U.S. markets closed

Edited Transcript of LNDC earnings conference call or presentation 31-Mar-20 9:00pm GMT

Q3 2020 Landec Corp Earnings Call

MENLO PARK Apr 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Landec Corp earnings conference call or presentation Tuesday, March 31, 2020 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Albert D. Bolles

Landec Corporation - CEO, President & Director

* Brian F. McLaughlin

Landec Corporation - CFO

* James G. Hall

Lifecore Biomedical, LLC - President

================================================================================

Conference Call Participants

================================================================================

* Anthony V. Vendetti

Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst

* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Michael Morales

Walthausen & Co., LLC - Research Analyst

* Michael John Petusky

Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst

* Mitchell Brad Pinheiro

Sturdivant & Co., Inc., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, and thank you for joining Landec's Third Quarter Fiscal year 2020 earnings call.

With me on the call today is Dr. Albert Bolles, Landec's Chief Executive Officer; and Brian McLaughlin, Landec's Chief Financial Officer; and Mr. Jim Hall, President of Lifecore, who is available to answer questions.

During today's call, we may make forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially. These risks are outlined in our filings with the Securities and Exchange Commission, including the company's Form 10-K for fiscal year 2019. Let me now turn the call over to Mr. Al Bolles. Thank you, sir. You may begin.

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [2]

--------------------------------------------------------------------------------

Thank you, and good afternoon, everyone. As a leading innovator in diversified health and wellness solutions, Landec is comprised of 2 operating businesses, Lifecore Biomedical and Curation Foods. Landec designs, develops, manufactures and sells products for the food and pharmaceutical industry. Lifecore Biomedical is a fully integrated contract development and manufacturing organization, or CDMO, that offers highly differentiated capabilities in the development, fill and finish of difficult-to-manufacture pharmaceutical products distributed in syringes and vials.

As the leading manufacturer of premium injectable grade hyaluronic acid, or HA, Lifecore brings over 35 years of expertise as a partner for global and emerging pharmaceutical and medical device companies across multiple therapeutic categories to bring their innovations to market.

Curation Foods, our natural foods business, is focused on innovating plant-based foods with 100% clean ingredients to retail, club and food service channels throughout North America. Curation Foods is able to maximize product freshness through its geographically dispersed network of growers, refrigerated supply chains and patented BreatheWay packaging technology, which naturally extends the shelf life of fruit and vegetables.

Curation Foods brands include Eat Smart fresh packaged vegetable and salads, O Premium artisan oil and vinegar products and Yucatan and Cabo Fresh avocado products.

We are focused on creating shareholder value by delivering against our financial targets, strengthening our balance sheet, investing in growth, implementing our strategic priorities to improve operating margins at Curation Foods and driving top line momentum at Lifecore.

We are committed to maximizing the value of our portfolio through sound and thoughtful execution in each of our segments, while protecting the planet for future generations with a sustainable business practice. However, today, we are clearly facing a new landscape, given the rapidly changing environment and ongoing impact associated with COVID-19. We are following the guidance from the World Health Organization, the Centers for Disease Control and Prevention about the escalated global public health threat of COVID-19 and taking it very seriously. Our first priority is the health and safety of our employees, products, consumers, partners and communities. In response, we immediately activated emergency preparedness teams and they are working closely with the consortium of leaders to establish and share best practices. The goal is to ensure business continuity to do everything possible to keep our employees and products safe. This team is doing phenomenal work, is responsible for tracking the most updated information about COVID-19 so that we can communicate and adapt quickly.

Food supply and pharmaceutical product manufacturing are considered essential businesses for the ongoing health and safety of the public. Therefore, our operations currently remain fully functional and we expect that to continue. Given the ongoing uncertainty surrounding the duration, magnitude and geographic reach of COVID-19 global pandemic, we are unable to accurately forecast any related impact on the company's financial performance. However, we have confidence in reiterating full year guidance, which is largely based on fundamental improvements that we've made to the business. Our fiscal '20 guidance calls for consolidated revenue and continuing operations to grow 4% to 6% to a range of $580 million to $590 million, adjusted EBITDA of $30 million to $34 million and adjusted earnings per share of $0.16 to $0.20, excluding restructuring and other nonrecurring charges, tax implications and any potential impact of COVID-19 pandemic.

Today, we are reporting adjusted third quarter earnings per share of $0.04, in line with our recent guidance of $0.02 to $0.06. Excluding restructuring and nonrecurring charges, we continue to expect to generate substantial profits in the fourth quarter of the fiscal year. We are well positioned to achieve our goals. At this point in time, we don't see any impacts to our supply chains. We are in ongoing discussions with all major suppliers in this fluid situation, and we believe that we can continue to supply our needs through fiscal 2020. Quarter-to-date, business has remained largely unaffected at Lifecore, which continues to be on track to deliver its fourth quarter targets.

