Q2 2020 Earnings Call
Good morning, Thank you for joining Landecs second quarter fiscal year 2020 earnings call with me on the call today is Dr. Albert both Landecs, Chief Executive Officer, and Brian Mcglaughlin, Landecs interim Chief Financial Officer, and Jim Halt President of life core who is available to answer questions.
Also joining today in Santa Maria is Don Campbell, Chief people Officer, Glenn wealth SVP of sales and customer service 10, Burgess SVP of supply chain, and we especially on our VP of corporate communications and Investor relation.
During today's call, we will make forward looking statements that involve certain risks and uncertainties that could cause actual results could differ materially. These risks are outlined in our filings with the securities and Exchange Commission, including the company's Form 10-K for fiscal year 2019, Let me turn the call over to Al Bolles. Thank you and good morning, everyone.
As a leading innovator and diversified health and wellness solutions.
Deck is comprised of two operating businesses.
What core biomedical Curations HM.
Landecs designs develops manufactures and sells products for the food pharmaceutical industry.
Life core biomedical, there's a fully integrated.
Truck development and manufacturing organization or CDMO.
That offers highly differentiated capabilities and the development fill and finish a difficult to manufacture pharmaceutical products distributed in syringes and vials.
As a leading manufacturer a premium injectable hi old erotic acid or age day.
Core brings over 35 years.
Expertise as a partner for global and emerging pharmaceutical and medical device companies across multiple therapeutic categories to bring their innovations to market.
Duration foods, our natural foods business is focused on innovating plant based foods with 100% clean ingredients to retail club and foodservice channel throughout North America.
Great and foods is able to maximize product freshness sewage geographically dispersed network of growers refrigerated supply chain and patented breatheway packaging technology, which naturally extends the shelf life fruits and vegetables.
Gration foods brands include eat smart fresh packaged vegetable salads.
Oh premium artists in oil and vinegar products and you can 10 Campbell fresh avocado products.
We are focused on creating shareholder value by delivering against their financial targets.
Secondly, our balance sheet investing in growth.
Implementing a strategic priorities to improve operating margin exploration foods and driving topline momentum at life core.
For the second quarter fiscal 20, consolidated revenues increased 14% 242 million compared to the second quarter of last year.
However, we experienced a greater than planned net loss and they decrease in gross profit than EBITDA during the second quarter fiscal 20.
This resulted in a second quarter net loss of 16 cents.
Before restructuring and nonrecurring charges.
We have an extensive operating plan that we want to improve performance like duration foods, but I will discuss in a moment.
Life core Landecs high growth high quality CDMO business focused on product development manufacturing of sterile injectable products had another tremendous quarter with impressive growth in revenues and operating income, while EBITDA more than doubled versus the prior year.
The business continues to move its customers through the product development lifecycle toward commercialization and events, it's probably pipeline of development customers that will drive long term profitable growth.
However, duration foods negatively impacted our second quarter results as the business was faced with supply chain challenges.
During the second quarter, we've completed the strategic review of exploration foods operations to better understand its strength in challenges, which revealed opportunities to make duration foods competitive and profitable again.
The result was an ongoing action plan and value creation program named project Swift that will build upon the network optimization efforts that are already well underway.
As well as focus the business on its key strategic assets and redesign the organization to the appropriate size.
Project Swift, which stands for simplify.
When you know they focus and transform.
It will strengthen our business by improving creation foods operating cost structure, and enhancing EBITDA margin, providing the foundation to improve the company's balance sheet and transformed duration foods into an agile competitive and profitable company.
While we have faced challenges into first half of fiscal appointing we are reiterating full year guidance, which calls for consolidated revenue from continuing operations to grow 8% to 10% to a range of 600 to the $613 million.
EBITDA of $36 million to $40 million in earnings per share of 28 to 32 cents, excluding restructuring and non recurring charges.
We continue to expect to generate substantial profits in the second half of the fiscal year.
Putting the current fiscal third quarter, and we are well positioned to achieve our goals.
Before I share more details on projects web and our momentum.
I've corn Curations foods moving into the second half in fiscal year I'd like to introduce a few new players to the management team.
First I would like to acknowledge Greg scanner is planned resignation.
As land that Chief Financial Officer, an executive Vice President was announced last week I wish to thank Greg for his years of service.
I'd be happy with the board at our employees, we wish him all the best.
With me today as Brian Glassman, who has been promoted from duration foods, Chief Financial Officer to Landecs interim Chief Financial Officer.
Glenn well, who has been promoted from vice President of sale Senior Vice President of sales and customer service for North America.
