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Landec Corporation (NASDAQ:LNDC)

F1Q13 Earnings Call

September 27, 2012 11:00 a.m. ET

Executives

Gary Steele - Chief Executive Officer

Gregory Skinner - Chief Financial Officer

Analysts

Morris Ajzenman - Griffin Securities

Tony Brenner - Roth Capital Partners

Chris Krueger - Northland Securities

Rick Fetterman - Fetterman Investments

Will Lauber - Sterling Capital Management

Operator

Good day, ladies and gentlemen, and welcome to the Landec First Quarter 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 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 Steele

Thanks, Jonathan. Good morning and thank you for joining Landec’s first quarter fiscal year 2013 earnings call. I have with me today, Greg 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 by selecting investors in the Financial Releases and Events page. The webcast will be available for 30 days through October 27, 2012. A replay of the teleconference will be available for one week until midnight Eastern Time, Thursday, October 4, 2012 by calling 888-266-2081 or 703-925-2533. The access code for the replay is 1590087.

During today’s call we can make forward-looking statements that involve certain risks and uncertainties that could actually cause the 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.

Yesterday in our earnings release we reported a good first quarter 2013 results. During the first quarter of 2013, revenues increased 39% to $102.1 million compared to $73.3 million last year. And our net income increased 40% to $2.5 million or $0.10 per share compared to $1.8 million or $0.07 per share during the first quarter of last year.

In addition we increased cash flow from operations by 17% to $5.1 million. The integration of GreenLine Foods into our Apio food business is going well and it’s ahead of plan. We were challenged during the first quarter with severe drought in the Midwest including the Ohio Valley where we source the majority of our green beans during the summer months. The drought resulted in approximately $1.2 million of incremental cost associated with sourcing green beans. The good news is we have returned to normal sourcing patterns and currently we have an adequate supply of green beans to meet customer demand and we believe we have an appropriate sourcing plan for green beans for the remainder of our fiscal year and going forward. Apio is on track for having another good year.

Our investment in Windset Farms continues to look good with excellent quality products, have remarkably good yields and good customer demand. Windset has been in full production with its first 64 acres of greenhouses in Santa Maria since December of last year with different varieties of tomatoes. Product performance has been exceeding Windset’s original expectations and they recently completed their second planting of tomatoes in all 64 acres.

As we have experienced in the past, Lifecore periodically has shipments that move from one quarter to another quarter, which happened again in the first quarter. The accelerated shipment resulted in a shift of $1.9 million of revenues and $1 million pretax profit to the first quarter that had been planned for the second quarter. Without this shift, revenues and profits for Lifecore would have been inline with our plan and guidance for the first quarter in which we had expected Lifecore to record lower revenues and profits during the first quarter compared to the first quarter of last year.

Importantly, the shipment does not change the expected results for Lifecore for the first half and Lifecore is on track for having another good year. The drought issue in the first quarter and the shift in the shipment at Lifecore do not change our expected results for the first half or for the full fiscal year of 2013.

Let me turn it over to Greg.

Gregory Skinner

Thank you, Gary, and good morning everyone. In yesterday’s news release, Landec reported that for the first quarter of fiscal year 2013, revenues increased 39% to $102.1 million versus revenues of $73.3 million for the first quarter of last year. The increase in total revenue during this year’s first quarter compared to last year’s first quarter was primarily due to first, $19.9 million of revenues of GreenLine, second, a $5.4 million increase in revenues in Apio’s non-GreenLine value added businesses which includes the fresh cut specially packaged vegetable business, Apio Cooling and Apio Packaging. Third, a $4 million increase in Apio’s export revenues, and fourth, an $851,000 increase in revenues at Lifecore.

The growth in Apio’s non-GreenLine value added vegetable businesses resulted from a year-over-year 22% increase in unit volume sales of fresh cut specially packaged products. These increases in revenues were partially offset by $1.3 million decrease in revenues in our technology licensing business due to the termination of the Monsanto licensing agreement at the end of the second quarter of fiscal year 2012.