For the Curation Foods business, we are quickly shifting to accommodate changing customer demand and shifting product mix. For example, as consumers prepare for the pandemic, we have seen an increase in the demand for salad, packaged fresh-cut vegetables sold to retail and club channels, and a reduction in demand for products typically consumed in social settings with large groups, such as Guacamole sold at 12-ounce and 16-ounce tubs and vegetable trays. We will continue to monitor the situation closely, and we will be prepared as consumer shopping patterns continue to fluctuate.

When we expect any deviation from these trends or experience any significant supply chain issues that could impact our plans for fourth quarter, we will communicate that to the market at the appropriate time. Long term, we expect Lifecore to generate, on average, low to mid-teen revenue growth over the next 5 years as they expand sales to existing customers, add new customers that continue to commercialize products that are currently in its development pipeline.

For Curation Foods, which is in the midst of a turnaround, my time line is immediate. We are driving this business on a day-to-day basis, and I believe our performance is best judged on a quarter-by-quarter basis to measure progress and success. The decisive actions we are implementing within Project SWIFT has the business on a path to reach our steady-state run rate target by the end of fiscal 2021.

On a Landec consolidated level, the third quarter financial metrics are beginning to catch up with the operational improvements we've been implementing. And this momentum will accelerate into the fourth quarter. For example, when comparing key fiscal '20 third quarter financial metrics for those generated in fiscal second quarter, we delivered 220 basis points improvement in gross margin, growth in adjusted EBITDA of $5.9 million and have recorded adjusted earnings per share improvement of $0.20.

Before I share more details on our positive momentum with Lifecore and Curation Foods, I am pleased to announce that Brian McLaughlin has been appointed as Landec's Chief Financial Officer. Brian's 10-year at Curation Foods, coupled with a specialized background in the fresh foods industry and 19 years of experienced banking, made him a natural choice to serve as Landec's interim CFO.

Brian was instrumental in working with our lenders to amend our credit agreement that we completed last week, and have already made great strides to positioning our business for future growth. I feel fortunate to have Brian's deep experience on the team. The timing is right for Brian to assume this role, and we look forward to his continued leadership as our permanent CFO.

With that, I'll turn the call over to Brian for the financial highlights.

--------------------------------------------------------------------------------

Brian F. McLaughlin, Landec Corporation - CFO [3]

--------------------------------------------------------------------------------

Thank you, Al. First, a review of our third quarter results. Consolidated revenues decreased by 2% to $152.9 million, driven by a 3% decrease in Curation Foods, which was centered in a planned $7.2 million decrease in revenues from the packaged vegetable bag and tray business, as we continue to focus on higher-margin products. This decrease was partially offset by a $1.7 million or 7% increase in revenues in the Lifecore business, which was primarily driven by a 50% increase in business development revenue.

Gross profit decreased 7% year-over-year due to the combination of an 8% gross profit decrease in Curation Foods and a 6% decrease in Lifecore gross profit. Curation Foods was negatively impacted by the sell-through of high-class avocado product, produced during the fourth fiscal quarter of 2019 and the first fiscal quarter of 2020 when the cost of avocados were over 2x higher than current cost. And weather-related event impacting raw material supplies primarily centered in Eat Smart vegetable bag and tray business.

Lifecore was negatively impacted by the previously announced timing of production and shipment. The impact on both businesses is temporary and should improve during this fiscal fourth quarter, noting that Lifecore was a timing issue for production and shipping. And Curation Foods now has sold through a majority of the high-cost avocado food inventory and achieved a 19% gross profit run rate in our avocado products business at the end of the fiscal third quarter.

Landec's net loss was $11.5 million for the third quarter, which includes $12.7 million of restructuring and nonrecurring charges, net of taxes, compared to net income of $1.5 million in the prior year, a decrease of $13.1 million. This translates to a third quarter loss per share of $0.39, which includes $0.43 per share of restructuring fees and nonrecurring charges. Excluding these charges, adjusted third quarter earnings per share was $0.04 versus our recent guidance of $0.02 to $0.06 per share.

Adjusted EBITDA declined $900,000 to $6.8 million for the quarter compared to the same quarter last year. However, the sequential comparison to fiscal second quarter is more representative of the progress the business is making. When viewed in this action, adjusted EBITDA improved by $5.9 million in the third fiscal quarter compared to adjusted EBITDA in second fiscal quarter.

Shifting to our commentary on year-to-date 9-month results. Consolidated revenues increased by 7% versus the prior period to $434.2 million, driven by an $8.6 million or 17% increase in Lifecore revenue. The acquisition of Yucatan Foods on December 1, 2018, which contributed $32.1 million in revenue and a $9.4 million or 7% increase in salad revenues. These increases were partially offset by a $15 million planned decrease in revenues in the packaged vegetable bag and tray business and a $7.5 million decrease in green bean revenues due to limited supplies resulting from weather events occurring in the first and second quarters of fiscal '20.

