Landec Corporation
Q4 2021 Earnings Call Transcript

Published: 28 Jul 2021

[Operator:]

Good afternoon and thank you for joining Landec's Fiscal 2021 Fourth 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 fourth quarter fiscal year 2021 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.

[Albert Bolles:]

Thanks, Jeff. Good afternoon, everyone, and thank you for joining us today. On today's call I'll provide highlights from our fiscal 2021 results. Jim Hall will then review some of the exciting developments at Lifecore. I'll cover our operational progress and Curation Foods and John Morberg will discuss our financial results and fiscal 2022 outlook. We'll then open the call for your question. We had a solid finish to fiscal 2021 with the fiscal fourth-quarter performances that exceeded our revised expectations. Full-year consolidated revenues of $544 million exceeded the high-end expectations of $12 million driven by both Curation Foods and Lifecore. Similarly, consolidated adjusted EBITDA the for the yearend was $31.4 million ahead of the high end of our guidance by $2.4 million. Both segments performed well and I'm proud of the team the collective efforts and what was a challenging year complete with a turnaround of our Curation Foods segment during a global pandemic.. Lifecore proved to be especially resilient in the COVID-19 disruptions and earnings topline growth of 14% and adjusted EBITDA growth of 22% for the full-year. This was really an exceptional performance in a highly uncertain year and is consistent with the low to mid teens compound annual growth trajectory that we expect out of this business over the long term. And at Curation Foods we were pleased to meet our year-end steady-state goal of generating segment gross profit margins in the range of 11% to 14% and reported margin of 11.9% in the fiscal fourth quarter. Our turnaround efforts with Curation Foods are on track and we have the added support of a more efficient distribution network that expands our reach while further simplifying our operations.

[Jim Hall:]

Thank you, Al. We had a very exciting fourth quarter with the highlight being our CMO partner, Heron Therapeutics, FDA approval for its Zen relief product, an important new therapy for treating certain post-surgical pain. The approval showcases the support that life cause world-class quality systems in manufacturing engineering excellence provides to our partners.

[Albert Bolles:]

Thanks, Jim. FY 2021 is very busy, an important year in our supply chain. And Curation Foods made some significant advancements within projects with to simplify the business in the fourth quarter to finish out the year. We dealt with COVID integrating facilities and entered into a new strategic distribution agreement. We also monetized our one set investment. Last year, COVID-19 had a tremendous impact on our workforce. I am very proud to say that our team took the threat seriously, implement and recommended mitigations quickly. And as a result, we were able to maintain the health and well-being of our people while continuing to grow our risk process and shift the very best guacamole, salads, and vegetables. And we did this for the entire year. At the same time, we were also optimizing our operational footprint by pairing back capacity to better match our product focus and generate profitable growth. As previously reported, we have divested underutilized assets in the fiscal first quarter. This included our Hanover and Ontario assets in third quarter, our Vero Beach facility and in fourth quarter, our Rock Hill operations. These strategic moves reduced organizational complexity by broadening leadership accountabilities and flattening our management structure.

[John Morberg:]

Thank you, Al. I'm pleased to share with you our financial results for the fourth quarter and full year of fiscal 2021. I'll begin with a summary review of each segment before concluding with a consolidated financial review. Starting with our Lifecore segment, fourth quarter revenues ended at $25.8 million, 1.3% increase over the same period of the prior year. CDMO revenues posted a modest increase of 1% to $21.9 million from the prior year primarily due to the timing of aseptic commercial shipments within the fiscal year particularly the large 33% growth rate we previously shared with you in the third quarter. Fermentation revenues similarly grew by 2% to $3.9 million.

[Operator:]

Our first question is from Mark Smith of Lake Street Capital Markets. Please state your question.

[Mark Smith:]

Hi guys. Thanks for taking the question. First, I just want to look at Curation Foods a little bit. Can you discuss some of the inflationary pressure where you've seen it whether it's labor, delivery, whether this is and kind of response to initial price increases or other ways to kind of mitigate this?

[Albert Bolles:]

Yeah. Hi, Mark. It’s Al. How are you doing?

[Mark Smith:]

Doing well. How are you?

[Albert Bolles:]

A lot of the inflation is coming from our direct materials, things like corrugate packaging, those type of things. And we're very focused on our efficiency program to ZEST. To continue to take costs out, we have some further automation planned as well. But as I said in my statements earlier that we think we have a pretty good head start on this with the actions that we took with SWIFT last year and getting the full-year impact of the reduction of the workforce and getting our footprint much more tighter. So, that's pretty much where they're coming from. I think other companies are feeling the same thing. But we feel like we have a little bit of a head start in that area. And if we continue to see inflation build, we're not afraid to take pricing where we feel we have leverage to do that. And those are some of the discussions that we have going on right now. But our culture is much more focused and we know that this is a headwind, but it's one that we're going to think we have a head start on and we have some other things planned as a fiscal year walls for us to mitigate those risks because we're really focused, Mark, on achieving a level of 14% gross margins in our business.

[Mark Smith:]

Perfect. And then one more on Curation, just can you discuss food service maybe what you're seeing, any kind of changes in consumer behavior with the reopening and maybe any benefit from that? Changes in consumer behavior or with the reopening and maybe benefit from that?

[Albert Bolles:]

Yeah. As I had mentioned previously, we hired a head of food service last fiscal year. We never had that focus, salesperson dedicated to food service before. So, we are anticipating growth in the food service area. We're seeing it open up for us primarily in our green bean business as restaurants are coming back, back up as well as salads. And just recently, we started shipping to Amazon, which is a new channel for us that we had not been in before. So, we expect some growth from that, as well as continuing growth with the away from home category with HelloFresh continues to grow very strongly for us. So, we're starting to see it open up and we're going to benefit from that, which really was a big part of our decline with COVID during the last fiscal year.

[Mark Smith:]

Okay. And then the last one for me just looking at Lifecore. As we look at this -- I don’t know if excessive is the right word inventory and kind of the timing of the roll off. Will this be kind of a gradual kind of slow roll off throughout the first half or is it more abrupt that in the next six months it happens more abruptly? And then you know is there anything that could change kind of these inventory levels or could help take some of this pain away in the first half as far as new accounts coming on new customers?

[Albert Bolles:]

Yeah, let me take the first part of that and I'll turn it over to Jim for more color. But we don't have visibility for more color. But we don’t have visibility into our customers’ inventories until they really order, and they’re kind of -- had built a stockpile during COVID, and we expect that to roll off here in the first half of the year and really get back on track in January. But I will let Jim give you some more color there.

[Jim Hall:]

Yeah. Hi, Mark. Like Al said, what we -- we started noticing lower order patterns from some of our customers and started working with them to understand what the issue was with their inventory levels and got some insight really through all Q4. And what the issue is, is not so much in the US. Most of these customers sell their products worldwide. Things are opening up and pretty much back to historical rates in the US, not so much in the rest of the world. And as things open up over there, they expect to work through. They have surgeries lined up for the product. The reason they let it build off is the uncertainty of how fast things would open. So we're working hand-in-hand with these customers to understand how this goes. We're hopeful that it happens relatively quickly as things open up and vaccination rates pick up. But it's something we'll monitor, and like always, we continually try to build our pipeline with new projects that could potentially offset some of this. But we're not projecting that.

[Mark Smith:]

Okay. That's helpful. Thank you, guys.

[Operator:]

Our next question is from Anthony Vendetti of Maxim Group. Please state your question.

[Anthony Vendetti:]

Sure. Thanks. Good afternoon, guys. I was just -- I wanted to follow up on the comments you made on your agreement with Castellini Transportation. Obviously, you're looking to get some efficiencies there. And I was wondering if you could quantify a little bit more what this could mean in the near term. And then what's the -- what's the total opportunity. Is this going to bring down your transportation expenses by X or contribute to margin by Y? What can we -- what can we look for there?

[Albert Bolles:]

Yeah. Hi, Anthony. This is Al. How are you today?

[Anthony Vendetti:]

Good. Thank you.

[Albert Bolles:]

I want to talk just to give you a little bit of background here. We had our own logistics system and this move was primarily driven by us to be more efficient and more effective. One of the things that we have not been able to do is deliver six times a week which enables us to have fresher product on the shelf. And now, with this agreement that we just put in place, and right now, we're in the middle of just starting to roll it out and implement it. It's going to help us with our reach to being able to deliver six times a week what should translate into decreased shrinkage at our customers. That's primarily due to our selling fresher products on the shelf. And there are places today we just couldn't get to with our own logistics system is a fair amount of white space out there for us primarily in the Midwest and Castellini delivers to those places. So it’s going to help us in terms of being able to generate new business for us with our customers where we cannot be able to get there with our own logistics system. So they have the ability as well that we didn't have based on the scale of being able to hedge pricing fuel. We were not able to do that. So our timing couldn't have been better in terms of doing that. So we feel really good about the efficiency and the effectiveness that we're going to reach. John, any color you like to add here?

