Landec Corporation

Good afternoon, and thank you for joining LANDEC's fiscal 2021 third quarter earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, I will provide instructions on how to ask a question. Now, I would like to turn the call over to Jeff Sonick, investor relations at ICR.

Good afternoon, and thank you for joining us today to discuss LANDEC Corporation's third quarter fiscal year 2021 earnings results. On the call today from the company are Dr. Albert Bowles, President and Chief Executive Officer, John Moorberg, Chief Financial Officer, and Jim Hall, President of Lifeboard. By now, everyone should have access to the press release, which went out today just after 1 p.m. Pacific or 4 p.m. Eastern time. If you've not received the release, it's available on the investor relations portion of Landec's website at ir.landec.com. In addition, the company may refer to the supplemental earnings presentation also contained on LandEx Investor Relations' website. Before we begin, we'd like to remind everyone of the safe harbor statement. Certain statements made in the course of this conference call contain forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning risk factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's filings with the SEC, including but not limited to the company's Form 10-K for fiscal year 2020. Copies of these filings may be obtained from the company's website as well. And with that, I'd like to turn the call over to Al.

Thanks, Jess. Good afternoon, everyone, and thank you for joining us today. On today's call, I will provide highlights from our third quarter fiscal 2021 results. Jim Hall will then review some of the exciting developments in the CDMO industry, and John Moorberg will discuss our financial results in more detail and update you on our fiscal 2021 guidance. We will then open the call for your questions. I'd like to start today by recognizing the contributions of all of our workers at both LifeCorps and Curation Foods who show up every day in our facilities across the country. Our incredible operational employees remain on the front lines of the COVID pandemic, and I am grateful for their resolve, fortitude, and contributions. Fortunately, we are now starting to feel like we are seeing a light at the end of this long tunnel. With many of our employees now getting vaccinated, we are working with our county administrators to facilitate delivery of vaccines for our employees. Our organization has been working hard to manage against a variety of impacts from this terrible pandemic, and today we feel like we are making good progress. The added complexity and resulting financial effects of the pandemic has negated the many areas of financial improvement in some instances. And in the fiscal third quarter, we were met with a more pronounced adverse financial impact on our curation food segments, results of operations than anticipated. We experienced indirect impacts from canceled orders, shifting demand of SKUs, and the related write-off of inventories for our perishable products. On the cost side, we experienced higher labor expenses due to the state mandated paid time off for workers, both testing positive to or exposed to COVID, which was implemented in January, as well as the ongoing costs associated with social distancing requirements, expansion of PPE, sanitation, testing, and training. Yet, despite all these challenging impacts, I am very pleased how well we have performed against the prior year, which is a testament to our amazing organization of hardworking and focused employees at all levels in the company. While we are disappointed with our fiscal third quarter results, we view this as a temporary obstacle rather than a permanent headland. We're only now in a period in which we are at the anniversary of the COVID pandemic. we are still benefiting from operational improvements and efficiency as a result of Project SWIFT, which we launched nearly 15 months ago. Since launching, we have now consolidated and closed three offices and two manufacturing facilities, discontinued many unprofitable SKUs, and rationalized G&A headcount across the curation foods segment. We continue to review every facet of our operations to align the various businesses with our strategy for future growth. In helping to take Project SWIFT to the next level, I am pleased to welcome our new CFO, John Morber, who provides an incredible depth of executive and financial leadership to all our businesses. John has helped several organizations navigate challenging circumstances and is quickly getting up to speed in providing a fresh perspective on all of our strategies and businesses. Don is already making meaningful contributions to our organization, and I am confident that he is the right leader to help further our accomplishments we started under Project SWIFT. For the third quarter, on a consolidated basis, adjusted EBITDA increased to $7.6 million, an increase of 12.6% over the prior year third quarter, and consolidated gross margins increased 120 basis points to 14.3% over the prior year third quarter. On a year-to-date basis, consolidated adjusted EBITDA increased to $19.4 million, an increase of 146% over the prior year, and consolidated gross margins increased 230 basis points to 14% over the prior year. While we are pleased with the year-over-year performance, we still are not where we want to be. The impact from COVID had a substantial impact in the third quarter, and we expect the residual impact for the balance of this fiscal year. For some perspective, looking back on our forecast one year ago, when the material impacts of the COVID pandemic to our business first began, we were estimating financial impact to Curation Foods to be a reduction of approximately $4 to $5 million in adjusted EBITDA for fiscal year 2021. Today, we now see the impact to be approximately $11 to $12 million for the full year, or more than double our initial estimate. As a result, we have revised our annual adjusted EBITDA guidance down to a range of $27 to $29 million. which we believe is attributable to the impacts related to the COVID-19 pandemic. Presenting to you today in our fiscal fourth quarter, we are feeling more optimistic about the summer months ahead. Our customers face their own challenges as additional lockdowns took effect over the holidays. We are hopeful to see some of that clearing in the coming months. To give you a sense of the delay, where we had previously planned for some new product introductions in our fiscal second and third quarters based on the initial indicator requests from retail customers. Those retail customers only now starting to schedule the delayed merchandise resets and are planning new product introductions late spring and into summer. We are also continuing to push forward our focus around higher margin plant-based food innovations, and the curation foods business. Our avocado products brands continue to deliver solid year-to-date growth of 5.3%. In our Eat Smart Sell business, we rolled out a new slim bag design that is improving sales velocity, and we are continuing to test other package designs and new product introductions, working in conjunction with our key customers. I am excited to be part of the many top-to-top meetings with our important customers during this next quarter to share the innovations that we have been working on during the pandemic. Before I turn the call over to Jim Hall, our president of LifeCorps, to share the exciting industry trends that the LifeCorps business is addressing, I wanted to recognize LifeCorps' continued outstanding results. In a nine-month year-to-date period, LifeCorps generated a 20% increase in revenue and a 34% increase in segment-adjusted EBITDA. LifeCorps has weathered the COVID pandemic well and is operating at traditional rates of efficiency and we believe continues to be extremely well positioned for continued growth. We are very excited about a robust contract development and manufacturing organization, or CDMO, new business development pipeline, and the category in which we operate. LifeCorp's specialized capabilities in the CDMO space are sought after by its partners, and we are ensuring that they have the necessary capital to meet the long-term plan to generate consistent, high-margin, double-digit revenue growth. With that, I'll turn the call over to Jim.

