Q3 2021 Landec Corp Earnings Call

Good afternoon, and thank you for joining landec fiscal 2021 third-quarter earnings call during the presentation. All participants will be in a listen-only mode afterwards. We will conduct a question-and-answer session at that time. I will provide instructions on how to ask a question now. I would like to turn the call over to Jeff Sonic investor relations and icr.

Good afternoon, and thank you for joining us today to discuss landec corporations third quarter fiscal year 2021 earnings results on the call today from the company or dr. Albert Bolles prep chief executive officer. John Warburg 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 p.m. Eastern time. If you have not received the release it's available on the investor relations portion of landec website at in addition to Colby May refer to the supplemental earnings presentation also contained on land X investor relations website before we begin I'd like to remind everyone of the Safe Harbor statement certain statements made in the course of this conference call contains forward-looking statements important to note that the company's actual results could differ materially from those projected in such forward-looking statements.

additional information concerning risk factor

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 twenty-twenty copies of these filings may be obtained from the company's website as well. And with that. I'd like to turn the call over to Al

Thanks, Jeff. Good afternoon everyone and thank you for joining us today. Today's call. I will provide highlights from our third quarter fiscal 2021 results. Jim Hall will then review some of the exciting developments in the City MO industry and John Warburg will discuss our financial results in more detail than update you on a fiscal 2021 guys. We will then open the call for your questions.

I'd like to start today by recognizing the contributions of all of our workers at both lifecore and curation Foods who show up everyday and our facilities across the country with our incredible operational employees remain on the front lines of the COVID-19 pandemic and I am grateful for their resolve fortitude and contributions Fortune off right now starting to feel like we are seeing a light at the end of this long tunnel with many of our employees dial getting vaccinated. We are working with our County administrators to Thursday at 8 delivery of vaccines for our employees.

Our organization has been working hard to manage against a variety of impacts from this terrible pandemic. And today we feel like we are making good progress with the added complexity and resulting Financial effects of the pandemic has negated the many areas of financial Improvement in some instances and in the fiscal third-quarter, we were met with a more pronounced adverse Financial impact on our curation food segments results of operations than anticipated. We experience indirect impact from cancel orders shifting demand of SK use in the related right off of inventories for our perishable products.

On the car side, we experienced higher labor expenses due to the state-mandated paid time off for workers both testing positive to or exposed to call them which was implemented in January as well as the ongoing costs associated with social distancing requirements expansion of p p e n a testing and trade.

Yet despite all these channels again packs. I am very pleased how well we have performed against the prior-year which is a testament to our amazing organization of hard-working focused employees at all levels in the company while we are disappointed with our fiscal third-quarter results review this as a temporary obstacle rather than permanent had we're only though in a period in which we are at the anniversary of the COVID-19 pandemic. We are still benefiting from operational improvements in efficiency as a result a project Swift which we launched nearly fifteen months ago since launching we have now Consolidated enclosed three offices and took you faxing facilities discontinued many unprofitable SK use and rationalized g n a headcount across the curation foods segment. We continue to review every month.

facet of our operations

To align the various businesses with our strategy for future growth.

In helping to take project Swift to the next level and pleased to welcome our new CFO John Morgan who provides an incredible depth of executive and financial leadership off all our businesses. John has helped several organizations navigate challenging circumstances and is quickly getting up to speed and providing a fresh perspective of our strategies and businesses that is already making meaningful contributions to our organization and I am confident that he is the Right leader to help further our accomplishments you started under project Swift

Well the third quarter on a Consolidated basis adjusted with the increased to seven point six million dollars an increase of 12.6% over the prior-year third quarter the Consolidated gross margin increased 120 basis points to 14.3% over the prior-year third quarter.

About a year to date basis Consolidated adjusted ebitda increased the nineteen point four million dollars an increase of 146% over the prior-year Consolidated gross margins increase 230 basis points, the 14% over the prior-year.

Well, we are pleased with the year-over-year performance. We still are not where we want to be the impact from COVID-19 had a substantial impact in the third quarter and we expect some residual impact from the balance of this fiscal year or some perspective looking back on our forecast one year ago when the material impacts of or read pandemic to our business first began, we were estimating Financial impact to curation foods to be a reduction of approximately four to five million dollars and adjusted off with the the fiscal year point21 today. We now see the impact to be approximately 11:00 to 12 million dollars for the full year or more than double our initial estimate.

As a result, we have revised our annual adjusted even the guidance dialed to a range of $2,729, which we believe is attributable. The impacts related to the COVID-19 demek.

Presenting to you today in our fiscal fourth-quarter. We are feeling more optimistic about the summer months. Ahem. Our customers face their own challenges as additional lockdown exact over the holidays, but we are hopeful to see some of the clearing in the coming months to give you a sense of the delay where we had previously planned for some new products introduction in our fiscal second and third quarters based on the initial indicator request from retail customers, those retail customers only now starting to schedule the delayed merchandise resets and are planning new product introductions late spring and Into Summer. We are also continuing to push forward our Focus around higher plant-based food Innovations and the curation foods business.

