Lifecore Biomedical, Inc. Q2 FY2025 earnings call

• Revenues for the period were strong and in line with fiscal guidance. Gross margins improved from Q1. • Business development team signed multiple new projects. • Balance sheet was materially strengthened with PIPE financing completion and revolving credit facility restructuring. • Held Investor Day outlining a growth plan aiming for 12% revenue CAGR and over 25% EBITDA margins. • Advanced existing customer business, progressed pipeline projects towards commercialization, and expanded business development efforts. • Signed a new project with Nersum Laboratories for CDMO services related to NRS-033's clinical development. • Installed a high-speed multipurpose filler, doubling capacity and increasing annual revenue-generating capacity to ~$300 million. • Appointed new leadership, including Senior Vice President of Operations and Executive Vice President of Quality and Development, to drive operational productivity and regulatory compliance.

For the three months ended November 24, 2024, revenues were $32.6 million, an increase of 8% compared to $30.2 million in the prior year. Gross profit was $11.1 million compared to $10 million in the same period last year. Adjusted EBITDA for the three months was $6.5 million, an increase of $1.1 million from the prior year's $5.4 million. For the six months ended November 24, 2024, revenues were $57.3 million, up 5% from $54.7 million in the prior year. Gross profit was $16.5 million compared to $12.7 million in the same period last year. Adjusted EBITDA for the six months was $4.7 million, a $1.3 million increase from the prior year's $3.4 million. Revenue growth was driven by increases in CDMO and manufacturing revenues. Gross margins improved due to higher revenues, a favorable sales mix, and better overhead cost leverage. Adjusted EBITDA increased primarily due to the rise in gross profit.

• Revenue guidance for the year remains in the range of $126.5 to $130 million. • Gross margins are expected to continue improving with higher revenues and overhead cost leverage. • Adjusted EBITDA is anticipated to benefit from revenue growth and margin improvements. • No change was mentioned in the top-line revenue guidance.

Forward-looking statements made during the call are subject to risks and uncertainties. Actual results could differ materially from projections. Risks associated with these forward-looking statements are detailed in the company's SEC filings, including Form 8-K and the Q2 fiscal 2025 Form 10-Q.

Q: Good afternoon. Congratulations on all the progress in the second quarter. Maybe first up, if we could dig in a little bit on the Nersum opportunity.

A: Thanks, Matt. First of all, and happy New Year. Yes, we are excited about the Nersum opportunity. As I think about it and any opportunity that comes in, it really is our BD team working aggressively to identify potential opportunities to drive new business into our organization. So that is how the lead manifested itself. And then from there, although we have signed a limited scope of work to start the program, the thought and the idea is to contemplate ongoing development over the long term through phase two to phase three and then ultimately the commercialization. We will finalize those agreements as development continues down the way, if you will. As it relates to commercial volumes and numbers, we have not yet quantified those with the customer at this point, but we think it will be meaningful.

Q: And then maybe a more broad question, but over the past couple of months, I assume that you have been having lots of conversations with your pharma customers, those existing and potential new customers. What are you hearing from them as they look at fiscal 2025 or calendar year 2025, either from a budgeting perspective or whether or not they are looking at prioritization pipelines? What is the feedback you are getting from the customers, and how can you be a solution to any bottlenecks that they are coming up against?

A: Great question. So, you know, I see ongoing and continued momentum as it relates to development programs and also the opportunity for late-stage site transfers, which may be heretofore Lifecore has not participated in. The other leading indicator that I take some solace in is the growth in our pipeline related to large multinational pharmaceutical companies. It now represents close to thirty-plus percent of the overall pipeline. When I joined the organization, it was less than ten. So it tells me that not only the combination of the momentum in the market but also our hunting business development strategy is leading to what I would say are indicators of potential future success, which we are very optimistic about.

