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Landec Corporation (LNDC) CEO Albert Bolles on Q3 2020 Results – Earnings Call Transcript

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Via SeekingAlpha.com

Landec Corporation (NASDAQ:LNDC) Q3 2020 Earnings Conference Call March 31, 2019 5:00 PM ET

Company Representatives

Albert Bolles – Chief Executive Officer

Brian McLaughlin – Chief Financial Officer

Jim Hall – President of Lifecore

Conference Call Participants

Gerry Sweeney – Roth Capital

Anthony Vendetti – The Maxim Group

Mitch Pinheiro – Sturdivant

Mike Petusky – Barrington Research

Mike Morales – Walthausen & Company

Operator

Good afternoon and thank you for joining Landec’s Third Quarter Fiscal Year 2020 Earnings Call. With me on the call today is Dr. Albert Bolles, Landec’s Chief Executive Officer, and Brian McLaughlin, Landec’s Chief Financial Officer, and Mr. Jim Hall, President of Lifecore, who is available to answer questions.

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 2019.

Let me now turn the call over to Mr. Al Bolles. Thank you, sir. You may begin.

Albert Bolles

Thank you and good afternoon everyone. As a leading innovator in diversified health and wellness solutions, Landec is comprised of two operating businesses: Lifecore Biomedical and Curation Foods. Landec designs, develops, manufactures and sells products for the food and pharmaceutical industry.

Lifecore Biomedical is a fully integrated contract development and manufacturing organization, or CDMO that offers highly differentiated capabilities in the development, sale 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 pharmaceutical and medical device companies across multiple therapeutic categories to bring their innovations to market.

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

Curation Food brands include Eat Smart fresh packaged vegetables and salads, O premium artisan oil and vinegar products, and Yucatan and Cabo Fresh avocado products.

We are focused on creating shareholder value by delivering against our financial targets, strengthening our balance sheet, investing in growth, implementing our strategic priorities to improve operating margins at Curation Foods and driving top line momentum at Lifecore.

We are committed to maximizing the value of our portfolio through sound and thoughtful execution in each of our segments, while protecting the planet for future generations, with a sustainable business practice. However, today we are clearly facing a new landscape given the rapidly changing environment and ongoing impacts associated with COVID-19. We are following the guidance from the World Health Organization and the Centers for Disease Control and Prevention about the escalated global public health threat of COVID-19 and taking it very seriously.

Our first priority is the health and safety of our employees, products, consumers, partners and community. In response, we immediately activated emergency preparedness teams and they are working closely with a consortium of leaders to establish and share best practices. The goal is to ensure business continuity to do everything possible to keep our employees and products safe. This team is doing phenomenal work, is responsible for tracking the most updated information about COVID-19, so that we can communicate and adapt quickly.

Food supply and pharmaceutical product manufacturing are considered essential businesses for the ongoing health and safety of the public. Therefore, our operations currently remain fully functional and we expect that to continue.

Given the ongoing uncertainty surrounding the duration, magnitude and geographic reach of COVID-19 global pandemic, we are unable to accurately forecast any related impact on the company’s financial performance. However, we have confidence in reiterating full-year guidance, which is largely based on fundamental improvements that we’ve made to the business.

Our fiscal ’20 guidance calls for consolidated revenue and continuing operations to grow 4% to 6% to a range of $580 million to $590 million; adjusted EBITDA of $30 million to $34 million, and adjusted earnings per share of $0.16 to $0.20, excluding restructuring and other non-recurring charges, tax implications and any potential impact of COVID-19 pandemic.

Today we are reporting adjusted third quarter earnings per share of $0.04, in-line with our recent guidance of $0.02 to $0.06, excluding restructuring and non-recurring charges, and we continue to expect to generate substantial profits in the fourth quarter of the fiscal year. We are well positioned to achieve our goals. At this point in time, we don’t see any impacts to our supply chain. We are in ongoing discussions with all major suppliers in this fluid situation and we believe that we can continue to supply our needs for fiscal 2020.

Quarter-to-date, business has remained largely unaffected at Lifecore, which continues to be on track to deliver its fourth quarter targets. For the Curation Foods business, we are quickly shifting to accommodate changing customer demand and shifting product mix. For example, as consumers prepare for the pandemic, we have seen an increase in the demand for salads, packaged fresh-cut vegetables sold to retail and club channels, and a reduction in demand for products typically consumed in social settings with large groups, such as guacamole sold at 12oz and 16oz tubs and vegetable trays.

