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LANDEC CORP (LNDC) Q3 2019 Earnings Conference Call Transcript

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LANDEC CORP  (NASDAQ: LNDC)
Q3 2019 Earnings Conference Call
April 04, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Landec Third Quarter Fiscal 2019 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 follow at that time. (Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Molly Hemmeter, Landec President and CEO. Please go ahead.

Molly A. Hemmeter -- President and Chief Executive Officer

Thank you, Amanda. Good morning, and thank you for joining Landec's third quarter of 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 businesses: Lifecore, our Contract Development and Manufacturing or CDMO business; and Curation Foods, our natural foods business, which now includes five brands that offer plant-based products with 100% clean ingredient. These brands include our flagship brand Eat Smart packaged salads and fresh vegetable products, and our four emerging natural food brands that include O Olive Oils and Vinegars, Now Planting pure-plant meal solutions, and our recently acquired Yucatan and Cabo Fresh guacamole and avocado products.

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

During the third quarter, we made significant progress in our strategic objective to drive long-term shareholder value. Lifecore completed the installation of its new multi-purpose vial and syringe filling line in preparation for commercial production of vials that is expected to begin on this new line during the first half of fiscal 2020. Lifecore has also made significant strides in building and expanding its CDMO product development pipeline. Lifecore now has over 15 FDA regulated drug and medical device products at various stages of development, ranging from early phase pre-clinical work to late phase pivotal clinical studies.

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

The four new and emerging natural food brands now include O, Now Planting, Yucatan and Cabo Fresh, and are projected to generate 13% to 16% of Curation Food's revenue in fiscal year 2020, with our flagship brand, Eat Smart, representing the largest portion of the natural foods business. As they scale overtime, the four emerging brands are expected to generate gross margins of at least 30% compared to gross margins of 10% to 12% in the packaged fresh vegetable business, which is subject to more sourcing and cost volatility.

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

Before I go into more detail about our key areas of focus over the next 12 to 24 months, let me turn the call over to Greg for some financial highlights from our third quarter of fiscal 2019.

Gregory S. Skinner -- Chief Financial Officer

Thank you, Molly, and good morning, everyone. Revenues in the third quarter of fiscal 2019 increased 7% to $155.7 million compared to a $144.9 million in the year-ago quarter. The increase was due to a $10 million or 8% increase in revenues at Curation Foods, primarily from the addition of Yucatan Foods during the quarter, and from a $744,000 or 3% increase in Lifecore revenue.

Net income for the quarter was $1.1 million or $0.04 per share compared to net income from continuing operations of $16.3 million or $0.58 per share in the year-ago quarter. The decrease in net income was a result of: first, a $13.7 million or $0.49 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 $1.7 million of acquisition-related expenses; third, a $2.3 million net increase in operating expenses, primarily due to the addition of Yucatan Foods and Now Planting soups this fiscal year and after including the $2.6 million benefit from the reduction in the earnout liability from the O acquisition; and fourth, a $1.2 million increase in interest expense. These decreases in net income were partially offset by $1.4 million increase in gross profit at Curation Foods, primarily from the addition of Yucatan Foods during the quarter and from a $600,000 decrease in income taxes excluding the tax benefit from tax reform recorded during the third quarter of last year.

Revenues in the first nine months of fiscal 2019 increased 6% to $405.3 million from $383.2 million in the same period last year. The increase was due to a $19.6 million or 6% increase in revenues at Curation Foods and a $2.5 million or 5% increase in Lifecore revenues.

Net income for the first nine months was $672,000 or $0.02 per share compared to net income from continuing operations of $19.1 million or $0.68 per share in the same period last year. The decrease was a result of: first, a $13.7 million or $0.49 per share one-time tax benefit from the new corporate income tax rate that went into effect last year; second, $2.5 million of acquisition-related expenses; third, $1.8 million net increase in operating expenses, primarily due to the addition of Yucatan Foods and Now Planting soups this fiscal year and after including the $3.5 million benefit from the reduction in the earnout liability from the O acquisition; fourth, a $1.9 million increase in interest expense; and fifth, a -- sorry, I got my pages backwards here -- actually, I'm missing a page -- excuse me, my bad -- fifth, a $1.6 million increase in the fair market value of he Company's Windset investment during the first nine months of fiscal 2019 compared to a $2.2 million increase in the first nine months of last year. These decreases in net income were partially offset by $745,000 increase in gross profit at Curation Foods, primarily from the addition of Yucatan Foods and from a $1.7 million decrease in income tax expenses excluding the impact from the tax reform in fiscal 2018.

