This FAQ represents a set of Questions and Answers that were included in the most recent Landec Quarter Earnings Release (Read Press Release issued on January 2, 2020 for the quarter ended August 25, 2019) and offers comments for understanding Landec's business. Following the Disclaimer below, there is a list of questions. Thank you for your interest in Landec.
Important Cautions Regarding Forward-Looking Statements
Except for the historical information contained herein, the matters discussed in this news release are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially, including such factors among others, as the timing and expenses associated with operations, the ability to achieve acceptance of the Company's new products in the market place, weather conditions that can affect the supply and price of produce, the timing of regulatory approvals, the ability to successfully integrate Yucatan Foods into the Landec Curation Foods business, and the mix between domestic and international sales. For additional information about factors that could cause actual results to differ materially from those described in the forward-looking statements, please refer to our filings with the Securities and Exchange Commission (“SEC”), including the risk factors contained in our most recent Quarterly Report on Form 10-Q and Annual Report on Form 10-K. Forward-looking statements represent management’s current expectations and are inherently uncertain. Except as required by law, we do not undertake any obligation to update forward-looking statements made by us to reflect subsequent events or circumstances.
Management has confidence in being able to achieve its fiscal 2020 guidance which, based on its fiscal third quarter guidance, implies that for the fiscal fourth quarter the Company will need to realize EPS of $0.50 to $0.53 to hit the guided range for fiscal 2020.
- Lifecore is forecasted to recognize operating income of $8.5 million to $8.8 million and EBITDA of $9 million to $10 million during the fourth quarter, its most profitable quarter during fiscal 2020.
- Curation Foods is forecasted to recognize operating income in the fourth quarter of fiscal 2020 of $14 million to $15 million and EBITDA of $18 million to $19 million. This is driven by three factors:
- Avocado products revenue in the fourth quarter of fiscal 2020 is forecasted to be $18 million to $20 million with a gross margin of 28% or greater.
- Cost out: The Company expects approximately 45% of the projected $18 million to $20 million in cost savings from its cost out initiatives to be recognized during the fourth quarter.
- Eat Smart brand momentum
- Eat Smart Salads are outpacing category growth by 600 basis points, second quarter fiscal 2020 compared to second quarter fiscal 2019, according to Nielsen 52 week ending 12/2/2019
- The Eat Smart brand re-stage is scheduled to be in market January 2020. Based on consumer insights, the new packaging tested extremely well with consumers, both in US and Canada, projecting an uplift in sales velocities.
- The Company realized a gross margin improvement in its Eat Smart products of 80 basis points during the fiscal second quarter compared to the second quarter of last year, as it continues to de-emphasize its core vegetable and tray business.
These drivers of revenues and earnings will be partially offset by Landec Corporate allocation expenses which will reduce fiscal fourth quarter EBITDA by $3 million to $4 million.
Key variables affecting the relative performance:
- The Company expected that due to its overplant strategy, green beans would have been a meaningful profit contributor during the second quarter. Unfortunately, the November freeze and other weather-related events impacted green bean and raw materials supply resulting in much lower yield than expected. The shortages and higher cost of raw material supply resulted in its profits being $0.08 per share lower than it had forecasted.
- In the avocado products business, while the Company had projected that the sales of higher-cost products would occur over the second and third quarter, a greater percentage was sold during the second quarter than the Company expected. As a result, the profits for avocado products were $0.03 per share less than the Company planned.
- The Company experienced increased healthcare costs resulting in lower-than-planned profits of $0.03 per share during the quarter.
- The Company engaged third-party consultants, including the Hackett Group and the Dennis Group, to assist in identifying areas to gain efficiencies and improve Curation Foods’ operating cost structure, enhance profitability and strengthen the Company’s balance sheet. During the second quarter, the Company incurred consulting expenses of approximately $0.4 million or $0.01 per share, associated with these efforts.
These misses were partially offset by $0.05 per share better-than-planned performance at Lifecore and from lower-than-planned operating expenses at Curation Foods and Landec Corporate.
Project SWIFT is a value creation program that will continue network optimization initiatives at Curation Foods, as well as focus the business on strategic assets and redesign the organization to be the appropriate size to compete and thrive. As a result of Project SWIFT, the Company has made several strategic decisions surrounding its operations that will provide total annualized cost savings from these actions of approximately $3.7 million.
