregory S. Skinner

Well, overall, in the course of the year we’re probably around 50% capacity, I mean there is obviously room to grow there. Do I have those exact percentages? No, but if I was to make a guesstimate at this point it’s probably 40-60 first half to second half because we did have some inventory that carry over from last year.

Michael Needleman – Preservation Asset Management

And just, so that I have an understanding of the mix, when you refer to the mix of the margins being significantly lower in the second and third quarters, where are those products going versus the first and fourth quarter?

Gregory S. Skinner

In the first and fourth quarters, the majority of our sales are aseptic filling products which is where we actually make the HA. We fill it in a syringe, we sell the syringe.

Michael Needleman – Preservation Asset Management

Okay.

Gregory S. Skinner

That particular product or products is going to absorb most all your overhead and most of all your labor, whereas during the second and third quarters, the mix shifts more to selling just the powder and the powder is just the fermentation process, very high margins, requires very low labor, requires very little overhead, and therefore their margins are more in the 75% to 80% range whereas the aseptic filling is more in the 30% to 35% range and that’s why you have the big swing in mix.

Michael Needleman – Preservation Asset Management

But you’re getting a higher price for the more heavily detailed product, is that correct on a revenue basis?

Gregory S. Skinner

Yeah, well, it’s kind of almost apples and oranges, because in one case, you’re selling the full finished product and in other case you are selling a raw material, really, because your customer is then going to take that powder and convert it into a liquid and do their own filling on their end. So it’s kind of hard to say – it’s kind of hard to compare the prices, but in general what you are saying is correct.

Michael Needleman – Preservation Asset Management

Okay. And one last question. In terms of the tray business you talked about, does that have a higher margin than the bag business?

Gregory S. Skinner

Yes, frankly.

Michael Needleman – Preservation Asset Management

Okay, thank you so much gentlemen.

Gary T. Steele

Thanks, Michael.

Operator

Thank you. Our next question comes from the line of Bill Lauber from Sterling Capital Management. Your question, please?

Gary T. Steele

Good morning, Bill.

William Lauber Sterling Capital Management

Good morning. On Apio, kind of been between the lines in your release, can I assume that you guys are starting to see some margin pressure or you said one of the goals I think was to maintain margins, can you talk about pricing?

Gregory S. Skinner

We’re not starting to see margin pressure. We’ve had it ever since October of 2008 when the great recession started and consumers were really squeezed and therefore buyers were squeezing, suppliers et cetera, et cetera. So it’s – there is, don’t read anything new here. It’s out there, it’s in the food world, it’s fairly competitive, we differentiate ourselves with technology and good customer service and product quality and those things. So don’t read anything in there that’s new.

But overall business wise, our strategy and our management team’s focus is on increasing overall margins for Landec as a consolidated company. And that means we got to launch new products that have higher margins than the old products and we’ve got to change our business mix just as we did with Lifecore when we bought them, you may recall, they have raised our overall gross margins 320 basis points last year, even though they were only 10% of our revenues. So our focus is on improving margins overall as a company. So there is nothing, there is no new competitive pressures or new ups in the food business that or any different than what we have seen in the last few years in terms of margin pressure.

William Lauber Sterling Capital Management

And when did you guys receive the Monsanto payment, was that in December?

Gary T. Steele

December 1.

William Lauber Sterling Capital Management

December 1, so that will show up in the next reported quarter?

Gary T. Steele

Yeah.

William Lauber Sterling Capital Management

Okay. Any update on the Clearly Fresh Bags?

Gary T. Steele

No, it’s in retail trials in Texas and we are letting it run for a while and see how it goes.

William Lauber Sterling Capital Management

Okay. And I think you gave the information, probably forgot that, but if you had that handy, Greg, what’s the average buyback price?

Gregory S. Skinner

Probably if I do the math, it is $4.8 million and 880, so it was about 5.45 or something like that. Yeah, that’s about right, Will.

William Lauber Sterling Capital Management

Okay. How much authorization is still up?

Gregory S. Skinner

See, we’ve got about $3.8 million go of the $10 million. Yes, I did the math, its $5.45 million exactly.