Landec gross profit decreased 7% year-over-year to $50.9 million due to the combination of a 9% increase in Lifecore gross profit and a 16% decrease in gross profit in Curation Foods. Net loss registered $23 million for the first 9 months of fiscal '20, which includes $14.5 million of restructuring and nonrecurring charges, net of taxes, compared to net income of $1.8 million in the prior year, a decrease of $24.8 million. This translates to a year-to-date loss per share of $0.79, which includes $0.50 loss per share of restructuring fees and nonrecurring charges. Excluding these charges, the adjusted year-to-date loss per share is $0.29. Year-to-date adjusted EBITDA registered $7.9 million, a decrease of $6.8 million versus the prior year 9-month period. The year-over-year decrease is largely concentrated in the first half of fiscal year '20.

Turning to our financial position. As previously announced, on March 19, 2020, we entered into a Seventh Amendment to the credit agreement, which, among other things, increased the leverage ratio of covenant to 5.75:1 from 5:1 for the third fiscal quarter ended February 23, 2020. We believe we have sufficient flexibility within the amended agreement to maintain compliance during the fourth fiscal quarter, given our confidence in delivering our adjusted EBITDA goal. Beginning in the first fiscal quarter of 2021, our covenants remain substantively unchanged compared to the existing terms of the credit agreement. This is a transaction that accomplished our goals while minimizing cost, and we are pleased with the flexibility that our lenders provided. They understand the short-term impact that Project SWIFT is having on the business and also have a complete understanding of the positive financial improvements that are beginning to unfold. We are focused on deleveraging as a top strategic priority, which is a key initiative within Project SWIFT. We have taken a disciplined approach for every investment. On a going-forward basis, we have set clear priorities to find return on investment metrics to support the future growth at both Lifecore and Curation.

Shifting to our outlook. As Al mentioned in his remarks, we are reiterating our full year guidance, which calls for consolidated revenue from continuing operations to grow 4% to 6% to a range of $580 million to $590 million, adjusted EBITDA of $30 million to $34 million, and adjusted earnings per share of $0.16 to $0.20. As a reminder, the adjusted EBITDA earnings per share excludes restructuring and nonrecurring charges, tax implications and any potential impact of COVID-19 pandemic. Our annual guidance incorporates a substantial lift in profits during the fourth fiscal quarter. We feel very confident in our ability to execute against this plan.

With that, I'll turn the call back to Al.

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [4]

--------------------------------------------------------------------------------

Thank you, Brian. Let me go into more detail about the progress we're making in our Lifecore and Curation Foods businesses to maximize shareholder value across our portfolio. Lifecore continues to see momentum benefiting from 3 industry trends: number one, a growing number of products seeking FDA approval; number two, the increasing trend towards sterile injectable drugs; and number three, a growing trend among pharmaceutical and medical device companies to outsource the formulation and manufacture of products, spanning the clinical development stage to commercialization.

As a highly differentiated and fully integrated CDMO, Lifecore is positioned to capitalize on these tailwinds. It continues to establish high barriers to competition. Lifecore's speed and efficiency benefits its partners by decreasing their time to market, which adds immense value in their ability to improve patient lives through commercialization of their innovative therapies.

Looking forward, Lifecore will fuel its long-term growth by executing against its 3 strategic priorities: number one, managing and expanding its product development pipelines, Lifecore added 1 new business development project, increasing its development pipeline to 16 projects in various stages of a product life cycle from clinical development and commercialization, which aligns with the businesses' overall strategy. Business development revenue in the third quarter of fiscal 2020 increased 50% year-over-year; number two, meeting customer demand by managing capacity and operational expansion to meet future commercial production needs. Demand stands at approximately 6.5 million units in fiscal 2020, and the facility has the capacity of producing approximately 17 million units annually; and number three, continuing to deliver on a strong track record of commercialization in our product development pipeline. Lifecore currently expects 1 product in development to be approved by FDA for commercialization in calendar year 2020. The FDA recently recommended approval of Lifecore's manufacturing site for this product based on a recent FDA reinspection that resulted in no 483 observations, which is a key step in the partners' approval process.

Looking to the future. Lifecore is targeting approximately 1 regulatory product approval annually and is on track to achieve this cadence beginning in fiscal 2022. At Curation Foods, the positive impacts of Project SWIFT are being realized in our improved financial performance and will continue to unfold as we implement its 3 core components next year in fiscal '21: first, a continued focus on network optimization, which maximizes the efficiency, productivity and teamwork at the organization. To date, this is comprised of the lean manufacturing practices being implemented at our facilities and the centralization of Curation Foods offices into the new headquarters in Santa Maria; second, a focus on maximizing our strategic assets, which simplifies the business by divesting noncore assets. We are currently exploring strategic alternatives for the legacy vegetable and tray business, which generated net sales of $160 million for fiscal year 2019 and divested the company's assets related to its Ontario, California, yet to be operational salad dressing manufacturing facility; and third, redesigning the organization to the appropriate size, developing and elevating internal talent and reducing head count in order to compete. The total annualized cost savings from these previously announced actions will be approximately $5 million, $0.13 per share on an after-tax basis.

