Landec Corporation (NASDAQ:LNDC), a leading innovator of
diversified health and wellness solutions within the packaged
natural food and biomaterial markets, reported results for the
fiscal 2017 fourth quarter and fiscal year ended May 28,
2017.
“For fiscal 2017, Lifecore delivered a record year with revenues
increasing 18% to $59.4 million compared to last year and operating
income increasing 13% to $15.9 million,” commented Molly Hemmeter,
Landec’s President and CEO. “The shift of Lifecore’s business model
from a premium supplier of hyaluronic acid (HA) to a fully
integrated contract development and manufacturing organization
(CDMO) for difficult-to-handle biomaterials is delivering results.
During fiscal 2017, Lifecore commercialized its first non-HA drug
product and continued to build and expand its product pipeline of
HA and non-HA development projects to fuel future growth.”
Ms. Hemmeter added, “Apio’s strategy to focus on innovation and
shift its product mix to higher margin products resulted in a 260
basis point increase in fiscal 2017 gross margin compared to fiscal
2016. Despite a 4% decline in revenues, Apio’s gross profit in
fiscal 2017 increased $10.5 million, or 23%, which was due to a
reduction in lower margin product sales coupled with positive
operating efficiencies, including more favorable produce sourcing
during fiscal 2017 compared to fiscal 2016.
“For well over a year, we have been emphasizing our strategy to
grow Apio’s Eat Smart® salad business through continued product
innovation and expanded distribution in major U.S. retailers.
During the fourth quarter of fiscal 2017, Apio entered the
single-serve salad kit segment with the launch of its innovative
Eat Smart “Salad Shake-Ups!™”, increasing the total addressable
market for our Eat Smart products in the North American value-added
vegetable space by approximately $500 million to $3.8 billion. This
product line is designed to attract new consumers to the
single-serve category that currently has a household penetration of
only 11%. Eat Smart “Salad Shake Ups!” feature unique flavors, a
100% clean label, nutrient-rich vegetables and plant proteins in a
patented bowl design that makes it easy to enjoy with less mess.
The first three single-serve products are now being sold to over a
dozen retailers in North America,” said Ms. Hemmeter.
“We also made significant gains in U.S. distribution of our Eat
Smart salads during the fourth quarter. For the 52 weeks ending May
27, 2017, the All Commodity Volume (ACV) for Eat Smart multi-serve
salad kits increased by 10 percentage points from 14% to 24%. We
expect this to increase further over the coming months as our
salads start to fill the shelves at new customers. In May of 2016,
Walmart began testing our Sweet Kale Salad in 400 stores, which was
subsequently expanded in October of 2016 to 1,400 stores following
the product’s strong performance. During the fourth quarter of
fiscal 2017, Walmart further expanded the distribution of the Sweet
Kale Salad, which today can be found in approximately 3,800 stores.
In addition, Apio added Fresh Market as a new customer and began
shipping eight Eat Smart salads to approximately 177 stores during
the quarter,” added Ms. Hemmeter. “We are also pleased to announce
that Kroger has become Eat Smart’s newest salad customer, with four
Eat Smart salads being distributed to approximately 2,000 stores
starting this month. The Sweet Kale Salad and the Strawberry
Harvest multi-serve salad kits and two of the new Eat Smart “Salad
Shake-Ups” single-serve salad kits began shipping at the start of
July and we expect all 2,000 stores to have the salads by August.
We are committed to delivering value to all of our customers with
innovative products, strong analytics, shopper insights and
strategic promotions to grow consumer traffic and profitability for
our retail partners.
“In our ongoing efforts to make Eat Smart products available to
all consumers, we are aligning ourselves with strong partners
across all channels, including the growing online marketplace,”
continued Hemmeter. “We are currently selling packaged fresh
vegetables to several Direct-to-Consumer Meal Kit companies,
including Hello Fresh, and began shipping Eat Smart products to
Amazon Fresh in February of this year. It is important that we
partner strategically with these customers to align our innovative
Eat Smart products with changing consumer purchasing behaviors.
Over time, the increased distribution of our salads will drive
higher, more profitable volumes through Apio’s facilities.
“These new products and our new distribution gains will begin to
increase revenues and gross margins as they are fully rolled out
during fiscal 2018 and full distribution is achieved. Even though
these new products and new distribution had little impact on our
fiscal fourth quarter of 2017, our strategy of changing our product
mix at Apio to higher margin products is reflected in our results
as our gross margin in our Apio packaged fresh vegetables business
increased 130 basis points during the quarter and 290 basis points
for the fiscal year 2017 compared to the prior year periods,”
concluded Hemmeter.
