Landec Corporation (LNDC) Q3 2022 Earnings Call Transcript

Landec Corporation (NASDAQ: LNDC) Q3 2022 earnings call dated Apr. 05, 2022

Corporate Participants:

Jeff Sonnek — Investor Relations

Albert Bolles — President and Chief Executive Officer

James G. Hall — Lifecore – President

John D. Morberg — Chief Financial Officer

Analysts:

Mark Smith — Lake Street Capital Markets — Analyst

Mitch Pinheiro — Sturdivant & Company — Analyst

Matt Bullock — Maxim Group — Analyst

Mike Petusky — Barrington Research — Analyst

Presentation:

 

Operator

Good afternoon, and thank you for joining Landec’s Fiscal 2022 Third Quarter Earnings Call. [Operator Instructions]

Now, I’d like to turn the call over to Jeff Sonnek, Investor Relations at ICR.

Jeff Sonnek — Investor Relations

Good afternoon, and thank you for joining us today to discuss Landec Corporation’s third quarter fiscal 2022 earnings results. On the call today from the company are Dr. Albert Bolles, President and Chief Executive Officer; Jim Hall, President of Lifecore; and John Morberg, Chief Financial Officer. By now, everyone should have had access to the press release, which went out today, just after 1:00 PM Pacific or 4:00 PM Eastern. If you’ve not received the release, it’s available on the Investor Relations portion of Landec’s website at ir.landec.com.

Before we begin today, I 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 in such forward-looking statements. Additional information concerning risk factors that could cause actual results to differ materially 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-K for fiscal year 2021. Copies of these filings may be obtained from the Company’s website.

And with that, I’d like to turn over the call to Al.

Albert Bolles — President and Chief Executive Officer

Thanks, Jeff. Good afternoon, everyone, and thank you for joining us today. On today’s call, I will provide a brief overview of our businesses. Jim Hall will then review recent developments at Lifecore; and then John Morberg will discuss our financial results and fiscal 2022 outlook that we are reiterating today. We will then open the call for your questions.

In fiscal third quarter, our Lifecore business grew revenue by 28% to $34.8 million, and we are excited to announce that we added two new projects to the development pipeline. Business returned to more normalized rates of revenue in fiscal third quarter following the drawdown of channel inventory that our customers work through in fiscal first half. As a reminder, this was expected and was a result of pandemic induced delays to [Phonetic] elective procedure volumes.

We expect that the reversion to a more consistent operating environment at healthcare facilities will also create more consistent ordering patterns for Lifecore’s products going forward. However, I know that the degree of the rebound in fiscal third quarter exceeded our expectation, as a result delivery timing and mix weighed on adjusted EBITDA generation in fiscal third quarter. Nonetheless, we expect this to reverse in fiscal fourth quarter, and we are confident that we are on track to achieve our guidance for full fiscal year 2022.

With respect to Curation Foods, we believe that our avocado products business remains well positioned within a growing industry supported by favorable consumer trends. While the business has been impacted by the inflationary environment recently, we expect our pricing actions that become effective in fiscal fourth quarter combined with significant operational improvements will largely mitigate the associated margin pressure and allow us to meet our full year segment guidance from continuing operations. As we look ahead, we believe this business is well positioned for long-term growth.

Our high pressure processing or HPP investment is opening inroads with major customers for [Phonetic] private label placements, which is an area of the industry that has experienced a recent growth, that is more than 2 times that of the industry as a whole. We think this asset has significant value. Our brands have a stronger consumer reception versus our competition. We have doubled the amount of repeat purchasers compared to our competition. And we have a best-in-class efficient and automated production facility in Mexico.

As it pertains to Project SWIFT, our team is working through the reverse integration process, following our December 13 sale of our Eat Smart fresh packaged salad and vegetables business, they are making excellent progress. We remain focused on maximizing the value of our remaining assets, which we believe are each well positioned in their respective markets both for avocado products and premium olive oil and vinegars. Our Board and I remain committed to maximizing shareholder value, as we seek to optimize our remaining Curation Foods’ assets, deploy excess cash towards debt repayment and fund growth initiatives to meet anticipated demand from Lifecore’s accelerating development pipeline.