Q: Hey. Good afternoon. Happy New Year to everybody. Maybe, Paul, sticking on the business development front, you alluded to, I think, maybe trying to win some late-stage customers. I guess, thinking about the fill-finish capacity you have and some of the dynamics in that end market, is it possible for you to go after a commercial tech transfer project? Obviously, it is good to see the early-stage wins, so I am just curious about the opportunities on maybe later-stage or commercial opportunities for fill-finish.

A: Jacob, thanks for the question, and happy New Year. One hundred percent, I think that is certainly part of our strategy. What I think I may have articulated to you or to others is we want to be strategically positioned to take advantage of late-stage or commercial site transfers, of which we have had now significant opportunities enter our pipeline. So we are working aggressively to close those. We want to be positioned and be top of mind within our customer's mind when those needs arise. That is what we are working hard to do with our expanded business development team. But certainly, we have meaningful ones in our pipeline that we are working on today.

Q: And then maybe for Ryan, just on the margin side of things, obviously, nice top-line beat that flowed through to solid gross margin outperformance, at least versus direct certifications. I am just curious, how should we think about gross margins trending throughout the rest of the year? Is there any kind of benefit from the timing in the quarter that we need to be cognizant of? And I guess the other kind of use of this is the new five-head filler. Is there any impact on gross margin that we need to take into account there?

A: Thanks, Jacob. So as we have mentioned previously, we have some great opportunities to continue to improve gross margins and adjusted EBITDA as well over time. Sequentially, the primary improvements in the Q2 margins were driven by higher revenues, favorable sales mix, and favorable absorption of overhead costs coupled with lower operating supplies and headcount expenses. We still expect overall margins for the year to be in the low thirty percent range. With the improvement in Q2, I think that makes the gross profit split roughly in the forty percent range in the first half and improving to approximately sixty percent in the second half. I do not think that you will see anything dramatic this year as it relates to the five-head filler in terms of improvement in margins. But as we look out to the future, it is certainly one of the areas where we do expect, as revenues continue to grow in future years, that we are going to continue to experience increased leverage of our overhead costs over greater revenues.

Q: Hey. Good afternoon, guys. A lot is going on. Hey. So let me start real quick with housekeeping. I have not seen the Q hit yet. And, Ryan, I am just curious because I know your debt calculation is a little bit funky, and I think you have to have the debt discount figure to sort of figure out total debt. Can you either give that figure or the total debt figure as of the end of the quarter by any chance?

A: It should be filed, Michael, but I believe that the total debt figure is around $160 million.

Q: So in terms of the quarter, the quarter really looks strong, including the adjusted EBITDA. Ryan, did you say that there was some, in addition to favorable mix, that there was some favorable timing that impacted that? I am just curious because I would have honestly, with the historical seasonality of this business, particularly, you know, second half and particularly the fourth quarter, I would have expected you to take EBITDA guidance up unless you felt like there was some, I guess, pull forward in Q2.

A: Yeah, I mean, we did see some early fulfillment of some orders in the quarter, which is just timing between the quarters. And you are correct. I did mention an improvement in the overall mix of that revenue for the quarter.

Q: Oh, okay. Okay. Alright. Fair enough. So, I mean, can you by any chance quantify the pull forward? I think it was a few million more than what we had originally anticipated. And how did that flow to EBITDA?

A: I do not have the specifics of that.

Q: Great question, Michael, thank you, and happy New Year. You know, I would say this, that there is a level of ignorance as it related to knowledge about Lifecore. I will say our capabilities are certainly well known for our capabilities in fermentation. But really, the great opportunity is to expand that and open the aperture to our sterile fill-finish capabilities, and I think that has been welcomed greatly by our potential customers. This is directly related to the growth in, I will say, large multinational programs within our BD pipeline and the level of customer visits to Chaska that are planned in the future and that have taken place in the past. So, again, I am optimistic about the opportunity we have based on the early learnings and experience that I have had in the early days.

Q: Okay. Great. And just one quick clarification. I just want to absolutely make sure I heard this right. Did you say, Paul, that you have roughly fifty-ish new opportunities in the pipeline and thirty percent of which involve large multinationals?

A: Yes, sir. Yes, sir.