Q2 2022 Landec Corp Earnings Call
[music].
Good afternoon, and thank you for joining landmarks fiscal 2022 second 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 your question.
Now I would like to turn the call over to Jeff Sonic Investor Relations at ICR.
Good afternoon, and thank you for joining us today to discuss lander corporations second quarter fiscal 2022 earnings results on the call today from the company are Dr. Albert Bolles, President and Chief Executive Officer, John <unk>, Chief Financial Officer, and Jim Hall, President of lifeboat.
By now everyone should have access to the press release, which went out today just after one PM Pacific for eastern.
If you've not received the release, it's available on the Investor Relations portion of land decks website at IR Dot land deck Dot com.
Before we begin today, we'd like to remind everyone of the safe Harbor statement certain statements made in the course of this conference call will contain forward looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward looking statements additional information concerning risk factors that could cause actual results to.
Differ materially from those in the forward looking statements is contained from time to time in the Companys filings with the SEC, including but not limited to the company's Form 10-K for fiscal year 2021.
Copies of these filings maybe obtained from the Companys web site.
And with that I'd like to turn the call over to al.
Thanks, Jeff.
Everyone and thank you for joining us today.
Today's call.
Provide an update on our progress with project Swift well all of them.
Salt life core.
And then John Marburg.
First our financial results.
Updated fiscal 2022.
We will then open the call for your questions.
We've been quite busy since we last spoke to you in September.
You can now see our focus has been on executing the sale of our eat smart fresh packaged salad and vegetables business.
Which closed on December 13 for $73 $5 million in cash.
This asset sale.
It's an important milestone project Swift.
Demonstrates our ongoing efforts to extract value from our noncore assets within our curation foods business. Although we are against the company around our rapidly growing life core biomedical business.
We have already utilized the net proceeds from the transaction to pay down debt.
Which ultimately reduce our balance sheet leverage.
This puts the business back on a firm foundation that allows us the flexibility to channel our resources to more fully support the growth and expansion of the life core business.
With the divestment of eat smart the while there's more work to do management is laser focused on the life core business when the remaining duration of assets.
They're growing at a higher rate produce more attractive margin.
And have value that we believe is presently under appreciate it.
As such.
We will be focusing most of our attention and discussion going forward.
Quarterly updates on life Court.
Which is generating the vast majority of our consolidated adjusted EBITDA.
It has provided land deck with a consistent and growing source of high margin revenue, that's our acquisition of the business in 2010 in.
In fact, <unk> revenue has grown at a compound annual rate of <unk>.
15.4% since then.
Which is really impressive performance.
Before I pass the call over to Jim for a review of wife Corp.
Also wanted to take a moment to characterize it.
Financial reporting for the fiscal second quarter as.
As well as our guidance for the balance of the fiscal year.
Since the eat smart sale occurred subsequent to fiscal second quarter, and we are providing you with a pro forma look at the curation foods signal.
For the first half of fiscal 'twenty, two as well as the full year fiscal 'twenty one to aid in your modeling the Gulf forward business.
John will share some greater insights on our financials and we later guidance, but I want to recognize the great performance that life core.
Revenue growth accelerated to a 7% increase in second quarter.
[noise] understates the accomplishment.
Some of the channel inventory headwinds.
Working through this.
Bill first half.
And adjusted EBITDA growth was 26%.
Life core continues to perform well we are excited for a strong fiscal second half of the year, we couldn't be more excited about what lies ahead.
With that I'll pass the call over to Jim for a deeper review of our lifeboat business.
Thank you al.
We operate and the Amazing C D M O industry with strong fundamentals and life course perfectly positioned to take advantage of the growing C. D M. All opportunities to deliver attractive financial returns to all of our stakeholders.
We are a beneficiary of the significant industry trends towards outsourcing of new drug development.
And our syringe and vial filling capabilities align perfectly with the powerful trends and new injectable drug applications that are utilizing these capabilities in fact, approximately 55% of all new drug applications are injectables.
Pre filled syringe demand is growing at a 13% compound annual rate.
Couple this backdrop with limited injectable drug manufacturing capacity.
Life course presented with an incredible opportunity to fill unmet demand with our existing capacity.