[John Morberg:]

No. It's great. It's just that with Castellini it's what they really do, right? They're experts in it. It was just something that we were nearly as efficient. We weren't sending out full trucks. You know we're one of the products that Castellini delivers. And by the way, the cost of us to deliver six days a week would have added several million dollars. And this -- in our agreement, we have a guaranteed savings per year built in and it can only get better. And I really describe it as a strategic partnership. And so I think there's just a lot of benefits for the company both in logistics team so. And really the timing just couldn't be better particularly walking into a year a lot of inflationary pressures and it's nice to have that done versus having inflation hitting and then trying to figure it out. And that project was probably being worked on for the better part of a year or so. It's a lot of work logistics to get right. And I think there's just a lot of benefits for the company from a white space, the costs distribution, all those things. So our sales team is very excited about it because of the service levels we can provide to our customers in particular.

[Anthony Vendetti:]

All right. Good. I mean, it sounds like you had a home-grown system that was clearly inefficient and like you said, for all the reasons you just mentioned as well as some of the external events going on, transportation has been getting expensive for goods across all industries, trouble hiring truck drivers…

[Albert Bolles:]

Right.

[Anthony Vendetti:]

…various reasons. So to get that off your plate, I'm sure, is a big win. And what I want to segue into is Project SWIFT, right, because constant improvement and efficiencies is something, I'm sure, you're working on a regular basis. But if we had to just quantify Project SWIFT, where is that at in terms of total savings recognized since that was implemented. And do you have a specific end date for Project SWIFT, recognizing, of course, that you’re always going to be looking for efficiencies and better systems and so forth. But I'll just -- just to focus on Project SWIFT for this question.

[Albert Bolles:]

Yeah, Anthony. I'm a big baseball fan. So I would say we're probably in the sixth inning as well. The deal was a deal that was on my strategic focus to get after. We just had so much to do in terms of rightsizing our operations and the ability for us now to get that done at the end of fiscal year and begin the implementation of that is really important to us. It was a key part of Project SWIFT. SWIFT is just a way of the way it's the way it’s going to be at Curation Foods, we’re always looking to improve our efficiencies and our operations. So, that's where as well our -- a lot of the heavy lifting is done. I would have gotten that Castellini sooner, but we just had so many other things that "we had to clean up" in our system to right size the operations in terms of our footprint and the rate structure in place from a people standpoint that would go along with that.

[Anthony Vendetti:]

Okay. And Al, do you have -- but you have a total savings since you implemented Project SWIFT to date on an annualized basis?

[Albert Bolles:]

Yeah. So Anthony, we -- that's been a key part for us as our focus on gross margins and that's what's been enabling us to get our gross margins up to that 11% to 14% range. In terms of total assets sold to date, I think it's been around $20 million dollars or so that with our focus on the balance sheet to pay down debt and it's going to help us as we begin to fight the inflationary pressures that we see ahead. John, anything you wanted to add here for Anthony?

[Albert Bolles:]

Yeah, Anthony, I think I'd just add that I think Project SWIFT is more than just a savings to EBITDA, but it's also really a cultural change. It's about simplification. It's about picking up assets and trying to make and simplifying. And so, it's things like how do we monetize our investment. And when set for instance that was not strategic. So, instead that we could put more investment into Lifecore’s CapEx going forward that is very strategic for the business. It just makes a lot more sense. Lifecore’s CapEx going forward, it is very strategic for the business. It just makes a lot more sense. And it’s also those kinds of things that really fall into our thinking around project SWIFT. It was the idea of how do we find a strategic partner and think through logistics in a smarter way for us. So, it wasn’t just how do we put more EBITDA at the bottom line but, but how do we do it in a really smart way. And how we make our culture work for us in a better way as well. So, it just, it's a really a bigger thinking process and when the culture starts getting behind it, it's just, there's just so much more they can get accomplished. And I think that's really the benefit. And the brilliance that Al brought to that when he started that and it just feels like -- I agree with, without that we're probably like in the fifth inning or so. And I think it'll be with the company for quite some time because it's -- we've -- as we rationalize skews as we think through our marketing efforts, all those things are kind of still falling within the idea of the framework of Project SWIFT.

[Anthony Vendetti:]

Okay, no that's helpful. Just -- during the fifth inning, are there any -- obviously transportation was a big item, are there any big items like that on the near-term horizon that you've identified. Said hey there's, there's a there's a huge opportunity here to make this particular piece of the business much more efficient.

