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Landec (NASDAQ:LNDC)
Q3 2018 Earnings Conference Call
April 4, 2018 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Landec Corporation Third-Quarter Fiscal 2018 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 this 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.

Molly A. Hemmeter -- Chief Executive Officer

Thank you, Jonathan. Good morning and thank you for joining Landec's third-quarter fiscal year 2018 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 2017. As a leading innovator in the diversified health-and-wellness solutions space, Landec continues to drive solid growth within its three strategic growth platforms: Eat Smart salads, natural food products, and Lifecore biomaterials. As a result of the strong performance from these growth platforms, Landec delivered record revenues this quarter, with consolidated third-quarter revenues increasing 9% despite revenues from our export business decreasing 39% on a year-over-year basis. As mentioned in our press release on February 28, the food-export business will be discontinued at the end of this fiscal year.

Extreme weather events this year have adversely impacted raw-material sourcing cost at Apio, more than offsetting the positive contribution to earnings from the 9% increase in revenues. As a result, we did meet our recently revised third-quarter guidance of $0.9 per share excluding the one-time tax benefit recorded during the quarter, however, based on the impact from weather-related events and the discontinuation of the food-export business, we are revising our annual EPS guidance from continuing operations from $0.40 to $0.42 per share. At Apio, the Eat Smart salad business is demonstrating exceptionally strong performance this year, as distribution and revenues are growing much more quickly than we had originally expected. Revenues in our Eat Smart packaged fresh-vegetable business increased 15% in the third quarter and 10% in the first nine months of fiscal 2018 compared to the same period last year.

This growth was due to increased sales of Eat Smart salads, which increased 27% in the third quarter and 24% in the first nine months of fiscal 2018 compared to the same period last year. The growth in salad was primarily driven by a high 57% increase in salad revenues from the U.S. retail channel during the first nine months of fiscal 2018. The U.S.

retail all-commodity volume, or ACV, for Eat Smart multiserve salad kits for the 52 weeks ending January 27, 2018, nearly doubled from 20% to 39%, and was sequentially up by 500 basis points, from 34% for the 52 weeks ended October 28, 2017. This increase in ACV was driven by expanded distribution in key U.S. accounts such as Walmart, Kroger, Target, and others. The incremental distribution in U.S.

retail occurred more rapidly than originally anticipated, leading to considerably higher-than-expected salad revenues this fiscal year and accelerating some of the salad growth expected to occur next year into this year. We now expect Eat Smart revenues to grow 22% to 23% this fiscal year 2018 compared to last fiscal year, doubling the rate of growth that we projected in our original guidance of 10 % to 12% at the beginning of the fiscal year. Lifecore had a very profitable quarter, with revenues of $23 million and a gross margin of 51%. Revenues and gross profit are slightly lower than the third quarter of last year due to a timing shift in certain shipments typically recognized during the third quarter being shifted to the fourth quarter of the fiscal year.

On a year-to-date basis, Lifecore met expectations through the first nine months of fiscal 2018, with revenues of $49.2 million and operating income of $11.9 million. We expect to Lifecore to exceed our original growth expectations for fiscal year 2018, with revenues projected to increase 10% to 11% compared to last year, up from our original projections of 6% to 8%. Lifecore's growth is being fueled by the strategic expansion of its business beyond its historical capabilities as a premium supplier of Hyaluronic Acid, or HA, to become a fully integrated contract development and manufacturing organization, or CDMO, providing differentiated fermentation, formulation, and aseptic fill services for difficult-to-handle pharmaceutical and medical materials. At O Olive, operating performance for the first nine months of fiscal 2018 is slightly below expectations, with revenues of $3.3 million and an operating loss of 441,000.

We are currently focused on integrating the Eat Smart sales force with the Olive organization to leverage the Eat Smart customer base and relationships throughout North America to gain new customers and new distribution for O Olive. Landec's consolidated gross profit and net income were negatively impacted during the quarter by weather effects that resulted in higher produce-sourcing costs at Apio within our lower-margin fresh-cut-vegetable bag business, resulting in $3.6 million of unexpected higher produce-sourcing costs during our third fiscal quarter. The weather events included freezing temperatures in Florida during January and unseasonably warm weather in the western growing region, both of which exasperated the impact from hurricanes and tropical storms we experienced earlier in our fiscal year. The Apio team is working on several fronts to mitigate future weather-related issues, such as modifying sourcing contracts and geographic sourcing regions and shifting the product mix to reduce our reliance on certain difficult-to-economically source produce items.