Are avocado products?

Brands continue to deliver solid year-to-date growth of 5.3% and our eat Smart sell business. We rolled out a new swim bag design that is approving sales velocity and we are continuing to test other package designs and new product introductions working in conjunction with our key customers, and I'm excited to be off the mini top the top meetings with our important customers during this next quarter to share the innovations that we have been working on during the pandemic.

Before I turn the call over to Jim Hall a president of lifecore to share the exciting industry trends at the lifecore business is addressing. I wanted to recognize lifecore has continued outstanding results with a 9 month year today. Lifecore generated a 20% increase in revenue and a 34% increase in segment adjusted ebitda lifecore has weathered the covin pandemic. Well, it is operating a traditional rates of efficiency, and we believe continues to be extremely well-positioned life in you growth.

We are very excited about a robust contract development and Manufacturing organization or cdmo new business development Pipeline and the category in which we offer live course specialized capabilities in the CD amount space are sought after by its partners and we are ensuring that they have the necessary Capital to make a long term plan to generate consistent high-margin double-digit Revenue growth with that. I'll turn the call over to Jim.

Thank you is Al eluded. The whole Market is enjoying significant favorable trends that are supporting life course long-term strategy and growth plans off. The market is funding important advancements and novel therapies that along with limited available parenteral manufacturing capacity are creating exciting opportunities for special. I see them all Partners like lifecore according to Market Research in the last ten years approximately 75% of new drug development in small. The mid-size Farm companies has been out sourced injectable products represent approximately 45% of total products and development which have a projected compound annual growth rate of 10.5% and prefilled syringes have a projected compound annual growth rate of 13% through 2023.

Based on an expectation for an acceleration and injectable approvals their significant unmet demand for specialized cdmo vial and syringe capacity, which he ended up estimates will grow by an incremental seventy-five to a hundred million units.

We believe that our strength without thaumic products and thirty plus years of experience handling hard to manufacture products based on hyaluronic acid or Aha and our ability to support both small and large molecule products has put us in an ideal position to be especially player and the CDM all space with very distinct capabilities. Therefore, we believe that lifecore can play a pivotal role and we are well-positioned to meet the large incremental needs of this exciting industry. Our expertise and discus materials are long-term development and Manufacturing Partnerships and our world-class quality system enable us to stand out as a specialized leader in a c d m o n dustry. We are very pleased with the continued expansion of our pipeline which currently consists of 17 active projects that are in

Various stages of their product development lifecycle many of our projects are reaching important late phase development milestones with their FDA clinical trials giving us confidence in achieving our near-term in future growth plans. We are continuously working to expand our development Pipeline and are in active discussions with five new partners that took believe will continue to support our long-term growth strategy and fiscal year 2020. We manufactured approximately 6.5 million total units of six vials and project a manufacturer 8.5 million total units by the end of our current fiscal year two thousand twenty one out of our aggregate total capacity of a little more than ten million units based on the current projections for commercialization of the products in our development pipeline. We estimate wage

Will require an approximate capacity of $22 million total units within three to four years. This is broken into approximately 18.5 million units of syringe full capacity and 3.5 million units of Bio filling capacity. Our current facility infrastructure has the ability to hose two more filling lines one thousand installed lifecore theoretical capacity would exceed Thirty million units as lifecore cdmo product development pipeline continues to grow and expand the project commercialization rate will be monitored to determine the timing of future capacity needs which in turn will dictate future capacity investment and timing lifecore focused its capital investment strategy to take advantage of the industry Trends and to ensure we have the needed capacity to support our projected growth. We remain on birth

With our Capital deployment to support growth in our business including spending approximately 13.5 million dollars in capital expenditures in fiscal year two thousand and twenty one to build our capacity to meet our customers ever-growing vial and syringe filling requirements. Now, I would like to turn the call over to John.

Thank you. It's great to be here as part of the landec team a team that is passionate and committed to the strategies the organizations just a short time ago and formalized with the project Swift framework. I'm looking forward to being part of the continued Improvement of the business as we seek to unlock further value across the entire language business for its stockholders.

Turning to the financial performance of the company. I'm going to begin with a detailed review of each segment before concluding with a Consolidated financial review.

Touring with our life force segment and the third quarter by four generated record quarterly revenues of twenty seven point two million dollars a 60% increase over the same period of the prior year.

Medium, oh revenues increased a robust 33% 18.6 million dollars from the prior-year driven by increased aseptic Commercial Business wage, which more than offset a 25% decline in fermentation revenues, which was primarily due to the timing of shipments within the fiscal year.

