Landec Corporation

Good afternoon, and thank you for joining Landax Fiscal 2021 Second Quarter Earnings Call. With me on the call today is Dr. Albert Bowles, Landax Chief Executive Officer, Brian 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 the fiscal year 2020. Let me turn the call over to Al Bowles.

Thank you, and good afternoon, everyone. I'd like to start by wishing everyone a healthy and joyful new year and take a moment to recognize the contributions of our essential workers at both LifeCorps and Curation Foods, who show up every day in our facilities across the country while many of us have been asked to modify our lives and work from home our essential operational employees can remain on the front lines and i am grateful for their perseverance land deck is a leading innovator in diversified health and wellness solutions comprised of two operating businesses life core biomedical and curation foods life core 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. Duration 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 packaged fresh vegetables and salads, O'Premium artisan olive oil and vinegar products, and Yucatan and Cabo Fresh avocado products. At LifeCorps, our employees are manufacturing pharmaceutical products and medical devices that improve patients' lives. And at Curation Foods, our employees provide access to fresh, delicious, nutrient-dense food for our customers to feed and nourish consumers across North America. Through our focus on safety, We put precautions and measures in place to protect all of our employees, their families, and our communities at large. Together, we are ensuring that our company remains positioned to produce products that improve our collective livelihood and drive shareholder value during the global pandemic. However, our focus on creating shareholder value goes further. We are motivated to deliver against our financial targets, invest in growth, drive top line momentum at Life Corps, and implement our strategic priorities to improve adjusted EBITDA margins at Curation Foods. In order to execute against these initiatives, it is imperative that we have a capital structure in place to support our efforts. I'm pleased to share that on December 31st, 2020, we entered into a comprehensive refinancing of the company's credit facilities. This refinancing was made possible by the consistent profitable growth at LifeCorp and the significant demonstrated improvement in cash flow generation at Curation Foods that was brought about by Project SWIFT, which relaunched one year ago. These efforts drove a $33.4 million year-over-year improvement in operating cash flow for the first half of fiscal 2021. Our business is back on track and we are delivering significantly improved financial performance. And I am proud of our organization's resilience as we work together to accomplish this critical milestone. As we look ahead, we continue to have confidence in delivering a strong fiscal 2021 for our shareholders and are reiterating our annual guidance for fiscal 2021 today. We continue to expect adjusted EBITDA in the range of $33 to $37 million, which implies a 59% increase at the midpoint of the range versus prior year. Year to date, for the first six months of fiscal 2021, we have generated $11.8 million in adjusted EBITDA, which represents an increase of $10.6 million versus the prior year period. At the segment level year to date, Duration Foods generated $4.7 million in adjusted EBITDA, which represents an increase of $7.3 million versus the prior year period. And LifeScore generated $8.7 million in adjusted EBITDA, which represents an increase of $3.7 million versus the prior year period. We expect that this trend of improving year-to-date performance will continue to accelerate through the second half of this fiscal year as our curation food segment marches towards the year end. Steady state gross margin targets that we've detailed previously in the range of 11 to 14% and a fiscal 2021 gross margin performance at LifeCorp of approximately 38%. Before I share more details on our outlook and priorities for the second half of fiscal 2021 for LifeCorp and curation foods, I'll turn the call over to Brian for the financial highlights and a deeper discussion around our refinancing and second quarter performance.

