Lifecore Biomedical, Inc. Q1 FY2023 earnings call

Jim Hall discussed the strategic initiative to transform the company to a standalone Lifecore business, targeting November for formal branding and ticker switch. Lifecore's project portfolio had 24 active projects from 21 customers across various development stages. The company's commercial strategy involved an expanded team and increased prospective opportunities. Operationally, they integrated LIMS, added a weekend shift, and focused on efficiency improvements. HA remains critical, with potential revenue from development and commercial activities.

In the fiscal '23 first quarter, Lifecore grew revenue by 8% to $23.7 million, with adjusted EBITDA increasing 8.1% to $2.5 million. CDMO activities represented nearly 80% of the revenue mix, while the balance was generated from HA raw material sales.

Lifecore reiterates revenue guidance for fiscal '23 in the range of $122 million to $126 million (12%-15% growth) and adjusted EBITDA guidance of $31 million to $32.5 million (7%-12% growth). Curation Foods segment has no formal guidance. Consolidated adjusted EBITDA is expected $23.5 million to $25.5 million. Gross margins expected to decline ~100 basis points. CapEx guidance $34 million to $38 million for fiscal '23.

Uncertainty regarding outcomes of monetizing remaining Curation Foods assets. Industry challenges like pandemic, inflation, labor shortages may impact asset sales. CapEx spending complexity and leverage risks.

Q: Good morning Jim and John. Congrats to the nice start to the year at Lifecore. Maybe kicking off with a higher level question. Jim, you talked a little bit about the state of the fill finish market, but maybe just to flush it out some more. Can you just talk about kind of where fill finish supply and demand is for the industry? It sounds like capacity is still tight there? And then just a follow-up there, maybe just a couple of comments on how you differentiate yourself versus other fill finish providers?

A: Sure. Good morning, Jacob. Listen based on the activity that we see coming in from the field and what we're hearing from our salespeople on the streets. I think you can see there's no end in the opportunities that are coming our way. We increased our opportunities that we're evaluating by 14 projects and I know there's more knocking on the door. And I think a lot of that is based on our ability to provide capacity. People know that we have additional capacity coming on board over the next couple of years, which also says there isn't a lot of unused capacity out there. And people are looking for it, right? That's part of it. And the other part is the niche that we provide in the complex formulations of products and the fact that Lifecore has the HA manufacturing capability and the importance of that HA to our business that I discussed during the -- earlier in the call also plays into it, because a big chunk of what's coming our way contains HA and which is answers part of your question on the differentiation of Lifecore. So you hear people talking about reduced funding in biotech projects. I think that's probably true. I think in our experience though, what's not getting funded is earlier phase projects that would probably wouldn't be funded in a typical situation except that there was a lot of funding available out there. So we're not seeing a slowdown far from it. We still see the limited capacity out there that's helping drive the additional opportunities for Lifecore and listen the work we've done to put the organization in place from a targeted marketing and sales approach is really starting to pay off. And now the focus is on converting those opportunities into active projects to continue to drive things moving forward.

Q: Hi, guys. Just wanted to look at the pipeline just a little bit more. Can you just talk about, kind of, conversion from prospects into projects, kind of, generally how you feel about your pipeline, and then really that conversion process?

A: Sure. Good morning, Mark. Obviously, we have a lot of things in the pipeline that we're analyzing 63 that we're in discussion with now. And the way we look at those is how they run through the funnel is what converts to leads and then we monitor qualified leads and then they get to the proposal stage and not all of them are going to make it into that process. We have a lot of experience and a pretty good set of criteria we look at to gauge opportunities before we would even consider them part of that funnel or part of the 63 projects. So I don't have a set percentage of how many of those will be onboarded over the next period of time. A lot of it depends on what phase they're in and how it fits into our niche of capabilities. But our track record in historical rate is pretty high. Will that continue as more come through? It's our intent to have as many of those come through as we can, but it's difficult to judge how many of those. The one thing I can tell you is the majority of those 63 fit what we look for. Now it's just going to be picking the best ones that utilize our skill set and we can provide the most value to.

Q: Hey, good morning. So that actually was a perfect lead into the question I wanted to ask. One of the questions, I guess, most about Landec is CapEx in terms of, sort of, the longer term normalized CapEx. Can you guys -- you sort of alluded to a lot of the current year spending growth capital. Could you just speak to what's a normalized figure or normalized range after you, sort of, get through what I think is a period of elevated investment?

A: Yes, John, you want to take that? John Morberg: Yes. Hey, Mike. Good morning. How are you? Mike Petusky: Hey, good. John Morberg: I think as we've shared a few times, we've had our CapEx needs or could be somewhat lumpy and not necessarily perfectly linear. But we certainly are looking at our capacity needs and we need to place orders for filling equipment a couple of years it takes to get it here and then you've got time to get it validated before it starts really earning some revenue. And so that's a big part of the -- of what we look at from a CapEx perspective. But primarily, I would say that our CapEx is going to be growth focus, so we should be 85% plus of our CapEx spend is always going to be focused on that and not focused on maintenance CapEx. So the other part is, as you can see that we're transitioning to really a growth company. And so we intend to really at least the next couple of years is to reinvest our EBITDA at Lifecore back into CapEx, because we're really focused in on is growing our EBITDA out into the future. And we think with these investments, the annual increase in EBITDA is very worthwhile. We think this $34 million to $38 million for instance, how to build and generate an additional $5 million to $10 million of EBITDA on an annual basis. And as a result, that turns into a very nice ROI, when you look at valuation multiples in the CDMO space.

Q: Yes, hi. Good morning. One thing I want to understand that you talk about tight capacity in the syringe fill finish area in the industry. But our isn't that capacity kind of constrained that company to company where new drugs, new therapies or the manufacturer is sort of already embedded into that process at the beginning? So I'm not sure why there's a lack of capacity that you can take advantage of in any immediate sense. Wouldn't you have to go through the whole FDA process again that get approved into that new therapy? Could you talk about that a little bit?

A: Yes, Mitch, I think where you're a little bit confused is and I'll clarify your last part of your question. If somebody is going to transition from an already approved CDMO to another one, that would require the qualification of the approval, the whole process again. What we're finding, there's a lot of drug development going on and the majority of that is being outsourced. And what we're seeing is people trying to identify CDMOs that have capacity that can build with them in the future. So they have a product platform, several products, they project what kind of capacity they're going to need for the next two, three, four, five years and try to lock that up with somebody that's got the ability to grow with them. And that is part of the qualification process for in a drug would be an NDA where Lifecore in this case would be qualified as they develop the product and process. But a lot of the things in our pipeline or companies looking for that capacity and who has capacity available and to lock that up for what they see as their future demand.

Q: I know -- as you look forward, I mean, is there a leverage target that you think Lifecore biomedical can operate comfortably? Is it 3 times? Is it 2 times? Any idea?

A: Yes, I mean, my personal sense is I'd love to be in the three times range and we recognize for a short period of time we might have to be above that. But ultimately, we think we can be more comfortably in that type of range. We look, kind of, mid range time frames.