Thank you. As Al alluded, the CDMO market is enjoying significant favorable trends that are supporting LifeCorps' long-term strategy and growth plans. The market is funding important advancements in novel therapies that, along with limited available parenteral manufacturing capacity, are creating exciting opportunities for specialized CDMO partners like LifeCorps. According to market research, in the last 10 years, approximately 75% of new drug development in small to mid-sized pharma companies has been outsourced. Injectable products represent approximately 45% of total products in development, which have a projected compound annual growth rate of 10.5%, and pre-filled syringes have a projected compound annual growth rate of 13%. through 2023. Based on an expectation for an acceleration in injectable approvals, there's significant unmet demand for specialized CDMO vial and syringe capacity, which the industry estimates will grow by an incremental 75 to 100 million units. We believe that our strength with ophthalmic products and 30 plus years of experience handling hard to manufacture products based on hyaluronic acid or HA and our ability to support both small and large molecule products has put us in an ideal position to be a specialty player in the CDMO space with very distinct capabilities. Therefore, we believe that LifeCorps can play a pivotal role and we are well positioned to meet the large incremental needs of this exciting industry. Our expertise in viscous materials, our long-term development and manufacturing partnerships, and our world-class quality system enable us to stand out as a specialized leader in the CDMO industry. We are very pleased with the continued expansion of our pipeline, which currently consists of 17 active projects that are in various stages of their product development lifecycle. Many of our projects are reaching important late phase development milestones with their FDA clinical trials, giving us competence in achieving our near-term and future growth plans. We are continuously working to expand our development pipeline and are in active discussions with five new partners that we believe will continue to support our long-term growth strategy. In fiscal year 2020, We manufactured approximately 6.5 million total units of syringes and vials and project to manufacture 8.5 million total units by the end of our current fiscal year, 2021, out of our aggregate total current capacity of a little more than 10 million units. Based on the current projections for commercialization of the products in our development pipeline, We estimate we will require an approximate capacity of 22 million total units within three to four years. This is broken into approximately 18.5 million units of syringe filling capacity and 3.5 million units of vial filling capacity. Our current facility infrastructure has the ability to house two more filling lines. Once installed, LifeCorp's theoretical capacity would exceed 30 million units. As LifeCorp's CDMO product development pipeline continues to grow and expand, the projected commercialization rate will be monitored to determine the timing of future capacity needs, which in turn will dictate future capacity investment and timing. LifeCorp has focused its capital investment strategy to take advantage of the industry trends and to ensure we have the needed capacity to support our projected growth. We remain on track with our capital deployment to support growth in our business, including spending approximately $13.5 million in capital expenditures in fiscal year 2021 to build our capacity to meet our customers' ever-growing vial and syringe filling requirements. Now I would like to turn the call over to John.