For the fourth quarter of fiscal 2019, we expect revenues to be in the range of $150 million to $153 million and net income to be $0.12 to $0.15 per share. The net income guidance for the fourth quarter reflects Lifecore revenues of $23 million to $24 million and operating income of $7.8 million to $8.2 million.

At Curation Foods, we expect revenues of $127 million to $130 million and operating income of $2.5 million to $3.3 million. The operating income in our Curation Foods business during the fourth quarter is projected to be negatively impacted from: first, significant sourcing-related costs in our non-salad vegetable business due to record cold temperatures in the month of February in Southern California and very heavy rains in February and early March throughout California, both of which are expected to negatively impact yields during our fiscal fourth quarter; second, higher than expected logistics costs due to driver shortages; and third, no change in the fair market value of our Windset investment during the quarter. In addition, we expect interest expense to increase sequentially, primarily due to capitalizing less interest than previously forecasted.

We are currently forecasting for the fourth quarter of fiscal 2019 consolidated cash flow from operations of $10 million to $12 million and capital expenditures of $14 million to $18 million.

Turning to our financial position. At the end of the third quarter, we had approximately $147 million of debt, which translates into a debt to equity ratio of 0.54, and debt to tangible assets ratio of 0.39. Our leverage ratio at the end of the third quarter was approximately 3.7. Our covenant is 4.5 or less, which means we had borrowing capacity of approximately $28 million. We typically generate the most cash from operations during the fourth quarter of our fiscal year. However, due to the projected increase in capital expenditures in the fourth quarter compared to the previous three quarters of fiscal 2019, we expect our debt and leverage ratio to increase by fiscal year end 2019 but still be well within our leverage covenant at fiscal year end and beyond.

Let me turn the call back over to Molly.

Molly A. Hemmeter -- President and Chief Executive Officer

Thanks, Greg. Our top priorities over the next one to two years are: first, to implement cost savings initiatives in our Curation Foods business; second, to integrate the Yucatan Foods team and operations into our Curation Foods business; and third, to invest in innovation and growth at both Lifecore and Curation Foods.

At Lifecore, we continue to invest in accelerating growth and profitability by expanding the Lifecore business beyond its historical capabilities as a premium supplier of hyaluronic acid or HA. We have achieved this by investing in business development capabilities to expand into new markets. Landec has also invested in infrastructure and equipment to enable Lifecore's transition to a fully integrated CDMO that provides differentiated fermentation, formulation, aseptic filling and final packaging services for difficult-to-handle FDA-approved pharmaceutical products. Most recently, we invested in the installation of Lifecore's new $16 million multi-purpose filling line. The new line will further enhance Lifecore's growth strategy as a CDMO, which is specifically designed to align Lifecore's capabilities with the growing needs and market expectations of its partners and provides Lifecore with the capacity to fill commercial quantities of drug products in vials, in addition to its existing capacity to fill syringes.

Lifecore has also initiated a capacity expansion of its HA fermentation process to increase overall capacity by 25%. This expansion is expected to be complete in fiscal 2020 in preparation for future HA demand, driven by products currently in product development. The new multi-purpose filling line and the new HA capacity has a potential to drive $40 million to $60 million of incremental revenues annually once full capacity is achieved. We plan to continue to invest in Lifecore to meet its future demand requirements as products currently in development receive FDA approval and transition to commercial products.

The mission of Curation Foods is to increase access of plant-based foods with 100% clean ingredient to as many people as possible, while preserving and protecting our planet for future generations. We accomplished this by reimagining how fresh and refrigerated products are grown, prepared and delivered. Curation Foods has a unique combination of capabilities that makes it truly differentiated in the market with proven internal innovation capabilities, a refrigerated supply chain and a direct sales force to partner strategically with customers throughout the fresh perimeter of the store.