Been investing in over the past few years.
Activity within our pipeline remains strong.
Fiscal second quarter, we initiated work on two new projects that we establish development agreements for late in the first quarter.
This maintains our development pipeline at twenty-three projects with 19 different customers, which are spread across early phase clinical development with five projects phase one and two clinical development with eight projects in phase three clinical development and scale up commercial validation activity with 10.
Projects.
Moving forward as we continue to build and prepare the organization to advance and expand our development pipeline activity remains strong and we are in active discussions with many potential new project candidates to continue to expand our pipeline.
In addition development activity for the existing pipeline continues to advance with several new statements of work being initiated in the first half of this fiscal year to continue advancing the project through their development cycle.
Life core also received three key FDA approvals during our fiscal second quarter.
First life core was approved to manufacture a key product in one of our existing commercial customers product portfolios.
Second life core received FDA approval for a new manufacturing process that we designed and validated to support commercial scale manufacturing for one of our customers recently approved drug products.
And finally, we received FDA registration for a new state of the art raw material warehouse to support increased raw material requirements and volumes as we continue to grow.
All of these approvals were key components to support our future growth and provide continued validation of life course world class quality management system.
We also see an opportunity for life core to grow and extend our reach through investments in new capabilities to meet the industry's ever growing needs.
Our expertise in discussion materials, and our world class quality management system that supports drugs biologics medical devices and combination products enables us to stand out as a specialized leader in the <unk> industry.
We are preparing for this through operational and capital investments, but 1.6 million dollar investment in the P&L of this fiscal year is focused on sales marketing and development resources to expand our reach with new customers.
And to increase our development services, which ultimately allow us to continue to expand our pipeline and open new sales channels that expand and complement our existing capabilities.
From a capital investment perspective, we are focused on maximizing the revenue generating capacity within our current infrastructure.
Looking to the future to source and qualify the necessary equipment to keep up with growth unexpected capacity needs. We continue to expect capital investments in fiscal 'twenty two of approximately $32 million towards expanding our operational filling capacity.
Current 10 million units to reach full utilization of the 22 million units a theoretical capacity that we built infrastructure alone more.
More specifically.
It is this enhancement and capacity utilization.
All of Us to drive continued growth in the years ahead.
In summary, we are excited about the excellent position that we're in today.
We are benefiting from the strong industry trends and our investments in capacity will allow us to continue to generate strong sustainable growth in the years.
Now I would like to turn the call to John.
Thank you Jim.
<unk> had a great fiscal second quarter, the business realized total revenues of $24 9 billion or a seven 4% increase versus the prior year period.
Given by a 17%.
Increase in our CMO business, partially offset by a 27, 8% decrease and as fermentation business.
Which was a result of timing of shipments within the fiscal year.
Additionally, consider that we face headwinds from excess channel inventory.
In the fiscal first half of the year, which we have largely moved through here early in the fiscal third quarter.
Gross profit margin improved by approximately 185 basis points versus the prior year to 47%.
Largely due to improved revenue mix.
Segment, EBITDA totaled $9 1 billion for the quarter, a 25, 6% increase over the prior year with an EBITDA margin of 36, 6%.
The life core business is on track for a strong step up in growth in the fiscal second half of this year as we move past the excess channel inventory and we're supporting that with a reiteration of our life for segment guidance on both the top line and EBITDA.
We are guiding life core revenues to a range of 105 million to 108 million representing growth of approximately 7% to 10%.
And adjusted EBITDA in the range of $26 million to $27 million Rep.
Representing an increase of approximately 6% to 10%.
As a reminder, the difference in growth rates this year, where EBITDA lags revenue is entirely due to the $1.6 million of P&L investment that we're utilizing as we prepare for our next phase of growth.
Let's now shift to curation foods and related financials we've.
We've recast our duration segment results and have provided pro forma results for the first half of fiscal 'twenty, two and full year fiscal 'twenty one.
Our hope is that this will provide the necessary bases to understand the go forward segment.
Which is now comprised of our avocado products business.
R O olive oil and vinegar business and breezeway.