Our fiscal fourth quarter plan marks an important inflection point in terms of profitability. After corporate allocation, our fiscal '20 guidance implies that Lifecore business will recognize fiscal fourth quarter adjusted EBITDA of $9 million to $10 million. And that our Curation Foods business will recognize fiscal fourth quarter adjusted EBITDA of $14 million to $16 million. We remain confident in our ability to meet the guidance, and I'll spend a few minutes describing 2 key drivers at Curation Foods, so you have a greater understanding of my confidence.

First is our continued drive for operational excellence, continuous improvement in cost containment. Today, we are announcing a new lean manufacturing program called ZEST. ZEST is not only about a cultural shift to employee accountability and empowerment, but also a strategy to improve daily operational efficiency without extensive capital investment. ZEST stands for zero mindset, such as zero recalls, defects, accidents and waste. Empowerment, a focus on employee engagement and impact change. Standardization, allowing us to implement the same practices across our organization. And training, which is truly the cornerstone of success in employee engagement.

We can measure the positive impact of these principles when you look at the improvements in our operations in Mexico and the bottom line results they achieved. The team has implemented lean manufacturing principles, now referred to as ZEST, that have significantly improved the cost structure of the business and have turned this business to profitability. Today, we are realizing a 60% reduction in our delivered cost per case. This is the basis for the transformation in the avocado products business gross margin, which at the end of fiscal third quarter was operating at a 19% gross margin run rate. As we move out of the final high-cost fruit inventory and realize our operational efficiencies, we have confidence in accelerating to a forecasted gross margin of 28% in fiscal fourth quarter. We have initiated the process of rolling out the ZEST framework to all our U.S. facilities as part of our continuous improvement process.

The second key driver of Curation Foods is containment and reduction of structural cost, is also a significant component of our strategy, as a key driver of our fiscal fourth quarter forecast. Curation Foods Cost Out Program is on track to achieve our goal of $18 million to $20 million in fiscal '20 savings, with 45% of our projected savings being recognized in the fourth quarter.

This all said, we can't implement change and achieve improved financial results without the right people in the right jobs, focused and working together. My team is advancing our strategic agenda to simplify our business, and the resultant improvement in profitability is already beginning to take shape. We are moving forward together. Even we're not working shoulder to shoulder for the time being, I'm enormously grateful for the individual contributions of all our employees in this challenging environment that has affected us all personally and professionally. Thank you.

In summary, we have confidence in our fiscal fourth quarter plan despite the fluidity of the environment. The Landec team is focused on creating value by delivering against our financial targets, strengthening our balance sheet, implementing our strategic priorities to improve operating margin and investing in growth. I am confident in our plan to make the changes necessary to be successful and secure long-term profitable growth to deliver value to our customers, consumers and shareholders.

Operator, please open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Gerry Sweeney with Roth Capital.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

--------------------------------------------------------------------------------

So we've got a lot going on. I mean, obviously, we have Lifecore and Curation turnaround and then a dose of COVID-19, just to add a little bit of excitement to everything. So I'm going to start with the veggie business. Obviously, you want to either downsize or sell it, I think this is key to reducing volatility on a go-forward basis and letting some of these cost-out initiatives really start to shine through next year and beyond. Where does that business -- where does that stand? And the other portion of it is, you gave some longer-term objectives on growth and profitability. So the second half of the question would be, what happens to your cost structure if you sell it and/or shrink it down substantially, how do we look at it from that perspective as well?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [3]

--------------------------------------------------------------------------------

Yes. So Gerry, you're absolutely right. We've made a strategic decision to sell it. It's always been a source of volatility, right? That you can't control. We've had -- we've been working with William Blair. We have put bids out. We have several LOIs that have come back. And we are in the process now of going through the LOI process. We had one company in our facility over the weekend. Obviously, they had to file all the LVID requirements before them to go in, but they've looked at facility. And that is where we're at. We probably have another 4, maybe 5 that will be joining the LOI process. So it's moving along. William Blair is on the point with it. And we'll know a lot more probably in the next 45 to 60 days.

And obviously, if we could sell it, certainly, the proceeds will go to pay down debt. If we don't sell it, we have a backup option, which significantly reduces the size of the business by at least half that allows us to focus on a few customers, strategic customers, around 10 or 12, that we will be looking at improving our margins in that business to get them closer to where we need them. In many cases, we haven't taken price increases where we should have and we're in the process of going through that now. So obviously, we wouldn't get any proceeds there to pay down debt. But we believe we would end up with a model that enables us to live comfortably with a much, much smaller, but a much more profitable core veg business that's higher margin, that's focused on a few customers, that allows us to absorb volatility if indeed we have a weather issue.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

--------------------------------------------------------------------------------

Got it. And what happens to your -- the cost structure internally, though, with shrinking versus selling, just with maybe some of the overhead and things like that, how much cost comes out?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [5]

--------------------------------------------------------------------------------

Yes. Brian, do you want to handle that one?