It is important to note that there have been no unexpected raw-material sourcing costs attributed to our salad business during the first nine months of fiscal 2018 and Apio has been able to meet all customer demand for our salad products. Before I go into more detail about our plans for fiscal year 2018 and beyond, let me turn the call over to Greg for some financial highlights.

Gregory S. Skinner -- Chief Financial Officer

Thank you, Molly, and good morning, everyone. Revenue in the third quarter of fiscal 2018 increased 9% to $149.3 million, compared to $136.6 million in the year-ago quarter. The increase was primarily due to a $15.5 million, or 15%, increase in revenues in Apio's packaged fresh-vegetables business. This increase was partially offset by a $2.9 million, or 39%, decrease in revenues in Apio's lower-margin export business, which will be discontinued at the end of fiscal 2018.

Reported GAAP net income in the third quarter of fiscal 2018 was $16.1 million, or $0.58 per share, compared to $3.5 million, or $0.13 per share, in the year-ago quarter. The increase was a result of, first, a $13.7 million, or $0.49 per share, one-time tax benefit from the new lower corporate income tax rate, primarily from a reduction in the company's deferred-tax liability; second, a $2.2 million decrease in consolidated operating expenses due to legal-settlement charges of $2.1 million incurred during the third quarter of last year; and third, a $761,000 decrease in income taxes prior to the one-time tax benefit. These increases in net income were partially offset by, first, a $2.2 million decrease in gross profit in Apio's packaged fresh-vegetable business, primarily due to $3.6 million of unplanned produce-sourcing costs as a result of weather-related issues during the quarter; second, a $1 million decrease in gross profit at Lifecore due to the timing of shipments within the fiscal year; third, a $700,000 decrease in the change in the fair-market value of our Windset investment from $700,000 increase during the third quarter of last year, compared to no change during the third quarter of this year; and fourth, a $240,000 decrease in export gross profit due to lower export revenues. For the first nine months of fiscal 2018, revenues increased 1%, to $409.1 million from $404.8 million in the same period last year.

The increase is primarily due to a $31.3 million, or 10%, increase in revenues in Apio's packaged fresh-vegetable business and from a $1.4 million, or 3%, increase in Lifecore revenues. These increases were partially offset by a $30.3 million, or 54%, decrease in Apio's lower-margin export business. Reported GAAP income in the first nine months of fiscal 2018 was $18.7 million, or $0.67 per share, compared to $8.1 million, or $0.29 per share, in the first nine months of fiscal 2017. The increase was a result of, first, a $3.7 million, or 49% -- or $0.49 per-share one-time tax benefit from a new lower corporate tax, income tax rate; second, a $1.5 million increase in the change in the fair-market value of the company's Windset investment from a $700,000 increase during the first nine months of last year, compared to a $2.2 million increase during the first nine months of this year; third, a $476,000 decrease in consolidated operating expenses; fourth, a $1.2 million decrease from the loss on debt refinancing during the first nine months of last year; and fifth, a $1.9 million decrease in income taxes prior to the one-time tax benefit.

These increases in net income were partially offset by, first, a $4.1 million decrease in gross profit in Apio's packaged fresh-vegetable business, primarily due to $7.7 million of unplanned produce-sourcing costs as a result of weather-related issues during the first nine months of fiscal 2018; second, a $2.3 million decrease in gross profit at Lifecore due to the timing of shipments within the fiscal year; and third, a $1.8 million decrease in export gross profit due to lower export revenue. Turning to our financial position, at the end of the third quarter of fiscal 2018 cash totaled $7.7 million after generating $18.1 million in cash flow from operations, receiving net borrowings of $5.2 million, and investing $18.5 million in property and equipment. At February 25, 2018, we had $88 million available to borrow under our line of credit. Looking forward to the fourth quarter of fiscal 2018, we expect consolidated revenues from continuing operations, which exclude the food-export business, increase 13% to 16% compared to the fourth quarter of last year.

Key drivers of this growth include our Eat Smart salad products sales growth growing at 12% to 15%, Lifecore revenues growing 40% to 43%, and O Olive recognizing revenues of between $1.4 million to $1.7 million in the fourth quarter. And we expect that the fair-market value change in our investment in Windset during the fourth quarter of fiscal 2018 to be between $600,000 to $800,000. As a result, we are projecting consolidated net income from continuing operations for the fourth quarter to be $0.20 to $0.22 per share. For the full year of fiscal 2018, we expect consolidated revenues from continuing operations to grow 10% to 12% compared to the prior year.