Together this represents approximately $75 5 million of annual revenue at the midpoint of our new segment guidance with avocado products, representing approximately 85% of the mix.
With that foundation I'll make just a few comments on the pro forma curation foods segment results versus the comparable pro forma prior year period.
First revenue increased 10, 6% in fiscal second quarter comprised of a four 5% increase in avocado products to $15 4 million.
With the balance representing O olive sales.
Note that <unk> has historically been included in the fresh packaged salads and vegetables business categorization that we used prior to the sale of eat smart.
Curation foods generated a pro forma adjusted EBITDA loss of <unk> 4 million, which compares to a loss of <unk> 2 million in the prior year period.
However, as you think about adjusted EBITDA production from the remaining business.
And on a pro forma basis. Please consider that we are in the midst of a reverse integration.
The separation of the eat smart business will require us to right size. Our go forward infrastructure with a smaller revenue base.
This work commenced with the sale, but will take six to nine months to fully execute.
As we work through the transition services agreement with the buyer of eat smart.
Our reverse integration efforts, there will be stranded corporate costs that weigh on the segment margin in the near term, which could amount to approximately 2 million in annual savings.
As it pertains to the updated outlook for fiscal 'twenty. Two we're providing you figures on a reported basis and a pro forma basis to help clear out some of these nuances brought about by the sale of eat smart.
The bottom line message here is that we're not materially changing the key underlying assumptions for the remaining business.
I have a counter products O olive and breezeway.
The primary change in revenue guidance on a like for like basis is the second quarter underperformance of the household eat smart business as well as the anticipated loss contribution of that business in the fiscal second half.
Additionally, I'd point out that we have reallocated approximately $3 5 million and corporate expense allocation from the sold business back to our corporate and other segment.
Once again, we will be working through a right sizing of our corporate structure over the next six to nine months and expect some additional savings in time.
The eat smart sale has significant impacts on our balance sheet as well.
Net bank debt on a reported basis for fiscal second quarter as of November 29, 2021 was $165 1 million.
However, on a pro forma basis adjusting for the utilization of the eat smart sale net proceeds of 67 9 billion.
Net debt would have been approximately $97 million.
This compares to net bank debt at the end of fiscal 'twenty, one of $192 6 million.
An improvement of nearly 50% or $100 million in the year to date period, which reflects the sale of our <unk> investment in the first quarter and the eat smart disposition in December.
We still have some more work to do but our cash flows are significantly more stable our margin structure is significantly more attractive.
And our growth profile is greatly improved.
We believe this set of attributes provides a solid foundation for our team to begin demonstrating consistent operating results.
It could be better appreciated by the investment community as we work to deliver shareholder value.
And with that operator, please open the call for questions.
At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys one.
One moment, please while we poll for questions.
Our first question is from Gerry Sweeney with Roth Capital. Please proceed with your question.
Good afternoon, John and Jim Thanks for taking my call.
Hi, Jerry.
Hi, Jerry.
Wanted to start on.
Obviously life because that's the focus.
Congratulations again on the eats martell, but.
Curious if this they'll actually.
How do we say that I'm just curious maybe if life core obviously there was a lot of capital is capital intensive.
And there may have been some constraints on the capital side, but also curious if this also constrained maybe some customer acquisition opportunities.
A lot of these potential opportunities are.
I have not written in but a part of the phase III trials et cetera.
We will just open up more customer opportunities in other words, there are some customers look at the food business as a drag in calling for a little bit of caution in coming to life core for opportunities.
Yeah.
Jeremy Let me just start out here by saying you know this year.
Are we.
We have mentioned that it's an investment year at life core.
We we have no plans, we've already implemented some capital.
Close to $30 million in capital investments to grow those future opportunities as Jim mentioned.
You know we've invested a little six more along the new business development pipeline.
To attract more customers and we've invested not only money, but we have added resources.
At life core to bring in some new talent to really continue to drive that.
That investment pie.
Pipeline and bring more customers on board.
And the future.
Jim anything more you'd like to add to that or John.
Yeah sure Hi, Jerry this is Jim.
To directly answer your question I don't think it's going to have an impact one way or another I think we're really happy and confident on where things are heading with life core.
