Landec Corp

F:LDE

Earnings Call Transcript 2019-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the fourth quarter and fiscal year-end 2019 earnings conference call. [Operator Instructions] As a reminder, today's program is being recorded. And I will now introduce your host for today's program, Dr. Albert Bolles, President and CEO of Landec Corporation. Please go ahead.

[Albert Bolles, executive]

Good morning and thank you for joining Landec's Fourth Quarter and Fiscal Year 2019 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 year 2018.

As a leading innovator in diversified health and wellness solutions, Landec is comprised of two operating business units, Lifecore Biomedical and Curation Foods. Lifecore Biomedical is a fully integrated contract development, and manufacturing organization or CDMO that offers highly differentiated capabilities in the development, fill and finish of difficult to manufacture pharmaceutical products, distributed in syringes and vials.

As a leading manufacturer of premium injectable grade Hyaluronic Acid or HA, Lifecore brings over 35 years of expertise as a partner for global and emerging biopharmaceutical and biotechnology companies across multiple therapeutic categories, to bring their innovations to market.

Creation Foods, our natural food business is focused on innovating plant-based foods with a 100% clean ingredients in retail club and foodservice channels throughout North America. Curation Foods is able to maximize product freshness through its geographically dispersed family of growers, refrigerated supply chain and patented BreatheWay packaging technology, which naturally extends the shelf life of fruits and vegetables.

Curation Foods brands include Eat Smart fresh packaged vegetables and salads, O Premium artisan oil and vinegar products and Yucatan and Cabo Fresh avocado products. Consolidated revenues and gross profits for both increased during the fourth quarter of fiscal year 2019, while adjusted EBITDA increased 19% during the fourth quarter compared to the fourth quarter of last year and slightly increased for the fiscal year compared to fiscal 2018. For the fourth quarter of fiscal 2019, our consolidated revenues increased 8% to $152.8 million at the high end of our revenue guidance for the quarter. The earnings per share from continuing operations was $0.01. With the announcement of becoming Landec's President and CEO on May 28, I shared that my focus is to drive profitability by maintaining our focus on food innovation, simplifying our business, improving our quality, while driving productivity and operational excellence across the organization. We will also allocate our capital expenditures strategically to support future growth.

For Curation Foods, we took action to improve financial performance by streamlining the organization and reducing the number of projects, we are working on. First, we consolidated all of our packaged vegetable products under our Eat Smart trade name, resulting in a write-off of our GreenLine trade name. Second, we discontinued our EatSmart@Home e-commerce business and thus wrote off all the assets associated with that business. And third, we had leadership changes at the end of the fiscal year, resulting in severance-related expenses. These three actions resulted in non-recurring charges, which reduced earnings from continuing operations during the fourth quarter by $3.3 million or $0.11.

Excluding these non-recurring charges, our earnings per share was $0.12 consistent with the low end of our guidance for the quarter. We also discontinued Now Planting soup business, which is reflected as a discontinued operation in our financials. These changes will immediately strengthen our business and focus the organization on fewer projects that will deliver greater impact. Lifecore continue to grow on fiscal 2019 and provides strong financial performance with annual revenues growing 16% and EBITDA growing 13% compared to 2018.

The results were even more impressive in the fourth quarter with revenues growing 49% and EBITDA growing 46% compared to the same period last year. This growth was driven by an increase in demand for commercial production and the expansion of our pipeline of development projects.

Lifecore continues to expand its overall capabilities and capacity to support its growing CDMO and HA businesses. The recent completion of our new multipurpose filling line, dedicated quality control lab and expansion of our secondary packaging area all enhanced our capabilities to meet the ongoing demands of our business and expectations of our customers.

Also during fiscal 2019, Lifecore increased its HA fermentation capacity by 25% through its continuous improvement process, which required only a minimal amount of additional capital expenditures. These increases in capacity to meet future commercial production demand, plus a robust business development pipeline will provide for profitable and sustainable growth for our Lifecore CDMO and HA businesses for years to come. Curation Foods continue to generate revenue growth in 2019, with revenues growing 5% compared to fiscal 2018. Fiscal 2019 was a transformative year for our food business as we concluded our transition from the packaged fresh vegetable company to a natural food company.

We completed the largest transaction in company's history by acquiring Yucatan Foods. We launched Curation Foods, a corporate entity that serves as a corporate umbrella for the portfolio of Food brands and we named new Executive Leadership. We are strongly positioned to deliver on-trend plant-based food solutions to customers with a combination of unique capabilities that make Curation Foods truly differentiated in the market. We offer proven internal innovation capabilities, creating food products that meet consumer demand for 100% clean ingredient products.

