Landec Corporation
Q1 2022 Earnings Call Transcript

Published: 29 Sep 2021

[Operator:]

Good afternoon and thank you for joining Landec's Fiscal 2022 First 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'd like to turn the call over to Jeff Sonnek, Investor Relations at ICR.

[Jeff Sonnek:]

Good afternoon. And thank you for joining us today to discuss Landec Corporation's first quarter fiscal 2022 earnings results. On the call today from the company are Dr. Albert Bolles, President and Chief Executive Officer; John Morberg, Chief Financial Officer and Jim Hall, President of Lifecore. By now everyone should have access to the press release, which went out today just after 1 p.m. Pacific or 4 Eastern. If you've not received the release, it's available on the Investor Relations portion of Landec's website at ir.landec.com. Before we begin today, I'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 2021. Copies of those filings may be obtained from the company's website. With that, I'd like to turn the call over to Al.

[Albert Bolles:]

Thanks, Jeff. Good afternoon, everyone, and thank you for joining us today. On today's call, I will provide highlights from our fiscal 2022 first quarter results. Jim Hall will then review recent developments at Lifecore. I'll cover our operational progress at Curation Foods and John Morberg will discuss our financial results and fiscal 2022 outlook. We will then open the call for your questions. We had a strong start to fiscal 2022 with our first quarter performance where we generated consolidated revenues of 129 million and consolidated adjusted EBITDA of 4.4 million, as we anticipated, the drivers were margin related, with a 7% increase in consolidated gross profit and a 42% increase in adjusted EBITDA both of which were achieved despite a 5% decrease in our revenue, which is explained by the planned contraction within our Curation Foods segment. Moreover, I'm pleased with our ability to drive adjusted EBITDA growth at both of our operating segments in our fiscal first quarter. Lifecore grew revenue by a modest 1% but drove adjusted EBITDA growth of 57% based on some mixed related benefits. And at Curation Foods, we were pleased to generate segment gross profit margin of 11% and grow adjusted EBITDA by 25% despite the ongoing strategic contraction of revenue, as we continue to rationalize SKUs and simplify that business. We are on plan to the first quarter and continue to feel good about our fiscal 2022 outlook. As a result, we are reiterating those objectives here today, which are called for a full year consolidated revenues of 545 million to 554 million and consolidated adjusted EBITDA of 33.3 million to 35.5 million. We have the benefit of a nimbler organization, which as I hope you can see is translating to improving margins. We have more work to do but we are on the right track. We have a solid foundation and both our businesses expect to drive more consistent results going forward as we work towards delivering enhanced shareholder value. With that, I'll turn the call over to Jim.

[Jim Hall:]

Thank you, Al. Building on our fiscal fourth quarter update, we continue to make headway with our operating initiatives, including the $1.6 million investment in sales and marketing that are planned for fiscal 22 that we discussed last quarter. I'm pleased to report that we're on track with a build out of our development pipeline as we prepare for the future. In the fiscal first quarter, we signed development agreements with two additional companies and started work on one new project. This brings our development pipeline to 23 projects, which are spread across early phase clinical development with five customers, phase one and two clinical development with eight customers and phase three clinical development and scale up commercial validation activity with 10 customers. We have also completed one development project, which received FDA regulatory approval and have transitioned that product into commercial production. In addition, as we continue to build and prepare the organization to advance and expand our development pipeline, activity remains strong and we remain in active discussions with many potential new project candidates to continue to build on our pipeline moving forward. We operate in the amazing CDMO industry with strong fundamentals and Lifecore is perfectly positioned to take advantage of the growing CDMO opportunities to deliver attractive financial returns to all of our stakeholders. We are a beneficiary of the significant trends towards outsourcing of new drug development and our syringe and vial filling capabilities align perfectly with the powerful trends and new injectable drug applications that are utilizing those modalities. Limited injectable drug manufacturing capacity creates an opportunity for Lifecore to grow and also extend our reach through investments and new capabilities to meet the industry's ever growing needs. Our expertise in viscous materials and our world-class quality system that supports drugs, biologics, medical devices, and combination products enables us to stand out as a specialized leader in the CDMO industry. We are preparing for the future through operational and capital investments with the $1.6 million investment in the P&L this fiscal year through sales and marketing and development resource expenses to expand our reach with new customers and to increase our development service capabilities, which ultimately allow us to continue to expand our development pipeline and open new sales channels that complement our existing capabilities. From an operational perspective, we are intensely focused on enhancing our organization to ensure that we remain prepared to meet our growth objectives. This really comes down to attracting and retaining great people with the pertinent technical capabilities to help Lifecore grow. In response, we recently established Lifecore University to educate and train our next generation of technical professionals in the critical operations of aseptic filling processes. In August, we graduated our first class who will now use their knowledge to make an impact on our sales growth and lean culture. On the capital side of the house, we're focused on maximizing the revenue generating capacity within our current infrastructure and looking to the future to source and qualify the necessary equipment to keep up with growth and expected capacity needs. We continue to expect capital investment in fiscal year '22 of approximately $32 million towards expanding our filling capacity beyond our current 10 million units to reach approximately 37 million units over the next five years. This investment will support future capacity needs and nearly double Lifecore's revenue generating capacity of our aseptic fill finish business. Finally, a brief update on the channel inventory that we spoke about last quarter. As a reminder, in the fourth quarter of fiscal 21, we learned that many of our commercial customers carried larger inventories of finished products during COVID due to the temporary deceleration and procedure volume. In the fiscal '22 first quarter, this dynamic explains a flattish year-over-year revenue growth and we continued to expect a similar situation in fiscal second quarter. Expectations for inventory to rebalance remain focused on mid fiscal year based on the latest communication with our customers but could change based on market forces and procedure volumes. Now I would like to turn the call back to Al.

[Albert Bolles:]

Thanks, Jim. Curation Foods started fiscal 22 strong and perhaps most importantly, we are hitting the gross margin targets that we've been working towards as a result of project Swift. We delivered on our steady state target of 11% to 14% in fiscal 21 fourth quarter, which was a significant milestone for the business. And in fiscal 22 first quarter, we achieved 11%. We are standing by our commitment, deliver that same range of 11% to 14% for the full fiscal year, which speaks to the massive operational enhancements that we made over the past two years to put this business on firm footing as we prepare and shift our energies toward growth. Our focus this year has evolved to drive efficiencies and our operational performance through maturing our operational excellence program, which we refer to as ZEST, Zero Waste, Employee Engagement, Standardization and Training. This is an approach based on the Lean principles that are well recognized for improving operational performance. ZEST is only possible now that we have done the work to simplify the business through strategic moves to reduce organizational complexity, divest non-core assets, broaden leadership accountabilities, and flatten our management structure. Of course, inflation is having a significant impact across a variety of industries in here at Curation Foods as well. While we'll continue to believe that we are in a relatively better position, given all the operational enhancements we've made over the past two years of project Swift categories, such as packaging, freight and supplier related costs are things that we are dealing with daily. We have a focused program to drive continuous productivity through the supply chain with a concerted effort to offset cost increase, where we are unable to offset cost increases, we are also working with our sales teams to implement price increases as we are committed to maintain gross margin in the 11% to 14% steady state range that I have previously discussed. Many supply chains remain dysfunctional post COVID as well and we are seeing issues with some suppliers of salad dressing and other inputs that are complicating our operation and to a limited extent subduing our ability to meet demand. As expected, our fresh packaged salads and vegetable business declined 7% in the first quarter of fiscal 22 due to veggie trays being discontinued from club stores as a result of COVID and fewer people being able to congregate. We are now just starting to see retailer interest in bringing back trays that we see an opportunity for the business to pick up as fiscal year 22 progresses. Our avocado products business was essentially flat in Q1 of fiscal 22. partly due to SKU rationalization with certain customers and a timing delay in our promotional activity, as our Guacamole Now or squeezed product test was delayed from Q1 into Q2. We remain excited about our growth in the squeeze product. We continue to pick up additional customers and we are now capable of bidding on private label guacamole opportunities as our HPP line is now in production. On the commercial front, our retailing merchandising efforts related to resets, the new items are continuing to build as we hold additional top level customer meetings. As planned, we are now seeing introductions of our new products starting to hit the shelves. These products have been delayed for as long as a year due to COVID and include our buffalo cauliflower, spicy sweet kale salad and Ready-to-Wok kits. We also introduced a unique packaging design a saddlebag into one of our large club store customers and it is outperforming expectations. The saddlebag replaces a 28 ounce salad with two 14 ounce salad that are in separate bags but fused at the top. This allows consumers to open one salad at a time with a smaller portion size, retaining freshness on the unopened bag. We see the packaging format rolling out beyond the test, and improving our overall sales in the salad category later in the year. So on the whole, I'm feeling like we are in a good spot. We have the innovations ready to go. We have distribution accelerating across North America and we expect to see momentum, with recess as we move through fiscal second quarter and into the second half of the year. Now, I will turn the call over to John.

[John Morberg:]

Thank you, Al. I'm pleased to share with you our financial results for the first quarter of fiscal 22. I will begin with a summary review of each segment before concluding with a consolidated financial review. Starting with our Lifecore segment, first quarter revenues ended at 22 million, a 0.7% increase over the same period of the prior year. CDMO revenues posted an increase of 8% to 17.8 million from the prior year primarily due to the timing of aseptic commercial shipments. Fermentation revenues decreased 22% to 4.2 million primarily due to the channel inventory rebalancing that Jim discussed as well as difficult growth comparison on the prior year where this revenue category was up 620%. Gross profit margin improved by approximately 330 basis points versus the prior year to 26.3%, largely due to improve product mix. Segment adjusted EBITDA totaled 2.3 million for the quarter, a 57.2% increase over the prior year and adjusted EBITDA margin was 10.4% marking 375 basis points of improvement versus the prior year. Let's turn to our Curation Foods segment results for the fiscal first quarter. Revenues totaled 106.8 million a 6.2% decline from the prior year first quarter. Fresh packaged salads and vegetables declined 7% which was primarily due to the planned reduction in the lower margin legacy vegetable and trade business. Avocado products revenues were approximately flat versus the prior year. Gross profit margin improved by 100 basis points versus the prior year to 11%, which is consistent with our expectations to achieve steady state segment gross margins in the range of 11% to 14% for a full year of fiscal 2022. Adjusted EBITDA for the quarter totaled 3 million, with a corresponding margin of 2.8%. Briefly turning to our consolidated financial performance, fiscal first quarter revenues declined 5.1% to 128.8 million. Selling, general and administrative expenses decreased 2 million versus the prior year to 15.9 million in the first quarter. And consolidated adjusted EBITDA grew 42% to 4.4 million for the first quarter as compared to 3.1 million in the prior year period. Let's now turn to our cash flow performance. Cash provided by operations was 0.8 million for the first fiscal quarter ended August 29, 2021 compared to cash provided by operations of 17 million in the prior year period. Cash from investing activities improved by 38 million compared to the prior year, driven primarily by proceeds from the sale of the Windset investment of 45.1 million. At the end of the first quarter, our net debt was 155.8 million. We continued to work toward improving 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 to ultimately enhance shareholder value. With that I'll transition to our outlook for fiscal 22 which we are reiterating today across the board. We continue to estimate consolidated revenues in the range of 545 million to 554 million, representing a range of flat two plus 2%. And consolidated adjusted EBITDA remains in the range of 33.3 million to 35.5 million, representing an increase of 6% to 13%. At the segment level, we're guiding Lifecore revenues to a range of 105 million to 108 million, representing growth of approximately 7% to 10% and an adjusted EBITDA in the range of 26 million to 27 million, representing an increase of approximately 6% to 10%. Curation Foods revenues are expected in the range of 440 million to 446 million, representing a slight year-over-year decrease of flat to down 1.4% and adjusted EBITDA is expected in the range of 12 million to 13 million, representing an increase of approximately 9% to 18%. And as you think about the segment level guidance and how it builds into our consolidated outlook, we think it is helpful to share some framework to inform your modeling and judgment of our future performance. First, starting with Lifecore. As discussed last quarter, Lifecore’s top line growth in fiscal 22 is hindered by approximately 500 basis points due to excess customer inventory as a result of the delay in elective procedures. The expectation is that this will rebalance at the end of our fiscal second quarter, which results in flattish expectations for growth in the first half, then transitioning to substantial second half growth to meet the plan we're putting forth today for growth of 7% to 10%. Layering on the 500 basis points inventory headwind, we bridge back to Lifecore’s long-term expectations for compound annual revenue growth in the low to mid-teens. From an adjusted EBITDA perspective, we now expect the first half to approximate less than the 30% of the full year guidance that we anticipated previously, due to shifts in expected sales mix. For the fiscal second half, growth should recover in a very material fashion to meet our guidance for the fiscal year which implies an increase of approximately 6% to 10%. From a gross margin perspective, for the first half of the fiscal year 22 as compared to the prior year, first half, we anticipate a lower gross margin rate due to product mix. And as Jim discussed, please keep in mind that the business is investing in sales, marketing, and development activities to drive longer term development revenues and to enhance some capabilities in anticipation of future growth. So adjusted EBITDA margin expansion on the higher revenues is temporarily muted but expected to resume over the intermediate and long-term. Shifting over to the Curation Foods segment, we continue to expect a fairly consistent year flat to modest quarterly revenue growth in the next three quarters. Gross margin has been an important KPI for Curation since embarking on projects Swift, and we expect to drive additional gains in fiscal year 22 as a result of those operational enhancement and simplification efforts that Al spoke to. We ended the fiscal first quarter with a segment gross margin of 11% and we believe that we will meet our steady state goals 11% to 14% on a full year basis for fiscal year 22. The inflationary pressures we are now seeing in our business, like so many other companies will negatively impact our second quarter. However, we anticipate that these headwinds will be offset by future price increases and cost saving initiatives in the second half of fiscal 22. From an adjusted EBITDA perspective, we expect to realize a decrease in Q2 as a result of the near term inflationary impacts. However, as we look out to the fiscal second half adjusted EBITDA growth is expected to resume to achieve the full year segment guidance we are reiterating today. And finally, from a CapEx perspective, in addition to the 32 million at Lifecore, we plan to spend more modestly in Curation with up to 7 million on projects primarily related to maintenance CapEx and some minor automation enhancements. And with that, operator, please open the call for Q&A.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Mark Smith with Lake Street Capital Markets. Please proceed with your question.

[Mark Smith:]

Hi guys. First couple questions on Curation, just wanted to check you guys talked last quarter a little bit about grocery store, shelf reset, what are you seeing here, what are you seeing being pushed out and kind of your expectations as we move through the next couple of months?

[Albert Bolles:]

Yes. The resets are starting to happen I think you noticed that we -- our Guacamole Now test the reset was pushed out a couple months which delayed our testing but that's now happening and we're getting our new products now into many customers. We're excited about our buffalo cauliflower product that's off to a great start Ready to (ph) is off a good start. And our spicy sweet kale resets happened in Canada, we're now national in Canada with that product and have begun to ship to other customers here in the U.S. So it's really good Mark to see that the resets are happening. We're kind of getting back to normal here on the timing of those things.

[Mark Smith:]

Okay. Then similar question, just as we look at food service, we're hearing a little bit more negative kind of chatter coming out of food service here over the last maybe two months. Any update on kind of, as you've got good fingers on the pulse of that business on what you're seeing within food service.

[Albert Bolles:]

Yes. We're actually doing well in food service. We picked up some new distribution with our green beans, some of the salads, so we're not seeing a slowdown or food service. It's nicely ramping for us. We also see the away from home and like the Hello Fresh products, demand is very strong on that. And we're also off to a very good start in our ecommerce business with Amazon.

[Mark Smith:]

Okay, great. And then just turn into Lifecore a little bit. Can you just walk through a little bit the gross margin there and some of that delta. Was this product mix, was this driven primarily by the inventory stocking, walk us through any additional insight you can give us on the gross margin there?

[Albert Bolles:]

Yes. Sure, we can do that. John, do you want to take Mark through that?

[John Morberg:]

Yes, sure. I mean, it's primarily just product mix, right? So the combination of the products within the CDMO side with aseptic filling, the manufacturing, principally that’s driving the gross margin story there.

[Mark Smith:]

Okay. So not as much an impact from the inventory stocking or is that have maybe some of the impact just as that then impacts of the product mix?

[John Morberg:]

Yes. No, really just on the sales side, or the aseptic filling side, just really strong demand there. Really driving and assisting with the margins for the quarter itself. So really pleased to see that, that strong performance of the gross margin for the quarter.

[Operator:]

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

[Anthony Vendetti:]

Thanks. Yes, I just wanted to check on the logistics contract with Castellini, I think it is, where is that - because I know you're outsourcing that but where is that in terms of being completely rolled out? Is it partially rolled out and then when it is completely rolled out what type of savings either on a dollar amount or gross margin improvement or what can you tell us about that and the opportunity there, because that seems like a good opportunity to take out some costs?

[Albert Bolles:]

Yes, Anthony. We just started to roll it out in Q1. So we are fully rolled out and beginning to ramp it up. We are seeing already with a couple customers, one of the big reasons we wanted to do this was to get that out to be more efficient and more effective. We're shipping to several customers, five, six days a week now or before we were only doing three. So that's having a positive impact for us. And I am really pleased that we got that partnership done, because I think, the impact of freight costs these days. And I can't imagine where we would be if we would not have done that project having a really strong partner with Castellini. I've been to Cincinnati twice met with their CEO. We're getting our teams integrated. So we're rolling it out. And we're really happy to see that and we're expecting somewhere in the neighborhood of around a million dollars of improvement this year. And that's where we are.

[Anthony Vendetti:]

Okay, great. So overall, it should save you a million dollars. But it's not just the savings, it's the efficiency, the benefits to the customer, the on-time delivery, all that is critical right going forward?

[Albert Bolles:]

Yes. Anthony, you are absolutely right. That's the real reason why we did it. I mean, obviously, we want to save costs. Obviously, they're professionals at this, we were not, they're able to hedge their fuel. We weren't, we never had to scale to do that. But the real opportunity is to get more fresh product on the shelf, it’s to decrease our shrinkage on the shelf, which we're starting to see that happen. A couple customers where we are getting the five, six day delivery per week program in and we are now just talking about whitespace. Because I think as I've mentioned before, Anthony, if you drew a circle from Minnesota to Texas, there's a lot of whitespace that we were not able to get to before. And now with Castellini, we're able to start talking about with our sales force how can we get after that whitespace, particularly on the Eat Smart side, and really begin to get growth and it's growth that I call news without SKUs, we don't have to invent anything new. It's just to get to customers that we couldn't get to before.

[Anthony Vendetti:]

Okay. Lastly, on the on the cost side, are there any other costs that you're looking at or that you've identified that you can take out of the system in general, not just logistics, to offset some of the inflationary prices that you're seeing?

[Albert Bolles:]

We're taking a look at on procurement side opportunities that we're looking at to partner stronger with our key growers to work closer with them on our grow contracts, that's an opportunity. We spend $150 million a year there. And we are beginning to work a whole lot closer with them. And I know John is doing some work in the space of our inventories. So John, anything you want to add there?

[John Morberg:]

Yes. I mean, I think the other big thing is that, we've spent so much of the year in integrating other facilities as well. And it just takes a lot of time and effort and now that we've finished that we can really concentrate on the four walls of our current facilities and our teams are really focused on trying to sweat the assets that we have and trying to get more efficiencies and with Project ZEST and the continuous improvement. We think there's just still great opportunities for us. And we've got several business initiatives that we're tracking that are in place that are a big part of really trying to offset these inflationary pressures going forward. So we're really excited about those.

[Albert Bolles:]

Anthony, our Tanok facility in Mexico is operating extremely well. We got ZEST, really up and going in the second half of last year, you saw the impact in Q4. We have a really highly engaged workforce in Guadalupe. And we just in the first quarter of this year, got it institutionalized in Bowling Green facility, which is starting to pay dividends for us as well. It's exciting to see the engagement in the workforce. Inside our four walls, we're not having labor issues, like you may hear from other companies. So it's exciting to see as being able to roll that out, get it moving and get it institutionalized and really begin to sweat the assets.

[Anthony Vendetti:]

Okay, excellent guys. Thanks, I appreciate it. I'll hop back in the queue.

[Operator:]

Thank you. Our next question is from Mitch Pinheiro with Sturdivant & Company. Please proceed with your question.

[Mitch Pinheiro:]

Hi. Good evening. So a couple things here first, just to housekeeping for a second in the press release the restructuring charges and non-recurring, is part of the adjusted EBITDA was 3.3 million. And I realized there's some tax benefits but in the footnote it says 4.9 million. What's the difference between those 2, 4.9 of restructuring charges and the 3.357 that I'm seeing in the table.

[Albert Bolles:]

Yes, John, you want to take that?

[John Morberg:]

Hey, Mitch. I probably need to look at that and get back to you on an answer to that.

[Mitch Pinheiro:]

Okay. That's fine. And then, as far as, I'm bouncing around here. So the debt ended at 155 million, you're spending obviously some capital, is it fair to assume that debt will be at 155 million or maybe slightly higher at fiscal year end 22?

[John Morberg:]

No. With CapEx and everything we still see debt, as we discussed last quarter end somewhere around 180 million of net debt by the end of the year.

[Mitch Pinheiro:]

180 million of net debt. Okay.

[John Morberg:]

Yes. And that was part of just under, I would put us just under five times leverage that's considering we're doing around 32 million of CapEx for Lifecore up to 7 million for Curation. Now it assumes some operating cash flow on the GAP statement of probably 6 million to 8 million; 15 million or so of free cash flow after the Windset investment. Obviously the Windset investment helps us by doing and allowing us to do that type of investment.

[Mitch Pinheiro:]

Okay. And then, you may have mentioned this, I might have missed. In the Yucatan business, whole Guacamole Now business where, what were margins in that business like year-over-year?

[John Morberg:]

Yes. Well, we don't actually give margins out individually for those the gross margins itself but they substantially improved for sure. I think what we have said in previous conversations and Al took that over -- that business over, we were essentially didn't hardly have margins and that was a big part of the project Swift was really operating and fixing that facility. And now we're having -- that's been a big part of fixing the whole Curation story.

[Mitch Pinheiro:]

Is that still a high 20%, 30% kind of gross margin business?

[John Morberg:]

Well, we don't give guidance out. It’s not that high, to that level, but we haven't given guidance out on gross profit at the segment level. It's not that high though but it's a good margin.

[Mitch Pinheiro:]

Okay. I thought that's what the target margin was. My memory may be a little off. Okay. And then one for Jim. Any color on ZYNRELEF roll out, it has gone smoothly. Any feedback from Heron on, feedback they're getting any color would be helpful?

[Jim Hall:]

Yes. From our perspective things are going to according to plan, productions, right in line with what we projected. I'll refer you to Heron's recent releases and various comments, I think they're happy with the way things are going and getting good feedback. But I really can't provide much more than that. But from our perspective, it's right on track and nothing out of the ordinary for us.

[Mitch Pinheiro:]

And then, I guess the next question going back to Curation. Also you may have talked about this, but as you look at pricing and your cost savings combined that will help offset the inflationary pressures. What's like the mix there, is it 50

[Jim Hall:]

Well, for the fiscal year, I would say it's double on our productivity to our ZEST program, and then over one we are going to take for pricing during this fiscal year.

[Mitch Pinheiro:]

I'm sorry. I didn't understand that.

[Jim Hall:]

So you asked for the mix. So our productivity would be 2x of saving versus what we are beginning –

[Mitch Pinheiro:]

I didn’t hear that. I got it, okay. I didn't hear the x. And then I guess last question is -- is it I guess we should finally see. And it's been a long time revenue growth in the third quarter, is that when things -- is that when -- as a company, is it going on a consolidated basis? The third quarter is, we're back in the black on growth. Is that a good assumption?

[Jim Hall:]

Yes. I mean, we have confidence that our guidance for the year, by the time we get our productivity plans start to come to fruition, pricing taking hold. And then, as I said, we are very excited and we're off to a good start with our innovation. We're picking up new customers that we haven't had before, in the Midwest, as well as some other channels. And we have a big focus on food service this year. And we expect those things to start to really pay off for us to see better profits and better top-line growth in the second half of the year.

[Albert Bolles:]

Mitch, from an overall perspective, we are definitely -- there's definitely a meaningful growth with the Lifecore side, too, from the top-line to hit the overall 7% to 10%. So, we'll definitely start seeing overall consolidated revenue growth in the third quarter.

[Mitch Pinheiro:]

Yes, that'll be nice. When you need to get the revenue growing again and it's been quite a year, year, and a half, but it's sort of closer than it's ever been, I suppose. So, thank you for your time.

[Operator:]

Thank you. Our next question is from Mike Petusky with Barrington Research. Please proceed with your question.

[Mike Petusky:]

First one is for Jim, did you all say that second quarter Lifecore revenue should be roughly flat year-over-year? Did I hear that or no?