--------------------------------------------------------------------------------

Brian F. McLaughlin, Landec Corporation - CFO [6]

--------------------------------------------------------------------------------

Yes. Yes, Gerry. So we have, in previous phone calls or chats, outlined our work with the Hackett Group, and we've detailed a very clear path and process for either option in order to reduce the cost structure. In either case, we believe, to get us back to at least a breakeven on the margin impact, if not positive.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [7]

--------------------------------------------------------------------------------

Got it. Okay. And then maybe just switching gears a little bit. Yucatan, great to see the margins at 19% heading to 28%. Any concerns with some of the transition from like the tub size. Are the other Yucatan products selling pretty well in this environment? Or is there any concern about that?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [8]

--------------------------------------------------------------------------------

Well, yes, it's a little early to tell, Gerry. I mean we've seen -- the last couple of weeks have been a little soft on the bigger sizes, obviously, because of the nature of how the product is used in groups and gatherings. We've seen an uptick in our salads, as we mentioned. But we also see just observationally in the stores that there's a lot of products that are out of stock. So we expect the business to come back over the next week or so. But we're keeping a close eye on it. But it's not like the bottom's fallen out. It's just a little softer than what we had forecasted. But the good news is the products that we are selling now are highly profitable for us versus what we had to live through in the first 2.5 quarters of the year.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

--------------------------------------------------------------------------------

Yes, the 19% is great. So completely get that. And one more question on Lifecore. Obviously, that's chugging along pretty well and just outlining the units that you can have manufacturing today versus capacity, so plenty of capacity, and expectation is you're going to fill that, and this is more COVID-related, too. Are there any of the drugs a little bit more elective in nature, obviously, that may push some stuff around? Or any concerns on the COVID-19 on Lifecore?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [10]

--------------------------------------------------------------------------------

Well, there's -- some of the things like cataracts is an elective procedure. We have not slowed down any shipping to date with any of our customers. And if there is a slowdown later in the year because of this, it's just an elective surgery that people are going to go ahead and have done anyway, right?

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11]

--------------------------------------------------------------------------------

Okay. That's what I was really asking.

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [12]

--------------------------------------------------------------------------------

Yes. Yes. So no real major concerns, but certainly, that's where we are today, and we're keeping a close eye on the situation.

--------------------------------------------------------------------------------

Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

--------------------------------------------------------------------------------

Congratulations, again. We are starting to see the metric. So it's great to see.

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [14]

--------------------------------------------------------------------------------

Thank you, Gerry.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Our next question comes from the line of Anthony Vendetti with Maxim Group.

--------------------------------------------------------------------------------

Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [16]

--------------------------------------------------------------------------------

I was wondering, you reiterated guidance. Can you talk about exactly how you see the COVID-19 impacting your business in either a positive way in terms of demand, increased demand for some of your products or in a negative way in terms of supply chain interruption?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [17]

--------------------------------------------------------------------------------

Yes. So we're fortunate to be, right, both in businesses that are deemed as mandatory, right, on the health care side and on the food side. We have seen a major uptick in salads, where people are staying home. It's not the kind of product that you would be able to store like shelf-stable or frozen. I don't think you're going to see the uptick like you are in some other food companies with those products. People are eating at home now. And salads, we think, will continue to do pretty well in this environment. And our supply chain has remained largely interrupted. We continually work with our -- we have very close relationship with our growers. We have no issues with supply coming into our facilities. We have our own refrigerated trucks. So we're able to move products around. We're geographically dispersed on the food side, where we have 2 plants on the East Coast, along with the Guad plant in California. So we're able to -- on the food side, sort of the flux with this environment. Obviously, we put in very high standards for employee safety that we have in place. And that's sort of where we're at right now. And once again, on the Lifecore side, Jim hasn't seen any change in orders or shipments to date.

So my confidence for Q4, I think that's what you're trying to get at in the COVID environment is, obviously, there's the revenue piece, but there's a couple of other pieces that are there. One is, it's great to turn the corner on the avocado products business, where we're -- we'll be now shipping high-margin products that we have not been able to do for 2.5 quarters. So we're making money there. We are really tracking very, very well with our Cost Out Program. I know at the beginning of the year, $18 million to $20 million seem like a stretch. We've been project managing it. We're very confident about making our number there and probably more towards the high end. So that remains on track. And it's also the time of year where we have the least volatility weather-wise, it's historically the fourth quarter been the least volatile from a produce side with Curation Foods. So our programs are on track. And that's what gives us confidence as we are in the fourth quarter.

--------------------------------------------------------------------------------

Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [18]

--------------------------------------------------------------------------------

Okay. And just as a follow-up to Lifecore, though, is it possible with all of the biotechnology companies and pharmaceutical companies that are working to develop treatments and vaccines, particularly on the vaccine side, is it possible that Lifecore could see an uptick at some point in some development programs?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [19]

--------------------------------------------------------------------------------

That's probably more long term, but I'll let Jim go ahead and answer that in more detail for you.