I also want to take a moment to characterize our financial reporting for the fiscal third quarter, as well as our guidance for the balance of the fiscal year. With the sale of Eat Smart in fiscal third quarter, we have shifted that business into discontinued operations for the fiscal year-to-date period. As you may recall during the fiscal second quarter we provided pro forma guidance for Curation Foods segment, which assumed the elimination of the Eat Smart contribution for the full fiscal year, as if it had been sold at the beginning of the fiscal year. As such, our guidance for the full fiscal year 2022 remains in place and reflects the continuing operations of the go forward businesses within our Curation Foods’ operating segment.

In summary, we’ve accomplished a lot so far this year. We monetized our Windset investment ahead of schedule to $45.1 million. We successfully realized $73.5 of value from our Eat Smart business through its sale. And as I discussed, we made significant operational improvements through our remaining Curation Foods assets, which we are actively working to optimize. We recognize shareholder desire to take action quickly. And we look forward to providing you additional updates, as we execute on our strategy.

With that, I’ll pass the call over to Jim for a deeper review of the Lifecore business.

James G. Hall — Lifecore – President

Thank you, Al. We continue to operate in a dynamic CDMO industry with strong fundamentals and Lifecore is perfectly positioned to take advantage of the growing CDMO opportunities to deliver attractive financial returns to all of our stakeholders. We are a beneficiary of ongoing industry trends towards outsourcing of new drug development.

Further, our syringe and vial filling capabilities align perfectly with the favorable trends and new injectable drug applications that are utilizing these capabilities. In fact, approximately 55% of all new drug applications are injectables and prefilled syringe demand is growing at a 13% compound annual rate. Given the industries limited injectable drug manufacturing capacity, we intend to take advantage of this incredible opportunity to fill unmet demand with our existing capacity that we’ve been investing in over the past few years.

Our development pipeline continues to be very strong, which is supported by the initiation of new projects and advancement of existing projects. In the fiscal third quarter, we initiated work on two new early phase projects, which expands our development pipeline to 24 projects with 21 different customers. These projects are spread across early phase clinical development with six projects Phase 1 and 2 clinical development with nine projects and Phase 3 clinical development and scale up commercial validation activity with nine projects. We also continue to make progress with advancing projects within our pipeline with one early phase project advancing to the Phase 1 and 2 stage, and one of our late phase scale up projects advancing to full commercial stage.

Beyond our existing pipeline, we continue to push ahead and convert new potential engagements. We have dozens of opportunities that we are pursuing, which span multiple end markets, multiple classes of drugs and medical devices and with an assortment of companies, both large and small. As you may recall, we invested $1.6 million into the P&L this fiscal year to fortify our sales, marketing and development resources. And in an effort to expand our reach with new customers and to increase our development services, which ultimately allows us to continue to expand our pipeline and to open new sales channels that expand and complement our existing capabilities. There is no question that this has had an immediate impact to the expansion of our prospective pipeline of opportunities.

Our expertise in complex and viscous materials and our world-class quality management system that supports drugs, biologics, medical devices and combination products enable us to stand out as a value-added and specialized leader in the CDMO industry.

We continue to feel confident about delivering a multi-year acceleration in our revenue growth trajectory, which is supported by known projects within our existing pipeline. As we work to attract new customers and projects, we will further enhance our long-term growth opportunities.

In terms of operational updates, we continue to advance our CDMO platform in several respects. Quality and safety are hallmarks of the Lifecore culture that we take seriously and have been critical and building trust with our partners over nearly four decades. In February, we received recognition from OSHA for our operating sites 2 and 3, which now joined site 1 as MIN [Phonetic] SHARP certified facilities. This is a great win for our quality and safety program, and I want to recognize our team for their long-term commitment to safety and excellence.

We’ve been working on an expansion and enhancement of our quality control labs since January 2022, and we are making great progress with completion targeted for May of 2022. This expansion enhances lab capacity and capabilities and improves workflows for both our team and products. The lab expansion will be combined with the implementation of our new laboratory information management system in June of 2022, which we expect to provide additional enhancements to our analytical development and data visibility with our clients. Again, this is another example of the sort of continuous operational improvement that drives Lifecore and allows us to be more effective partners with our customers.

Finally in past calls, we’ve shared some initiatives around Human Resources and Talent Development, which we call Lifecore University. Since its initiation in late 2021, we’ve been able to expedite the training and on-boarding process for key technical manufacturing level positions. As an example, we have reduced the time it takes to qualify aseptic filling and formulation technicians by 80%, which plays a key role and ensuring Lifecore has the necessary resources to support the growth of our business in a timely and effective manner.