[Albert Bolles:]

Well, I think most of the heavy lifting is behind us, Anthony as I mentioned. And our focus is less SWIFT to continually to simplify. And we got a lot of things to look at in terms of how we work with inside the business, we made big improvements in our processes, bit improvements in our forecasting. We have things that we’re working on in the harvest area that I’m very excited about that we’re not ready to talk about today, but how can we improve our forecasting and our time to harvest? How do we continually grow our green bean business by diversifying or planting as well as where we plant and how we plant to get ready for seasonality upticks in the business? So it's really about getting it to work for us now much harder and much more efficiently than we had before. But I do believe that, from a footprint standpoint, we're down to two manufacturing facilities. We're leveraging castaways. So we’re able to take down our Rock Hill facility. We shut down Vero Beach which only had one line in it that made green beans. Now, we're able to make all those green beans in Bowling Green with the investments that we made there. So we'll continue to focus on the big opportunities. But for the most part, the heavy lifting is behind us. It's really about getting it to work for us now as we move forward.

[Anthony Vendetti:]

Okay. Very helpful. I’ll hop back in the queue. Thanks very much.

[Albert Bolles:]

Thanks, Anthony.

[Operator:]

Our next question is from Mike Petusky of Barrington Research. Please state your question.

[Mike Petusky:]

Hi, guys. Good evening. I guess the first one for Jim. Jim, could you remind me and possibly a few others just sort of as a product successfully gets regulatory approval and then goes to commercialization, can you just talk about the impact just in terms of that customer in terms of revenue sort of in the short term, margins in the short term, and then sort of how that will typically play out over time or your expectations for how that will play out over time just in terms of that customer that's gotten a regulatory clearance? Thanks.

[Albert Bolles:]

Yeah, go ahead, Jim.

[Jim Hall:]

Okay. Hey, Mike. How are you doing? It's a good question and depends a lot on the product and how it's being launched. But typically in the qualification process, we work through process qualification lots that are also utilized for commercial production. So it depends on how a customer wants to build pretty large quantities. But typically Lifecore is selling commercial product at least a quarter, if not earlier, before a product launches, and then it just depends on what type of launch it is and how rapidly they build their sales force. If it's a customer that's got an established sales force, that happens quicker. If they're building the sales force and it's a newer company, it takes a little longer. So, typically, in the first fiscal year after launch, the build is relatively slower and ramps up. Margins are typically in line with what our targets are for our fill/finish business right out the gate. Otherwise, we wouldn't be working on that product. And as market penetration happens, the quicker it happens, the faster it ramps up. So we work on new products with typically a six-month rolling forecast that adds on a quarter every time we get an update. And so it just depends on all those things. How fast they really penetrate the market. So hopefully that helps.

[Mike Petusky:]

Okay. Thank you. And sorry, John, I may have missed this but CapEx expectation for this coming fiscal.

[John Morberg:]

Yeah. So last quarter we suggested $32 million and up to $7 million at Curation Foods this year.

[Mike Petusky:]

Okay. So I'm assuming then almost certainly a negative free cash flow expectation for the fiscal year.

[Albert Bolles:]

Well if you count the cash received for wins that will be a positive free cash flow.

[Mike Petusky:]

Okay. Okay. But yeah, just from -- in terms of sort of operating, would you expect to have a more negative free cash flow, set aside wins there. But you'd expect them a higher negative free cash flow this year than last year.

[Albert Bolles:]

Yeah. Probably based upon the guidance today that that would probably be true. Yes.

[Mike Petusky:]

Okay. And right. And just in terms of -- sorry, in terms of the cadence of the CapEx spend in fiscal 2022, is there any guide there? I mean is that can be lumpy or is that can be fairly straight line? Can you speak to that?

[Albert Bolles:]

Yeah. I mean I think it's -- I think you could almost assume it's going to be fairly linear for the year.

[Mike Petusky:]

And then could you guys speak to what you're seeing going on in the avocado business. Obviously, the year-over-year comp wasn't great and maybe there were some hope that with less COVID impact that avocado would have looked better. Can you just speak to I guess what you’re seeing there and what’s your hope on sort of forward?