--------------------------------------------------------------------------------

James G. Hall, Lifecore Biomedical, LLC - President [20]

--------------------------------------------------------------------------------

Anthony. Potentially long term, we've had some interest in, not so much the development of those products, but if one's developed down the road, would -- Lifecore has the capacity or the ability to contribute to production of those vaccines or products. Nothing short term, though, that we've seen that would impact our development pipeline.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from the line of Mitch Pinheiro with Sturdivant.

--------------------------------------------------------------------------------

Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [22]

--------------------------------------------------------------------------------

Just a couple of quick questions. Any -- with the disruption in our food system, do you see any change to the squeeze rollout or your marketing plans related to that?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [23]

--------------------------------------------------------------------------------

No. If you remember, we talked a bit about in the fourth quarter that we were going to spend more money on our new product introductions. We have 2 very large customers, one in Canada, one in the U.S. that we are testing right now, various models of trying to drive trial and awareness on the product. We know when we get trial and awareness, we can repeat. So that isn't slowing us down right now in terms of the testing and learning that we want to gain in the fourth quarter. We've seen a little bit of shift from some customers on the resets because of COVID-19 to move from May to June. Those are just minor shifts. But that wouldn't have much of a financial impact on us anyway in Q4.

But our plans remain intact to complete our testing with these 2 major customers and gain the learning we need to really build awareness and really that squeeze really began to work for us in next fiscal year.

--------------------------------------------------------------------------------

Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [24]

--------------------------------------------------------------------------------

Okay. As far as Lifecore, you -- that raw material shortage from your supplier, I know it normalized. Is there anything with the COVID activities in payability from that supplier again? Or are you comfortable with that?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [25]

--------------------------------------------------------------------------------

You're talking about the syringe supply issue?

--------------------------------------------------------------------------------

Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

Yes. Yes.

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [27]

--------------------------------------------------------------------------------

Yes. No, but Jim, is there anything else that you want to add to that?

--------------------------------------------------------------------------------

James G. Hall, Lifecore Biomedical, LLC - President [28]

--------------------------------------------------------------------------------

No. Just, -- Mitch. Just to clarify, that issue was not through an actual supplier, but with one of our customers that was providing that. And that supply has been shored up and is very stable now and shouldn't be impacted by this and hasn't been. So that's something like all our raw materials and critical supplies we're keeping an eye on and working very hard to make sure we have enough on -- during this COVID period.

--------------------------------------------------------------------------------

Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

Okay. And then just 2 more things. Any update on BreatheWay?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [30]

--------------------------------------------------------------------------------

We were -- we continue our testing and rollout with Driscoll's on raspberries. It's going very well, and we continue to want to expand that and we have into the design development cycle for BreatheWay, which we don't talk much out. We have some other very interesting customers where we believe the technology can bring a benefit to their product line, their higher-margin product lines. And we're working with them now to prove that. What we really are trying to do with BreatheWay, find customers that we can have scale. In the past, we've kind of worked around with smaller customers. We really are very particular about who we work with and to make sure that if we partner with somebody that there's going to be enough scale for us to get the profitability that we want to achieve.

--------------------------------------------------------------------------------

Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

And on your own products, does the longer shelf life aspect of your product -- has that been something customers are aware of in sort of the current environment?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [32]

--------------------------------------------------------------------------------

Yes. They're aware of it. We don't put it on all of our packages, only those that we get the benefit of an extra few days of shelf life. But to be quite honest with you, they don't pay for it. So the benefit is us in terms of being able to decrease shrinkage on our side, but it's not a benefit that the customers are willing to pay for unlike some of the other projects that we're working on with BreatheWay.

--------------------------------------------------------------------------------

Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [33]

--------------------------------------------------------------------------------

Okay. And then just final question. Any update to your capital spending plans for this year? What that number might be by year-end?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [34]

--------------------------------------------------------------------------------

Yes, I'll have Brian handle the capital numbers.

--------------------------------------------------------------------------------

Brian F. McLaughlin, Landec Corporation - CFO [35]

--------------------------------------------------------------------------------

Yes. So we're managing those numbers much more tightly. During the Q2 call, I believe we threw out second half spend numbers in the $22 million to $26 million range, as part of our focus on adding discipline to our capital spending process and becoming very stingy about where we're spending money, while at the same time, really making sure that we're supporting the right growth platforms. That number has been reduced to somewhere in the $18 million range or lower perhaps. So we are very focused on becoming very, very disciplined and diligent about how we spend money on capital and putting it in the right places.

--------------------------------------------------------------------------------

Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [36]

--------------------------------------------------------------------------------

So where that -- where do you think you'll end up for the year -- for the fiscal year?

--------------------------------------------------------------------------------

Brian F. McLaughlin, Landec Corporation - CFO [37]

--------------------------------------------------------------------------------

We -- the bank's amendment has a number of $37 million in it, and I'm confident that we will come in below that number.

--------------------------------------------------------------------------------

Mitchell Brad Pinheiro, Sturdivant & Co., Inc., Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

Okay, below that.