Fourth Quarter 2017 Results Compared to Fourth Quarter
of 2016
- Revenues decreased 6% to $127.4 million
- Gross profit decreased 14% to $19.7 million
- Net income decreased 48% to $2.5 million or $0.09 per
share
Fiscal Fourth Quarter 2017 ResultsLandec
consolidated revenues in the fourth quarter of fiscal 2017
decreased 6% to $127.4 million from $135.3 million in the year-ago
quarter. The decrease was due to a $7.1 million or 54% decrease in
revenues in Apio’s export business due to the Company’s decision to
discontinue selling certain low margin fruit products and a $4.1
million or 26% decrease in revenues at Lifecore compared to above
average revenues at Lifecore in the fourth quarter of last year.
This decrease was expected due to a customer’s request to ship
their product in the fourth quarter of last year, which
historically shipped in the third quarter. These decreases in
revenues were partially offset by a $3.0 million or 3% increase in
revenues in Apio’s packaged fresh vegetables business due to
increased offerings and new distribution of salad kits in U.S.
retail.
Landec consolidated net income in the fourth quarter of fiscal
2017 was $2.5 million or $0.09 per share compared to a net income
of $4.7 million or $0.17 per share in the year-ago quarter. The
decrease in net income was due to (1) a $4.3 million decrease in
gross profit at Lifecore resulting from lower revenues and an
unfavorable product mix change compared to the fourth quarter of
last year, (2) a $1.7 million increase in R&D expenses for new
product development, and (3) a $438,000 decrease in gross profit in
Apio’s export business due to lower revenues. These decreases
in net income were partially offset by (1) a $1.7 million increase
in gross profit in Apio’s packaged fresh vegetables business and
(2) a $2.1 million decrease in income taxes.
Fiscal 2017 Results Compared to Fiscal 2016
- Revenues decreased 2% to $532.3 million
- Gross profit increased 17% to $83.2 million
- Net income increased to $10.6 million or $0.38 per share
- Cash flow from operations increased 34% to $29.3 million
Fiscal 2017 ResultsLandec consolidated revenues
in fiscal 2017 decreased 2% to $532.3 million compared to $541.1
million last year. The decrease in revenues was primarily due to a
$15.8 million or 4% decrease in revenues in Apio’s packaged fresh
vegetables business and a $1.7 million or 3% decrease in Apio’s
export business partially offset by an $8.9 million or 18% increase
in revenues at Lifecore.
Landec consolidated net income in fiscal 2017 was $10.6 million,
or $0.38 per share, compared to a net loss of $11.6 million, or
$0.43 per share, in fiscal 2016. The increase in net income was due
to (1) a $34 million ($21.5 million net of tax) write down of the
GreenLine trademark in the third quarter of last year, (2) a $10.7
million or 26% increase in gross profit in Apio’s packaged fresh
vegetable business as a result of a 290 basis point increase in
gross margin, and (3) a $2.7 million or 11% increase in gross
profit at Lifecore. These increases in net income were
partially offset by (1) a $10.9 million or 19% increase in
operating expenses, which included $4.7 million of expenses from
legal fees and a legal settlement charge resulting from a
labor-related class action lawsuit at Apio, (2) a $911,000 decrease
in gross profit at Corporate due to the completion of two licensing
agreements earlier in fiscal 2017, and (3) from a non-recurring
charge of $1.2 million related to the refinancing of Apio’s debt
during fiscal 2017.
“During fiscal 2017, Eat Smart salad kit sales remained
relatively flat due to Costco’s decision to multi-source Sweet Kale
Salad. This reduction in Eat Smart salad kit sales at Costco was
offset by substantial growth of Eat Smart salad kits in U.S. retail
during fiscal 2017,” stated Ms. Hemmeter. “For the twelve months
ended May 27, 2017, the U.S. salad kit category growth in consumer
dollars, excluding Costco, was 18%, while the comparable growth for
Eat Smart salad kits during the same period was 51%. Our Eat Smart
share in the U.S. retail multi-serve salad kit market grew
approximately 100 basis points, but still remains low at 4.5%,
providing ample room for future growth.
“During fiscal 2017 we completed a reorganization of Apio’s
retail sales force, led by Parker Javid, Apio’s new Chief Customer
and Sales Officer,” continued Ms. Hemmeter. “In just one year, the
team has built a new retail sales organization and retail broker
network, engaged with customers at a more strategic level,
developed improved forecasting and demand planning capabilities,
optimized trade spending and product promotional programs and
acquired new business with top new customers such as Walmart and
Kroger. This is an impressive list of accomplishments for one year.
The new sales force is continuing to build momentum and a strong
sales pipeline to fill Apio’s existing capacity and drive a higher
return on invested capital.”