For the first quarter of fiscal year 2013, Landec’s net income increased 40% to $2.5 million or $0.10 per share compared to net income of $1.8 million or $0.07 per share for the first quarter of last year. The increase in net income during the first quarter of fiscal year 2013 compared to the first quarter last year was due to a $2.9 million net increase in Apio’s pre-tax income. The increases in Apio’s pre-tax income were comprised of, first, $1.2 million from GreenLine, second, a $1.2 million increase from Apio’s non-GreenLine value added and export businesses, and third, a $1.3 million increase in the fair market value of our Windset investment compared to the increase in Windset’s fair market value during the first quarter of last year.

These increases in Apio’s pretax income were partially offset by new amortization expenses associated with the acquisition of GreenLine and increased variable operating expenses from the increase in non-GreenLine revenues at Apio. The net Apio increase in pretax income of $2.9 million was partially offset by, first, a $1.3 million reduction in license fees from the termination of the Monsanto license agreement, second, a $593,000 decrease in pretax income at Lifecore due primarily to the timing of production and operating expenses within the fiscal year, and third, a $382,000 increase in the income tax expense.

Turning to Landec’s financial position, during the first quarter of fiscal year 2013, we generated $5.1 million of cash from operations and ended the quarter with $10.8 million in cash and marketable securities. We incurred $2 million of capital expenditures during the quarter. In addition, the company paid down debt by $5.5 million and paid a $10 million earn out payment related to the acquisition of Lifecore. Gary?

Gary Steele

Thanks, Greg. Over the past three years we have worked to focus on our two core business, namely, our specialty packaged value added produce business, and our biomedical injectible materials business. The word focus is the key word as we have reduced our complexity and deepened our market presence in two businesses that relate to enhancing the health of people. Evidence of Landec’s commitment to investing in its core business and in products that promote health and the support the quality of life that results from a healthy lifestyle, is demonstrated across our businesses. Including Apio with its use of our BreatheWay packaging technology, our acquisition of GreenLine Foods, our investment in Windset Farms, and the acquisition of Lifecore Biomedical and our continuing investments in technology based applications.

Apio, through our BreatheWay packaging technology that extends shelf life to preserve freshness for the consumer, has grown significantly in recent years to become the leader in the U.S. fresh cut vegetable market, and we continue to enjoy unit growth volume that far exceeds the overall fresh cut produce category growth itself. The acquisition of GreenLine, the leading processor and marketer of value added fresh cut green beans in North America, strengthens our position in the market place and broadens potential applications for BreatheWay packaging.

In addition, Apio has partnered with Windset Farms, a leading hydroponic grower of high quality product in North America, delivering high yields of high quality produce during all 12 months of the year, where Windset uses only 128th of the water needed for soil grown produce. At Lifecore, Lifecore develops and manufactures product composes of biopolymer Hyaluronan, also known as Hyaluronic acid or HA. Hyaluronan compounds are important lubricating, connective and shock absorbing components that occur naturally in human body. We make HA in a fermentation process in our pharmaceutical grade facility in Chaska, Minnesota, and our HA is used in ever growing range of applications including [opthamol] ophthalmic surgery, [athior] arthritis treatments and veterinary care.

Since 1986, over 50 million patients worldwide have benefited from Lifecore’s innovations in Hyaluronan based products. Overall, we are more focused today and better positioned to capitalize on the growth in our two core businesses with our focus on products for enhancing to help the people. Our priorities going forward are to meet or surpass our financial plan for this fiscal year by successfully integrating GreenLine into Apio, thus allowing us to benefit from cross-selling into our now combined larger customer base. By continuing to launch newly specialty packaged food products, by growing Lifecore’s business, allowing us to capitalize on higher capacity utilization of our Chaska, Minnesota facility, and continuing to invest in new technology based applications.

We are now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Morris Ajzenman from Griffin Securities. Please go ahead.

Morris Ajzenman - Griffin Securities

A question on Lifecore Biomedical. Last conference call it was discussed about what was a particularly customer -- two customers that have received clearance by the FDA for new products. Just curious how that’s playing out. Any impact to revenues this year and any color you can give to that.

