Landec (LNDC) Tops Q3 EPS by 1c, Revenues Miss; Offers Q1 EPS/Revenue Guidance Below Consensus, FY19 EPS Views Below Consensus

April 3, 2019 4:10 PM EDT

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Landec (NASDAQ: LNDC) reported Q3 EPS of $0.04, $0.01 better than the analyst estimate of $0.03. Revenue for the quarter came in at $155.7 million versus the consensus estimate of $156.47 million.

Third Quarter 2019 Results Compared to Third Quarter of 2018 from Continuing Operations

  • Revenues increased 7% to $155.7 million
  • Gross profit increased 7% to $21.2 million
  • Gross profit margin decreased slightly from 13.7% to 13.6%
  • Net income was $0.04 per share compared to $0.09 per share in the prior period, excluding the one-time tax benefit of $0.49 per share in the third quarter of fiscal 2018 from tax reform

“During the third quarter we made significant progress in our strategic objectives to drive long-term shareholder value. Lifecore completed the installation of its new multi-purpose vial and syringe filling line in preparation for commercial production of vials that is expected to begin on the new line in the first half of fiscal 2020. Lifecore has also made significant strides in building and expanding its Contract Development and Manufacturing Organization (CDMO) product development pipeline,” stated Molly Hemmeter, Landec’s President and CEO. “We currently have over 15 FDA-regulated drug and medical device products at various stages of development, ranging from early phase pre-clinical work to pivotal, late phase clinical studies.”

“Also during the third quarter, the name of Landec’s food business was changed from Apio to Curation Foods, signifying the completion of the strategic transformation of this business and unifying five plant-based brands, all with 100% clean ingredients and under one mission-based corporate identity. Two of these brands, Yucatan® and Cabo Fresh®, were added as a result of the acquisition of Yucatan Foods in December, 2018. With this acquisition, Curation Foods entered the high growth guacamole category, added sales capabilities and strategic customer relationships in the deli department of retail stores and gained a low-cost manufacturing footprint in Mexico.

“Moving forward, Lifecore is focused on commercializing new FDA-regulated products while Curation Foods is focused on the integration of Yucatan Foods and an aggressive cost-out program to drive operational efficiencies, while advancing product innovation and market share.”

“For the third quarter of fiscal 2019 our consolidated revenues increased 7% to $155.7 million, consistent with the low end of our revenueguidance for the quarter. The earnings per share of $0.04 was at the top end of our guidance due to a $2.6 million or $0.07 benefit from the reduction in the earnout liability associated with the O acquisition which was partially offset by (1) incremental costs in our non-salad vegetables business due to weather volatility, (2) a shortage of drivers in our logistics operations resulting in increased shipping costs, and (3) no increase in the fair market value of our Windset investment,” said Hemmeter.

Lifecore“Lifecore’s third quarter results were consistent with expectations, generating revenues of $23.7 million and a gross profit of $11.6 million,” stated Jim Hall, Lifecore’s President. “Revenues increased 3% and 5% in the third quarter and first nine months of fiscal 2019, respectively, compared to the same periods last year. Gross profit was essentially flat compared to the third quarter and first nine months of last year. We still expect Lifecore to meet its original fiscal 2019 revenue growth expectations of approximately 14% to 16% while maintaining its historical gross margin of 40% to 45%.

“Lifecore continues to expand its manufacturing capabilities and capacity to support its growing CDMO and hyaluronic acid (HA) businesses. The recent installation of the new multi-purpose filling line aligns Lifecore’s filling capabilities with the growing needs and market expectations of its partners and provides Lifecore with the capacity to fill commercial quantities of drug products in vials, in addition to its existing capacity to fill syringes. Lifecore has also initiated a capacity expansion of its HA fermentation process to increase overall capacity by 25% in preparation for future HA demand driven by products currently in its product development pipeline. The new multi-purpose filling line and the new HA capacity have the potential to drive $40 million to $60 million of new incremental revenues annually once full capacity is achieved,” concluded Hall.

Curation Foods“At Curation Foods, fiscal 2019 third quarter revenues were $132.0 million and revenues for the first nine months were $353.5 million, an increase of 8% and 6%, respectively, compared to the same periods last year. This increase was due to the addition of Yucatan Foods during the quarter and a 2% increase in salad sales partially offset by a 6% decrease in non-salad packaged vegetables sales. Gross profit in our Curation Foods business was $9.6 million and $33.9 million for the three and nine months ended February 24, 2019, an increase of 18% and 2%, respectively, compared to same periods last year, due primarily to the addition of Yucatan Foods partially offset by increased freight and raw material sourcing and costs in our non-salad packaged fresh vegetable business,” continued Hemmeter.

