Lifecore Biomedical Q4 2023 Earnings Call Transcript

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August 31, 2023

There are 4 speakers on the call.

Operator

Good morning, and thank you for joining Lifecore's Fiscal 2023 4th Quarter Earnings Call. During the presentation, all participants will be in listen only mode. Now, I'd like to turn the call over to Jeff Sonnich, Investor Relations at ICR.

Speaker 1

Good morning, and thank you for joining us today to discuss Lifecore Biomedical's 4th Quarter and Full Year Fiscal 2023 Earnings Results. Hosting the call today from the company are Jim Hall, President and Chief Executive Officer and John Warburg, Chief Financial Officer. Before we begin today, we would like to remind everyone of the Safe Harbor statement. Certain statements made in the course of this conference call contain forward looking statements. It is important to note that the company's actual results could differ materially from those projected From those in the forward looking statements is contained from time to time in the company's filings with the SEC, including, but not limited to, the company's Form 10 ksA for fiscal year 2023 and their subsequent periodic reports.

Speaker 1

Finally, in light of the company's ongoing exploration of strategic alternatives, Management will not be conducting a live Q and A session on today's call. With that, I'd like to turn the call over to Jim Hall, Chief Executive Officer. Jim?

Speaker 2

Thank you, Jeff. Good morning, everyone, and thank you for joining us for our fiscal 2023 4th Quarter and year end update. Today, I'll briefly touch on our fiscal 2023 4th quarter and year end results and provide an update on our development portfolio. Before I do so, I want to briefly address the outstanding strategic review process, which remains ongoing. We aren't in a position today to provide any updates, but we remain focused on continuing on our business plan and that the Board continues its evaluation of potential strategic alternatives so as to determine the best path forward to maximize value for our stockholders.

Speaker 2

As you recall from our last call, At the end of May, we took significant step forward with the execution of an expanded supply agreement with Significant long term customer, Alcon, as well as completing a comprehensive restructuring of our debt arrangements, in which Alcon became our primary lender. These transactions were significant in creating a more stable and sustainable capital structure for Life These transactions also brought some added complexity to our year end reporting, which is the primary reason for the delay you with our full year fiscal 2023 update. In the fiscal 2023 Q4, Lifecore generated Segment revenue of $31,500,000 and segment adjusted EBITDA of $6,100,000 both of which were consistent with our expectations and the cadence that we disclosed during our Q3 call. We believe our business remains very well positioned as a fully integrated CDMO with highly differentiated capabilities for the development, fill and finish of complex sterile injectable grade pharmaceutical products. These technical capabilities have been honed from our more than 40 years of experience in building a premier Pharmaceutical injectable grade hyaluronic acid manufacturing platform with a focus on complex and highly regulated products.

Speaker 2

We continue to believe that our unique expertise coupled with ongoing industry trends towards outsourcing of new drug development And our 4 decades of experience in creating a world class quality management system positions Lifecore as a preferred partner In fact, Lifecore is the only major manufacturer A pharmaceutical injectable grade with injectable CDMO expertise in the market today. Approximately 55% of all new drug applications are injectables and prefilled syringe demand is growing at an estimated 13% Compound annual rate according to pharma projects. Given the industry's limited specialized injectable drug manufacturing We intend to continue to take full advantage of this incredible opportunity and deliver much needed capacity that we've been investing in during the past few years. Overall, our development portfolio The active projects advanced nicely in the Q4 with the addition of several later stage projects. In total, as of the end of our fiscal year in May, our active development projects increased by 5 to 29.

Speaker 2

These 5 new projects are also with 5 new customers, which brought our development customer count as of year end up to 27. These projects are spread across early phase clinical development with 7 projects, Phase 1 and 2 clinical development with 8 projects and Phase 3 clinical development and scale up commercial validation activity with 14 We continue to see an active project pipeline and continue to work on the velocity at which we close on new project opportunities. As a result, we expect to add several new projects to our development portfolio by the end of our Q1 of fiscal 2024. Our team is doing a great job ramping up commercial presence in the market. As we've discussed several times over the past Sure.