These new asylum, coupled with our previously announced strategic hires gives me great confidence that we have the right team in place and are well position to achieve our goal for fiscal 20.
With that I'll turn the call over to Brian for the financial highlights.
Thank you Alan good morning, everyone first.
A brief review of our second quarter results, we grew consolidated revenues by 14% to $142.6 million.
Driven by a 48% and a 10% increase in life core into duration foods revenues respectively.
Gross profit decreased 8% year over year, which was driven by a decrease deterioration foods that I'll speak to in greater detail in a moment. This contraction at Curations foods was only partially offset by life courts strong performance, which posted a gross profit increased to 52% year over year.
EBITDA declined.
$5.3 million to a loss of 1.5 million for the quarter. Our loss per share was 23 cents and includes seven cents per share of restructuring fees and nonrecurring charges.
Excluding these charges second quarter loss per share was 16 cents.
Shifting to our commentary on first half results. We believe the first half results may be a more useful measure of our performance. During this transitional period against our projections for fiscal year 20.
Which are backend loaded in the third and fourth quarter.
Revenues increased 13% to $281.3 million during the first six months of physical 20, compared the same period last year, primarily due to first.
$6.8 million worth 24% increase in life core revenues second the acquisition of Yucatan food on December 1st 2018, which contributed $30.2 million in revenues.
And third the $8.4 million or 9% increase in our salad revenues.
These increases were partially offset by a $9.7 million planned decrease in revenues in the package vegetable bag and trade business.
And by 5.3 million dollar decrease in Green Bean revenues due to limited supplies, resulting from weather events in both the first in the second quarters of fiscal 20.
Weather issues continue to be the greatest challenge to our business as discussed previously we took decisive actions to mitigate this risk with a green bean over plant strategy. This summer to meet customer demand. This holiday season. This strategy proved to be advantageous during hurricane Hurricane Doran.
Where we felt little impact however, the industry experienced yet another unforeseen challenge in the form of an early widespread cold weather event in November that impacted our green beans supply availability for the holiday season.
Gross profit decreased 7% or $2.4 million during the first six months the fiscal 20 compared to the same period last year due to a 4.9 million dollar decrease in the Companys Curations foods business.
The drivers of Curations foods gross profit performance was follows.
First the sell through of high cost avocado product during the fourth quarter of fiscal 19 in the first quarter of fiscal 21, the cost of avocados were over two times higher than current costs.
Second weather related events impacting raw material supply.
Third lower gross profit, resulting from a plan contraction of the packaged vegetable bags and tray business.
These two these decreases were partially offset by a 2.5 million dollar were 29% increase in gross profit at life Court driven by higher revenues.
Net income decreased during the first six months of fiscal 2000 compared to the prior to year due to birth, a 2.4 million dollar decrease in gross profit.
Second a 4 million dollar increase in operating expenses, resulting from the addition of Yucatan foods third.
Third a $2.7 million increase in interest expense due to the incremental debt associated with the acquisition of Yucatan foods.
For a 200000 dollar increase in the fair market value of the company's Windset investment compared to a 1.6 million dollar increase during the first six months of prior year and fear restructuring fees and nonrecurring charges of $2.4 million worth seven cents per share on an after tax basis.
These decreases in net income were partially offset by 3.1 million dollar decrease in income tax expense.
Excluding the seven cents, a restructuring fees and nonrecurring charges. During the first six months of fiscal 20, Landec would have recognized a loss per share of 33 cents.
EBITDA for the year to date period was negative $1.2 million compared to a positive $7 million in the prior year, when excluding 2.4 million of nonrecurring charges. The six month EBITDA would have been positive 1.2 million.
Turning to our financial position at the end of the second quarter.
Fiscal 20, Landec carried approximately $107 million of long term debt or fixed coverage ratio at the end of the second quarter was 1.5, which is in compliance with our covenant of greater than 1.2.
Our leverage ratio at the end of the second quarter was 4.9, which is in compliance with our debt covenant.
5.0, or less we expect to be in compliance with all of our debt covenants going forward Atlantic expense expects to have adequate liquidity for the balance of fiscal 2000 and to continue to grow its business and invest in capital to advance our strategies for both like core in Curations food.
Shifting to our outlook as al mentioned in his remarks, we're reiterating our full year fiscal 2000 guidance, which called for consolidating revenue from continuing operations.
To grow 8% to 10%.
To a range of $602 million to $613 million.
EBITDA of 36 to 40 million an earnings per share of 28 to 32 cents, excluding restructuring and nonrecurring charges.