Thank you. It's great to be here as part of the LANDEC team, a team that is passionate and committed to the strategies Al brought to the organization just a short time ago and formalized with the Project SWIFT framework. I'm looking forward to being part of the continued improvement of the business as we seek to unlock further value across the entire LANDEC business for its stockholders. Turning to the financial performance of the company, I'm going to begin with a detailed review of each segment before concluding with a consolidated financial review. Starting with our LifeCorps segment in the third quarter, LifeCorps generated record quarterly revenues of $27.2 million, a 7% increase over the same period of the prior year. DDMO revenues increased a robust 33% to $18.6 million from the prior year, driven by increased aseptic commercial business, which more than offset a 25% decline in fermentation revenues, which was primarily due to the timing of shipments within the fiscal year. Our strong top line growth drove a 6% increase in gross profit to $11.6 million with a hefty 42.5% gross margin that was essentially flat compared to the prior year. As a result, EBITDA totaled $8.1 million for the quarter, a 5.9% increase over the prior year. On a year-to-date basis, our live core revenues increased 19.7% over the prior year to $72.2 million due to a strong 23.8% increase in CDMO revenues to $53.3 million, and a solid 9.7% increase in fermentation sales to $18.9 million. This impressive top-line revenue growth drove a 22.8% increase in gross profit to $27 million. Gross margins increased 90 basis points to 37.4%, largely due to a favorable sales mix within our CDMO segment. Year-to-date EBITDA totaled $16.8 million, a sizable 33.6% increase over the prior year, and an EBITDA margin of 23.3%, which is a dramatic 240 basis point increase over the prior year, largely due to the 90 basis point gross margin increase, as well as the improved leverage of SG&A costs and expenses against third-quarter revenue. With respect to our full-year outlook for the life course segment, we remain on track with our existing revenues guidance in the range of $93 million to $97 million, representing growth of approximately 11%, and EBITDA guidance, in the range from $22.5 million to $24.5 million, representing projected growth of approximately 17%. Let's now turn to our curation food segment results for the third quarter. Full curation revenues for the quarter totaled $110.6 million, a 13% decline for the prior year, primarily due to a solid avocado product sales increase of 6% offset by a 14.6% decline in fresh packaged salads and vegetables, which was primarily due to the planned reduction of the lower margin legacy vegetable and trade business and exacerbated by an increase in adverse sales impacts related to the COVID pandemic. Gross profit for the quarter decreased 11.3% $8.1 million from the prior year, which included a one-time technology category royalty benefit of $1.5 million recognized during the prior year. Excluding this one-time royalty in the prior year, gross profit increased 6.1%. Gross margins for the quarter were 7.4%, a 20 basis point improvement over the prior year. Excluding the effects of the one-time royalty in the prior year, gross margins increased a solid 150 basis points due to the favorable mixed shift toward our higher margin products from the planned sales reduction in lower margin products. Adjusted EBITDA for the quarter totaled $340,000 as compared to the prior year's adjusted EBITDA loss of $101,000. which included the one-time royalty of $1.5 million recognized in the prior year. On a year-to-date basis, duration revenues totaled $332.1 million, 11.2% decline from the prior year, comprised of a solid 5.3% increase in avocado product sales and a decline of 13% in fresh packaged salads and vegetables. Again, the declines primarily resulted from planned reductions in sales of lower margin items and the adverse impacts from the COVID pandemic. Year-to-date gross profit totaled $29.6 million, an increase of 2.6% over the prior year, which included the one-time royalty. Excluding the effects of the one-time royalty, gross profit increased 8.3%, and gross margin increased 150 basis points over the prior year to 8.9% due to the favorable mixed shift I mentioned previously. Year-to-date adjusted EBITDA totaled $5.1 million as compared to an adjusted EBITDA loss of $2.9 million in the prior year, which included the one-time royalty of $1.5 million recognized in the prior year. While we're pleased with our year-over-year performance and the tangible benefits from the project's swift consolidation and simplification strategies, we believe the impact from the COVID pandemic that Al mentioned in his remarks have hindered our ability to meet our prior four-year expectations. Early on last year, we were met with increased labor costs due to social distancing requirements. absenteeism related to due exposure rules, illnesses of plant workers, and cost of personal protective gear, increased worker sanitizations, testing, and training. Fortunately, our sales were fairly steady in the first two quarters, which helped mitigate these higher expenses. However, we faced increased headwinds after the holidays when many of our markets incurred additional imposed lockdowns. In January through February, for example, our club customers canceled orders sometimes even the day before shipping due to sporadic changes in consumer traffic to their retail locations. Consequently, those cancellations resulted in lost sales, lost gross profits, and in some cases, the sunk costs of manufacturing and materials, such as labor and the finished goods we could not sell due to freshness dating. In January, one of our large club customers announced this decision to