William Lauber Sterling Capital Management

Okay. I guess it’s kind of a longer term question. I think I’m reading between the lines, but you guys have, I think with your stock price, I’m getting an impression that you guys think that the Apio business alone is worth what your stock is trading right now. And I’m wondering is that something that you look at, when I look back over this past couple of years, I think the one thing where you guys will definitely get A in is the Lifecore acquisition and it looks like this Windset Farms is a good deal as well. And maybe getting rid of that Apio, but you don’t have to worry about the weather, does that make sense for the shareholders if you do believe that the Apio business alone is worth the stock price now?

Gregory S. Skinner

It’s a fair question, Will. And in pre-Lifecore, we didn’t have that luxury. We didn’t have in that conversation. Post-Lifecore, you can have that conversation. We do have that conversation. As we do, we’re interested in how do we increase shareholder value. So if that is one way of doing it, you can – that that we’re talking about it, but there are other ways that we see increasing shareholder value and so we consider it all.

William Lauber Sterling Capital Management

Would you believe this is worth pretty much what your stock prices alone?

Gregory S. Skinner

I do, yes.

William Lauber Sterling Capital Management

Okay, thank you.

Gregory S. Skinner

Thank you, Will.

Operator

Thank you. Our next question comes from the line of Rick Federman from Federman Investments. Your question, please?

Gary T. Steele

Good morning, Rick.

Rick Federman – Federman Investments

Good morning. My question has been answered earlier. Thank you very much.

Gary T. Steele

All right, thank you.

Operator

Thank you. (Operator Instructions) Our next question is a follow-up question from Peter Black from Winfield Capital. Your question, please?

Peter Black – Winfield Capital

Hi, I’m just wondering how do you from an accounting perspective calculate the fair value of the Windset investment from quarter-to-quarter?

Gregory S. Skinner

Well, from end of last year, there is a formula that we negotiated as part of the agreement. That is the formula that will be used in six years. We put into that when they call it. And we determine at least for the time being and this is based on a third-party appraisal, that that formula approximated fair market value. So we’ve been using that formula at least for the first two quarters of this year.

We will be doing an annual appraisal, well, which is basically a discounted cash flow analysis, which is using their five-year plan obviously applying a discount of that plan, comparing it to other market participants out there and that’s really how we do it right now is to use that formula. And as long as that formula continues to approximate fair market value based on annual appraisal, we’ll continue to use that formula. If it ever diverges, then it’s matter of sitting down with Ernst & Young and figuring out how do you do it on a quarterly basis without getting quarterly appraisals. And luckily, we are not there yet so far, the formula was approximating fair market value.

Peter Black – Winfield Capital

Got it. Okay, thanks a lot.

Gregory S. Skinner

Thanks.

Operator

Thank you. Our next question comes from the line of Nelson Obis from Winfield Capital. Your question, please?

Nelson Obis – Winfield Capital

Yeah, thank you. My question was answered. Thanks.

Gregory S. Skinner

Okay, thanks.

Operator

Thank you. Our next question is a follow-up question from Warrick Jervis from Trailhead Asset Management. Your question, please?

Warrick Jervis – Trailhead Asset Management, LLC.

Can you refresh me on what the size of the buyback authorization is?

Gregory S. Skinner

$10 million.

Warrick Jervis – Trailhead Asset Management, LLC.

Okay. And is there a certain level of cash that you intend to keep available for additional acquisitions or are you going to just continue to buyback shares going forward here?

Gregory S. Skinner

Well, a fair question, and we’re not at the $10 million level, but we are not in the business of just buying back stock, that there is just a point when you feel like your share price is not properly valued and so you have this kind of a plan, but we want to preserve most of our cash for investments in our current core businesses. And we are actively and selectively looking for further acquisitions if we could find another Lifecore, or another investment like we just did with Windset, we would pursue that aggressively. And we have had a history of finding companies that we acquired and have integrated into our company successfully, and there aren’t a lot of companies that know how to do that, and we’re very picky. And so to answer your question is, we want the vast majority of any cash that we are generating or cash that we already have to be available for existing investments in core businesses and future acquisition. So that’s our focus.

Warrick Jervis – Trailhead Asset Management, LLC.

Okay, great. Thank you.

Gary T. Steele

Thank you.

Operator

Thank you. (Operator Instructions) And I’m not showing any further questions at this time. I’d like to turn the program back to management for any further remarks.

Gary T. Steele

Well, we appreciate you being with us today. Thank you for taking your time to hear the updates on Landec and we look forward to keeping you posted on our progress. Many thanks.

Operator

Thank you. And 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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