We will continue to monitor the situation closely and we will be prepared as consumer shopping patterns continue to fluctuate. Should we expect any deviation from these trends or experience any significant supply chain issues that could impact our plans for the fourth quarter, we will communicate that to the market at the appropriate time.

Long term, we expect Lifecore to generate on average low to mid-teen revenue growth over the next five years as they expand sales to existing customers and new customers that continue to commercialize products that are currently in its development pipeline.

For Curation Foods, which is in the midst of a turnaround, my timeline is immediate. We are driving this business on a day-to-day basis and I believe our performance is best judged on a quarter-by-quarter basis to measure the progress and success. The decisive actions we are implementing within Project SWIFT has the business on a path to reach our steady state run rate target by the end of fiscal 2021.

On a Landec consolidated level, the third quarter financial metrics are beginning to catch up with the operational improvements we’ve been implementing and this momentum will accelerate into the fourth quarter. For example, when comparing key fiscal ’20 third quarter financial metrics to those generated in fiscal second quarter, we delivered 220 basis points improvement in gross margin, growth in adjusted EBITDA of $5.9 million, and have recorded adjusted earnings per share improvement of $0.20.

Before I share more details on our positive momentum with Lifecore and Curation Foods, I am pleased to announce that Brian McLaughlin has been appointed as Landec’s Chief Financial Officer. Brian’s tenure at Curation Foods, coupled with a specialized background in the fresh foods industry and 19 years of experienced banking made him a natural choice to serve as Landec’s Interim CFO.

Brian was instrumental in working with our lenders to amend our credit agreement that we completed last week, and has already made great strides to positioning our business for future growth. I feel fortunate to have Brian’s deep experience on the team. The timing is right for Brian to assume this role and we look forward to his continued leadership as a permanent CFO.

With that, I’ll turn the call over to Brian for the financial highlights.

Brian McLaughlin

Thank you, Al. First, a review of our third quarter results. Consolidated revenues decreased by 2% to $152.9 million, driven by a 3% decrease in Curation Foods, which was centered and a planned $7.2 million decrease in revenues in the packaged vegetable bag and tray business as we continue to focus on higher margin products. This decrease was partially offset by a $1.7 million or 7% increase in revenue in the Lifecore business, which was primarily driven by a 50% increase in business development revenue.

Gross profit decreased 7% year-over-year due to the combination of an 8% gross profit decrease in Curation Foods and a 6% decrease in Lifecore gross profit. Curation Foods was negatively impacted by the sell-through of high-cost avocado products produced during the fourth fiscal quarter of 2019 and the first fiscal quarter of 2020, when the cost of avocados were over two times higher than current costs, and weather related events impacting raw materials supply primarily centered in Eat Smart vegetable bag and tray business.

Lifecore was negatively impacted by the previously announced timing of production and shipment. The impact on both businesses is temporary and should improve during this fiscal fourth quarter, noting that Lifecore was a timing issue for production and shipping, and Curation Foods now has sold through a majority of the high-cost avocado fruit inventory and achieved 19% gross profit run rate in our avocado products business at the end of the fiscal third quarter.

Landec’s net loss was $11.5 million for the third quarter, which included $12.7 million of restructuring and non-recurring charges net of taxes, compared to net income of $1.5 million in the prior year, a decrease of $13.1 million. This translates to a third quarter loss per share of $0.39, which includes $0.43 per share of restructuring fees and non-recurring charges. Excluding these charges, adjusted third-quarter earnings per share was $0.04 versus our recent guidance of up $0.02 to $0.06 per share.

Adjusted EBITDA declined $900,000 to $6.8 million for the quarter compared to the same quarter last year. However, the sequential comparison to fiscal second quarter is more representative of the progress the business has made. When viewed in this fashion, adjusted EBITDA improved by $5.9 million in the third fiscal quarter compared to adjusted EBITDA in the second fiscal quarter.

Shifting to our commentary on a year-to-date nine-month results, consolidated revenue increased by 7% versus the prior period to $434.2 million, driven by an $8.6 million or 17% increase in Lifecore revenue; the acquisition of Yucatan Foods on December 1, 2018, which contributed $32.1 million in revenue, and a $9.4 million or 7% percent increase in salad revenues. These increases were partially offset by a $15 million planned decrease in revenues in the packaged vegetable bag and tray business and a $7.5 million decrease in green bean revenues due to limited supplies resulting from weather events occurring in the first and second quarters of fiscal ’20.