Speaker 2

We believe our investments in our business development team are paying dividends in terms of our project pipeline. Our 2 new isolator fillers remain on track, which broaden our opportunity set in a significant way As a request for usage of that category of fillers for customers' projects are in particularly high demand. Our approach has shifted in response to that. We've continued to evaluate and target our prospective opportunities With the increased capacity represented by those fillers in mind, as we look toward the future state with more optimized and balanced capacity, Our targeted and focused sales approach is highlighted and identified 44 prospective projects And our development opportunity pipeline as of the end of the fiscal Q4 that are as diverse and impactful as we ever had at Lifecore. These opportunities span multiple end markets, classes of drugs and medical devices And with an assortment of companies, both large and small, which we believe speaks to the attractive CDMO capabilities This is especially exciting as we work on leveraging our expanded set of capabilities.

Speaker 2

We are seeing great interest from potential customers who are working on drug products, which represents approximately Half of our current development opportunity pipeline and includes the potential to expand our relationships with some of the larger pharma companies in the industry. But we also continue to see substantial interest from customers Who want to utilize our expertise for highly viscous products. We are making progress on opening paths to other segments of the market That we previously may not have had the ability to execute and refining our pipeline to focus on opportunities that we believe are uniquely situated to capitalize upon. When combined with our unique expertise working with materials, we feel like we are in an extremely strong position. In terms of our growth and ability to meet needs contemplated in our development portfolio, we continue to invest in capacity.

Speaker 2

Today, our theoretical filling capacity remains at 22,000,000 units versus demand of 8,000,000 to 10,000,000 units That we expect will be fully utilized over the next few years with projects within our existing development portfolio. As such, we need to keep our eye on the near and long term given lead times with installing new capacity and Human capital that's required to operate these higher levels. We have invested in 2 new isolator fillers, A 5 head and a 10 head that have been manufactured and are going through the final stages of factory acceptance testing With anticipated delivery dates this fall, our 5 head isolated filler and new fill room are planned to be GMP ready by Q1 1 of calendar 2024. We believe that these fillers will allow us to double our theoretical capacity We are in the process of moving from a single shift fermentation production staff to hiring a full 20 fourseven staff To increase our sterile capacity by 50% by June 2024 to address the increased volume requirements associated with our expanded supply agreement with Alcon. Along with capacity enhancements, We continue to build out our organizational capabilities to attract new talent and develop the team we already have in place.

Speaker 2

Our Lifecore University training program is a key element of that as is our lean certification program, which continues to elevate our team. We are proud of the 10 individuals who are granted their lean practitioner certification And having an additional lean certification training group staged to start November. Our Operational excellence team continues to focus on creating metrics that matter, enhancing our training program and creating an efficient environment for enhanced cross functional communication. With our portfolio of current development projects And the pipeline of opportunities we are seeing, the new fillers will be very timely to assist Lifecore in fulfilling our customers' forecasted Commercial units, which we see on the horizon. Once again, we believe Lifecore is well positioned to take advantage of the strong Industry fundamentals and customers' projects as they progress through development and into commercialization.

Speaker 2

We believe this position will translate into significant revenue generating potential in FY 'twenty four and beyond. In summary, we are making important progress on preparing Lifecore for the growth that we see in our development portfolio. I'm extremely pleased with the resilience that our organization has demonstrated and thank each of our team members for their individual contributions. We operate in an exciting and rapidly growing industry, and I believe we are well positioned for significant growth ahead. With that, I'll pass the call to John to discuss Lifecore's financials.