[John Morberg:]

Yes. This is John. Yes. It should be so much flattish. Really the year-over-year in the first half is somewhat flattish, basically.

[Mike Petusky:]

Okay. So if you then sort of proceed with the math, to get to the lower end of the yearly guide, and top line growth at Lifecore; Lifecore has to be clicking off sort of mid-teens growth in the second half. And I guess my question is why should that occur?

[JohnMorberg:]

Yes. We're very comfortable with what's in the pipeline, and what our customers are forecasting, to have a very strong second half. As well as remember, we're also investing in the P&L. And we're already starting to see with our investment in the sales marketing side including starting to add to the pipeline, that we're seeing the opportunity there, that will then translate into the top-line sales.

[Jim Hall:]

Yes, Mike, this is Jim. Basically things are back to full speed ahead in the second half of the year. We're seeing inventories work through like we projected and project that can be done in the second half, that includes uptick and production in the second half, which is an uptick in AHA. And we have a lot of activity in our pipeline, on the development revenue front in the second half of the year. So you are right, the second half of the year growth is high, but as we projected the first half of the year is playing out exactly like we had expected Q1 or happy with that finished looking at what we see from our customers, barring any COVID surprises things are back on track. So the second half of the year is going to be a big growth half. For us, that brings us into our guidance.

[Mike Petusky:]

So Al, the price increases that you're going to put through, I guess, on the food side, has any of that been done or is that to be done?

[Albert Bolles:]

The majority of it is being done now. It takes a little time at the retail sector to get the prices in. So most of the dollars will be realized in the second half of the year. But we are taking some surcharges freight to where we can for instance in the food service side. We are taking these -- those as we speak now. But the majority will be -- well, here in the January timeframe.

[Mike Petusky:]

Okay. And when you guys sort of model out, hey, we've got to offset these inflationary pressures. And you talk about cost savings and you talk about price increases. I heard the 2x on the cost savings versus pricing. But can you give us a sort of -- and I may have missed it if you gave us, forgive me, but what is the dollar figure we're talking about in terms of your estimated inflationary pressures for fiscal 22?

[Albert Bolles:]

Well, yes, John.

[John Morberg:]

What we're saying Mike is, we think it's a couple 100 basis points in the second quarter, is really what we're saying. And that we are basically trying to cover that. And we will cover it really through the, you know, the balance of the year with pricing and with some cost savings. And we really feel like the pricing itself on an annualized basis would cover all of the inflation.

[Mike Petusky:]

So 200 basis points is what I should hear or what I should take away?

[John Morberg:]

Yes, in the second quarter. Yeah.

[Mike Petusky:]

All right. And then on avocado what's your current outlook for top line growth in that business in this fiscal year?

[John Morberg:]

Yes. Right now we think it's on the low single-digit growth is still growing.

[Mike Petusky:]

Okay. So like 2% or 3% for the year.

[John Morberg:]

Yes. We were seeing is probably mid-single digits, it's just a little bit of delay with the test here.

[Albert Bolles:]

But we did mention, I don’t if you caught it, we've invested in the high pressure line and that enables our sales force now to go after private label, which is the fastest growing part of our avocado products. So we are actively bidding private label business as well, most of which were not probably hit till later in the year just by how they do their bidding. But we're excited about the opportunity now that we can go after private label where we were blocked before because we did not have high pressure.

[Mike Petusky:]

Just one other question and forgive if I missed this, you guys gave a lot of information. Expectation for gross margin in Q2, do you expect that to be better than gross margin in Q2 a year ago or do you expect that to be flattish or worse?

[John Morberg:]

We still think it's going to have some impact this year, but we still believe it's going to be better than last year in the Curation side.

[Mike Petusky:]

I'm talking about consolidated gross margin.

[John Morberg:]

Yes, I think it's going to be still a little bit better than last year, but we're a little bit because of -- on the Curation side, it will be a little bit better than last year and not quite as strong on the Lifecore side. So in summary, here in total, it should still be a little bit better than last year.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the floor back over to Dr. Bolles for any closing comments.

[Albert Bolles:]

Thank you again for your interest in Landec Corporation and your participation on the call today. We look forward to talking to you once again when we release our fiscal second quarter results. Thank you very much.

[Operator:]

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