Gregory Skinner

Morris, it’s Greg. Yeah, as we discussed, this is going to be a second half results for us. It’s not going to impact the first half. The new clearances, they have got to work through their inventory, we have got to build inventory then we have got to start shipping it to them. You know it’s all based on order patterns and right now we don’t have a clear crystal ball on that so I can't give you the magnitude. We will know a lot more on our next conference call but view this as a second half event.

Morris Ajzenman - Griffin Securities

Okay. And unrelated to this, any comment, any target on debt reduction for the remainder of the fiscal year?

Gregory Skinner

Well, we will definitely payoff the $7 million current. That’s not an issue. Our goal is to try to pay off the line of credit at Apio. What would preclude us doing that if there is a better use for that cash? I mean this is debt that’s two and a quarter and if it makes more sense to put money into equipment for productivity at GreenLine or Apio or at Lifecore, then that’s what we will use the money for. But our ultimate goal is to try to pay off the line before the end of the fiscal year.

Morris Ajzenman - Griffin Securities

I have a last question on the GreenLine acquisition. You say things have come along pretty well and maybe even better than initially expected. Any upside to where you initially look out to this fiscal year as far as synergies, cost reductions, etcetera, etcetera, beyond what initially you had thought was the case.

Gary Steele

I would say in the cost reduction side probably not. We took early in the first quarter in terms of streamlining some headcount that was redundant. There are some opportunities later in the year in terms of cross-selling. Hard to put those in the plan because you just have to get at it. But before we did that we wanted to have our systems, our ERP system totally synchronized and integrated and that was a massive effort on both GreenLine and Apio’s part to have that happen and that came together Sunday night. And it looks like it’s seamless now and working very well.

So we can go to customers now and we know that our order entry system and our tracking systems are all integrated and up and running. So I would say if there is any upside it’s in the cross-selling side, Morris. And as each quarter goes by we will have more visibility on that.

Operator

Thank you. Our next question comes from the line of Tony Brenner from Roth Capital Partners.

Tony Brenner - Roth Capital Partners

Couple of things. Apio value added unit volume was up 22%, and it looks like those related revenues are ahead by 12%. Where is the disparity?

Gary Steele

It’s product mix.

Gregory Skinner

Yeah, as you ship more, it’s the volume increase in retail versus club, you are going to have a shift in sales price. And so your volume can still be up but your revenue doesn’t necessarily track exactly the volume because of product mix changes. And last year it kind of went the other way where you had volumes that the revenues were higher than volumes because the shift was more towards club. And that could shift a bit quarter-to-quarter.

Tony Brenner - Roth Capital Partners

So in other words there was a tilt towards club versus retail, was that what you are saying?

Gregory Skinner

No, the other way around.

Gary Steele

The opposite.

Tony Brenner - Roth Capital Partners

The other way around?

Gregory Skinner

We have a much higher ring at club than we do at retail.

Gary Steele

You are selling mostly, you know, two and three pound product at club and 12 ounce in retail.

Tony Brenner - Roth Capital Partners

I see. But there has been no favorable shift towards [trays] from [bag] to products, right?

Gregory Skinner

No, it’s pretty stable.

Tony Brenner - Roth Capital Partners

And last quarter your guidance was to look for a pretty healthy decline in export sales and it was exactly the opposite in this quarter which I think is the biggest quarter for exports. So what's going on there?

Gary Steele

Very favorable volume and pricing in export, higher than we anticipated. But we never declare victory in export until we get through the winter months. The winter months are always the trickiest. And so it did surprise in the pleasant way in the first quarter.

Tony Brenner - Roth Capital Partners

On Lifecore, what portion of sales at this point does your largest customer account for?

Gregory Skinner

Let me do the math in my head. About a third.

Tony Brenner - Roth Capital Partners

Has that declined since you acquired Lifecore? That percentage.

Gregory Skinner

(inaudible) percentage? Yes. The rest of the business has grown.

