This FAQ represents a set of Questions and Answers that were included in the most recent Landec Quarter Earnings Release (Read Press Release issued on Oct 2, 2018 for the quarter ended Aug 26, 2018) and offers comments for understanding Landec's business. Following the Disclaimer below, there is a list of questions. Thank you for your interest in Landec.
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 Company’s Form 10-K for the fiscal year ended May 27, 2018 (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.
- Labor, freight and packaging costs continue to increase.
- Abnormal weather conditions continue to add volatility to our food business.
- The vegetable tray category is declining.
- The shifting landscape in U.S. retail to more private label products from branded products.
- The trend for pharmaceutical and biotech companies to outsource product development and aseptic filling to CDMOs is growing and the need for a CDMO which specializes in difficult-to-handle materials has never been greater.
- The North America healthy eating trend continues as packaged salad kit, core vegetable and green bean categories continue to grow.
- The rapidly growing consumer segments for plant-based, 100% clean and natural products are looking for solutions.
The gross margin in our Natural Foods business in the first quarter of fiscal 2019 was 11.9%, compared to 14.7% for the first quarter of last year. This decrease in our gross margin was due to a 14% increase in labor rates which also resulted in an increase in the cost of raw product as it is a shared labor base, a 9% increase in the cost of packaging and a 5% increase in the net cost of freight. The Company is in the process of implementing price increases to offset many of these increases during the second half of fiscal 2019.
The gross margin in our packaged fresh vegetables business was 10.8% for fiscal 2018 compared to 12.5% in fiscal 2017. The gross margin was lower in fiscal 2018 due to the negative impacts from significant weather events during the first nine months of fiscal 2018 which resulted in a significant increase in the cost of produce. These events include the aftermath of the hurricanes and tropical storms during the summer and fall of 2017 which were exacerbated by freezing temperatures that impacted green bean growing regions of Florida during January, and by persistent unseasonably warm temperatures in Western growing areas that affected the sourcing costs of our lower-margin vegetable bag business.These weather events resulted in incremental produce sourcing costs of approximately $7.8 million, or $0.19 per share after taxes, during fiscal 2018. Excluding these excess sourcing costs, the gross margin in our packaged fresh vegetable business would have been 12.5% or the same as last year even after taking into account a 10% increase in labor rates this fiscal year compared to last fiscal year and a significant increase in promotional expenses.
During the last twelve months, Windset has completed a 10-acre facility that uses a new type of greenhouse structure for growing strawberries on a small commercial scale and a new 30-acre glass greenhouse which has been fully planted with peppers.
Over the last couple of years, Windset has purchased approximately 200 acres of land, with an option to buy another 100 acres, adjacent to its currently owned greenhouses in Santa Maria. Windset is in the early planning stages of further expansion in California and/or Nevada with construction estimated to begin in late calendar 2019 to early 2020.
Windset’s gross profits continue to deliver double-digit growth with increasing EBITDA margins.
Our continuing priorities are:
- Investing in capital expenditures, R&D, people and systems to drive growth in our three growth pillars: (1) Lifecore, (2) Eat Smart salads, and (3) new natural food products.
- Increasing demand for our CDMO services and branded natural food products to fill existing capacity, drive plant efficiencies and increase our return on invested capital.
- Implementing strategies to reduce our exposure to weather-related events in our food business by shifting our product mix to higher margin, less volatile natural food products and implementing aggressive cost cutting programs across our food business to offset cost increases.
The results are as follows (unaudited and in thousands):
|Three Months Ended|
|August 26, 2018||August 27, 2017|
|Natural Foods (a)||$||112,051||$||103,617|
|Total Gross Profit||16,337||18,802|
|Research and Development:|
|Selling, General and Administrative:|
|Operating Income before Allocation of Corporate Expenses:|
|Total Operating Income before Allocation of Corporate Expenses||(447||)||2,725|
|Corporate Expenses Allocation:|
|Operating Income after Allocations of|
|Total Operating Income after Allocations of Corporate Expenses||(447||)||2,725|
|Non-Operating Income (Expense) (c):|
|Total Non-Operating Income||637||(370||)|
|Net Income from Continuing Operations:|
|Net Income from Continuing Operations||$||190||$||2,355|
(a) Natural Foods includes revenues and gross profit from Apio Eat Smart, Apio Packaging, O and Now Planting.
(b) Included in Other are Corporate expenses.
(c) Non-Operating income (expense) includes: Windset dividends and FMV change, net interest expense and income taxes.