Lifecore Biomedical, Inc. (LFCR) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Landec Corporation Third Quarter Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [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.

Thanks, Jonathan. Good morning. And thank you for joining Landec's third quarter of fiscal year 2017 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 2016. We have been very active since our second quarter release just three months ago, with efforts to further position Landec as a true innovator in the health and wellness space. We announced the Eat Smart 100% Clean Label initiative. We acquired O Olive Oil, a branded all-natural and organic supplier of premium olive oils and wine vinegars. We extended our minority investment agreement with Windset Farms for five more years. We had Debbie Carosella to our Board of Directors. And we agree to settle several labor related legal actions that have been active for over 18 months, thus avoiding the unknown outcome of trial and a potential millions of dollars of cost for future legal fees associated with litigation. Our results in the third quarter and first nine months of fiscal 2017 demonstrates the benefit of our ongoing strategic commitment to innovation and the shifting our product mix to higher margin products, resulting in a record quarter for Lifecore and improved operating results for Apio. Our consolidated gross margin during the quarter increased 730 basis points to 17.2% compared to 9.9% in the third quarter of fiscal 2016. Lifecore had a remarkable quarter, setting records for quarterly revenues of $23.5 million, a 50% increase compared to the third quarter of last year and operating income, which increased 92% to $99 million compared to third quarter of last year. The transition to fully integrated contract development and manufacturing organization or CDMO is well underway and positions Lifecore to provide specialized outsourcing services for medical materials that are difficult to formulate or fill into a delivery device and require FDA approval. These services adjust the entire product lifecycle from early stage development to later stage development and throughout commercial production. For the first nine months of fiscal 2017 compared to the first nine months of fiscal 2016, Lifecore revenues increased 38% and operating income increased 74% or $6.2 million due to a substantial increase and higher margin fermentation sale and a 26% increase in aseptic sales. Lifecore’s revenues and operating income growth both of which are expected to exceed our original expectations for fiscal 2017 reflect a result of the CDMO transition. At Apio, we have to focus on transforming the business from a commodity to a branded packaged fresh vegetable business differentiating the market through innovation. Over the last several years, we have expanded our product segments from the traditional core vegetable bags and trays to the adjacent, high growth, more profitable salad kit segment, thereby increasing the size of the market in which we compete from 1.3 billion to 3.2 billion. At Apio, even with revenues down 4%, gross margin was up 290 basis points, gross profit was up 30% and operating income was up 17%, a considerable improvement during the first nine months of fiscal 2017 compared to the same period last year, reflecting the continuing shift in product mix to innovative higher margin products, more normal raw material sourcing conditions and increasing operating efficiency. We continue to pursue our strategy to expand the distribution of our Eat Smart salad kit in U.S. retail account. In May of last year Wal-Mart agreed to test the Eat Smart retail salad in approximately 400 stores. Due to the success of this test, the salad was expanded to approximately 1,400 doors in October. We are currently waiting a final decision for Wal-Mart whether they will expand this product to all 4,000 Wal-Mart doors next month. That being said, the velocity data of retail salad in Wal-Mart remained strong. We have positioned both of our core businesses, Apio and Lifecore to benefit from the favorable market trend, driven by people making choices to live healthier lives. Apio delivered packaged fresh vegetable products that make it convenient and delicious to eat healthy. Lifecore helps to bring FDA approved drugs and medical devices to market that enhance the ability to stay active. We will continue to differentiate ourselves through innovation and to build internal innovation capabilities within our branded food products and biomaterials businesses to deliver new products that consumers and customers value. Before I go into more details on our progress and plans for the rest of fiscal 2017 and our strategic objectives over the next three years to five years, let me turn the call over to Greg for some financial highlights.