Operator

(Operator Instructions) Our next question comes from the line of Chris Krueger from Northland Capital Management. Your question please.

Chris Krueger - Northland Securities

First on the numbers. Looking at your SG&A expense for the Apio business which now include GreenLine of course, the $5.5 million, is that a decent run rate going forward?

Gregory Skinner

Yeah, that should be.

Chris Krueger - Northland Securities

Okay. Then on your Windset investment. I know you don’t provide specific sales or numbers like that and income. Can you give us an idea of what Windset sales growth has been in recent quarters?

Gary Steele

Well, their primary growth-- and, no, I can't give you the numbers because they are a private company and obviously we have been asked not to share that information. But their main growth this last year was the fact that the U.S. operation came online. That started up in, well, the full 64 acres in December. So you got a big pop this first eight months of this year because of that new operations being online.

Chris Krueger - Northland Securities

Okay. And I am not sure if I have heard in your commentary but the next 64 acres, what's the outlook for that to come online?

Gary Steele

They are looking at it right now, Chris, and you have got to go through permitting and planning and stuff like that. But we are not going to see any of that this fiscal year and if it happens we will see it next fiscal year.

Chris Krueger - Northland Securities

Okay. And then last, I don’t believe you commented on any of your efforts with Chiquita, whether it’s the existing business or the potential for the shipping container business. Can you update us on that?

Gary Steele

The two active programs there are the Chiquita’s ToGo program, that’s going strong. They like it. They make money from it. We like it. We make money from it. The shipping container, more tests. More containers being tested around the world. Nothing more to say about that except that it’s in the testing phase. And then if you follow Chiquita you know that there are a lot of changes going on in that company. Change in CEO, change in their headquarters, lot of changes with people. So we are watching it closely but it looks like the two programs we are doing with them seem to be very secure and are working for them. We really do owe you some more information on the shipping container program at the next call and we will make a note of that to have more details.

Operator

Thank you. Our next question comes from the line of Rick Fetterman from Fetterman Investments. Your question please.

Rick Fetterman - Fetterman Investments

I would like to circle back and ask question in another way regarding the Lifecore and the products that recently got an FDA approval from a couple of your customers. Has there been any indication from those folks as to what their requirements might be going forward, after whatever the ramp up period is?

Gary Steele

Yeah. They give rolling forecast. We are now receiving those rolling forecast. As Greg mentioned, they start to kick in our second half. You know our fiscal year is May, so those start to materialize in the second half. So we are starting to see, since, with three months updated forecast we are starting to see some visibility on those volumes.

Rick Fetterman - Fetterman Investments

Then any numbers you can share with us?

Gary Steele

Wouldn’t want to share them with you. There is some competition in this field and we hold those numbers near and dear to us but they are material. They have reached the materiality level for sure.

Rick Fetterman - Fetterman Investments

Okay.

Gregory Skinner

And our growth for the year, our guidance, is 15%.

Gary Steele

For Lifecore.

Gregory Skinner

Let's just say a good chunk of that growth is coming from these new products.

Rick Fetterman - Fetterman Investments

And my other question regarding the Clearly Fresh bag test. Is there anything new there or is it still in the test marketing phase?

Gary Steele

There is a test that’s starting shortly using infomercials. We hadn’t done any marketing at all around that product. And so the infomercial test will be going on in the next three months. And so next quarter we should have something to tell you.

Operator

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

Will Lauber - Sterling Capital Management

Can you tell me -- I don’t if you addressed this before, but in your guidance at the beginning of year did you bake in anything for any kind of synergies or revenue opportunities between Apio traditional and the GreenLine?

Gary Steele

Yes. What we did is we firmly baked in operational synergies, cost savings. So that was definitely in our plan and we have realized at least $1 million already in those synergies. And we expect to see some more because there is some synergy in what I call purchasing power of cartons and films and things like that. So that’s definitely in the plan. What is not is fully put into the plan is customer synergy. Meaning, GreenLine gets a customer that we had that they didn’t have, or Apio gets a customer that GreenLine has that we didn’t have, that kind of thing.