Thank you, Al. For the second quarter, consolidated revenues decreased by 8% year-over-year to $130.9 million. The decrease was driven by a 10% plan decrease in curation foods revenues, which was partially offset by a 2% increase in life core revenues. LifeCorp's year-over-year performance was driven by a 2.5% increase in CDMO business, which was partially offset by a 1.4% decrease in its fermentation business. At Curation Foods, revenue performance was primarily driven by the planned reduction in our legacy vegetable and tray business in connection with Project SWIFT and ongoing softness within our food service business due to COVID. Combined, this resulted in a 12% revenue decrease in our fresh packaged salads and vegetable business. The planned reduction in the legacy vegetable and tray business is a key aspect to our strategy of focusing on high-margin products and on new innovation in the curation food sector. Partially offsetting this was a 5% increase in revenue from our avocado products business. primarily due to ongoing retail distribution expansion of our innovative avocado squeeze product and growth in the Cabo Fresh brand. Consolidated gross profit increased 33% to $20.6 million year over year, and gross profit margin increased 490 basis points to 15.8%. The gross margin improvement was primarily driven by the curation food segment, which experienced a 360 basis point increase versus prior year to 9.4% and puts curation foods well on its way to achieving our steady state gross margin goals by year end in the range of 11 to 14%. The improvement in second quarter was led by our avocado products business, which benefited from operational improvement and improved raw material sourcing compared to the prior year period. Additionally, the segment achieved gross margin expansion within its fresh packaged salads and vegetables business, despite the planned decrease in revenues and from the positive financial impacts of consolidating operations plus the continuous improvement in operations associated with Project SWIFT. LifeCorps also contributed to the increase in consolidated gross margin as its business returned to normalize pre-COVID gross margin rates that were further bolstered by an advantageous sales mix, driving a $1.9 million or 21% improvement in gross profit year over year, resulting in gross profit margin of 45.1% compared to 37.8% in the prior year period. Landex second quarter net loss was $13.3 million, or a loss of 45 cents per share, which includes 4.4 million of restructuring and other non-recurring charges, such as legal and settlement expenses, net of tax, and also includes a non-cash WINSET fair market value adjustment of 9.4 million net of tax. Excluding these non-recurring charges and WINSET fair market value adjustment after tax charges of $13.8 million Adjusted diluted net income per share was approximately $0.02. Adjusted EBITDA increased by $7.8 million versus prior year to $8.7 million during fiscal second quarter, primarily centered in year-over-year improvements in the curation food segment. Despite the strong growth, this performance was muted by headlands from increased corporate expenses associated with ongoing legal and settlement-related fees that were not part of our adjusted EBITDA add-backs. On the segment level, during the fiscal second quarter, Curation Foods generated $2.4 million in adjusted EBITDA, which represents an increase of $6.7 million versus the prior year period. And LifeCorp generated $7.3 million in adjusted EBITDA, which represent an increase of $1.6 million versus the prior year period. Further evidence of our improving financial performance can be seen through the lens of our cash flow state. Cash flow provided by operations was $18.5 million for the six-month period ending November 29, 2020, compared to cash used by operations of $14.9 million in the prior year period, which marked a $33.4 million improvement year over year. Additionally, cash from investing activities improved $21.2 million versus prior year, driven by a capital expenditure decrease of $8.6 million and fixed asset sales proceeds of $12.9 million. Turning to our financial position, the company had cash and cash equivalents of $2.5 million as of November 29, 2020. Total debt at fiscal second quarter end was $170.2 million, consisting of its line of credit and long-term debt. The company's net leverage ratio was approximately 5.2 to 1 based on its trailing net 12-month adjusted EBITDA, which is an improvement of 3.6 turns compared to fiscal year end 2020, and due to the combination of improved adjusted EBITDA performance and lower net debt levels. Subsequent to second quarter end, on December 31, 2020, we closed on a comprehensive refinancing transaction, which we believe provides our business the necessary flexibility to support LifeCorp's long-term strategic growth plan while we continue to build on the recent positive momentum of Project SWIFT in our curation foods business. This new structure includes a five-year $170 million Unitronch term loan, of which $150 million was funded immediately upon closing. The Unitronch term loan carries an interest rate of LIBOR plus 850 basis points. and we will have access to an additional 20 million via an accordion feature so long as we maintain certain leverage requirements. Importantly, borrowings under the term loan are interest only for the first two years. This provides a $6 million favorable annual impact to cash flows in the short term, primarily related to 12 million in lower annual schedule principal payments. This is partially offset by estimated incremental annual interest expense of $6 million. The $75 million asset baseline of credit carries an initial interest rate of LIBOR plus 225 basis points. As a result of refinancing the company's existing credit facilities in the third quarter of fiscal 2021, Landec will record a $1.2 million charge as a result of the non-cash write-off of unamortized debt issuance costs related to the refinancing under these new credit facilities. Shifting to our outlook, 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%. In curation foods, revenues in the range of $437 to $453 million, representing a decrease of approximately 12%. From an adjusted EBITDA perspective, we continue to expect consolidated adjusted EBITDA for land deck in the range of $33 million to $37 million, representing growth of approximately 59%. Lifecore to range from 22.5 million to 24.5 million, representing growth of approximately 17%. And curation foods to range from 12 million to 14 million, representing growth of approximately 193%. In the second quarter of fiscal 2021, the total corporate overhead and public company management fees of 4.5 million were allocated to the three business segments as follows. 1.2 million to LifeCorp, $1.4 million to curation foods, and the remaining $1.9 million to udder. The total consolidated capital expenditures in the second quarter were $2.8 million. Invested as follows, $1.7 million for LIHCOR, $1.1 million for curation foods. Regarding seasonality, we are updating our statements from last quarter to help shape the sequencing in the second half. We anticipate that fiscal third quarter revenue will be greater than fiscal fourth quarter revenue for both operating segments due to variation in seasonality. On gross margin, we believe that Curation Foods will continue to generate consistent sequential quarterly improvements in its gross profit margin as the business builds towards its steady state gross profit margin target of 11% to 14% by fiscal year-end 2021. LifeCorps has reverted to its pre-COVID gross margin levels and is managing the business to its annualized target of approximately 40%. However, taking into account its fiscal first quarter, which experienced a negative impact to margin due to COVID, we expect LifeCorps to achieve full-year fiscal 2021 gross margin of approximately 38%. For consolidated adjusted EBITDA, we anticipate minimal quarterly variation between fiscal third and fiscal fourth quarter for its consolidated adjusted EBITDA results. With that, I'll turn the call back to Al.