“Our balance sheet and cash generation remain strong,” stated
Greg Skinner, Landec’s VP of Finance and CFO. “We ended the fourth
quarter with $5.4 million in cash. Debt at the end of the year was
$54.0 million with a debt-to-equity ratio of 24%, compared to $61.1
million and 29%, respectively, at fiscal year-end 2016. Cash flow
from operations for fiscal 2017 was $29.3 million, up from $21.9
million last year. Capital expenditures for fiscal 2017 were $22.6
million, down from $40.9 million in fiscal 2016. The net effect
resulted in free cash flow of $6.7 million for fiscal 2017 compared
to a negative free cash flow of $19.0 million last year, an
improvement of $25.7 million.”
Management Guidance for Fiscal 2018 (see Questions &
Answers section at the end of this release for further
details)
“We expect consolidated revenues to grow 2% to 4% in fiscal 2018
with our Eat Smart salad products growing double digits, Lifecore
growing 6% to 8% and O Olive increasing revenues by $5 to $6
million. We expect the revenue in Apio’s lower margin core and
export businesses to decrease $20 to $25 million. We are projecting
consolidated net income to increase 35% to 55% in fiscal 2018
compared to fiscal 2017, resulting in an estimated EPS range of
$0.52 to $0.58. The fair market value of our Windset investment is
estimated to increase approximately $4.0 million in fiscal
2018. These expectations provide the basis for expected cash
flow from operations in the range of $32 to $36 million and capital
expenditures of $44 to $48 million in fiscal 2018. For the first
quarter of fiscal 2018, we expect revenues to be $120 to $125
million and net income to be $0.05 to $0.07 per share,” noted Mr.
Skinner.
Ms. Hemmeter stated, “Landec continues to invest in innovation
in order to shift its product mix and drive higher gross margins.
Lifecore’s growth trajectory remains intact with expectations for
double-digit revenue growth on average over the next five years.
For fiscal 2018, revenues for Landec’s food-related businesses,
which includes both Apio and O Olive, are expected to be flat to
slightly up despite an expected $20 to $25 million incremental
decline in lower margin core and export businesses. This
strategic loss of business is expected to be more than offset by an
increase in the higher margin Eat Smart salad and O Olive products,
underlying and continuing with our strategy to shift the product
mix toward higher margin products. The fiscal 2018 revenue decrease
in our lower margin core businesses is expected to be the final
significant phase in Apio’s efforts to right-size its
non-strategic, lower margin core packaged fresh vegetable and
export businesses.
“Looking toward the next five years, we will continue to focus
on innovation in order to: (1) grow our Eat Smart salad business by
double digits each year on average, (2) expand our food product
offerings beyond produce to refrigerated, natural food products
with higher margins, and (3) grow our Lifecore business annually on
average by double digits as we build our product development
pipeline with HA and non-HA initiatives poised for future
commercialization. With these three growth platforms in place, we
have established Landec’s consolidated financial goals to be
accomplished within the next five years, specifically (1)
increasing consolidated gross margin from 15.5% in fiscal 2017 by
400 to 500 basis points or to approximately 20%, (2) tripling
fiscal 2017 operating income of $15.5 million and (3) at least
doubling the fiscal 2017 return on invested capital (ROIC) of 6.4%
over the next five years,” Hemmeter concluded.
Conference CallThe live webcast can be accessed
directly at http://ir.Landec.com/events.cfm or on Landec’s website
on the Investor Events & Presentations page. The webcast will
be available for 30 days.
Date: Wednesday, July 26, 2017Time: 11:00 a.m. Eastern time
(8:00 a.m. Pacific time)Direct Webcast link:
http://ir.Landec.com/events.cfm
To participate in the conference call via telephone, dial
toll-free (844) 860-6243 or (661) 378-9884. Please call the
conference telephone number 5-10 minutes prior to the start time so
the operator can register your name and organization. If you have
any difficulty with the webcast or connecting to the call, please
contact ICR at (646) 277-1254.
A replay of the call will be available through Wednesday, August
2, 2017 by calling toll-free (855) 859-2056 or international (404)
537-3406, and entering code #45958252.
About Landec
Corporation
Landec Corporation (NASDAQ:LNDC) is a leading innovator of
diversified health and wellness solutions within the packaged
natural food and biomaterial markets. Apio, Landec’s food business,
is the leader in branded, packaged fresh vegetables in North
America, utilizing its proprietary BreatheWay® packaging technology
to naturally extend the shelf life of fresh produce. Apio combines
this technology with the capabilities of a large national fresh
produce supplier to offer healthy fresh vegetable products under
the Eat Smart® brand to consumers through club and retail grocery
stores. Extending its reach into adjacent natural food products
outside of produce, Landec recently acquired O Olive Oil, Inc, an
organic and natural producer and marketer of olive oils and
vinegars under the O brand. Lifecore Biomedical, Landec’s
biomaterial business, is a fully integrated Contract Development
and Manufacturing Organization (CDMO) that offers expertise and
capabilities in fermentation, specialty formulation, aseptic
filling and final packaging for FDA regulated medical devices and
drugs to customers for applications in a wide array of markets
including Ophthalmic, Orthopedic and Oncology. For more information
about the company, visit Landec’s website at www.landec.com.