Are strong top-line growth drove a 6% increase in gross profit to 11.6 million dollars with a hefty 42.5% gross margin wage. That was essentially flat compared to the prior-year.

As a result either. I totaled eight point 1 million dollars for the quarter a 5.9% increase over the prior-year.

On a year-to-date basis or lifecore revenues increased 19.7% over the prior-year is 72.2 million due to a strong 23.8% increase revenues to 53.3 million dollars and they solid 9.7% increase in fermentation sales to 18.9 million dollars.

This impressive top-line Revenue growth drove a 22.8% increase in gross profit 227 million dollars gross margins increased knowledge basis points to 37.4% largely due to a favorable sales mix within our cdmo segment.

Your did they totaled 16.8 million dollars a sizable 33.6% increase over the prior year and an even on margin of 23.3% which is a dramatic 240 basis point increase over the prior-year largely due to the 90 basis point gross margin increase as well as improve leverage of sg&a costs and expenses against third-quarter Revenue.

With respect to our full-year outlook for the lifecore segment. We remain on track with our existing revenues guidance in the range of 93 million to $97 a month representing growth of approximately 11% And even our guidance in the range from 22.5 million to 24.5 million dollars representing wage growth of approximately 17%

Let's now turn to our curation Foods segment results for the third quarter.

Curation revenues for the quarter totaled 110.6% decline for the prayer year primarily due to a solid avocado product sales increase of 6% off. I'll set by a 14.6% decline in fresh packaged salads and vegetables which was primarily due to the plan reduction of the lower-margin Legacy vegetable and trade business get exacerbated by an increase in adverse impacts related to the COVID-19 pandemic.

Gross profit for the quarter decreased 11.3% to 8.1 million dollars from the prior year which included a one-time technology category royalty benefit off of one point five million dollars recognized during the prior year excluding this one-time royalty in the prayer year gross profit increased 6.1%

resources for the quarter were 7.4% a 20 basis-point improvement over the prior year.

Excluding the effects of the one-time royalty in the prior-year gross margins increase a solid a hundred and fifty basis points do the favorable mix shift toward our higher-margin products from the plan sales reduction in lower-margin products.

Just even after the quarter totaled $340,000 as compared to the prior Year's adjusted ebitda loss of $101,000 which included the one-time royalty of 1.5 million recognizing the prior-year.

On your day basis curation revenues totaled $332 11.2% decline from the prior year comprised of a solid 5.3% increase in avocado product sales and a decline of 13% in fresh packaged salads and vegetables.

Again, the declines primarily resulted from planned reductions in sales of lower-margin items in the adverse impacts from the COVID-19 pandemic.

Your to date gross profit totaled twenty nine point six million an increase of 2.6% over the prior year which included the one-time royalty month, excluding the effects of the one-time royalty gross profit increased 8.3% and gross margin increased a hundred fifty basis points over the prior-year to 8.9% wage to the favorable mix shift. I mentioned previously

You're the date adjusted ebitda total 5.1 million dollars as compared to an adjusted ebitda loss of two point nine million in the prior year which included the birth of one point five million dollars recognized in the prior-year.

While we're pleased with our year-over-year performance in the tangible benefits from the project Swift consolidation and simplification strategies. We believe the impacts from the COVID-19 Panthers mentioned in his remarks have hindered our ability to meet our prior full-year expectations.

Liliane last year we were met with increased labor costs due to social distancing requirements.

Absenteeism related to do exposure rules illness is a plant workers and cost of personal protective gear increased worker sanitization testing and training.

Fortunately our sales were fairly steady and the first two quarters which helped mitigate these higher expenses. However, we faced increased headwinds after the holidays when many of our Mark incurred additional imposed lockdowns,

In January through February, for example, our club customers cancelled order or sometimes even the day before shipping do the sporadic changes in consumer traffic to their retail locations.

Consequently, those cancellations resulted in Lost sales lost gross profits and in some cases the some cost of manufacturing and materials such as labor in the finished-goods. We could not sell due to freshness Stadium.

In January one of our large Club customers announces decision to eliminate vegetable trays until after the pandemic is over.

Lost sales and our Foodservice business has been particularly affected or high-margin green bean business while many other retail customers delayed resets and new product introductions the benefits of which were built into our original fiscal year plan that we are revising today.

Is that I mentioned at the beginning of the year. We estimated the impact of the COVID-19 ibadah to be approximately $4 off an accelerated during our fiscal third-quarter. We saw the COVID-19 impact to our business accelerate as well and now estimate the overall COVID-19 impact of the year to be approximately eight to twelve million dollars of which approximately 2 million to 3 million dollars will likely be permanent cost going forward.

Despite these impacts. We are proud that we still deliver substantial adjusted ebitda improvements through the fiscal year to date. As compared to the prior-year.