This growth is being driven by Lifecore revenues that are now projected to grow 10% to 11%, which is up from our original projection of 6% to 8% and by Eat Smart salad sales that are now projected to grow 20% to 23%, which is up from our original projection of 10% to 12% and our most recent projection in our February 28, 2018, press release of 15% to 18%. O Olive Oil revenues are expected to grow to $4.7 million to $5 million, which is below our original projections by approximately $1 million, due primarily to construction delays in bringing our vinegar production in-house, which is now up and running. We are projecting earnings per share from continuing operations for all of fiscal 2018 of $0.40 to $0.42, which excludes the favorable 49% earnings per share from the one-time tax benefit in fiscal 2018 and the results from the export business. We are now projecting fiscal 2018 consolidated cash flow from operations of $28 million to $32 million and capital expenditures of $30 million to $34 million.

Let me turn the call back to Molly.

Molly A. Hemmeter -- Chief Executive Officer

Thanks guys. Now let me go into more detail about the progress we are making in our three continuing growth businesses, Lifecore, Eat Smart salads, and natural food products, as we position each of these for growth and enhanced profitability. Lifecore continues to evolve its business model from being a supplier of HA to a fully integrated CDMO. Lifecore is benefiting from a growing trend among 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 a fully integrated CDMO to augment its pipeline with new projects to fuel its long-term growth. Due to a stronger-than-expected performance of our Lifecore business, we have revised our revenue growth projections from 10% to 11% this year, implying a total fiscal year 2018 revenue projection of $65 million to $66 million. We continue to maintain gross-margin target between 40% and 45% and expect to realize an EBITDA of approximately $21 million in fiscal 2018. We continue to expect Lifecore to generate double-digit revenue growth on average over the next five years as Lifecore expands sales to existing customers, adds new customers, and commercializes its products that are currently in its development pipeline.

The transformation of the Apio business is still in process but evolving rapidly. This transformation is occurring in two distinct phases. The first phase of transformation began in fiscal year 2012 and focused on transitioning Apio from a commodity produce company to a true innovation company with a focus on identifying consumer healthy-eating trends and developing value-added products to support those trends. Our Eat Smart salad-kit business was launched during this first phase of transformation through an in-depth understanding of consumer healthy-eating trends.

Key to our growth strategy for salad is penetration in the U.S. retail market, and we are making significant progress in our strategy to increase the Eat Smart share of multiserve salad kits in this U.S. retail market. The annual U.S.

retail market from multiserve salad kits is approximately $1.4 billion, representing over 75% of the approximate $1.8 billion North American multiserve salad kit market, including Costco. For the 52 weeks ended January 27, 2018, Eat Smart multiserve salad kits in U.S. retail consumer dollars, grew 61% in the U.S. retail market, compared to a category-growth rate of 15%.

For the same period the market for Eat Smart multisalad kits in the U.S. retail market increased to 5.7% from 4.1%, an increase of 160 basis points, demonstrating continuous distribution gains as well as room for additional growth. With continued innovation and expanded distribution we expect revenues in our salad business to continue to grow over the next five years. The second phase of transformation of our food business began last fiscal year.

This phase involves expanding our product line from fresh packaged vegetables to include other fresh natural-food products that meet consumers' evolving needs. As the first step in the second phase, we launched the Eat Smart 100% Clean Label initiative to ensure that all of our Eat Smart products, including salad toppings, dressings, and dips, are made from all-natural ingredients by the end of calendar year 2018. We are on schedule to deliver this commitment. In fiscal year of 2017, we also created the Landec New Ventures Group to develop a natural-food strategy and to lead new product development and acquisition initiatives in this area.

As the first step in the new ventures effort, we acquired O Olive, a supplier of all-natural premium olive oils and vinegars. This acquisition was timely, as consumers are rapidly switching from traditional olive oils and vinegars to all-natural options. The O Olive products also provide a unique opportunity for future innovation of Eat Smart, offering all-natural O Olive dressings within our growing salad-kit business. In March we completed the construction of our vinegar facility in Petaluma, California.

We are now producing our own vinegars in-house, enabling internal oversight to ensure the highest quality product standards and ingredient-sourcing transparency while simultaneously reducing costs and delivering higher gross margins. During this fiscal year, the New Ventures Group accelerated its efforts in the development of a national product strategy, and through our research we found that there is a rapidly growing number of consumers searching for plant-based meal solutions. These consumers celebrate plant-based ingredients and view fruits, vegetables, grains and nuts as the central component of their eating experience. This new plants-forwards consumer could be, but is more likely not a vegetarian or vegan.

