Landec Corporation

Good afternoon, and thank you for joining Landax Fiscal 2021 First Quarter Earnings Call. With me on the call today is Dr. Albert Bolz, Landax Chief Executive Officer, Ryan McLaughlin, Landax Chief Financial Officer, and Jim Hall, President of LifeCorps. 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 2020. Let me turn the conference over to Al Bowles.

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. LifeCorp 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, LifeCorps 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. Creation Foods, our natural foods business, is focused on innovating plant-based foods with 100% clean ingredients to retail, club, and food service channels throughout North America. Curation Foods is able to maximize product freshness through its geographically dispersed network of growers, refrigerated supply chain, and patented breathe-away 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 olive oil and vinegar products, and Yucatan and Cabo Fresh avocado products. We are focused on creating shareholder value by delivering against our financial targets, investing in growth, driving top-line momentum at LifeCorps, and implementing our strategic priorities to improve adjusted EBITDA margins at Curation Foods. Furthermore, we continue to work toward improving our balance sheet and net leverage ratio, which our organization is aligned around. We are taking a disciplined approach to strengthen our position through, first, the implementation of a formal capital allocation process with stringent return and investment criteria is in place to ensure that we are maximizing the dollars we are putting to work for shareholders. Second, with our company-wide focus On operational excellence, we believe we can reduce our CapEx budget while improving the efficiency of our operations, which is expected to drive greater free cash flow versus prior year. Third, as part of Project SWIFT, we have been executing on our commitment to divest non-strategic assets to strengthen our operations and pay down debt. On August 7th, we closed on the sale of our cell addressing facility, in Ontario, California, for $4.9 million. And on September 4th, we close on a sale of our Hanover manufacturing facility and related assets for $8.7 million. And fourth, our team is vetting long-term refinancing solutions to add stability to our balance sheet, and we look forward to communicating those to you at the appropriate time. We began to see the financial benefits from Project SWIS decisive actions reflected in our results in the fourth quarter of fiscal 2020, but it is much more visible in our performance during the first quarter of fiscal 2021. Even with some lingering COVID headwinds that we managed through, the dedication and hard work of our entire organization, from our essential frontline employees to our executive team, is ensuring that this momentum of improved outcomes continues. In the first quarter of fiscal 2021, LifeCorps continued to deliver on its track record of high-margin revenue performance, delivering 81% year-over-year growth, while Creation Foods delivered a planned decrease of 10%. At LifeCorps, this reflects the concerted effort to better balance the seasonality of the fermentation business While at Curation Foods, this respects our continued strategy of simplifying and strengthening the business by making it smaller and more profitable. On a consolidated basis, we drove a 7% increase in gross profit and a 890% increase in adjusted EBITDA. As I spoke about during the prior earnings call, we continue to have confidence in delivering a strong fiscal 2021 for our shareholders, which is the most visible in our adjusted EBITDA guidance of 33 to 37 million that we are reiterating today. This implies a 59 percent increase at the midpoint of the range versus prior year and puts us on pace to achieve the steady state margin targets that we've detailed previously. 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 sustainable business practices. Before I share more details on our outlook and priorities for fiscal 2021 for LifeCore and Curation Foods, I'll turn the call over to Brian for the financial highlights and a deeper discussion around our fiscal 21 outlook and related modeling considerations.