Covid impacts short primarily in our gross margins. We anticipated our gross margins would continue a trend of sequential growth through the fiscal third and fourth quarters month. However, as I sure earlier our fiscal 2021 third-quarter gross margin was 7.4% which is the deceleration of two hundred basis points versus fiscal 2021. Second quarter gross margin of 9.4%

relative to the fiscal 2021 second quarter approximately 140 basis points relates to Lost sales due to cancelled orders, which may also include the right off of notorious related to those lost sales logistics and freight cost increases and labor costs associated with government-mandated employer paid time off or positive COVID-19 age or those exposed to covet

Alex the variance for approximately 60 basis points relates to increases in California minimum wage and increased overtime pay due to the timing of holidays during the third quarter of

Despite these headwinds. We still believe that our fiscal twenty Twenty-One you're in goal to achieve a curation Foods steady-state gross. Margin Target and 11:00 to 14% range is the same thing with revisions the low end of that range. We believe that this range remains achievable based on the following factors.

Potentially from fiscal third-quarter to the fourth quarter. We anticipate that we will benefit from higher crop yields due to the better growing season and cute for as compared to the winter growing season of Q3.

We have fully integrated volumes related to the shutdown of the Hanover facility and our operating at a progressively more efficient rate.

In addition on a year-over-year basis, we expect to improve on our prior year fourth quarter margin of 10.1% based on the positive mix shift benefit towards higher-margin avocado in higher-margin fresh vegetable products.

With respect to our full-year outlook for our curation segment. We're adjusting our revenues guidance to be in the range of 430 million to $435, representing a sales decline of approximately 14.5%

and adjusted even a Guidance the range of 8 million to 9 million dollars representing growth of approximately 90% at the midpoint.

Included in this updated guidance is an expected gross margin of approximately 9.6% for the full year as we believe we will continue to benefit from operational improvements drink by project Swift it a mix shift strategy geared towards higher-margin products.

Briefly turning to our Consolidated financial performance 9.9% 237.8 million year-to-date revenues declined 6.9% to 404.3 million dollars.

Dolly in general and administrative expenses decreased two million or 10.7% to 16.8 million in the third quarter and decreased 3.3 million or 6% of 250.8 million dollars for the full year due to the cost-saving initiatives under project Swift including the consolidation of office space and Facilities.

Consolidated adjusted ebitda totaled seven point six million dollars for the third quarter an increase of 12.6% over the prior year or an increase of 44.7% off during the one-time royalty payment in the prior-year.

So what date of adjusted ebitda I told nineteen point three million dollars for the year-to-date an increase of 144% over the prior year or an increase of 202% excluding the Royal payment in the prior-year.

Or overall Consolidated outlook for the full fiscal year. We now expect Consolidated revenues to be in the range of $523 to $532 and not solid dated adjusted ebitda in the range of 27 to $29 representing an increase of 23 to 32%

What's now turn to our proving cash flow performance cash provided by operations was ten point six million the nine month period ended February 28th, 2021 wage approved 14.9 million dollars compared to cash used by operations a 4.3 million dollars in the per year.

Cash from investing activities and proved twenty point eight million dollars compared to the prior-year as a result of 10.7 million decrease in capex in actions associated with projects that resulted in fixed assets sales proceeds a twelve point nine million dollars.

At the end of the third quarter our net debt was a hundred eighty three point nine billion dollars a decrease is 6.1 billion from 190 million at the end of the prior fiscal years or net leverage ratio was approximately 5.5 times based on a trailing 12-month adjusted ebitda as calculated under our credit facilities. However, on a pro-forma basis including the expected benefit from the exercise of the Forty Five Point 1 million dollar Book value of our interest in the windset investment, which has a full month of March 31st, 2022 are pro forma net leverage ratio was approximately 4.2 times.

We continue to improve our financial position and create greater Financial flexibility to ensure that we can execute our strategic plans as we similarly and strategically review page and every aspect of our businesses.

With that. I'll turn the call back doubt.

Thanks, John. Looking forward. We continue to be very excited about our business due to a number of factors. First are lifecore segment continues to produce outstanding results in as well positioned to take advantage of strong industry dynamics that will support growth for many years to come and secondly as the adverse impacts COVID-19 pandemic subside, we expect consumer demand for our Diversified curation food product offerings to grow and we intend to utilize our own sense of retail Network and proven track record with developing Innovative products. So once again be the industry leader in our categories after we also intend to use a strong research and development position to be in the Forefront of Industry opportunities such as the rapidly growing plant based product trends

finally

We'll continue to focus on executing our strategy to deliver long-term value to our shareholders.

Operator not ready for questions and answer sessions of the call.

Thank you. We will be now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate that your line is in the question queue you may start to if you would like to remove your question from the Q4 participants using speaker equipment and maybe necessary to pick up your handset before pressing the star key. One moment, please while we pull for questions.