However, we found that plant-based ingredients make up at least 50% of the meals enjoyed by this consumer. Based on a deep understanding of attitudes and behaviors of this new consumer target, we are developing products to meet the needs of this emerging segment. In the first half of fiscal year 2019, the Landec New Ventures Group will launch our first internally developed product line within our natural-foods initiative to meet the needs of this ever-growing segment of consumers. We will share more about this initiative during our next earnings release call.

Our focus in our food business is on developing and offering products that are on trend with consumers and that deliver higher margins and a higher return on our invested capital. We have successfully implemented this strategy with our entry into the more multiserve salad kit category, our recent launch into the single-serve salad category, the addition of both olive oils and vinegars, and with the recent launch of our Eat Smart TimeSavors and Ready to Wok products. Eat Smart TimeSavors are in our core historical vegetable line, offer fresh-vegetable kits that make eating vegetables convenient and delicious. The Eat Smart Ready to Wok product is a unique stir-fry product that includes fresh vegetables and noodles and is currently being offered within the produce department all Sam's Club stores.

While we expand our higher-margin value-added products, we also continue to right-size the lower-margin or more volatile parts of the business. Currently this includes the decision to discontinue our lower-margin food-export business. As seen by the effects that weather had on our business during the first nine months of fiscal 2018, this has become an increasingly important strategic initiative. We are excited to begin leveraging many of the investments we made over the past several years in both capital and personnel to create forward momentum.

This fiscal year we have begun increasing production volumes of our higher-margin products, both Apio and Lifecore, to start filling our expanded production capacity and increasing our gross margins over time. Looking to fiscal 2019 we will continue to innovate. At Apio we will continue to launch new Eat Smart products that make it easy and delicious for consumers to eat healthy. We will continue to grow our O Olive line of products and launch a new line of internally developed natural-food products.

At Lifecore, we will continue to add new processes and capabilities to meet the needs of our customers for their difficult-to-handle pharmaceutical and medical materials, and we will begin selling products and vials in addition to syringes. We are also focused on increasing production volumes in each of our facilities to drive efficiencies and increase our return on invested capital or ROIC. Finally we are focused on increasing efficiencies and driving costs down in our operations, in order to offset the rising costs that are affecting our businesses. In summary, we will continue to focus on developing innovative products that deliver value to our customers, consumers, and shareholders.

As we continue to transform our businesses we will focus on growing our three platforms, Lifecore, Eat Smart salads, and our natural-food products while simultaneously reducing costs and increasing efficiencies. Our balance sheet remains strong and provides the resources for executing on our strategic objectives and reaching our financial goals. We are now open for questions

Questions and Answers:

Operator

[Operator instructions] Our first question comes from the line of Anthony Vendetti from Maxim group. Your question, please.

Anthony V. Vendetti -- Maxim Group -- Executive Managing Director

Yes, thanks, good morning. So good quarter all around. I guess, Lifecore, I thought this year was going to be a transition year, is outperforming. Any specific contract or anything, any specific product, what are they doing that's put them ahead of schedule? And is that going to translate into 2019 getting off to a strong start if the transition's over at Lifecore?

Gregory S. Skinner -- Chief Financial Officer

Well it wasn't anything in particular, Anthony. Basically it's just higher sales volumes from our existing customers than we were expecting, which is good news. And yeah, it should carry over into '19. And, as we've stated numerous times, we expect Lifecore to grow, on average 10% to 15%, and I see no reason why that shouldn't be the range next year.

Anthony V. Vendetti -- Maxim Group -- Executive Managing Director

And, if we just do the math by fiscal year '21 or '22, Lifecore could be at $100 million-plus in terms of revenues. Is it at that point where you make a decision as to whether or not Lifecore remains part of Landec? Or how how do you think about Lifecore once it gets to around $100 million in revenues?

Molly A. Hemmeter -- Chief Executive Officer

Hi Anthony. We are consistently looking at our strategic options with Lifecore. So this isn't a, we're sitting around waiting to understand what that is. We're constantly evaluating what the right strategic decision is at any point in time.

And so right now we strongly believe that it belongs as part of the Landec portfolio. And one of the reasons is, it needs to grow and grow bigger and $100 million will provide a bit better opportunity for us to look at, maybe it'll kind of shift the picture and maybe at that time it will be. But we're going to continue to look at those options and when the numbers make sense, we will do whatever makes sense to maximize shareholder value.