We expect to generate substantial profits in the second half of the fiscal year in our introducing fiscal third quarter guidance, excluding restructuring and nonrecurring charges as follows.
Third quarter consolidated revenues are expected to be in the range 154 to 158 million earnings per share in the range six to nine cents and EBITDA in the range of $7 million to $11 million.
I'll now turn the call back to Al to review strategy.
Thanks, Brian .
We remain confident about our plans to drive profitable growth in fiscal 20.
Let me go into more detail about the progress we are making it our life for on creation foods business.
Life floor continues to see momentum that's benefiting from the three industry trend number one.
A growing number of products seeking FDA approval.
Number two the increasing trend towards sterile injectable drugs and number three a growing trend among pharmaceutical and medical device companies to outsource to formulation and manufacture of products spanning the clinical development stage to commercialization.
As a highly differentiated and fully integrated CDMO last quarter is positioned to capitalize on these tailwinds.
Through life quarter, 35 years, as a global leader and manufacturing premium injectable grade ha lifelong has developed the knowledge to process and manufactured difficult to formulate infill pharmaceutical products in both surrenders in vials.
This has a lot of life core to establish high barriers to competition and create unique business development opportunities.
Looking forward last quarter, we'll feel its long term growth by executing against its three strategic priorities number one.
Managing and expanding its product development pipeline.
Number two.
Leading customer demand by managing capacity and operational expansion to make future commercial production needs.
And number three continuing to deliver on a strong track record of commercialization will from their product development pipeline.
Regarding its product development pipeline life quarter made significant progress in the fiscal second quarter business development revenue in a second quarter fiscal 2020 increased 49% year over year, you contributed 36% of the increase in the life for fiscal second quarter revenues the bill.
This development pipeline has 15 projects in various stages of the product lifecycle from clinical development to commercialization, which aligns with the businesses overall strategy.
To meet future demand that life core we will be investing approximately $13 million for capacity expansion in fiscal twaddle.
As planned life quarter began commercial validation for the new multi purpose syringe vial fill or production in fiscal second quarter.
When complete this new line will increase life course current capacity by more than 20%.
Life core business as well position to make the future commercialization and development needs within its existing footprint, which can accommodate a doubling of its production capacity.
Further life core continue to make substantial progress in advancing its customers late stage product development activities by supporting their phase three clinical programs in commercial process scale up activities. Currently Lifecore has one product under review at the FDA with projected approach.
A little during calendar year 2020.
Looking to the future life core is targeting approximately one regulatory product approval annually and is on track to achieve this cadence beginning in fiscal 2022.
We continue to expect led go to generate on average low to mid teen revenue growth over the next five years as they expand sales to existing customers add new customers and continue to commercialized products that are currently in its development pipeline.
Life course team of cross functional experts coupled with the best in class quality system in facility enables our partners to accelerate product development activities.
Our speed and efficiency decrease time to market for our partners, which has immense value and their ability to improve patient lives through commercialization of their innovative therapies.
Regarding curation foods, what I assume the hell that land that earlier this fiscal year I established our strategic priorities and prowess decisive action to health and achieve our short and long term financial goals.
We have made excellent progress against these strategic initiatives and through our activation of project Swift, we will transform creation foods into an agile competitive in profitable business duration foods will continue to deliver the highest level product quality and safety while executing.
And with excellence on its customer grower can partner commitments.
We remain focused on staying true to our mission of providing access to our nutritious and delicious food, while protecting our plan for future generations, the sustainable business practices.
That duration foods, we are launching projects with today.
A first step in our ongoing plan that will be implemented throughout fiscal 20 and 21.
Aligning our activities to simplify the business in improved profitability.
Project Swift has three core components.
First our continued focus on network optimization.
Second.
They focus on maximizing our strategic assets.
And third redesigning the organization to the appropriate size in order to compete.
The total annualized cost savings from these actions will be approximately $3.7 million or nine cents per share.
Going into more detail on each car component.
Our continued focus on network and operational optimization is demonstrated with today's announcement that we are centralizing curation foods offices into its headquarters and Santa Maria California.
This will simplify the way, we do business it will make us more efficient and effective.
Having the team centrally located in Santa Maria will allow for greater collaboration.
Streamline our communication and improved teamwork.
Decision will result in the closure of the least Landecs office in Santa Clara, California, The least Yucatan Foods office in Los Angeles, California, and the sale of the curation Foods headquarters in San Rafael California.
Second we are focusing our business on strategic assets and divesting non core assets to continue to simplify the business to that end, we are initiating the exit in the sale of the company's Ontario, California salad dressing facility, which has yet to become operational.
Third.
We have announced our new organizational design, which places team members and a REIT rules for ongoing strategic initiatives develops and elevates internal tower begins to reduce headcount to aside that as appropriate for our business I.
I am grateful for the contributions that the employees affected by this plan have made exploration foods and I am sincerely thank them for their service.
As previously discussed I believe we will deliver a strong performance exploration foods in the second half of fiscal 20, with our strategic pillars that focus on growing our higher margin products optimizing our operations.
10 million to mitigate the cost pressures facing our industry and to delivering breakthrough product innovation, while continuing to strive for operational excellence.
Although the first half of fiscal 20 was met with a host of challenges that we are overcoming.
We are advancing our initiatives and we will see this work reflected in the financials during the third and fourth quarter of fiscal of this fiscal year.
Before key growth and profitability drivers are first.
Our growing and successful life quarter business is forecasted to recognize operating income was $8.5 million to $8.8 million during fourth quarter, which are the largest quarter of this fiscal year with projected EBITDA of $9 million to $10 million.
Second.
In line with advancing iteration foods innovation strategy.
We will be delivering high margin revenue in the second half the fiscal 20, with our packaging solutions and natural food products.
We continue to be an innovative leader with our proprietary packaging solutions.
We focused our resources to create value with our patented breatheway packaging solution.
The technology is now being used to wrap pallets of raspberries for Driscoll.
As a result of the successful test and just falls, California.
Distribution centers, we have now expanded the program to wrap Driscoll Raspberry pallets in North America.
In addition creation foods has secured category exclusivity.
With the packaging company that produces our yucatan squeeze packaging and a flexible squeeze pouch.
Just because this company has the exclusive distribution rights in North America.
This unique packaging solution allows for greater usage and convenience as well as extended shelf life reduced waste.
We also continue to lead with product innovation.
We have momentum in our branded avocado products in our expanding our test of our squeeze packaging into our cobble fresh Brent.
We are also enthusiastic about the launch of eat smart brands Restage.
Which is currently scheduled to be end market in January .
20.
Based on consumer insights, the new identity and packaging tested extremely well with consumers both in the us in Canada, and we have expectations for an uplift in sales velocity.
Our third strategic pillar for second half momentum as our continued focus on operational excellence to improve gross margin.
The team has made significant improvements by initiating lean manufacturing practices at our operations located into Mexico.
Well, we manufacture our yucatan and Campbell fresh avocado products.
The results of our actions include a 40% improvement in production conversion costs, and a 50% reduction in raw fruit costs.
In fact, beginning in January of 28.
80% of our inventory is projected to be manufactured with lower cost fruit.
These improvements will reduce.
Projected overall costs, but 28% in the second half of fiscal 2000.
Importantly.
As a result of these efforts we are projecting to deliver fourth quarter gross margin of at least 28% for our Yucatan in capital fresh avocado products.
As we have been communicating our four strategic pillar is our focus on taking cost out of our business. The curation food cost out program is on track to achieve our goal of 18 to 20 million.
Fiscal 2000 savings with 45% of our projected savings being recognized in the fourth quarter.
As part of this program today, we announced that we are consolidating from two labor contractors to one labor contractor.
And the Guadalupe, California facility.
Which will provide an annual savings of $1.7 million. We will also benefit from project Swift actions as savings from this program.
We will begin to be realized in the fourth quarter this fiscal year.
As mentioned in my opening statements. None of these achievements would be possible without the right people in the right jobs focused and working together in one centralized location.
I believe my team will advance our strategic agenda to simplify our business and improve profitability.
In summary, we have confidence in our guidance for fiscal 20 Atlantic team is focused on creating value by delivering against our financial targets strengthening our balance sheet.
Implementing our strategic priorities to improve operating margins at creation foods in that life for investing in growth in driving topline momentum.
I am confident in our plan to make the changes necessary to be successful and secure long term profitable growth to deliver value to our customers consumers and shareholders.
Well now open for questions operator.
Thank you will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad confirmation, telling all indicate your line is in the question can you May proceed starts you if you'd like to some of your question from the Q for participants using speaker equipment, maybe necessary to pick up your hands that before pressing the star Keith one moment. Please all we pull for your questions.
Our first question comes from the line of Brian Holland with D.A. Davidson. Please proceed with your question.
Yes. Thanks. Good morning first question I guess, just making sure that we understand.
You know, how we get from the Q2 shortfall to the to the full year guide being maintained.