In addition, we’ve graduated a total of 17 Certified Lean practitioners, 1 certified Six Sigma Green Belt and 22 Six Sigma Yellow Belts, this is a great accomplishment for our organization and for [Technical Issues] those individuals. As a result of this success, we are expanding the program to include training and problem solving and investigation excellence along with 5S [Phonetic] principles. I’m extremely pleased by these results, which really speaks to the culture of excellence here at Lifecore and our commitment to team members career advancement.

From a capital investment perspective, we continue to focus on maximizing the revenue generating capacity within our current infrastructure. In addition, we are looking to the future to source, qualify and optimize our facilities and equipment to ensure we meet our expected capacity needs to drive continued long-term profitable growth. To this end, we’ve been able to shift approximately $5 million of capex to next fiscal year and now expect our capex spend to be approximately $27 million for fiscal 2022. This keeps us on track to expand our operational filling capacity from our current 10 million units to 22 million units and beyond to meet expected demand with our pipeline.

In summary, we are very excited about the excellent position that we’re in today. We continue to take advantage of the strong industry trends and our investments in capacity will allow us to continue to generate strong sustainable growth in years ahead.

Now, I would like to turn the call over to John.

John D. Morberg — Chief Financial Officer

Thank you, Jim. As we anticipated Lifecore had a very strong fiscal third quarter. The business realized total revenues of $34.8 million or a 27.9% increase versus the prior year period, driven by a 33.1% increase in our CDMO business and a 16.4% increase in our fermentation business, which is consistent with our expectation for improved sales in the second half of fiscal 2022, as we move past the channel inventory drawdown.

However, as Al noted the step up in fiscal third quarter revenue was greater than anticipated due to timing of deliveries to customers. Furthermore, the complexion of those revenues was geared toward some of our lower margin SKUs, which resulted in a gross margin decline of approximately 540 basis points versus the prior year to 37.1%. In turn, this resulted in segment adjusted EBITDA growth of 5.9% to $8.6 million for the quarter, representing an adjusted EBITDA margin of 24.6%. The combination of timing and mix is expected to largely reverse in fiscal fourth quarter making for lower relative revenues and higher relative adjusted EBITDA in fiscal fourth quarter, as compared to our reported fiscal third quarter results.

Given the timing nuance, it is more informative to look at the fiscal second half, which based on the year-to-date performance and the guidance we’ve reiterated today implies fiscal second half revenue growth of 10% to 15% to meet our full year guidance that calls for growth of 7% to 10%. Similarly for segment adjusted EBITDA, our year-to-date results and guidance implies a second half decrease of approximately 7.5% to 1.5% to meet our full year guidance that calls for growth of 6% to 10%.

The primary variable here is gross margin, which is expected to decrease by approximately 400 basis points versus the prior year period in the fiscal second half. However, our guidance implies a sequential improvement from fiscal third Quarter to fiscal fourth quarter of approximately 200 basis points. Again, the normalization of our HA business in second half and the margin mix impact largely explains this phenomenon. Nonetheless, as the figures imply, we are well on our way to achieving our full year guidance, which we are reiterating today.

I’ll now shift to Curation Foods and related financials. We formally moved our Eat Smart operations into discontinued operations in our financial statements following the divestment of that asset in December. This change does not impact comparability to the pro forma segment guidance metrics that we provided in fiscal second quarter and which we are reiterating here today.

As a reminder, our continuing operations reflect the go forward segment, which is now comprised of our avocado products business. Our O Olive Oil and vinegar business and BreatheWay together, this represents approximately $75.5 million of annual revenue at the midpoint of our segment guidance, with avocado products representing approximately 85% of the mix.

With that I’ll make just a few comments on the Curation Foods segment results versus the comparable prior year period. First, revenue increased 4.6% in fiscal third quarter to $18.3 million. This was comprised of a 32% increase in sales velocity from O Olive and a 1.9% increase in avocado products.

Curation Foods generated an adjusted EBITDA loss from continuing operations of $0.9 million compared to an adjusted EBITDA of $1.2 million in the prior year period, driven by temporary margin headwind associated with inflation, which is expected to be offset by price actions in fiscal fourth quarter. Thus, we remain confident with our full year guidance for the Curation Foods segment.