Thank you. Our first question comes from Anthony vendetti with the maximum group. Please proceed with your question. Thanks. I was just wondering, you know project Swift as you mentioned something you implemented quickly as you came on board. It's been about fifteen months. Where where are you with that?

How what's the magnitude of the the annual stays annual savings that you've been able to been able to procure from that project? And and how much do you think is left and then specifically can you talk about the opportunity in your logistical operations? Yeah. Sure. Hi Anthony. How are you today? Good. How are you? You know we've we've canceled we accomplished a lot with project Swift. I mean, you know, we've we've cut our expenses, you know, we've closed several offices right sized r f t and t you know that all was around twelve and half million dollars. We really focused on the eat Smart, dial if you remember the end of last year, we had invested a lot, you know automation that has led to at the end of last year about a nightclub.

Improving cost out for us primarily focused on the core vegetable side, which that along with what we've changed in the sales force with a focus. I'm really going after profitable growth not just chasing Revenue growth that price increase allowed us to take our our Legacy Corvette products to a low to single-digit sometimes negative depending on the year gross margins to to high single-a gross margins. We improved, you know, Yucatan Yucatan. Remember last year at this time still wasn't profitable for us. And now we have to turn that into a a a very profitable business for us and it's it's growing nicely for us. And you know, we we we closed Hanover which are going to start to see the benefits of that birth.

as well as

Shutting down Ontario and those are the things Anthony that if we would not have done the gross margin degradation would have been even worse in Q3. But as I'm looking here at queue for the ball is bounce back or sales are healthy again, which you know gives me confidence that we're going to be in that 11 to 14% goal of gross margin range and we had said at the beginning of the year you asked about Logistics COVID-19 in Q3 slowed down some of the travel and things we have planned. So we HID bulb if you will a bit of a pause button on that that has started up as of March 1st, and we are still focused on you know dead.

Making progress there where it makes sense for a business will probably have more to report on that later. And you know, you asked me like what anywhere in life know it's maybe the 6th setting could be the 7th inning stretch, but somewhere in there because we continue to look at everything in our business and not just the way we're going to continue to wage rate is the really simplify the business and make it far more profitable and I'm really proud of what we accomplished. So I'm not happy with financial results, but I'm happy with the resiliency of the team and the things we've done to get here which gives me confidence that you know, Anthony I wouldn't have done anything differently. Maybe if I would have had a crystal ball that would have helped with the Corvette but I didn't and I believe in my team believes were doing the right things that we need to do to improve the balance sheet here at curation Foods.

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

Yes, we have confirmed commitments. These aren't things. I'm hoping or happening. These are confirmed commitments from major customers that.

War plan for earlier and a year particularly Q3 Springtime, we see the resets going in beginning now and the end of Q3 and and to end of Q4 and into q1 of next year. And the other thing Anthony that's opening up are more top the top meetings with me and our in our customers but I say with confidence we have a a robust pipeline of new products that are going in and we're beginning to see some of the month the small changes that are going to have big impacts for us. For instance too. Small slim some size bag that we put in we're beginning to see improvements in terms of our velocities off with that bag.

Okay, great. I

Will hop back in the queue. Appreciate it. Thanks. Thanks Anthony.

Thank you. Our next question comes from Mike Petoskey with Berrington research. Please proceed with your question. Good evening. Thanks for taking the questions. I get the one I understand I guess I want to reconcile a statement you just made with the guide and for Q4 you sort of just said that hey sales are bouncing back. You know, we feel to feel good about the momentum in the business, but the fact I'd even at the higher end implies material sequential decreases in in both segments. So I guess I want to understand when you say sales are bouncing back. What does that mean? Yeah, so mid January to February we had

A lot of our a good number of our sales. We just didn't hit the budget that we had because we just had zigzagging of orders for instance, you know, come back up for an order day later recant. What or, you know, we're stuck with the inventory. We're stuck with the walk by let's say the broccoli and the feeling a double whammy for us. So what we're seeing now is, you know, we're back to budget in terms of sales. I think what we're saying is though the operational impact of coal-bed there are practices with you know, increased that are going to be happening the higher degree of sanitation's life that are going to be with us on an ongoing basis we believe but we also know that we're getting the summer months versus the winter months and that's less risk for us.

In terms of the the raw material risk and the weather that that affects itself, we we feel that the business momentum is going to get back. We've got some classic going to be with us, but certainly the January the mid January to February COVID-19 impact on Foodservice hotels trays. We think those things are going to be starting to come back for us.

Can you quantify you know, I heard what you said about sort of combining eat smart and vegetables, but can you quantify what you know sort of just bought a year-over-year for for for the quarter for nine months, you know eat Smart, it's Top Line performance relative to you know where it was a year ago.

Well, it's relatively flat versus year ago. At least, you know, I mean I'm talking about you mean with or without the moment because we call but it's down.

No, I mean.

