Landec's (LNDC) CEO Molly Hemmeter on Q3 2018 Results - Earnings Call Transcript

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About: Landec Corporation (LNDC)
by: SA Transcripts

Landec Corporation (NASDAQ:LNDC) Q3 2018 Earnings Conference Call April 4, 2018 11:00 AM ET

Executives

Molly Hemmeter - President and Chief Executive Officer

Greg Skinner - Chief Financial Officer

Analysts

Anthony Vendetti - Maxim Group

Francesco Pellegrino - Sidoti & Company

Chris Krueger - Lake Street Capital

Mitch Pinheiro - Costello Asset Management

Operator

Good day, ladies and gentlemen and welcome to the Landec Corporation Third Quarter Fiscal 2018 Earnings Conference Call. [Operator Instructions] As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program, Molly Hemmeter, President and CEO of Landec Corporation. Please go ahead.

Molly Hemmeter

Thank you, Jonathan. Good morning and thank you for joining Landec’s third quarter fiscal year 2018 earnings call. With me on the call today is Greg Skinner, Landec’s Chief Financial Officer.

During today’s call, we may make forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially. These risks are outlined in our filings with the Securities and Exchange Commission, including the Company’s Form 10-K for fiscal 2017.

As a leading innovator in diversified health and wellness solutions space, Landec continues to drive solid growth within its three strategic growth platforms: Eat Smart Salads, Natural Food products and Lifecore biomaterials. As a result of the strong performance from these growth platforms, Landec delivered record revenue this quarter with consolidated third quarter revenues increasing 9% despite revenues from our food export business decreasing 39% on a year-over-year basis. As mentioned in our press release on February 28, the food export business will be discontinued at the end of this fiscal year. Extreme weather events this year have adversely impacted raw material sourcing costs on Apio more than offsetting the positive contribution to earnings from the 9% increase in revenues. As a result, we did meet our recently revised third quarter guidance of $0.09 per share, excluding the one-time tax benefit recorded during the quarter. However, based on the impact from weather-related events and the discontinuation of the food export business, we are revising our annual EPS guidance from continuing operations to $0.40 to $0.42 per share.

At Apio, the Eat Smart salad business is demonstrating exceptionally strong performance this year as distribution and revenues are growing much more quickly than we had originally expected. Revenues in our Eat Smart packaged fresh vegetable business increased 15% in the third quarter and 10% in the first nine months of fiscal 2018 compared to the same period last year. This growth was due to increased sales of Eat Smart salads, which increased 27% in the third quarter and 24% in the first 9 months of fiscal 2018 compared to the same period last year. The growth in salads was primarily driven by a high 57% increase in salad revenues from the U.S. retail channel during the first 9 months of fiscal 2018.

The U.S. retail All Commodity Volume, or ACV, for Eat Smart multi-serve salad kits for the 52-weeks ending January 27, 2018 nearly doubled from 20% to 39% and was sequentially up by 500 basis points from 34% for the 52-weeks ended October 28, 2017. This increase in ACV was driven by expanded distribution in key U.S. accounts such as Walmart, Kroger, Target and others. The incremental distribution in U.S. retail occurred more rapidly than originally anticipated leading to considerably higher-than-expected salad revenues this fiscal year and accelerating some of the salad growth expected to occur next year into this year.

We now expect Eat Smart salad revenues to grow 20% to 23% this fiscal year 2018 compared to last fiscal year doubling the rate of growth that we projected in our original guidance of 10% to 12% at the beginning of this fiscal year. Lifecore had a very profitable quarter with revenues of $23 million and a gross margin of 51%. Revenues and gross profits are slightly lower than the third quarter of last year due to a timing shift in certain shipments, typically recognized during the third quarter being shifted to the fourth quarter of this fiscal year.

On a year-to-date basis Lifecore met expectations for the first nine months of fiscal 2018 with revenues of $49.2 million and operating income of $11.9 million. We expect Lifecore to exceed our original growth expectations for fiscal year 2018 with revenues projected to increase 10% to 11% compared to last year, up from our original projections of 6% to 8%. Lifecore’s growth is being fueled by the strategic expansion of its business beyond its historical capabilities as a premium supplier of hyaluronic acid or HA to become a fully integrated contract development and manufacturing organization or CDMO. Providing differentiated fermentation, formulation and aseptic fill services for difficult to handle pharmaceutical and medical materials.