We are making solid progress with the reverse integration of our business, as we work to right size our go forward infrastructure with a smaller revenue base on both Curation Foods and our corporate segments.

Now turning to our balance sheet. Net bank debt on a reported basis for fiscal third quarter, as of February 27, 2022 was $117.6 million compared to net bank debt at the end of fiscal ’21 of $192.7 million, which reflects the repayment of $67.9 million in borrowings following the Eat Smart Disposition.

However, I would like to emphasize that we’ve repaid a total of $109.1 million in borrowings so far this fiscal year through the utilization of the net proceeds from our Windset investment sale and the Eat Smart Disposition.

In summary, we’ve made significant progress in simplifying the business and enhancing our financial flexibility. We are pleased with our year-to-date results, which have us well on our way to achieving our full fiscal year 2022 guidance, and we are looking ahead to building on our results in fiscal 2023.

And with that, I will turn the call back over to Al.

Albert Bolles — President and Chief Executive Officer

In summary, we are marching ahead and have made significant progress in improving our balance sheet through some strategic actions. We now have the advantage of a significantly more stable cash flow stream due to an improved margin structure, and we believe our growth profile is also greatly improved with the focus we brought to the business through Project SWIFT. There’s still work to be done. So we have a solid foundation for our team to deliver consistent operating results that can be better appreciated by the investment community, as we work to maximize shareholder value.

And with that operator, please open the call for questions.

Questions and Answers:

 

Operator

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Mark Smith with Lake Street Capital Markets. Please proceed with your question.

Mark Smith — Lake Street Capital Markets — Analyst

Hi, guys, sorry — just want to ask a little bit on the margin profile during the quarter. Just walk us through kind of what it was that squeeze that margin so much, as you had strong orders in the Lifecore business.

Albert Bolles — President and Chief Executive Officer

Yeah. Hi, Mark, this is Al. John, you want to take that.

John D. Morberg — Chief Financial Officer

Yeah. Hey, Mark, yeah, thanks for the question. I think when you look at margins, you really have to step back to the beginning of the year. As you know, we had to work through the inventory rebalancing due to the fewer procedures being performed during COVID and that created a mix and timing of normal ordering patterns in the first half, the maturity in our ophthalmic viscoelastic products. And as Al said earlier fortunately, that’s now all been worked through and we’re back to more typical ordering patterns here in the second half.

But as a result, our first half gross margins were approximately 280 basis points higher this year than in the prior year first half, and then that in turn also created back half change for gross margins in comparison to the prior year second half due to timing and mix. So overall, I think it’s best, which I said in my remarks to really view gross margins in Q3 combined with Q4 since we are reiterating guidance today.

And as you look at Q4, we’re now estimating Q4 margins of approximately 42%, which is sequential increase of 500 basis points, but 150 basis points to 200 basis points less than the prior year assuming the midpoint of the guidance range. And this would then imply second half gross margins in the 39 percentages and full year in the 38 percentages, which is consistent with our expectations. So I think that Mark is probably the best way to look at it. You got to kind of look at the back half, and I think pretty much aligns with our expectations.

Mark Smith — Lake Street Capital Markets — Analyst

No, that’s helpful. And as we think about the guidance here, any insight into kind of how the business is trending. Do you feel like there is — is there a level of conservatism built into the guidance? Or do you have pretty good read through on, where you think this quarter rolls out and finishes up?

John D. Morberg — Chief Financial Officer

Yeah. I mean from my perspective, I think we’ve got a lot of great insights into what our customers are doing at both Lifecore and in Curation. I mean, we’re confident, I think in the numbers that we see right now. We feel pretty good about them. Sure, we’d like to beat those if we can. But I think we’re just comfortable at this point and reiterating guidance today.

Mark Smith — Lake Street Capital Markets — Analyst

Maybe one last one from me. I didn’t do the math, maybe I’ll ask you to do it for me quickly. The two projects that were added, were these with new customers or existing relationships?

James G. Hall — Lifecore – President

Hi, Mark, this is Jim. Yeah, sorry, Al, you want me to take that.

Albert Bolles — President and Chief Executive Officer

Yeah. Go ahead. Go ahead, Jim.

