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.