We serve our customers in North America with the direct produce, and daily sales force and a nationwide refrigerated supply chain that deliver our products in the freshest state possible. The Eat Smart brand salads compete in [ $2.8 billion ] salad kit business in North America. We continue to have a #1 salad kit SKU in U.S. and Canada retail sales with our Eat Smart Sweet Kale Salad Kit.

The Eat Smart brand is the market leader in Canada for multi-serve salad kits, therefore maintaining our #1 position in Canada and increasing our Eat Smart share of salads in the U.S. retail accounts are both key long-term objectives. During fiscal 2019, we grew overall salad revenue by 1% compared to fiscal 2018. This growth was driven by growth in the U.S. retail market, which was partially offset by lower club sales due to loss of a rotation.

According to Nielsen, which excludes certain retailers and Costco for the 12-months ended May 2019, Eat Smart salad kit revenues outpaced the salad kit category, which grew at 5.8%. Specifically, U.S. retail sales of Eat Smart multi-service salad kits grew 9.7% and our market share increased 20 basis points to 6.4% from 6.2%, demonstrating continuing distribution gains. Additionally, our Eat Smart single serve salad kit grew 133% to $23 million in retail sales and is responsible for 63% of the single-serve category growth. We are projecting 2020 revenue growth of 6% for our salad business in line with the expected growth in the market. Another area of growth for Eat Smart in fiscal 2020 will be a greater focus on growing our green bean business. We will grow our business by focusing on the customer. We have a strategy in place to mitigate weather-related supply issues by diversifying our growing regions and modifying our planting strategy. This will allow us to continue to build consistent supply for our existing customers and aggressively grow into new channels, including Foodservice, where we expect to increase our business by 12% in fiscal 2020 seeing much of this growth into second half of fiscal 2020. Consumer demand for pre-packaged convenient guacamole products is driven by a strong demand for avocado products as they provide healthy calories and are quickly becoming a staple in people's diets.

According to IRI, the branded guacamole category at retail is showing an 18% 3 year CAGR. Also according to IRI, the 12 months ended in May 2019, retail sales of guacamole was [ $389 million ] growing at 10.7% and with a 91% ACV. Our brands, Yucatan and Cabo Fresh together command [ 16% ] market share in the guacamole category. Yucatan is primarily sold in deli and during the 12 months ending May 2019, delivered $42 million in retail sales. Cabo Fresh, our emerging brand marketed to millennial consumers delivered $20 million in retail sales during the same 12-month period, growing 77% compared to the same period a year ago. This product is sold primarily in the produce section, which leverages the core competency of the Curation Foods sales team. With a relatively low ACV of 28%, Cabo Fresh will continue to be our growth engine, as we increase retail distribution for this brand, along with new product introductions in Cabo Fresh and Yucatan brands. O Olive Oil and Vinegar hand-crafted artisan products continue to deliver on the strategic objective of producing a high gross margin with a distinct premium brand. O competes in three categories: premium wine vinegar, organic apple cider vinegar, and extra-virgin olive oil. O completed their brand refresh in fiscal 2019 and grew the number of distribution points by 32%. Fiscal 2020 growth will continue to be driven by distribution gains across all channels, natural, grocery and in club North America. Before I go into more detail concerning additional plans for fiscal 2020 and beyond, let me turn the call over to Greg for some financial highlights.

[Gregory Skinner, executive]

Thank you, Al, and good morning, everyone. Revenues in the fourth quarter of fiscal 2019, increased 8% to $152.8 million compared to $141.1 million in the year ago quarter. The increase was due to a $7.9 million or 49% increase in revenues at Lifecore and from a $3.8 million or 3% increase in revenues at Curation Foods.

Net income from continuing operations for the quarter was $367,000 or $0.01 per share, compared to net income from continuing operations of $6.7 million or $0.24 per share in the year ago quarter. The decrease in net income was a result of first, a $7 million increase in operating expenses primarily due to the acquisition of Yucatan Foods in the third quarter of fiscal 2019.

Second, a $1.9 million decrease in gross profit at Curation Foods, primarily due to a decrease in Eat Smart revenues driven primarily from a reduction in lower margin bag, and tray sales at retail. And a decrease in salad kit sales primarily at club, due to one less rotation this year compared to last year.

The decrease in Eat Smart gross profit was partially offset by gross profit from Yucatan Foods. Third, recognizing no income from the change in our Windset investment compared to recognizing 700,000 of income during the fourth quarter of fiscal 2018.

And fourth, a $1.4 million increase in interest expense. These decreases in net income were partially offset by a $3.3 million increase in gross profit at Lifecore and from a $1.4 million decrease in income taxes. Adjusted EBITDA for the fourth quarter of fiscal 2019 increased 19% to $11.8 million compared to $9.9 million in the year ago quarter. Revenues for fiscal 2019, increased 6% to $557.6 million from $524.2 million in fiscal 2018. The increase was due to a $22.9 million or 5% increase in revenues at Curation Foods and a $10.4 million or 16% increase in Lifecore revenue.

Net income from continuing operations for fiscal 2019 was $2.1 million or $0.07 per share, compared to net income from continuing operations of $25.8 million or $0.92 per share in fiscal 2018. The decrease was the result of, first a $14.3 million or $0.51 per share one-time tax benefit from the new corporate income tax rate that went into effect during the third quarter of last year.

Second, a $10.8 million increase in operating expenses primarily due to the acquisition of Yucatan Foods in the third quarter of fiscal 2019.Third, $465,000 decrease in gross profit at Curation Foods, primarily due to a decrease in Eat Smart revenues driven from a reduction in lower margin bag and tray sales at retail and an unfavorable product mix for salads to a higher percentage of [ salad ] revenue increase coming from our lower margin single serve salad. The decrease in Eat Smart gross profit was almost completely offset by gross profit from Yucatan Foods. Fourth, recognizing $1.6 million of income from the change in our Windset investment in fiscal 2019 compared to recognizing $2.9 million of income during fiscal 2018. And fifth, a $3.3 million increase in interest expense.

These decreases in net income were partially offset by $3.1 million increase in gross profit at Lifecore and from a $3.4 million decrease in income taxes, excluding the impact from the tax reform in fiscal 2018.

Adjusted EBITDA for fiscal 2019 increased 1% to $26.1 million compared to $25.7 million last year. Shifting to fiscal 2020, we're projecting consolidated revenues from continuing operations to grow 8% to 10% which is driven by expectations for Lifecore to grow in the range of 10% to 12% and Curation Foods to grow 8% to 10%.

The revenue growth in Curation Foods will primarily come from having Yucatan for full year and from salad and green bean growth, offsetting an expected reduction in revenues in the lower margin packaged vegetable bag and trade products. We are projecting consolidated earnings per share to be $0.28 to $0.32. Consolidated EBITDA for fiscal -- for 2020 is expected to be in the range of $36 million to $40 million. At the segment level, we expect EBITDA after corporate expense allocations of $19 million to $21 million for Curation Foods and $21 million to $23 million for Lifecore.

Corporate is expected to realize an EBITDA loss of approximately $4 million after allocations to Curation Foods and Lifecore. We are projecting the cash flow from operations will be in the range of $26 million to $30 million and capital expenditures to approximate the amount spent in fiscal 2019 with a large majority of those expenditures resulting from capacity expansion at Lifecore and the Curation Foods cost out initiatives. For the first quarter of fiscal 2020, we expect revenues to be in the $135 million to $140 million range with a net loss of $0.14 to $0.16 per share. The projected loss in the first quarter of fiscal 2020 is due to, first, the timing of production and product mix within the fiscal year at Lifecore, where we are projecting a loss in the first quarter of fiscal 2020.

Second, a projected loss from the sale of avocado products due to very high avocado prices since April. Third, $2.3 million of interest expense. Fourth, increased SG&A to kick off new initiatives in the areas of food, safety, new packaging, network optimization and IT. And fifth, a projected loss in our green bean product line during the first quarter due to the severe rains in Ohio Valley during May and June of this year, resulting in a significant decrease in yield.

We expect the rest of the quarters of fiscal 2020 to be profitable, but don't expect to be profitable on a year-to-date basis until the third quarter of fiscal 2020. We expect net income to increase each quarter with the fourth quarter generating the highest level of quarterly income during the year. The timing of our income generation during the year is driven by the fact that, first, Lifecore generates approximately 80% of its operating income for the year during the second half. Second, all of the profits from the sale of avocado products occurs in the second half. Third, we expect to recognize a large majority of our cost savings from our cost-out initiatives at Curation Foods during the second half. And fourth, we expect our green bean product line to generate substantial profits in the second half of fiscal 2020.

Turning to our financial position. At the end of fiscal 2019, we had approximately $149 million of debt, which translates into a debt to equity ratio of 55%. Our fixed coverage ratio at the end of fiscal 2019 was 2.2 which is well above our covenant of 1.2 or greater. Our leverage ratio at the end of the fourth quarter was 3.7, our covenant is 4.5 or less, which means we had borrowing capacity of approximately $32 million. We are currently in discussions with our banks and a new bank not currently part of our syndicate to refinance our debt. We are discussing a financing structure that will extend the overall terms of our debt and result in a meaningful reduction in the average interest rate on all of our debt. I'll now turn the call back to Al.

[Albert Bolles, executive]

Thanks, Greg. We are confident about our plans to drive profitable growth in fiscal 2020. Let me go into more detail about the progress we are making in our Lifecore and Curation Foods business units. Lifecore continues to benefit from a growing trend among pharmaceutical and other medical material companies to outsource specialty services and manufacturing. 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.

Lifecore differentiates itself by delivering the highest quality products and services for client needs in a reliable, timely and professional manner. These attributes along with Lifecore's industry specialization and ability to fill products and syringes and more recently in vials, empowers their ability to be selective in our business relationships and fosters long-term partnerships, in turn delivering consistent growth. To meet future demand, we will be investing in fiscal 2020 approximately $13 million for capacity expansion. We continue to expect Lifecore to generate on average low to mid-teen revenue growth over the next five years as they expand sales to existing customers, add new customers and commercialize products that are currently in its development pipeline.

We are set up for success at Curation Foods. We have finalized our transition from a packaged fresh vegetable company to a natural food company. We invested in our future by investing in people and bringing in new talent at all levels of the organization to drive meaningful change. Now. we will go the final mile and begin to execute with excellence, focused on improving Curation Foods' EBITDA. We are committed to delivering long-term shareholder value. Our fiscal 2020 strategy focuses on growing our higher-margin products, growth that makes us better before bigger by delivering breakthrough product innovation, while continuing to mitigate the cost pressures facing our industry.

We will do this while keeping true to our purpose of providing access to quality plant-based, 100% clean ingredient foods and protecting our planet for future generations of sustainable business practices. For our natural food brands, we will focus on growing our core product lines that deliver high gross margin in vibrant retail categories such as salads, green beans, premium wine vinegar and organic olive oil and avocado products. For O specifically, we are investing growth capital in organic olive oil orchards to build long-term supply to meet growing demand for California organic extra-virgin olive oil. In my experience, leading innovation teams, I have learned that small changes can lead to really big things. We will create products that are sticky and meet consumer unmet needs. We are now implementing this playbook at Curation Foods. You will see several new product launches in fiscal '20 that provide incremental profitable growth that will carry into fiscal 2021. We are actively working with key strategic partners and customers to test these products prior to scaling them. This aligns with our priorities of focusing our resources, and doing fewer projects to drive sustainable profitable growth. To drive improvements and deliver on our commitments to our customers, Tim Burgess, our newly appointed SVP of Supply Chain is actively implementing an enterprise-wide operations management system to improve efficiencies across the supply chain and optimize our network. His first order of business will be to successfully integrate and improve avocado products operations in Mexico.

Bill Richardville, VP of Operations will continue to lead our cost out and productivity initiatives to mitigate the cost pressures and weather-related events. From cost out programs in fiscal 2019, we realized $7.2 million in savings, which allowed us by fiscal year-end 2019 to improve the gross margin of our growing Eat Smart single-serve salad business by 500 basis points. Our goal for fiscal 2020 is to recognize $20 million of cost savings from this program. The cost savings will be used to offset projected cost increases, primarily driven from labor, freight and raw material produce sourcing. In addition, the company in its plan and guidance has set aside a considerable contingency fund to cover unforeseen produce sourcing issues due to weather-related events over and above what we have historically set aside in our plants. In summary, we have confidence in our guidance for fiscal 2020. At Curation Foods, our team will focus on four priorities to deliver strong financial performance. We will continue to simplify our businesses, focus on fewer new products that deliver high impact, execute with operational excellence while driving cost out. I am confident that we have an action plan in place to make the changes necessary to be successful and secure long-term profitable growth. Curation Foods and Lifecore revenues, and more importantly profits begin to ramp up during the third and fourth quarters. At the same time as the changes we have outlined begin to take hold. The combination of these efforts will allow us to deliver strong financials finish to the year. For our future, we will provide the capital required for strong EBITDA growth and deliver value to the customers, consumers and shareholders. We are now open for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Mitch Pinheiro from Sturdivant & Co.

[Mitchell Pinheiro, analyst]

So just 2 questions. The first, sort of what surprised me the most in the release was the projection of a loss at Lifecore in the first quarter, it prompted me, I went back in my model and I noticed the first quarter. Back in 2012 and '13, were breakeven and in '15 if I recall your -- [ one of your ] HA customers was bought, there was an inventory reduction during that transition and you lost money in fiscal '15. I believe. But now that it's got this much -- Lifecore has grown. I kind of thought, you could outrun any weakness in the first quarter. I'd love to understand the moving parts there with Lifecore in Q1.

[Gregory Skinner, executive]

Sure. Mitch, this is Greg. Well, it's a combination of really four things that come into play. One is their lowest revenue quarter, you'll see historically, first quarter is always their lowest revenue. So just that alone means they're going to generate less gross profit, but in combination. It's a mix issue. So it's a quarter in which most of the sales are the aseptic sales, which is the lower margin and probably the biggest driver that's resulting in a loss is it's a very low production quarter. Which means, your overhead that it's fixed over the course of the year, probably a good example is, say, our overhead for the years and this is just illustrative, these aren't real numbers is $10 million and you think, you're going to produce 1 million units which means that's $10 of overhead per unit if in the first. If you're expensing $2.5 million a quarter, but in that first quarter. You're only producing a 100,000 units. That means, only $1 million is going to inventory, the difference, the 1.5 that goes to cost of sales and is therefore reducing your gross profit. That in combination with the fact that your OpEx is fixed means that you're just not generating enough in that first quarter in gross profit to cover your CapEx. So hopefully, that explains why it's going to be a loss in the first quarters. Quickly turns around and comes profitable in the second, third and fourth and we have every reason to believe that they're going to hit their plan for the year.

[Mitchell Pinheiro, analyst]

And so in Q2, that is -- does Q2 normalize or -- like Curation, you'll see a build through the -- I know the second half is stronger. So is that going to be -- just a -- building profitability throughout the year?

[Gregory Skinner, executive]

It is, but is historically, this last year was somewhat of an anomaly, but historically Lifecore's best quarter is the third quarter and that'll be the case this year. The second and the fourth will be pretty close as far as operating income.

[Mitchell Pinheiro, analyst]

Okay, fantastic. And then second question and I'll get back in the queue. Just could you give a breakdown of the revenue sort of guidance you gave for fiscal '20, a breakdown of the volume price and acquisition for Curation and then volume and price for Lifecore, rough numbers, so with Lifecore 10% to 12% revenue growth. What kind of -- is that all volume, is it pricing, mix?

[Gregory Skinner, executive]

It's a combination. Do I have the exact percentages? No I don't, I can get back to you on those percentages, but it is a combination. It's not driven by strictly volume. There is a price and volume component.

[Mitchell Pinheiro, analyst]

Okay. And so how about Curation?

[Albert Bolles, executive]

And a mix component, too.

[Gregory Skinner, executive]

Yes, [ and always ] a mix component. So that's true of both company.

[Mitchell Pinheiro, analyst]

What kind of volume? I'm sorry, to interrupt. But what kind of volume growth would you have at Curation of the 8% to 10%?

[Gregory Skinner, executive]

I don't have the exact percentage. I would guess that it's pretty close to 50-50.

[Operator]

Our next question comes from the line of Gerry Sweeney from ROTH Capital.

[Gerard Sweeney, analyst]

So I want to -- I have a couple of questions and I want to focus on maybe some of the consistency and stability in the cost-out program. I think you highlighted $20 million of cost savings by year-end, so I'm assuming, the full effect will be felt in 2021 and we'll see an incremental on impact on 2020. Is that fair to expect?

[Gregory Skinner, executive]

No, we actually expect all $20 million to be realized in FY '20 and that will obviously build going into '21. But no, we expect cost savings of $20 million this year, that's going to offset freight, labor, raw material, which if you look at our cost of sales, it's well over $400 million. So that's really only an increase of $4.5 million or 4.5% I should say that we're covering, with that $20 million in cost-out.

[Albert Bolles, executive]

The reason we have confidence in that is that -- we started -- we started the cost-out program in '19 and we over delivered close to $1 million in that by delivering $7.2 million, so that momentum and that focus, it's primarily automation in our facilities, gives us confidence that we can meet that $20 million and culturally, this is just going to be a way of continuous improvement for us in years to come.

[Gerard Sweeney, analyst]

So fair to say, so we have $20 million of savings going into 2020 that's the expectation.

[Gregory Skinner, executive]

Yes.

[Gerard Sweeney, analyst]

Is there opportunity to build on that?

[Albert Bolles, executive]

It's a good example of focus and it's one of the areas that I think, we've done a really good job at Curation and having a dedicated team focused on just getting the cost out and that's why I -- I'm confident and that's -- that frankly is a standard we're holding up in a company to start doing other projects. The way we are doing cost-out programs.

[Gerard Sweeney, analyst]

Okay. So I assume going forward, there is also an opportunity to take out additional costs.

[Albert Bolles, executive]

Yes.

[Gerard Sweeney, analyst]

And any -- and are we -- on the CapEx side? What's your plan for CapEx for this year, maybe specifically -- maybe breaking it down between maintenance as well as maybe some cost out and growth?

[Gregory Skinner, executive]

Well, our ongoing maintenance CapEx. Now that we, especially since we just added a major plant in Mexico is probably north of 15, now. The -- as I said in the script, where -- think along the lines of what we spent this year, which I think it was around $43 million for next year. So the rest of that is going to be dedicated and it's almost split evenly between the cost out initiatives at Curation and the capacity expansion at Lifecore, that's where the monies are going to go.

[Gerard Sweeney, analyst]

Okay. And then on the sourcing on the green bean side, it sounded like you have a new strategy. I mean, obviously it sounds great, when you talk about it, but what are the challenges on implementing this and how confident are you in that sourcing strategy working out. And then the follow-up at that would be the, you know, the growth opportunity. How are you seeing this and 12%, a nice chunk for -- move forward -- any, if you give a little bit more detail on that.

[Gregory Skinner, executive]

Yes, well, one of the things I discovered here was green beans is a really good margin product for us. And I almost look at what we're doing in green beans like launching a new product that's going to be highly profitable for us. It's our approach of not so much focused on the weather. But let's look at it from a customer standpoint and when you do that change your frame of reference, we as a team decided that we're going to change some of our geographic locations. Add more geographic location. So we have a diversity across United States working for us in the second half and really being in an oversupply situation because our sales force is very bullish on selling our branded green beans. We have not done a good job in the past of always meeting our customer demand.

So our strategy is to different locations and over plant and be in a situation where it can meet our needs. And if we have excess, we won't put it -- keep in the ground, we will sell it to other customers. And the foodservice channel is one that we're very focused on because that also gives us protection from an act of God standpoint in pricing, if indeed. There is a [ weather ago ] as one channel. You can actually take pricing in.

[Gerard Sweeney, analyst]

That makes sense. One final question, I'll jump back in line. I know, you've been on the board for a while, there, Al and just been CEO, probably a little over 60 days or so. But the -- one of the bigger challenges, it's always been this core vegetable business and getting the most out of that. Any thoughts, ideas on shrinking that business, it's always part of the plan, but where could it go and maybe other opportunities on that side.

[Albert Bolles, executive]

Yes, that's a good question. Short answer is yes. Okay.

[Gerard Sweeney, analyst]

Okay.

[Albert Bolles, executive]

We're very focused on it. We are now going through by SKU, by customer, what our profitability is and we've had some cases where we just have walked away. I call it addition by subtraction. We actually become more profitable by not doing something in that business. So we are going through that SKU-by-SKU and really focused on trying to, you know, maximize our profitability. But also there are cases where the core veg business helps us with customers to get other products in. So we are -- we are focused on rationalizing it.

[Operator]

Our next question comes from the line of Anthony Vendetti from Maxim Group.

[Anthony Vendetti, analyst]

Sure. So the Yucatan is going to be in for the full year of fiscal year 2020. If we took Yucatan out, what would be the growth rate for Curation Foods without Yucatan, so it's sort of an apples to apples ?

[Gregory Skinner, executive]

It would be relatively flat, just because of the growth in salads and the growth in green beans both expected. We now expect will be offset by a reduction in our core. As Al just said, we are going to be doing a rationalization of our core, so from just an absolute dollar standpoint. Yes, most of the dollar growth is coming from Yucatan, because we'll have it for a full year.

[Anthony Vendetti, analyst]

Okay.

[Gregory Skinner, executive]

There is also growth. I should also say though that there is also growth at O. We expect those revenues to almost double next year, but it's a very small base. So...

[Anthony Vendetti, analyst]

Right. Okay. And then, Al, you talked about some of the things, Tim Burgess is going to do in terms of improving the operations in Mexico for Yucatan. Can you -- layout -- I guess lay out the specifics of what needs to be done there. Specifically, or what are the -- what's the low hanging fruit that can be easily fixed?

[Albert Bolles, executive]

Well, last year, we bought the business and we knew this, they were really short on cash and they weren't ready for the season. They were ready from a labor standpoint and they were not ready from just having raw materials like the packaging on hand nothing but inventory to get started. So #1 is to get the team right down there. We've made changes and our focus is to bring people in earlier. We have kept a staff of about 40 people through the season now that we are not running and we're going to be bringing our folks in and training them ahead of the scheduled production, which starts probably end of September with the fruit, so that we're ready when the fruit comes in at the lowest cost to really put away as much as we can. And then secondly, we are putting in, what does success look like from a metric standpoint. So we're driving KPIs down to the, if you will, the shop floor. We would have clear metrics on how much throughput, we expect per day and what kind of yields -- we're going to be primarily focused on throughput and yields. But it first starts with getting the people right and we weren't ready last year, but we will be ready this year and our plan is to run this plant and shut it down. Probably the end of April or early May. So we don't get caught in a situation we got caught into this year, where we have to run in June and July, which causes our first quarter issue of having high [ fixed ] costs. We will not repeat that this year.

[Anthony Vendetti, analyst]

Okay. So is it just one factor down there that you have to get right or is it more than one?

[Albert Bolles, executive]

Well, we have one factory that we own and we also have a co-packer down there that we have a relationship with. So where it makes sense for us to, and it's a co-packer that I would say, Yucatan has 15-year history with, that one make sense based on the cost of the fruit. We will put away product at the co-packer as well. So our focus is strictly on improving our yields, growing our labor and there is a automation playbook that we have to get right down there and in the future, where in second half of the year, we're going to be looking at how we can even automate more at Yucatan that will empower -- enable us to take our labor down and improve our margins.

But that won't be -- that will be a second half initiative that goes into '21.

[Anthony Vendetti, analyst]

Okay and then just one last question before I have -- just a couple of questions for Greg on the financials. So we've all seen beyond [ meat ] and the stock and right now the market cap just probably -- just looked at it a couple of minutes ago is $11.7 billion and obviously with your network of farms and so forth and plant-based products, vegetables and so forth. Is there any thought or strategy to get into that market in any way or is it even possible that you could do that with your current infrastructure?

[Albert Bolles, executive]

We believe plant-based proteins are on trend and growing, here to stay. So we have some innovation that we are working on and we'll be testing with a major customer in the second half of the year. That is plant-based protein related, that fits within our current infrastructure and requires no capital. So that's part of our new, as I mentioned small changes to big things, part of our new innovation playbook, that we're putting in at Curation.

[Anthony Vendetti, analyst]

Okay. Great.

[Albert Bolles, executive]

I can't tell you, we are going to have the same impact on our [ meat packaging ] but at certainly where the PUC is going.

[Anthony Vendetti, analyst]

Okay. And then Greg on the financials. First half, obviously is a loss, but you said second quarter -- fiscal second quarter '20, would be profitable on a net income basis. How should we look at that? Is it going to be just barely profitable? Or should it offset most or all of the loss in the fiscal first quarter?

[Gregory Skinner, executive]

It will not offset the loss in the first quarter. Well, it depends on where the loss comes in at, I mean, if we can do better than what we're currently forecasting, obviously will get closer, but now, will be profitable, but think more along the lines of a small profit. Lifecore will definitely have a big turnaround and a good quarter. It's still going to be a tough quarter for Yucatan, until we get through and start producing with, because we're going to be selling this higher price fruit, through most of the second quarter, first quarter most of the second quarter. We're not going to start really producing the lower-cost products until, maybe the last month of second quarter. So it's going to be a drag and Eat Smart tends to have a much better second half than they do at first half. So -- think, small profit.

[Anthony Vendetti, analyst]

Okay and then lastly, you mentioned on the call, $32 million credit facility, you working with the banks to repay some of the debt, as you're going through that process. Just the timeline, do you feel like you have enough capital or is it possible, it will be somewhat capital constrained, until you until you renegotiate this?

[Gregory Skinner, executive]

Yes, we're fine in the meantime, if I'm feeling fairly bullish at this point, we still got the details and work through, but I would say, expect an announcement hopefully within the next 30 day to 60 day.

[Operator]

Our next question comes from the line of Chris Krueger from Lake Street Capital.