The activity in our development pipeline remains strong every aspect of our development pipeline continues to transfer and transition through the development phases, which ultimately you know.
Turn into commercial opportunities for us.
The.
The work, we've done to expand that pipeline with our investment and how we go out and target opportunities is on track we've.
Hired 10 out of 11 key positions that.
That we had identified to build up not only the development resources to accelerate the development pipeline, but.
I've also brought in a new VP of corporate strategy from the C. D M O world to help us expand that.
Darren Heber as his name and he's on board now and digging in and really helping us look differently at how we go out and target opportunities.
And the.
The knocks on the door are still really really frequent theres a lot of things we're in discussion with that.
That hopefully will onboard soon so.
More to come on that front, but we're very happy where things are at we spent a lot of time over the last quarter trying to balance out the quarters and when we're doing development work in and the development activity and the investment has allowed us to do that because you see the performance in the second quarter.
And projections for the rest of the year, so very comfortable with where life cores out right now and where we're headed.
So suffice to say that that $1 6 million in business development.
Start is increasing.
Bob pipeline base or opportunity I guess, that's the way, it's allowing us to react quicker and go after more and you know our intent was to.
Have that start impacting the back half of this fiscal or this later in the second half of this fiscal year, but really start kicking in.
FY 'twenty three and beyond.
But we're very very happy with where we're at.
What is the capacity I mean, obviously 23 projects in the pipeline and.
Some of those may filter out.
Pending on how some of the trials go on it et cetera, but.
How much capacity do you have and the other I guess the follow on is.
I think you are at 10000 or more of a $10 million.
At present, youre going to $22 million.
To hit that $22 million.
How what does that pipeline has to look like I know, it's like a multiyear process, but just trying to get an idea of how that sort of plays out over the next couple of years.
Yeah, Yeah, really I mean, it's ultimately our goal to have that pipeline continue to build and we add resources to support that when needed.
We still have room to expand and grow the pipeline with what we're adding now to give you a specific number of projects is tough just because it depends on the workload and where things are at.
And how long they take to go through as an example, you know one of the one of the projects that are in our late phase here.
Is going very very well and I just signed the 43rd statement of work for that project. So you can see along.
They've got to develop in various stages, but.
Overall capacity to drive to $22 million of things that really drive that are already in our pipeline.
The investments focus to fill that out and we're also as you know because we've talked about in the past looking.
Looking at beyond that and starting to get the fill lines into go beyond that $22 million.
Got it really helpful well again, congratulations on the smart and before you know it.
It seems like a life core growth.
Faster further I should say okay. Thank you.
Yeah. Thank you Joe.
Our next question is from Mark Smith with Lake Street Capital Markets. Please proceed with your question.
Hi, guys.
First question for me is can you just walk through the remaining headwinds within life core and kind of as you move through those anything that's remaining.
Any headwinds in life core.
Yeah, just as you've talked a little bit about the industry as some of the things that slowed some of the growth. This year kind of how you're working through those and kind of your outlook.
Yeah, well the.
Our growth was impacted once again by the million six an investable.
Building a more robust.
A robust pipeline for us that we went through Oh the.
The other impact was we were sitting at a.
High degree of inventory late in Q4 and Q1.
Of of H E.
But that was primarily driven by.
Our customers, primarily international and Covid.
We have moved to that ramp more rapidly.
Then what we are what.
While we had planned for.
We.
We don't see any slowdown with the with the last phase here for the next phase of Covid. So.
That those are the two headwinds that we had that.
We are pretty comfortable with and we're moving forward.
Jim anything you want to add to that.
Yeah, Hey, Mark.
Al covered it pretty well listen you know.
We went into the year.
Especially on the ophthalmic side of our business with heavier inventories because of the slowdown due to COVID-19.
We implemented.
Oh, very frequent meetings and planning meetings with supply chain groups from both our customers and life core. So we're we're getting a lot more real time data and we're.
We're happy to say that you know we are we have worked through the heavier inventories orders are picked backup demands picking back up not in all markets, but generally an overall picking back up.
<unk> not seen any impacts related to this latest phase of Covid and if we do well.
We will be.
All over it since we talk very frequently with our customers on the inventory planning side of things, but it's worked through you should start seeing.