Landec gross profit decreased 7% year-over-year to $50.9 million due to the combination of 9% increase in Lifecore gross profit and a 16% increase in gross profit in Curation Foods. Net loss registered $23 million for the first nine months of fiscal ’20, which includes $14.5 million of restructuring and non-recurring charges net of taxes compared to net income of $1.8 million in the prior year, a decrease of $24.8 million. This translates to a year-to-date loss per share of $0.79, which includes $0.50 loss per share of restructuring fees and non-recurring charges. Excluding these charges, adjusted year-to-date loss per share was $0.29.

Year-to-date adjusted EBITDA registered $7.9 million, a decrease of $6.8 million versus the prior year nine-month period. The year-over-year decrease was largely concentrated in the first half of fiscal year ’20.

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Turning to our financial position, as previously announced on March 19, 2020, we entered into Seventh Amendment to the Credit Agreement, which among other things increased the leverage ratio covenant to 5.75:1 from 5:1 for the third fiscal quarter ended February 23, 2020. We believe we have sufficient flexibility within the amended agreement to maintain compliance during the fourth fiscal quarter, given our confidence in delivering our adjusted EBITDA growth.

Beginning in the first fiscal quarter 2021, our covenants remain substantively unchanged compared to the existing terms of the credit agreement. This is a transaction that accomplished our goals while minimizing costs and we are pleased with the flexibility that our lenders provided. They understand the short-term impact that Project SWIFT is having on our business and also have a complete understanding of the positive financial improvements that are beginning to unfold.

We are focused on deleveraging at as a top strategic priority, which is a key initiative within Project SWIFT. We are taking a disciplined approach for every investment. On a going forward basis, we have set clear priorities to fund return on investment metrics to support the future growth at both Lifecore and Curation.

Shifting to our outlook, as Al mentioned in his remarks, we are reiterating our full-year guidance which calls for consolidated revenue from continuing operations to grow 4% to 6% to a range of $580 million to $590 million, adjusted EBITDA of $30 million to $34 million, and adjusted earnings per share of $0.16 to $0.20. As a reminder, the adjusted EBITDA earnings per share excludes restructuring and non-recurring charges, tax implications and any potential impact of COVID-19 pandemic.

Our annual guidance incorporates a substantial lift in profits during the fourth fiscal quarter. We feel very confident in our ability to execute against this plan.

With that, I’ll turn the call back to Al.

Albert Bolles

Thank you, Brian. Let me go into more detail about the progress we’re making in our Lifecore and Curation Foods businesses that maximize shareholder value across our portfolio.

Lifecore continues to see momentum benefiting from three industry trends. Number one, the growing number of products seeking FDA approval; number two, the increasing trend toward sterile injectable drugs; and number three, a growing trend among pharmaceutical and medical device companies to outsource the formulation and manufactured products spanning the clinical development stage to commercialization.

As a highly differentiated and fully integrated CDMO, Lifecore is positioned to capitalize on these tailwinds and continues to establish high barriers for competition. Lifecore’s speed and efficiency benefits its partners by decreasing their time to market, which has an immense value in their ability to improve patient lives through commercialization of their innovative therapies.

Looking forward, Lifecore will fuel its long-term growth by executing against its three strategic priorities. Number one, managing and expanding its product development pipeline, Lifecore added one new business development project; increasing its development pipeline to 16 projects in various stages of the product life cycle from the clinical development to commercialization, which aligns with the business’s overall strategy. Business development revenue in the third quarter of fiscal 2020 increased 50% year-over-year.

Number two, leading customer demand by managing capacity and operational expansion to meet future commercial production needs. Demand stands at approximately 6.5 million units in fiscal 2020 and the facility has the capacity of producing approximately 17 million units annually.

And number three, continuing to deliver on a strong track record of commercialization in their product development pipeline. Lifecore currently expects one product and development to be approved by FDA for commercialization in calendar year 2020. The FDA recently recommended approval of Lifecore’s manufacturing site for this product based on a recent FDA reinspection that resulted in no 483 observations, which is a key step in the partner’s approval process. Looking to the future, Lifecore is targeting approximately one regulatory product approval annually and is on track to achieve this cadence beginning in fiscal 2022.

At Curation Foods, the positive impact to Project SWIFT are being [inaudible] in our improved financial performance and will continue to unfold as we implement its three core components next year in fiscal ’21. First, a continued focus on network optimization, which maximizes the efficiency, productivity and teamwork at the organization. Today, this is comprised of the lean manufacturing practices being implemented at our facilities and the centralization of Curation Foods offices into the new headquarters in Santa Maria.