Obviously, the green Bean revenue and net loss revenue and profit you don't get back so it sounds like the implementation of projects Swift and the facility consolidation that you just referenced is that the whole of the sort of be offset for the Q2 shortfall that would sort of keep.
The guidance hole for the year and if not is there anything else that we should just be thinking about that bad sort of drives those numbers.
Yeah, Hi, Hi, Brian its ALOG good morning.
[noise], you're you're absolutely right I mean projects sweats. It is a gone to be a part of our.
Focus of which is getting the right sizing and getting the cost out.
But we have also have been working a number of incremental cost savings programs that are above and beyond the cost out programs that we talked about through our manufacturing site. So we.
We know we had a whole there. So we had started back in Q2, some projects to a seismic of it will say that Brian you want to comment further yeah, Hi, Brian It's Brian .
Yes. So in addition, just it.
The sort of help us catch up here in the fourth quarter and make up for some of the slow pace here in the first part of the year as Al mentioned, one there's the rightsizing on cost savings that will be reflected in Q4 theres. Some additional cost out items that we identified after the year started you know that we're tracking.
And going after we also have stronger than planned a salad revenues and margins were ahead of plan now and so we expect that to continue and that's also helping us I'm in the second half of the year and we have better than planned to know conversion production costs and then through the back.
And items and improvements.
And our cost structure in general.
Along with product mix. Our overall margin percent has also looking stronger in the second half of the year. So it's really a mixed bag of things and you and you add them all out on their and they're sort of putting some some here under our wins here in the fourth quarter.
Okay. Thank you. Good that's helpful color from both of you just a follow up and speaking towards the cost out initiatives.
Usually you maintaining the targets you know.
Your one quarter closer to year end, so you've gone through 'em. Another three months of of working against these.
Initiatives.
I'm curious <unk> I assume I presume that there was some cushion in place given the scope of these initiatives in the number of initiatives that you have in place I'm wondering if you could talk to specific examples of initiatives within those costs out targets, where you're getting greater visibility a greater <unk>, where the progress Where's the pro.
Gross some things that you weren't currently had in place before this quarter. Obviously, there's been some new stuff here are that you announced this morning, but up but I'm thinking about stuff that you were doing beginning right kind of where we are.
You know it's.
As we've discussed its a.
Very broad granular list of items, the data and so from a risk management standpoint, it really does sort of spread the risk out of a profit 18 to 20.
Yes. It gets a wide variety of thing is yield improvements in the plan is automation on our single serves is pelletization automation, it's the automation of our case directors corrugated.
It's just a wide wide variety of things.
Our masterpass our trade design it just goes on and on and so again. This is Tom it's helped us quite a bit having that granularity on its logistics into our plans from the field. So it's obviously a wide variety of things Fortunately it's spread out.
Oh.
From a broad spectrum of resources in the company and so they really are sort of you know you know coming from a variety of spokes into the hub.
Yeah and Brian .
[laughter] you could tell us is fairly complex the number of things, but we are managing lives through our new PMO office and focusing on making sure that Oh, we execute these things is X was a we are another third quarter. We are on track and we're feeling.
What about being able to pull this together and hit our range of $18 million to $20 million.
I appreciate that that's a I appreciate that was a pretty broad question. So a helpful context, there I will leave it there are best of luck everyone.
Thanks, Brian .
Thank you. Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.
Thanks, Good morning.
I just wanted to focus on.
Good morning, guys I want to focus on the gross margin.
I know as we move through the year, particularly Yucatan is going to get up to 20%.
Like score is going to continue increase they aren't on track for their best quarter in the fourth quarter. So I I see that I see the ramp occurring I was just wondering if we look at the overall corporate gross margin.
In the fourth quarter, how do we have a range of what we expect that to be yet.
[noise] [noise].
Yes.
Well there are a number of prospects that we're driving against you know project Swift and so on and the I'm going as well the cost out I would sort of shy away from giving you a precise number but there are a number of things we're working on here that we expect to.
Continue to enhance our margin in the fourth quarter as well the salad product mix.
In a more stable raw product sourcing environment, Yeah Anthony.
No what I took that how on the.
Ah the cell margins were were decreasing.
Our revenues were good but ourselves margins were decreasing some of that was mix you know we've got a single serve product that is outgrowing the category.
It really nice innovation floors, but it started out in the mid teens in terms of margin and we've had a lot of effort here in the first half through a number of optimizations, including reducing some of the packaging in that product that has very little impact that consumers. So we expect to get these single serve.
Our packaging somewhere in the mid Twentys is where we're targeting for.
And that's been a help us tremendously with the large improvement program plus we're seeing a favorable mix.
This year, which is also helping us at our salads. So.
We see the salads, improving I think you get the what's happening down in Mexico, the avocado products and Oh, we are a really focus on driving the profitability this business [noise].
That help.
Yes, yes, Alan just in terms of I know the focus is on streamlining curations food Didnt, you've outlined a number of projects.
That you're trying to taking kind of all at once you are there are there any other.
Hobbyists.
Business lines debt that you didn't need to be eliminated or or changed dramatically worse what you.
Now uncovered over the last six or seven months is is pretty much pretty much it.
Well I wouldn't say we're finished okay. So project Swift is a you know we kicked it off today.
Yeah, It's our program for ongoing continuous improvements efforts focused on driving profitability and a growing here but of Curations foods.
So it's not a onetime event, it's a process that we've kicked off and we are focused engaged on that.
So you know probably water company that too.
I'll get this business was really thriving for us.
Sure that's helpful just real quick.
Financial question for for Brian So the 2.4 million restructuring charge as we run that through the model, but what was that 2.4 million net of tax for the quarter.
Oh booth at the 2.4 million net of taxes, probably about five or six cents.
Okay. Okay, great. Thanks, I'll hop back in the Q.
Thank you. Our next question comes from the line of Gerry Sweeney with Roth Capital Partners. Please proceed with your question.
Hi, good morning, everyone.
Morning hearing your <unk> I've a question on on life core actually a couple but starting on the Capex side <unk> capex been pretty substantial in life quick last five years I'm actually gotten a couple inbound questions on this I assume.
This capex should mitigate post completion other expansion efforts I think they expanded their facility a couple of years ago actual structure and now they got the file filling line what is the maintenance capex level for life core once all of this expansion has done.
Yeah.
Jerry This is Jim typically our maintenance Capex and yearly isn't the four to 5 million range.
And you're right. The majority of the Capex that we spend is to manage capacity as our volumes increase with commercialization of our development pipeline.
Got it and a fair to say.
Good.
Hi, I'm not sure if this correctly essentially double revenue prior to any large capex investment, obviously, you would actually invest sooner than that but.
Post completion.
A lot of capacity is really what I'm getting at.
Right.
Sure.
Usually doesn't in Dallas, unless the business dictates, but I'll give you. An example, like putting in a new filling line is a three to four year process. So we spend a lot of time evaluating where our potential capacity needs need the goal based on the products that were working on.
And our pipeline and have to me.
Some investments.
Especially on larger filling equipment or packaging equipment.
Well ahead of plan.
The expected capacities needed so, but it's always wage in against.
All the business opportunity what the return on that investment would be et cetera.
Got it that's helpful. Thanks, Yes, switching gears backed securities from Foods I'm, the one thing I'm, having a little bit of trouble.
Hi, Squaring off is you talked about lower revenue in the veggie in trade area, which obviously, we deemphasize, but this also led to a I can impact on the gross profit side I was previously running under the impression at some of this business was low margin or even know March and so if you're.
Want to de emphasize this business and there is an impact on that on a gross profit line and.
Back the envelope I was thinking from using our discussion earlier think about a million dollars was from on the gross profit maybe from.
The veggie and trade area I mean, this was decent gross profit dollars I went out the door and if you want to deemphasize that I mean, how does that square up longer term in a in terms of de emphasizing that business without really.
Whacking or gross profit dollars I'm, just having trouble connecting the two if that makes sense.
Yeah. So what were when we say de emphasizing we had been going through a process of S.K. you rationalization was our customers and that's something you can just.
I'll do.
Overnight you have to work with them for me in effect on the other business. So we're really trying to do it. Its work in process is to have a minimum margin that we are going to.
Require for we are well sell the process. So that's really what we're trying to do here is put hurdles and to the sales organization work with our customers on.
Improving overall profitability by the limelight kind of what I call addition, by subtraction, you take so things out and you actually improve your margins. So it's really haven't had very conscientious focused effort once again, our eyes on driving profitability not driving revenue.
Got it.
Yes, just surprised by how much the gross profit in the addition by subtraction actually what does thought that gross profit may have been flat to up here with the removal.
Oh for that division tray business, but I if <unk>.
Book holistic, where well step back we have just like any other too we had some weather related issues. Okay. Okay that affected our gross profit so.
It wasn't just screen means but you had you know a number of other things and then the out the avocado products as well got it got it.
That makes sense I appreciate it and then finally on yeah sorry.
Well into first half the here and you know as we said we are going to that's going to turn around Seattle kind of products will turn around in the second half a year.
Got it and then finally, just I'm just thinking about Yucatan.
But do you telling the roll out of the then news squeeze packaging.
It it's a process getting it into the into I think the supermarket chain, maybe just several some commentary on how many stores don't roll out and how do we don't get that 2020 2021.
Yes, so are we rolled it out you know at Walmart.
It's achieving the velocities and Walmart that they expect for the category, it's actually selling at the same velocities as our current products that are at Walmart we.
Have a.
Test and learn a program going on in Chicago in July so given that Joel. It's you know different different consumer than typical Walmart consumer yeah. So remember things going on there we have presented to a large number of the major reach.
Taylor's in the U.S. and work with them now on getting him into their category.
Resets that it could be happening within the next six months. So we feel a we feel pretty good about that.
Got it.
A couple of I appreciate it that's it from my end.
Thank you.
Thank you. Our next question comes from the line as Mitch Pinheiro with start of it and company. Please proceed with your question.
Hi, good morning.
Publications Hill on those.
So as you know, it's the backend loaded nature of the Oh.
Of this fiscal years performance [noise].
I mean, what kind of margin of safety do we have in the forecast.
Thought there was something built in.
To this fiscal year and has that been users.
As it was inadequate gives them yet to be used could you talk.
Yeah, Yeah. This is Brian .
I'm so much of that is its really the conservatism in the guidance I'm that we're building and we are building that into the second after the year in particular in the third quarter, but as well you know one of the huge items that is.
Very favorably affecting the margin swing and actually burdened us in the first part of the year and then it maybe you know confusing and some of the stuff we're talking about.
We had [noise].
You know $30 million in revenues and used in the first half of the year and because of the issues with our avocado cost and fruit cost. It was roughly a breakeven business in the second half of the year and in particular in fourth quarter given the the changes to that operating model that we see on sustaining basis going forward.
We're looking at margins in the fourth quarter at 28% or greater for the all our products area that is huge and that is going to really change. The overall margin structure in the second half of the year versus the first half of the year and so it's a you know it's sort of embedded arm in the press release it might be.
A little tough to pull out but is it is a major major driver along with cost out in terms of swinging thing.
Yes. So so you have your you know see have the favorable.
You can you just described you have some of the the cost out you know 45% of the a you know 18 plus million you expect to achieve Hum projects Swift ongoing progress and efforts your move again.
And this might be part of the original but you know you're moving corporate headquarters to Santa Maria close in Los Angeles, Ontario.
Hi, all that builds into the fourth quarter.
There's not going to be.
I mean.
You know, it's just something well yeah, we still have margin of safety beyond all this because it's the.
The only thing consistent about Atlantic over the last 10 years has been its and consistency.
And and I know, it's driven by just.
You know very difficult supply chain.
Issues you know, it's very you know and so.
If we get a if we know that really hot and dry summer or really wet and cold.
Summer is is the fourth quarter still gonna be there.
In India has his guidance. So let me just that add a little bit here to that so it all right now we have momentum.
Our salad kit business and ER, that's coming in better than planned.
In terms of the second half of the here, we're going to continually say that margin improvement.
And our salad business.
And then we have most of the risk from the weather standpoint as in Q3.
And we have worked cross functionally here.
And feel that we had the appropriate risk built into the <unk> and into the guidance for the for Q3.
So we feel that the second half plan or at least I feel and I know my team does that's a second half plan.
Is a tighter.
The first half play.
You know I've only been here a six month and.
Really have gotten to know the business then or what's the new team that we've put together, we're feeling pretty good about how we have the flow of the second half going.
Okay very helpful.
A couple other little things right away.
You will start to see revenue from breed away in Q3.
Yeah, Brian Yeah, the second half of the year, we're expecting to have continued.
Improvement in expansion in Breatheway. The first half of the year was really focused more on a test as we're kind of coming through this time of the year coming into the latter part of you know the winter and spring.
We're going to be expanding our overall volumes picking up some additional coolers and distribution centers with record.
Is that exactly curations suit settlement.
Yes.
Okay.
In terms of Capex, where what does the full year.
Look like.
Still on plan for.
30.
Million.
Well I'm actually the full year plan at this point, we're looking at a range of between 38 and 42 were 16 million in first half of the year.
Second after the year has a range of 22 to 26 that could swing around depending upon timing and you know, we'll see how you know obviously want to make sure we're eating or numbers in the fourth quarter, which did end up accelerating or slowing things down.