Thank you, Al. I will start with a review of our first quarter financial results. Consolidated revenues decreased 2.2% to $135.6 million. The decrease was driven by a 10.1% planned decrease in Curation Foods revenues, which was nearly offset by an 81.1% increase in LifeCorp revenues. LifeCorp's improved year-over-year performance was impressive, with a 46% increase in its EDMO business and a 620% increase in its fermentation business. The exponential growth of the fermentation business during first quarter reflects our efforts to balance shipment timing throughout the fiscal year to mitigate some of the seasonality that we've experienced historically. At Curation Foods, revenue performance was primarily driven by the planned reduction in our legacy vegetable and tray business in connection with Project SWIFT, continued softness experienced by our food service business due to COVID, and to a lesser extent by our single-serve salad business as consumer shopping and dining patterns have shifted during the COVID-19 pandemic. Combined, this resulted in a 12.4% revenue decrease in our fresh packaged salads and vegetable business. The planned reduction in the legacy vegetable and trade business is a key aspect of our goal on focusing on higher margin products and on new product innovation in the curation food segment. Partially offsetting this was a 5% increase in revenue from our avocado products business, primarily due to incremental growth in the retail distribution of our innovative avocado squeeze products. Consolidated gross profit increased 6.6%, and gross profit margin increased to 12.1%, up 100 basis points compared to the prior period. The gross margin increase was primarily driven by the life course segment, where its significant first quarter revenue growth led to an increase in gross profit that was nearly double the prior year period. Further, Curation Foods' avocado business delivered improved gross profit. as a result of lower-cost avocados compared to fiscal 2020, as well as operational improvements derived from our ZEST framework. However, these gains were partially offset by three key factors, which we believe we have addressed for future quarters. First, at Curation Foods, we experienced unplanned operational inefficiencies due to an automation equipment installation delay in turn due to travel restrictions during the COVID-19 pandemic. Second, weather impacted our profitability at Curations Foods due to higher raw material costs resulting from extreme heat in the west and cold in the east. Historically, we have not had a pattern of extreme weather impacting first quarter operations. Going forward, we feel we have adequately forecasted potential weather impacts into our guidance for the remainder of the fiscal year. And third, as we discussed during the fiscal fourth quarter call, LifeCorp experienced headwinds in gross profit during the first quarter due to the sell-through of higher-cost inventory manufactured during our prior year fiscal fourth quarter. And as a result, segment gross margin was approximately half of what it has been traditionally. That high-cost inventory has now been sold through, and the business has returned to its historical gross margin run rates. Landex first quarter net loss was $11 million, or a loss of 38 cents per share, which includes $7.8 million of restructuring and other non-recurring charges net attacked to, which are primarily associated with the sale of our Hanover facility and ongoing legal matters at our Yucatan avocado facility in Mexico. Excluding these non-recurring charges of 27 cents, adjusted diluted net loss per share was 11 cents. Adjusted EBITDA increased to $3.1 million, up $2.8 million, or 890% versus the prior year period. Gap cash flow from operations was $17 million in fiscal first quarter, an increase of $22.2 million versus the negative $5.2 million in the year-ago period. As Al mentioned in his remarks, our first quarter performance demonstrates the improving consistency of our operations at Curation Foods, as well as the more balanced seasonal contribution from LifeCorps. Turning to our financial position, as of the fiscal first quarter end on August 30, 2020, we are in compliance with all of our financial covenants under the company's credit agreement. Our total leverage ratio, as calculated under our credit agreement, improved from 5.9 to 1 for the fiscal fourth quarter ended May 31, 2020, to 4.7 to 1 for the fiscal first quarter ended August 30, 2020, which was primarily driven by improved operating performance and the recent asset sales. As of August 30, 2020, we had $173.9 million in borrowings outstanding under our credit agreement, including $69 million under our revolving credit facility and $104.9 million under our term loan. As previously disclosed, the company's borrowings under our credit agreement mature September 23, 2021. Deleveraging the balance sheet continues to be our primary focus, and in the near term, refinancing of our debt is a top corporate priority. We remain confident in our ability to drive significantly improved adjusted EBITDA generation in fiscal 2021. following the operational turnaround efforts we implemented during fiscal 2020. Our aim is to continue to demonstrate consistency in our operating results this year and reestablish baseline profitability within our curation food segment while continuing to support the growth of LifeCorps. Shifting to our outlook, as Al mentioned, we are reiterating annual guidance for fiscal 21 as follows. Consolidated revenues in the range of $530 million to $550 million, representing a planned decrease of approximately 9%. Life core revenues in the range of $93 million to $97 million, representing growth of approximately 11%. And curation foods revenues in the range of $437 million to $453 million, representing a decrease of approximately 12%. From an adjusted EBITDA perspective, we continue to expect consolidated adjusted EBITDA in the range of 33 million to 37 million, representing growth of approximately 59 percent. Life score to range from 22.5 million to 24.5 million, representing growth of approximately 17 percent. And curation foods from 12 million to 14 million, representing growth of approximately 193 percent. Additionally, we are reporting two new metrics in the first quarter of 10Q, filing, which breaks down, one, the corporate management allocation to each segment, life core, curation, foods, and other. The other segment represents LandEx corporate operating costs that are not allocated at the segment level. And we are providing you with capital expenditures at the segment level on a quarterly basis. In the first fiscal quarter of fiscal 21, The total corporate, overhead, and public company management fees of $6.1 million were allocated to the three business segments as follows. $1.4 million to LifeCorps, $1.9 million to Curation Foods, and the remaining $2.8 million to other. The total consolidated capital expenditures in the first quarter were $4.6 million, allocated as follows, approximately 59% budgeted for LifeCorps and 41% for Curation Foods. Regarding seasonality, we are reiterating our statements from last quarter. We continue to anticipate minimal quarterly variation due to revenue seasonality for both LifeCorps and Creation Foods through the balance of the fiscal year. And in terms of adjusted EBITDA, we expect to continue to deliver normalized gross and adjusted EBITDA margins, which at LifeCorps means back to the historical level, and at Creation Foods means we are marching forward our by-year-end steady-state goals previously detailed. With that, I'll turn the call back to Al.