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [39]

--------------------------------------------------------------------------------

If I may, just on the capital side, just a couple of things. I think it's fair to say that in the past, we haven't had a, "Disciplined approach" to capital. The Ontario facility being an example. We have put in a capital committee, a capital process across the enterprise, where we're much more stricter on capital and expecting that if we spend the money, we're going to get the returns. And the automation, I mean, a lot of the Cost Out Program, the $20 million, has come from capital investments through automation, which was greatly needed. That's essentially done. And that's why we're moving the project ZEST, which is more of an operational cultural shift to a zero mindset of waste and a real focus on OEE of our equipment so that we start to get more efficiencies out of the equipment that we have. So that's going to decrease our usage of capital at Curation Foods. Obviously, our priority is to continue to provide the capital needed on the Lifecore side to generate the growth that they need.

On the Curation Foods side, we think that we can, over the next few years, achieve a lot of productivity and efficiencies through ZEST without having to spend a lot of money and capital.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Our next question comes from the line of Mike Petusky with Barrington Research. (Operator Instructions).

--------------------------------------------------------------------------------

Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [41]

--------------------------------------------------------------------------------

I may have missed this, but did you guys give Q3 revenue for the salads and the guacamole businesses? Or could you?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [42]

--------------------------------------------------------------------------------

Brian? I don't...

--------------------------------------------------------------------------------

Brian F. McLaughlin, Landec Corporation - CFO [43]

--------------------------------------------------------------------------------

Yes, no, we have not, and we normally would not give that kind of guidance. We manage it at the full segment level.

--------------------------------------------------------------------------------

Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [44]

--------------------------------------------------------------------------------

Okay. Can you say how much they were either up or down or any guidance on how they actually performed sort of key portions?

--------------------------------------------------------------------------------

Brian F. McLaughlin, Landec Corporation - CFO [45]

--------------------------------------------------------------------------------

Yes, sure. As was indicated in the press release as well, we are up in salads on a year-to-date basis, $9.4 million. And that would be on a year-over-year basis, about 7%. So you can do the math backwards there. On the -- on core veg side, we've indicated that we're down. We're managing that down purposely. Like it's a highly volatile segment. And a lot has been said on core veg already. On the bean side, we've had -- it's a high-margin category for us. We have had some supply issues there, not anywhere near the sort of cost variance issues that we've had in core veg. And so we're down year-over-year in that area. So...

--------------------------------------------------------------------------------

Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [46]

--------------------------------------------------------------------------------

Guacamole, I think at one point, you guys had said that you thought Q4 would come in at $18 million to $20 million. And I think a meaningful part of that was assumed to be sort of the lead up to Cinco de Mayo. I mean obviously, that, to me, that would seem like that holiday could be meaningfully impacted. Could you just talk about your current assumptions around revenue in Guacamole for Q4?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [47]

--------------------------------------------------------------------------------

Yes, Brian, do you want to...

--------------------------------------------------------------------------------

Brian F. McLaughlin, Landec Corporation - CFO [48]

--------------------------------------------------------------------------------

Sure. Yes. In our current model, which ladders into the guidance that we've provided, we've pared back, but I think just to be conservative, just a bit, a couple of million bucks or so, the Guacamole fourth quarter revenue number. We're feeling good about hitting that number. We're keeping an eye on the issues that Al mentioned earlier. But again, we've already built some -- we've already pared that back a bit here from the earlier guidance or discussions that we may have had. So I think we feel pretty confident at this point that we'll come in, probably, a couple of million bucks or so lower than the numbers you just threw out.

--------------------------------------------------------------------------------

Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [49]

--------------------------------------------------------------------------------

Okay. So how much does that impact what you were planning on doing on gross margin in that business in Q4 because that was a huge part of the assumption of the Q4 guidance as well?

--------------------------------------------------------------------------------

Brian F. McLaughlin, Landec Corporation - CFO [50]

--------------------------------------------------------------------------------

It's -- yes, we are still tracking towards the same gross profit margin figure that Al indicated. And there may be a little bit of paring back on the gross profit. But again, this ladders into the guidance that we provided for the full year.

--------------------------------------------------------------------------------

Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [51]

--------------------------------------------------------------------------------

And then on the legal expense, the $3.2 million was sort of eye popping and jarring. Can you guys speak to that? I know you don't want to speak to it or you can't speak to it in great detail, but going from $800,000 to $3.2 million, I mean, and essentially saying we have no idea where this ends. Can you speak to that at all?

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [52]

--------------------------------------------------------------------------------

We really can't speak to it. I mean, right now, there's -- we have Printpack and we have Pacific Harvest, and we're working with the lawyers on how to best handle the situation. We really can't talk much more about it.

--------------------------------------------------------------------------------

Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [53]

--------------------------------------------------------------------------------

Okay. Was that -- Brian, was that $3.2 million, was that excluded from adjusted EPS and adjusted EBITDA? Or it was...