Over the last several years, we have rapidly entered into several high-growth categories with innovative new products and are well positioned to deliver long-term and sustainable top line growth. With the strategic transformation of the Curation Foods product portfolio complete, we turn to the next stage and critical stage of our growth. During this next phase, we will focus on delivering operational and service excellence by driving efficiencies through automation, systems integration and supply chain synergies. These efficiencies are critical to reducing costs in our Curation Foods business to offset ever-increasing costs due to weather volatility, as well as increasing labor, freight and packaging costs that are being experienced by the entire industry. As such, we have engaged The Hackett Group, a third-party consulting firm with considerable experience in the produce industry, to identify cost reductions in our food operations above and beyond the cost savings that have already been identified by the Curation Foods team. We are currently forecasting that the cost savings in fiscal 2020 will offset known cost increases and mitigate costs associated with weather volatility, with the primary objective of improving the predictability of earnings in our food business.

Simultaneously with reducing costs in our food business, we are focused on integrating Yucatan Foods into Curation Foods. We believe immediate synergies exist between the two organizations. Yucatan Foods will leverage the experience of the Curation Foods sales team within club stores and produce department of retail stores, while Curation Foods will leverage the Yucatan Foods sales team experience in the deli department of retail stores. Over time, the newly combined sales organization will be able to expand distribution of all Curation Foods products throughout the fresh perimeter of the store, as this real estate continues to evolve to attract the plant-forward consumer.

In addition to increased sales and distribution, there are other synergistic opportunities to drive future growth and profitability. In the medium term, we will evaluate the potential of Yucatan Foods to leverage Curation Foods' refrigerated logistics fleet to reach their customers at lower cost, while delivering equal or higher product quality and service levels. Longer term, numerous opportunities also exist for product innovation that leverage capabilities among the Curation Foods' portfolio of brands. And Curation Foods may also be able to leverage the Yucatan Foods' relationship and footprint in Mexico to secure lower cost sourcing and manufacturing for its Eat Smart products.

Along with cost savings initiatives and the integration of the Yucatan -- of Yucatan Foods, we continue to invest in innovation to drive growth. At Curation Foods, we continue to invest in creating on-trend plant-based foods with 100% clean ingredients with proven success in launching new products and disrupting market in partnership with our strategic customers. We have bolstered our internal innovation efforts with the select acquisitions of O Olive Oil & Vinegar and Yucatan Foods. Each of these acquisitions contribute high-quality plant-based products that will contribute to Curation Foods' future growth and profitability and can benefit from Curation Foods' innovation, selling and supply chain capability.

Looking to fiscal 2020, we expect revenues and operating income to increase at both Lifecore and Curation Foods compared to fiscal 2019. The revenue growth at Lifecore will continue to be driven by the expansion of its CDMO and HA product development pipeline. The revenue growth in Curation Foods will be primarily driven by a full year of avocado product sales and continued growth in the guacamole category. With the revenue growth in fiscal 2020 coming from our higher margin products, we're expecting overall gross margin and operating income to also increase. We will share our fiscal 2020 guidance with our fiscal 2019 year-end results release in late July and provide growth projections for both Lifecore and Curation Foods in that release.

In summary, we are committed to growing our two businesses. Over the years, we have successfully grown Lifecore revenues to create a profitable CDMO business of scale. At Curation Foods, we've continued to innovate 100% clean plant-based products in high-growth segments. With the acquisition of Yucatan Foods, Curation Foods adds a double-digit growth platform, a lower cost infrastructure in Mexico and a higher margin product offering that exhibits less volatility, all of which contribute to and advance our progress in driving future more predictable profitability in our food business.

We are now open for questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question is from the line of Mike Petusky of Barrington. Your line is open.

Michael Petusky -- Barrington Research -- Analyst

Hi. Good morning. A couple of questions. So Molly, on the salad numbers, to me, it looks like you guys are below 5% through nine months in terms of growth there. And I know that you guys are targeting a more upper single digit toward 10% figure there as you look forward, and you've sort of discussed innovation and the introduction of new products. And I was just wondering as you're looking over the next, say, 6, 12, 18 months, do you guys feel like you're teeing up some things that consumers will respond to positively and will drive you toward something closer to 8%, 10% growth in the salad category?