Anthony V. Vendetti -- Maxim Group -- Executive Managing Director

OK, great. And then on Eat Smart salad kits, obviously that's growing significantly faster than you thought. Obviously, when we were out there for the Analyst Day, we had a chance to try them personally and so I understand why they're doing well, and I think you're right on trend with the consumers. Can this much higher growth of 20%-plus, do you do you see that as sustainable growth as we as we move through the next couple of years?

Molly A. Hemmeter -- Chief Executive Officer

What we experienced this year was an accelerated distribution growth, I mean, the new sales team is just doing amazingly well. And they were able to get new distribution much quicker than we had anticipated. So I think a lot of the growth, not a lot but some, of the growth from next year was pulled into this year. So, as you know, we added, we increased our distribution Walmart, we added salad in Kroger, we've recently also started selling our salads to Target.

I will say the one remaining account that we are trying to pursue is Meyer. But after that, it's going to be more about, as we start growing our relationships with these customers, it's going to be about ensuring that our salads that are on shelf are gaining consumer adoption and awareness. And then increasing the number of SKUs in those customers. So I do think some of the growth from next year was pulled into this year, but we have been stating that we're trying to grow on average about 10% each year and I think we can hold to that.

Next year might be lower than 10%, in the single digits, since we grew so much this year.

Anthony V. Vendetti -- Maxim Group -- Executive Managing Director

OK. But you're coming out with new products in that category, and right now did you say about, right now, you only have about 5.7% of the market?

Molly A. Hemmeter -- Chief Executive Officer

That's true, that's right, exactly. So there's lots of room to expand, there's lots of room to add more SKUs in existing accounts and we just have to keep innovating and fighting for that space.

Anthony V. Vendetti -- Maxim Group -- Executive Managing Director

And just to, I know you're in Target, Walmart, Kroger, but where are you within the Target stores? Are you are you rolled out into all of them at this point? Or all the ones that [Crosstalk]

Molly A. Hemmeter -- Chief Executive Officer

We're in approximately 330 doors at Target. So that's another opportunity, is to grow and expand our doors at Target.

Anthony V. Vendetti -- Maxim Group -- Executive Managing Director

OK, great. I'll hop back in the queue. Thank you so much.

Molly A. Hemmeter -- Chief Executive Officer

You're welcome.

Operator

[Operator instructions] Our next question comes in the line of Francesco Pellegrino from Sidoti & Company. Your question, please.

Francesco Pellegrino -- Sidoti & Company -- Analyst

Good morning, guys. So I guess I'll start off with Apio. If I look at the really strong performance for your salad kit product line during the quarter and then I just sort of peg it against what the Apio value-added segment did in regards to gross profit, I know we talked about salad kit margins ranging anywhere between 15% to 24%, single-pack salad kit product margins are probably maybe around like 10%. If I apply a 15% gross margin to the salad kit product line this quarter, it sort of nets out to around, like, $7 million in gross profit just for that product line.

And then I, guess what I'm sort of backing into is, did the rest of the core packaged fresh-vegetable business, like, was that operating at break-even, during the quarter?

Gregory S. Skinner -- Chief Financial Officer

Well you've gotta remember, one of the things, and I I can't verify your math, I don't have that level of detail in front of me --

Francesco Pellegrino -- Sidoti & Company -- Analyst

Yeah, it was just hypothetical.

Gregory S. Skinner -- Chief Financial Officer

The $3.6 million in sourcing hits that we took during the quarter, that's all associated with the historical core, primarily the historical core bag business. So even though I don't have the math in front of me, it could play out exactly what you said, is that when you factor in the $3.6 million against the margins that that business makes, it could put it, probably did put it, in a loss position for the quarter.

Molly A. Hemmeter -- Chief Executive Officer

Well, the other part of that, too, right now is that were heavily promoting our salads because we're new into all these accounts. We are putting a lot of promotional dollars behind these to ensure consumer adoption and grow awareness. So that's going to be the other effect on your gross margins in addition to the sourcing hits.

Francesco Pellegrino -- Sidoti & Company -- Analyst

OK. On promotional activity, are we thinking, like, after four quarters you pull back on it and then all of a sudden you get margin expansion? Or you get like more normalized margins for the salad kit product line? Or do you think this competitive space is going to last for quite a bit of time?

Molly A. Hemmeter -- Chief Executive Officer

No, we will pull back on the promotional spend after some time. I can't say how long a time that will be, if it will be through next year or how long, but we won't keep it this rate forever. It's just because we're so new in these accounts. And when you look at the real estate on shelf, we still only have one to three to five SKUs in a sea of like 60.