eliminate vegetable trays until after the pandemic is over. Lost sales in our food service business has been particularly affected, our high margin green bean business, while many other retail customers delayed resets and new product introductions, the benefits of which were built into our original fiscal year plan that we are revising today. As I'll mention, at the beginning of the year, we estimated the impact of the COVID-19 pandemic on curation adjusted EBITDA to be approximately $4 to $5 million. As the pandemic accelerated during our fiscal third quarter, we saw the COVID impact to our business accelerate as well, and now estimate the overall COVID impact of the year to be approximately $11 to $12 million. of which approximately $2 million to $3 million will likely be permanent costs going forward. Despite these impacts, we are proud that we still delivered substantial adjusted EBITDA improvements through the fiscal year-to-date period as compared to the prior year. The COVID impacts show up primarily in our gross margins. We anticipated our gross margins would continue a trend of sequential growth through the fiscal third and fourth quarters. However, as I shared earlier, our fiscal 2021 third quarter gross margin was 7.4%, which was a deceleration of 200 basis points versus our fiscal 2021 second quarter gross margin of 9.4%. Relative to the fiscal 2021 second quarter, approximately 140 basis points relates to lost sales due to canceled orders, which may also include the write-off of inventories related to those lost sales, logistics and freight cost increases, and labor costs associated with government-mandated employer paid time off for positive COVID workers or those exposed to COVID. The balance of the variance, or approximately 60 basis points, relates to increases in California minimum wage and increased overtime pay due to the timing of holidays during the third quarter. Despite these headwinds, we still believe that our fiscal 2021 year-end goal to achieve a curation foods steady-state gross margin target in 11 to 14% range is attainable, albeit with a revision to the low end of that range. We believe that this range remains achievable based on the following factors. Sequentially, from fiscal third quarter to the fourth quarter, we anticipate that we will benefit from higher crop yields due to the better growing season in Q4 as compared to the winter growing season of Q3. We have fully integrated volumes related to the shutdown of the Hanover facility and are operating at a progressively more efficient rate. In addition, on a year-over-year basis, we expect to improve on our prior year fourth quarter margin of 10.1% based on the positive mixed shift benefit towards higher margin avocado products and higher margin fresh vegetable products. With respect to our full year outlook for our curation segment, we're adjusting our revenues guidance to be in the range of $430 million to $435 million, representing a sales decline of approximately 14.5% and adjusted EBITDA guidance in the range of $8 million to $9 million, representing growth of approximately 90% at the midpoint. Included in this updated guidance is an expected gross margin of approximately 9.6% for the full year, as we believe we will continue to benefit from operational improvements driven by Project SWIFT and a mid-shift strategy geared towards higher margin products. Briefly turning to our consolidated financial performance, Our third quarter revenues declined 9.9% to $137.8 million, and year-to-date revenues declined 6.9% to $404.3 million. Selling, general, and administrative expenses decreased 2 million, or 10.7%, to $16.8 million in the third quarter, and decreased 3.3 million, or 6%, to $50.8 million for the full year. due to the cost-saving initiatives under Project SWIFT, including the consolidation of office space and facilities. Consolidated adjusted EBITDA totaled $7.6 million for the third quarter, an increase of 12.6% over the prior year, or an increase of 44.7%, excluding the one-time royalty payment in the prior year. Consolidated adjusted EBITDA totaled $19.3 million for the year to date, an increase of 144% over the prior year, or an increase of 202%, excluding the royalty payment in the prior year. For overall consolidated outlook for the full fiscal year, we now expect consolidated revenues to be in the range of $523 to $532 million, and consolidated adjusted EBITDA in the range of $27 to $29 million. representing an increase of 23 to 32%. Let's now turn to our improving cash flow performance. Cash provided by operations was $10.6 million. The nine month period ended February 28, 2021, which improved $14.9 million compared to cash used by operations of $4.3 million in the prior year period. Cash from investing activities improved $20.8 million compared to the prior year as a result of $10.7 million decrease in CapEx in actions associated with Project SWIFT that resulted in fixed asset sales proceeds of $12.9 million. At the end of the third quarter, our net debt was $183.9 million, a decrease of $6.1 million from the $190 at the end of the prior fiscal year. Our net leverage ratio was approximately 5.5 times based on a trailing 12-month adjusted EBITDA as calculated under our credit facilities. However, on pro forma basis, including the expected benefit from the exercise of the $45.1 million book value of our interest in the WINSET investment, which has a put-call date of March 31st, 2022, our pro forma net leverage ratio was approximately 4.2 times. We continue to improve our financial position and create greater financial flexibility to ensure that we can execute our strategic plans as we similarly and strategically review each and every aspect of our businesses. With that, I'll turn the call back to Al. Thanks, John. Looking forward.