Thank you, Brian. Let me go into more detail about the progress we are making in our LifeCore and Curation Foods businesses to maximize shareholder value across our portfolio. LifeCorps continues to benefit from a pharmaceutical market that is seeing increasing demand for new drug development, supported by an increasing number of drug products in various phases of clinical development. In addition, the CDMO market continues to see positive demand for services, and drug developers continue to outsource development and manufacturing services in order to decrease time in the market save costs, and reallocate internal resources. As a highly differentiated and fully integrated CDMO, LifeCorps is positioned to capitalize on these tailwinds and continues to establish high barriers to competition. LifeCorps' speed and efficiency benefits its partners by decreasing their time to market, which has immense value in their ability to improve patient lives through the commercialization of their innovative therapies. Looking forward, LifeCorps will continue to provide long-term growth by taking advantage of positive market trends. It will continue to expand its pipeline with new and existing customers, manage capacity to meet customer demand, and deliver commercial manufacturing excellence. During the second quarter, two of LifeCorps' key partners reported positive data from their Phase II clinical studies and are transitioning to Phase III development activities. LifeCorps also initiated construction at their leased Site III location to provide additional warehouse and storage space for their growing business. And finally, LifeCorps successfully completed three audits with customers and received notification that the FDA approved a 30-day notice that allows LifeCorps to serve as a complete testing and release site for raw materials and packaging components for a key customer with no questions, which is a testament to the world-class quality system LifeCorps has in place to support its customers. For curation foods, the exceptional outcomes of Project SWIFT, which we launched on a year ago, have now stabilized the business and we are seeing those results play out in our financial performance. While our work is not done and we continue to focus on opportunities to improve our operating cost structure, we have built a solid foundation to profitably grow our business. As you can see in our second quarter results, there is evidence of the gross margin improvement progression resulting from continuous improvement in our operations and consolidation activities that we've implemented with Project SWIFT. Further, we are in the final stages of strategic analysis of outsourcing our logistics operations. We are targeting a late fourth quarter implementation of this strategy that will drive greater efficiency and margin improvement while simultaneously improving effectiveness with more frequent deliveries to our customers. This will result in less customer inventory waste and extend product shelf life for consumers. We have great confidence in margin improvement continuing through the balance of this fiscal year as we work towards the steady state gross margin targets we laid out in February of last year. This margin improvement is the key to improve cash flow generation and underpins our adjusted EBITDA guidance for this year. We are also continuing to push forward on our focus around high-margin consumer insights-driven plant-based food innovation. Our key current innovation, Yucatan and Cabo Fresh Squeeze, continues to deliver growth as we expand our distribution. And our existing high-margin guacamole tub business is performing well. According to Nielsen Research, the guacamole category is growing at 7% year-to-date, compared to previous year. The Curation Foods brands continued to outpace the category. Year to date, all of Curation Foods' avocado products are growing at more than double the category growth rate, with our Cabo Fresh brand leading the way, growing at four times the category growth rate. Our innovative Squeeze products now comprise 13% of Curation Foods' total avocado products retail sales. In our Eat Smart Sell business, we have several innovations that we have launched or are launching this month. First, we are rolling out a new slimmer bag design that we believe will increase velocity and drive incremental growth with product line expansion. Second, we are having success in our plant-based innovation co-development partnerships with the Club Channel. We have two high-margin salads in test markets with two separate retailers that are both showing promising sales trajectories. We believe the innovation and other new products in our plant-based protein platform will drive profitable growth in FY22. In summary, we have made tremendous progress and are starting to see the results. 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 margins and making strategic investments and growth. We intend to fully realize the potential of each business through the sound and thoughtful execution, creating sustainable value for our shareholders, customers, employees, and communities. Operator, please open a call for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from Jerry Sweeney with Roth Cap. Please proceed with your question.