Molly A. Hemmeter -- President and Chief Executive Officer

Hi, Mike. Thanks for your question. So right now, in fiscal year '19, we are projecting about a 2% growth in our salad sales. And I think, as we've said in past calls, a lot of that is due to headwinds in both crop rotations and private labels, specifically in the mass channel. As we're looking forward, we're not quite ready to give our growth projections for salads next year, but we do see growth and we do see what we are going to be launching innovation in our fourth quarter. And so, I think as we launch that innovation in our salad [ph] quarter in the fourth quarter, we're going to start to see kind of how that is received in the market and be able to give better projections and more accurate projections for that at our July call.

Michael Petusky -- Barrington Research -- Analyst

Are those going to be sort of innovation in sort of a limited release or is it going to be fairly widespread introductions?

Molly A. Hemmeter -- President and Chief Executive Officer

Well, we typically try to release our products to a few strategic customers first to test them and learn and make sure before we scale that we've got the right recipe for success. And so, I see it more in a few strategic customers moving forward so that we can test them, learn and see how that goes.

Michael Petusky -- Barrington Research -- Analyst

Got you. And sort of on a related subject, so you guys have now had several months of Now Planting in Publix and maybe one or two other retailers. Yet any traction -- I'm not looking necessarily for a quantification, but do you feel like you're getting traction, or have you learned things there that will help you going forward, or is there anything you can just talk about in terms of Now Planting?

Molly A. Hemmeter -- President and Chief Executive Officer

Yes. So we've actually been learning quite a good deal with our new -- Now Planting, and we're very happy that we're testing it with our strategic customers because we've seen really a wide variety of results, and I can give an overview of that. So I would say we're now in about three -- we're in three different customers. We are in -- well, we were in three different customers. So we launched into Publix, we launched in the Loblaws in Canada, and we also launched into a natural store up in Minneapolis area called Lunds & Byerlys. And we're seeing three different results from those three stores, which is why we like to test and learn.

So in Publix, we actually are no longer being carried there. And what we found is that in Publix, they do not have a high percentage of our plant-based consumer, and they are in a very low market as far as indexing pursuit. A lot of that has to do that we were selling when it was over 90 and 100 degrees in the Florida area. So in Publix, we have determined that that's not the right market for us.

In Loblaws, it's going very well in Canada. Now, we know and in past calls, we've talked about how the Canadian market actually indexes very well for plant-based consumers and are -- we are their market share leader with our salads in Canada with our Eat Smart brands. And so, in Loblaws, we see that it is doing very well.

And then in the natural channel, it's a small chain called Lunds & Byerlys, were actually also performing very well. So I think what we're finding as we kind of move and we're learning with those consumers is, we really want to expand to where we believe the plant-based consumer is, and we're working on specific customer marketing programs to grow awareness of the brand and the product.

Michael Petusky -- Barrington Research -- Analyst

Okay. Great. And just one quick one for Greg. Greg, as you sort of look at -- and I appreciate the Q4 guidance in terms of cash flows. But as you sort of look at -- and I know you're not giving official guidance, but as you sort of look out over the next several quarters, is there a quarter or is there a fiscal year where you say, hey, this is sort of where we are targeting where we get cash flow positive on a consistent basis?

Gregory S. Skinner -- Chief Financial Officer

Yeah. Well, and without getting into specifics, given that we haven't finished our budget, I think the peak of the -- at least our leverage ratio will be the fourth quarter of this year. And the first half of our years tend to be -- as a result of some seasonality and some cyclicality, specifically at Lifecore, are usually the lower quarters of the year. So when you're looking out, I think the second half of next year, but we'll give more specifics in the July call.

Michael Petusky -- Barrington Research -- Analyst

Okay. Great. Thank you. Appreciate it.

Molly A. Hemmeter -- President and Chief Executive Officer

Thanks, Mike.

Operator

Thank you. Our next question is from the line of Anthony Vendetti of Maxim Group. Your line is open.

Anthony Vendetti -- Maxim Group -- Analyst

Thanks. Good morning.

Molly A. Hemmeter -- President and Chief Executive Officer

Good morning, Anthony.

Anthony Vendetti -- Maxim Group -- Analyst

Good morning, Molly. Just wanted to talk a little more about Lifecore first. So I know you've increased the capacity. What was the -- just remind me, what was the cost to do that and what's the timing of some of the new business now that capacity is online?

Molly A. Hemmeter -- President and Chief Executive Officer

(multiple speakers) Okay. Go ahead, Greg.

Gregory S. Skinner -- Chief Financial Officer

Go ahead, Molly. Okay. So the cost of line was about $16 million, Anthony. And right now, it's looking like the -- at least the initial use where we're in testing right now will be in the first half of 2020 -- fiscal 2020.

Anthony Vendetti -- Maxim Group -- Analyst

And there's business already lined up for that, correct?

Gregory S. Skinner -- Chief Financial Officer

Yes.

Anthony Vendetti -- Maxim Group -- Analyst

Okay. And in this quarter, some of that -- ex that capacity, but just Lifecore in general, there were some revenue pushed into the upcoming fiscal fourth quarter. Any reason for that, or is it just timing of contracts?

Gregory S. Skinner -- Chief Financial Officer

That seems to be more of a change. Historically, if you look back at Lifecore, lion's share of their revenues and profits were in the third quarter. We started seeing it last year and we're seeing it again this year that it's been more evenly spread over the third and fourth quarter, and that could be the new trend going forward. Obviously, we're still in the process of putting our plan together for '20, but that could be the new norm.

Anthony Vendetti -- Maxim Group -- Analyst

Okay.

Gregory S. Skinner -- Chief Financial Officer

They're in line with our expectations, internal expectations for the year. We knew that some of the revenues that historically had hit in the third quarter were going to happen in the fourth quarter this year.

Anthony Vendetti -- Maxim Group -- Analyst

Okay. And then, if we look at the non-salad revenue, it looks like that was down around 6% in Q3. Is that correct? And if so, what's the reason for that?

Molly A. Hemmeter -- President and Chief Executive Officer

The core revenue is down a lot because of -- the core revenue is down mostly because of the supply issues we've been having. So it especially hit us in the first quarter with green bean as we were not able to -- and again, was an industrywide thing. And so, we were not able to meet all the demand and we did short some customers unfortunately. We're back in on green bean now and that looks very strong. But in Q3 and Q4, with the heavy rains that we spoke about in the front part of this call, cauliflower and broccoli have been going in and out of availability, and it has just really hurt our ability to service our customers.

That being said, I do want to reiterate we haven't had any shortages in our salad business, and that business really continues to not have the volatility we see in core. We've been in salad business maybe five or six years now, and we have yet to have to short any customers in those five or six years on salad. So the vegetables we're using in those products are much more robust and not susceptible to the volatility we see in our core bag business.

Anthony Vendetti -- Maxim Group -- Analyst

Okay. Great. Alright, guys. Thanks.

Molly A. Hemmeter -- President and Chief Executive Officer

You're welcome.

Operator

Thank you. Our next question is from the line of Chris Krueger of Lake Street Capital Markets. Your line is open.

Chris Krueger -- Lake Street Partners -- Analyst

Hi. Good morning, guys.

Gregory S. Skinner -- Chief Financial Officer

Hi, Chris.

Molly A. Hemmeter -- President and Chief Executive Officer

Hi, Chris.

Chris Krueger -- Lake Street Partners -- Analyst

Hi. You guys indicated that you had significant sourcing issues from bad weather in California, I think, in the month of February and into March. Has that gotten better in recent weeks? And also how are the green bean growing regions?

Molly A. Hemmeter -- President and Chief Executive Officer

Right. So the green bean growing regions are doing well right now. So we're back into green beans. We don't see any issues there. We've been in and out, as I said previously, on our cauliflower and broccoli, and we do see some in the fourth quarter. We have seen some shortages due to the rains that were earlier and the inability to get in the fields right away. So we do see some shortages, which -- those shortages are included in the projections we gave in the press release.

Chris Krueger -- Lake Street Partners -- Analyst

Alright. Got it. There has been a talk in recent days really about the Mexican border and whether or not it could potentially be shut down. How should we look at that risk as far as the avocado and guacamole, the new business you acquired?

Molly A. Hemmeter -- President and Chief Executive Officer

Right. So obviously, this is an evolving situation and prices have spiked with Hass avocados in the last couple of days on the news. That being said, there also is a pretty large supply of Hass avocados. So there is no shortage of avocados, but people are stocking up and buying avocados in anticipation of any border closure. We've done the same. We are also stocking up on avocados. We have our own ripening rooms, so we are making sure that we have those and are ripening our own avocados. And our -- as soon as we create finished goods at our Mexico facility, we actually transport those finished goods, which is guacamole, into the United States. So we are building our inventories at our warehouses in the United States in anticipation of anything happening, and that will at least give us temporary -- a temporary cushion in the event that something does happen. So hard for me to predict if that is going to happen, but we're doing everything we can in the event that it does.

Chris Krueger -- Lake Street Partners -- Analyst

Got it. Okay. And then on the salad kits, I don't -- I haven't really checked lately, but in the past, you've talked about having roughly one new product per quarter. Is that still kind of the pattern?

Molly A. Hemmeter -- President and Chief Executive Officer

It is. And we will be launching new innovation in the fourth quarter. So I look forward to talking about it. I'll probably be putting some news out on our LinkedIn about the new products, if everybody follows LinkedIn, and we'll be talking about it in our next earnings call.

Chris Krueger -- Lake Street Partners -- Analyst

Alright. Thank you.

Molly A. Hemmeter -- President and Chief Executive Officer

Thank you.

Operator

Thank you. (Operator Instructions) Our next question is from the line of Mike Morales of Walthausen. Your line is open.

Michael Morales -- Walthausen -- Analyst

Hi. Good morning, guys. Thanks for taking my question.

Molly A. Hemmeter -- President and Chief Executive Officer

Good morning.

Gregory S. Skinner -- Chief Financial Officer

Good morning, Mike.

Michael Morales -- Walthausen -- Analyst

One of the things I'd like to dig into a little bit more is the Lifecore and the HA capacity expansion there. So I guess at the outset, could you give us a figure on what the typical growth in the -- just the HA market is per year?

Gregory S. Skinner -- Chief Financial Officer

The -- if you look at some -- and I'm not sure how current these stats are, but just from the aging demographics, the lion's share of Lifecore's HA is in the ophthalmic space, so -- and primarily in cataract surgery. So you've got a kind of focus on what the growth of cataract surgeries are, and at least the last statistics I saw was it was growing in the 5% range per year. So with that growth, you can pretty much bank on that level of growth in our HA just as the base, and then anything additive would increase that growth.

Michael Morales -- Walthausen -- Analyst

Sure. So 5% growth in the lion's share of the HA market. So it sounds like the 25% HA line expansion, a large part of that is going to support operations of the new filling line. Is that correct?

Gregory S. Skinner -- Chief Financial Officer

That -- I'm not quite sure I followed your question. But yeah, the -- a lot of the use of the new line is -- and the main purpose for the new line is for vials, and that's primarily directed toward the pharmaceutical drug market.

Michael Morales -- Walthausen -- Analyst

Sure. So maybe another way of saying it, with only 5% growth in the typical HA market, a 25% capacity expansion on HA wouldn't be just going to fill the natural growth in the HA market and could be used to support just the new dual filling line. Is that correct?

Gregory S. Skinner -- Chief Financial Officer

Yeah. And new customers and new products.

Michael Morales -- Walthausen -- Analyst

Sure. And so -- and...

Gregory S. Skinner -- Chief Financial Officer

Growth in market share is the primary driver there.

Michael Morales -- Walthausen -- Analyst

Okay. And you're getting rolling forecast from your customer that go out how long?

Gregory S. Skinner -- Chief Financial Officer

12 months.

Michael Morales -- Walthausen -- Analyst

12 months. Okay. So at least on this new dual filling line then, can you help us understand the economics of how that's comparing to the existing work that Lifecore is doing? Is it on a per unit basis above what Lifecore has historically done?

Gregory S. Skinner -- Chief Financial Officer

Since we haven't started up yet, ask me that question in July, and I may have an answer for you.

Michael Morales -- Walthausen -- Analyst

Okay.

Molly A. Hemmeter -- President and Chief Executive Officer

That being said, in general, as we look out even three years with Lifecore and we model all the new businesses in the product development pipeline, we expect Lifecore to continue deliver 40% to 45% gross margins. So there's an obvious product mix there. But as [ph] HA in the fermentation space, which is high, and the product development margins are very high, the mix continues to deliver 40% to 45% gross margin.

Michael Morales -- Walthausen -- Analyst

Okay. That's helpful. And then lastly from me would be engagement of The Hackett Group, can you give us an update on any specific areas that they're looking at as far as opportunities to take cost out of the business and [ph] continue to make more progress?

Molly A. Hemmeter -- President and Chief Executive Officer

Sure. So we're very optimistic about the cost-out program, and we consider this the top priority in our food business. As we've all seen the cost of doing business in the food business are ever increasing and we need to acknowledge these costs, first and foremost, our cost increases are going up year-over-year. And our goal is to build more cushion and contingency in our business every year against weather volatility so that we can deliver a more predictable earnings. And I think that's what our initial goal of cost-out program is.

As far as examples, we have had -- we have a tremendous amount of cost-out opportunity. It's one of the things when I look at this business that is extremely positive is that we don't have to -- it's not a 100-year business where you have to dig and dig to find cost-out opportunities. In the past, it didn't make sense to automate a lot of the process and a lot of the unit operations, and the reason was that the labor was cheap enough or it just didn't make sense when the ROI was not there. With the increasing labor costs, it really starts to make automation just make a lot of sense. And so, in our plant in Guadalupe and in our plant in Bowling Green, we are automating a lot of the unit operations that we did not previously automate, and we will be doing that next year.

We are also seeing -- I'm very optimistic about some of the cost-out that we can gain by our Yucatan acquisition. We're finding that in our logistics and if you really think about internal logistics instead of outbound. So as we are shipping products from Mexico up into the United States into the different warehouses, we're finding that we can use our own internal trucks for the Yucatan products that are already going on those routes, and let me give you an example. We do currently grow during parts -- about nine months of the year, we currently grow broccoli in Mexico for our current customers and we have our own trucks bringing that up through Texas. That is the same route that the guacamole is using. So we're very excited that we're going to be able to put the guacamole on the same truck as our broccoli and bring it up through Texas and leverage those logistics synergies. So those are just a few of the examples, but I think automation is going to be a big one for us in the food business.

Michael Morales -- Walthausen -- Analyst

Alright. Thank you very much, Greg. Thanks, Molly.

Operator

Thank you. And at this time, I would like to turn the call back over to Ms. Hemmeter.

Molly A. Hemmeter -- President and Chief Executive Officer

Thank you. Well, thank you, everyone, for joining our call today. We continue to be very optimistic about our Lifecore and our food business. Lifecore continues to develop -- deliver growth. They're projected to hit their 14% to 16% growth that we projected for this year. In Curation Foods, we're continuing to work through our transformation. I truly believe that we have our strategic portfolio in line. We are in product segments now in the market that are poised for growth and are on trend with consumers, so the top line feels very strong and our focus now turns to cost-out and integration of our -- of Yucatan and Cabo Fresh brands into the rest of our system. And I think fiscal year '20 and beyond, we're going to be very focused on getting cost out in order to deliver more predictable earnings in our food business, and we'll be doing this simultaneously with growing market share.

So thank you for joining us today, and thank you for support of Landec.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Have a great day.

Duration: 41 minutes

Call participants:

Molly A. Hemmeter -- President and Chief Executive Officer

Gregory S. Skinner -- Chief Financial Officer

Michael Petusky -- Barrington Research -- Analyst

Anthony Vendetti -- Maxim Group -- Analyst

Chris Krueger -- Lake Street Partners -- Analyst

Michael Morales -- Walthausen -- Analyst

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