Second, a focus on maximizing our strategic assets, which simplifies the business by divesting non-core assets. We are currently exploring strategic alternatives for the legacy vegetable and tray business, which generate its net sales of $160 million for fiscal year 2019, and divesting the company’s assets related to its Ontario, California yet-to-be-operational salad dressing manufacturing facility.

And third, redesigning the organization to the appropriate size, developing and elevating internal talent, and reducing headcount in order to compete. The total annualized cost savings from these previously announced actions will be approximately $5 million or $0.13 per share on an after-tax basis.

Our fiscal fourth quarter plan marks an important inflection point in terms of profitability. As per corporate allocation, our fiscal ’20 guidance implies that Lifecore business will recognize fiscal fourth quarter adjusted EBITDA of $9 million to $10 million and that our Curation Foods business will recognize fiscal fourth quarter adjusted EBITDA of $14 million to $16 million. We remain confident in our ability to meet the guidance, and I’ll spend a few minutes describing two key drivers at Curation Foods, so you have a greater understanding of my confidence.

First is our continued drive for operational excellence, continuous improvement and cost containment. Today, we are announcing a new lean manufacturing program called ZEST. ZEST is not only about a cultural shift to employee accountability and empowerment, but also a strategy to improve daily operational efficiency without extensive capital investment. ZEST stands for Zero Mindset, such as zero recalls, defects, accidents and noise; Empowerment, a focus on employee engagement that impact change; Standardization, allowing us to implement the same practices across our organization; and Training, which is truly the cornerstone of success and employee engagement.

We can measure the positive impact of these principles when you look at the improvements in our operations in Mexico and the bottom line results they achieved. The team has implemented lean manufacturing principles, now referred to as ZEST, that has significantly improved the cost structure of the business and have turned this business to profitability. Today, we are realizing a 60% reduction in our delivered cost per case. This is the basis for the transformation in the avocado products business gross margin, which at the end of fiscal third quarter was operating at 19% gross margin run rate.

As we move out of the final high cost group inventory and realize our operational efficiencies, we have confidence in accelerating to a forecasted gross margin of 28% in fiscal fourth quarter. We have initiated the process of rolling out the ZEST framework to all our U.S. facilities, as part of our continuous improvement process.

The second key driver at Curation Foods is containment and reduction of structural costs, which is also a significant component of our strategy and is a key driver of our fiscal fourth quarter forecast. The Curation Foods Cost Out Program is on track to achieve our goal of $18 million to $20 million in fiscal ’20 savings, with 45% of our projected savings being recognized in the fourth quarter.

This all said, we cannot implement change and achieve improved financial results without the right people in the right jobs, focused and working together. My team is advancing our strategic agenda to simplify our business and the resulting improvement in profitability is already beginning to take shape. We’re moving forward together. Even though we’re not working shoulder to shoulder for the time being, I am enormously grateful for the individual contributions of all our employees through this challenging environment that has affected us all personally and professionally. Thank you.

In summary, we have confidence in our fiscal fourth quarter plan, despite the fluidity of the environment. The Landec team is focused on creating value by delivering against our financial targets, strengthening our balance sheet, implementing our strategic priorities to improve operating margin and investing in growth. I am confident in our plan to make the changes necessary to be successful and secure long-term profitable growth to deliver value to our customers, consumers and shareholders.

Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Gerry Sweeney with Roth Capital. Please proceed with your question.

Gerry Sweeney

Hey, good afternoon Al, Brian and Jim. I think I got everybody’s names right there.

Albert Bolles

Yeah, hi Gerry. How are you doing today?

Gerry Sweeney

Good. So we got a lot going on. I mean obviously we have Lifecore, Curation turnaround, and then a dose of COVID-19 just to add a little bit of excitement to everything. So I’m going to start with the veggie business. You know obviously you want to either downsize or sell it. I think this is key to reducing volatility on a go-forward basis and letting some of these Cost Out initiatives really start to shine through next year and beyond.

Where does that business, where does that stand, and the other portion of it is you gave some longer-term objectives on growth and profitability. So the second half of my question would be, what happens to your cost structure if you sell it and/or shrink it down substantially? How do we look at it from that perspective as well?

Albert Bolles

Yeah. So Gerry, you’re absolutely right. We made a strategic decision to sell it. It has always been the source of volatility right that you can’t control. We’ve had – we were working with William Blair; we have some bids out; we have several LOIs that have come back and we are in the process now of going through the LOI process.

We had one the company in our facility over the weekend. Obviously they had to follow all the COVID requirements before they could go in, but they’ve looked at the facility and now that’s where we’re at. We probably have another four, maybe five that will be joining the LOI process, so it’s moving along. William Blair is on the point with it and we’ll know a lot more probably in the next 45 to 60 days.

And obviously, if we could sell it, certainly the proceeds will go to pay down debt. If we don’t sell it, we have a backup option which significantly reduces the size of the business by at least half that allows us to focus on a few customers, strategic customers, around 10 or 12 that we will be looking at improving our margins in that business to get them closer to where we need them. In many cases, we haven’t taken price increases where we should have, and we are in the process of going through that now.

So obviously we wouldn’t get any proceeds there to pay down debt, but we believe we would end up with a model that enables us to live comfortably with a much, much smaller, but a much more profitable core veg business that’s higher margin, that’s focused on a few customers that allows us to absorb volatility if indeed we have a weather issue.

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Gerry Sweeney

Got it. What happens to your, the cost structure internally though with shrinking versus the selling? Just to point maybe some of the overheads and things like that, how much cost comes out?

Albert Bolles

Yeah Brian, do you want to handle that one?

Brian McLaughlin

Yeah, hi Gerry. So we in previous phone calls or chats outlined our work with the Hackett Group and we have detailed a very clear path and process for either options in order to reduce the cost structure. In either case we’ll be able to get us back to at least a break-even on the margin impact, if not a positive.

Gerry Sweeney

Got it, okay. And then maybe just switching gears a little bit; Yucatan, great to see the margins at 19%, heading to 28%. Any concerns with some of the transition from like the tub size? Are the other Yucatan products selling pretty well in this environment or is there any concern about that?

Albert Bolles

Well – yeah, it’s a little early to tell Gerry. We’ve seen – you know in the last couple of weeks they have been a little soft on the bigger sizes, obviously because of the nature of how the product is used in groups and gatherings. We’ve seen an uptick in our salads as we mentioned, but you know we also see just observationally in the stores that there’s a lot of products that are out of stock. So we expect the business to come back in the next week or so, but we’re keeping a close eye on it.

It’s not like the bottom is falling out, it’s just a little softer than what we had forecasted. But the good news is the products that we are selling now are highly profitable for us versus what we had to live through in the first two and a half quarters of the year.

Gerry Sweeney

Yeah, the 19% is great, so we completely get that. And one more question on Lifecore. Obviously that’s chugging along pretty well and just outlining the units that you can have manufacturing today versus the capacity, so plenty of capacity and expectation if you’re going to fill that, and this is more COVID-related too. Are there any of the drugs a little bit more elective in nature? Obviously that may push some stuff around or any concerns on the COVID-19 on Lifecore?

Albert Bolles

Well, you know there’s some of the things like cataract you know that is an elective procedure. We have not slowed down any shipping to date with any of our customers, and if there is a slowdown later in the year because of this, it’s just an elective surgery that people are going to go ahead and have done anyway, right. [Cross Talk]

Yeah, yeah, so no real major concerns, but certainly that’s where we are today and we’re keeping a close eye on the situation.

Gerry Sweeney

Okay, great. I’ll jump back in line. Congratulations again on the percentage of the metric through. It’s great to see it. Thanks.

Albert Bolles

Thank you, Gerry.

Operator

Our next question comes from the line of Anthony Vendetti with The Maxim Group. Please proceed with your question.

Anthony Vendetti

Sure, thanks. I was wondering, you reiterated guidance. Can you talk about exactly how you see the COVID-19 impacting your business in either a positive way in terms of demand, increased demand for some of your products or in a negative way in terms of supply chain inflection?

Albert Bolles

Yeah, so we’re fortunate for being right, both in businesses that are deemed as mandatory right, on the healthcare side and on the food side. We have seen a major uptick in salads where people are staying home. It’s not the kind of product that you would be able to store like shelf stable or frozen. I don’t think you’re going to see the uptick like you are in some other food companies. But those products, you know people are eating at home now, and you know salads we think will continue to do pretty well in this environment and our supply chain has remained largely interrupted.

We continually work with our – we have a very close relationship with our growers. We have no issues with supply coming into our facilities. We have our own refrigerated trucks, so we’re able to move products around. We’re geographically dispersed on the food side where we have two plants on the East Coast, along with the Guad plant in California. So we’re able to – on the food side sort of flux with people in this environment.

Obviously we put in very high standards for employee safety that we have in place and that’s sort of where we’re at right now. And once again, on the Lifecore side, you know Jim hasn’t seen any change in orders or shipments to date.

So my confidence for Q4, I think that’s what you’re trying to get at, on the COVID environment is obviously there’s the revenue piece, but you know there’s a couple of other pieces that are there. One is, it’s great to turn the corner on the avocado products business, where we’ll be now shipping high margin products that we have not been able to do for two and a half quarters, so we’re making money there.

We are really tracking very, very well with our cost out program. I know at the beginning of the year, you know $18 million to $20 million seemed like a stretch. We’ve been project managing it. We’re very confident about making our number there, but probably more towards the high end. So that remains on track and it’s also the time of year when we have the least volatility weather wise. Historically the fourth quarter’s been the least volatile from on a produce side with Curation Foods. So our programs are on track and you know that’s what gives us confidence as we are in the fourth quarter.

Anthony Vendetti

Okay. And just as the follow-up to Lifecore there, is it possible with all of the biotechnology companies and pharmaceutical companies that are working to develop treatments and vaccines, particularly on the vaccine side, is it possible that Lifecore could see an uptick at some point in some development programs?

Albert Bolles

That’s probably more long term, but I’ll let Jim go ahead and answer that in more detail for you.

Jim Hall

Hi Anthony. Potentially long term, we’ve had some interest in not so much the development of those products, but if one’s developed down the road, would Lifecore have the capacity or the ability to contribute to production of those vaccines or products. Nothing short term though that we’ve seen that would impact our development pipeline.

Anthony Vendetti

Okay, that’s helpful. Alright thanks, I’ll hop back in the queue.

Albert Bolles

Thank you.

Operator

Our next question comes from the line of Mitch Pinheiro with Sturdivant. Proceed with your question.

Mitch Pinheiro

Yeah, hi.

Albert Bolles

Hi Mitch, how are you?

Mitch Pinheiro

Hello there. All is well, as it could be. As is well as it could be. Just a couple of quick questions. With the disruption in our food system, do you see any change to the Squeeze roll out or your marketing plans related to that?

Albert Bolles

No. If you remember, we’ve talked a bit about in the fourth quarter that we were going to spend more money on our new product introductions. We have two very large customers; one in Canada, one in the U.S. that we are testing right now; various models of trying to drive trial and awareness on the product. We know when we get trial and awareness, we get repeat. So that isn’t slowing us down right now in terms of the testing and learning that we want to gain in the fourth quarter.

We’ve seen a little bit of shift from some customers on the resets because of COVID-19, to move from May to June. Those are just minor shifts, but that wouldn’t have much of a financial impact on us anyway in Q4. But our plans remain intact to complete our testing with these two major customers and again the learning we need to really build awareness and really Squeeze really begin to work for us in the next fiscal year.

Mitch Pinheiro

Okay. As far as Lifecore, you know with raw material shortage from your supplier, I know it normalized. Is anything with the COVID activities impair your ability from that supplier again or are you comfortable with that?

Albert Bolles

You’re talking about the syringe supply issue?

Mitch Pinheiro

Yes.

Albert Bolles

No, but Jim, is there anything else that you want to add to that?

Jim Hall

No, just – hey Mitch, just to clarify, that issue was not through an actual supplier, but with one of our customers that was providing that, and that supply has been sure to open. It’s very stable now and shouldn’t be impacted by this and hasn’t been. So it’s something like all our raw materials and critical supplies that we’re keeping an eye on and working very hard to make sure we have enough on during this COVID period.

Mitch Pinheiro

Okay. And then two other things; any update on BreatheWay?

Albert Bolles

We’re continuing our testing and roll out with Driscoll’s raspberries. It’s going very well and we continue to want to expand that and we have into the development cycle for BreatheWay, which we don’t talk much about. We have some other very interesting customers where we believe the technology can bring a benefit to their product line, a higher margin product line, and we’re working with them to prove that.

What we’re really are trying to do with BreatheWay are find customers that we can have scale. In the past we’ve kind of worked around with smaller customers. We really are very particular about who we work with and to make sure that we partner with somebody, that there’s going to be enough scale for us to get the profitability that we want to achieve.

Mitch Pinheiro

On your own products, does the longer shelf life aspect to your product, has that been something customers are aware of due to the current environment?

Albert Bolles

Yes, they’re aware of it. We don’t put it on all our packages, only those that we get the benefit of an extra few days of shelf life. But to be quite honest with you, they don’t pay for it. So the benefit is us in terms of being able to decrease shrinkage on our side, but it’s not a benefit that the customers are willing to pay for, unlike some of the other projects that we’re working on with BreatheWay.

Mitch Pinheiro

Okay, and then just final question. Any update to your capital spending plans for this year? What that number might be by year-end?

Albert Bolles

Yeah, I’ll have Brian handle the capital numbers.

Brian McLaughlin

Yeah. So we’re managing those numbers much more tightly. During the Q2 call, I believe we drew out second half spend numbers in the $22 million to $26 million range as part of our focus on adding discipline to our capital spending process and becoming very stingy about where we’re spending money, while at the same time really making sure that we’re supporting the right growth platforms. That number’s been reduced to somewhere in the $18 million range or lower perhaps. So we are very focused on becoming very, very disciplined and diligent about how we spend money on capital and putting it in the right places.

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Mitch Pinheiro

So with that, where do you think you’ll end up for the year, for the fiscal year?

Brian McLaughlin

The bank amendment has a number of $37 million in it and I’m confident that we will come at below that number.

Albert Bolles

If I may, just on the capital side, just a couple of things. I think it’s fair to say that in the past we haven’t had a “disciplined approach to capital,” the Ontario facility being an example. We have put in a capital committee, a capital process across the enterprise, where we’re much more stricter on capital and expecting that if we spend the money, we’re going to get the returns.

And the automation, I mean a lot of the Cost Out Program, the $20 million has come from capital investments through automation, which was greatly needed. That’s essentially done and that’s why we’re moving the Project ZEST, which is more operational cultural shift to zero mindset of waste and a real focus OEV of our equipment, so that we start to get more efficiencies out of the equipment that we have. So that’s going to decrease our usage of capital at Curation Foods.

Obviously, our priority is to continue to provide the capital needed on the Lifecore side to generate the growth that they need there. On the Curation Foods side, we think that we can over the next few years, achieve a lot of productivity and efficiencies through ZEST, without having to spend a lot of money on capital.

Mitch Pinheiro

Alright, thank you very much.

Operator

Our next question comes from the line of Mike Petusky with Barrington Research. [Operator Instructions] Mike, please proceed with your question.

Michael Petusky

Thanks. I may have missed this, but did you guys give Q3 revenue for salads and the guacamole businesses or could you?

Albert Bolles

Brian?

Brian McLaughlin

Yeah, no, we have not and we normally would not give that kind of guidance. We manage it at the full segment level.

Michael Petusky

Okay. Can you say how much? They were either up or down or any guidance on how they actually performed, sort of the key portion?

Brian McLaughlin

Yeah, sure. As was indicated in the press release as well, we are up in salad on a year-to-date basis, $9.4 million, and that would be on a year-over-year basis about 7%. You can even do the math backwards there.

On the core veg side we’ve indicated that we’re down, we’re managing that down purposely. It’s a highly volatile segment and a lot has been said on core veg already. On the bean side, we’ve had – it’s a high margin category for us. We have had some supply issues there, not anywhere near the sort of cost variance issues that we’re having core veg, and so we’re down year-over-year in that area as well.

Michael Petusky

Guacamole, I think at one point you guys had said that you thought Q4 would come in at $18 million to $20 million. I think a meaningful part of that I would assume to be sort of the lead up to Cinco de Mayo. I mean obviously that to me, that would seem like that holiday could be meaningfully impacted. Could you just talk about your current assumptions around revenue in guacamole for Q4?

Albert Bolles

Yeah Brian, if you want to…?

Brian McLaughlin

Sure, yeah. In our current model, which ladders into the guidance that we’ve provided, we’ve paired back, but I think just to be conservative, just a bit, a couple of million bucks or so, the guacamole fourth quarter revenue number. We’re feeling good about hitting the number. We’re keeping an eye on the issues that Al mentioned earlier, but again we’ve already built some — we’ve already paired that back a bit here from the earlier guidance or discussions that we may have had. So I think we feel pretty confident at this point that we’ll come in probably a couple of million bucks or so lower than the number you just threw out.

Michael Petusky

Okay. So, how much does that impact what you were planning on doing on gross margin in that business in Q4, because that was a huge part of the assumption of the Q4 guidance as well.

Brian McLaughlin

Yeah, we are still tracking toward the same gross profit margin figure that Al indicated and there may be a little bit of pairing back on the gross profit, but again there’s ladders into the guidance that we provided for the full year.

Michael Petusky

And then on the legal expense, the $3.2 million, eye-popping, jarring, can you guys speak to that? I know you don’t want to speak to it or you can’t speak to it in great detail, but going from $800,000 to $3.2 million I mean and essentially saying we have no idea where this ends, can you speak to that at all?

Albert Bolles

We really can’t speak to it. I mean, you know right now there’s – we have Printback [ph] and we have Pacific Harvest and we’re working with the lawyers on how to best handle the situation and really can’t talk much more about it.

Michael Petusky

Was that – Brian, with that $3.2 million, was that excluded from adjusted EPS and adjusted EBITDA or…?

Brian McLaughlin

Yeah, it was. You’ll also note and I believe it’s in the press release that we do believe that a fair amount if not all of those dollars will be ultimately recoverable.

Michael Petusky

Okay, that’s all I’ve got. Thank you.

Albert Bolles

Thank you.

Operator

Our next question comes from the line of Mike Morales with Walthausen & Company. Proceed with your question.

Albert Bolles

Hi Mike.

Mike Morales

Good afternoon Al, Brian and Jim. Hope you’re all staying healthy and safe with everything that’s going on, thanks for taking my questions.

Hey, some of the color that you gave around the CapEx guidance and Brian too, and the automation initiatives was helpful. Can you just help give us a sense of maybe from the – as it relates to the $18 million of cost out and $18 million to $20 million, how much of that is tied to automation equipment that has yet to go in? And is there some risk of that getting pushed out with all the disruption happening out there or is that equipment essentially already in and now just using it?

Albert Bolles

Yeah, that equipment is essentially in. We had one final piece to go in that’s affected by a couple of weeks, but it’s not meaningful. Okay. So we feel like we’re pretty well on track with the equipment going in.

Mike Morales

Okay, that’s helpful. And then I guess as it relates to the balance of CapEx, even on the reduced number, I mean the commentary is the least helpful as it relates to capacity utilization of Lifecore. Help us understand what that money is going toward?

Brian McLaughlin

The majority of it in the second half of the year is going to Lifecore. I’ll let Jim sort of speak to the uses of that cash and the platforms that are being supported.

Jim Hall

Yeah, hi Mike. I think we’ve had this conversation before, but what we’re using that money for is filling out the capacity for some of the commercialization of the products in our pipeline. You know we’re currently – the $17 million is really a theoretical number based on the infrastructure we have set up and the number of fillers we have. There are still some things for some of these products as they continue to grow for formulation work or packaging type operations.

The other thing that we think based on or we project based on the commercialization rates of the late base products in our pipeline, that we will fill that capacity over the next three to four years, and are also starting to spend money on facility and infrastructure to go beyond that $17 million. If you remember, I talked about – you know it takes three to four, sometimes even longer years to put additional capacity by the time you get equipment ordered, installed and then go through the regulatory approval process. So that’s kind of a combination, but all focused on managing the capacity to meet future demand.

Mike Morales

Great! That’s helpful. Jim, in your experience with the FDA in the past, given all the uncertainty that’s out there, I mean I’m not exactly sure how in Lifecore whether the FDA could reallocate resources. Is there anything that you’re seeing right now that would impact the timing of some of the products in the pipeline – programs in the pipeline as it relates to the outlook for Lifecore?

Jim Hall

We are not seeing anything right now, and you know the primary product that we’re expecting approval on during this calendar year is already complete and in the final stages of FDA review. We have several opportunities that are enrolling clinically in Phase 3 and in Phase 2 and obviously several in early phase clinical, but we haven’t – we talk to our customers almost on a daily basis and haven’t seen any slowdown.

If resources are reallocated, potentially in the future, could cause delays with clinical trial approval. Things are slowing down big time there, but the trials that are ongoing are at a place where that hasn’t impacted them, so we haven’t seen anything.

The other comment I’ll make is some of the opportunities in our pipeline are tech transfer related, so increasing volume of product that we already manufactured, transitioning it from another supplier that doesn’t take any or very minimal FDA input. So that’s the other reason we’re still pretty confident in where the pipeline is heading and how that will impact capacity needs in our operation moving forward.

Mike Morales

Sure. So it sounds like maybe a potential longer-term opportunity depending on I guess a lot of uncertainties. But as it relates to the near-term opportunities that may be have you guys most excited, nothing on the horizon that’s changing your expectation?

Jim Hall

No, we haven’t seen anything to-date, no.

Mike Morales

Alright, gentlemen thank you very much for taking my questions, and be well.

Albert Bolles

Thank you.

Jim Hall

You too.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session and I would like to turn the call back over to Dr. Bolles for any closing remarks.

Albert Bolles

Thank you for your interest in Landec, and have a great day and everybody stay safe out there. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day!




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