“During the third quarter of fiscal 2019, the Company changed the name of its food business from Apio, Inc. to Curation Foods, Inc, marking the completion of its strategic transition from a packaged fresh vegetables company to a branded, natural foods company. The mission of Curation Foods is to provide access to plant-based foods made from 100% clean ingredients to as many people as possible in a way that preserves and protects our planet for future generations. Curation Foods serves as the corporate umbrella for a portfolio of five natural food brands, including its flagship brand – Eat Smart® packaged fresh vegetables and salad kits – as well as its four emerging natural food brands, consisting of O Olive Oil & Vinegar® premium olive oil and vinegar products, Now Planting® pure-plant meal solutions and recently acquired Yucatan and Cabo Fresh authentic guacamole and avocado products,” stated Hemmeter.

“With the acquisition of Yucatan Foods in December 2018, avocado products are projected to deliver $25 to $28 million in revenues in fiscal 2019. Looking to fiscal 2020, we expect Yucatan Foods to contribute incremental profits and a full year of revenues that are projected to more than double from the revenues we expect in fiscal 2019. This growth is being driven by its two strong guacamole brands and from the tailwinds in the guacamole category, which is currently growing annually at 20% in the U.S. We expect the four emerging brands — Yucatan, Cabo Fresh, O and Now Planting — to contribute 13% to 16% of total Curation Foods’ revenues beginning in fiscal 2020, with less supply chain volatility and higher margins than our other food products.

“Our Curation Foods business has a unique combination of capabilities that make it truly differentiated in the market with proven internal innovation capabilities, a refrigerated supply chain and a direct sales force to partner strategically with customers throughout the fresh perimeter of the store. We are uniquely positioned to deliver on-trend, plant-based solutions with 100% clean ingredients to consumers,” commented Hemmeter.

“Over the last several years in our food business, we have rapidly entered into several high-growth product segments with innovative new products. Our portfolio of five plant-based brands is well positioned to deliver long-term, sustainable topline growth. With the strategic transformation of our Curation Foods portfolio complete, we turn to the next stage of our growth where we will focus on delivering operational and service excellence by driving efficiencies through automation, systems integration and supply chain synergies. These efficiencies are critical to reducing costs in our Curation Foods business to offset ever-increasing costs due to weather volatility as well as increasing labor, freight and packaging costs that are being experienced by the entire industry. As such, we have engaged The Hackett Group, a third-party consulting firm with considerable experience in the produce industry, to identify cost reductions in our food operations above and beyond the cost savings that have already been identified by the Curation Foods team. We are currently forecasting that the cost savings in fiscal 2020 will offset known cost increases and help mitigate costs associated with weather volatility, with the primary objective of improving the predictability of earnings in our food business. Over time these cost savings should result in increased profitability as they start to exceed anticipated industry-wide cost increases,” said Hemmeter.

GUIDANCE:

Landec sees Q4 2019 EPS of $0.12-$0.15, versus the consensus of $0.22. Landec sees Q4 2019 revenue of $150-153 million, versus the consensus of $154 million.

Landec sees FY2019 EPS of $0.15-$0.18, versus the consensus of $0.23.

“For the fourth quarter of fiscal 2019, we expect revenues to be in the range of $150 million to $153 million and net income to be $0.12 to $0.15 per share. The net income guidance for the fourth quarter reflects Lifecore revenues of $23.0 million to $24.0 million and operating income of approximately $7.8 million to $8.2 million. At Curation Foods we expect revenues of $127 million to $130 million and operating income of $2.5 million to $3.3 million. The operating income in our Curation Foods business during the fourth quarter is projected to be negatively impacted from (1) significant sourcing related costs in our non-salad vegetables business due to record cold temperatures in the month of February in Southern California and very heavy rains in February and early March throughout California, both of which are expected to negatively impact yields during our fiscal fourth quarter, (2) higher than expected logistics costs due to driver shortages, and (3) no change in the fair market value of our Windset investment during the quarter. In addition, we expect interest expense to increase sequentially primarily due to capitalizing less interest than previously forecasted. We are currently forecasting for the fourth quarter of fiscal 2019 consolidated cash flows from operations of $10 million to $12 million and capital expenditures of $14 million to $18 million,” stated Greg Skinner, Landec’s Vice President of Finance and CFO.

“For fiscal year 2019 we expect consolidated revenues to grow 6% to 7% and we expect net income to be $0.15 to $0.18 per share. See Question #1 in the Questions and Answers section below for more details about the reasons for the Company’s change in guidance for fiscal 2019.

“For fiscal 2020, revenues and operating income are expected to increase at both Lifecore and Curation Foods compared to fiscal 2019. The growth at Lifecore will continue to be driven by the expansion of its CDMO and HA product development pipeline. The growth in Curation Foods will primarily be coming from a full year of avocado product sales and continued growth in the guacamole category. We also expect our overall gross margin to increase in fiscal 2020 based on the progress in our strategy to drive revenue growth from the change in our product mix to higher margin products. We will share our fiscal 2020 guidance in our fiscal 2019 year end results release in late July and provide growth projections for both Lifecore and Curation Foods in the release,” concluded Skinner.

For earnings history and earnings-related data on Landec (LNDC) click here.



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