Those are much more speculative, Will. And so it’s hard to hardwire those into a plan but certainly we are bound and determined to get those. But those would be, except for one target, that would be upside to our plan.

Will Lauber - Sterling Capital Management

Okay. And as far as the cost synergies, from your release I take it that you are ahead of plan on the cost synergies side?

Gregory Skinner

No. No, we are ahead of plan on the integration, not the synergies. And that’s primarily associated with the system conversion. We did this much quicker than we thought we would be able to. And we can't even start the cross selling until you have the systems in place because you need the one stop shop. You need to have the distribution setup, the freight setup, order entry, everything. And so systems have to come first. As Gary mentioned, we flipped the switch this Sunday. We are going to run parallel for a month and hopefully by the end of October the old systems gone, the new systems up and we are off and running.

Gary Steele

But in terms of operational synergies, they are right on plan.

Will Lauber - Sterling Capital Management

And what was the original plan for getting rid of the old system? You said coming on...?

Gregory Skinner

Several months down the road. Yeah. We were hoping we would have it done before the end of the November. So we are pleasantly surprised with how quickly and how well this has gone. And you could credit the Apio team. They have busted their tails to get here.

Gary Steele

Yeah, the GreenLine Apio team did a super job.

Will Lauber - Sterling Capital Management

So you are a month or two ahead in that area and then that allows you an extra month or two to pursue revenue synergy.

Gary Steele

That’s right.

Operator

Thank you. Our next question is a follow up from Morris Ajzenman from Griffin Securities. Your question please.

Morris Ajzenman - Griffin Securities

In the conversation with Chiquita, the avocadoes was not brought up. Is that the moot issue at this point?

Gary Steele

I think so. I think it’s in no man’s land for right now. And you might recall from our last call, there was a request on their part to have some more time to explore different options, different alternatives for them. They had, had difficulties sourcing avocadoes on a year-round basis. Made it very difficult to compete in a marketplace where there are suppliers that can source reliably year-round. We were using our packaging technology to allow you to buy a ripe and ready to eat product. That value is clearly there but if you lose that incremental value on having sourcing costs that are too high, than it’s not going to work.

So they are asking us to give some time to them, for them to come back to us with some other alternative thoughts. We don’t have those yet. And with their massive changes in their organization, we are a little bit hard pressed to know who to talk to and when this is going to get decided. But they operate under some minimums right now so we will be revisiting with them in the next quarter or two, where they stand on that, Morris. And one scenario is we just take it back and we do something else. So it’s limbo time for that right now.

Morris Ajzenman - Griffin Securities

And I presume in the other technology licensing, you had mentioned I think that nothing is really going on at this point?

Gary Steele

No. No. What I will tell you is that our focus is on the two core businesses. We have made our investments there. We see the growth there. We see the earnings there. We will not rule out doing other licensing deals but they are going to be very few and far between. We are going to be very selective. And when and if we do any of them we probably won't even talk about them, because we don’t want to get back into a situation where we all get excited about a licensing deal and you have that up and down and often you are disappointed because the partner changes his mind or isn’t able to fulfill the promises etcetera. So there really is a major focusing effort going on in the company and we think focusing on the two core businesses is the right way to go.

Operator

(Operator Instructions) And our next question is a follow up question from the line of Will Lauber from Sterling Capital.

Will Lauber - Sterling Capital Management

On the avocadoes, can you say whether you had talked to any of the major avocado companies before you originally signed a deal with Chiquita?

Gary Steele

Yes, we did.

Will Lauber - Sterling Capital Management

Okay. And I guess you cannot be talking with them now with your current contract with Chiquita?

Gary Steele

We currently cannot be talking with them now.

Operator

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

I just want to thank you all for being on this call today. As you can see we are in the process where the company has made some significant investments in last few years. These are starting to come to fruition. Our job is to stay highly focused on our two core businesses and deliver the numbers. And so you can know that’s where we are putting our time and attention. So many thanks for being with us this morning.

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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