So we really need to make it pop for consumers and get them to try our salads.

Francesco Pellegrino -- Sidoti & Company -- Analyst

Got it. I guess just shifting over to Lifecore for a minute, you guys provide some really great guidance in regards to each of your segments and just the overall business. For Lifecore, I know historically we should just think about Lifecore aiming for 43% to 45% gross margin. But in the guidance all we're really provided with is operating-income growth.

What should we be thinking about Lifecore's gross margin for the year?

Gregory S. Skinner -- Chief Financial Officer

Your range was pretty good.

Francesco Pellegrino -- Sidoti & Company -- Analyst

OK. So if we're aiming for like 43 to 45, we're having this issue where some higher-margin business is being shifted over to the fourth quarter. I guess I was just a little bit more enthusiastic for the back half of the year and I thought on the last earnings call, what was being implied was, we were going to be seeing Lifecore gross margins right around 55% for the second half. And it just looks as if maybe some of the business that was pushed back wasn't really as high-margin as we necessarily thought was going to exist for the second half? Or maybe there's timing things and some business isn't coming on line? Because on the second-quarter call, I thought there was a level of comfort that Lifecore was going to have a second-half gross margin in excess of 50% and I think right now based upon the guidance that you are providing us with, it's going to come out slightly below 50%.

Gregory S. Skinner -- Chief Financial Officer

And that's probably pretty accurate. With Lifecore, it comes down to mix. Because they've they've got three distinct businesses, the aseptic filling, which is the lower-margin business, because that's where all the labor and overhead exists. You've got the fermentation, which is higher, and business development, which is higher.

And depending on that mix, in any given quarter it's going to dramatically change their margins. And if you look historically at the fourth quarter, their historical fourth-quarter margins are usually in the 30s. And so the fact that it's even nearing 50% tells you that the third quarter, where a lot of the high-margin business occurs, shifted to the fourth quarter and to even get it close to 50%. So this is actually within what we had expected for Lifecore for the year.

Francesco Pellegrino -- Sidoti & Company -- Analyst

It makes sense that each of your product lines and the product mix is going to be creating these changes, but I thought they were going to be some product line, product mix shifts as well. For example, I thought within aseptic filling, it's the lowest-margin product line of the three product lines within Lifecore, I thought we were also going to see this phenomenon of non-HA aseptic filling business coming on line in the second half, which was actually going to increase the overall aseptic product line gross margin. So I'm not sure if maybe aseptic filling [Crosstalk]

Gregory S. Skinner -- Chief Financial Officer

That has happened. That's one of the reasons their margins are nearing 50%, as you pointed out in the fourth quarter. Otherwise, even with the shift in some shipments from the third quarter to the fourth quarter, it would have been less than that.

Francesco Pellegrino -- Sidoti & Company -- Analyst

OK. And I guess maybe just the last question to sum this all up. Is it better to think of whole-year gross margins for Lifecore at the lower end of the 43% to 45% range?

Gregory S. Skinner -- Chief Financial Officer

Yes.

Francesco Pellegrino -- Sidoti & Company -- Analyst

OK, perfect. That's it for me. Thank you, guys

Operator

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

Chris Krueger -- Lake Street Capital Markets -- Analyst

Hi, good morning. Just a couple of quick questions. You mentioned that your O Olive business is expected to grow to about $4.75 million this year and that you're trying to get your Eat Smart people to start selling that. If you were to land a couple of significant national retailers for that business, how big could that be in the next couple of years? Could it be a $20 million business or how do you look at that?

Molly A. Hemmeter -- Chief Executive Officer

Well, we definitely think that one day this business can be a $20 million business. It comes back to exactly what you're saying, which is the timing of new distribution. That has to do with us first even getting to know these new buyers and their different reset timings. I would hope that in the next one to two years that we can double, the business and go from there.

But, I mean, when we acquired this business we definitely think, believe it can be an over-$20 million business.

Chris Krueger -- Lake Street Capital Markets -- Analyst

If you were to land a couple of significant contracts, do you have the capacity to quickly meet that demand?

Molly A. Hemmeter -- Chief Executive Officer

Yes, so we have, on the vinegar side of the business we have plenty of capacity. As we mentioned in the call, we just built our own vinegar facility, which has plenty of capacity for the growth projections that we have. On the olive oil side of the business, we have, we do have a limited supply of olive oil and how quickly we can grow that business. So right now we're in the middle of sourcing new olive oil, partnering with new olive growers, and to actually take our growth, enable our growth to go over that $20 million in three-plus years.