James G. Hall — Lifecore – President

All right. Hey, Mark, yeah, they are with new customers. So the total project load now is at 24 with 21 customers. So we’re really excited with the amount of activity we have in our pipeline right now. I think we’re really seeing the benefits of the investment that we’ve made into our sales and marketing and development efforts to enhance that not only with the addition of new opportunities, but the advancement of products within the pipeline moving through the various stages of development continues to go very well. And really, we’re also seeing a continuous build in the amount of projects that we’re evaluating and that continues to go well with a lot moving forward close to signing deals. So a lot of activity. It’s very positive. And I think we’re really paying — seeing benefits for the investment that we’ve made.

Mark Smith — Lake Street Capital Markets — Analyst

Perfect. Thank you, guys.

Operator

Our next question is from Mitch Pinheiro with Sturdivant & Company. Please proceed with your question.

Mitch Pinheiro — Sturdivant & Company — Analyst

Yeah. Hey, good afternoon. So I guess my first question just sort of a follow-up on Lifecore’s sort of product mix. Was the mix just kind of the negative mix, margin mix in the quarter due to the CDMO side or the fermentation side because 33% growth in CDMO is quite strong. And was that the lower margin part of the mix?

Albert Bolles — President and Chief Executive Officer

Yeah. Jim, why don’t you go through the mix one [Phonetic] or John, either one.

James G. Hall — Lifecore – President

Yeah. Sorry, either one.

John D. Morberg — Chief Financial Officer

Yeah. Mitch, it’s primarily in the CDMO side again back to our kind of the legacy of our business, the, you know the ophthalmic viscoelastic products really which were impacted in the first half with the inventory level. So it really has to do with the CDMO side.

Mitch Pinheiro — Sturdivant & Company — Analyst

Okay.

John D. Morberg — Chief Financial Officer

Yeah. Mitch, I’ll just add that the biggest impact on the inventory here or inventory carryover we had was with our legacy ophthalmic business that picked up and actually accelerated faster than we had hoped and really had a large, large involvement in Q3. And now this gets back into more normal loads between the mix of overall CDMO and HA moving forward.

Mitch Pinheiro — Sturdivant & Company — Analyst

Okay. And what was any of that due to basically, yeah, overhead cost allocation, is it related to like maybe lower volume through your facility or truly like the pricing of the products within the revenue.

John D. Morberg — Chief Financial Officer

Yeah. I mean, look, I don’t think it’s necessarily pricing, but we know, we do have a mix of SKUs at various levels of gross margin and sometimes we advanced some higher sales that were slightly lower margin. But again when you look at the back half of the year for the full assortment, again, I think what we know is coming and what’s on order, you know because we know those orders, we’re feeling very confident in the second half gross margins itself.

Mitch Pinheiro — Sturdivant & Company — Analyst

Okay. And then when staying with Lifecore the — we’re then — then we’re looking at through the overhead allocation, I haven’t seen your Q, you haven’t filed the third quarter Q yet. But roughly what was the — was the corporate overhead allocation for Lifecore similar to that of the second quarter.

John D. Morberg — Chief Financial Officer

Yes. Mitch, we have kept the overhead allocations or the corporate allocation essentially the same. For Lifecore we’ve not adjusted that.

Mitch Pinheiro — Sturdivant & Company — Analyst

Okay.

John D. Morberg — Chief Financial Officer

And the only thing we have done is that we’ve really have now taken what used to be under Eat Smart and have now allocated it back really to the corporate overhead line or corporate, other segment line.

Mitch Pinheiro — Sturdivant & Company — Analyst

Okay. The — switching to Curation, so can you still have that services contract with Taylor. Is that still happening, what’s the status of that?

Albert Bolles — President and Chief Executive Officer

Yeah. Mitch, that’s in the process of winding down for us right now. So we still have it, but I would say that it’s pretty well winding down for us here in the next two months.

Mitch Pinheiro — Sturdivant & Company — Analyst

When you look at sort of how — was that all in the discontinued operations or the costs and sort of fees for that there or were they [Phonetic] in your ongoing?

Albert Bolles — President and Chief Executive Officer

Yeah. John, you want to clarify that.

John D. Morberg — Chief Financial Officer

Yeah. The way we handle the TSA fees, they really just offset G&A costs, so they are not discontinued ops. There is just some offset to our ongoing spend. And it really is substantially complete, as Al said. So there’s only just a few more things remaining, but is pretty much substantially complete at this time. We’re really pleased with that. I think it went really well. And we’re really now focused on things other than that TSA.