In absolute numbers. What is the smart you over here?

I don't I don't know if we have that it might you know, we we really in our segments we report this fresh packaged salads and vegetable growth which includes, you know off our salads vegetable trays and everything combined, you know from a total perspective for the year, you know based upon our guidance today, you know, we're seeing anywhere from 17% to negative -17 to -16 percent which really implies in the fourth quarter -27 to -23 per cent. And also you should remember last year. I do have the 53rd week. So the extra 14th weekend the quarter last year. So excluding that we would be in the negative 14 the negative 15% for the full year.

I'm not sure what you're telling me. Is that for eight smart or is that person that's for a fresh packaged salads vegetable growth? Okay, I guess I've always thought he'd smart was sort of a home or or with at least one of the parts of the business that was expected to grow like the the the Corvette. I never really thought was a a part of the thesis here and that's why I'm asking specifically about eat Smart unless that's not really considered. You know, if if if I'm wrong about the long-term thesis that's a part of the growth and then I don't I guess the question is isn't as relevant. But to me it feels that actually should be a like you're breaking out avocado. I'm not sure why eat Smart say business. I think 3 to 4 x the size of avocado, right?

Revenue standpoint, yes, you know the part of the thesis for growth has been getting a number of our new products. I'm going to eat Smart side and the pack itself kids you've heard is talk about plant-based proteins. All of that has been essentially put on Palm during Q3 and has been moved out to the end of Q4 and into q1 of next year based on customer reset

Okay, I guess one more question turning sorta to capex and and I guess you know at the end of last quarter, I think capex guidance was still around Thirty million or possibly even a little bit more than that. Obviously you guys are way behind that pace as when you know your fiscal Q4. Can you can you just talk about it? Maybe I missed this maybe you mentioned earlier. But what what's the updated guidance backpacks for this physical? Yeah, John can do and all that. Yes couple of things for the quarter. We spent two point six point at lifecore and 1.1 million curation for a total of 4 billion and the in Q3. So we're looking at spending an additional 6.99 lifecore in Q4 in a 1.7 curation in Q4.

and the white cord

You know certainly keeps us on our growth plans for the and the creation spend as for h p p system of avocado products will benefit our guacamole gross margins by two percentage points were mortgaging forward in the next year. Now. I'll just add on to that from a cash flow perspective, you know, we're operating cash flow of 10.6 million, you know for for the year-to-date lesser cat backs of 11/4 add back 12.9 for a fixed asset sales and the closing of hand over in Ontario facilities. We do have a process of free cash flow of 12.1 million year to date and even based upon the guidance today. We would be flat to positive two million, you know for the year off, so and hopefully that answered your question and total were about just under $25 million of expected capex for the error, okay.

So the the guide for Q4 you're telling me is is roughly 8 and 1/2 million, right?

6917 yes to me. It looks like to me it looks like you're coming off of off of that. But maybe my math is dead. Okay? All right. I think that's all I've got. Thank you.

Yeah, thank you.

Thank you. Our next question comes from Mark Smith with Lake Street Capital Market. Please proceed with your question, I guess first first question for me. Can you give us some detail on what you're seeing from a couple trial standpoint and and any potential impact on lifecore? Yeah. I'll I'll let Jim go into detail here. But you know as we mentioned we have several projects a number of them are in the late stages of clinical trial for FDA approval and I you know still continue to add discussions with numerous customers on more of the pipeline bills as we continue to build that out, but I'll let Jim answer any more details you may have around that Jim.

Hey Mark, how you doing? I'm assuming your question is are we experiencing any delays with our partners clinical trials? Is that your exact question? Yeah. Yeah. I need delays it you're seeing anything back there and then maybe any update, you know post quarter and on and what trends you're seeing today. Yeah for the most part things are staying on track some of the early phases of objects that are in phase one phase to clinicals depending on what the what indication they're going after and what kind of clinics are in did experience some delays things are starting to fire back up again more importantly though. The the main things the late phase things in our development pipeline continue to move forward with several of our partners have reported fairly strong and very strong phase two and phase three data and continue to you know advantage.

Stir their studies according to what our plans are.

You know, we're working with you know, some of the top pharmaceutical and that device companies that are out there. These guys are performing in the top of the page it with products that have been in in the market for a long time and are going anywhere and a lot of these people are who we are working with in our development pipeline as well. So it's the strong group of people on the strong group of Partners and they're advancing. Well, we did just uh with one of the things we were working on. I think in the last quarter I mentioned we were expecting an FDA approval later this year. We were just notified that one of the products were working on received approval. So that was exciting news for us. And I know you know, one of the other late phase three projects were working on as a Paducah date coming up here in May that's still on track and we're busy preparing to age.

To help them with eventual knob so things are are on track and continue to build we're very happy with the activity in our pipeline as it continues to build and see things continuing your house and it just staying on life Court any additional Insight on the delayed shipments and and fermentation business, you know, it's just more, you know shift. She for and and you know, I assume that this is fully built into the revenue guidance.

Yeah actually marked the the shifts were earlier into our fiscal year or so. You know what I'm sorry rebate numbers. We have 10% or just a hair under 10% growth RHA business. So the growth is there is an increased orders from our commercial customers. It's just a timing of shipments actually earlier in the fiscal year or so. There's no divorce is things are on track with RHA business. Just remember we were doing a lot of work to try to flatten out or quarter the variances in revenue and this is just an offset of that things that normally ship in in the third quarter shift in in primarily the first quarter of this year and I can't again in a second.

Okay, great. And and it just one question for me is we look at curation, you know, you guys have talked more about new products, you know plant-based protein, you know any additional Insight you can give us on that and then a specially any potential increase in R&D spend.

You know our R&D spending remains relatively flat Mark and that's just chilling by the fact that we are very focused and selective about what projects we work on and we have made a shift from just working on a number of projects based on what we think is the right thing is to work on based on Trends and consumer Trends to taking those insights and working much more closer with customers and develop products that are more specific to their needs. I will give you a a tangible example. We launched earlier in the year our Mediterranean plant-based protein product with Sam's Club. It has performed extreme. Well, it's a rotational product for us. So that means it goes in for, you know, four or five months and replace it with another product off.

last time we had a rotational product with

Three or four years ago. It was strawberry Harvest and our Mediterranean protein product is doubling that in Revenue off. Sam's is very pleased with us and we will continue the rotational program with them as we go into next fiscal year. A number of other products just have been delayed due to the resets, but we're in conversations now and have as I mentioned firm dates for for those to go in and once again, you know, it's just not products. We think there's opportunities in packaging for us with the same products, but maybe the right size the right format the right usage occasion, and we're really excited about some of the packaging innovations that we have in our pipeline. Okay, great. Thank you.

mark

Thank you. Our next question comes from Mitch pinheiro with Sturdivant and Company. Please proceed with your question.

Hi, good afternoon. How you doing? A couple questions. I'm doing okay be better if I understood the fourth quarter for curation a little better off. So I'm just trying to with what the guy that she gave for the year. We're going to we're going to see a decline in curation in the fourth quarter and revenue of you know, you're 20% is that correct?

We're going to see a decline in the fourth quarter of anywhere from 23 to 27% And if you exclude the 53rd week last year would be 17 to 22%

And so it's just can you talk about the Seventeen to twenty 2% decline just break that out the puts in take a relative for last year why it's down it's down more than I would have. Thought. I know you probably went through it in the in the in the in the prepared remarks, but if you could just go through that again, I'd appreciate that.

Well, one of the things last year at this time is winning the queue queue for Mitch. We had a pretty full lineup of Corvettes Home Products, and it was until the end of Q4 and the q1 when we got the cost out through and the price increase increases through that we really started the aggressive SKU rationalization of our Legacy Corvettes business. So that's a a big driver for us is it's it's still Falls. I know it seems like a long time but it really wasn't our plan reduction in the Corvettes business and to move it to be to be more profitable.

So that's that's a big part.

Of the revenue reduction year-over-year in Q4.

It seems like yeah, it seems like though to your point. It seems like we've been like ready to laugh the you know rejection of that already, but I guess not it's it was starting to come down. Look at my numbers. It's been coming down the you know, the the the the non-core business. It seems like it's Fallen more than the plan reduction is that not is that true or is that there was coming down last year. I remember we were looking at us and we just didn't make any money at all.

And so we started SKU rationalization and a Corvette business and then our salad business as well. Were we were just spending a lot of money on trade to keep our products on the Shelf. So we started some of it but we got so that that that's been happening. It's probably why you feel like it's been happening for a long time cuz it's one of the things I first initiated off when I got here, but we really then through last year through the Q4 of last year, you know, we were still on the fence on whether we were going to we had to walk path of reducing and trying to manage a more profitable smaller Corvette business or where we go to sell it.

And we made the decision that end of Q4 early q1 that our productivity went through it hit the bottom line. Our our sales team was able to go out and secure a higher prices. We hadn't taken a price increase in some cases and twenty years which is part of the problem and we were able to get prices in you know wage increases through significantly improved our contribution margins on the business and that really was in to one of last year. So I know it seems like it's been a long time but really as you look back at it really hasn't been helped.

Okay, and then so avocado products in the fourth quarter. Are they going to be I mean we looking for the flattest you had a good quarter a year ago. What's your expectations for you? Yeah, we we continue this.

But you know Nielsen data or where ground about 8.3% internally were growing at 5 versus our plans, but John there's a there's a fifty third week in there too long. So we we actually look you know, we we kind of look flat against it because of the 53rd week, but if you exclude that it's consistent with what we have been growing.