We continue to be very excited about our business due to a number of factors. First, our life course segment continues to produce outstanding results and is well positioned to take advantage of strong industry dynamics that will support growth for many years to come. Secondly, as the adverse impacts of the COVID-19 pandemic subside, we expect consumer demand for our diversified curation food product offerings to grow. and we intend to utilize our extensive retail network improvement track record of developing innovative products that once again be the industry leader in our categories. We also intend to use our strong research and development position to be in the forefront of industry opportunities such as the rapidly growing plant-based product trends. Finally, we'll continue to focus on executing our strategy to deliver long-term value to our shareholders. Operator, we are now ready for questions and answer sessions of the call.

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. A 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 Anthony Vendetti with the Maxim Group. Please proceed with your question.

Thanks. I was just wondering, you know, Al, Project SWIFT, as you mentioned, something you implemented quickly as you came on board. It's been about 15 months. Where are you with that? What's the magnitude of the annual season? annual savings that you've been able to been able to procure from that project? And how much do you think is left? And then specifically, can you talk about the opportunity in your logistical operations?

Yeah, sure. Hi, Anthony. How are you today? How are you? You know, we've, we've canceled, we've accomplished a lot with Project SWIFT. I mean, You know, we've cut our expenses. You know, we've closed several offices, right-sized our FT&E. You know, that all was around $12.5 million. We really focused on the eat smart cost out. If you remember the end of last year, we had invested a lot in automation. That has led to, at the end of last year, about a $9 million loss. improvement in cost out for us, primarily focused on the core vegetable side, which that, along with what we've changed in the sales force with a focus on really going after profitable growth, not just chasing revenue growth. That price increase allowed us to take our legacy core veg products to a low to single-digit, sometimes negative, depending on the year, gross margins to high single-digit gross margins. We improved, you know, Yucatan, Yucatan, remember last year at this time, still wasn't profitable for us, and now we have turned that into a very profitable business for us, and it's growing nicely for us. And, you know, we closed Hanover, which you're going to start to see the benefits of that year over year, as well as shutting down Ontario. And those are the things, Anthony, that if we would not have done, the gross margin degradation would have been even worse for us in Q3. But as I'm looking here at Q4, the ball has bounced back. Our sales are healthy again, which gives me confidence that we're going to be in that 11% to 14% goal of gross margin range that we had set at the beginning of the year. You asked about logistics. COVID in Q3 slowed down some of the travel. And things we had planned, so we hit, if you will, a bit of a pause button on that. That has started up as of March 1st, and we are still focused on, you know, making progress there where it makes sense for our business. We'll probably have more to report on that later. And, you know, you ask me, like, what inning we're in, you know, it's maybe the sixth inning. could be the seventh inning stretch, but somewhere in there because we continue to look at everything in our business and not just the way we're going to continue to operate is to really simplify the business and make it far more profitable. And I'm really proud of what we accomplished. I'm not happy with financial results, but I'm happy with the resiliency of the team and the things we've done to get here, which gives me confidence that, you know, Anthony, I wouldn't have done anything differently. Maybe if I would have had a crystal ball, that would have helped with the COVID, but I didn't. And I believe and my team believes we're doing the right things that we need to do to improve the balance sheet here at Curation Foods.

Okay. And then just to follow up on just one last question on product reset, you know, now that we're moving past hopefully the worst of the pandemic, Are you seeing more of an opportunity this year to increase your penetration into your core customer base?

Yes. We have confirmed commitments. These aren't things I'm hoping are happening. These are confirmed commitments from major customers that were planned for earlier in the year, particularly Q3 springtime. We see the resets going in beginning now in the end of Q4 and into Q1 of next year. And the other thing, Anthony, that's opening up are more top-to-top meetings with me and our customers. But I say with confidence we have a robust pipeline of new products that are going in, and we're beginning to see some of the The small changes that are going to have big impacts for us, for instance, the small, slim-sized bag that we put in, we're beginning to see improvements in terms of our velocities with that bag.

Okay, great. I will hop back in the queue. Appreciate it. Thanks.

Thanks, Anthony.

Thank you. Our next question comes from Mike Petoskey with Barrington Research. Please proceed with your question.

Good evening, guys. Thanks for taking the questions. Al, I guess I want to understand, I guess I want to reconcile a statement you just made with the guidance for Q4. You sort of just said that, hey, sales are bouncing back, you know, we feel good about the momentum in the business, but the guide, even at the higher end, applies material, sequential, decreases in both segments. So I guess I want to understand when you say sales are bouncing back, what does that mean?

Yeah. So mid-January through the end of February, we had a good number of our sales. We just didn't hit the budget that we had because we just had zigzagging of orders. For instance, a customer would call up for an order. Day later, they'd cancel it. Or, you know, we're stuck with the inventory. We're stuck with the walk-by. Let's say the broccoli in the field. That's a double whammy for us. So what we're seeing now is, you know, we're back to budget in terms of sales. I think what we're saying is, though, the operational impact of COVID, there are practices with, you know, increased PPEs, that are going to be happening, a higher degree of sanitations, for instance, that are going to be with us on an ongoing basis, we believe. But we also know that we're entering the summer months versus the winter months, and that's less risk for us in terms of the raw material risk of the weather that affects us. So we feel that the business momentum is going to get back. We've got some added costs. costs that are going to be with us, but certainly the mid-January through February COVID impact on food service itself and trays, we think those things are going to be starting to come back for us.

Can you quantify I heard what you said about sort of combining Eat Smart and vegetables, but can you quantify what sort of year over year for the quarter, for nine months, Eat Smart, its top-line performance relative to where it was a year ago?

Well, it's relatively flat versus a year ago. At least, you know, I mean, I'm talking about, do you mean with or without the COVID? Because with COVID, it's down.

No, I mean, in absolute raw numbers, what is eat smart year over year?

I don't know if we have that.