- Network and Operational Optimization: As part of the consolidation activities during the second quarter of fiscal 2020, the Company consolidated its R&D and centralized business activities into its new Santa Maria location. As a result, the Company will close its leased Santa Clara office and its leased Los Angeles office, which was acquired in the Yucatan acquisition. The Company sold its San Rafael office and innovation center for $2.4 million, net of commissions. The sale closed on December 24, 2019, and proceeds were used to improve the Company’s balance sheet. The sale resulted in a loss of $0.4 million which was included in general and administrative expenses during the second quarter. The Company expects annual non-personnel cost savings of approximately $0.9 million from shutting down these offices.
- Focus on Strategic Assets: The Company will sell its yet to be operational salad dressing plant in Ontario, CA. The Company is unable to estimate the expected financial impact from the sale at this time. The Company expects to finalize the sale during the second half of fiscal 2020 and use the proceeds to improve our balance sheet.
- Organizational Redesign: The Company has taken action to right size and redesign the organization so that it is appropriate for the Company’s size, focusing on strategic initiatives, developing and elevating internal talent and reducing headcount. With this rightsizing, the Company expects annual cost savings of approximately $2.8 million.
In summary, the Company expects to realize total annualized cost savings from these actions of $3.7 million and recorded approximately $0.4 million of restructuring fees during the second quarter of fiscal 2020, in general and administrative expenses.
- Cost Out Program: As part of the previously announced $18 to $20 million cost out initiatives, the Company has taken action to consolidate from two labor contractors to one labor contractor in the second quarter, which streamlined its Guadalupe facility. The new labor contract will result in year one annual savings of approximately $1.7 million. The labor contractor the Company is no longer using owes the Company $1.2 million. Since the full collectability of this loan is now in doubt, the Company elected to fully reserve the loan and recorded a reserve of $1.2 million during the fiscal second quarter. The Company intends to use all legal recourse to collect the full amount owed.
- Yucatan Foods Related Expenses: As Landec is disclosing in its second quarter Form 10-Q, the Company discovered and reported to U.S. regulators a compliance issue at its Yucatan Foods production facility in Guanajuato, Mexico. The conduct at issue began prior to Landec’s acquisition of Yucatan Foods in December 2018 and relates to potential environmental and foreign corrupt practices act compliance matters associated with regulatory permitting at the facility. The Company has taken appropriate remedial measures and is cooperating in the U.S. government investigation that followed the Company’s disclosure. Because this is an ongoing legal matter, the Company is not able to provide more details at this time. However, the issue does not relate to the health, safety or quality of the food the Company sells. The Company incurred expenses of approximately $0.8 million this quarter which are primarily related to legal expenses associated with this matter, and it expects to incur additional expenses in future quarters until the matter is resolved. The Company intends to pursue recovery for those expenses in future quarters. At this time, the Company cannot predict the amount of these expenses or the recovery, if any. The Company considers these expenses to be non-recurring expenses and not part of its ordinary course of business.
In summary, in the second quarter and first six months of fiscal 2020, the Company incurred non-recurring charges associated with cost out initiatives and the acquisition of Yucatan Foods of $2.0 million.
The Company’s top priorities over the next 12-24 months are:
- Focus: Manage fewer, high-impact projects that will drive positive EBITDA growth.
- Innovation: Commit to the consumer with on-trend, plant-based food with 100% clean-ingredients from Curation Foods core growth platforms: Eat Smart® salads and green beans, Cabo Fresh® and Yucatan® avocado products and O Olive Oil & Vinegar® premium artisan products.
- Productivity: Deliver ongoing savings by creating a culture of trust, respect and continuous improvement by clarifying people’s roles and building highly accountable, productive teams.
- Operational Excellence: Commit to the customer by creating a Project Management Office to improve efficiencies throughout operations and the supply chain, with a concentration on network optimization. Initial focus will be on the integration and improvement of Yucatan and Cabo Fresh operations in Mexico.
- Sustainability: As a mission-based company, continue to institute and follow business practices that respect people and the planet as part of everyday culture to further differentiate the Company in the market.
The Company has made progress against its strategic priorities in fiscal second quarter of 2020 as follows:
- Yucatan Guacamole® Squeeze: Expanded sales of the Company’s new, first-of-its-kind packaged guacamole product in a flexible squeeze pouch, which allows for greater usage and convenience, as well as extended shelf life for reduced waste. Looking ahead, the Company’s Cabo Fresh brand will use this packaging technology beginning in the third quarter of fiscal 2020. The Company has category exclusivity with the packaging company that has exclusive distribution rights in North America.