So about enough that 22 that 26 in the second half of the year about two thirds of that is in the fourth quarter and centered on life core.
Okay, and then how about cash from your asset sales.
Well, what what do you expect it to net out.
I'm sorry, what was the catching a cash from asset sales from the sale of Reno.
You know.
It is really too early to know over in the process I'm at this point of assessing you know you know pass to liquidating you know those items. So there will be more to come on those in any quarter. Yeah. Yeah. This is all part of projects left for look at a continuing to optimize our network and we are very focused on.
The balance sheet.
There was or not.
It's oh olive.
On vinegars that is that still part of your plan.
Okay.
We haven't heard anything about it but just curious where the where that stands.
Yeah, well, we're working on or improving me, but Oh, Hello, So Oh right now that's a that's our focus for the year.
Okay.
It's definitely yes, there's not a really big growth area for us right now so.
Thank you I don't mind, if you'd like to ask a question. Please press star one on your telephone keypad and the interest. This time, we ask you limit yourself for the remainder of the call to one question and one follow up. Our next question comes from the line of Mike Petusky with Barrington Research. Please proceed with your question.
Hey, good morning, a lot a lot of what information and and so some of that hard to fall, but in terms of Q4. I mean is you know, 75%, 80% of sort of the margin pickup associated with a pickup in gross margin are you getting much leverage on the F. G and any line can you just sort of speak to that.
I'm, sorry, do that again could you. Please yeah, sorry, so in the fourth quarter, obviously, you're expecting a huge huge number in the fourth quarter. Obviously expansion of margins did you know from an operating margin standpoint does most of that calm sort them be it I'm, assuming most of that comes via the gross margin.
Line, but I mean, the split between gross margin and SGN a pick up I mean is that like 80 20 Mohit go into the gross margin line.
Yeah, I think the vast majority of it is centered at the gross margin line and again just back to the avocado statement that I made earlier you know most of that inventory already and we called about 60 to 90 days worth of inventory. So most of the inventory that we actually see coming through at this point in our model.
Through the latter part of Q3 and through the beginning in the middle of Q4, it's already in our warehouses is is there when we absolutely no cost. So the mystery of that has really been taken out its just a matter of us continuing to do what we're doing on the revenue line.
But yeah. The vast majority of improvement at the gross margin line, though we have been done I think doing a very good job this year relative to plan and managing our as generic.
Okay, and I know you can't comment on this extensively but the legal issue down in Mexico with good Tan has that resulted in meaningful or changes in leadership down there in terms of the operations of that a facility.
[noise] really or you know its own environmental permitting issue, we have resolve the issue we're working with the regulators.
Now on the next step so it's ongoing but in terms of the operations.
The operations are running as good as I've ever Iran.
What are you know decreasing conversion costs by 40% our yields are at high throughput for the through the plant.
As a record high for us and is consistent.
And the operation is running very well.
Okay, sorry, but have you had meaningful changes in leadership down there.
[noise], we're putting meaningful leadership in their beginning of the year.
To put our lean manufacturing practices so.
The leadership that's there now what is what we had put out we had changed the leadership out.
Back in.
The beginning of May we change the leadership, okay. So nothing so no nothing nothing has changed in terms of leadership there now, but we have changed leadership, but it was prior yeah and then just last question I didn't hear it if it was said what were the Oh route revenues for the second quarter.
Roughly.
The Oh, Oh, all of revenues for the second quarter, Yeah hang on just one second here.
Below 1.5 million.
Okay, all right that's all I've got thanks.
Thank you. Our next question comes from the line of Hunter Hillstrom, what Paul Let investment management. Please proceed with your question.
Hi, Thank you just one quick general question I mean, these are two very different businesses here. So I was wondering if you could just.
Comment on how you think these two units a fit together and then and whether or not you think it makes sense to keep them together in a long term.
Well. So you know a life core is a well oiled machine is I would say its operating very very well.
Curation foods is that a well oiled machine at the moment.
However, we really like the categories that were in.
In terms of where the consumers are going.
We believe that duration foods are in categories.
That should have tailwinds for us all around the primitive a store and then health and wellness.
So the focus that we have is to drive the profitability of Croatia foods and get it back on track.
Hi continually work with my board on the opportunities.
That we have but right now.
The two focuses our to fix the profitability of curation foods and to make sure that we are providing the capital needed to continually have a great momentum growth at life core.
Great. Thank you.
Thank you we have reached the I never question answer session I'd like to turn the call back over to Mr. bowls for any closing remarks.
Thank you very much for your interest in Atlanta.
And happy new year to everybody.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.