At O Olive operating performance for the first nine months of fiscal 2018 is slightly below our expectations with revenues of $3.3 million and an operating loss of $441,000. We are currently focused on integrating Eat Smart sales force with the O Olive organization to leverage the Eat Smart customer base and relationships throughout North America to gain new customers and new distribution for O Olive. Landec consolidated gross profit and net income were negatively impacted during the quarter by weather that resulted in higher produce sourcing costs at Apio within our lower margin fresh cut vegetable bag business resulting in $3.6 million of unexpected higher produce sourcing costs during our third fiscal quarter. The weather events included freezing temperatures in Florida during January and unseasonably warm weather in the Western growing region, both of which exacerbated the impact from hurricanes and tropical storms we experienced earlier in our fiscal year.

The Apio team is working on several fronts to mitigate future weather related issues such as modifying sourcing contracts and geographic sourcing regions and shifting the product mix to reduce our reliance on certain difficult to economically sourced produce items. It is important to note that there have been no unexpected raw material sourcing costs attributed to our salad business during the first nine months of fiscal 2018. And Apio has been able to meet all customer demand for our salad products.

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

Greg Skinner

Thank you, Molly and good morning everyone. Revenue in the third quarter of fiscal 2018 increased 9% to $149.3 million compared to $136.6 million in the year ago quarter. The increase was primarily due to a $15.5 million or 15% increase in revenues in Apio’s packaged fresh vegetables business. This increase was partially offset by $2.9 million or 39% decrease in revenues in Apio’s lower margin export business which will be discontinued at the end of fiscal 2018. Reported GAAP net income in the third quarter of fiscal 2018 was $16.1 million or $0.58 per share compared to $3.5 million or $0.13 per share in the year ago quarter. The increase was a result of first a $13.7 million or $0.49 per share one-time tax benefit from the new lower corporate income tax rate primarily from a reduction in the company’s deferred tax liability. Second, a $2.2 million decrease in consolidated operating expenses due to legal settlement charges of $2.1 million incurred during the third quarter of last year. And third a $761,000 decrease in income taxes prior to the one-time tax benefit.

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

For the first 9 months of fiscal 2018, revenues increased 1% to $409.1 million from $404.8 million in the same period last year. The increase is primarily due to $31.3 million or 10% increase in revenues in Apio’s packaged fresh vegetable business and from a $1.4 million or 3% increase in Lifecore revenues. These increases were partially offset by $30.3 million or 54% decrease in Apio’s lower margin export business.

Reported GAAP income in the first 9 months of fiscal 2018 was $18.7 million or $0.67 per share compared to $8.1 million or $0.29 per share in the first 9 months of fiscal 2017. The increase was a result of first a $3.7 million or 49% or $0.49 per share one-time tax benefit from a new lower corporate tax income tax rate; second, a $1.5 million increase in the change in the fair market value for the company’s Windset investment from a $700,000 increase during the first 9 months of last year compared to a $2.2 million increase during the first 9 months of this year; third, a $476,000 decrease in consolidated operating expenses; fourth, a $1.2 million decrease from the loss on debt refinancing during the first 9 months of last year; and fifth, a $1.9 million decrease in income taxes prior to the one-time tax benefit. These increases in net income were partially offset by first, a $4.1 million decrease in gross profit in Apio’s packaged fresh vegetable business primarily due to $7.7 million of unplanned produce sourcing costs as a result of weather-related issues during the first 9 months of fiscal 2018; second, a $2.3 million decrease in gross profit at Lifecore due to the timing of shipments within the fiscal year; and third, a $1.8 million decrease in export gross profit due to lower export revenue.

Turning to our financial position at the end of the third quarter of fiscal 2018, cash totaled $7.7 million after generating $18.1 million in cash flow from operations receiving net borrowings of $5.2 million and investing $18.5 million in property and equipment. At February 25, 2018, we had $88 million available to borrow under our line of credit. Looking forward to the fourth quarter of fiscal 2018, we expect consolidated revenues from continuing operations, which exclude the food export business increased 13% to 16% compared to the fourth quarter of last year. Key drivers of this growth include our Eat Smart salad product sales growth growing at 12% to 15%, Lifecore revenues growing 40% to 43%, and O Olive recognizing revenues of between $1.4 million to $1.7 million in the fourth quarter.