- BreatheWay® Technology: Grew distribution of BreatheWay patented packaging technology to go beyond maintaining optimal atmosphere for individually packaged produce to offering a full supply chain packaging solution for perishable products, reducing shrink for retailers and extending shelf life for consumers. The BreatheWay packaging solution is being used to wrap pallets of raspberries for Driscoll’s and has moved from a successful test in its California distribution centers to a full rollout for Driscoll’s in North America. The Company plans to scale this business by testing several other adjacent perishable product categories.
Operational Excellence and Productivity:
- Operational Excellence: Significant improvements in operational efficiency has been achieved by initiating lean manufacturing practices at the Yucatan and Cabo Fresh manufacturing operations located in Tanok, Mexico. Enhancements include a 40% improvement in production conversion cost and 50% lower raw fruit costs, reducing projected overall costs by 28% in the second half of fiscal 2020.
- Cost Out: On track to achieve fiscal 2020 goals of $18 million to $20 million in cost savings for Curation Foods as the Company invests in automation and productivity.
- Enhancing Food Quality and Safety: Successful integration of the Curation Foods standard quality systems in Yucatan and Cabo fresh operations in Mexico and O brand operations in Petaluma, CA.
At the end of the second quarter of fiscal 2020, the Company’s debt-to-equity ratio was 70% and its debt-to-tangible assets ratio was 41%. Its fixed coverage ratio at the end of the second quarter of fiscal 2020 was 1.5, which is well above its covenant of 1.2 or greater. The Company’s leverage ratio at the end of the second quarter of fiscal 2020 was 4.9, and its debt covenant is 5.0 or less. Over the remainder of fiscal 2020 the Company expects to have adequate liquidity to continue to grow its business and invest in capital to advance both the Curation Foods and Lifecore businesses.
Lifecore currently has approximately 15 FDA-regulated drug and medical device products in its business development pipeline that are in various stages of development ranging from early-phase formulation and product development, pre-clinical work to late-phase, pivotal clinical studies. It is important to understand that Lifecore is the CDMO partner for the biopharmaceutical companies that own the regulatory submission process and the Design History File of the products Lifecore is formulating and developing and will manufacture. Lifecore actively supports the submission process for new products by providing the necessary CMC documentation requested by its partners. Lifecore is routinely inspected by the FDA and regulatory agencies from Europe, Brazil and other international markets that audit Lifecore as part of drug and medical device products regulatory approval process (Pre-Approval Inspections) and ongoing surveillance audits. Lifecore anticipates at least one to two of the current products under development will be approved and begin to generate commercial revenues within the next 24 months. Moving forward, Lifecore is working towards having a pipeline that provides an average of one to two products that receive regulatory approval annually and subsequently contribute to future revenue growth.
Non-GAAP Financial Information and Reconciliations
The tables below present the reconciliation of non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP and other supplemental information. See “Non-GAAP Financial Information” above for further information regarding the Company’s use of non-GAAP financial measures.
|(Unaudited and in thousands)||Three Months Ended||Six Months Ended|
|Net (loss) income from continuing operations||$||(6,740||)||$||(113||)||$||(11,524||)||$||221|
|FMV change in Windset investment||(200||)||(600||)||(200||)||(1,600||)|
|Net interest expense||2,144||713||4,194||1,425|
|Depreciation and amortization||4,414||3,313||8,827||6,458|
|Total EBITDA excluding Windset FMV change||$||(1,547||)||$||3,735||$||(1,233||)||$||7,036|
|Significant non-recurring charges||2,434||—||2,434||—|
|Total adjusted EBITDA excluding significant non-recurring charges||$||887||$||3,735||$||1,201||$||7,036|
|(Unaudited)||Three Months Ended||Six Months Ended|
|Diluted net (loss) income per share from continuing operations||$||(0.23||)||$||0.00||$||(0.40||)||$||0.01|
|Significant non-recurring charges, net of tax||$||0.07||$||0.00||$||0.07||$||0.00|
|Adjusted diluted net (loss) income per share from continuing operations||$||(0.16||)||$||0.00||$||(0.33||)||$||0.01|
Source: Landec Corporation