The chain side of the business start picking back up in the second half and we're happy with where that's headed and you know.
Things are on track as we laid out the fiscal year.
Perfect and then you guys gave a lot of info on the pipeline.
It sounds like it remains very strong.
Maybe just big picture walk us through how selective you can be in deals and new partnerships and how much of this is really you know people knocking on your door versus having to go out and work for this.
New partnerships.
Yeah.
I mean, we're fairly selective in that we want to make sure. We're partnering with people that we can provide.
<unk> value to and typically we look at.
And in life course niches in the complex type formulation products, whether they're biscuit us whether they're complex to formulate or synthesize those are things. We look at we want to make sure we add value we want to make sure we're working with people that.
You don't have experience in and have a product.
With a market that we can support.
And but really we're agnostic if it's something we can provide value to and we can partner with them, we do it and.
Historically life cores primary driver was our performance our project pipeline as you can see is 923 projects with 19 different customers.
And so we have a lot of repeat customers and we have some customers in that pipeline that are referred to us from people we work with.
The investments intended tended to do is start focusing.
I'm more of a hunting style for us to go out and actually find things that are in development and be more aggressive in going after them. We think that's going to be a key part to expanding the pipeline.
Beyond where where it is today.
Yeah, and Marc will go ahead based on our activity.
And our track record of.
High quality.
Facilities.
The work to how well we execute at life core.
And our relationships with F. D. A we have a pretty high hit rate of folks that get in our pipeline that we ended up.
Keep in their business.
Perfect.
And that leads really to my next question just as we look at.
You know projects and commercialization any update there.
We've seen good things out of this heron.
Project any updates there on on those that have really advance through approval and commercialization.
Yeah, I mean, the things that are in late phase three yeah, I mean, I can't report on data or anything like that.
But I can tell you they are progressing well and on the timelines that we have laid out.
And our projections internally you also.
<unk> heard me talk about three key FDA approvals.
The first of those was for an ophthalmic product in one of our customers commercial customers product portfolio as it was the only one we were not approved to manufacture yet but that approval will be key for us to continue to expand business with them moving forward.
The process approval.
Was a key approval for not only life core, but for our customer and that it allows us to really scale up to.
To feed their not only their U S launch, but O U S launch as well.
Then the.
The other key approval as our warehouse.
We needed the additional space temperature controlled space for the to handle the increase in raw materials with the increase in our our manufacturing capacity. So all three of those support.
Hum, where life course, heading longer term and where key approvals for us because we continue to grow.
Okay and then last question for me just wanted to ask one on the remaining piece of curation.
You know those businesses look pretty solid can you just talk a little bit more any about the outlook and maybe insight into the timing or expectation on disposal of some of those assets.
Yeah, well, let me talk a bit about.
Ocado products.
You know Mark we launched this test market in Cincinnati.
Guacamole now we got very very strong results.
We doubled our velocities.
54% of households.
Purchased the product came back so we have a very high.
Repeat rate of 20% with a gain of six 4% of households that had not ever tried the product. So our key issue has always been trial. Once we get trial, we have very strong repeat so we're very excited about the guacamole now.
And we're looking at converting that nationally in March.
Right to be completed before second two mile well.
Also launched a new.
Product called the only avocado.
The avocado without all of the spaces that are we.
We were pleasantly surprised that we will increase incremental sales by 60%. So got a lot of new buyers or the category and we are.
Looking at the <unk>.
Extending that nationally here.
At the beginning of the end of January early February So we're excited about.
The things that we're doing on the avocado products business.
And.
Part of project Swift has been for us too.
Look at everything and we were really pleased the board is very pleased with the sale and the price we got at 73 and a half million dollars.
In each of our business really helped us in the last six months.
We really get our balance sheet.
We're in a much better spot by taking down $100 million in debt.
No. We continue to work, it's a process that we continue to work.
Perfect. Thank you guys.
Our next question is from Mitch Pinheiro with sort of it and company. Please proceed with your question.
Yeah, Hi, good afternoon.
Amit.
I have a bunch of questions, but I sort of follow up Jerry was asking I guess, Jim regarding capacity.
You know you are currently at 10 million go into 'twenty, two does that capacity.
Is it kind of go up linearly or does it go up.
Based on how your project pipeline and when does the capacity actually.
Is there any can you give us some timeline on that and then also of the $10 million.
What is your current capacity.
Are you currently running.
50% of that $10 million or higher.
Any color would be helpful. There.
Yeah, Jim you want to take that for Mitch.
Sure he image.
So break down your question here currently.
We're staffed and.
Ancillary equipment to handle 10 million units we.
We typically try to keep our capacity.
Demand and don't like.
Demand ever to reach more than 80% of capacity. If we can help it to handle fluctuations in demand, especially on the upside. So this fiscal year.
With everything we got running through from a commercial standpoint, and later phase development pills are doing approximately 8 million units.
Maybe a little bit more than that.
And as far as fill rates from the capacity.
It's not linear.
It just depends on the approval rate and the demand of those approvals, but it's.
It's our goal to fill that capacity as fast as we can we.
We haven't provided.
Any forward looking guidance, yet on how fast that gets filled but.
The one thing I have talked about in the past that that.
You've heard is that we're already investing in capacity beyond the filling capacity and the filling equipment beyond 'twenty 2 million units, we have to fill lines on order now.
It takes three to four years to get those in place. So that should give you some guidance and where we see and how fast we think.
We're going to need the additional capacity beyond 'twenty 2 million units.
And so.
The $32 million that you're spending this year.
Does that does that that doesn't take you to the $22 million does it.
Part of it part of that is too.
To fill out the 22 million units.
Part of it is to go beyond you know for some of the longer lead time filling equipment.
Relatively pretty even break out.
From them about 30, 35% or so of our capital spend this year fills out that 22 million units will.
We will need to continue.
To spend capital over the next few years to continue to fill that out like I talked about when we don't.
If lead times on equipment like lab equipment or mixers are filters or things like that are a lot shorter lead time. So we don't spend the money until we need it and always keep our capacity.
Okay.
To handle.
The 80% demand equation I talked about earlier.
So the other parts of it are the go beyond 22 million units. We also spent capital this year to expand our development capabilities and expand our equipment offering there and then the rest of the capital is.
It's just what we were what we refer to as base or maintenance Capex. So it's kind of broken out in those four buckets.
You think I know, you're not giving forward guidance, but from a capital.
Spending perspective as next year.
Going to be lower than the $32 million spend this year.
John do you want to cover capital at all.
Yeah, sure Hey, Mitch Yeah.
As Jim said, you know, we haven't yet given out.
<unk> centre forward plans, we're still looking at those and I think we've said in the past our capital is going to be somewhat chunky.
Depending on the year end, depending on the needs depending on the lead times so.
We're still kind of working on that.
Planned to have.
And be speaking towards that very soon though.
And then back to.
Jim you know we have 23 projects.
In the pipeline that was the same number as in Q1.
The two new projects that you added does that imply that that two of the other.
Other projects moved into commercial production.
Yeah, we had one move into <unk>.
Commercial production, we had one preclinical.
Product that is we don't consider active right now so we took that off the list.
It's not going away, it's just in a phase where we're not spending any time on it.
And the two new ones that we added we basically signed the agreements right towards the end of our first quarter and work really began this fiscal year and so yeah. The numbers are the same as I reported in Q1, but the activity is.
Is a lot higher now because of the work actually started.
Okay and then.
Yeah.
The 8-K and not not been the fermentation side, but.
Sort of as a strategic competency.
Our competency that you have.
You had mentioned that a year ago or so that about 60% of your pipeline was 8-K related and.
Hum.
That to me just you know just.
Uh huh.
As they as they read up on each day, it seems like that would be.
A big strategic advantage and a large element of your pipeline build.
Having the expertise with H, a being a drug delivery system.
Is that where a lot of the activity you see coming from the H a part for.
Is your is your pipeline going forward going to significantly diversify away from HCA.
And related derivatives.
Yeah actually the with the current product mix in our pipeline, 70% of them utilize H J.
It's a strong tool for us.
And really you know what really has built our capabilities and our niche.
And always going to be very important and really and I know.
In the several things we're talking.
With this potential projects.
Good percentage of those are kind of in that same neighborhood is what we are actively working on are we.
We want people that are developing products with.
Pharmaceutical injectable grade IHA to come to life core.
The things we're working on obviously light core.
As the major player in the <unk> World and the ophthalmic market for Visco elastic.
We have several things in that pipeline.
From the ophthalmic realm.
Age related macular degeneration dry eye.
Advancements in viscoelastic formulations those are things, we're working on but there are also quite.
Quite a few things and.
Management of general surgery draw.
Drug delivery things like that that utilize HD that are expanding beyond.
Our historical ophthalmic focus a few things in orthopedics.
Cancer tumor therapy things like that so from a drug delivery standpoint. So it is a focus you've heard me talk.
That we sell research Haa to the research community.
To several hundred different researchers annually.
That kind of seeds.
Future development in the AG World, sometimes that takes several years.
Before something materializes into a product, but we're still happy with.
Where things are going in our pipeline I think longer term.
More <unk> based products will be.
Joining that pipeline not taking it and wait anything away from the AJ, but theres just so much being developed.
And in several applications that doesn't don't utilize hav utilize our skill set.
So I think it'll start balancing out in.
In the coming years.
Thank you and then what just one more question.
Probably for Jon.
Now, perhaps but when it comes to the.
Corporate overhead.
And you talked about stranded costs and Youre right sizing the corporate.
Structure.
Okay.
You know right now.
Life core absorbs.
<unk>.
About $5 million.
Of your your overhead.
And.
Is that.
When you think of it when you're when all said and done we're nine months into the process as you get through some of the curation expenses I.
I mean, where what does that $5 million look like.
It's gonna grow you know obviously there is.
Corporate expenses, but of your other corporate expenses were how much can you can you take that Dan you mentioned, the 2 million number and annualized savings I wasn't sure.
If you could.
Just talk a little bit about that it would be helpful.
Yeah, Let me give you a high level and I'll, let John get into the details with you.
We just closed.
Each of our business here.
Here in December.
We're working through a reverse integration process.
Right now Mitch.
Looking.
Looking at right sizing the.
Corporate overhead right sizing the avocado business as we go forward.
So that's gonna be a <unk>.
Processes as we stated you know it will take six to nine months.
We've estimated around.
Two men the $2 million on stranded costs.
But right now we're really just working through the reverse integration.
The TSA with the buyer.
Well, we're working through to make sure that we have a slow quarter.
Orderly transition of the business to them with no customer.
Our options no quality issues. So we're we're in the midst of evaluating.
All of those costs right now Mitch John anything you want to add there.
Yes, I think you handled it pretty well there and Mitch you know we've also had this corporate structure, we've been operating a basically holding company with two different companies working underneath it so well.
For one point on life core, we don't see changing that management fee or that allocation certainly for the rest of this fiscal year, that's not impacting them instead, we will see.
Cost of the integration reverse integration costs on our corporate line structure.
So we see an opportunity there as we reverse integrate too to make that structure fit within the you know the platform that we have.
And we will also see on the on the curation side those stranded costs also be reverse integrated.
So there's really kind of two buckets of potential savings here that we'll be working through over the next two to three quarters.
Okay helpful.
That actually.
Prompted one more question.
So we.
We have right now about $97 million of debt.
Yeah.
Win win.
Obviously you know.
Youre going to generate cash you still have another.
<unk> 15.
$15 million to $20 million of capital spending to do based on your six month.
Spend so far.
So when we get done this fiscal year.
How do you think that's gonna look considering.
Considering you know the.
Yes.
You know needing your TSA and things like that are we going to is it is.
Are we going to see sort of a cash flow breakeven for curation.
Through the rest of the year.
Yes.
No.
Yeah, Let me first tell you about where I think that's going to end up.
The 97 million will obviously go up from there with the Capex spend.
You think about it we're spending $32 million at life core and we said, we would spend up to $7 million at curation.
That number is now down to about $1 billion, obviously with the sale.
So if you add that we're also in a period of time, we're investing in our working capital and it's on the curation side primarily.
On the avocado products seasonally this is where were we.