Good afternoon, Al and Brian. Thanks for taking my call.

Happy New Year, Jerry.

Happy New Year as well, and congrats. It looks like curation is turning the corner here, so it's starting to come out in the numbers. So it's a nice start to the new year. My question revolves around curation. I want to see if I can actually get this out in a way that's Makes sense here. So second half, you're guiding to 11% to 14% gross margin by year end. Could you maybe bucket out some of the items that are going to drive that, just from an operational standpoint, as well as the market opportunity? Obviously, avocados are growing. I'm just curious about salads. Salads sound like they have a little bit of a refresh coming next year. But I just wanted to understand and just get a refresh, per se, on it. on the opportunity for the second half of this year?

Yeah, Jerry, you're right. I mean, avocado products business continues to double. We're having, you know, great success with our cobbled fresh land. So that's, you know, going to be a key driver for us as we continue the second half of the year. We also have done a lot in our mix when it comes to the Eat Smart Salad business. You know, a big part of Project Lift was, you know, not only what we did on the core veg business, taking pricing and getting the cost-out benefits that we talked about before, Jerry, but we also are swapping out salads that are not profitable with more profitable salads that we think are going to turn better. So we're continuing to work, you know, that segment as well. And, you know, we've had a pretty good year thus far with the green bean category. You know, this is the first time in a long time that we were able to not prorate customers at Thanksgiving based on the strategy that we took with our growing strategy. We had a record number of hurricanes. We were minimally impacted. And we think we've have figured out from a geographic standpoint how to how to manage that better in the future and we anticipate you know as COVID begins to lift none of us know exactly when that is but with the vaccine we're optimistic that some of our businesses that have been affected by COVID primarily in the food service sector will start to come back so It's just a continuous focus, and we have things going on with Project Zest in our facilities in North America with Bowling Green that we believe will help us improve our overall margins.

Yeah, hey, Jerry, this is Brian. I just had a couple of other quick things to drop in. So one, we're going to benefit in the second half of the year to the full second half of the year, the closure of Hanover. We didn't close that until the beginning of the second quarter as well. Included in the 9.4 are actually above the gross margin line. Some of the restructuring costs that go with Hanover, if you back those out to sort of steady state it, curation would have had a 10.1% second quarter, not a 9.4%. Recognize 9.4 is the right way to report it, but just to give you that context. 2.4 is a big quarter for Yucatan, in particular May, driven by Cinco de Mayo and Memorial Day. It's our highest margin segment, so to have Lyft in that quarter, which we've had thus far has been our experience with the company, also sort of helps with things. And then lastly, from a raw risk, reserve standpoint, the fourth quarter is traditionally the quarter that is the mildest, the kindest. And so as a result, the company typically has a margin that's in the fourth quarter that way as well. So I'll just add those things to what Al had to say.

Mother Nature is most kind in the fourth quarter, fiscal fourth quarter.

It is. Not always 100% kind, but more kind.

More kind. the curation he said the 10.1 versus the 9.4 as reported and that was one of my questions in the prepared remarks you did say there was some you know i think uh headwinds that weren't adjusted uh necessarily adjusted was that um 700 000 it looks like was that all of it or were there others sort of maybe not true one time item but maybe some no yeah there are other um

you know, one-time items and restructuring that we had in the, you know, in the second quarter. But, yeah, adjustments. But above the gross profit line, it is about, it was actually about $730,000 that related to the handover closing. Yeah.

Got it. And that shouldn't be there on a go-forward basis, or some of that still trickles into... Yes, we won't have that going forward, if that's what you're trying to say.