And we expect that the fair market value change in our investment in Windset during the fourth quarter of fiscal 2018 to be between $600,000 to $800,000. As a result, we are projecting consolidated net income from continuing operations for the fourth quarter to be $0.20 to $0.22 per share. For the full year of fiscal 2018, we expect consolidated revenues from continuing operations to grow 10% to 12% compared to the prior year. This growth is being driven by Lifecore revenues that are now projected to grow 10% to 11%, which is up from our original projection of 6% to 8% and by Eat Smart salad sales they are now projected to grow 20% to 23%, which is up from our original projection of 10% and 12% and from our most recent projections in our February 28, 2018 press release of 15% to 18%.

O Olive revenues are expected to grow $4.7 million to $5 million, which is below our original projections by approximately $1 million due primarily to construction delays in bringing our protection in-house, which is now up and running. We are projecting earnings per share from continuing our operations for all of fiscal 2018 of $0.40 to $0.42 which excludes the favorable 49% earnings per share from the one-time tax benefit in fiscal 2018 and the results from the export business. We are now projecting fiscal 2018 consolidated cash flow from operations of $28 million to $32 million and capital expenditures of $30 million to $34 million.

Let me turn the call back to Molly.

Molly Hemmeter

Thanks Greg. Now, let me go into more detail about the progress we are making in our three continuing growth businesses, Lifecore, Eat Smart salads and Natural Food products as we positioned each of these for growth and enhanced profitability. Lifecore continues to evolve its business model for being a supplier of HA with fully integrated CDMO. Lifecore is benefiting from a growing trend among pharmaceutical and other medical material companies to outsource specialty services and manufacturing. With the growing number of products in the industry seeking FDA approval Lifecore is well positioned as a fully integrated CDMO to augment its pipeline with new projects to fuel its long-term growth.

Due to a stronger than expected performance of our Lifecore business, we have revised our revenue growth projections to 10% to 11% this year, implying the total fiscal year 2018 revenue projection of $65 million to $66 million. We continue to maintain a gross margin target between 40% and 45% and expect to realize an EBITDA of approximately $21 million in fiscal 2018. We continued to expect Lifecore to generate double digit revenue growth on average over the next 5 years as Lifecore expand sales to existing customers as new customers and commercialized its products that are currently in its development pipeline.

The transformation of the Apio business is still in process but evolving rapidly. This transformation is occurring in two distinct phases. The first phase of transformation began in fiscal year 2012 and focused on transitioning on Apio from commodity produce company to a true innovation company with the focus on identifying consumer healthy eating trends and developing value added products to support those trends. Our Eat Smart salad kit business was launched during the first phase of transformation through an in-depth understanding of consumer healthy eating trends. Key to our growth strategy for salads is penetration in the U.S. retail market and we are making significant progress in our strategy to increase the Eat Smart share of multi-service salad kit in this U.S. retail market. The annual U.S. retail market from multi-service salad kits is approximately $1.4 billion, representing over 75% of the approximate $1.8 billion North American multi-service salad kit market including Costco.

For the 52 weeks ended January 27, 2018, Eat Smart multi-service salad kits in U.S. retail consumer dollars grew 61% in the U.S. retail market compared to a category growth rate of 15%. For the same period the market share of Eat Smart multi-service salad kits in the U.S. retail market increased to 5.7% from 4.1%, an increase of 160 basis points, demonstrating continuous distribution gains as well as room for additional growth. With continued innovation and expanded distribution, we expect revenues in our salad business to continue to grow over the next 5 years.

The second phase of transformation of our food business began last fiscal year. This phase involves expanding our product line from fresh packaged vegetable to include other fresh natural food products that meet consumers evolving needs. As the first step in the second phase, we launched the Eat Smart 100% clean label initiative to ensure that all of our Eat Smart products including salad toppings, dressings and dips [ph] are made from all natural ingredients by the end of calendar year 2018. We are on schedule to deliver this commitment.

In fiscal year 2017, we also created the Landec new ventures group to develop a natural food strategy and to lead new product development and acquisition initiatives in this area. As the first step in the new ventures effort, we acquired O Olive a supplier all-natural premium olive oils and vinegars. This acquisition was timely as consumers are rapidly switching from traditional olive oils and vinegars to all natural options. The O Olive products also provide a unique opportunity for future innovation at Eat Smart offering all natural O Olive dressings within our growing salad kit business. In March, we completed the construction of our vinegar facility in Petaluma, California. We are now producing our own vinegars in-house enabling internal oversight to ensure the highest quality product standards and ingredient sourcing transparency, while simultaneously reducing costs and delivering higher gross margins.

During this fiscal year, the New Ventures Group accelerated its efforts in the development of the natural products strategy. And through our research, we found that there is a rapidly growing number of consumers searching for plant-based meal solutions. These consumers celebrate plant-based ingredients and view fruits, vegetables, grains and not as the central component of their eating experience. This new plant-forward consumer could be, but is more likely not a vegetarian or vegan. However, we found that plant-based ingredients make up at least 50% of the meals enjoyed by this consumer.

Based on a deep understanding of attitudes and behaviors of this new consumer target, we are developing products to meet the needs of this emerging segment. In the first half of fiscal year 2019, the Landec New Ventures Group will launch our first internally developed product line within our natural foods initiative to meet the needs of this ever-growing segment of consumers. We will share more about this initiative during our next earnings release call.

Our focus in our food business is on developing and offering products that are on-trend with consumers and have delivered higher margins at higher return on our invested capital. We have successfully implemented this strategy with our entry into the multi-serve salad kit category, our recent lunch into the single-serve salad kit category, the addition of O Olive oils and vinegars and with the recent launch of our Eat Smart timesavers and ready to walk products.

Eat Smart timesavers are in our core historical vegetable line offered fresh, vegetable kit that make eating vegetables convenient and delicious. The Eat Smart ready to walk product as a unique stirfry product that includes fresh vegetables and noodles and is currently being offered within the produce department of all Sam’s Club stores. While we expand our higher margin value-added products, we also continue to right-size the lower margin or more volatile parts of the business. Currently, this includes the decision to discontinue our lower margin food export business. As seen by the effects that weather had on our business during the first 9 months of fiscal 2018, this has become an increasingly important strategic initiative. We are excited to begin leveraging many of the investments we made over the past several years in both capital and personnel to create forward momentum. This fiscal year, we have begun increasing production volumes of our higher margin products both Apio and Lifecore to start filling our expanded production capacity and increasing our gross margins over time.

Looking at fiscal 2019, we will continue to innovate. At Apio, we will continue to launch new Eat Smart products that make it easy and delicious for consumers to eat healthy. We will continue to grow our O Olive line of products and on to new line of internally developed natural food products. At Lifecore, we will continue to add new processes and capabilities to meet the needs of our customers for their difficult to handle pharmaceutical and medical materials and we will begin selling products and vials in addition to syringes. We are also focused on increasing production volumes in each of our facilities to drive efficiencies and increase our return on invested capital or ROIC. Finally, we are focused on increasing efficiencies and driving costs down in our operations in order to offset the rising costs that are affecting our businesses.

In summary, we will continue to focus on developing innovative products to deliver value to our customers, consumers and shareholders. As we continue to transform our businesses, we will focus on growing our three platforms, Lifecore, Eat Smart salad and our Natural Food products while simultaneously reducing costs and increasing efficiencies. Our balance sheet remains strong and provides the resources for executing on our strategic objectives in reaching our financial goals. We are now open for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Anthony Vendetti from Maxim Group. Your question please.

Anthony Vendetti

Yes, thanks. Good morning.

Greg Skinner

Good morning.

Anthony Vendetti

Good morning. So, good quarter all around. I guess Lifecore I thought this year was going to be a transition year, is outperforming. Any specific contract or anything any specific product what are they doing that’s put them ahead of schedule and is that going to translate into 2019 getting off to a strong start that transitions over at Lifecore?

Greg Skinner

Well, it wasn’t anything in particular, Anthony, basically just higher sales volumes from our existing customers that we were expecting, which is good news. And yes, it should carryover into ‘19. And as we stated numerous times, we expect Lifecore to grow on average 10% to 15%, I see no reason why that, that shouldn’t be the range next year.

Anthony Vendetti

And if we just do the math by fiscal year ‘21 or ‘22 Lifecore could be at $100 million plus in terms of revenues, at that point where you make a decision as to whether or not Lifecore remains part of Landec or how do you think about Lifecore once it gets to around $100 million of revenues?

Molly Hemmeter

Hi, Anthony. We are consistently looking at our strategic options with Lifecore. So, this isn’t we are sitting around waiting to understand what that is. We are constantly evaluating what the right strategic decision is at any point in time. And so right now, we strongly believe that it belongs as part of the Landec portfolio and one of the reasons is it needs to grow and grow bigger and $100 million will provide a bit better opportunity for us to look at maybe it will kind of shift the picture and maybe at that time it will be, but we are going to continue to look at those options and when the numbers make sense, we will do whatever makes sense to maximize shareholder value.

Anthony Vendetti

Okay, great. And then on the Eat Smart salad kits, obviously that’s growing significantly faster than you thought and obviously when we were out there for the Analyst Day, we had a chance to try them personally and so I understand why they are doing well and I think you are right on trend with the consumers, can this much higher growth of 20% plus do you see that as sustainable growth as we move through the next couple of years?

Molly Hemmeter

What we experienced this year was an accelerated distribution growth. I mean, the new sales team is just doing amazingly well and they were able to get new distribution much quicker than we had anticipated. So, I think a lot of the growth, not a lot, but some of the growth from next year was pulled in to this year. So, as you know, we added – we increased our distribution at Walmart, we added salads in Kroger, we have recently also started selling our salads to Target. I will say it’s the one remaining account that we are trying to pursue is Meijer. But after that, it’s going to be more about as we start growing our relationships with these customers, it’s going to be about ensuring that our salads that are on shelf are gaining consumer adoption and awareness and then increasing the number of SKUs in those customers. So, I do think some of the growth from next year was pulled into this year, but we haven’t stating that we are trying to grow on average that 10% each year and I think we can hold to that, next year might be lower than 10% of the single digits as we grew so much this year.

Anthony Vendetti

Okay, but you are coming out with new products in that category and right now did you say about right now you only have about 5.7% of the market?

Molly Hemmeter

That’s right exactly. So there is lots of room to expand, there is lots of room to add more SKUs in existing accounts and we just have to keep innovating and fighting for that space.

Anthony Vendetti

And just I know you are in Target, Walmart and Kroger, but were you within the Target stores, are you rolled out into all of them at this point all the ones that ?

Molly Hemmeter

We are in about – we are in approximately 330 doors at Target. So, that’s another opportunity is to grow and expand our doors at Target.

Anthony Vendetti

Okay, great. I will hop back in the queue. Thank you so much.

Molly Hemmeter

You’re welcome.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Francesco Pellegrino from Sidoti & Company, your question please.

Francesco Pellegrino

Good morning guys.

Greg Skinner

Good morning.

Molly Hemmeter

Good morning.

Francesco Pellegrino

So I guess I will start off with Apio, if I look at the really strong performance for your salad kit product line during the quarter and then I just sort of peg it against what the Apio value added segment did in regards to gross profit, I know we talked about salad kit margins ranging anywhere between 15% to 24% single pack salad kit product margins are probably maybe around like 10%, if I apply a 15% gross margin to the salad kit product line on this quarter it sort of net out to around like $7 million in gross profit just for that product line. And then I guess what I am sort of backing into is did your – the rest of the core packaged fresh vegetable business like was that operating at breakeven during the quarter?

Greg Skinner

Well, if you remember one of things and I can’t verify your math, I don’t have that level of detail in front of me.

Francesco Pellegrino

It was just hypothetical?

Greg Skinner

The $3.6 million and sourcing hits that took during the quarter that’s all associated with the historical core – primarily the historical core bag business. So even though I don’t have the math in front of me, a good play out exactly what you said is that when you factor in the $3.6 million against the margins that that business makes it could put it or probably did put it in a loss position for the quarter.

Molly Hemmeter

Or the other part of that too, right now is that we are heavily prompting our salads because we are new into all these accounts. We are putting a lot of promotional dollars behind these to ensure consumer adoption and grow awareness. So that’s going to be the other factor on your gross margins in addition to the sourcing hits.

Francesco Pellegrino

Okay. All the promotional activity, are we thinking like after four quarters you pulled back on it and then all of a sudden you get margin expansion or you get like more normalized margins for the salad kit product line or do you think this competitive space is going to last for quite a bit of time?

Molly Hemmeter

We will pull back on the promotional spend after some time, I can’t say how longer time that will be, that will be through next year or how long, but we won’t keep at this rate forever, it’s just because we are selling new in these accounts. And when you look at the real estate on shelf, we still only have 1 to 3 to 5 SKUs in the sea of like 60, so we really need to make it top for consumer in getting to try our salad.

Francesco Pellegrino

Got it. I guess just shifting over to Lifecore for a minute, can you guys provide some really great guidance in regards to each of your segments and get the overall business, for Lifecore I know historically we should just think about Lifecore aiming for 43% to 45% gross margin, but in the guidance that we are really providing with – provided with is operating income growth what should we be thinking about for Lifecore’s gross margin for the year?

Greg Skinner

Your range was pretty good.

Francesco Pellegrino

Okay. So if we are aiming for like 43% to 45% we are having this issue where some higher margin business is being shifted over to the fourth quarter, I guess I was just a little bit more enthusiastic for the back half of the year and I thought on the last earnings call the – what was being implied was we were going to be seeing Lifecore gross margins right around 55% for the second half and it just looks as if maybe some of the business that was pushed back wasn’t really at high margin as we necessarily thought it was going to exist for the second half or maybe there is timing things and some business isn’t coming online, you guys had on the second quarter call I thought there was a level of comfort that Lifecore was going to have the second half gross margin in excess of 50% and I think right now based upon the guidance that you are providing us with is going to come out slightly below 50%?

Greg Skinner

And that’s probably pretty accurate. With the Lifecore, it comes down to mix, because they have got three distinct businesses, the aseptic filling, which is the lower margin business, because that’s where all the labor and overhead exist. You got the fermentation, which is higher and business development which is higher. And depending on that mix in any given quarter, it’s going to dramatically change their margins. And if you look historically at the fourth quarter, the historical fourth quarter margins are usually in the 30s. And so the fact that it’s even nearing 50% tells you that the third quarter where a lot of the high margin business occurs shifted to the fourth quarter that even getting close to 50%. So, this is actually within what we had expected for Lifecore for the year.

Francesco Pellegrino

It make sense that each of your product lines and the product mix is going to be creating these changes, but I thought there were going to be sub product line product mix shift as well. For example, I thought within that aseptic filling it’s the lowest margin product line of the three product lines within Lifecore. I thought we were also going to see this phenomenon of non-HA aseptic filling business coming online in the second half, which was actually going to increase the overall aseptic product line gross margin. So, I am not sure maybe aseptic filling – that happened.

Greg Skinner

Yes. That’s one of the reasons there. Their margins are nearing 50% as you pointed out in the fourth quarter, otherwise even with the shift in some shipments from the third quarter to fourth quarter would have been less.

Francesco Pellegrino

Okay. And I guess maybe just the last question to sum this all up, is it better to think of full year gross margins for Lifecore at the lower end of the 43% to 45% range?

Greg Skinner

Yes.

Francesco Pellegrino

Okay, perfect. That’s it for me. Thank you, guys.

Operator

Thank you. Our next question comes from the line of Chris Krueger from Lake Street Capital. Your question please.

Chris Krueger

Hi, good morning.

Greg Skinner

Good morning, Chris.

Molly Hemmeter

Good morning, Chris.

Chris Krueger

Just a couple of quick questions. You mentioned that your O Olive business is expected to grow at about $4.75 million this year and then you are trying to get your Eat Smart people to start selling that? If you were to land a couple of significant national retailers for that business, how big could that be in the next couple years, could it be a $20 million business or how do you look at that?

Molly Hemmeter

Well, we definitely think that one day that business can be a $20 million business. It comes back to exactly what you are saying, which is the timing of new distribution. That has to do with us first even getting to know these new buyers and their different reset timings. I would hope that in the next 1 to 2 years that we can double the business and go from there, but I mean when we acquired this business we definitely think we believe it can be over $20 million business.

Chris Krueger

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

Molly Hemmeter

Yes. So, we have on the vinegar side of the business, we have plenty of capacity. As we mentioned in the call, we just build our own vinegar facility, which has plenty of capacity for the growth projections that we have. On the olive oil side of the business, we do have limited supply of olive oil and how quickly if we can grow that business. So right now we are in the middle of sourcing new olive oil partnering with new olive growers and could actually take our growth, enable our growth to go over that 20 million in 3 plus years. So, vinegar, plenty of capacity, no issues on supply, olive oil working on it and we will have limited supply until we secure longer supply agreements.

Chris Krueger

Alright. And then my last question is do you have the kind of an internal pipeline of potential new brands or new acquisitions that you are evaluating right now and is that growing?

Molly Hemmeter

So, our – we have a large initiative in the natural food space that we plan to bring to market in fiscal year ‘19. And I know we have been very excited about that. But we have been doing a lot of research on this new plan based consumer and that’s nothing new, but I think what we found in our research and really getting down to attitudes and behaviors and beliefs and needs of this consumer, we found some unique insights. And based on those insights, we are developing a new product line to launch this calendar year fall and so that product line will be out and around August or September area and we are looking forward to sharing more about that in the next earnings release call.

Chris Krueger

Alright, thank you. That’s all I got.

Molly Hemmeter

Thank you.

Greg Skinner

Thanks Chris.

Operator

Thank you. Our next question comes from the line of Mitch Pinheiro from Costello Asset Management. Your question please.

Mitch Pinheiro

Yes, hi. Good morning, everybody.

Greg Skinner

Good morning.

Molly Hemmeter

Good morning.

Mitch Pinheiro

Hey. So, just a couple of questions. Any first on Apio, have you seen any changes in the market or anything resulting from Fresh Del Monte’s acquisition of Mann?

Molly Hemmeter

We have not seen anything yet. I mean, it’s a buzz and people know about it. I haven’t seen any shifts or differences in our relationships or anything at this time.

Mitch Pinheiro

Okay. And then with sourcing I have been hearing for years about how you are going to strategically change and tried to mitigate the sourcing issues, but at the end of the day, you are always going to have sourcing issues of some sort or can you talk about how confident or really if anything has changed dramatically in the sourcing that will really mitigate the lots of downs that we have had in the last couple of years?

Molly Hemmeter

You are correct in the fact that, that portion of our business that is highly volatile and it’s the vegetable bag portion, where it’s always going to have sourcing risks. It is the business we are in. We are in produce business with short shelf life and it is what it is. That being said, I do feel like we can do several things to mitigate that strategy. First of all, when I look at that product line that’s the most volatile, one thing we are trying to do is increase our gross margins of that line. So, that even when there is volatility we have the profitability to absorb those extra costs. And so when I look at that how are we doing that? One, we have been going out with price increases and we have had some success for next fiscal year in gaining these price increases, which we haven’t had in a while. So, we are seeing success finally and getting some price increases. The third thing is innovation. So, we have started to – the second thing is innovation. We have started to innovate within our core line. So I mentioned at the beginning of the call about products that we just launched and there are really products within our core bag business, but we are evolving like a bag of broccoli and a bag of cauliflower to actual kits, which as you know, consumers are looking for more and more convenience. So in these kits, we are calling them timesavers, they come with sauces and different additions to make vegetables taste better and they make it easy. It makes it easy to put on the test better. These products that we still consider in our core line we are adding margin to that line. So, we just launched one of the examples is cauliflower fried rice. Another one is a green beans sauté. And we just launched them, but they are doing rather well. We also started a new line of – call it ready-to-wok. And ready-to-wok is a line of stir fry kits with noodles and vegetables in the produce department, is doing extremely well at Sam’s. And this fetches a higher margin. So, the second thing we are trying to do is innovate. The third one is we are also shifting our channels a bit and we have been aggressively going after the direct-to-consumer market and creating small portion packs for the different meal kit companies and this has been a profitable endeavor for us also. So, it might be just a small bag of green beans or a small bag of broccoli, but those are fetching, because it’s such convenience for these meal kit companies. Those are fetching a higher margin. And I’d say the fourth thing is all about cost reduction. We have to continue to get aggressive in reducing the cost in our plant side and gaining efficiencies and taking out costs wherever we can. And so these four initiatives you hope that over time we do increase the profitability. And if we would not have had the sort – the hurricanes this year, you would have actually seen an increase in margin in that core vegetable bags business if I was taking out the sourcing hits. So the standard margin that we see has increased, but this year was an awful sourcing year and it’s completely hiding the fact that we are increasing the margin in that business likely over time.

Mitch Pinheiro

Yes, that’s helpful Molly. And then it just seems like you have never been able to get paid for the sourcing risk, you are the ones and other companies like such as yourself are the ones that bear the brunt of sourcing risk and it’s never the consumer or the retailer or rarely the consumer or the retailer, but so you have just got to do what you got to do that to work around that, but what about the labor you pointed out labor going up, is that something that you can you think you can take pricing for I mean you are just trying to take out costs in the plant faster than labor rises?

Molly Hemmeter

So that’s why all four of those initiatives that I just outlined to increase the probability in core are trying to offset labor price increases and the volatility that we are seeing with weather, so there is a lot going on to try to counteract those. And you are right we have won the brunt of that cost increases and we have to start passing pricing along and we have to start getting our costs down. And it’s a major initiative going into fiscal year ‘19 to do just that.

Mitch Pinheiro

Just a couple of other questions, one is like with the M&A pipeline how does that look and how the M&A valuations look, are they trending up, down or flat in your view?

Molly Hemmeter

So we have a long list of M&A companies that we are reviewing and we are constantly reviewing I will say that the multiples are still extremely high you are probably seeing that for companies that have been acquired. We have not found an acquisition target right now that makes sense from an ROI standpoint. It just doesn’t make sense to pay the high multiples we are seeing in the market. If we find an acquisition that we believe we can deliver an ROI and its strategic we will be right on it. Until that, we are not sitting back, we are going to develop our own products because I think there is a higher ROI on internally developing products from the natural food space and I think it’s a core competency that we have at Apio is our consumer insight in our internal innovation engine. And I think we can do – we can launch new products that will deliver much higher ROI right now compared to acquisitions. Now if that changes and the market for acquisitions changes and those multiple come down, we can we can shift immediately.

Mitch Pinheiro

Okay. And then last one CapEx, what’s – Greg can you delineate what the CapEx will be, the buckets of the spending?

Greg Skinner

Buckets being between Apio and Lifecore or...

Mitch Pinheiro

Yes. And maybe just within that what exactly a little more specificity like this type of project I think?

Greg Skinner

Yes. This year you know what the revised guidance, the majority that this year is what is Lifecore and most of that’s our new filling line which should be up and running in June which we are very excited about. Some of the projects at Lifecore are being at Apio were delayed. And so you we had originally thought this year would be in the mid-40s and now it looks like it’s going to be in the low-30s. Lot of that difference is going to roll in the next year. They were just delayed projects. They still need to get done. And so we had expected this being a big year, big drop next year, I think they are going to be pretty close year-over-year. So this year in the low-30s, next year it’s going to be close to that.

Mitch Pinheiro

Okay. And your good visibility…?

Greg Skinner

At least in the area of equipment, there is some buildings, but most of it is equipment or capacity.

Mitch Pinheiro

And you have good visibility with Lifecore, the new customer and the new customer pipeline were with that, is that anywhere part of the spending at Lifecore or is there then potential for additional CapEx of the pipeline performs better at Lifecore?

Greg Skinner

Yes and yes. We obviously built the filling line in anticipation of filling customer needs. And if those needs become much greater than what we are currently forecasting, we are fully prepared to add another line.

Mitch Pinheiro

Okay. Thanks for the time guys.

Greg Skinner

Thanks Mitch.

Molly Hemmeter

Thank you.

Operator

Thank you. [Operator Instructions] And 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.

Molly Hemmeter

Thank you everyone for joining us today to talk about Landec. We look forward to our next call with you to update you further on our initiatives. Thanks so much.

Operator

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