Okay helpful. And then just when we're on on on curation is was there what was your adjusted? Is there any adjustments to gross profit for curation in the third quarter?

3.1 million, no justice. Okay moving on to your home. It's like you're saying I shouldn't more detail. You really aren't going to see a lab in the Corvette business till November. Okay, cuz we had to give customers leave old times and whatnot. So just so you know an ongoing basis, we won't really be lapping the numbers you want us to be laughing till about November.

Okay, thank you. And then with lifecore, so could you should we expect to happen to revenue or gross margins? If one of your near-term pipeline, you know drugs just approved. What happens is there is is their revenue smoothing. Is there going to be an initial jump in shipments? Will you see a spike in the quarter that it's approved? Have you already been building inventory for that and then second, you know are their margins on the initial shipments. You know, how do you how do you figure your margins on that? Uh, and

You know, would that be you know when we see any margin pressure or something on and a launch of a new drug to talk about that a little bit, please?

Yeah, sure Mitch, so I'll start with.

for the for assuming you're talking about the

the project that has a producer day coming up in your May and we've been actively working with that partner to manufacture material and preparation for launch. Should they receive approval which you know, everybody's fairly confident in but as far as pricing and margin and any shifts in margin, we typically price especially with the newer non-legacy type products at contribution margins that easily support our overall gross margin objective, which is to maintain, you know, overall gross margins in the 40% range. So we're not going to see any pressure on margins. If anything it should help a little bit in the overall scheme of things typically want a product like this like b or products like these launch they have a bowl of some material to go out to to feed the field and and feed the market.

So there's a buildup of inventory and then slowly sells through and we supplied on a more steady rate but this is all figured into our numbers for fiscal year. And when we present next fiscal year will be included in all this but you know, it's our overall goal like we discussed, uh, the last couple of calls to to do what can the balance our revenue and profitability from quarter-to-quarter. I think we've done a good job with that this year and I think the more we get approved in the more products that uh, turn commercial and are successful. There are only going to help us with that. So no margin pressure. We've been actively working all ready to prepare for this launch of manufacture that material and long-term. We hope to have it help flatten our quarterly performance. So hopefully that answers your question.

Does thank you.

I appreciate that. And then when you look at your you know, you said 17 active projects what percentage of those projects sort of use your you know, h a and proprietary, um, you know know how around AJ.

Yeah, it it shifts a little bit depending on what we're working on. But right now it's about sixty 60% of the product in that portfolio utilize 40% don't offer several of the things that were in discussion with the add to that 17. Don't use a check some do so. It's it's we see, you know, as we continue to grow line and continue to grow our business that the h a number will start coming down and it'll it'll be more even with other polymers and and other types of products.

And when when it comes to Aha, you're obviously a liter, but are there any other?

companies out there specializing in and formulations within the City MO

Chapter I'm fairly certain at least, you know, I'm not aware of any other CBM all that actually has the capabilities that the manufacturer in a very similar ways to support their product portfolio and the support the customers and that Avenue. There are other CD MOS out there that work with h a m that formulate and fill products that utilize aha, but we're were the prime player in the only CD em all that has a stand-alone home h a raw material business that I'm aware of.

Yeah, well as you pointed out I guess in presentations they say is I'm seeing increasing number of drugs and therapies. I'm using that polymer for all the reasons that you know, uh all the reasons that you put in your presence. Excuse me in your presentation, but it seems like that's a very rapidly growing area and I guess one last question. Are you going to see which we expect pipeline growth package and the upcoming 12 months?

We you know, like you've already mentioned in the past and another presentations. I've done our primary markets in the space and there's a lot of development. Going on and that space especially in the back of the I you know, the tree page related macular degeneration and other retinol type diseases and we're doing a lot of work in that there's a lot of the projects now, you know, there's three or four, you know pipeline that are ophthalmic based products that will support future growth our primary market like disco elastics, you know, we work with the top three players in the industry. There we have for a long time and there's projected, you know, loading a single-digit growth for those applications. Just simply based on the Aging demographics of the population. So we see growth in RHA business. We're also spending money.

Time now not just focused on the growth of our CMO pipeline.

But also looking at what we can do to expand RHA offerings to take advantage of some of the you know development work that's going on there as well. So we'll see growth. They won't be the primary goal driver for life for money for they'll still be driven by our cdmo business like we discussed in the past.

Well, thank you. Appreciate the time.

Okay, this is John. I just wanted to update a couple of things on our guidance for capex for the year for the quarter it just to make it clear or to for guidance on capex is 10.1 million spend for lifecore one point seven million for curation for a total of 11.8 million that that then equates to approximately year-to-date spend or your own estimates spend of 17 million at lifecore 6.2 million curation for a total of 23.2 million overall estimate for the urine capex.

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

concludes today's conference rep

you may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.

Todd