Yeah, and Jerry, as we progress with Project SWIFT, we believe the heavy lifting restructuring costs are behind us as we move forward.

The other question I had was, Al, you touched upon it there, but the food service, how much of an impact, can you quantify how much COVID is sort of impacting it?

Um, I know it's early across the country and every place is different right now, but yeah, it's about, it's about two plus million dollars in margin that goes with the bean headwind.

And, and we also have a margin impact, uh, Jerry on our tray business because people are not gathering. So we've seen a significant drop off channel trays. And, um,

a small amount but not insignificant with our single serve salads just because you know people aren't going into work they're eating at home yeah got it so that's that's really helpful uh then yeah if you were to roll all those up it's about it's about three and a half to four million dollars that goes with that in terms of margin impact what i'll just describe that on an annualized basis no that's just the first half of the year first half okay so that's considerable i mean that

Yeah, it is considerable. You know, it's a COVID world, so we don't know what's happening, but vaccine being rolled out, things get back to normal. That becomes less of a headwind next year, maybe even, you know, it adds a little boost to, you know, profitability, potentially next year. Is that a way of potentially? I'm not looking for that, but okay, got it. And then just real quick on logistics. That strategic review, would that also free up cash? I'm not sure if you lease the trucks or do you own them? There's a lot of costs.

Yeah. We have 30 plus trucks, Jerry, and the project I've been wanting to get at since I came on board and we've had so many other things that we've had to do. We just didn't have the resources to do them all at once, so We started this study several months ago, and we're in the final stages of compiling the results, but they're fairly compelling for us. So we have 30-plus trucks that we do lease. Don't think we need all 30-some trucks. And there's going to be a play there for us that we believe is going to improve our margins. But as, if not more important, our effectiveness to our customers are greatly going to improve. We're going to be able to deliver six times a week versus three times a week. That's going to lead to better product freshness. It's going to lead to less shrinkage at the customer level. And that combined with the launch of our new swim bag, we believe is going to have an impact for us on shelf. that will impact velocities as well as allow us to achieve more facings with the slimmer bag, which will, by the way, have the same amount of ounces as our current bag has. So it's all kind of wrapped up in a big efficiency and effectiveness program that is going to start happening here in the second half and really give us benefits in FY22. Got it.

I'd like one just follow up and then I'm done. On that logistics side, is there a service benefit, right? So you can service your customers six times instead of three times. You spoil it, shrink it. I look at your sales when I go to the grocery store, right? Sometimes the dates are a little near and things like that. So if you improve that, could that get you into more stores, improve and obviously improve the service but make sales easier or retention better?

Yeah, I'll tell you, the sales force is very excited about this logistics program and the slim bag together to do what you just said all the above. So we expect to get more sales. We expect to be able to expand the new customers that we couldn't get to and meet the requirements, as well as we have some significant shrinkage at some of our customers that We're now going to be able to get after Jerry.

Got it. All right. I appreciate it. I'll jump back in line. I've asked too many already. Thank you.

Thanks, Jerry.

Thank you. Our next question comes from Mitch Panero with Sturdivant and Co. Please proceed with your question.

Yeah, hi. Good afternoon. Hey, just a couple questions here. The gross margin goals, so, you know, 11% on curation, 11% to 14%, that's, you know, somewhere by the fourth quarter. Is that a second hash average? And then what I wanted to ask is, is that 11% to 14% range going to be something that we could count on for the following fiscal year?

Yeah. Yeah. Yeah, you can give the details. But as we've talked before, that we are really committed to getting this business at a steady state. And the 11 to 14 is what we expect to achieve in the fourth quarter. And Brian said we're at 10-1 now. We've seen significant improvements in our margins. And we expect that to carry over. and into fiscal year 22. And, you know, our job isn't done. Our focus on margin expansion will continue into FY22 as well, Mitch. Okay. Yeah. I'm sorry.

Yeah, no, I was just going to – the second part of your question is, is that what we're looking for next year, Mitch? Yeah, there's just a lot of moving parts, as Al mentioned, this year. So the idea is to get to that steady state going forward by the end of this fiscal year.

With WINSET, the charge, is that related to the put call date? I mean, when is the – could you remind me when the put call date is? It's March of 22. Okay. Go ahead, Brian. So – It was a substantial, you know, a substantial, you know, write down what drove that.