Speaker 3

Thank you, Jim. I'll begin with a brief review of our financial results before transitioning to the balance sheet, the impacts from our recent refinancing, Some timing perspectives on our SEC filings and a brief guide on our fiscal 2024 forecasted business. For the fiscal Q4 of 2023, Lifecore segment revenues increased 14.2% To $31,500,000 driven by a 38% increase in our hyaluronic acid, raw material manufacturing Our fermentation business and a 9% increase in our CDMO business. The increase in raw material primarily due to the timing of customer shipments as well as a higher mix of earlier phase development projects onboarded at the earlier lower initial revenue stage, but have nevertheless strong runways for future periods. Lifecore segment gross profit decreased $4,900,000 $8,500,000 for the Q4 of 2023, representing a gross margin of 26.9%, which compares to 48.4% in the prior year period.

Speaker 3

The gross profit decline was primarily due to a favorable volume variance of $1,900,000 due to the increase in year over year revenues, offset by an unfavorable rate variance of $6,800,000 The rate variance was driven by the lower volume Of higher margin development revenues in the current year period, inflationary impacts of commercial aseptic products on certain legacy contracts, somewhat offset by the higher volume of fermentation revenues. Lifecore segment adjusted EBITDA With $6,100,000 for the Q4 of 2023, representing an adjusted EBITDA margin of 19.3%. Given the divestment of the remaining Curation Foods businesses in Q4, I will not comment on those segment results. In the Corporate Other segment, adjusted EBITDA was negative $1,900,000 for Q4 of fiscal year 2023, which was consistent with our expectations. And as a reminder, this is the final quarter of reporting the Corporate Other segment.

Speaker 3

Beginning in the Q1 of fiscal 2024, we will be collapsing this segment into Lifecore's G and A. We're still in the process of transitioning all remaining holding company back office functions, including financial, Accounting, compliance and IT infrastructure and once that is complete, we will then be able to finalize our reduction in stranded Costs from the legacy Landec Holding Company structure. Consequently, while we collapse the holding company segment Into a single reporting segment, we will still communicate to shareholders the amount that would have been part of the holding company structure, particularly as we remain in the strategic review process so that our shareholders have an apples to apples comparison. While not reflected in our adjusted EBITDA figures, our 4th quarter net income was impacted By $6,900,000 in restructuring and other non recurring charges, net of tax, primarily related To consolidating and transitioning operations associated with the divestment of Curation Foods Businesses, Advisory costs, audit fees and transition costs from corporate headquarters transitioned to Lifecore as well as restructuring and advisory costs associated with our refinancing activities. In terms of outlook, particularly in light of our ongoing strategic review process, we are not in a position to provide formal guidance for fiscal 24 at this time.

Speaker 3

However, as we have discussed during our fiscal Q3 update, the timing impacts we have been Including the completion of some larger revenue, late stage development projects and delays in commercialization of others, The timing and mix of new development projects and smaller earlier stage projects as well as the inflationary impacts on certain legacy commercial contracts are expected to continue in our 1st fiscal quarter of 2024 results. Later in Q2 of fiscal year 2024, we expect that those impacts will ease as delayed commercial projects Begin shipping in earnest. And by January 1, 2024, we expect to be able to effectuate Pricing offsets under existing contracts to help mitigate some of the impacts of the recent inflationary pressures. Consequently, we expect Q1 of fiscal 'twenty four to represent the low point for the year And on a sequential basis relative to the Q4 that we are reporting today, Q1 revenue and adjusted EBITDA are expected to decrease before reaccelerating across the balance of the year. That said, Q1 Lifecore adjusted EBITDA is expected to be approximately breakeven, Excluding the burden of our other segment, which as I noted, we expect to collapse into our consolidated results Beginning in fiscal 2024 Q1.