Mitch Pinheiro — Sturdivant & Company — Analyst

When the TSA sort of — when the fees go away, it’s winding down here, what happens to the costs associated with the TSA. Are they being wound down quickly as well.

John D. Morberg — Chief Financial Officer

That’s correct. And as Al said the reverse integration that we’ve been doing has been ongoing.

Mitch Pinheiro — Sturdivant & Company — Analyst

Yeah.

John D. Morberg — Chief Financial Officer

And so we’ve been going through essentially a rolling riff of employees that were associated with the Eat Smart business. We’re very happy that many of them did get jobs with the buyer itself. And — but we’ve also had to let folks go, as we’re right sizing for the size of the business that we have. And that will continue, as I guess, said last quarter, we will probably see that for a couple of quarters, as we right size because we still have to operate the remaining businesses of $75.5 [Phonetic] million of revenues, and we’ll continue to again, right size that over the coming quarters.

Mitch Pinheiro — Sturdivant & Company — Analyst

Okay. Getting to — speaking to Yucatan, is the — is the volatility in the avocado market affect maybe the timing of maybe finding a buyer here for Yucatan. Is that causing any delay? Do you still find interest in that asset? You talked obviously, you’re very confident in the business, and you like — you think it’s a very attractive asset or you have significant value, I think you said. Does the market itself is that — is there any delays here because of the volatility or do you find ample interest in that asset?

Albert Bolles — President and Chief Executive Officer

Yeah. Mitch, so you know, we run a model look the volatility, I think you’re talking about it being fruit costs, we run our models. So we buy our fruit when it’s low cost. So typically the plant starts to operate late August, early fall when the fruit is at its stores price, and then we put away fruit as much as we can. Our yields are very good. We had record yield this year. We’ve gotten hit with inflation like most companies have here in the third quarter. However, we’ve been very aggressive in taking pricing. We took around an 8% price increase, 95% of our customers accepted it. And that is going to start to roll in here in Q4. It takes 90 to 120 days to have pricing stick in food retail side. So we’re really pleased with how the pricing has gone in.

We’ve got some exciting things that we’re doing on the operational side to improve our efficiencies there. And I would like to — I also mentioned there, the HPP side, we’re starting to get traction here on private label. And in fact April 1st, we just shipped to a major private label provider our Squeeze for the first time in private label. So we have a lot of positive momentum going on. So it’s exciting. The private label business is growing twice, as much as the branded business. We just — we’re not in a position before this year to go actively bid on private label since they require the HPP technology. So we all feel really good about where the asset is. We feel really good about the growth aspects for that asset.

Mitch Pinheiro — Sturdivant & Company — Analyst

I mean, and is there an interest in the asset from third-parties or is it, I mean, where do we stand with that?

Albert Bolles — President and Chief Executive Officer

All I can really say is — Mitch is that we continue to implement Project SWIFT, and we’re working our assets that’s left Curation Foods for us to maximize shareholder value. We’re really pleased, we are able to generate $109 million this year from Windset and Eat Smart. So we just continue to work Project SWIFT. That’s about all I can say on that topic, Mitch.

Mitch Pinheiro — Sturdivant & Company — Analyst

Okay. And then just the last question. Just [Phonetic] the $900,000 of charges related to the Mexican facility legal costs and consulting, is that found in Curation’s SG&A?

Albert Bolles — President and Chief Executive Officer

John, you want to answer that.

John D. Morberg — Chief Financial Officer

Yeah. Sorry, Mitch, I was on mute here. Not — it’s allocated to the corporate.

Mitch Pinheiro — Sturdivant & Company — Analyst

Okay. Thank you.

John D. Morberg — Chief Financial Officer

Not to the Curation.

Mitch Pinheiro — Sturdivant & Company — Analyst

Okay. That’s all I have. Thank you.

Operator

Our next question is from Anthony Vendetti with Maxim Group. Please proceed with your question.

Matt Bullock — Maxim Group — Analyst

Hi, this is Matt on for Anthony Vendetti. Thanks for taking my questions. It sounds like you’ve had a lot of success. You mentioned you made a $1.6 million investment in the P&L to fortify the sales and marketing resources you have. Is there any kind of additional metrics you can provide to us in terms of the return you guys had in terms of your pipeline expansion there? And how should we think about the investment going forward in fiscal ’23?