Yeah, I'll just jump in on this. I apologize. You know, it's really targeted around some situational issues, in particular the extensive West Coast fires that resulted in very dense smoke all up and down the West Coast, affecting sunlight, production volumes, and as a result, revenue and earnings in all of their greenhouse facilities from California all the way up into British Columbia. The model is still very solid. I think they're going to work through some of these situational issues. The way that the discount model works is close in impacts way very heavily. The smoke lowered earnings correspondingly. Lower earnings increased the debt and the discount modeling and the combination of those two, you know, being closed in and right now is what really drove it. As we go towards the put call date, you know, the true value will be a function of trailing four or eight quarters. We get the greater of the average of whichever is more favorable to us. So if events from the trailing four quarters in March looking backwards, are stable and are not dealing with some of these issues apart from just whatever, you know, business model and competitive issues they may have, then we may have a recovery on the number that we just put, you know, that we just wrote down. We may not, but we may. It'll depend on actual numbers and events in March of 22.

Okay. Okay, very helpful. One more question. With regard to the new financing, so, you know, I'm not a fixed income guy, but, you know, 850 over LIBOR seems high, doesn't it? Or is that just, am I not, am I just, I haven't really refinanced, you know, $170 million in debt lately.

Yeah. No, I'm actually very happy with that. If you look back over the last nine months, the credit markets have changed quite a bit with COVID. Credit underwriting for senior lenders has changed quite a bit. This is on a blended rate, so when you blend them together, our average rate we think is going to be somewhere around 7.5%. I'm very happy with this type of rebucketing and financing and the flexibility that provides to the company our ability to support the growth platforms, in particular the growth platforms at LifeCorps, and to be able to get that kind of financing without some sort of an equity component, warrants or whatever, that would be diluted to the shareholders, I am thrilled about. Okay.

But with – and I noticed, like, a lot of the, you know, the covenants relate around LifeCorps. I mean, it's almost a life – you know, I'm not sure what it is, but is – Obviously, LifeCorp has some CapEx needs down the road here, so I understand that. But the fact that it sort of relies and it's called out in the covenant that LifeCorp gross profits need to be $29 million, it was kind of odd that it wasn't Landec gross profit. And I was curious if you could comment on that.

Well, when you look at this type of debt, it's really a mezzanine piece. It's sort of sitting somewhere between shareholders and a senior lender. So there's definitely an enterprise value focus on the components. Clearly, LifeCorp adds a lot to that equation if you're sort of in that space behind the senior lenders. And so it makes sense that they would give them As we, you know, as members have added, and they are today, you know, I think they're going to continue to shift favorably going forward and be more balanced between curation and life core. But it makes sense, given sort of where they are in the, you know, in the capitalization equation, that they would rely heavily upon sort of the enterprise value and the intrinsic values there. And accordingly, that puts a big focus on life core.

All right, that's all I have. Thank you. That was a very helpful caller.

Thank you. Our next question comes from Mark Smith with Lake Street Capital Markets. Please proceed with your question.

Hi, guys. First one for me, you gave us some good insight into a kind of food service environment, what's been happening there with COVID. Any additional insight into kind of grocery markets?

and club what you're seeing from you know kind of those customers as well as from consumer behavior here recently yeah hi mark the club business uh has been affected primarily through our through trays that's been a big uh a big impact us we sell most of our cut veg trade business to uh the club stores so that business is down um 50% or more for us and has remained down. The other issue that we have seen at some of the club stores is in their order patterns based on the lines that may be forming to go into the stores. There's been sort of a zigzagging of ordering that we're seeing recently. And the other big impact for us has been On launching our new products, you know, we're not able to do sampling programs that are important to us. And, you know, the ability to be as aggressive as we want to be to expand our new products, they are, you know, not as aggressive as they have been. And that flows over to the retail side, which is, you know, a lot of the customers are not doing resets on new products like they normally do. They're delaying them a bit based on, you know, the COVID environment. But we see that, you know, beginning to, you know, lift here, we believe, into Q4 and into Q1. So, you know, those are the big impacts that we see at the retail level and club level.

Okay. And then as we look purely at kind of the avocado products, what are you seeing in that market as far as pricing and how confident are you in kind of where the avocado pricing is today and that helping you get to your gross profit margin goals?

