OREANDA-NEWS. September 28, 2016. Landec Corporation (NASDAQ:LNDC), a leading innovator of diversified health and wellness solutions within the packaged food and biomaterial markets, reported results for the fiscal 2017 first quarter ended August 28, 2016. 

For the first quarter, our consolidated gross margin increased 270 basis points to 16.0% and net income increased 12% to \\$0.12 per share compared to the first quarter of last year. These results are in line with our strategy to innovate new products and continually shift our product mix to higher value items, commented Molly Hemmeter, Landecs President and CEO. As expected, revenues for the first quarter decreased 2% compared to the first quarter of last year primarily due to a strategic decision to reduce low margin business in our packaged fresh vegetables business during the second half of fiscal 2016. However, our efforts to shift away from non-strategic low margin business and to innovate and grow higher margin products as a larger percent of our business is resulting in continued improvement of gross margin, operating income and net income, and has us on target to meet our stated performance goals for fiscal 2017. 

Summary of First Quarter 2017 Results Compared to First Quarter of 2016

  • Revenues decreased 2% to \\$132.4 million
  • Gross profit increased 18% to \\$21.1 million
  • Operating income increased 39% to \\$5.5 million
  • Net income increased 12% to \\$3.3 million or \\$0.12 per share

We continue to make progress in our long-term strategy of driving growth through our internal innovation capabilities within our branded food products and biomaterials businesses.  Lifecore has expanded its business beyond its historical capabilities as a premium supplier of hyaluronic acid (HA) to become a fully integrated contract development and manufacturing organization (CDMO), providing differentiated fermentation, formulation and aseptic fill services for difficult-to-handle medical materials, continued Hemmeter.

We are on the way to achieving our fiscal 2017 annual guidance. Lifecore is off to a very strong start, with first quarter revenues increasing 40% and operating income increasing \\$1.6 million. At Apio, even though its total first quarter revenues were down 5%, or \\$6.8 million, due to our strategic decision to focus on our higher margin business, gross profit was up \\$1.2 million, or 8%. We expect continued progress in both of our businesses, added Hemmeter. 

In our Apio packaged fresh vegetables business, we have been successful in significantly shifting our product mix to higher margin Eat Smart vegetable salad products. Since 2013, Eat Smart salads have grown at a three-year CAGR of 81%.  We continue to project lower double-digit growth in our salad business this fiscal year due to expected new business from existing and new customers and new product launches in fiscal 2017, concluded Hemmeter.
Fiscal First Quarter 2017 Results
Revenues in the first quarter of fiscal 2017 decreased \\$3.0 million, to \\$132.4 million, compared to \\$135.4 million in the year-ago quarter. The decrease in revenues was primarily due to a \\$7.8 million, or 7%, decrease in revenues in Apios packaged fresh vegetables business as a result of the strategic shift away from some low margin business during the second half of fiscal 2016. This decrease in revenues was partially offset by a \\$3.5 million, or 40%, increase in revenues at Lifecore due to increased demand for higher margin fermentation products and the shift in the timing of some shipments within fiscal 2017, as well as a \\$1.0 million, or 4%, increase in Apios export business as a result of an 11% increase in sales volume.

Net income in the first quarter of fiscal 2017 increased \\$360,000, or 12%, to \\$3.3 million, or \\$0.12 per share, compared to \\$3.0 million, or \\$0.11 per share, in the year-ago quarter. The increase was primarily a result of a \\$1.6 million increase in operating income at Lifecore due to a favorable product mix shift, which increased gross margin to 41.5% compared to 36.5% during the first quarter of last year. This increase in net income was partially offset by: (1) no increase in the fair market value of the Companys Windset investment during the first quarter of fiscal 2017 compared to the \\$800,000 increase in the year-ago quarter, and (2) a \\$198,000 increase in income tax expense.

Management Comments and Guidance for Fiscal 2017
Ms. Hemmeter stated, For fiscal 2017, we are reiterating our guidance for consolidated annual revenues to increase 3% to 6%, with Lifecore revenues and our salad product revenues growing at lower double digits and revenues in Apios historical packaged vegetables and export businesses expected to be flat to slightly up. We continue to expect consolidated net income to increase 50% to 70% in fiscal 2017 compared to fiscal 2016, resulting in an estimated EPS range of \\$0.53 to \\$0.60. This is based on produce sourcing returning to more historical levels and our continued shift to higher margin products. We are still not projecting a material change in our Windset investment in fiscal 2017. We expect consolidated cash flow from operations of \\$34 million to \\$38 million and capital expenditures of approximately \\$25 million. For the second quarter of fiscal 2017, we expect revenues to be in the range of \\$137 million to \\$142 million and net income to be \\$0.05 to \\$0.07 per share. The net income range of \\$0.05 to \\$0.07 reflects the primarily non-cash charge of \\$1.2 million, or \\$0.03 per share after tax, associated with refinancing our current debt, and which was included in our original guidance for fiscal 2017, as announced earlier today.   

Conference Call
The live webcast can be accessed directly at www.landec.com/earningscall or on Landecs website on the Investor Events & Presentations page. The webcast will be available for 30 days.

Date: Wednesday, September 28, 2016
Time: 11:00 a.m. Eastern time (8:00 a.m. Pacific time)
Direct Webcast link: www.landec.com/earningscall

To participate in the conference call via telephone, dial toll-free (866) 814-1914 or (703) 639-1358. 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, October 5, 2016 by calling toll-free (888) 266-2081 or direct (703) 925-2533, and entering code #1675982.

About Landec Corporation

Landec Corporation (NASDAQ:LNDC) is a leading innovator of diversified health and wellness solutions within the packaged food and biomaterial markets.  Apio, Landecs 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.  Lifecore Biomedical, Landecs 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 Landecs website at www.landec.com.

Important Cautions Regarding Forward-Looking Statements
Except 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 Companys 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 Companys 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
(In thousands)
 August 28, 2016 May 29, 2016
Current Assets:   
Cash and cash equivalents\\$8,626  \\$9,894 
Accounts receivable, net 44,150   46,406 
Inventories, net 30,182   25,535 
Prepaid expenses and other current assets 4,815   4,468 
Total Current Assets 87,773   86,303 
Investment in non-public company 62,700   62,700 
Property and equipment, net 120,720   120,880 
Intangible assets, net 70,795   71,016 
Other assets 1,784   1,754 
Total Assets\\$343,772  \\$342,653 
Current Liabilities:   
Accounts payable\\$31,613  \\$30,904 
Accrued compensation 4,045   5,460 
Other accrued liabilities 9,139   7,772 
Deferred revenue 706   832 
Line of credit    3,500 
Current portion of long-term debt 7,930   7,873 
Total Current Liabilities 53,433   56,341 
Long-term debt, less current portion 44,066   45,972 
Capital lease obligation, less current portion 3,787   3,804 
Deferred taxes 23,546   22,442 
Other non-current liabilities 1,989   1,744 
Stockholders' Equity   
Common stock 27   27 
Additional paid-in capital 138,077   137,244 
Retained earnings 77,192   73,457 
Total Stockholders' Equity 215,296   210,728 
Non-controlling interest 1,655   1,622 
Total Equity 216,951   212,350 
Total Liabilities and Stockholders Equity\\$343,772  \\$342,653 
(In thousands, except per share amounts)
 Three Months Ended
 August 28,August 30,
 2016 2015
Product sales\\$132,394  \\$135,355 
Cost of product sales 111,250   117,378 
Gross profit 21,144   17,977 
Operating costs and expenses:       
Research and development 1,938   1,875 
Selling, general and administrative 13,736   12,165 
Total operating costs and expenses 15,674   14,040 
Operating income 5,470   3,937 
Dividend income 413   413 
Interest income 4   31 
Interest expense (653)  (502)
Other income    800 
Net income before taxes 5,234   4,679 
Income tax expense (1,889)  (1,691)
Consolidated net income 3,345   2,988 
Non-controlling interest (33)  (36)
Net income and comprehensive income applicable to common stockholders\\$3,312  \\$2,952 
Diluted net income per share\\$0.12  \\$0.11 
Shares for diluted net income per share 27,521   27,409 


1) In the first quarter Lifecore had remarkable year-over-year growth. Do you now expect Lifecore revenues to grow more than your original guidance of lower double-digit growth for fiscal 2017?

Our original guidance included significant year over year growth for Lifecore in the first quarter due to increased demand and timing of some shipments within fiscal 2017. Therefore, at this time, our projection for fiscal 2017 for Lifecore to deliver lower double-digit revenue growth remains unchanged.  It should be noted that for Lifecore the fiscal 2017 second quarter is the key production quarter for products to be shipped in the fiscal third quarter. As a result of this seasonality, and included in and consistent with our fiscal 2017 full year guidance, we expect Lifecores fiscal second quarter revenues and operating income to be down sequentially from the fiscal first quarter by approximately 6-8% and 30-35%, respectively.

2) How is produce sourcing looking thus far in fiscal 2017?

Produce sourcing for the first four months of fiscal 2017 was good, with an adequate supply of virtually all of our high volume crops. During our second fiscal quarter we enter the shoulder season when we transition the production of most of our California crops from the central coast of California to southern California and Mexico. We also transition our green bean production from the Ohio Valley to Kentucky and Georgia and eventually to Florida. This shoulder season can potentially lead to yield and production issues which in some years have led to shortages during late October and November. Overall, for the first four months of fiscal 2017 our produce sourcing costs are on plan.

3) Can you remind us how much low margin business you lost at Apio in fiscal 2016 and the reasons for those losses?

We lost approximately \\$30 million of packaged bag business as a result of (1) our strategic decision to discontinue select low margin business, (2) a couple of large customers deciding to shift from single sourcing to a multi-source strategy, and (3) prorating some customer orders during the produce shortages last fiscal year. A large majority of the business we lost was low margin business that carried a very high cost to service. We expect through the remainder of fiscal 2017 to replace this revenue with new higher margin revenues within Apios packaged fresh vegetables business from expected new retail business and new products. This should result in higher revenues and operating income at Apio during the second half of fiscal 2017 compared to the first half of fiscal 2017.

4) How is the growth of your Eat Smart salads progressing this year?

From fiscal 2013 through fiscal 2016, Eat Smart salads delivered a three-year revenue CAGR of 81% and reached over \\$150 million in sales in fiscal 2016. For fiscal 2017, we are still expecting our salad revenues to grow at lower double digits as we launch several new salads and expand distribution in key U.S. retail accounts.  In May of this year, Walmart U.S. began a test of our Sweet Kale Salad in approximately 400 stores. The test has been very successful and Walmart will be expanding Sweet Kale Salad to approximately 1400 stores next month.

For the first quarter of fiscal 2017, salad revenues ranged from \\$2.6-\\$3.1 million per week, similar to the first quarter of last year.  We did not see growth in the first quarter of fiscal 2017 compared to the first quarter of last year for two primary reasons: (1) during the year-ago first quarter we launched a market test of plant-based protein salads throughout all Costco U.S. stores that was discontinued later in last fiscal year, and (2) during our last fiscal year extensive industry-wide sourcing challenges caused customers to delay making commitments on new products until sourcing returned to normal. As consistent supply has resumed, customers are now reviewing new products and we expect to launch new Eat Smart salads during our second fiscal quarter. 

5) Your release earlier today announcing your new credit facility stated you plan to use the revolving facility to fund capacity expansion of existing operations and new product development and for potential merger and acquisition activity. Do you plan to use any of these available funds this fiscal year?

We currently believe cash flow from operations will be able to fund all of our capital investments in fiscal 2017. Based on our current expansion plans and our desire to develop new capabilities within the Company, we believe we will be using some of these available funds starting in fiscal 2018.

6) Remind us again why are you expecting no change in your Windset investment in fiscal 2017?

Despite the fact that Windset continues to realize double-digit annual growth, we currently do not expect to realize a material change in our Windset investment in fiscal 2017 primarily because of the required change in the calculation of Windsets fair market value in fiscal year 2017. 

Starting this fiscal year, as a result of the put/call date in February 2017, the fair market value of Windset will be calculated based on the contractual formula in the stock purchase agreement.  The fair market value, per the contractual formula, is based on Windsets trailing twelve month EBITDA, multiplied by a pre-negotiated valuation multiple, plus cash, less debt and the value of preferred stock. Therefore, in a year of expected expansion for Windset, cash will decrease and debt will increase with the corresponding EBITDA from the expansion trailing the upfront construction costs causing the expansion to not fully benefit the fair market value of Windset until the following year.  As a result, the expansions currently underway at Windset will have a short-term negative impact on the fair market value calculation.  Although we do not expect a material change in our investment in fiscal 2017, our current projections point toward a substantial change in fiscal 2018.

7) What is the status of Windsets expansion plans and the permitting issues?

Windset is nearing completion of a new ten-acre facility on land Windset owns in the City of Santa Maria using a new type of greenhouse structure that Windset intends to use to grow strawberries on a small commercial scale. They have also started construction on a new 30-acre glass greenhouse, which is also on land they own in the City of Santa Maria, where they currently intend to grow peppers and/or cucumbers. 

Windset expects that it will begin commercially harvesting crops from these two new site expansions late this calendar year or early next calendar year.

Windset is also looking at constructing an even larger strawberry structure on land it owns in the City of Santa Maria but it is in the early planning stages and any construction of this new facility will not begin until next calendar year.

Windset is still working with the County of Santa Barbara on permitting for land it is leasing in the County for the construction of greenhouses using its new type of greenhouse structures. 

8) What are Landecs 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.
(b) Developing innovative new salad products to broaden and strengthen our offerings.
(c) Expanding our retail presence in the U.S. through gaining new customers and increasing distribution with existing customers.
(d) Increasing demand for both our packaged vegetable products and our biomaterials products to fill the additional capacity added in fiscal 2016.
(e) Increasing return on invested capital by maximizing returns on each capital allocation decision.
(f) 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.
(g) Advancing our Lifecore programs with key customers and development partners.
(h) Supporting Windset in its expansion plans to build new hydroponic controlled atmosphere structures using new growing methods for new crops.

9) How do the results by line of business for the three months ended August 28, 2016 compare with the same period last year?

The results are as follows (unaudited and in thousands):

 Three months
Three months
 ended 8/28/16ended 8/30/15
Apio Packaged Fresh Vegetables (a)\\$95,945 \\$103,706 
Apio Export 23,339  22,344 
Total Apio 119,284  126,050 
Lifecore 12,332  8,798 
Corporate (b) 778  507 
Total Revenues 132,394  135,355 
Gross Profit:      
Apio Packaged Fresh Vegetables 14,406  13,252 
Apio Export 1,028  1,003 
Total Apio 15,434  14,255 
Lifecore 5,122  3,215 
Corporate 588  507 
Total Gross Profit 21,144  17,977 
Apio 237  205 
Lifecore 1,328  1,225 
Corporate 373  445 
Total R&D 1,938  1,875 
Apio  9,561  8,203 
Lifecore 1,406  1,242 
Corporate  2,769  2,720 
Total S,G&A 13,736  12,165 
Other (c):      
Apio (166) 716 
Lifecore (103) (10)
Corporate (1,889) (1,691)
Total Other (2,158) (985)
Net Income (Loss):      
Apio 5,470  6,563 
Lifecore 2,285  738 
Corporate (4,443) (4,349)
Net Income \\$3,312 \\$2,952 

a) Apios Value-Added vegetable business includes revenues and gross profit from Apio Cooling LP. and Apio Packaging.
b) Included in Corporate are the non-Apio and non-Lifecore license fees, R&D revenues, royalties and profit sharing.
c) Included in Other is other operating income/(expense), net interest income/(expense), dividend income, change in the FMV of Windset, non-operating income/(expense) and income tax expense.