[Albert Bolles:]

Yeah. So, we’re seeing the avocado category slow down a bit. Some was COVID. There’s some new competitors that have entered the marketplace. But we remain confident in our growth rates of avocado products that we're going to be in the mid- to high-single digits with our products, squeezed products is doing very well. I'm very excited about it. We have extremely high repeat on that business and we've got some money this year set aside that we have not had in previous years for sales and marketing. We are in a test right now in Cincinnati where we just rolled out our new positioning of the product all around building awareness, the Guacamole Now products. So we have a fair amount of dollars that we have set aside to do some marketing testing and how we can build that product and get awareness because once we get awareness, it really does well. It's doing extremely well at Walmart for us. They've gotten behind the products. And we continue to want to grow that because we have exclusive position with our products. And we're fairly excited about that. So the category is slowing down a bit, a lot of private label pressure. But we feel really good and well positioned where we are to see mid- to single-digit growth which is going to outpace the category.

[Jim Hall:]

Hey, Mike. I think last year the category grew in the mid-single digits, and if you back out the extra, the 53rd week last year, for the full year, we grew 4.3%, so very close and very -- actually fairly consistent with the category.

[Mike Petusky:]

Right. But…

[Albert Bolles:]

So as…

[Mike Petusky:]

Yeah.

[Albert Bolles:]

So 52 to 53 -- yeah, it’s off 2.2%, but 4.3%, backing out the 53rd week.

[Mike Petusky:]

Right, right. I got you. Al, so I think that sweet -- I mean, it's just my opinion, but I think that sweet product is probably the best thing you guys have come out with on Sweet Kale. Is there any openness to sort of disclosing either a revenue number there or just sort of the growth rates you're seeing there or something to sort of give us a sense? Because I do think that's a special product for you guys, potentially, not just now but going forward.

[Albert Bolles:]

Yeah. We don't disclose those growth rates. I will tell you, we have launched a Spicy Sweet Kale that we did up in Canada last year and did it with a customer in the Quebec region. They have now expanded that to all of Canada, and we're seeing uptick with some club mass channel customers with Spicy Sweet Kale in the -- in Canada, as well as retailers in the US are beginning to take it. So Sweet Kale continues to be strong for us. We’ve switched to the slim bag, and when we are in market, in US sales, in retail, we're seeing very nice uptick in velocities with our slim bag in Sweet Kale, along with all of our salads. And we have some tests that are ongoing now with our mass of club channels to test some more different packaging variations of the Sweet Kale Salad. So it continues to be a big driver of profitability for us. And we are flanking it with the right new ideas because we think -- we at least take the approach that Sweet Kale is a platform for us to innovate off of. So some of the packaging changes, flavor changes, we're expecting growth rates this year.

[Mike Petusky:]

Okay. All right. Very good. Thanks guys. Appreciate it.

[Albert Bolles:]

Thanks, Mike.

[Operator:]

Our next question is from Gerry Sweeney of ROTH Capital Partners. Please state your question.

[Gerry Sweeney:]

Hey, good morning or good afternoon and thanks for taking my call. The question is probably more for Jim. Just wanted to ask a question around the CapEx and I think I got my numbers right $32 million investment in over the next -- I think it was five years like that investment or helps take filling capacity from 10 million units to 37 million units. Just curious as to if -- what gives you the confidence that business is going to expand by that much. And then two, if you hit that $37 million type of fill, what does that mean for incremental revenue and profitability? Obviously there's business development and other revenues behind and within but I'm just curious to see what that would do to the P&L.

[Albert Bolles:]

Yeah.

[Jim Hall:]

Do you want me to..

[Albert Bolles:]

Yeah. Go ahead. Yeah. Hi, Gerry. And we can talk about this later too. But yeah -- so, I’ll touch it. Yeah, I’ll touch on that -- on the build and confidence, really it’s modeling our -- the commercialization rate of our development pipeline. And right now, out of the 21 things, we have 5 things in qualification and six of them are in Phase 3, so pretty far along and are the primary drivers of future capacity needs. So, we're looking at approval rates over the next several years that really gets us to how much capacity we need to be prepared for. And as you know and we've talked about, it's a several year process to add additional filling capacity, so that's where we're focused. The spend also focuses on building out some preclinical and early phase clinical manufacturing capability to segregate back from the commercial lines since we're going to need all that for commercial product. So, there's that focus too as we continue to expand and build our pipeline. And really like we said and I said during the call, we look at building out and maximizing the revenue generating capacity at this facility by building out that going capacity, doubles that revenue generating capacity. So, that should give you some idea of where we see this going and how it supports a business moving forward.

[Operator:]

Ladies and gentlemen, we have reached the end of question-and-answer session. And I will now turn the call back over to Dr. Al Bolles for closing remarks.

[Albert Bolles:]

Yes. Thank you again for your interest in Landec and your participation in the call today. We look forward to talking to you once again when we release our first quarter. Thank you very much.

[Operator:]

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