So vinegar plenty of capacity, no issues on supply. Olive oil, working on it and we will have limited supply until we secure longer supply agreements.

Chris Krueger -- Lake Street Capital Markets -- Analyst

All right. And my last question is, do you have a kind of an internal pipeline of potential new brands or new acquisitions that you are evaluating right now? And is that growing?

Molly A. Hemmeter -- Chief Executive Officer

So our, we have a large initiative in the natural-food space that we plan to bring to market in fiscal year '19 and I know we have been very vague about that. But we have been doing a lot of research on this new plant-based consumer, and that's nothing new, but I think what we found in our research at really getting down to attitudes and behaviors and beliefs and needs of this consumer, we found some unique insights. And based on those insights, we're developing a new product line to launch this fall, this calendar year fall. And so that product line will be out around August or September area and we're looking forward to sharing more about that in the next earnings release call

Chris Krueger -- Lake Street Capital Markets -- Analyst

All right. Thank you. That's all I got.

Operator

Thank you. Our next question comes from the line of Mitchell Pinheiro from Costello Asset Management. Your question, please.

Mitchell B. Pinheiro -- Costello Asset Management -- Portfolio Manager

Yeah, hi. Good morning, everybody. So just a couple of questions. First on Apio, have you seen any changes in the market or anything resulting from Fresh Del Monte's acquisition of Mann?

Molly A. Hemmeter -- Chief Executive Officer

We have not seen anything yet. I mean it's a buzz and people know about it. I haven't seen any shifts or differences in our relationships or anything at this time.

Mitchell B. Pinheiro -- Costello Asset Management -- Portfolio Manager

OK. And then, with sourcing. I have been hearing for years about how you've, you're going to strategically change or try to mitigate the sourcing issues, but at the end of the day, you're always going to have sourcing issues of some sort. Or can you talk about how confident or really if anything's changed dramatically in the sourcing that will mitigate the lots of downs that we've had in the last couple of years?

Molly A. Hemmeter -- Chief Executive Officer

You are correct in the fact that that portion of our business that is highly volatile and it's the vegetable bag portion where it's always going to have sourcing risks. It is the business we are in. We are in produce business with short shelf life and it is what it is. That being said, I do feel like we can do several things to mitigate that strategy.

First of all, when I look at that product line that's the most volatile, one thing we're trying to do is increase our gross margins of that line, so that even when there is volatility we have the profitability to absorb those extra costs. And so when I look at that, how are we doing that? One we have been going out with price increases and we have had some success for next fiscal year in gaining those price increases which we haven't had in a while. So we are seeing success finally and getting some price increases. The third thing is innovation.

So we have started to, the second thing is innovation. We've started to innovate within our core line. So I mentioned at the beginning of the call about products that we just launched, and they're really products within our core bag business but we are evolving like a bag of broccoli and cauliflower to actually, to actual kits, which, as you know, consumers are looking for more convenience. So in these kits, we're calling them TimeSavors, they come with sauces and different editions to make vegetables taste better and they make it easy, it makes it easy for them to taste better.

These products that we still consider in our core line, we are are adding margin to that line. So we just launched, one of the examples is cauliflower fried rice, another one is the green bean saute. And they're, we just launched them but they're doing rather well. We also started a new line called Ready to Wok, and Ready to Wok is a line of stir-fry kits with noodles and vegetables and the produce department is doing extremely well at Sam's and fetches a higher margin.

So the second thing we're trying to do is innovate. The third one is we are also shifting our channels a bit and we have been aggressively going after the direct-to-consumer market and creating small portion packs for different meal-kit companies, and this has been a profitable endeavor for us also. So it might be just a small bag of green beans or a small bag of broccoli but those are fetching, because it's such convenience for these meal-kit companies, those are fetching a higher margin. And I'd say the fourth thing is all about cost-reduction.

We have to continue to get aggressive in reducing the cost in our plant site and gaining efficiencies and taking out costs wherever we can. And through these four initiatives, we hope that over time we do increase the profitability. And if we would not have had the hurricanes this year, you would have actually have seen an increase in margin in that core vegetable-bag business, if I were taking out the sourcing hits. So the standard margin that we see has increased but it's, this year was an awful sourcing year and it's completely hiding the fact that we are increasing the margin in that business slightly over time

Mitchell B. Pinheiro -- Costello Asset Management -- Portfolio Manager

Yeah, that's helpful, Molly. And just seems like you've never been able to get paid for the sourcing risk. You're the ones, and other companies such as yourselves, are the ones that bear the brunt of sourcing risk and it's never the consumer or the retailer or rarely the consumer, the retailer. But, so you've just got to do what you got to do, to work around that.