Hey, Mike, you know, we really, in our segments, we reported this fresh packaged salads and vegetable growth, which includes vegetables. you know, our salads, vegetables, trays, and everything combined. You know, from a total perspective for the year, you know, based upon our guidance today, you know, we're seeing anywhere from 17 percent to negative 17 to negative 16 percent, which really implies in the fourth quarter negative 27 to negative 23 percent. And also, you should remember last year we did have the 53rd week. So the extra for the 14th week and the quarter last year. So excluding that, we would be in the negative 14 to negative 15% for the full year.

I'm not sure what you're telling me. Is that for Eat Smart or is that for some... That's for fresh packaged salads and vegetable growth. Okay. Well, I guess I've always thought Eat Smart was sort of a core product. or was at least one of the parts of the business that was expected to grow? Like the core veg I never really thought was a part of the thesis here, and that's why I'm asking specifically about Eat Smart unless that's not really considered, you know, if I'm wrong about the long-term thesis, that's a part of the growth, and then I guess the question isn't as relevant. But to me it feels like that actually should be a Like you're breaking out avocado. I'm not sure why we wouldn't. EatSmart's a business that's, I think, 3 to 4x the size of avocado, right?

From a revenue standpoint, yes. Part of the thesis for growth has been getting a number of our new products going on the EatSmart side. The packet salad kits, you've heard us talk about plant-based proteins. All of that has been essentially put on pause during Q3 and has been moved out to the end of Q4 and into Q1 of next year based on customer research.

Okay. I guess one more question turning sort of to CapEx, and I guess, you know, at the end of last quarter, I think CapEx guidance was still around $30 million or possibly even a little bit more than that. Obviously, you guys are way behind that pace as we're in, you know, your fiscal Q4. Can you just talk about, and maybe I missed this, maybe you mentioned it earlier, but what's the updated guidance for CapEx for this fiscal?

Yeah, John, can you handle that?

Yes, a couple things for the quarter. We spent $2.6 million at LifeCore and $1.1 million at Curation for a total of $4 billion in Q3. So we're looking at spending an additional $6.9 million at LifeCore in Q4 and $1.7 at Curation in Q4. And the LifeCore CapEx certainly keeps us on our growth plans, and the Curation spend is for our HPP system. of our avocado products will benefit our guacamole gross margins by two percentage points or more going forward in the next year. Now, I'll just add on to that from a cash flow perspective. You know, our operating cash flow of 10.6 million, you know, for the year to date, lesser CapEx of 11.4, add back 12.9 for our fixed asset sales, and the closing of Hanover and the Ontario facilities, And we do have a positive free cash flow of $12.1 million year to date. And even based upon the guidance today, we would be flat to positive $2 million for the year. So hopefully that answers your question. In total, we're about just under $25 million of expected CapEx for the year. OK.

So the guide for Q4, you're telling me, is roughly $8.5 million, right? $6.9 to $1.7, yes. Okay. To me, it looks like you're coming closer to $20 than $25 off of that, but maybe my math is wrong. Okay. All right. I think that's all I've got. Thank you. Yeah, thank you.

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

Hi, guys. First question for me, can you give us some detail on what you're seeing from a clinical trial standpoint and any potential impact on LifeCorps?

Yeah, I'll let Jim go into detail here, but, you know, as we mentioned, we have 17 active projects. A number of them are in the late stages. of clinical trial for FDA approval. And, you know, still continue to add discussions with numerous customers on more of the pipeline build as we continue to build that out. But I'll let Jim answer any more details you may have around that. Jim?

Hey, Mark, how you doing? I'm assuming your question is, are we experiencing any delays with our partners clinical trials? Is that your exact question?

Yeah, any delays that you're seeing, any impact there, and then maybe any update, you know, post quarter end on what trends you're seeing today?

Yeah, for the most part, things are staying on track. Some of the early phase projects that are in phase one, phase two clinicals, depending on what the indication they're going after and what kind of clinics are in did experience some delays, but things are starting to fire back up again. More importantly, though, the main things, the late phase things in our development pipeline continue to move forward. Several of our partners have reported fairly strong and very strong phase two and phase three data and continue to advance their studies according to what our plans are. We're working with some of the top pharmaceutical and med device companies that are out there. These guys are performing in the top of their market with products that have been in the market for a long time and aren't going anywhere. And a lot of these people are who we are working with in our development pipeline as well. So It's a strong group of people and a strong group of partners, and they're advancing well. We did just, with one of the things we were working on, I think in the last quarter I mentioned we were expecting an FDA approval later this year. We were just notified that one of the F-PALMA products we were working on received approval, so that was exciting news for us. And as you know, one of the other late Phase III projects we're working on has a BDUPA date coming up here in May. That's still on track, and we're busy preparing to help them with eventual launch. So things are on track and continue to build. We're very happy with the activity in our pipeline as it continues to build and see things continuing to progress.

Okay. And just staying on LifeCorp, Any additional insight on the delayed shipments and fermentation business? You know, is this more, you know, a shift beyond Q4 and, you know, I assume that this is fully built into the revenue guidance?

Yeah, actually, Mark, the shifts were earlier into our fiscal year. So, you know, it's our year-to-date numbers. We've got 10% or just a hair under 10% growth in our HA business. So the growth is there. It's on increased orders from our commercial customers. It's just the timing of shipments actually earlier in the fiscal year, so there's no delays. Things are on track with our HA business. Just remember we were doing a lot of work to try to flatten out our quarterly variances in revenue, and this is just an offset of that. Things that normally shipped in the third quarter shift in primarily the first quarter of this year and again in the second. Okay.

Great. And then just one question for me as we look at curation. You know, you guys have talked more about new products, you know, plant-based protein. You know, any additional insight you can give us on that and especially any potential increase in R&D spend?

You know, our R&D spend remains relatively low. And that's just driven by the fact that we are very focused and selective on what projects we work on. And we have made a shift from just working on a number of projects based on what we think are the right things to work on based on trends and consumer trends to taking those insights and working much more closer with customers. and develop products that are more specific to their needs. I will give you a tangible example. We launched earlier in the year our Mediterranean plant-based protein product with Sam's Club. It has performed extremely well. It's a rotational product for us, so that means it goes in for four or five months and we replace it with another product. The last time we had a rotational product was three, four years ago. It was strawberry harvest, and our Mediterranean protein product is doubling that in revenue. SAMS is very pleased with us, and we will continue the rotational program with them as we go into next fiscal year. A number of other products just have been delayed. due to the resets, but we're in conversations now and have, as I mentioned, firm dates for those to go in. Once again, it's just not products. We think there's opportunities in packaging for us with the same products, but maybe the right size, the right format, the right usage occasion. We're really excited about some of the packaging that we have in our pipeline.

Okay, great. Thank you.

Thank you, Mark.

Thank you. Our next question comes from . Please proceed with your question.

Hi. Good afternoon. How are you doing? A couple questions. I'm doing okay. I'd be better if I understood the fourth quarter for curation a little better. So I'm just trying to, with what the guidance you gave for the year, we're going to see a decline in curation in the fourth quarter in revenue of, you know, near 20%. Is that correct? Yeah, we're going to see a decline in the fourth quarter of anywhere from 23% to 27%. And if you exclude the 53rd week last year, it would be 17 to 22%.

Okay.

And so, I just want to just, can you talk about the 17 to 22% decline? Just break that out, the puts and takes relative to last year, why it's down. It's down more than I would have thought. I know you probably went through it in the prepared remarks, but. If you could just go through that again, I'd appreciate that.

Well, one of the things last year at this time is when the Q4, Mitch, we had a pretty full lineup of core veg products. And it wasn't until the end of Q4 and into Q1 when we got the cost out through and the price increases through that we really started the aggressive SKU rationalization of our legacy core veg business. So that's a big driver for us is it still falls. I know it seems like a long time ago, but it really wasn't. Our planned reduction in the core veg business and to move it to be more profitable. So that's a big part of the revenue reduction year over year in Q4.

It seems like, yeah, it seems like, though, to your point, it seems like we've been, like, ready to laugh the, you know, reduction of that already. But I guess not. It was starting to come down. Looking at my numbers, it's been coming down, you know, the non-core business. And it seems like it's fallen more than... the planned reduction. Is that not, is that true or is that fair?

It was coming down last year. Remember, we were looking at SKUs and we just didn't make any money at all. And so we started SKU rationalization in the core veg business and in our salad business as well, where we were just spending a lot of money on trade to keep products on the shelf. So we started some of it, but we got, so that's been happening. It's probably why you feel like it's been happening for a long time because it's one of the things I first initiated when I got here. But we really then through last year, through the Q4 of last year, we were still on the fence on whether we were going to – whether we had the dual path of reducing and trying to manage a more profitable, smaller core veg business or were we going to sell it. And we made the decision at – end of Q4, early Q1, that our productivity went through, it hit the bottom line. Our sales team was able to go out and secure higher prices. We hadn't taken a price increase in some cases in 20 years, which is part of the problem. And we were able to get prices, you know, increases through, significantly improved our contribution margins on the business. And that really was in... Q1 of last year. So I know it seems like, Mitch, it's been a long time, but really, as you look back, it really hasn't been held.

Okay. And then, so avocado products in the fourth quarter, are they going to be, I mean, are we looking sort of flattish? You had a good quarter a year ago. What should be the expectations for Yucatan?

Yeah, we continue to see growth. We're growing at, you know, Nielsen data, we're growing about 8.3%. Internally, we're growing at 5% versus our plans. But, John, there's a 53rd week in there, too.

Yeah, so we actually look, you know, we kind of look flat against it because of the 53rd week. But if you exclude that, it's consistent with what we have been growing.

Okay. Okay. And then just one more on curation is, was there, what was your adjusted, was there any adjustments to gross profit for curation in the third quarter? No. 8.1 million. No adjustments, okay. Moving on to LifeCore. Hey, Mitch.

Hey, Mitch. If I could just answer the question in more detail, you really aren't going to see a lap in the Corvette's business until November. Okay? Because we had to give customers lead times and whatnot. So just so you know, on an ongoing basis, we won't really be lapping the numbers you want us to be lapping until about November.

Okay. Thank you. And then with LifeCore, so... Jim, could you, so what should we expect to happen to revenue or gross margins if one of your near-term pipeline, you know, drugs gets approved? What happens? Is there revenue smoothing? Is there Going to be an initial jump in shipments? Will you see a spike in the quarter that is approved? Have you already been building inventory for that? And then second, you know, are there margins on the initial shipments? You know, how do you figure your margins on that? And, you know, would that be, you know, would we see any margin pressure or something on the launch of a new drug? Can you talk about that a little bit, please?

Yeah, sure, Mitch. So I'll start with, for the, for, and assuming you're talking about the project that has a PDUFA Day coming up in here in May, and we've been actively working with that partner to manufacture material in preparation for launch should they receive approval. which everybody's fairly confident in. But as far as pricing and margin and any shifts in margin, we typically price, especially the newer non-legacy type products at contribution margins that easily support our overall gross margin objective, which is to maintain overall gross margins in the 40% range. So we're not going to see any pressure on margins. Um, if anything, it should help a little bit, uh, in the overall scheme of things. Um, typically when a product like this, like B or products like diesel launch, um, they have a bolus of material to go out to, to feed the field and, and, uh, feed the market. Um, so there's a buildup of inventory and then, uh, slowly sells through and we supply it on a more steady rate. Um, but this is all figured into our numbers. for this fiscal year. And when we present next fiscal year, it will be included in halls. But, you know, it's our overall goal, like we've discussed the last couple calls, to do what we can to balance our revenue and profitability from quarter to quarter. I think we've done a good job with that this year. And I think the more we get approved and the more products that turn commercial into and are successful, they're only going to help us with that. So no margin pressure. We've been actively working already to prepare for this launch and manufacture that material. And long term, we hope to have it help flatten our quarterly performance. So hopefully that answers your question.

Thank you. Appreciate that. And then when you look at your You know, you said 17 active projects. What percentage of those projects sort of use your, you know, HA and proprietary, you know, know-how around HA?

Yeah, it shifts a little bit depending on what we're working on, but right now it's about 60% of the products in that portfolio utilize HA, 40% don't. Several of the things that we're in discussion with to add to that, 17, don't use HA, some do. We see as we continue to grow the pipeline and continue to grow our business that the HA number will start coming down and it'll be more even with other polymers and other types of products.

When it comes to HA, You're obviously a leader, but are there any other companies out there specializing in HA and formulations within the CDMO sector? I'm...

Fairly certain, at least. I'm not aware of any other CDMO that actually has the HA capabilities to manufacture HA at various molecular weights to support their product portfolio and to support their customers in that avenue. There are other CDMOs out there that work with HA that formulate and fill products that utilize HA. But we're the prime player and the only CDMO that has a standalone HA raw material business that I'm aware of.

Yeah, well, as you pointed out, I guess, in presentations, the HA is, I'm seeing an increasing number of drugs and therapies using HA, using that polymer for all the reasons that, you know. Yeah. all the positives that you put in your presentation, but it seems like that's a very rapidly growing area. And I guess one last question, are you going to see, would you expect pipeline growth in the upcoming 12 months?

You know, like you've heard me mention in the past and other presentations, I've done our primary markets in the ophthalmic space and there's a lot of development going on in that space, especially in the back of the eye. You know the treat age related macular degeneration and other retinal type diseases, and we're doing a lot of work in that. There are a lot of the projects now, you know, there's three or four in our pipeline that are ophthalmic based products. that will support future growth. Our primary market is in ophthalmic discoelastics. You know, we work with the top three players in the industry there. We have for a long time and there's projected, you know, low to mid single digit growth for those applications just simply based on the aging demographics of the population. So we see growth in our HA business. We're also spending more time now not just focused on the growth of our CDMO pipeline, but also looking at what we can do to expand our HA offerings to take advantage of some of the, you know, development work that's going on there as well. So we'll see growth. That won't be the primary growth driver for life we're moving forward. That will still be driven by our CDMO business like we've discussed in the past. All right. Well, thank you.

Appreciate the time. Yep.

Okay, this is John. I just wanted to update a couple of things on our guidance for CapEx for the year, for the quarter. Just to make it clear, our Q4 guidance on CapEx is 10.1 million spend for life core, 1.7 million for curation for a total of 11.8 million. That then equates to approximate year-to-date spend or year estimate spend of 17 million At life core, $6.2 million at curation for a total of $23.2 million overall estimate for the year in CapEx.

Thank you again for your interest in LANDEC and your participation, and we look forward to talking to you again at the end of the fiscal year. Thank you very much.

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