Important Cautions Regarding Forward-Looking
StatementsExcept for the historical information contained
herein, the matters discussed in this news release are
forward-looking statements that involve certain risks and
uncertainties that could cause actual results to differ materially,
including such factors among others, as the timing and expenses
associated with operations, the ability to achieve acceptance of
the Company's new products in the market place, weather conditions
that can affect the supply and price of produce, the amount and
timing of research and development funding and license fees from
the Company's collaborative partners, the timing of regulatory
approvals, the mix between domestic and international sales, and
the risk factors listed in the Company’s Form 10-K for the fiscal
year ended May 29, 2016 (See item 1A: Risk Factors) which may be
updated in Part II, Item 1A Risk Factors in the Company’s Quarterly
Reports on Form 10-Q. As a result of these and other factors, the
Company expects to continue to experience significant fluctuations
in quarterly operating results and there can be no assurance that
the Company will remain consistently profitable. The Company
undertakes no obligation to update or revise any forward-looking
statements whether as a result of new developments or
otherwise.
LANDEC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS(In
thousands) |
|
|
May 28, 2017 |
|
May 29, 2016 |
|
(unaudited) |
|
|
ASSETS |
|
|
|
Current Assets: |
|
|
|
Cash and
cash equivalents |
$ |
5,409 |
|
$ |
9,894 |
Accounts
receivable, net |
|
47,083 |
|
|
46,406 |
Inventories, net |
|
25,290 |
|
|
25,535 |
Prepaid
expenses and other current assets |
|
3,498 |
|
|
4,468 |
Total Current
Assets |
|
81,280 |
|
|
86,303 |
|
|
|
|
Investment in
non-public company |
|
63,600 |
|
|
62,700 |
Property and equipment,
net |
|
133,220 |
|
|
120,880 |
Intangible assets,
net |
|
76,990 |
|
|
71,016 |
Other assets |
|
2,918 |
|
|
1,754 |
Total Assets |
$ |
358,008 |
|
$ |
342,653 |
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY |
|
|
|
Current
Liabilities: |
|
|
|
Accounts
payable |
$ |
25,868 |
|
$ |
30,904 |
Accrued
compensation |
|
8,211 |
|
|
5,460 |
Other
accrued liabilities |
|
9,125 |
|
|
7,772 |
Deferred
revenue |
|
310 |
|
|
832 |
Line of
credit |
|
3,000 |
|
|
3,500 |
Current
portion of long-term debt |
|
4,940 |
|
|
7,873 |
Total Current
Liabilities |
|
51,454 |
|
|
56,341 |
|
|
|
|
Long-term debt, less
current portion |
|
42,299 |
|
|
45,972 |
Capital lease
obligation, less current portion |
|
3,731 |
|
|
3,804 |
Deferred taxes |
|
24,581 |
|
|
22,442 |
Other non-current
liabilities |
|
7,791 |
|
|
1,744 |
|
|
|
|
Stockholders'
Equity |
|
|
|
Common
stock |
|
27 |
|
|
27 |
Additional paid-in capital |
|
141,680 |
|
|
137,244 |
Accumulated other comprehensive income |
|
432 |
|
|
— |
Retained
earnings |
|
84,470 |
|
|
73,457 |
Total Stockholders'
Equity |
|
226,609 |
|
|
210,728 |
Non-controlling interest |
|
1,543 |
|
|
1,622 |
Total Equity |
|
228,152 |
|
|
212,350 |
Total Liabilities and
Stockholders’ Equity |
$ |
358,008 |
|
$ |
342,653 |
LANDEC
CORPORATIONCONSOLIDATED CONDENSED STATEMENTS OF
INCOME (In thousands, except per-share
data)(unaudited) |
|
|
|
|
Three Months Ended |
|
Twelve Months Ended |
|
|
|
May 28,
2017 |
|
May 29, 2016 |
|
May 28, 2017 |
|
May 29, 2016 |
Product
Sales |
$ |
127,430 |
|
|
$ |
135,313 |
|
|
$ |
532,257 |
|
|
|
541,099 |
|
|
|
|
|
|
|
|
|
|
|
Cost of
product sales |
|
107,773 |
|
|
|
112,529 |
|
|
|
449,071 |
|
|
|
470,142 |
|
|
|
|
|
|
|
|
|
|
|
Gross
profit |
|
19,657 |
|
|
|
22,784 |
|
|
|
83,186 |
|
|
|
70,957 |
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses: |
|
|
|
|
|
|
|
|
Research
and development |
|
3,556 |
|
|
|
1,815 |
|
|
|
9,473 |
|
|
|
7,228 |
|
|
Selling,
general and administrative |
|
13,659 |
|
|
|
13,876 |
|
|
|
58,208 |
|
|
|
49,515 |
|
|
Impairment
of GreenLine tradename |
|
― |
|
|
|
― |
|
|
|
— |
|
|
|
34,000 |
|
|
|
Total operating costs
and expenses |
|
17,215 |
|
|
|
15,691 |
|
|
|
67,681 |
|
|
|
90,743 |
|
Operating
income (loss) |
|
2,442 |
|
|
|
7,093 |
|
|
|
15,505 |
|
|
|
(19,786 |
) |
|
|
|
|
|
|
|
|
|
|
Dividend income |
|
412 |
|
|
|
412 |
|
|
|
1,650 |
|
|
|
1,650 |
|
Interest income |
|
1 |
|
|
|
7 |
|
|
|
16 |
|
|
|
71 |
|
Interest expense |
|
(394 |
) |
|
|
(563 |
) |
|
|
(1,826 |
) |
|
|
(1,987 |
) |
Loss
on debt refinancing |
|
— |
|
|
|
— |
|
|
|
(1,233 |
) |
|
|
— |
|
Other
income |
|
200 |
|
|
|
200 |
|
|
|
900 |
|
|
|
1,200 |
|
Net
income (loss) before taxes |
|
2,661 |
|
|
|
7,149 |
|
|
|
15,012 |
|
|
|
(18,852 |
) |
Income taxes |
|
(197 |
) |
|
|
(2,346 |
) |
|
|
(4,335 |
) |
|
|
7,404 |
|
Consolidated net income (loss) |
|
2,464 |
|
|
|
4,803 |
|
|
|
10,677 |
|
|
|
(11.448 |
) |
Non-controlling interest |
|
(12 |
) |
|
|
(74 |
) |
|
|
(87 |
) |
|
|
(193 |
) |
Net
income (loss) available to common stockholders |
$ |
2,452 |
|
|
$ |
4,729 |
|
|
$ |
10,590 |
|
|
$ |
(11,641 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
$ |
0.09 |
|
|
$ |
0.17 |
|
|
$ |
0.38 |
|
|
$ |
(0.43 |
) |
|
|
|
|
|
|
|
|
Shares used in diluted per share computations |
|
27,755 |
|
|
|
27,474 |
|
|
|
27,652 |
|
|
|
27,044 |
|
LANDEC
CORPORATIONFOURTH QUARTER ENDED MAY 28,
2017QUESTIONS & ANSWERS
1) Can you please give us more detail concerning your guidance
for fiscal 2018 in the areas of gross profit and operating
expenses?
We expect gross profit to increase 6% to 10% in fiscal
2018 compared to fiscal 2017 with our gross margin expected to grow
at least 100 basis points. This growth is being primarily driven by
a more favorable product mix at Apio due to a higher percentage of
revenues and gross profit being generated by higher margin salad
sales. As a result, we are projecting Apio’s gross margin to grow
approximately 100 basis points. At O Olive, we plan to
significantly grow revenues and generate gross margin expansion of
over 500 basis points. At Lifecore, we continue to shift to a
higher percentage of revenues and gross profit coming from our CDMO
business. In fiscal 2018, we expect Lifecore’s gross margin to
remain in the mid-40% range.
We expect total operating expenses to increase 2% to 3%
in fiscal 2018 compared to fiscal 2017. Excluding the $5.5 million
of unplanned operating expenses (see Q&A #6 below) in fiscal
2017, operating expenses are projected to increase approximately
10% year over year, with R&D expenses increasing approximately
17% due to our commitment to emphasize innovation and product
development at both Apio and Lifecore as demonstrated by the recent
hiring of the VP of R&D and Innovation at
Apio. 2)
What is the status of Lifecore’s new vial filling line?
Lifecore continues to make progress on the
implementation of a new filling line to further enhance its growth
strategy as a CDMO. Several active development projects have
met significant milestone thresholds, and generated the required
return on investment targets at the onset of this new equipment
line. As a result, Landec has approved the remaining $12
million in capital needed to complete the facility expansion and
installation of the new filling line during fiscal 2018.