Albert Bolles — President and Chief Executive Officer

Yeah. Well as you know, beginning of the year that was part of our strategy to invest more in sales and marketing to drive that part of the business. And I think we — myself, Chairman and John, we’re very pleased with the impact that, that investment is having for us. And I’ll let Jim add some more color around the two customers that we have landed this year.

James G. Hall — Lifecore – President

Yeah. Thanks, Al. Hey, Matt. So really what the initial investment was focused on was expanding our sales and marketing focus. We had 11 key positions identified that involve sales, marketing, as well as development to handle and broaden our bandwidth and our development capabilities. We’re in very good shape. We’ve added those key positions. And what we’re starting to see is more activity within the pipeline.

So as an example, the two we just added are new customers. They are not customers that we worked with in the past. And I think what we’re more excited about is the number of potential opportunities that we’re evaluating. So the Group’s able to take advantage of the tail market wind — the market tailwinds that we’ve talked about and get more opportunities to the table and in the door.

And year-over-year from a development standpoint, we’re seeing nice gains in our development revenue and overall CDMO profile. And I think moving forward, as we focus more to a targeted sales effort at Lifecore, we are going to be adding additional resources to the sales force. We’re looking at where those go and what makes the most sense as part of our FY ’23 plan. But things are on track and in line, and we’re very happy with what we’re seeing in the amount of work coming to Lifecore to be evaluated.

Matt Bullock — Maxim Group — Analyst

Excellent. Thanks very much. I’ll pass it on.

Operator

[Operator Instructions] Our next question is from Mike Petusky with Barrington Research. Please proceed with your question.

Mike Petusky — Barrington Research — Analyst

Hey, guys, thanks for the questions. John, I guess, in terms of the — and I may have missed this earlier, but in terms of the capex expectation for Q4, I mean, should we be thinking roughly $15 million, $16 million based on what Jim said about the $5 million shifting. Is that about right for Q4 capex of $15 million, $16 million?

John D. Morberg — Chief Financial Officer

No. Actually, I think it’s going to be closer to $13 million for $27 [Phonetic] million overall. I have nothing right now really lined up for Curation. We’re not spending capital there. If we did, it would be in the few hundred thousand range or something. So overall, that would put us at about 31.5% for the full year.

Mike Petusky — Barrington Research — Analyst

Oh, I see.

John D. Morberg — Chief Financial Officer

For everything combined and what we spent even back during the Eat Smart. So — but I think the focus want to be honest, the $27 million for Lifecore, $13 million for Q4.

Mike Petusky — Barrington Research — Analyst

And then any guidance around cash flow from ops in Q4, what you expect there? I’m assuming negative, but any guide?

John D. Morberg — Chief Financial Officer

Yeah. I don’t have any like [Phonetic] formal guidance, but I just — I know Al said — mentioned it several times, too. But I think that from a cash flow perspective, what we’ve done this year, generated $45.1 million from Windset, $73.5 million from Eat Smart. And you take out the $109 million of debt we paid down with that $118 million, our EBITDA that we’re generating plus interest, it puts us like free cash flow before capex or any cash restructuring of mid-teens before we get to pay for capex.

So I think that we’re trying to find a way to pay for capex with EBITDA and judiciously [Phonetic] use of debt. So certainly, we’re going to be a little higher in debt. But I think still in that kind of $130s million of debt by the end of the year. So all the things we’re doing to manage cash, including really the — looking at the capex, making sure that we’re aligning with the Lifecore team, anything that we can push off or — from a timing perspective, we do. Cash is king. We’re trying to be very thoughtful around that.

Mike Petusky — Barrington Research — Analyst

Okay. I’m not entirely sure everybody on the call would agree with the thing sort of asset sales and using that as some kind of metric for generating free cash, but okay.

John D. Morberg — Chief Financial Officer

I’m not trying to — I’m just trying to talk about the things that we did in the cash flow this year. I mean, certainly, our focus has been really, as you know, has been to delever the balance sheet. And I think we’ve done a lot there and continue to.

Mike Petusky — Barrington Research — Analyst

Okay. All right. I guess, Al, I want to understand on the 8% increase that you were able to get 95% of your Yucatan customers to accept. How is that generally — or if you have any sense, how does that sort of flow through to the end user customer? I mean, does that then get sort of marked up again by the grocery store? How is it [Phonetic] like essentially, what’s the customer going to see on their end as far as a price increase? I mean is that going to be like low double digits? Is that going to be 8%? I mean what — do you have any sense for that — do you have any sense for [Speech Overlap] demand?