Speaker 3

In Q2 of fiscal year 2024, We expect revenues and adjusted EBITDA to show accelerated improvement following the commencement of commercial shipments that were delayed. Relative to the prior year Q2, we anticipate FY 'twenty four Q2 revenues to grow by nearly 40% And Lifecore adjusted EBITDA to grow at approximately twice the rate of revenues, which implies some margin expansion Due to the aforementioned improvement in revenue mix associated with new commercial shipments, strong fermentation revenues And pipeline development projects that are expected to come online during the Q2. Then in Q3 and Q4 of fiscal year 2024, we expect to generate adjusted EBITDA at more normalized levels similar to or greater than what we achieved in fiscal year 2022, 3rd and 4th quarters. I'd like to emphasize that these quarterly forecasts are being provided without the impact of our other segment, which reflects The corporate overhead that we still carry and we are sharing this added granularity to help you isolate an apples to apples comparison to our prior segmentation. As for these corporate costs, we believe that there will be ultimately savings to be realized And for modeling purposes, we believe it is prudent to assume that our current quarterly run rate of approximately $1,800,000 to $2,100,000 Continues in the near term.

Speaker 3

In addition and excluded from our FY 2024 adjusted EBITDA expectations Approximately $2,000,000 to $2,800,000 in start up costs associated with the fermentation capacity improvements That Jim mentioned earlier, including the transition to a 20 fourseven work shift, requiring significant one time recruiting, Hiring and training costs associated with this approximately 50% capacity increase in fermentation. We began incurring these costs during the fiscal Q1 and expect that they should be relatively consistent across the balance of fiscal 2024. Now turning to our balance sheet. Note that at the end of fiscal year ended May 28, 2023, our balance sheet reflects the revised capital structure and impact from our recent refinancing. Net term and revolver debt on a reported basis for fiscal year 2023 was 147,200,000 including $19,100,000 of cash and cash equivalents, which compares to net bank debt at the end of fiscal 2022 of $137,200,000 In analyzing the new term debt, we identified and valued certain embedded derivative features Totaling $64,500,000 that you will see broken out separately on the balance sheet, the embedded derivatives result from certain call and put features associated with the debt and are more fully described in the credit agreement.

Speaker 3

To be clear, the $147,200,000 of reported net debt Includes the derivative liability. CapEx was $20,800,000 for fiscal year 2023, which includes $2,500,000 of capitalized interest, which is consistent with our prior expectation. CapEx is focused on supporting Lifecore's long term growth initiatives and is earmarked for 2 multi use isolator fillers and the associated formulation and process support equipment. For fiscal 2024, we expect CapEx to be somewhat moderated to fiscal 2023 Depending on the timing of payments and likely in the range of $17,000,000 to $19,000,000 included anticipated capitalized interest similar to FY 'twenty three levels, but first half loaded as we welcome in our 2 new fillers. Before closing the call, I'd like to comment on our SEC filing process and the timing of our Form 10 ks filing.

Speaker 3

It is our intention to file the 10 ks as soon as practicable as we finish up the remaining documentation matters in our year end filings. The final Creation Foods divestment in Q4 and the accounting for activities associated with closing up the transition services agreements In prior period of divestments, including the treatment of discontinued operations and restructuring costs combined with the significant refinancing At close, in the closing days of Q4 'twenty three has caused significant additional staff and audit effort to complete the year end processes. On the refinancing side, we had analyzed the embedded derivative features I discussed earlier and engaged specialists to value the derivatives A very technical and time consuming effort. Additionally, post closing adjustments to the sale leaseback Included a fair market value study by an appraiser that also took on significant time and effort. Consequently, these areas when factored into the smaller footprint of a standalone Lifecore segment operation resulted in lower audit materiality thresholds and significant efforts by 3rd party specialists.

Speaker 3

Fortunately, that work is winding down and we expect to be on file in the near future. In conclusion, I'd like to recognize the great work that the Lifecore team is putting forth. While filing delays in the strategic review process have created some added Flexity to our communications, as you heard today from Jim, our commercial efforts are advancing nicely. Our development pipeline is growing in a healthy and diversified fashion and we have the business gearing up for significant expansion in the quarters and years to come. That concludes our call today.

Speaker 3

Thank you for participating.

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Earnings Conference Call
Lifecore Biomedical Q4 2023
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