Yeah, well, you know, this is the first full year that we've been able to run the plant with the model that we have where we buy avocados at low cost. in the fall and be able to put them away on low cost. And we were operating at very, very efficiently. We were able to put away a lot of the low-cost avocado products, which helps us on our margin in pricing. And our innovation, as I mentioned, you know, the guacamole squeeze is working very well for us. We have some programs in place where that's currently our lowest margin product, but it's growing the most, that we are going to be significantly improving the gross margins of the Squeeze product now that it's successful. And Cabo Fresh is getting a lot of good traction. I've talked before, Mark, that this brand really resonates with millennials, and we're seeing that in terms of the growth rate that we are experiencing with the Cobble Fresh brands.

Great. And then this might be too broad of a question, but following the refinancing, what are kind of next steps that we look at in the turnaround of this business as we've moved through a lot of SWIFT? What are the big picture items that we should be looking at now?

Well, we still have a few things to do on the SWIFT program, as I mentioned. I would say this is a baseball game. We're probably in the seventh inning. But the heavy restructuring costs that we've gone through with what we did in this past year with closing Hanover, taking down our production overhead, consolidating our offices, right-sizing our – I would say the majority of that is behind us. We'll probably have some restructuring with a logistics project. We think the paybacks are tremendous. But for me, the big focus now is we've got a pipeline loaded with innovation. And as we move forward into, you know, Q3 and into Q4, we really begin to transition the curation food business from one of getting there by cutting costs to really growing profitably in our categories of avocado products and our salads, primarily based around our plant-based protein salads. So it's really setting us up for growth, Mark. That's what we're really looking forward to, having the momentum take us from the second half of the year into FY22.

So really a transition from turnaround to now kind of operating and growth.

Right. I would say we're, you know, at an inflection point right now. And, you know, we have really improved the relationships with our key customers. They're very healthy now. And we've got a lot of innovation that we are planning on launching and a lot of innovation that we're working directly with them on in a very collaborative way. The relationship, you know, we don't really talk about this, Mark, but the relationship with our customers where we were a year ago versus today is absolutely night and day. So I remain, you know, very confident that as we move forward that we're going to be growing this business through our innovation while we continue to have a cold eye on costs. Okay.

Sounds great. Thank you.

Thank you, Mark.

Thank you. Our next question comes from Anthony Vendetti with Maxim Group. Please proceed with your question.

Thank you. Good evening. So, just a couple questions. One is, you talked about the logistics review. Can you quantify what you found when looking at the logistics of your operations and What were the quantifiable benefits that you were able to extract from that?

Well, we don't have all the numbers figured out yet, but I will tell you just where we are right now, there is several million in savings we believe we can achieve. We also believe there's, as I said, just not only the efficiency standpoint of logistics, but there's an effectiveness rate, which we really won't know what that is until we get into it, but it's pretty clear for us by decrease and shrink, getting a fresher product on the shelf, the opportunity to expand our facings holistically, we think this program will have a really great payback for us. So that's where we're at with this, and it's going to take us a little bit of time. It's not something I can just turn the light switch on. But as I mentioned, Mitch, we're going to be out in Q4 with doing this.

Okay. And then just on the new innovations, Al, you know, the single serve, nice improvement in the curation. gross margin, higher margin products, that seems to be starting to bear fruit. Can you talk about the incorporation of plant-based alternatives? What's the opportunity that you see there? And when can we expect to see that start to be a contributor for you?

Yeah, so, you know, our focus has been on, you know, really gaining insights here with our consumers, working with our customers. And we know there's a growing flexitarian consumer out there that's not vegetarian, but they're trying to eat, you know, less meat. So we have really focused our innovation around that. We've launched at the club store level. We had two launches that happened here just recently. They are very promising. These are higher-margin products for us, and we've only launched four new products. So we've got a lot of discipline in our processes about what we send out the door. It's not only got to be the right product, but it's got to be at the right margin level for us. So, you know, we're betting that we're going to start to see, you know, impact of that in the Q4, and then begin to really pay off for us in FY22. COVID has slowed us down in terms of the rate that we would like to expand, but the feedback that we're getting from the customers says that we have very strong products here.

You said you launched at the club store level, but that opportunity is still, would you say, in the nascent stages because of COVID and eventually as we as we, as we go forward here, this, this could become, is it fair to say you believe this could become a significant opportunity, um, in the not too distant future?