Albert Bolles — President and Chief Executive Officer

Yeah. It’s between 8% and 10%, thereabouts, and that’s pretty much in line, where our competition is.

Mike Petusky — Barrington Research — Analyst

Okay.

Albert Bolles — President and Chief Executive Officer

So it’s mainly to cover inflationary issues that we’re seeing. And we also evaluate everything for cost, as you know.

Mike Petusky — Barrington Research — Analyst

Yeah.

Albert Bolles — President and Chief Executive Officer

But since the war started, there’s been a 25% increase in diesel. We’re working with the customers that we can for a temporary surcharge of fuel as well because that gets passed on to us pretty directly from our customers. So those are the kind of things that we’re working through.

Mike Petusky — Barrington Research — Analyst

Okay. And I guess just one, quick one for Jim. Jim, when you think about Lifecore, the facilities, what you guys are doing in terms of building out your capabilities. I mean, is it reasonable to think over the next couple two years, three years that the projects may be 35 or 40 projects? Or how do you sort of think about that as you sort of think over sort of the multi-year investment you’re making there and what you sort of hope to be running through that facility over the next couple of years? And it’s not formal guidance, I’m just trying to get a sense of what’s reasonable to think about.

James G. Hall — Lifecore – President

Yeah. Thanks, Mike. That’s a good question. And obviously, we’re setting the organization up to handle more and more and more without building too far ahead. But really, it’s the whole reason we’re putting in a more targeted sales and marketing approach to get more people to Lifecore and get more of them onboarded. And while it’s hard to project specific numbers, I can tell you we have targets every year on new projects to add.

What’s hard to characterize is what may fall off the existing pipeline. But the overall goal is to get that continuing to increase. It wasn’t that long ago, five years, six years ago, we had less than 6 projects. Now we’re at 24. We have out of the 40 plus that we’re currently evaluating, I think there’s somewhere between 4 or 5, 6 that are closer to onboarding that we hope we can. They meet our criteria in what we — in our niche offering that we have. So the number will go up. It’s hard to say how much. But the overall goal is to build that pipeline to make sure we’re continually backfilling, and then more importantly, making sure the organization is built to handle it and support the increase in projects.

Mike Petusky — Barrington Research — Analyst

Do you have any preference in terms of new projects? I mean, would you rather sort of go deeper with existing customers, add to the footprint of customers? Is there any sort of bias there? How do you think about that?

James G. Hall — Lifecore – President

There’s not really a bias. Obviously, we have long relationships with our top customers, and we have several projects in that pipeline that are part of that customer list. But in reality, as we continue to expand our commercial offering, as things get through the pipeline, one of the goals is to diversify the customer base and get more customers in there.

Listen, if I could pick — handpick projects, I would pick things that are already on the market and just do a tech transfer. We actually have some of those. Like you’ve heard me discuss late [Phonetic] the — further to the right in that development cycle they get, the less risk there is of them being approved. But in reality, we’re pretty agnostic to who we’re working with, as long as they meet the criteria and utilize our niche skill set to drive value.

Mike Petusky — Barrington Research — Analyst

Okay. Last one. The $5 million that gets shifted, is that likely to sort of hit in Q1, Q2 of the next fiscal year? Or is that going to be spread out?

James G. Hall — Lifecore – President

We continually refine the time line and need for capital. It’s just a balancing of capital. Most of that will shift into next year. But we’re continually doing evaluations on when it makes sense to pull the trigger on capital based on what we’re seeing. It’s not a reduction in capital, and it definitely doesn’t have an impact on us meeting our capacity needs for growth objectives. But a good chunk of that will be in next year. But like I said, we haven’t provided guidance into what next year’s capex is yet, but that will come as part of our FY ’23 plan. Right. Thanks, guys. Appreciate it.

Operator

We have reached the end of the question-and-answer session. And I’ll now turn the call over to Dr. Al Bolles for closing remarks.

Albert Bolles — President and Chief Executive Officer

Thank you, again, for your interest in Landec Corporation. And we look forward to talking to you once again, when we release our fiscal fourth quarter results. [Operator Closing Remarks]