Thank you, Molly, and good morning, everyone. Revenues in the third quarter of fiscal 2017 increased 5% to $136.6 million, compared to $130 million in the third quarter last year. The increase was due to a $7.8 million or 15% increase in revenues at Lifecore and an $887,000 or 14% increase in revenues in Apio’s export business. These increases in revenues were partially offset by $1.9 million or 3% decrease in revenues in Apio’s packaged fresh vegetable business. Net income in the third quarter of fiscal 2017 was $3.5 million or $0.13 per share, compared to a net loss $21.2 million or $0.78 per share in the year ago quarter. The increase net income was due to; first, the $21.5 million after taxes write down of the GreenLine trademark in the third quarter of last year; second, a $4.7 million or 92% increase in operating income at Lifecore; third, a $5.8 million or 120% increase in gross profit at Apio; and fourth, a $700,000 increase in the change in the fair market value of our Windset investment. These increases in net income were partially offset by; first, a $5.6 million or 76% increase in operating expenses at Apio, resulting from the company agreeing to settle several labor related legal actions, which resulted in the company taking a $2.1 million charge during the quarter, less severance expenses and additional headcount hired during the past year in the areas of sales and financial analysis; second, a $743,000 increase in operating expenses at Corporate for new business development activities, expenses from the O Olive acquisition and an increase in stock based compensation expenses; and third, a $1.5 million increase in income taxes, excluding the year ago third quarter tax benefit from the GreenLine trade impairment charge. Revenues in the first nine months of fiscal 2017 were basically flat at $404.8 million, compared to $405.8 million in the same period last year. The slight change was primarily due to a 6% decrease in revenues in Apio's packaged fresh vegetables business offset by a 38% increase in revenues at Lifecore and an 11% increase in Apio's export business. Net income in the first nine months of fiscal 2017 was $8.1 million or $0.29 per share, compared to a net loss of $16.4 million or $0.61 per share in the first nine months of fiscal 2016. The increase in net income was due to; first, the $21.5 million after tax write down of the GreenLine trademark in the third quarter of last year; second, a $6.2 million or 74% increase in operating income at Lifecore; and third, a $9.2 or 30% increase -- $9.2 million or 30% increase in gross profit at Apio. These increases in net income were partially offset by; first, an $8.1 million or 33% increase in operating expenses at Apio, which includes the $2.1 million legal settlement charge; second, a $1.3 million increase in operating loss at Corporate consisting of a $764,000 reduction in gross profit due to the completion of a licensing agreement during fiscal 2016 and a $546,000 increase in operating expenses; and third, a $1.3 million increase in income taxes, excluding the year ago nine months tax benefit from the GreenLine trademark impairment charge. Turning to our financial position, at the end of the third quarter of fiscal 2017 cash totaled $12.7 million, up $2.8 million from fiscal year end 2016, that at the end of the third quarter was $52.2 million with a debt to equity ratio of 23%, compared to debt of $61.1 million and a debt to equity ratio of 29% at fiscal year-end 2016. Working capital improved to $39.4 million, up 31% compared to $30 million at fiscal year-end 2016 and cash flow from operations for the first nine months was $23.2 million, up from $6.4 million for the same period last year. Capital expenditures for the first nine months were $9.5 million, down from $26.2 million for the same period last year. Thus free cash flow of $13.7 million for the first nine months of fiscal 2017, compared to a negative free cash flow of $19.8 million for the same period last year, an improvement of $33.5 million. At February 26, 2017, we had $100 million available to borrow under our lines of credit. Let me now turn the call back over to Molly.

Thanks Greg. We have made and will continue to make appropriate and timely investments to expand our higher margin product portfolios through innovations in the coming years. At the same time maximizing returns on each capital investments by following a regimented capital allocation decision framework. In February, we announced an initiative about which we have agreed deal of passion throughout the company. The Eat Smart 100% Clean Label initiative is the first in our category to commit to clean ingredient and transparent labeling in all of our nonorganic products by the end of fiscal 2018. What does it mean to have a Clean Label, at Eat Smart clean products are free from high fructose corn syrup, artificial preservatives, hydrogenated fats, as well as artificial colors, flavors, and sweeteners. Eat Smart ingredient labels must also be easy-to-understand and only use recognizable ingredients that consumers can feel good about putting in their bodies and serving to their families. Nearly 90% of Eat Smart products already contain a Clean Label, including all cut vegetable products, salad blends and our most popular nutrient-dense vegetable salad kits, including our Sweet Kale, Strawberry Harvest and Sunflower Kale products. Apio's 100% Clean Label initiative is focused on reformulating salad dressings and toppings, and vegetable tray dips that we source from other suppliers and include with our vegetable products to ensure they meet our new 100% Clean Label initiative specifications. Our innovation team has been working diligently to formulate these ingredients for approximately two years to ensure that product adhere to our new Clean Label standard, but continued to make shelf life requirements and to deliver great taste. Select packages of Eat Smart salad and tray products with Clean Label will begin featuring a prominent first on the front of the package that says 100% Clean Label, no artificial colors, flavors or preservatives. More information about Eat Smart 100% Clean Label initiative can be found online at eatsmart.net. In early March Landec announced the acquisition of O Olive Oil Inc. for $2.5 million in cash plus an opportunity for the seller to earn an additional $7.5 million over the next three years based upon O Olive achieving mutually agreed EBITDA targets. O Olive, founded in 1995, is based in Petaluma, California, and is the premier producer of California specialty olive oils and wine vinegars. Its O branded products are sold in over 4,600 natural food, conventional grocery and mass retail stores, primarily in the United States and Canada. The oil and vinegars markets are currently experiencing a dramatic shift in consumer preference for conventional to natural and organic oils and vinegars, and O Olive is uniquely positioned to take advantage of this transition. The market size for oils and vinegars sold in U.S. multichannel outlet is approximately 4.3 billion. O Olive products compete in the specialty product segment of oils and vinegars that combined make up approximately $1.9 billion of the total $4.3 billion market. Within the specialty oil market, natural oil products now comprised 43% of specialty oils with a growth rate of 24% versus conventional oil products that comprise 57% of the specialty oil market are declining at a rate of 2% per year. Within the specialty vinegar category, natural products are 60% of the market and are growing at 54%, while conventional vinegar products are growing at only 13%. Retailers across North America are making Clean Label and organic products a priority. O Olive sells a variety of products, including certified organic options, that are all-natural, high quality, great tasting and with easily traceable ingredients for retailers to offer their consumers. O Olive has created a strong brand recognition and has been honored with 17 SOFI awards by the Specialty Food Association, more than any other oil and vinegar company in the world. By supporting O Olive products with growth capital and the strength of Apio's sales, customer service, procurement and logistics capabilities, O Olive can achieve its true potential and offer consumers a healthy and delicious option for everyday eating. The acquisition of O Olive is a first step in our expansion into healthy food products adjacent to produce with higher gross margins that drive an increase in our return on invested capital. The O Olive product has obvious synergies with our salad kit business that will provide opportunities for future innovation. We plan to invest in O Olive to develop and grow the high quality line of products, while continuing to seek out and develop other natural products to add our growth portfolio. Also in March, Landec announced the addition of Ms. Debbie Carosella to the Landec Board of Directors, a strong food innovation leader in the natural and organic industry, most recently CEO of Madhava and SVP of Innovation at Whitewave Foods. Ms. Carosella will serve with the -- with Director of Board on our Food Innovation Committee of the Landec Board of Directors. We look forward to working with Ms. Carosella and believe that she will bring insight and experience that will strengthen our internal innovation capabilities. Lastly, in March, Apio announced a five-year extension of its minority investment in Windset Farms. As a leader in innovation for fresh produce, Landec sees Windset as the most advanced greenhouse operator in North America. So the demand for greenhouse grown products is rising rapidly. The hydroponic process uses no soil and a fraction of the water required in field production. Furthermore, the process result in higher yields per acre and is not burdened with traditional weather related risks. Since Landec initial investment six years ago, Windset has significantly grown its business as demand continues to outpace supply. These growth have delivered to Landec an average annual return on invested capital of approximately 20%. We estimate, based on Windset's growth plans of its greenhouse capacity in Santa Maria that the return on invested capital over the next five years will continue to approximate the strong returns we realized during the first six years of our investment and that extending our investment in Windset is a wide and prudent use of our capital. Since of our -- since beginning, our interest in Windset has been motivated by three primary objectives; first, to realize a significant financial return on our invested capital; second, to be a strategic partner with the industry leader in sustainable, hydroponic, year-round growing of fruit and vegetables through packaging technologies and sourcing synergies; and three, to explore new crop targets, new growing techniques and/or new technologies with Windset that could benefit Apio's business and create potential competitive advantage in the future. With our ongoing strategic relationship, we look forward to supporting Windset in our future growth plans. Each one of these strategic initiatives announced during last three months, broadens and deepens the foundation for Landec's ongoing commitment to innovation and expansion of its food business. As our food business continues to benefit from tailwinds of positive healthy eating trends, Lifecore is also benefiting from a growing trend among those mature and start-up 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 the fully integrated CDMO to augment its pipeline with new projects to fuel its long-term growth. Moving forward, we are focused on three primary growth platforms. First, in our Lifecore Biomedical business we expect revenues grow on average at double-digit rate over the next five years. As part of the transition to a CDMO business, Lifecore is adding new syringe filling capacity over the next several months, a new bio filing capabilities within the next 12 months to 15 months, both of which will be needed in the future to meet the demand we expect from our deep pipeline of development programs along with continuing growth from existing customers. Second, our Eat Smart salad products are on trend within the fast growing healthy living space. We expect revenues in our salad business to begin growing again in fiscal 2018 and generate double-digit growth on average over the next five years as we continue to offer innovative new salads and expand our distribution. Third, along with exploring expansion in the higher margin healthy food products adjacent to produce, we are exploring new ways to leverage Apio national fresh food supply chain to bring additional all-natural food products to the market. As the first of these endeavors, we are committed to investing and growing O Olive by leveraging the sales, customer service, logistics and procurement capabilities of Apio to ensure we realize high returns on our investment. In summary, our focus is on developing innovative products to deliver value to our customers, consumers and shareholders. Our balance sheet remains strong and provides the resources for executing on our strategic objectives. We’ll now open for questions.

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

Thank you. First, just…

Good morning.

Good morning. Just on Lifecore, obviously, it was up strong, could you tell us a little bit of the break out between the core HA business and the non-HA business?

Yeah. On a year-to-date basis, Anthony, approximately 15% their business is non-HA. It’s primarily the new business with the new customer that whose product was approved back in audit and that’s a line share of that 15% along with their business development revenues for customers that we not named. So that 15% of business is non-HA. The rest of it would be historical HA. I mean, this quarter certainly benefited from very high fermentation sales, which is one of the higher margin products within the company.

Has some of the growth in the non-HA business that, when you talking about double-digit over the next five years in terms of growth in the Lifecore business. The non-HA business, does that represent a significant part of the expected growth?

Yes. It does. You can look at the base business in HA and that still is a very growth platform. We are expecting that to grow in the mid-single digits. So when we say we are going up to double-digits with growth that’s due to the non-HA business.

Okay. And then just switching gears to Apio, I know the decision is moving from Wal-Mart, I think, it’s -- by the end of this month, they will make a decision. I was wondering you’ve provided any color on the decision to go forward to rollout into all 4,700 Wal-Mart stores or you just have to kind of wait to hear, but it’s sounds like the metrics you gave out last time as well shows that Sweet Kale salad is one of the top selling salad kit, correct?

Right. I won’t try to speculate on the decision one of our customers is going to make, but I do know that the data that we are seeing with Sweet Kale salad and the last three data as it expanded from 400 to 1,400 stores has remained very strong. So and also Wal-Mart has a total of about 4,000 doors and we will need to look at those, if we do get the answer to be expanded which ones of those make sense for salad kit. So we don’t know the decision, but again the data looks strong.

And then just lastly on Kroger, I know you mentioned last quarter you -- in discussions with them any update on that?

We are continuing to engage with Kroger in discussion. So again no immediate decisions, but we are now -- we weren’t engaged at the corporate level, now are engaged with them in having meetings, so that’s about as much as I can tell you.

Okay. Great. Thank you very much.

Welcome.

Thank you. Our next question comes from the line of Morris Ajzenman from Griffin Securities. Your question please.

Good morning, guys.

Hi, Morris.

Just as a follow-up to the question on Lifecore, can you give us some examples, I know you’ve talked in the past that is closer to horizon for non-HA applications?

You ask that one more time, I want to make sure that I am answering it correctly.

And the specific non-HA applications that you are talking about or actually doing work on existing customers without naming customer, can you give some examples of the type of end treatments that we are referring too?

Sure. So, Morris, we are looking at different verticals within medical industry and pharmaceutical industry. I will just give you some examples of the types of verticals that Lifecore is exploring. Typically within HA we are focused on ophthalmic and orthopedic. By going into non-HA products we are looking at treatments in oncology, ENT, pulmonary, neurology and general surgery, to name a few. So it becomes like a broad and where we can focus our efforts.

Okay. And what would you expect five years from now the percent of revenues of Lifecore assuming mid single-digit growth in HA, what percent of revenues that could be of this division?

Well, at 15% now, if you assume going forward as Molly said earlier, the HA to grow at mid-single digits which is kind of the growth in the market and we are expecting more than double-digit growth or minimum of double-digit growth in topline. You could see where the non-HA business five years from now could be 40% of their revenues.

Okay. Switching gears to Windset then that, now that Windset has the ability to become more aggressive going forward and building facilities based on your five-year expansion. Any thought you want to share with us, I am sure, Windset is back there making their plans, but how more aggressive we can see new ground breakings over the next 24 months?

It’s still early go into details now, but it did have to finish up with what they are working on now, they finish the strawberry expansion, the 10 acres. They are working on the 30 acre new glass greenhouse that will be for either peppers or cucumbers, that’s expected to be completed sometime this summer. They are obviously sitting there looking putting plans together for expansion. One of the things that this extension allowed is now that the -- they no longer have to reserve for a potential put by Landec against their alliance, that now freeze up $60 plus million for them to be more accelerate their expansion plan. So we will be able to report on that more in, probably, maybe even next conference call, certainly, by the first quarter of next year we will have a better idea.

Okay. Last question, I will get back in queue here. Can you talk more about how the second sourcing with Costco, how that’s playing out and is that fully integrated from that perspective and are you seeing specially putting comparable growth when you account to that, how is that playing out for you guys?

Yeah. I’d say, it’s stabilized, it has stabilized. So we have transitioned that business and moving forward the good news is we have been able to grow our retail business to compensate for all of these losses and I don’t see much change, we are still seeing year-over-year increases in retail salad, in both, in our club channel. So I think stabilization is the word that would best describe it.

Thank you.

Thank you. Our next question comes from the line of Colin Radke from Wedbush Securities. Your question please.

Hi. So on Lifecore you’ve talked about double-digit annual revenue and operating income growth on average over the next five years. Just given the strong year that that Lifecore is having here in FY ’17, does that still a realistic expectation if you look out to FY ‘18 as well?

Over -- average over the five years, that’s what we expect, but, yeah, you are right, I think, they have just came off a huge growth of year last year, another huge growth of year this year. They are as we announced some months ago going to be focusing on bringing in bio filing capabilities next year. So lot of the efforts are going to be getting that new capability up and running. So it would be very difficult for them to certainly continue at the pace of the last two years. Next year going to actually be a year where they don’t plan it to double-digit growth, but over the five-year period we expect that.

Got it. And so you mentioned you expect a significant increase in O Olive revenues in FY ’18, are you able to maybe provide a little bit more color in terms of exactly what type of increase you are expecting? And maybe where you see the biggest customer opportunities and what visibilities sort of having expanding the distribution and penetrating some new accounts?

We refer that to the fourth quarter. So we are in the process. I mean we just acquired them a month ago. We are going through the first budget process. This is a smaller organization. So this is all new to them. We will have a lot better answers to that question coming July.

Okay. Fair enough. Maybe just last one for me, just on Canada, the salad kit market there. Looks like your ACV declined slightly this quarter. What was the cause of that and is that something you expect to continue. And maybe just broader, what gives you confidence that that Canada is more macro weighted and not just the category is going to hit maturity there?

Well, in Canada, there is a lot of macroeconomic issues going on. They just -- especially with the exchange rate and the oil economy. They are having a lot of pricing wars and it’s taking its effect on all retail and crop environment. I mean, this is not just in Apio or salad issue. So what we are seeing is really what is going on as retailers are not growing right now or they are growing slightly and they are fighting to get consumers into their door and they are doing that through choosing specific items and going through price wars. It’s a very difficult environment right now in Canada and so that's what I would attribute a lot of this too. I don't see any diminishing of our brand strength or our share as far as the long-term, but as they are going through these price wars we are seeing a little volatility there and we are not seeing the growth in dollars that we expected to see this year.

Okay. And just in terms of the ACV, I know there’s a slight decline, but is there anything in particular to call out there and is that something you might expect to continue?

No. It’s not a customer loss issue. I think, maybe some other, just a couple points, we are still up our ACV, still extremely high at 80%, like just 83% still in Canada. So it's probably more the volatility or could or but there isn’t any significant customer loss I can point too.

Okay. Fair enough. I will leave it there. Thank you.

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

Yeah. Good morning.

Good morning, Chris.

Good morning, Chris.

Most of my questions have been answered, but I just had one more coming following up on Lifecore, I know it’s growing very nicely right now, it is a some new business. Can you somehow quantify like the number of development stage projects or your pipeline of discussions you are having, like a growth rate where you are at now versus a year ago, you are trying to get an idea of what -- where that could and where it could lead you in the coming years.

Well, we -- there is always new customers, new products in the pipeline, but we have never disclosed what those are, who they are, this is an area, as you know requires FDA approval, there is a lot of, let’s say, confidentiality around these type of projects. So we would rather keep that to ourselves and announce them as they materializes commercial product. Just I want to say they have many products and customers in the pipeline for the future and let’s leave it with that.

Yeah. I mean, that’s why we are able to project the growth that we are projecting, because they have a strong development pipeline is giving us the confidence to give the growth projection that we have over the next five years.

All right. Look forward to the Analyst Day at Lifecore in a month. Thank you.

Yes. We will look forward to seeing you.

Thank you. Our next question comes from the line of Tom Erickson from Craig-Hallum. Your question please.

Yes. Good morning. I just had a few…

Good morning, Tom.

Good morning for Minneapolis, we will see you here soon. So just a few…

Right.

Just a few follow-ups relative to the model, on Lifecore, I know that's typically lumpy from a gross profit margin rate perspective, especially when you have a high fermentation quarter, so is it logical to expect gross profit margin rates going to drop in fiscal Q4 coming in May quarter?

Oh! Yeah. It does, significantly, in fact, the lion share of their fermentation sales for the year occurs in the third quarter and that’s -- with the exception of last year where some of it actually chipped out in the fourth quarter, you look back at the history of Lifecore since we acquired them, you will see that their third quarter is always their best quarter, it’s our highest margin quarter and typically the fourth quarter as a result of the great third quarter is typically their lowest revenue and lowest margin quarter. So, yes, you will see…

Got it.

… a significant drop in both.

Got it. And I know you issued a press release relative to May quarter expectations with good guidance there and I am just curious, if you are seeing any change relative to the growing patterns or what we might expect with regard to Apio, is there any change relative to Q4?

No change from what the guidance we have provided in the press release, Tom.

Okay. Okay. Yes.

Yeah. We have the heavy rains happening last quarter which are going to affect us in April and May of this quarter and that’s all rolled up into the guidance we provided.

Yeah. Perfect. And then on the operating expense dollars, you had a big bump up from November to February and is it fair to assume that this new $17 million run rate, $15 million for SG&A and R&D is going to carry forward?

No. We -- in the third quarter we had $3.5 million what I would say, non-recurring expenses that hit SG&A.

Got it.

It’s the legal settlement. It’s the legal fees associated with those claims and then we had some severance for restructuring our sales group down at our Apio.

Perfect. And then just two more quick ones, CapEx and depreciation, do we need to wait for the Q there or can you give us those numbers now?

It’s about [ph] $7.18 million -- $8 million (39:51) for year-to-date. They got a run rate probably about $10 million to $10.5 million for the year.

Got it. And tax rate?

$36 million.

Perfect. Awesome. Thanks so much. Great quarter guys.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Rob Straus from Wynnefield Capital. Your question please.

Hi, Molly and Greg. How are you today?

Hi, Rob.

Hi. Good morning.

Good morning. Greg, probably, just a couple questions for you and focused on Lifecore. I know that you made a couple of different statements, difficulty of continuing the growth in last two years in particular, but just a few questions on some numbers here. First, you want to take a look at the operating income to net income. Can you just explain the difference that we see in the quarter between those two lines for Lifecore?

The net income and operating income.

Yes.

Well, for, I mean…

If I am not mistaken, it looks like there were something added back to get down to the net income line and maybe I could be looking at that these numbers incorrectly, but…

Yeah.

But I just want through the P&L.

Maybe if we take a look -- why don't I walk you through offline because I don't think there's any difference between operating income and net income of Lifecore. I mean they really have nothing below the line, right. There is no, all the debt now is at the corporate level, all the interest expense is showing at the corporate at least in our disclosures and our press release, the taxes show up the corporate. So why don’t -- we could talk offline but there should be no difference.

Okay. And then, also, have you considered using an EBITDA metric that, I don’t know, might be cleaner and maybe just a better gage of the operations, have you ever considered that?

Considered it, the one thing about doing that in press release is obviously that is non-GAAP and you guys go through all the non-GAAP disclosures and since our financials is relatively straightforward it doesn’t take a lot to calculate EBITDA on your own. But that’s certainly something we could consider doing going forward. I mean we certainly calculate internally. We just elected not to put in the press release because it’s non-GAAP.

And just to review the profitability of Lifecore itself. I know that there is a step up in the business during the third quarter, if I am not mistaken and I think you reiterated that on the call today. Is there any sense that you can give us going forward on what you think the appropriate run rate is for that business run rate on profitability itself, is there any incremental kind of I don’t want to say guidance, but commentary that you can make regarding that?

From just an annual standpoint, as I have mentioned earlier, we think, like, next year, right, the growth is going to be in the single digits not extreme high growth we have had on the topline in the last couple years. But we see they maintaining their gross margins about 45% and their bottomline and this is where you can calculate yourself EBITDA margin of about 30%. So other than that unless you not quite sure if that answers your question, but that’s about the guidance I could give at this point.

Yes. All right. Thank you very much.

You’re welcome.

Thanks Rob.

Thank you. 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.

Thanks, Jonathan. And thank you all for joining us today. As we look at all the activities that we have going on Landec we look out into the future and really see that we have these three primary growth platforms that set us up for growth both the topline and bottomline going forward. So I just appreciate you joining the call and thank you.

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