Lifecore is in the process of constructing new clean rooms to house
the new filling line and formulation equipment, which we estimate
will be installed and operational by end of fiscal 2018. This
new line is projected to expand our overall filling capacity by 45%
as the line provides versatility that can be used to fill either
vials or syringes. It is specifically designed to align
Lifecore’s capability with market expectations of its partners,
from both a capability and capacity perspective. This
investment gives Lifecore the incremental capability for filling
commercial quantities of drug products in a vial, which expands the
breadth of products and markets Lifecore will be able to
serve.
3) How is the integration of O Olive progressing? What are some
of the strategic steps you are taking to grow O Olive’s business?
Can you describe any expected operating synergies and when would
you expect a contribution to net income from O Olive?
As previously disclosed, the acquisition of O Olive is a
first step in our stated strategy of moving into adjacent product
segments outside of produce that offer consumers healthy,
convenient and delicious products that deliver a higher gross
margin and leverage Apio’s robust supply chain, logistics and
customer reach. The integration is going very well, and we are
currently in the process of securing long-term sourcing of olives
ahead of the anticipated growth in olive oil sales while also
beginning to expand our customer base.
The O Olive products are a clear adjacency to our salad
kit products, a significant growth platform for Apio. The strong
product innovation capabilities of the O Olive team along with
product and logistical synergies with the Apio business provide a
roadmap for future, sustainable growth. We are very excited about
the growth prospects of this business. We expect revenues to grow
50-100% in fiscal 2018 compared to the trailing 12-month period and
we expect O Olive to be profitable in fiscal 2018.
4) You stated in your guidance for fiscal 2018 that revenues in
Apio’s historical core and export businesses are projected to
decrease $20 to $25 million. Are you nearing the end of your “right
sizing” of these businesses?
Since the beginning of the third quarter of fiscal 2016,
the revenues of our core packaged vegetables business have declined
as a result of (1) our strategic decision to discontinue select
lower margin business, (2) some customers deciding to shift from
single-sourcing to a multi-source strategy, and (3) our decision to
reduce our dependency on certain highly volatile produce items
resulting in the reduction of certain core packaged vegetable SKUs.
A large majority of the discontinued business was lower margin
business that carried a very high cost to service.
In fiscal 2017, this loss of core business resulted in a
sales volume decrease of approximately 4% in our packaged fresh
vegetable business. Because a vast majority of Apio’s overhead is
fixed, this loss of volume resulted in overhead being a higher
percentage of Apio’s cost of sales in fiscal 2017 than in past
years. As volumes increase, Apio’s per unit overhead expense
will decrease (since most all of the overhead is fixed), resulting
in margins expanding at a more accelerated rate.
During fiscal 2018, we expect to forego another $10 to
$12 million of lower margin core packaged vegetables business,
continuing with our strategy to increase margins in the long term.
However, we believe that by the end of fiscal 2018 we will have
achieved the optimum balance for this business and thus do not
expect our core vegetables business to decrease meaningfully after
fiscal 2018. We also expect that increased volume sales in our
salad business will more than offset the decrease in volume sales
in our core business and therefore result in a favorable overhead
absorption in fiscal 2018 compared to fiscal 2017.
Within our export business, we plan to forego
approximately $10 to $13 million of low margin fruit export
business in fiscal 2018 in an effort to increase export margins as
we have done with the core packaged vegetables business over the
last 18 months.
5) Why were Apio’s packaged fresh vegetables revenues down 4% in
fiscal 2017?
Revenues in Apio’s packaged fresh
vegetables business were down due to Apio’s core vegetables
business being down $14.5 million compared to last year and the
loss of some salad kit business at Costco U.S.
These reductions in packaged fresh vegetables business were nearly
offset by our salad kit revenues benefitting from the North
American salad kit 18% revenue growth in the retail channel, with
all of that growth from U.S. retail.
Importantly, even though revenues in our packaged fresh
vegetables business declined 4% in fiscal 2017 compared to fiscal
2016, that business generated a 26% increase in gross profit
resulting in a 290 basis point improvement in gross margin to 12.4%
as we continue to shift the mix of our product line.
6) What was the cumulative amount of unplanned expenses incurred
by the Company in fiscal 2017?
We experienced several unplanned, non-recurring expenses
in fiscal 2017 that negatively impacted our results by a cumulative
amount of $6.7 million or $0.15 per share after taxes,
specifically:
a. A loss on the refinancing of our debt of $1.2
millionb. A legal settlement expense of $2.6
million for labor-related litigationc. Legal
expenses of $2.1 million associated with the labor-related
litigation; andd. Severance expenses of $800,000
primarily from restructuring our Apio sales team
7) Why isn’t the Company’s EPS guidance for fiscal 2018 higher
given the unplanned expenses incurred in fiscal 2017?