[Chris Krueger, analyst]

Hi. Just a couple of quick questions. As far as the current vegetable supply situation in California, and other key growing regions, how is that currently, and are you able to maintain strong margins for your salad kits?

[Albert Bolles, executive]

So far, we're looking really good right now for our supply. We have no major issues. And Q3 is always the one that we are concerned about. But as I said, we have built a large contingency to help us with any weather-related events. So that we don't -- so that we could continue to supply with our customers and not sacrifice margins.

[Chris Krueger, analyst]

Okay. As far as salad kits go, I know in the past, the goal was to launch roughly one new SKU per quarter. Has that continued? And have there been any particular SKU standing out like the Sweet Kale, did. I know that's been a growth driver.

[Albert Bolles, executive]

Well, I'm not a believer in setting a metric with one salad kit per quarter. I'm more of working at more to try to find the one, big one that's going to stick in the year and have the most impact. So we're really focused on the strategy that sort of fewer, bigger, better and are going through that. We do have some that we're pretty excited about and have gotten some positive customer feedback on that we're going to test before we scale because it's important in new products to get it out there, make sure the pricing is right. At the end of the day, consumers vote with their wallet and to make sure that the products we have are indeed working for both us and the customer then we will scale from that standpoint, but I don't have any one particular philosophy at one per quarter. I will tell you, our Chopped and Crumble that we just recently launched is doing very well. We're very excited about that and have plans to expand that product.

[Chris Krueger, analyst]

Okay. Last question on Lifecore, in your press release you indicated there are approximately 15 FDA regulated drug and medical device products in your development pipeline at various ranges, if we look back 1 year, what would that number have been roughly a year ago ?

[Gregory Skinner, executive]

About the same. Our goal is to keep between that and as high as 20, but that's a manageable number.

[Operator]

Our next question comes from the line of Mike Petusky from Barrington Research.

[Michael Petusky, analyst]

Just a couple of questions. On Yucatan, are you guys assuming any organic growth from Yucatan in fiscal '20 ?

[Gregory Skinner, executive]

Yes.

[Albert Bolles, executive]

Yes, absolutely. As I mentioned Cabo Fresh, we have a relatively low ACV on Cabo Fresh and it's an area that's growing in the produce section so we have plans to expand that product for sure and we also have a couple of new products that we are going to be launching in the second half of the year as well, but if you just step back and look at it, we did -- last year we did around $27 million and that was for half the year, so if you multiply by 2, you got $54 billion. The category is growing around 18% to 20% just by itself without launching any new products.

So organically, we can get to the mid-60s in terms of revenue and growth. But it's also a very, very fertile area for innovation and we are all over that. So we expect organic growth and growth that's going to continue for us.

[Michael Petusky, analyst]

Okay. And then what did O Olive actually do and you said, you expected near doubling of revenues there but what did it actually do in fiscal '19?

[Gregory Skinner, executive]

Around 5.

[Albert Bolles, executive]

Yes. About 5, yes. We can sell every drop of oil, we can get and that's why, we have taken action to get more orchards. We were the first mover in California. I think we're in a really good position. I know it's small, but it's profitable for us and we -- our customers want it. What we make, our customers will take and don't forget vinegar -- our vinegar is doing extremely well for us as well.

[Michael Petusky, analyst]

Okay. All right. Very good. And I guess this is more of a question around investment and longer-term free cash generation. So obviously, another year of elevated CapEx this year. You disclosed that maintenance CapEx is around $15 million plus. Is there sort of a longer beyond fiscal '20 a longer-term target in terms of what normalized CapEx should be and where you guys start actually generating free cash?

[Gregory Skinner, executive]

Yes, this year because the cost-out program and the needed capacity expansions at Lifecore will be elevated. I would think on a go-forward basis. A number in the 30 to 35 range is a more reasonable expectation -- absent something really taking off, which obviously you're going to put money behind it if you need more capacity. And we should start generating free cash flow in the second half of this year, certainly by the fourth quarter and I expect to generate. We expect to generate free cash flow next year.

[Operator]

Thank you. 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.

[Albert Bolles, executive]

Yes, I just want to -- on behalf of Landec, thank everybody for your -- for listening and for the questions, and I just want to restate that I'm very excited to be here. I know the first half is a little rough, but that was totally expected and we are very focused on making the second half work and I have [ hydraulic ] confidence along with Greg as well as my ELT that we can achieve as planned. So thank you and thank you for your continued support.

[Operator]

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