--------------------------------------------------------------------------------

Brian F. McLaughlin, Landec Corporation - CFO [54]

--------------------------------------------------------------------------------

Yes. Yes, it was. You'll also note in the -- I believe it's in the press release that we do believe that a fair amount, if not all of those dollars, will be ultimately recoverable.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

Our next question comes from the line of Mike Morales with Walthausen & Company.

--------------------------------------------------------------------------------

Michael Morales, Walthausen & Co., LLC - Research Analyst [56]

--------------------------------------------------------------------------------

Al, some of the color that you gave around the CapEx guidance and Brian, too, and the automation initiatives was helpful. Can you just help give us a sense of, maybe, from the -- as it relates to the $18 million of cost out and -- $18 million to $20 million, how much of that is tied to automation equipment that has yet to go in? And is there some risk of that getting pushed out with all the disruption happening out there? Or is that equipment essentially already in and now you're just using it.

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [57]

--------------------------------------------------------------------------------

Yes, that equipment is essentially in. We had one final piece to go in that's been affected by a couple of weeks, but it's not meaningful. Okay? So we feel we're pretty well on track with the equipment going in.

--------------------------------------------------------------------------------

Michael Morales, Walthausen & Co., LLC - Research Analyst [58]

--------------------------------------------------------------------------------

Okay. That's helpful. And then, I guess, as it relates to the balance of the CapEx, even on the reduced number, I mean, the commentary in the release was helpful as it relates to capacity, utilization of Lifecore, help us understand what that money is going towards?

--------------------------------------------------------------------------------

Brian F. McLaughlin, Landec Corporation - CFO [59]

--------------------------------------------------------------------------------

The majority of it in the second half of the year is going to Lifecore. I'll let Jim sort of speak to the uses of that cash and the platforms that are being supported.

--------------------------------------------------------------------------------

James G. Hall, Lifecore Biomedical, LLC - President [60]

--------------------------------------------------------------------------------

Yes. Mike, and I think we've had this conversation before, but what we're using that money for is filling out the capacity for some of the commercialization of the products in our pipeline. We're currently -- the $17 million is really a theoretical number based on the infrastructure we have set up and the number of fillers we have. There's still some things for some of these products as they continue to grow for formulation work or packaging-type operations. The other thing that we think based on -- or we project, based on the commercialization rates of the late-phase products in our pipeline that we will fill that capacity over the next 3 to 4 years, and are also starting to spend money on facility and infrastructure to go beyond that $17 million. If you remember, I've talked about, it takes 3 to 4, sometimes even longer years to put additional capacity, and by the time you get equipment ordered, installed and then go through the regulatory approval process. So it's kind of a combination, but all focused on managing the capacity to meet future demand.

--------------------------------------------------------------------------------

Michael Morales, Walthausen & Co., LLC - Research Analyst [61]

--------------------------------------------------------------------------------

Great. That's helpful. Jim, in your experience with the FDA in the past, given all the uncertainty that's out there, I mean, I'm not exactly sure how it might work, whether the FDA can reallocate resources. Is there anything that you're seeing right now that would impact the timing of some of the products in the pipeline -- programs in the pipeline as it relates to the outlook for Lifecore?

--------------------------------------------------------------------------------

James G. Hall, Lifecore Biomedical, LLC - President [62]

--------------------------------------------------------------------------------

We are not seeing anything right now. And the primary product that we're expecting approval on during this calendar year is already complete and in the final stages of FDA review. We have several opportunities that are enrolling clinically in Phase 3 and in Phase 2 and obviously, several in early phase clinical. But we haven't -- we talk to our customers almost on a daily basis and haven't seen any slowdown. If resources are reallocated, potentially in the future, it could cause delays with the clinical trial accrual. Things are slowing down big time there. But the trials that are ongoing are at a place where that hasn't impacted them. So we haven't seen anything.

The other comment I'll make is some of the opportunities in our pipeline are tech transfer related. So increasing volume of product that we already manufacture, transitioning it from another supplier that doesn't take any or very minimal FDA input. So that's the other reason we're still pretty confident in where the pipeline is heading and how that will impact capacity needs in our operation moving forward.

--------------------------------------------------------------------------------

Michael Morales, Walthausen & Co., LLC - Research Analyst [63]

--------------------------------------------------------------------------------

Sure. So it sounds like maybe a potential longer-term opportunity depending on, I guess, a lot of uncertainties, but as it relates to the near-term opportunities that maybe have you guys most excited, nothing on the horizon that's changing your expectations.

--------------------------------------------------------------------------------

James G. Hall, Lifecore Biomedical, LLC - President [64]

--------------------------------------------------------------------------------

Not. No, we haven't seen anything to date, no.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back over to Dr. Bolles for any closing remarks.

--------------------------------------------------------------------------------

Albert D. Bolles, Landec Corporation - CEO, President & Director [66]

--------------------------------------------------------------------------------

Thank you for your interest in Landec, and have a great day, and everybody stay safe out there. Thank you very much.

--------------------------------------------------------------------------------

Operator [67]

--------------------------------------------------------------------------------

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