We're buying picking and trading our guacamole.
Same on the O olive side, we're now into the picking in the crush season, and then obviously, we use that that working capital over the summer months and into next year. So right now we see our debt somewhere around $130 million by the end of our fiscal year at the end of May.
And from a cash flow perspective, you're right on the curation side, we see that being essentially flat.
Okay.
So our use of debt in the end is really.
At this point Capex and working capital for the balance of this fiscal year.
And if that move that 30, if you get up to a $130 million of debt is that 33 million.
That incremental $33 million.
Like basically half.
The capital spending and have some working capital.
Yeah.
Yeah, that's about right.
Okay, and if you recall, we thought we would be closer to 180 billion plus.
Our last conference call for our year end debt.
That figure so certainly the balance sheet is getting a lot better.
Okay.
Alright. Thank you very much appreciate the questions.
Thank you Mitch.
In the interest of time, we ask that you. Please ask one question followed by one follow up question or.
Our next question is from Anthony Vendetti with Maxim Group. Please proceed with your question.
Okay. Thanks, Bob.
Most of the question has been asked but just a couple quick follow ups just on.
On the strategy Officer I guess.
Kim.
It.
Is that the.
The only higher you're intending to make or are you looking to is this the first hire in an effort to expand the sales force expand the marketing to try to drive even more projects.
To that funnel.
Yeah, Hi, Anthony Yeah. Yeah. This is this is the first obviously the strategic hire.
Wanted to somebody to come in at.
Could then do an assessment and work with the rest of my executive team and me.
To look at what our strategy is where we're going where we want to go and then what kind of gaps we have.
Within the organization.
Cross the board right with project management development services.
And then marketing and sales to support.
An expanded effort to bring more.
And targeted opportunities in here so we're actively.
Putting that together there will be more and we have that planned.
For later this fiscal year and early next year, but the first step was to get get that position filled.
And we've done that and are running full speed ahead.
Okay. So just just before I have a quick question on the gross margin.
Do you have a.
A number of people that you're targeting to hire.
Is it a couple more as it turned more.
Any any range or is that process still ongoing to determine.
Yes, the process is still ongoing to determine we've made some estimates.
That I don't want to talk about yet until we actually do the fin finished the analysis, but.
It's been taken into account for our operating plans.
Moving forward and will for future fiscal years as well.
Yes, Anthony we are okay in that at a tricky Anthony was bladder head of HR, we brought on a real.
Talented people are people pro.
Well you know that's helping Jim.
<unk> built out the team more in as you.
<unk> said he is working through that process right now.
More to come later.
Those were the two big Alright, Great and then just lastly.
Okay excellent and then just lastly on the gross margin.
You know a little bit better than we were expecting.
Is that should that be considered the new base is sort of the mid.
Low to mid Thirty's or mid 30.
Combined I guess corporate gross margin.
Is that how we should look at the combined business at this point.
Yeah, John do you want to take that.
Yeah, I mean look on the gross margin side, obviously had a great quarter and so much of that had to do with the revenue mix for the quarter.
Very strong development services revenue that really drove the.
Now the gross margin story in the quarter or so.
And I think one of the interesting things and Jim can speak to is what are you trying to do and balancing out the revenues for the year with a lot of our customers that would help generate kind of a more consistent profile.
And in the gross margin and in the EBITDA margin side itself.
Jim do you want to speak to that.
Yeah, just I mean in General Life Corp, We had a strong margin performance in Q2 Oh.
Related to two shifting of some of the development work.
Into that quarter, but overall, we still manage.
The overall blend of the business and the margins to be.
In the upper thirties.
We've historically done and that's where we should.
<unk> come out this fiscal year as well.
Okay, great. Thanks, very much I'll hop back in the queue appreciate it.
We have reached the end of the question and answer session and I will now turn the call over to Dr. Bolles for closing remarks.
Yeah.
We are really looking forward to.
The new business here as you look forward to a higher margin more profitable and a far more stable high growth business. So.
We're very excited about the future here at Atlantic.
Thank you again for your interest in land that Corporation and your participation on the call today.
Look forward to talking to you once again, when we release our fiscal third quarter results. Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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