But what about the labor? You pointed out labor is going up. Is that something that you can, you think you can take pricing for? I mean, you are just trying to take out costs in the plant faster than labor rises?

Molly A. Hemmeter -- Chief Executive Officer

Both. That's why all for all four of those initiatives that I just outlined to increase the profitability in core are trying to offset labor price increases and the volatility that we're seeing with weather. So there's a lot going on to try to counteract those ,and you're right we have borne the brunt of these cost increases and we have to start passing pricing along. We have to start getting our costs down and it's a major initiative going into fiscal year '19 to do just that.

Mitchell B. Pinheiro -- Costello Asset Management -- Portfolio Manager

Just a couple other questions. One is, like, with the M&A pipeline -- how's that look? And how do M&A valuations look? Are they trending up down or flat in your view?

Molly A. Hemmeter -- Chief Executive Officer

So we have a long list of M&A companies that we are reviewing and we're constantly reviewing. I will say that the multiples are still extremely high. You've probably seen that for companies that have been acquired. We have not found an acquisition target right now that makes sense from an ROI standpoint.

It just doesn't make sense to pay the high multiples we're seeing in the market. If we find an acquisition that we believe we can deliver an ROI on and it's strategic, we'll be right on it. Until then, we're not sitting back, we're going to develop our own products, because I think there's a higher ROI on internally developing products for the natural-food space. And I think it's a core competency that we have at Apio, is our consumer insight and our internal innovation engine.

And I think we can do, we can launch new products that will deliver a much higher ROI right now compared to acquisitions. Now, if that changes, and the market for acquisitions changes and those multiples come down, we can shift immediately.

Mitchell B. Pinheiro -- Costello Asset Management -- Portfolio Manager

OK. And then last one, CAPEX, what's the, Greg can you delineate what the CAPEX will be? The buckets of the spending?

Gregory S. Skinner -- Chief Financial Officer

Buckets being between Apio and Lifecore, or [Crosstalk]?

Mitchell B. Pinheiro -- Costello Asset Management -- Portfolio Manager

Yeah? And maybe just within that, what exactly, a little more specificity? Like the type of project thing?

Gregory S. Skinner -- Chief Financial Officer

Yeah. This year with the revised guidance, the majority of that this year is Lifecore and most of that's their new vial-filling line, which should be up and running in June, which we are very excited about. Some of the projects at Lifecore, I mean at Apio, were delayed and so we had originally thought this year would be in the mid-40s and now it looks like it's going to be in the low 30s. A lot of that difference is going to roll into next year.

They were just late projects -- they still need to get done. And so we had expected this being a big year, big drop next year, I think they're going to be pretty close year over year. So this year in the low 30s, next year is going to be close to that.

Mitchell B. Pinheiro -- Costello Asset Management -- Portfolio Manager

And you have good visibility?

Gregory S. Skinner -- Chief Financial Officer

Most of it is in the area of equipment. There is some buildings but most of it is equipment for capacity.

Mitchell B. Pinheiro -- Costello Asset Management -- Portfolio Manager

OK. And you have good visibility with Lifecore, the new customer and the new-customer pipeline, or is that anywhere part of the spending at Lifecore? Or is there then potential for additional CAPEX if the pipeline performs better at Lifecore?

Gregory S. Skinner -- Chief Financial Officer

Yes and yes. We obviously built the vial-filling line in anticipation of filling customer needs, and if those needs become much greater than what we're currently forecasting we are fully prepared to add another line.

Mitchell B. Pinheiro -- Costello Asset Management -- Portfolio Manager

OK. Thanks for the time, guys.

Operator

[Operator Instructions] And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Molly A. Hemmeter -- Chief Executive Officer

Thank you everyone for joining us today to talk about Landec. We look forward to our next call with you to update you further on our initiatives. Thanks so much

Operator

[Operator signoff]

Duration: 51 minutes

Call Participants:

Molly A. Hemmeter -- Chief Executive Officer

Gregory S. Skinner -- Chief Financial Officer

Anthony V. Vendetti -- Maxim Group -- Executive Managing Director

Francesco Pellegrino -- Sidoti & Company -- Analyst

Chris Krueger -- Lake Street Capital Markets -- Analyst

Mitchell B. Pinheiro -- Costello Asset Management -- Portfolio Manager

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