At Apio, the unexpected loss of two Costco distribution
centers for our Sweet Kale Salad in fiscal 2017 and the cumulative
net loss of approximately $40 million of core vegetable business
since late fiscal 2016 has created a much smaller, although more
profitable, product and volume base for our projected fiscal 2018
growth and beyond. In addition, for overall Landec, we expect
operating expenses, excluding the $5.5 million of unplanned
operating expenses in fiscal 2017, to increase approximately 10%
primarily due to an increase in new product development expenses
and employee incentive compensation programs aligned with revenue,
net income and ROIC goals. Lastly, we expect our income tax expense
to approximately double next year as it returns to approximately a
36% annual tax rate.
8) What were Apio’s market share numbers at end of fiscal
2017?
For the 52 weeks ended May 27, 2017, the size of the
North American market in which Apio participated (vegetable bags,
vegetable trays and salad kits) was approximately $3.3 billion in
consumer retail dollars, including retail and club stores. Of this
market, Apio’s overall market share is approximately 16% while
Apio’s Eat Smart salad kits have a market share of approximately
12%. In the retail market, excluding Costco, Eat Smart salad
kits enjoy a 41% market share in Canada and a 4.5% market share in
the U.S. Due to recent distribution gains in the U.S., the U.S.
market share number is up 100 basis points from a year
ago.
Our goal is to continue to aggressively grow the Eat
Smart market share and ACV for all our multi-serve salad kit
products as well as our newly launched single-serve salad kit
products.
9) Why was your tax rate so low in the fourth quarter of fiscal
2017?
The tax rate for the fourth quarter of fiscal 2017 was
considerably lower than our estimated 36% rate mainly due to a
higher than expected number of stock option exercises that occurred
during the quarter, largely due to a block of stock option grants
that were about to expire if not exercised by the holder. Due
to new stock-based compensation accounting rules, which the Company
adopted in fiscal 2017, the Company’s tax deduction, for the excess
tax benefits related to the stock-based compensation charged to the
holder, is now recorded as an income tax benefit in the income
statement. In the past, these excess tax benefits were recorded to
equity as additional paid-in capital. Also, the Company recognized
a larger than expected tax benefit related to R&D tax credits
in the quarter primarily related to resolution of prior period
R&D tax positions and increased R&D expenses in the current
year.
It should be noted that due to the new stock-based
compensation accounting rules, the Company’s tax rate will likely
be more volatile in the future, on a quarter to quarter and annual
basis, and will fluctuate from the expected 36%, especially when
large amounts of stock options are exercised at substantial gains
to the holder. The Company expects its tax rate for all of fiscal
2018 to be approximately 36%, however, this rate is subject to
change if projected stock exercises are significantly different
than those projections and /or R&D activities are different
than projected.
10) Why are capital expenditures projected to be so high in
fiscal 2018?
With the addition of O Olive in fiscal 2017, Landec now
has six operating facilities and two distribution centers located
throughout the U.S. Our annual “base” capital expenditures, which
include annual productivity initiatives, are now approximately $12
to $15 million for these eight locations. The remaining capital
expenditures we plan to spend in fiscal 2018 are for growth
initiatives, approximately half at Lifecore for its new
syringe/vial filling line and approximately half in our food
businesses.
11) What are Landec’s top priorities for the next 12 to 24
months?
Our continuing priorities are:
(a) Shifting our product mix to higher margin products
at both Apio and Lifecore while advancing the CDMO strategy at
Lifecore.(b) Increasing demand for both our
packaged vegetable products and our biomaterials products to fill
the additional capacity added in fiscal 2016.(c)
Developing innovative new salad products to broaden and strengthen
our offerings.(d) Expanding our retail presence of
Eat Smart products in the U.S. by gaining new customers and
increasing distribution with existing
customers.(e) Increasing return on invested
capital by maximizing returns on each capital allocation
decision.(f) Working with the O Olive team to
significantly increase the sales of its line of olive oil and
vinegar products while leveraging operating synergies to achieve an
even higher rate of profitability.(g) Focusing on
evaluating the natural food product segment to identify areas where
Landec can enter through new product development and/or strategic
acquisitions or investments.(h) Executing on our
Lifecore programs with existing customers and securing new
partnerships utilizing our CDMO strategy.(i)
Supporting Windset in its expansion plans to build new hydroponic
controlled atmosphere structures using new growing methods for new
crops.
12) How do the results by line of business for the three and
twelve months ended May 28, 2017 compare with the same periods last
year?
The results are as follows (unaudited and in thousands
and for comparability excludes the impact from the GreenLine
trademark impairment charge in fiscal 2016):
|
Three months ended 5/28/17 |
Three months ended 5/29/16 |
Twelve months ended 5/28/17 |
Twelve months ended 5/29/16 |
Revenues: |
|
|
|
|
Apio Packaged
Fresh Vegetables (a) |
$ |
108,651 |
|
$ |
105,641 |
|
$ |
408,021 |
|
$ |
423,859 |
|
Food
Export |
|
6,165 |
|
|
13,308 |
|
|
62,481 |
|
|
64,181 |
|
Total
Apio |
|
114,816 |
|
|
118,949 |
|
|
470,502 |
|
|
488,040 |
|
Lifecore |
|
11,596 |
|
|
15,722 |
|
|
59,392 |
|
|
50,470 |
|
Other
(b) |
|
1,018 |
|
|
642 |
|
|
2,363 |
|
|
2,589 |
|
Total
Revenues |
|
127,430 |
|
|
135,313 |
|
|
532,257 |
|
|
541,099 |
|
|
|
|
|
|
Gross
Profit: |
|
|
|
|
Apio Packaged
Fresh Vegetables |
|
14,626 |
|
|
12,913 |
|
|
51,148 |
|
|
40,479 |
|
Food
Export |
|
538 |
|
|
976 |
|
|
3,974 |
|
|
4,176 |
|
Total
Apio |
|
15,164 |
|
|
13,889 |
|
|
55,122 |
|
|
44,655 |
|
Lifecore |
|
4,114 |
|
|
8,369 |
|
|
26,755 |
|
|
24,081 |
|
Other |
|
379 |
|
|
526 |
|
|
1,309 |
|
|
2,221 |
|
Total
Gross Profit |
|
19,657 |
|
|
22,784 |
|
|
83,186 |
|
|
70,957 |
|
|
|
|
|
|
R&D: |
|
|
|
|
Apio |
|
978 |
|
|
256 |
|
|
1,840 |
|
|
987 |
|
Lifecore |
|
1,364 |
|
|
1,172 |
|
|
5,387 |
|
|
4,701 |
|
Other |
|
1,214 |
|
|
387 |
|
|
2,246 |
|
|
1,540 |
|
Total
R&D |
|
3,556 |
|
|
1,815 |
|
|
9,473 |
|
|
7,228 |
|
|
|
|
|
|
S,G&A: |
|
|
|
|
Apio |
|
8,605 |
|
|
9,321 |
|
|
40,481 |
|
|
33,188 |
|
Lifecore |
|
1,350 |
|
|
1,462 |
|
|
5,422 |
|
|
5,303 |
|
Other |
|
3,704 |
|
|
3,093 |
|
|
12,305 |
|
|
11,024 |
|
Total
S,G&A |
|
13,659 |
|
|
13,876 |
|
|
58,208 |
|
|
49,515 |
|
|
|
|
|
|
Other
(c): |
|
|
|
|
Apio |
|
522 |
|
|
128 |
|
|
573 |
|
|
983 |
|
Lifecore |
|
(1 |
) |
|
(146 |
) |
|
(13 |
) |
|
(242 |
) |
Other |
|
(511 |
) |
|
(2,346 |
) |
|
(5,475 |
) |
|
(5,135 |
) |
Total
Other |
|
10 |
|
|
(2,364 |
) |
|
(4,915 |
) |
|
(4,394 |
) |
|
|
|
|
|
Net Income
(Loss): |
|
|
|
|
Apio |
|
6,103 |
|
|
4,440 |
|
|
13,374 |
|
|
11,463 |
|
Lifecore |
|
1,399 |
|
|
5,589 |
|
|
15,933 |
|
|
13,835 |
|
Other |
|
(5,050 |
) |
|
(5,300 |
) |
|
(18,717 |
) |
|
(15,478 |
) |
Net
Income |
$ |
2,452 |
|
$ |
4,729 |
|
$ |
10,590 |
|
$ |
9,820 |
|
a) Apio’s packaged fresh vegetables business includes
revenues and gross profit from Apio Cooling LP. and Apio
Packaging.b) Included in Other are Corporate
licensing and R&D revenues and Corporate expenses, the non-Apio
and non-Lifecore royalties and profit sharing and the O Olive
operations.c) Included in Other are other
operating income/(expense), net interest income/(expense), dividend
income, change in the FMV of Windset, non-operating
income/(expense) and income tax expense.
Contact Information:
At the Company:
Gregory S. Skinner
Vice President Finance and CFO
(650) 261-3677
Investor Relations:
John Mills, Partner
(646) 277-1254
John.Mills@ICRINC.com
Landec (NASDAQ:LNDC)
Historical Stock Chart
From Aug 2024 to Sep 2024
Landec (NASDAQ:LNDC)
Historical Stock Chart
From Sep 2023 to Sep 2024