Yes. I, you know, we have, we've launched, we've launched the club stores, but we haven't been able to, uh, expand like we normally would be in this COVID environment. And we are expecting and have commitment for, uh, expansion in the second half of the year. And, uh, This is a big, big platform for us that we've invested in and that we believe is going to be a differentiator for us as we move forward.

Excellent. And then just last question. I don't know if you gave this number, but on the avocado squeeze product, you had 6,000, I believe, points of distribution on the last call. Where is that now in terms of points of distribution? And do you have a goal by the end of this fiscal year in terms of how many points of distribution you want to be in with that product?

Yeah, we're actually focused on the percent ACV. And, you know, right now Squeeze is at 19% ACV. And our goal is to just to kind of give you a point on that. Yucatan's at 46.5% ACV. So we continue to see Squeeze grow in ACV for us. And as I said, we have some things planned that we see margin expansion on the Squeeze product as well.

Okay, great. I'll hop back into the queue. Thanks. Appreciate it. Yep. Thanks, Anthony.

Thank you. Our last question comes from Mike Morales with Walt Housen & Co. Please proceed with your question.

Hey, good evening, folks. Thanks for taking my question. Hope you're all staying safe and well. Hey, guys, I want to start off on the Wednesday portion and, you know, understanding the operational challenges that they've had with everything that was going on. Help me understand, you know, as we get closer to this put call date, Where's the confidence coming from that Winstead's going to actually be able to afford a redemption of the preferred if you guys actually do put it to them? You know, with all the operational challenges, it's not unreasonable to think that that creates financing needs that they might need. Where's the confidence coming from?

Yeah, Brian, why don't you take that one?

Yeah, yeah, exactly. Well, there are a few things. My sense is, you know, but we're just... poking at this with them is that they're going to substitute us out somewhere in their capital structure behind their senior lenders. The way that our formula works, it's a very low multiple in that segment of EBITDA. I am very confident. I think there are all sorts of folks lining up, at least from my initial discussions with them. and the different advisors that they're talking to, that that is a very likely way for them to take us out. I don't see them writing a check. It's a very asset-intensive business model. If you have the greenhouse space, your platform is going to grow. There's a lot of demand for that space. Some amount of the greenhouse space has reverted over to the cannabis world, which has put more of a demand on Winsett's model. They're an excellent player. Their operational model is very, very solid. They're doing very well. They do have a fair amount of debt, not too much given, honestly, if you're close to their ratios, which I am. But I do think that if they have the ability to tap into senior you know, regulated bank financing, that they're going to use that to continue to expand their, you know, their platform and their growth model. And I believe they have many options to behind, you know, behind a senior lender group and them being able to finance their growth to find someone to substitute us out.

Sure, sure. And I guess, you know, mindful that you guys were just talking to creditors about this whole refi thing, You know, do you anticipate – so you're not anticipating them having any problem with the debt load that they do have in arranging more financing?

I do not. I think that they are, you know, financeable. They just actually put a brand new financing arrangement in place. And it's, you know, it's a very strong model. So I'm very close to it.

Sure. Understood. Turning over to the credit agreement, bear with me on this one, but a few interesting things stuck out to me in this one relative to previous agreements. A previous question noted that consolidated gross profit is really just defined as life course gross profit, so not really considering curation in that at all. I know you guys have a specifically defined term for what a permitted curation sale might look like. I found it interesting that there was a clause for allowing equity awards in anticipation of a spin-off of LifeCore. So all of that taken together and mindful of the good work that you guys have done in kind of improving Curation's operating structure, this certainly seems like much more tangible language than we've seen in the past as we think about value creation. So apologies for that long question, but I guess the total of it is, you know, can you guys just give an update on how the board is thinking about value creation mindful of this refine and the work that you've done to improve the operating structure of the businesses?

Well, I'll answer that. You know, I continually work with my board. You know that we've expanded the board, added some more life science folks on their expertise, if you will. And, you know, as we move forward, I continually work with my board to how we can enhance and create more shareholder value. So it's part of our strategy.

Understood. Understood. That's all that I have. I'll take the rest offline. I appreciate it, folks. I hope you guys stay safe and well.

Thank you very much. And I thank everyone today for having their interest in Landec, and Happy New Year to everyone, and stay safe. Thank you very much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful