Spain and EU Commissioners call for common European debt instruments: newspaper By Reuters

© Reuters. FILE PHOTO: Spanish PM Sanchez speaks during a news conference after taking part in a conference call with European leaders in Madrid

FRANKFURT (Reuters) – Europe needs debt mutualisation and a common Marshall plan to recover from the coronavirus pandemic, Spanish Prime Minister Pedro Sanchez told German newspaper Frankfurter Allgemeine Zeitung.

EU leaders have tasked policymakers with finding a new way to finance a recovery from the COVID-19 outbreak, after Germany and the Netherlands ruled out calls from France, Italy, Spain to create a common debt instrument.

Germany, among other nations, has long been opposed to issuing common debt with other European nations, arguing that it would stop individual countries from pursuing structural reforms and balancing their budgets.

Sanchez echoed the remarks of European Commission President Ursula von der Leyen who on Thursday called for a new EU budget in the form of a “Marshall Plan” to help drive Europe’s recovery from the coronavirus crisis.

The Marshall Plan was an aid programme initiated by the United States in 1948 to help countries in Western Europe recover after World War Two.

In the medium term, Europe needs a “new mechanism for debt mutualisation”, Sanchez also told the newspaper. “If the virus doesn’t stop at borders, then financing mechanisms cannot do so either,” he said.

Separately, the European Union’s Internal Market Commissioner Thierry Breton, and European Economics Commissioner Paolo Gentiloni, told Frankfurter Allgemeine Zeitung that Europe needed to create a European taxpayer fund which could then issue long-term bonds to pay for a recovery from the pandemic.

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Constellation Brands, Inc. (STZ) CEO Bill Newlands on Q4 2020 Results – Earnings Call Transcript

Constellation Brands, Inc. (NYSE:STZ) Q4 2020 Results Conference Call April 3, 2020 11:30 AM ET

Company Participants

Patty Yahn-Urlaub – SVP, IR

Bill Newlands – CEO

Garth Hankinson – CFO

Conference Call Participants

Bonnie Herzog – Goldman Sachs

Kaumil Gajrawala – Credit Suisse

Vivien Azer – Cowen

Bryan Spillane – Bank of America

Nik Modi – RBC Capital Markets

Dara Mohsenian – Morgan Stanley

Lauren Lieberman – Barclays

Kevin Grundy – Jefferies

Rob Ottenstein – Evercore

Andrea Teixeira – JP Morgan

Laurent Grandet – Guggenheim

Bill Kirk – MKM Partners

Bill Chappell – SunTrust

Sean King – UBS


Welcome to the Constellation Brands Q4 Full Year FY20 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Following the prepared remarks, the call will be opened for your questions. Instructions will be given at that time.

I will now turn the call over to Patty Yahn-Urlaub, Senior Vice President of Investor Relations. Please go ahead.

Patty Yahn-Urlaub

Thanks, Josh. Good morning and welcome to Constellation’s year-end fiscal ‘2020 conference call. I’m here this morning with Bill Newlands, our CEO; and Garth Hankinson, our CFO.

As a reminder, reconciliations between the most directly comparable GAAP measure any other non-GAAP financial measures discussed on this call are included in our news release or otherwise available on the Company’s website at

Please refer to the news release and Constellation’s SEC filings for risk factors, which may impact forward-looking statements we make on this call. Before turning the call over to Bill, similar to what we’ve done in prior quarters, I would like to ask that we limit everyone to one question per person, which will help us to end our call on time.

Thanks in advance. And now, here’s Bill.

Bill Newlands

Thank you, Patty. Let me add my welcome as well.

Let me quickly frame up the key themes you’re going to hear from Garth and me today. First, we delivered strong performance in fiscal ‘20, led by our beer business which generated double-digit operating income for the year with accelerating IRI trends as Q4 progressed, and that momentum has continued in the early stages of fiscal ‘21.

We have ample growing capacity to continue fueling the growth of our beer business in the medium term, and we’re working with local authorities and government officials in Mexico to ensure we have ample long-term capacity as our business continues to grow and evolve.

Second, our high-end power brands and successful new product launches fueled performance in fiscal ‘20 that drove accelerating depletion trends in Q4 for our wine and spirit business as our premiumization strategy continues to take hold.

And third, our strong performance and fit financial discipline generated record cash flow, reduced our outstanding debt, and built solid momentum heading into fiscal ‘21. We’ll talk in more detail about each of these areas, but before we go any further, I’d like to take a minute to address current circumstances related to the COVID-19 outbreak.

First and foremost, our thoughts and prayers go out to those affected by this terrible virus and to the first responders and healthcare professionals working to help those in need. We sincerely hope the increased efforts to more fully contain this virus gain strong traction soon.

With this in mind, we operate with a customer-focused mindset, a genuine concern for people and a desire to make a positive difference in our communities that is core to our DNA, even more important today as our industry and communities face substantial hardships. As such, constellation along with a number of our brands, has committed more than $2.5 million toward COVID-19 relief efforts that will directly benefit our business partners and communities now and through their recovery. Specifically, we are supporting the National Restaurant Association Educational Foundation, Restaurant Employee Relief Fund; the U.S. Bartenders Guild and first responders who continue to support those in need in communities across the U.S.

I’m also extremely proud of the Constellation team for their continued efforts to meet the needs of consumers and to help keep the economy going while also keeping our people safe. The health and wellbeing of our employees is our number one priority, and we’ve taken a number of preventative measures and provided a number of protections to keep our employees safe in our operations and out at retail and to ensure our continued ability to meet the needs of the market. Our production facilities in the U.S., Mexico, Italy, and New Zealand are operational and our distributors are up and running.

Our teams are also working hard to ensure our distributor and retail partners have ample supply of our products to meet consumer demand, particularly in the off-premise, which has seen accelerated growth as many restaurants and bars have suspended dine-in services to help mitigate spread of the virus. The off-premise channel represents 85% to 90% of depletion volume for both our beer and our wine and spirits businesses and over-indexes to the rest of the beverage alcohol industry in the U.S. versus the on-premise channel. These trends are reflected in recent IRI data ending 3 ‘22, which shows accelerating consumer takeaway trends in off-premise channels.

Specifically, we’ve seen IRI dollar sales growth for our beer business increase to 24% in the four-week period ending 3 ‘22 versus 12-week and 52-week trends of 17 and 12 respectively. For our wine spirits power brands, we’re also seeing accelerating growth, up 23% in the latest four-week period versus 12 and 52-week trends of 7 and 4.

During this time, we are focused on the channels the consumer is choosing, namely 3-tier e-commerce, direct-to-consumer and the off-premise, especially big box grocery, mass and club channels where we are working diligently to ensure high-end stock positions for our key SKUs.

We’ve also adjusted our marketing approach to ensure our consumer messaging is in tune with current realities and by shifting our focus to digital and social media platforms as sporting events and other major gatherings are suspended.

Bottom line, we are well-positioned to continue meeting the needs of consumers as well as our retailer and distributor partners.

We will continue to manage our business with focus and discipline, while remaining flexible and are willing to adapt as needed to shifting consumer behaviors. And I remain extremely optimistic about the long-term prospects for our business.

Now, let’s get back to those themes that I highlighted at the top of the call. As mentioned, our beer business once again delivered exceptional results in fiscal ‘20 and continues to be the leader in the high-end and a cornerstone of growth in the U.S. beer industry. Imports continued to be one of the primary growth drivers in the high-end and the total beer category with Constellation driving 100% of the growth in this segment. The primary drivers of our beer portfolio growth continues to be our Modelo and Corona brand families. The trio of brands that comprise the Casa Modelo brand family includes Modelo Especial, Modelo Negra and Modelo Chelada and is one of the biggest forces in beer, delivering more than 20 million cases of growth to the U.S. beer category, last year.

Modelo Especial led the way as the top non-seltzer share gaining beer brand in the U.S. beer industry, achieving depletion growth of more than 16%, an acceleration over the previous year’s trend of 12%.

Modelo Especial is now the number four beer brand overall in the U.S. beer market and the best selling beer in major markets like Chicago, as well as the States of Nevada and California where sales of the brand are greater than the two biggest premium domestic light brands, combined. We plan to invest at record levels this year from Modelo to reach more consumers and to increase the brand’s appeal among total market consumers.

We’ll accomplish this through innovation, investment in Spanish language media and targeted programming and will extend the brand through new pack sizes such as our seven ounce Modelito a popular format, particularly in C-stores, Innovation with new product offerings like Modelo Chelada, Mango Chile, and we’re testing new spirits Barrel-Aged offerings on a smaller scale that remain true to the essence of the Modelo brand and align with consumer’s desire for more flavor. I’m talking about Modelo Reserva, which is a golden, sessionable, refreshing water with a five 5.5% ABV that will be available in test markets in tequila and bourbon barrel-aged options.

Modelo’s strength with Hispanic consumers continues to fuel the growth of this brand and with more than 1 million Hispanics reaching legal drinking age each year, combined with our continued efforts to broaden our appeal with general market consumers. We believe we’re only scratching the surface of where this brand can go.

Our flagship Corona brand remains the number one imported brand family in the U.S., selling just shy of 150 million cases in fiscal ‘20. In fiscal ‘21, we’ll embark on a comprehensive master brand restage for the Corona brand family that drives a more cohesive look and greater consistency in marketing communications across sub brands, as well as new heritage and experiential programs designed to strengthen the bonds consumers already have with Corona.

We’re also excited to launch a new cause marketing program, focused on protecting our beaches, through our partnership with Oceanic Global, a leader in ocean conservation. We believe this program will further deepen the emotional connection Corona consumers have with the brand.

Corona Extra is the seventh largest brand in the U.S. beer category, and remains the number one brand in New York City, Miami, D.C., and is a top three brand in eight other major U.S. markets. Brand equity for Corona Extra remains extremely strong, and sales have accelerated in IRI with 4-week and 12-week trends outpacing their corresponding 52-week trends. We remain bullish on Corona Extra’s future potential, knowing that there are several large DMAs that based on high per capita income are right for Corona Extra growth.

In only a second year as a national brand, Corona Premier grew depletions nearly 19% in fiscal ‘20 to 10 million cases and became the number five growth brand in the U.S. beer category with distribution continuing to grow double digits. In just two years, Corona Premier has achieved an ACV of almost 75, which is similar to some brands that have been around for decades.

This brand is perfectly positioned to capitalize on the macro trends of betterment, premiumization as consumers trade up from domestic life. And we have plans in place to continue building traction for this brand, including winning with Hispanic consumers who compromise about 30% of its consumer base.

In fiscal ’20 Corona Refresca became a 3 million case brand in its first year, with a variety pack becoming the number five top selling new beer in IRI. This now gives Corona an honorable [ph] play in the ABA space, delivering tropical flavors to a range of consumers. To capitalize on the success Refresca, we will be extending the brand into the high ABV FMB space this fall with the launch of Corona Refresca Mass, 24-ounce cans with 8% ABV in tropical berry and mango citrus flavors.

We are very excited about this year’s Corona Hard Seltzer launch, which is off to a strong start and has already achieved an ACV approaching 50 in its first month of national launch.

As we’ve said before, the hard seltzer category continues to grow at a breakneck clip, and we believe it’s here to stay. As an aside, our recent venture investment in Press Seltzer provides a wonderful complement with a unique value proposition and price point, as we believe the hard seltzer segment will price stratify over time.

Our Pacifico brand grew depletions more than 13% in fiscal ‘20 which represents an acceleration over the previous year. Pacifico is the number seven beer overall in California, where it continues to grow double digits. In fiscal ‘21, our plans will focus on continuing to win in California, while further expanding awareness and trial in key DMAs across the country. This includes a 40% increase in digital marketing investment, including our first national YouTube buy, a new sponsorship with the LA Chargers, and continued partnerships with the Summer and Winter X Games, which will help us to do just that.

In addition to our continued focus on accelerating growth for our core beer franchises, we’re also leveraging innovation and domestic production capabilities to launch new to-world brands that allow us to compete in growing sectors of the high end. Our recent launch of Two Lane in partnership with country music star Luke Bryan is a great example. This beer plays in the domestic high-end sessionable space and delivers on a refreshing taste consumers want with only 99 calories, 3 grams of carbs and 4.2% ABV. In fiscal ‘21, Two Lane will be available in select markets in the Southeast.

In support of our efforts to build brands consumers love, our commercial team continues to work with our three-tier partners to ensure we deliver world-class execution at retail. This includes increasing adoption of shopper-first shelf principles, by making it easier for consumers to shop by organizing shelf flow in ways that help maximize growth and profitability and by meeting consumers where they are going by allocating space based on future growth opportunities and ensuring highly incremental packages with high velocity are represented with adequate holding power. We currently have 6,000 retailers that have implemented shopper-first shelf principles and those who have embraced this program have seen solid increases in overall growth and profitability for their category.

As you can see, we believe fiscal ‘21 holds great promise for our beer business with a healthy core, master brand innovations and emerging brands poised to grow. From an operational perspective, we continue to make strategic investments in our beer business to ensure we have the capacity, quality, control and flexibility to support the continued growth of our business in the medium-term based on our forecasts. The capacity we’ve built in Nava plus Obregon when completed at the end of this year will enable us to provide more than 400 million cases of beer, which is ample supply for several years to come. We also completed construction of furnace number five at our glass plant adjacent to our Nava Brewery, which now supplies 60% of the glass needs for that brewery, resulting in significant logistics savings.

Earlier this week, I met with Mexican president, López Obrador and his team in Mexico to discuss our brewery construction project in Mexicali. Our discussions were constructive and surfaced several options for consideration.

We will continue to work with local authorities and government officials in Mexico to reach an optimal solution for our business. We’ve had a positive, mutually beneficial relationship with Mexico for more than 30 years and we fully expect this to continue.

Some of you have asked about our operations. Let me just say that we are being exceedingly careful to protect our people and to maintain ultimate safety. With that said, over the past several weeks, we’ve taken steps to build ample product supply across our warehouse and distributor network in the U.S. We have close to 70 days in the system and we’ve shifted resources to accelerate production of high-volume SKUs for key off-premise accounts. Our facilities are currently operating and we remain confident in our ability to continue meeting the needs of U.S. consumers and did not expect any near-term service disruption to retailers.

Shifting now, our wine and spirits premiumization strategy continues to show promise as our business closed out fiscal ‘20 in a position of strength, posting accelerating power brand depletion growth and operating margin improvement in the fourth quarter.

Fourth quarter power brand’s family depletion growth accelerated to more than 4%, led by double-digit growth for Kim Crawford, Meiomi and The Prisoner Brand Family, as this collection of brands continued to outpace the total U.S. wine market.

Operating margin expansion was driven by our focus on more efficient price promotions with our mainstream power brands, as well as market share gains in the higher end of our portfolio with Meiomi and The Prisoner family contributing strong mix trends.

Innovation continues to fuel growth as we capitalize on innovation trends in consumer-driven growth segments. Our introduction last quarter of Unshackled by The Prisoner Wine Company has been extremely well received. We further capitalized on Barrel-Aged wine trends with the introduction of new offerings from both Woodbridge and Cooper & Thief. Since launching our first Barrel-Aged wine series a little more than two years ago, we have sold well over 2 million cases, and that number continues to climb.

In response to the consumer-led trends around convenience, we launched Kim Crawford wine in a can. And our Crafters Union brand remains the number one growth driver in the can wine segment. We’re also excited about the recent launches of SVEDKA botanical flavors, and Ruffino Organic Prosecco, which align with consumer trends for flavor, betterment and sustainability.

Bottom-line for fiscal ’20, our wine, spirit transformation focused on premiumization continues to gain traction. Our higher end power brands are driving mix and margin expansion. Our mainstream power bands are outgrowing the competition. And our innovation initiatives are fueling growth through velocity and distribution gains.

Heading into fiscal ‘21, we are committed to investments in bold innovations, compelling, marketing campaigns, and immersive brand experiences with a specific focus on top markets and accounts in priority DMAs.

We’ll continue building momentum by further leaning into our premiumization strategy and maximizing growth opportunities for our power brands through compelling marketing campaigns for Woodbridge, Kim Crawford, Meiomi, SVEDKA and The Prisoner. We’re instituting greater pricing discipline, consistent with strategies that have proven very successful in building strong brands in other parts of our beverage portfolio.

And, we’ll continue to leverage the power of existing brands with strong equity. We remain committed to mix and margin accretive innovation in growing sectors of the wine and spirits categories that align with consumer trends. We have a strong innovation pipeline planned for the coming year, including upcoming line extensions for Ruffino and SVEDKA Vodka in the RTD space. The launch of a new High West pre-mixed cocktail in the spirit space, and the extension of our highly successful Barrel-Aged wine program.

You can also expect us to introduce new-to-world brands in the wine category. In addition, we plan to leverage the success of shopper-first shelf initiative developed by our beer business by adapting and implementing this program for wine and spirits retailers in fiscal ’21. We recently took pricing on our Woodbridge brand beginning March 1st, and to-date we have seen no negative impact from this action, due to the consumer need to stick with tried and true brands in this time of uncertainty.

We are actively supporting this price increase with marketing investments, including national TV, as well as digital and social advertising. We’re in the final phase of completing the revised Gallo deal. And we continue to work with the FTC, primarily on the brands that have been excluded from the original deal. We have communicated our intent to retain the Cook’s and J. Rogét sparkling wine brands, and the FTC is currently reviewing our business plans to support these brands in the future.

In addition, the FTC is vetting potential buyers we have identified for Paul Masson Grande Amber Brandy, and our concentrate business. We continue to work in collaboration with Gallo to satisfy all FTC obligations, and both companies are fully committed to getting this deal done. With each step, we’re marching closer to the finish line. And we expect to close the deal around the end of our first quarter.

Finally, we’re very encouraged by the steps David Klein is taking in his new role as CEO of Canopy Growth. David and the Canopy team recently announced their focus on four key areas, improving Canopy’s connection with consumers, instilling greater focus and discipline across the organization, defining visible path for profitability and positive cash flow, and building the Company’s credibility with key stakeholders. Canopy continues to be the global leader in total cannabis sales, with a leading market share in Canada.

The Company recently took steps to right size its business to better align with consumer demand and position the Company for long-term success. Canopy just launched its first cannabis beverage product, Tweed Houndstooth & Soda, which has received an overwhelmingly positive consumer response. And they plan to roll out additional beverage products over the last few months. And I can tell you, they are awfully good. These are game-changers.

They also have completed their first shipments of cannabis-infused edible chocolates, and Juju Power 510 batteries in December of 2019. We expect further revenue from these products like vape, edibles and beverages gain traction in the marketplace now that rec 2.0 products have been legalized in Canada.

Canopy remains best positioned to win long-term and to face challenges associated with this current economic environment, as many competitors without access to capital show signs of trouble.

In closing, we reached the conclusion of an excellent year in fiscal ‘20. Our path to these impressive results was paved with great execution and consumer obsession in growing our core business supported by investments to enhance our portfolio and our operations. We are now facing an increasingly challenging operating environment and rapidly changing market conditions.

As you can see from our press release, we are not providing formal guidance. However, we provided the targets that are included in our original fiscal ‘21 plan, prior to the COVID-19 crisis. My goal in doing this is to reiterate that our strategy remains unchanged and to provide the confidence we have in the growth prospects for our core business, as I continue to feel very optimistic about our long-term opportunities.

When we look at the beverage alcohol category, we are generally a recession-resistant industry. In previous recessions and downturns, the TBA industry has generally been non-cyclical and only minimally affected. Bottom-line, we manage our business for the long term, making tough but necessary decisions to adapt to consumer trends while always looking forward to deliver what’s next. We will continue to quickly adapt to rapidly evolving market dynamics, which is a continuation of who we’ve always been.

Now, with that, I’d like to turn the call over to Garth who will review our financial results for fiscal ‘20 and our financial focus for ‘21. Garth

Garth Hankinson

Thank you, Bill, and hello everyone.

Fiscal ‘20 marked another great year for Constellation brands. We produced strong beer operating performance and cash flow results, while our wine and spirits power brand strategy continued to gain momentum as marketplace performance for these brands outpaced the overall U.S. wine and spirits category for fiscal ‘20.

Specifically, in fiscal ‘20, we grew comparable basis diluted EPS, excluding Canopy equity earnings by 6%. In addition, we generated record operating cash flow of almost $2.6 billion and record free cash flow of $1.8 billion. We also reduced debt by more than $1.4 billion and came within our target leverage range. And we returned over $600 million of cash to shareholders in dividends and share repurchases.

Before going into further detail on fiscal ‘20 results, I want to take a moment to discuss the rapidly changing market conditions due to the impact of COVID-19.

To echo Bill, while the COVID-19 outbreak and situation is unprecedented and creates a lot of uncertainty and volatility, one thing remains clear, we will continue to be agile in the marketplace and actively manage and responsibly navigate our way through this crisis. Constellation is a strong cash flow generator, has ample liquidity, financial flexibility, and significant capacity under our $2 billion revolving credit facility. Additionally, we remain committed to maintaining our investment grade credit rating, which allows for flexible access to capital markets and more favorable rates.

Furthermore, as Bill mentioned, we continue to work in collaboration with Gallo to satisfy all FTC obligations and both companies remain fully committed to finalizing this transaction. As such, upon close of the Gallo transaction, we expect to receive approximately $850 million in cash, which we plan to use for debt pay down to further advance and progress — to further advance the progress we’ve made to reduce our leverage and maintain it within our targeted range.

More on fiscal ‘21 in a minute, as I want to continue to expand on the fiscal ‘20 financial performance we delivered before the COVID-19 impacts began to unfold where I’ll generally focus on a comparable basis financial results.

Starting with beer. Net sales increased 8%, primarily due to shipment volume growth of 6% and favorable pricing. Depletion volume growth for the year came 7.5%, while depletion volume growth or import portfolio grew 8%. As expected, depletion volume growth was higher than shipment buying growth, primarily due to the FY19 year-end shipment timing benefit that reversed during our fiscal ‘20, most of which occurred in Q4.

Beer gross margin increased 120 basis points to 55.6%, driven by favorability in pricing and FX. Our operational cost and efficiency initiatives helped offset the impact of inflation on costs such as materials, labor and freight.

Marketing as a percent of net sales increased 70 basis points to 10%, primarily driven by increased investment for the Modelo and Corona brand families and in support of our innovation activities, including Corona Hard Seltzer, which came in at the higher end of our previous guide range. As a result of the above mentioned factors, we achieved record full-year operating margin of 40%, an improvement of 70 basis points.

Moving to wine. Net sales declined 6% on shipment volumes down approximately 8%. Full year net sales results outperformed our previous expectations, primarily due to stronger mix benefits from our power brands in Q4, driven by The Prisoner, Unshackled and Meiomi.

Depletion volume declined 5% while power brand depletions were up 2%. We remain confident that our premiumization strategy is working as power brand trends accelerated as we’ve finished fiscal ‘20.

Operating margins decreased 50 basis points to 26% as mix benefits and favorable SG&A were more than offset by higher COGS, primarily reflecting increased freight costs and an increase in marketing as a percent of net sales, driven by our premiumization and innovation activities.

Corporate expenses came in slightly better than our previous guidance, finishing at $224 million, up approximately 13% versus last fiscal year. The increase was primarily driven by an increase in insurance costs, high incentive compensation, and a ramp-up in IT spend, to support our SAP S/4HANA implementations. Those increases were partially offset by a reduction in consulting costs.

Comparable basis interest expense for the year increased 11% to $429 million. This primarily reflects additional interest expense related to the funding of our incremental investments in Canopy Growth in November 2018, partially offset by our debt pay down during fiscal ‘20.

Our comparable basis effective tax rate excluding Canopy equity and earnings came in at 16.1% versus 18.2% last year. This improvement was driven by lower effective rates from our foreign businesses, partially offset by lower level of stock-based compensation benefits. While stock-based compensation benefits were lower on a full year basis, the benefit came in higher than expected during Q4, which drove the tax rate favorability versus our previous guidance.

Now, let’s review Q4 results. Beer net sales increased 9%, primarily due to shipment volume growth of 7% and favorable pricing. Depletion volume growth for our import portfolio should continue to strength, growing over 11%. When including an unfavorable impact from Ballast Point, total beer depletions were up 10.8%, including the benefit of an additional selling day in Q4.

Beer operating margin decreased 120 basis points to 39.3% as increased marketing and SG&A spend was partially offset by benefits from pricing and COGS. Marketing as a percentage of net sales was 8.7% or 230 basis points higher than Q4 last year driven by marketing investments and spend timing. Wine and spirit net sales were up 1% for Q4, while shipment volume was down approximately 1%. As stated earlier, our power brands continued to drive mix benefits. Operating margin increased 120 basis points to 28.9%, primarily due to mix benefits and lower marketing and SG&A expenses.

Moving to fiscal ‘20 free cash flow, which we define as net cash provided by operating activities less CapEx, we generated a record $1.8 billion, compared to $1.4 billion last year. This represents an impressive 34% increase.

Free cash flow improvement reflects strong operating cash flow and lower CapEx in the beer segment. CapEx totaled $727 million or 18% below last year spend and in line with our most recent guidance. This included approximately $520 million of CapEx for our Mexico beer operation expansion. Furthermore, through fiscal ’20 we’ve cumulatively spent approximately $700 million in capital related to our Mexicali expansion project.

Moving to our full-year fiscal ’21 P&L and cash flow targets. Given the unprecedented COVID-19 events that began to have roughly and dramatically impact consumers and the marketplace, almost concurrently with the start of our fiscal year, and given the related uncertainty, volatility, and fast-moving developments that have evolved over the month of March, we do not believe it is prudent or appropriate to provide formal financial guidance for fiscal ’21 at this time.

With that being said, we thought it would be helpful to highlight some of our key financial targets, assuming a normalized environment for fiscal ’21 prior to COVID-19, as reference as you think through your modeling and scenario work given the changing marketplace dynamics.

For pre-COVID-19 fiscal ’21, the beer business targeted net sales growth of 7% to 8%, which includes 1% to 2% of pricing within our Mexican portfolio. Including the impact of the Ballast Point divestiture, organic net sales growth is 8% to 10%. Operating margin in the 39.5% to 40% range as investments for the Corona Hard Seltzer launch as well as inflation headwinds, primarily related to glass, raw materials, transportation and labor costs in Mexico are expected to be greatest in the benefits from product pricing and productivity initiatives.

Moving to wine and spirits. For pre-COVID-19 fiscal ’21, the wine and spirits business targeted net sales and operating income decline of approximately 30% to 35%. This assumes the revised wine and spirits divestiture transaction with Gallo and the separate divestitures of Paul Masson Grande Amber Brandy and the concentrate business closed around the end of Q1 fiscal ’21, while the separate but related agreement to divest the Nobilo Wine Brand to Gallo closes by the end of Q2 fiscal ’21. Lastly, the plan to retain the Cooks J. Rogét sparkling wine brands is also included in our pre-COVID-19 target for fiscal ’21.

Our pre-COVID-19 expectation for Q1 wine and spirits results assumes a decline of 25% to 30% in sales and operating income due to the following factors: Unfavorable Q1 FY21 comparison due to a very strong quarter last year for the brands to be divested, sales of the Black Velvet brands are not included in this year’s Q1 result, as a result of the divestiture late last year, and distributors have ample supply of brands targeted for the Gallo divestiture as they assumed fiscal ’20 year end close on the transaction.

Our retained portfolio of power brands in the wine and spirits business, including Cook’s and J. Rogét target net sales growth of 2% to 4% on a pre-COVDI-19 basis for fiscal ’21.

Other pre- COVDI-19 target assumptions include interest expense in the range of $385 million to $395 million, comparable tax rates excluding Canopy equity earnings of approximately 18%, weighted average diluted shares outstanding targeted at approximately 195 million, operating cash flow in the range of $2.3 billion to $2.5 billion.

This is a good spot to discuss a few items around capital management and deployment. As you would expect, we’re reviewing in detail all expenses in capital expenditure plans for refinement and flexibility to make sure we prioritize and optimize the spend given the current business conditions and economic environment. While wine and spirits EBIT is moving down in fiscal ’21, due to the planned divestitures, we are maintaining our current quarterly dividend rate.

In addition, we remain focused on our goal of returning significant capital to shareholders balanced between dividend payments and share repurchases. However, in the short-term, given the uncertainty around the COVDI-19 impact on our business, we will be maximizing free cash flow and utilizing that free cash flow to reduce debt and leverage. We believe longer term, we retained a full flexibility to fulfill our $4.5 billion commitment over time.

In closing, I want to reiterate that Constellation is a strong cash flow generator, has ample liquidity and financial flexibility. We remain focused on fruitfully navigating through the challenging environment presented by COVDI-19, and we’ll look to provide updates including full year guidance as more factors become known.

With that, Bill and I are happy to take your questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Bonnie Herzog with Goldman Sachs.

Bonnie Herzog

So, I wanted to get some clarification on the Mexican government’s decision, which determined that alcohol is non-essential. And I just wanted to make sure I understand what you’re sharing with us today that if I heard you correctly, you are not suspending your production. But, what I’m hearing is, a lot of the other brewers are suspending. So, I just wanted to make sure I heard you correctly. And then, curious to hear how you see this situation evolving and maybe what your contingency plans are. You did share with us some of the, I think,, finished inventory that you have on hand to meet the U.S. demand. But I just kind of wanted to understand where you’re at with that specific situation. Thanks.

Bill Newlands

Sure. So, as we stand today, we are currently operating. We also have, as I noted in my script, roughly 70 days through the system at either — and that does not include at retail. That is purely that we have or our distributors have. So, we are fairly confident that we will see no disruption at retail from our operations, and we’ll be able to meet consumer demand as it continues.


Our next question comes from Kaumil Gajrawala with Credit Suisse.

Kaumil Gajrawala

Bill, I think you mentioned that you’re working through a series of options on what’s going to happen with Mexicali. Obviously, we don’t know which of those options you’ll take. But, could you at least give some insight on what your options are from this stage?

Bill Newlands

We’re not prepared to go through what the exact options are. What I would say is this. We had a very productive meeting with the President and his team. I think there is mutual agreement that we have been a strong player in Mexico for 30 plus years, and that that strong relationship is going to continue, and that we will have solutions for the long-term to make sure that we are able to meet the strong consumer demand that we continue to have for our brands.

So, while I’m not prepared to talk about the specificity of that, we are very comfortable that our discussions will yield strong, medium and long-term benefits for our business.


Thank you. Our next question comes from Vivien Azer with Cowen. You may proceed with your question.

Vivien Azer

Thank you. Good morning. I was just hoping to the on-premise off-premise mix, Bill, very helpful in terms of contextualizing the revenue mix. But, Garth, I was wondering, whether you could offer any insight into the margin differential, given the purpose of kegs in the on-premise. And then, as a follow-up to that, is it possible for you guys to move cans and bottles that are no longer being sold in the on-premise into the off-premise for the distributors? Thanks.

Garth Hankinson

Thanks for the question, Vivien. So, to your first question, the margin differential, there’s no margin differential for us between on and off-premise, because that goes through — that all goes through distributors. So, same margin for us. As it relates to the question, can we move product out of the on-premise to the off-premise?

Bill Newlands

Let me touch on that Vivien. In many instances, distributors will pick up and redistribute supply where necessary or where a particular channel, like on-premise has effectively closed in many markets. So, yes, that in fact often does occur. Obviously, there’s some format differences in terms of what people use in particular channels. But yes, it does occur. Just to reiterate a piece of your question as well. We are multiple points across both, beer, wine and spirits, less reliant in on-premise than the industry overall. So our business has been skewed historically and still is to the off-premise channel, which in an instance like this is very valuable. But, that’s not to say, as you’ve heard, we haven’t recognized the many challenges that our friends in the on-premise are having at moment. And we as a company and many of us as individuals have made significant contributions to help those who are in need at the moment and who have run into very challenging times, for those who are in the on-premise?


Thank you. Our next question comes from Bryan Spillane with Bank of America. You may proceed with your question.

Bryan Spillane

Hey .Good morning, everyone. Garth, maybe just two quick modeling questions for you. One, in terms of the on, off-premise split for spirits and — wine and spirit for the year. Could you give us a sense, in the fiscal ’21 plan that was unaffected by COVID, what was the growth expectation in those two channels? What were you expecting from home versus growth at home? And then second, if you could give us a sense within both segments of just fixed and variable costs, as we kind of want to run through sensitivity to be able to get a rough sense of fixed and variable costs. Thank you.

Garth Hankinson

Bryan, would you mind repeating the first part of that question around the margins? I just — I didn’t quite catch that.

Bryan Spillane

So, the second part is just trying to get an understanding of what is fixed versus variable costs in both, the beer, and wine and spirits segments?

Garth Hankinson

Yes. Okay. So, fixed versus variable cost is — for both businesses is they skew highly towards variable, call it somewhere in the neighborhood of two-thirds variable and one-third fixed, maybe a little bit higher in some cases. On the beer side, the variable costs really are around freight and packaging. And in wine it’s freight costs and packaging. Then, I believe the first part of your question was around the on-premise versus off-premise growth rates. And for on-premise growth rates, we were modeling in flat and for off-premise it was mid single digits.


Thank you. Our next question comes from Nik Modi with RBC Capital Markets. You may proceed with your question.

Nik Modi

Thanks. Good morning, everyone. Bill, just a question on retail. I mean, we are hearing that resets are being pushed back — resets are being pushed back. And I just wanted to gain an understanding of impacting you guys, because obviously there’s a lot of new products coming in the marketplace. Corona Seltzer has gotten into the market but not at full distribution. So, if you could just give it some of the puts and takes in terms of how that’s going, are you getting just more space of your A level SKUs in the place of some of the new products that were going to come out in the market? Any thoughts on that would be helpful.

Bill Newlands

Sure. You bet. We’re seeing — first of all, obviously there was — particularly in March, there was a lot of heavy-up pantry loading, people buying particularly those brands where they have a lot of comfort. And of course many, many of our brands across beer, wine and spirits all fit into that. So, that was obviously very helpful. Keeping in mind that the Seltzer, much like Refresca did, goes into different space, and Seltzer has obviously been a very hot category. You see a lot of that product on the floor with us and with competitors as well. And we’ve already in just the first month, our team and our distributors have done an outstanding job of getting the product out to market. We’ve almost achieved 50%, ACV in the first month, which is again record speed. So, we think as time goes forward, you’re going to continue to see core SKUs, critical SKUs being very important. And in fact, we have made some adjustments in our production footprint to make sure that those core SKUs are fully available throughout the supply chain because that’s something that we think will occur in the near term, until consumers spend more time in stores. We’ve also seen a very rapid uptick in click, things like 3-tier e-commerce, click and collect. Our Company had its single biggest — in wine, had our single biggest direct-to-consumer week we’ve ever had last week as consumers again found alternate ways to continue to buy our products.

So, I think, just to summarize that, you’re going to continue to see critical SKUs, be in stronger distribution positions. But we’ve been very pleased with our distributors’ ability to continue to get critical new products. Remember, most of the new things that we’re doing this year are master brand extensions. So, they are consistent and part of strong brand families. That particularly at a time like this, I think is important because the consumer often during recession or recessionary type behavior, seeks out those core brands that they have a lot of personal comfort with. And again, our brands fortunately are part of that set.


Thank you. Our next question comes from Dara Mohsenian with Morgan Stanley. You may proceed with your question.

Dara Mohsenian

So, I wanted to ask more of a longer term question. In past cycles, we’ve seen some trade down occur in the beer category in a recessionary environment, including back in 2008, 2009. Could you just spend some time discussing how your product portfolio might be more or less at risk from a macro slowdown versus past cycles on a theoretical basis, sort of ex the COVID situation, due to much higher share level today, your brand mix has changed over time. So, just curious for your perspective on the degree of trade down risk or macro sensitivity may be versus what you see in the past cycles?

Bill Newlands

Yes. And I joked with Garth earlier today, I guess if you’re old enough, you’ve been through a couple of these cycles. So, I have. What we expect to see is this. Brands are even more important at a time like this, because many people are seeing the opportunity — and our category is one of those, for simple pleasures in life. Let’s face it. The more people are sheltering in place, the more that they look for those small pleasures in life and our category is one of those that addresses that. But, you often see even stronger brand behavior that occurs during this time.

So, let’s take our Woodbridge wine brand example. We have seen significant pickup in the month of March for that brand because as I said in my script, it’s a tried and true brand. People know it, they appreciate the quality for the price value relationship that exists there, and we’ve seen quite a bit of an uptick against that brand. We’ve seen the same thing with Kim Crawford, Meiomi and The Prisoner, brands that the consumer appreciates, and likes.

Similarly, in beer, when you have a brand like Modelo that’s the number four brand now in the entire U.S. beer business, you’ve got a brand that has a great deal of trust, and you’re seeing the trends that support that. Fortunately, Modelo and Corona are two of the most trusted brands in the consumers’ mind. And therefore, we feel very comfortable that we will actually get a disproportionate amount of benefit that occurs when people go to the more tried and true brands. That’s what we saw in 2008, that’s what we saw in the previous recession before that that those tried and true brands end up winning. And we think our brands are well-positioned across beer, wine and spirits to take advantage of that, just a little less experimentation during a recession environment, and that’s why those core brands like ours will do very well.


Thank you. Our next question comes from Lauren Lieberman with Barclays. You may proceed with your question.

Lauren Lieberman

My question was just continuing to going back to the conversation about Mexico production. If we do, in fact, get to place where you need to curtail production, even though there’s no [Technical Difficulty], how should we think about [Technical Difficulty] margins, right? So you shut down the plant for a month, I would think you get a good amount of pressure on margins, but does that even out, when you ramp back up as you come out of this? So, just kind of thinking about very, very short-term question, but just trying to understand how we should think about that net impact on profitability? Thanks.

Bill Newlands

Well, again, I’m going to repeat myself, but I hope you’ll bear with me on it. We continue to operate in Mexico. And as long as that is a consistent statement and we expect that it will be, we wouldn’t expect that there would be any significant issues around our margin structure. Obviously, a lot of things factor into that, not the least of which is, the peso and various other things that occur during times like this. But, I think the best way to think about it is, we have 70 plus days in the pipeline for our beer business and we expect to have no disruption in our ability to produce product and deliver it to retail.


Thank you. Our next question comes from Kevin Grundy with Jefferies. You may proceed with your question.

Kevin Grundy

Thanks. Good morning, everyone.

Bill Newlands

Good morning.

Kevin Grundy

Bill, I wanted to pick up on the on-premise, off-premise dynamic. I know, this is a difficult question to answer and I appreciate that you don’t want to give guidance. But maybe even qualitatively, I think what a lot of investors are kind of wrestling with is how much of the unprecedented weakness in the on-premise channel is potentially going to be captured in the off-premise. And we’ve seen big pantry loading at this point, but really harder to make conclusions on what’s going on in terms of how quickly consumers are going to — will destock their pantries. So, any comments you have potentially on how much of the on-premise weakness will potentially be offset by the off-premise? Thank you.

Bill Newlands

Sure. You bet. Admittedly, this is somewhat unprecedented. So, I think we need to all be careful with specificity of answers because in other recessionary periods, while you saw decreases in the on-premise, you didn’t have shutdown in the on-premise. So, it is a little different. With that said, channel shift is not unusual during recessionary times. And you’re obviously seeing that now in part because the on-premise is in many markets is largely closed.

Again, if you are in the 85% to 90% range for us and the off-premise to start with, the need to see some increase in channel shift is less significant than it is for someone who is more weighted to the on premise. Let’s take March as an example. Admittedly, there was some pantry loading that occurred during that month. It more than made up — the off-premise more than made up for the on-premise loss that occurred during that timeframe. It was an excellent month. But, we’re always reticent to project that forward because you don’t know what the consumption profile will be.

I’ll repeat what I said a minute ago, because I think it’s a very true comment. People look for small pleasures in their life when you were in situations of recession. Multiply that by the fact that most of us are now sheltering in home. Those small pleasures — our business is one of those small pleasures and I think that will be advantageous for our business going forward.

Garth Hankinson

As long as around the on and off-premise question, let me just go back to clarify, Bryan’s question around the growth rates related to on versus off-premise. Bryan, I gave you a bit of incomplete answer. So, what I gave you is zero on-premise growth and mid single digits. That was really for wine and spirits, as you think about their total sales being in that 2 to 4 range. On beer, total sales were targeting to be 8% to 10% on an organic basis. So, the on-premise would be in the sort of low to mid single digits and off-premise would be the remainder.


Our next question comes from Rob Ottenstein with Evercore.

Rob Ottenstein

I was just wondering, if you could talk a little bit about how you may be adjusting your marketing spend, and what sort of flexibility you have on your contracts. Obviously, you do a lot with ESPN, a lot of sports, UFC and a lot of these events just aren’t going to happen. So, is there — maybe there’s some kind of breakout that you can give us in terms of what is fixed for this year or let’s say the calendar year, next 12 months, and what areas you can possibly save or redirect?

Bill Newlands

This is also, as you would expect, a bit of a moving answer. Some things you’ve seen have been postponed. Therefore, we are not — well, we may not spend it in the first quarter, we might well spend it when the events do occur, assuming they do. What we have done is that we have adjusted, Jim Sabia and his team in both wine spirits and in beer, have done a fair amount to move to more digital and social media efforts, which is actually good. That’s very consistent with where the consumer is going anyway. So, we do have quite a bit of flexibility to move things around. When you have cancellations, let’s take the NCAAs. That is a cancellation. So, choices are then made as to whether or not we reproportion that type of spend that we have into other formats, or we don’t. Those decisions are ongoing. It’d be difficult to give you a definitive answer at this point in time around that. We will try to do that going forward, as more thoroughly understand what is canceled versus what is delayed. Until we have a better handle on that, it’d be very difficult. Suffice it to say, one of the traits that we’ve seen with our marketing group is to be very nimble, and they are being very nimble, adjusting on the fly to more digital and social environments from things where we can’t do live sports, as you know.


Our next question comes from Andrea Teixeira with JP Morgan.

Andrea Teixeira

As a follow-up on the comments about the production in the Mexico in your discussions, Bill, with the Mexican government. In order to stay open, could you prove that your production facilities are safe enough to be made operational through the end of April? And then as a follow-up to the margin commentary, how much of your Mexican peso dominated costs are hedged at this point in light of the devaluation of the Mexican pesos?

Bill Newlands

So, Garth, I’ll take the first half of that. Let me just tell you some of the things we’ve done. And we’ve done this in the wine and spirits as well as beer. And I think it’s important. As I said, our employees are our number one priority. We are testing for temperature as people enter our facilities. We are keeping social distancing in our facilities to make sure that people are safe. We have changed how we run shifts in our plants to make sure there are not overlaps of shifts, in case there are any issues that occur with people’s health. So, we are doing everything humanly possible to make sure that we continue to operate in a safe and effective manner within all of our operating facilities. The same is true of that in New Zealand and Italy as well.

So, first and foremost, we are taking great care to make sure we are operating correctly. I think that will likely be respected by the government of Mexico. They have obvious concerns for their entire economy, as our country has great concerns for our economy, to make sure that people are being protected. And I think the kind of steps that we’re taking to make sure we’re protecting our people, we believe is best in class. We’re keeping track of everything possible to ensure the safety of our employees, and that effort will continue. Garth, do you want to touch on the second piece?

Garth Hankinson

Sure, on the hedging piece. So, as it relates to both, commodities and on currency, we’re — for the current fiscal year, fiscal ’21, we are hedged on both fronts, in excess of 80%. We are using this period of time as we see some movements on commodities and in currency to layer in additional hedges for the next couple years. So, we could see some further benefits in coming fiscal years.


Thank you. Our next question comes from Laurent Grandet with Guggenheim. You may proceed with your question?

Laurent Grandet

Yes. Good morning. Thanks for the opportunity. So, two follow-up questions actually. One, you said you will focus on the core brands going forward. And that makes sense. I’d like to understand if Corona Seltzer is considered as a core brand and being — will be one of your focus points for the next two months. That’s one question. And the second follow-up, sorry to come back on this, manufacturing in Mexico. But, this morning again one of your competitors said that on Sunday April 5th Grupo Modelo will suspend beer production and distribution operations. So, as you’ve got 70 days of inventory, obviously you want to beat kind of goodwill with the Mexican government, I mean, on the Mexicali and brewery subset. So, why — and there is something, I don’t know understand it. Why are you — have you decided to go against the government decision in that specific subject? Thank you.

Bill Newlands

So, let’s tackle your first question, which is seltzer. Certainly, our Corona brand family, since we approached 150 million cases of product in fiscal ’20 is one of the critical things and critical brands that we have within our portfolio. The seltzer, as you know, is one of the fastest growing sub segments within the alcohol beverage business, as well. Therefore, the combination of the great Corona branding, plus the hot category of seltzer is a wonderful combination. And we’re expecting that that’s going to be important part of our success story for fiscal ’21.

I do need to be very, very clear with you. We are not doing anything against what the government of Mexico is suggesting. We certainly — our company is known for respecting, respectful of the laws and approaches of any company — any country in which we operate. And that certainly will continue. I have no comment regarding a competitor and what they are choosing to do or not choosing to do. I personally would suggest you ask them. What I would say is today, currently, we are operating and we will continue to do what’s appropriate under the restrictions that apply or don’t apply in any company — in any country in which we operate.


Thank you. Our next question comes from Bill Kirk with MKM Partners. You may proceed with your question.

Bill Kirk

Thank you, everyone. So, on the 70 days of inventory in the system, how much of that is in Mexico? I guess, that’ll show up in a 10-K, but how much of it is in Mexico and how much of that is actually allowed to leave Mexico and into the United States? Is that allowed to come over the border right now?

Bill Newlands

So, to answer your question, the vast majority of that answers in the United States between either inventory at our distributors or in our DCs. So, the vast majority of it I would say, in excess of 80% of that is already in the United States.


Thank you. Our next question comes from Bill Chappell with SunTrust. You may proceed with your question.

Bill Chappell

I just want to go back to Mexicali. And I understand you can’t talk about where it goes from here. But can you maybe give us an update on how much money has been put into it? And then, any kind of color on how you’ve got this far down the path and we got to this stage?

Garth Hankinson

Yes. I’ll take the first part of that. To-date, we have spent approximately a $700 million in Mexicali.

Bill Newlands

So, what I would say is that there are a lot of decisions that have been made as time has gone on. As you know, there have been changes in government during the time that this facility has been started. What I would say is this. We’ve been operating in Mexico for 30 years. It has been a tremendous partnership with the people of Mexico and with the government of Mexico and with the local States within Mexico. We remain extremely confident in our long-term ability to meet the consumer needs in the United States for the critical brands of Modelo, Corona, Pacifico, and other related brands. So, I don’t feel that it does anyone any good to micromanage the approach to the situation. What I would say is we’re going to have a very solid solution for our long-term prospects and we certainly appreciate the government’s engagement with us on that topic.


Thank you. Our next question comes from Sean King with UBS. You may proceed with your question.

Sean King

Hi. Thanks for the question. I got a wine sale question. Is it safe to say that the escalating COVID-related work stoppages and disruptions could have an impact on the, I guess, achievability of the new timing, or is that already baked into your new outlook?

Garth Hankinson

So, thank you for the question. We think that the COVID situation is baked into the current timeline. That being said, I don’t know how much more disruption COVID-19 could have in terms of the government’s ability to work. But I can tell you right now that the FTC continues to be actively engaged in our conversations and in the review of this process. And, we’ve factored all of that into the timeline that we provided.


Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Bill Newlands for any further remarks.

Bill Newlands

I’d just like to thank everyone for joining our call today, particularly in these challenging times. I believe we’ve done an excellent job of building vital momentum in fiscal ’20 as we head into what admittedly will be a volatile start to our new fiscal year. Through our strategic initiatives and priorities, we are positioning Constellation for sustained long-term success and will continue to quickly adapt to the rapidly changing market dynamics as we navigate through fiscal ‘21. As the environment evolves, and more factors become known over the next few months, we hope to be able to provide much more clarity on the prospects for our business for the year in which we are in.

I’d like to thank you all again for joining the call. And I hope you and your loved ones remain healthy and safe during this unprecedented time. Thank you.


Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.

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Lenders call on Washington for more clarity on small business rescue program a day before Friday launch

Lenders are still grappling with the U.S. government’s rollout of its $350 billion rescue lending program that aims to start shoring up small businesses battered by the coronavirus pandemic as soon as Friday.

Trump administration officials have said they want to get aid in the hands of small businesses within days of Friday’s planned rollout, as part of a broader $2 trillion stimulus package passed last week by Congress to help bolster Main Street and the larger U.S. economy.

But efforts to quickly get working capital out to small businesses, which in turn aims to staunch already skyrocketing unemployment, are being complicated by what some lenders have criticized as a chaotic process.

On Thursday, the Illinois Bankers Association added to a chorus of concerns from lenders about the outlines of the programs, saying in a statement that its members stand ready to assist clients with emergency funding, but that banks remain in a holding pattern until Washington completes rules for the Paycheck Protection Program, a cornerstone of the government’s small business rescue effort.

“Banks across the nation are waiting for instructions from the government on how to move forward, and Illinois banks stand ready to help as soon as they receive this information,” Illinois Bankers Association President and CEO Linda Koch said in the statement. “Until the rules are final, we are simply in a waiting game.”

Asked about the criticism at a White House briefing, Treasury Secretary Steven Mnuchin said he was confident the program was ready to start Friday.

“I’ve been assured the banks will be in the process starting tomorrow,” he said.

The Paycheck Protection program will offer up to $10 million to hard-hit businesses to help cover wages for employees, sick pay and eligible mortgage and other immediate debt payments. The loans are for two-year terms at a low 1% fixed rate of interest, require no collateral and come with debt forgiveness options for eligible expenses. The 1% rate was changed late Thursday from 0.50%.

JPMorgan Chase & Co.

JPM, +3.73%

 said in a statement late Thursday that it probably will not be ready to start accepting applications by Friday for the Paycheck Protection Program as hoped.

The Western Bankers Association, which covers lenders in 13 states including California, also said its members were in a holding pattern “less than 24 hours before these loans are to be made available,” in a statement.

Mnuchin said Wednesday in an interview with CNBC that he’s already prepared to ask Congress for more money beyond the initial $350 billion facility to support businesses, even before the first batch of funds are allocated.

“One of the things I’ve heard is this small business program is going to be so popular that we’re going to run out of our $350 billion,” he told the network.

Wall Street has been nervous about how the government will manage the coronavirus crisis. U.S. stocks on Thursday bounced higher along with crude oil prices, with the Dow Jones Industrial Average

DJIA, +2.24%

 gaining 2.2%, even as the global cases of the coronavirus topped 1 million.

Meanwhile, business owners struggling with coronavirus fallout can still apply online for the Paycheck Protection Program or for an advance of up to $10,000 to help cover lost revenue from the pandemic through the Small Business Administration’s website. The SBA also is offering low-interest disaster loans of up to $2 million for businesses to help cover payroll, fixed debts or other bills at an interest rate of 3.75%, and other debt relief measures.

But while the government has touted aid to approved business owners in as quickly as three days, the hitch is that the SBA still needs a roster of banks and credit unions willing to start disbursing funds to their clients.

Calls and emails to the Treasury Department and the SBA seeking comment on the rollout of the rescue programs weren’t immediately returned.

One assistant branch manager at a regional bank on Thursday told MarketWatch she expected to hear more on Friday about if her bank gets approval to participate in the SBA programs. If signed off, the bank then plans to go through its client list to see which businesses might be eligible for emergency funding, she said.

“We’re waiting for the green light.”

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National Bank of Greece S.A. (NBGIF) CEO Pavlos Mylonas on Q4 2019 Results – Earnings Call Transcript

National Bank of Greece S.A. (OTCPK:NBGIF) Q4 2019 Results Conference Call March 31, 2020 11:00 AM ET

Company Participants

Pavlos Mylonas – CEO

Christos Christodoulou – CFO

Gregory Papagrigoris – Head, IR

Conference Call Participants

Floriani Jonas – Axia Ventures

Bairaktari Angeliki – Autonomous Research

Abad Jose – Goldman Sachs

Bairaktari Angeliki – Autonomous Research

Memisoglu Osman – Ambrosia Capital

Nigro Alberto – Mediobanca


Ladies and gentlemen, thank you for standing by. I’m Constantinos, your Chorus Call operator. Welcome and thank you for joining the National Bank of Greece Conference Call to present and discuss the Full Year 2019 Financial Results. [Operator Instructions] And the conference is being recorded. The presentation will be followed by a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Pavlos Mylonas, CEO of National Bank of Greece. Mr. Mylonas, you may now proceed.

Pavlos Mylonas

Good morning, good afternoon, everyone, and good morning to those of you joining from the U.S. Welcome to our full year 2019 financial results call. I’m joined by Christos Christodoulou, Group CFO; and Gregory Papagrigoris, Head of IR. After my introductory remarks, the CFO will go into more detail on our financial performance, and then we will turn to Q&A. So, let’s begin.

The advent of the COVID-19 virus, and its extraordinary ramifications for the world economy clearly lessened the importance of the Q4 ‘19 results. As they represent developments from a past that is significantly different from what we face today and expect to face in the near future. I would like to begin by describing our response to this crisis over the past critical several weeks. NBG has shown that it can act quickly by, first, creating a functional new work from home operating model, able to protect the health of its people. Currently, more than 70% work from home, despite maintaining open all our branches.

Second, adapting processes to remote access functionality for our employees, including the improvements in our digital offering for our clients, while minimizing operational risk, including cyber risk. Indeed, the total transactions are severely down, the number of digital transactions is up.

And third, by participating in the establishment of actions to meet the immediate need of clients e.g. as regards appropriate payment holidays, a new government-guaranteed working capital facilities. Today, NBG and all its people are operationally and psychologically ready to operate in this rapidly changing new world. Key to success in this turbulence will be: one, a strong balance sheet; two, a flexible and efficient strategy to adopt the new reality; and three, effective empathetic leadership from the management team, working closely with the BoD. In this regard, NBG’s existing balance sheet has significant competitive advantages, combined with changed infrastructure developed for its transformation effort, and this provided a significant edge.

First, beginning with liquidity. NBG can withstand extremely adverse developments in markets due to a combination of a solid cash buffer, approximately €4.5 billion and its low recourse to repo market, only €1.5 billion in the repo market, as well as it has a small a held to collect and sell portfolio, less than €1 billion.

Second, NBG’s capital ratio currently stands at 18.5% at a time when regulatory limits have been reduced significantly. This is a buffer of approximately 700 basis points and it follows the €800 million capital gains achieved in the first 2 months of this year.

Third, a strong management team, leveraging off a very effective transformation program, has been successfully changing the bank, improving significantly its efficiency and profitability as the full year ‘19 financial results reveal. This team has a proven track record in implementing effective change, a critical asset in today’s environment. The highlights of full year 2019 financial results in brief.

A strong recovery in core operational profitability by 38% year-on-year to $235 million through: one, core income expansion, as well as a 9% reduction in operating costs, adjusted for IFRS 16 and Pangea, 11% at a bank level, including a Voluntary Exit Scheme for approximately 1,100 FTEs. Also, a significant reduction in fees by circa 1/3, €5.3 billion at the group level, €4.7 billion at a bank level without a significant impact of credit charges. Other notable developments are: first, we finally completed the long saga with the Auxiliary Pension Fund on March ‘19 with the voting of a new law by parliament.

These pensions have been taken over by the state with our liability capped at a 12% contribution on our annual wage bill over the order of €35 million to €40 million per year for the next several years. The result is consistent with our May 2019 business plan guidance. Second, the other saga with Ethniki Insurance continues, and we’re currently examining the outcome of the process with our BoD. We have taken an impairment on National Insurance to reflect our fair valuation exercise, and please note that there is no impact on our regulatory capital from this impairment.

At present, visibility as regards to the future is extremely limited. It is clear that the Greek economy will suffer, experiencing significant negative output growth in Q2 and in Q3, despite a very large policy stimulus. Specifically, the government is introducing about €6 billion in fiscal actions, mainly in the form of wage support, around €2 billion for 2 months, and the pushback of tax and social security obligations, again for 2 months. A further €6 billion support will arise from government guarantees and the diversion of EU funds towards the crisis. The impact of the economic expansion may also be mitigated by the relatively close nature of the Greek economy and its lack of dependence on the international supply chains.

Its lower level of gross fixed investment and consumption comprising basic goods, both are result of adjustments made during the previous crisis are the positives. The extent to which the tourism season is affected is another critical factor. Albeit early days, the threat of COVID-19 virus appears relatively more muted than in other countries due to the early policy response. Let’s knock on wood on that. What I can commit to is that NBG will be close to its clients and efficient in implementing the new policies approved by national and European authorities to ease the impact from the unprecedented shutdown of a large swap of the economy.

Moreover, NBG’s transformation will not stop. Indeed, NBG will speed up changes to its operating model, especially digitalization, improving services to both corporate and retail clients. In addition, NBG will be ready to launch its large NPE securitization greater than $6 billion as soon as market conditions permit. In conclusion, I have no doubt that in this very difficult period, NBG will live up to its tradition and play a critical role in supporting the economy and the society.

With that, I would like to pass the floor to our CFO, Christos, who will provide additional insights to our financial performance before we turn to Q&A. Christos.

Christos Christodoulou

Thank you, Pavlos. As you commented, the advent of COVID-19 has a profound impact on the economic prospects of countries and businesses across the globe. And at this point, the uncertainty around the duration of the economic shock makes any commentary on past financial performance diminishing. In that light, I will comment briefly on the financial trends of 2019, and I will try to give the forward-looking spend where possible.

Starting with profitability. In 2019, we have managed to grow our core income by 6% year-on-year, reflecting strong NII from securities, absorbing the cost of the 400 Tier 2 issuance in July as well as a contained reduction of just 2.8% in lending NII as a result of healthy production of new loans. Indeed, in 2019, domestic loan disbursements were up 13% year-on-year to €3.3 billion, driven by corporates at €2.8 billion. At the same time, the quality of lending interest income kept improving with more than three fourth of the 2019 non-performing interest in either cash or fully provided for. Domestic net interest margin decreased by just 6 basis points year-on-year to 265 basis points, while risk-adjusted NII remains at healthy levels of €793 million, approximately 5% higher year-on-year. Albeit results have been equally encouraging as we were up by 6% year-on-year, driven by retail banking fees, which are up by 13%. This has been the result of heightened growth across major fee business contributors, namely digital channels, bancassurance and lending-related fees.

The cost reduction efforts are also producing impressive results. Domestic personnel expenses declined by 8.2% year-on-year, as safety reductions from VASs started to pay off. Approximately 1100 employees accepted the VAS offering that expired in February 2020, with the cost saving impact from this exit is expected to provide a strong support to our 2020 operating result. Moreover, on the back of rigorous demand management and cost containment, admin expenses were reduced by 17% year-on-year, which translates to an impressive 9% adjusting for the impact of IFRS 16. Combining cost reduction with the expansion of our core income, group cost-to-core income dropped by 7 percentage points year-on-year to 58%. And after factoring in our sizable trading gains, group cost-to-income ratio dropped by nearly 20 percentage points to 50% on a year-on-year basis.

Despite the accretive NPE reduction, 2019 group credit risk charges were contained at 123 basis points, supporting our core operating profit, which climbed to €235 million, up by 38% year-on-year.

Factoring in strong trading line, aided by the sale of sovereign bonds and non-core assets, 2019 profit after tax from continuing operations reached €484 million relative to €65 million a year ago. The sharp recovery in our core operating profit, coupled by strong capital gains, mostly from our treasury, absorbed sizable one-off costs, leaving our tangible equity unaffected. Amongst them, the VAS charge, the resolution of the LEPETE issue and the impairment of the net asset value of our insurance subsidiary.

Turning to asset quality. Bank NPEs dropped by €0.8 billion quarter-on-quarter, bringing the 2019 NPE decline to a sizable €4.7 billion at the bank level and €5.3 billion for the group, exceeding the SSM NPE reduction target for the year. The domestic NPE ratio now stands at 32.2%, down by 190 basis points quarter-on-quarter and by an impressive 9 percentage points year-on-year, combining with a solid cash coverage of 53%. This result arises out of the combined efforts across nonorganic as well as organic channels. On the organic side, our efforts have resulted in an accelerated reduction versus 2018 of €1.4 billion year-on-year. Efforts reflect the pickup in viable restructurings involving significant debt forgiveness, predominantly to our mortgage clients through our innovative product Split & Settle as well as a pickup in liquidations applied only to noncooperative borrowers. Organic formation, excluding accounting write offs, remained in firmly negative grounds, accelerating quarter-on-quarter as a result of lower defaults and considerably higher curing.

As Paul said, NBG will keep preparing for a large scale securitization expected to be over €6 billion, comprising approximately 2/3 of our existing NPE stock and ready to be launched as soon as market conditions permit.

On the liquidity front, domestic private deposits expanded by €2.3 billion year-on-year, excluding state deposit withdrawals of €1.8 billion, while our LCR and the NSFR ratios stand at 207% and 115%, respectively, well above regulatory thresholds. Eurosystem funding remains at €2.2 billion, comprising only of TLTRO funding, while interbank exposure was reduced by €3.3 billion year-on-year, reflecting our funding cost optimization. Low interest rate deposits increased their share to 74% of total deposits compared to 69% a year ago, allowing our blended deposit yield to edge lower to 33 basis points with new time deposit production coming in at 30 basis points. The repricing, already evident this quarter, will support our 2020 NII and net interest margin as the ongoing repricing becomes fully factored in.

Finally, in terms of capital adequacy, the bank is in a very strong position with both CET1 and total capital ratios comfortably above our SREP capital requirements. Pro forma for the impact of agreed divestments of less than 20 basis points, year-end CET1 and total capital ratios stand at 16.2% and 17.1%, respectively. Most importantly though, after factoring in the capital gain of €0.5 billion, following the GGB swap completed in the early days of January this year, our total capital ratio climbs to 18.5%. And on this note, I would like to open the floor to questions. Thank you.

Question-and-Answer Session


[Operator Instructions] The first question comes from the line of Floriani Jonas with Axia Ventures.

Floriani Jonas

My first question is just a clarification on the LEPETE issue. I get that has been resolved. Now in terms of the accounting and the cash flows, I think that now in Q4, there was an additional €54 million on top of the €36 million. So is this related to the previous periods? I mean just trying to understand, because the ongoing number should be looking at and should have in our model should be around the €36 million in the coming years, right? So that’s the question number one.

Now question number two, probably is a similar discussion you already had with the other Greek banks in terms of the expectations for the year, but also not only in terms of expected hit or expected decline, but also how the, how do you feel that the government measures and also measures from the ECB both on capital NPE, but also the guarantees from the government? How do you expect this to attenuate or to soften a bit of the impact that you may see in your financial statements? Especially because it seems like, from the other conference calls, it seems like quite a big chunk of what could be negative impacts coming on the Greek banks way will be attenuated by one or more measures. So if you can please comment on that as well will be great. I’ll leave it there.

Christos Christodoulou

Florian, this is Christos. I’ll answer to your first question regarding LEPETE. So the €54 million extra provision that you see in Q4 is relating exactly to €50 million of provision for 2019, 2018. And another €40 million for 2019 with a total up to €90 million. Now in Q3, we have provided for €36 million. So this extra €54 million you see in the last quarter of the year is simply to come up to the number that the change in the law obliges us to go. And yes, you are right, going forward, you should expect something in the area of between €35 million and €40 million for the next several years.

Floriani Jonas

Okay. That’s clear.

Pavlos Mylonas

Okay. Your second question, we’ll see how we can answer it. It’s a lot of moving parts. And clearly, there’s been a lot of help from the, from both national and international authorities. As I’ve mentioned on the Greek authorities, only just for the 2, 3-month period, it is €13 billion, approximately 6% of GDP is stimulus. That’s a lot for such a short period of time. On the NPEs, we have flexibility on what is UTP and can provide relief to both households and corporates in terms of their payments for the next months; for households, it is a 3-month pushback on installments; and for corporates, it’s until the end of the year on their capital. And there has been an announcement by the government for interest, full interest subsidy for the performing corporate loans, so that’s another thing.

So combined with the wage support, combined with the reduction in rents for affected individuals as well as corporates. All this is, the guarantees which will provide working capital support for the affected companies, which includes most of the economy right now. All these will provide significant relief. Now the question is, how much of this, and I forgot to mention the tax and social security relief as well for affected company. So the big question is how long this will last? Because the second question is, this fiscal stimulus cannot keep going month after month, after month, after month. If it is as currently expected, we’re at the trough and things are starting to improve as it looks like in Spain and Italy. And as I said, we seem to be having a smoother ride so far. Then we can even save some of the tourist season and things will look significantly better towards the last months of the year. But the question is how long would this crisis last and that is more for the doctors to answer that correctly.

Jonas Floriani

Yes, but your base case is for — as it stands for recovery starting mid to end of Q3 compared to second half?

Pavlos Mylonas

I think we’re going to — the good scenario, and it looks like it maybe the base scenario is that we will save some of the summer season that this thing will end in May, June. So July, August can look better. Now we’ll soon find out.

Jonas Floriani

Thanks so much.


The next question is from the line of Bairaktari Angeliki with Autonomous Research. Please go ahead.

Angeliki Bairaktari

Hello. Thanks for taking my questions. First of all, you have now signaled another $300 million of bond gains in the first quarter, if I understood correctly from your presentation. So that’s €800 million of bond gains just in the first quarter of 2020, which I estimate is around 200 basis points of capital. So I was wondering if you could give us some color on the different moving parts of your CET1 ratio in 2020. And especially, how much of those €800 million do you expect to utilize for the NPE securitization that you’re planning to do once the March conditions normalize? And that’s my first question.

Then with regards to the principal and moratorium for corporates and also the installment moratorium for households. What percentage of your loan book do you expect to actually apply for these payment fees?

And one more question. On Slide 23, you showed the reallocation of mortgage loans from stage 2 to stage 1 on the back of the annual changes in your model. What was the provision release attached to these reallocations? And I guess, is there a risk now that you have to revise again those PTEs. And so we see a migration back to stage 2 on the back of the deterioration of the macro in the coming quarters?

Pavlos Mylonas

Okay. Your calculations are correct around 200 basis points of CET1. In terms of how much will we use frontier, you ask me what the price of frontier will be and I don’t know. We’ll see when the markets open up, how they will be. But what — how much we’ll need for frontier is unknown. All I can tell you is that given our current CET1 capital, it’s not going to be any constraint for Frontier.

The payment freeze. The payment freeze, how much will — what percentage of our loans will cover? I can tell you it’s a growing percentage day by day. How much it will be finally is still to be determined. But right now, the government keeps increasing the sectors that it considers affected by the crisis, and currently it is a very large share of economy. So I expect a large share of our loans will be affected by these temporary payment freeze. What you need to understand here is, one is the flexibility given by the SSM on this front. Two is that there is no NPV reduction. So this is just a pushing back of payments by a few months. So it is not a big change neither on the NII nor on the NPV, as I said before, of the loan. Now on the stage, to the stage 3, Christos.

Christos Christodoulou

So the recalibration of the model did not result in any material difference in terms of provisions, the coverage of stage 2 being at 5% did not give any impact worth mentioning. And so we don’t expect any reclassification of the back to Stage 2 and no volatility in our profitability because of that.


The next question is from the line of Abad Jose with Goldman Sachs.

Abad Jose

Just two questions from my side. The first one is on loan growth, if you could actually give us some color. What are your expectations now for loan growth during the year and also in particular, what do you expect the contribution from consumer lending to the overall loan production this year?

The second question is, I joined a bit later in the call so maybe I surely missed this, which is actually any color on the sale of the insurance business. You guided for a, between 100 and 200 basis points of capital impact potentially, so I believe this will be on the lower bound. But any clarity on the time line of these and actually potential impact would be quite helpful.

Pavlos Mylonas

Okay. On loan growth, it’s a bit counterintuitive, but I think we’ll see positive loan growth in 2020. And the logic is as follows: there are few corporates that are going to repay their working capital facilities. Actually, they’ll be increasing them with the help of the guarantee scheme. The holidays on capital will lead to a reduction in loans, stock of loans. So my base scenario is that the loans outstanding will be higher at the end of 2020 than they are at the end of 2019 for the simple reason that people are hoarding cash and are going to be using it to payback anyone, especially when we give them the opportunity for the holidays. Now…

Abad Jose

One follow-up here. Can you tell me what’s the amount of undrawn credit lines for corporates as of February, March?

Pavlos Mylonas

Yes, of course. Christos.

Christos Christodoulou

So the committed undrawn facilities is currently around €0.5 billion, just shy of [indiscernible].

Pavlos Mylonas

Okay. All right. Now on National Insurance, yes, I made it in my opening remarks, that’s an ongoing process, and therefore, that limits what I can say. But we did take, from an accounting point of view, an impairment of…

Christos Christodoulou

Around €0.5 billion.

Pavlos Mylonas

€0.5 billion. Okay, in the final quarter.


[Operator Instructions] We have a follow-up question from the line of Bairaktari Angeliki with Autonomous Research.

Bairaktari Angeliki

Just two clarifications, please. On the NPL sales that you report for this quarter, €228 million, do these refer to the Romanian portfolio that you have put for sale? And then do I understand correctly that effectively, the write-down of around €500 million on the insurance business has also reduced the amount of significant investments for your CET1 threshold calculation? And that’s why it is neutral to the CET1 ratio? Is that the right mechanic to think about it?

Christos Christodoulou

Let’s start from the end, yes, Angeliki, that’s correct. You got the math right. So no effect in capital as the CEO said about, from this impairment.

Pavlos Mylonas

And in terms of transactions, we, despite the turmoil, we are confident of concluding the transactions with, but with its ongoing negotiations with all bidders.

Angeliki Bairaktari

Yes. Sorry, just one clarification. The sales that you reported already in Q4, to which portfolio do they refer?

Pavlos Mylonas

It was, it’s NBG Cyprus and the Romanian portfolio. That’s the 2 additional.


[Operator Instructions] Next question comes from the line of Memisoglu Osman with Ambrosia Capital.

Memisoglu Osman

Just a question on the cost side. With the pandemic, the banks have been forced to operate with less personnel in the branches. And so far all seems to be going relatively well. With the digitalization efforts you already have been taking, is there a chance that this could lead to some cost savings, additional cost savings eventually or at least over the next couple of quarters?

Pavlos Mylonas

It’s a good question. We’ve all been, we had a board today, we’re discussing that in the strategy committee that the recent developments has forced us to rethink our operating model and see the successes we’ve been having from work from home and et cetera. So that will certainly be taken advantage of in the future. I’m not sure if it’s going to be the next few quarters. But down the road, clearly, with the lessons learned from the operating, new operating model will be applied and it will certainly lead to lower operating costs. So yes, I agree.


[Operator Instructions] The next question comes from the line of Nigro Alberto with Mediobanca.

Nigro Alberto

Just one clarification on loan volumes. You said that you expect higher loans in 2020. But what do you expect in terms of margins? All these liquidity provided to companies will come with some margin attached.

Pavlos Mylonas

I think that we won’t see a significant differentiation either up or down on margins. Most of the extensions are being done at the current rates. And the guarantees for the new working capital facilities will be more or less, as I understand it, in line with the rates we are offering now. So I don’t expect a significant change either way.


Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Mylonas for any closing comments. Thank you.

Pavlos Mylonas

Thank you very much for attending our call. I hope — I don’t think we’ll be seeing you soon. We may be hearing you soon. So we’ll be doing it from a distance. Hope everyone has good health in the next months, and we’ll be at least talking to you soon. Thank you very much.

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Landec Corporation (LNDC) CEO Albert Bolles on Q3 2020 Results – Earnings Call Transcript

Landec Corporation (NASDAQ:LNDC) Q3 2020 Earnings Conference Call March 31, 2019 5:00 PM ET

Company Representatives

Albert Bolles – Chief Executive Officer

Brian McLaughlin – Chief Financial Officer

Jim Hall – President of Lifecore

Conference Call Participants

Gerry Sweeney – Roth Capital

Anthony Vendetti – The Maxim Group

Mitch Pinheiro – Sturdivant

Mike Petusky – Barrington Research

Mike Morales – Walthausen & Company


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 Bolles

Thank you and good afternoon everyone. As a leading innovator in diversified health and wellness solutions, Landec is comprised of two 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, sale and finish of difficult to manufacture pharmaceutical products distributed in syringes and vials. As a 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 foodservice channels throughout North America. Curation Foods is able to maximize product freshness through its geographically dispersed network of growers, refrigerated supply chain and patented BreatheWay packaging technology, which naturally extends the shelf life of fruit and vegetables.

Curation Food brands include Eat Smart fresh packaged vegetables 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 impacts associated with COVID-19. We are following the guidance from the World Health Organization and 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 community. In response, we immediately activated emergency preparedness teams and they are working closely with a 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 non-recurring 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 non-recurring charges, and 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 chain. We are in ongoing discussions with all major suppliers in this fluid situation and we believe that we can continue to supply our needs for 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 salads, 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 12oz and 16oz tubs and vegetable trays.

We will continue to monitor the situation closely and we will be prepared as consumer shopping patterns continue to fluctuate. Should we expect any deviation from these trends or experience any significant supply chain issues that could impact our plans for the 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 five years as they expand sales to existing customers and 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 timeline 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 the 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 to 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 tenure 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 has 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 a permanent CFO.

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

Brian McLaughlin

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 and a planned $7.2 million decrease in revenues in 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 revenue 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-cost avocado products produced during the fourth fiscal quarter of 2019 and the first fiscal quarter of 2020, when the cost of avocados were over two times higher than current costs, and weather related events impacting raw materials supply 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 fruit inventory and achieved 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 included $12.7 million of restructuring and non-recurring 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 non-recurring charges. Excluding these charges, adjusted third-quarter earnings per share was $0.04 versus our recent guidance of up $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 has made. When viewed in this fashion, adjusted EBITDA improved by $5.9 million in the third fiscal quarter compared to adjusted EBITDA in the second fiscal quarter.

Shifting to our commentary on a year-to-date nine-month results, consolidated revenue 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% percent 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 9% increase in Lifecore gross profit and a 16% increase in gross profit in Curation Foods. Net loss registered $23 million for the first nine months of fiscal ’20, which includes $14.5 million of restructuring and non-recurring 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 non-recurring charges. Excluding these charges, adjusted year-to-date loss per share was $0.29.

Year-to-date adjusted EBITDA registered $7.9 million, a decrease of $6.8 million versus the prior year nine-month period. The year-over-year decrease was 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 Seventh Amendment to the Credit Agreement, which among other things increased the leverage ratio 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 growth.

Beginning in the first fiscal quarter 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 costs and we are pleased with the flexibility that our lenders provided. They understand the short-term impact that Project SWIFT is having on our business and also have a complete understanding of the positive financial improvements that are beginning to unfold.

We are focused on deleveraging at as a top strategic priority, which is a key initiative within Project SWIFT. We are taking a disciplined approach for every investment. On a going forward basis, we have set clear priorities to fund 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 non-recurring 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 Bolles

Thank you, Brian. Let me go into more detail about the progress we’re making in our Lifecore and Curation Foods businesses that maximize shareholder value across our portfolio.

Lifecore continues to see momentum benefiting from three industry trends. Number one, the growing number of products seeking FDA approval; number two, the increasing trend toward sterile injectable drugs; and number three, a growing trend among pharmaceutical and medical device companies to outsource the formulation and manufactured products spanning the clinical development stage to commercialization.

As a highly differentiated and fully integrated CDMO, Lifecore is positioned to capitalize on these tailwinds and continues to establish high barriers for competition. Lifecore’s speed and efficiency benefits its partners by decreasing their time to market, which has an 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 three strategic priorities. Number one, managing and expanding its product development pipeline, Lifecore added one new business development project; increasing its development pipeline to 16 projects in various stages of the product life cycle from the clinical development to commercialization, which aligns with the business’s overall strategy. Business development revenue in the third quarter of fiscal 2020 increased 50% year-over-year.

Number two, leading 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 their product development pipeline. Lifecore currently expects one product and 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 partner’s approval process. Looking to the future, Lifecore is targeting approximately one regulatory product approval annually and is on track to achieve this cadence beginning in fiscal 2022.

At Curation Foods, the positive impact to Project SWIFT are being [inaudible] in our improved financial performance and will continue to unfold as we implement its three core components next year in fiscal ’21. First, a continued focus on network optimization, which maximizes the efficiency, productivity and teamwork at the organization. Today, 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 non-core assets. We are currently exploring strategic alternatives for the legacy vegetable and tray business, which generate its net sales of $160 million for fiscal year 2019, and divesting 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 headcount in order to compete. The total annualized cost savings from these previously announced actions will be approximately $5 million or $0.13 per share on an after-tax basis.

Our fiscal fourth quarter plan marks an important inflection point in terms of profitability. As per 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 two key drivers at Curation Foods, so you have a greater understanding of my confidence.

First is our continued drive for operational excellence, continuous improvement and 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 noise; Empowerment, a focus on employee engagement that impact change; Standardization, allowing us to implement the same practices across our organization; and Training, which is truly the cornerstone of success and 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 has 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 19% gross margin run rate.

As we move out of the final high cost group 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 at Curation Foods is containment and reduction of structural costs, which is also a significant component of our strategy and is a key driver of our fiscal fourth quarter forecast. The 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 cannot 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 resulting improvement in profitability is already beginning to take shape. We’re moving forward together. Even though we’re not working shoulder to shoulder for the time being, I am enormously grateful for the individual contributions of all our employees through 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.

Question-and-Answer Session


Thank you. [Operator Instructions] Our first question comes from the line of Gerry Sweeney with Roth Capital. Please proceed with your question.

Gerry Sweeney

Hey, good afternoon Al, Brian and Jim. I think I got everybody’s names right there.

Albert Bolles

Yeah, hi Gerry. How are you doing today?

Gerry Sweeney

Good. So we got a lot going on. I mean obviously we have Lifecore, 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. You know 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 my 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 Bolles

Yeah. So Gerry, you’re absolutely right. We made a strategic decision to sell it. It has always been the source of volatility right that you can’t control. We’ve had – we were working with William Blair; we have some 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 the company in our facility over the weekend. Obviously they had to follow all the COVID requirements before they could go in, but they’ve looked at the facility and now that’s where we’re at. We probably have another four, maybe five 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 are 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.

Gerry Sweeney

Got it. What happens to your, the cost structure internally though with shrinking versus the selling? Just to point maybe some of the overheads and things like that, how much cost comes out?

Albert Bolles

Yeah Brian, do you want to handle that one?

Brian McLaughlin

Yeah, hi Gerry. So we in previous phone calls or chats outlined our work with the Hackett Group and we have detailed a very clear path and process for either options in order to reduce the cost structure. In either case we’ll be able to get us back to at least a break-even on the margin impact, if not a positive.

Gerry Sweeney

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 Bolles

Well – yeah, it’s a little early to tell Gerry. We’ve seen – you know in the last couple of weeks they 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 you know 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 in the next week or so, but we’re keeping a close eye on it.

It’s not like the bottom is falling 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 two and a half quarters of the year.

Gerry Sweeney

Yeah, the 19% is great, so we 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 the capacity, so plenty of capacity and expectation if 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 Bolles

Well, you know there’s some of the things like cataract you know that 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. [Cross Talk]

Yeah, yeah, so no real major concerns, but certainly that’s where we are today and we’re keeping a close eye on the situation.

Gerry Sweeney

Okay, great. I’ll jump back in line. Congratulations again on the percentage of the metric through. It’s great to see it. Thanks.

Albert Bolles

Thank you, Gerry.


Our next question comes from the line of Anthony Vendetti with The Maxim Group. Please proceed with your question.

Anthony Vendetti

Sure, thanks. 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 inflection?

Albert Bolles

Yeah, so we’re fortunate for being right, both in businesses that are deemed as mandatory right, on the healthcare 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. But those products, you know people are eating at home now, and you know 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 a 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 two plants on the East Coast, along with the Guad plant in California. So we’re able to – on the food side sort of flux with people in 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, you know 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, on the COVID environment is obviously there’s the revenue piece, but you know 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’ll be now shipping high margin products that we have not been able to do for two and a half 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, you know $18 million to $20 million seemed like a stretch. We’ve been project managing it. We’re very confident about making our number there, but probably more towards the high end. So that remains on track and it’s also the time of year when we have the least volatility weather wise. Historically the fourth quarter’s been the least volatile from on a produce side with Curation Foods. So our programs are on track and you know that’s what gives us confidence as we are in the fourth quarter.

Anthony Vendetti

Okay. And just as the follow-up to Lifecore there, 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 Bolles

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

Jim Hall

Hi 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 have 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.

Anthony Vendetti

Okay, that’s helpful. Alright thanks, I’ll hop back in the queue.

Albert Bolles

Thank you.


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

Mitch Pinheiro

Yeah, hi.

Albert Bolles

Hi Mitch, how are you?

Mitch Pinheiro

Hello there. All is well, as it could be. As is well as it could be. Just a couple of quick questions. With the disruption in our food system, do you see any change to the Squeeze roll out or your marketing plans related to that?

Albert Bolles

No. If you remember, we’ve talked a bit about in the fourth quarter that we were going to spend more money on our new product introductions. We have two 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 get 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 two major customers and again the learning we need to really build awareness and really Squeeze really begin to work for us in the next fiscal year.

Mitch Pinheiro

Okay. As far as Lifecore, you know with raw material shortage from your supplier, I know it normalized. Is anything with the COVID activities impair your ability from that supplier again or are you comfortable with that?

Albert Bolles

You’re talking about the syringe supply issue?

Mitch Pinheiro


Albert Bolles

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

Jim Hall

No, just – hey 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 sure to open. It’s very stable now and shouldn’t be impacted by this and hasn’t been. So it’s something like all our raw materials and critical supplies that we’re keeping an eye on and working very hard to make sure we have enough on during this COVID period.

Mitch Pinheiro

Okay. And then two other things; any update on BreatheWay?

Albert Bolles

We’re continuing our testing and roll out with Driscoll’s raspberries. It’s going very well and we continue to want to expand that and we have into the development cycle for BreatheWay, which we don’t talk much about. We have some other very interesting customers where we believe the technology can bring a benefit to their product line, a higher margin product line, and we’re working with them to prove that.

What we’re really are trying to do with BreatheWay are 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 we partner with somebody, that there’s going to be enough scale for us to get the profitability that we want to achieve.

Mitch Pinheiro

On your own products, does the longer shelf life aspect to your product, has that been something customers are aware of due to the current environment?

Albert Bolles

Yes, they’re aware of it. We don’t put it on all 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.

Mitch Pinheiro

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 Bolles

Yeah, I’ll have Brian handle the capital numbers.

Brian McLaughlin

Yeah. So we’re managing those numbers much more tightly. During the Q2 call, I believe we drew 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’s 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.

Mitch Pinheiro

So with that, where do you think you’ll end up for the year, for the fiscal year?

Brian McLaughlin

The bank amendment has a number of $37 million in it and I’m confident that we will come at below that number.

Albert Bolles

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 operational cultural shift to zero mindset of waste and a real focus OEV 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 there. 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 on capital.

Mitch Pinheiro

Alright, thank you very much.


Our next question comes from the line of Mike Petusky with Barrington Research. [Operator Instructions] Mike, please proceed with your question.

Michael Petusky

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

Albert Bolles


Brian McLaughlin

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

Michael Petusky

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

Brian McLaughlin

Yeah, sure. As was indicated in the press release as well, we are up in salad on a year-to-date basis, $9.4 million, and that would be on a year-over-year basis about 7%. You can even do the math backwards there.

On the core veg side we’ve indicated that we’re down, we’re managing that down purposely. 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’re having core veg, and so we’re down year-over-year in that area as well.

Michael Petusky

Guacamole, I think at one point you guys had said that you thought Q4 would come in at $18 million to $20 million. I think a meaningful part of that I would assume 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 Bolles

Yeah Brian, if you want to…?

Brian McLaughlin

Sure, yeah. In our current model, which ladders into the guidance that we’ve provided, we’ve paired 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 the number. We’re keeping an eye on the issues that Al mentioned earlier, but again we’ve already built some — we’ve already paired 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 number you just threw out.

Michael Petusky

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 McLaughlin

Yeah, we are still tracking toward the same gross profit margin figure that Al indicated and there may be a little bit of pairing back on the gross profit, but again there’s ladders into the guidance that we provided for the full year.

Michael Petusky

And then on the legal expense, the $3.2 million, eye-popping, 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 Bolles

We really can’t speak to it. I mean, you know right now there’s – we have Printback [ph] and we have Pacific Harvest and we’re working with the lawyers on how to best handle the situation and really can’t talk much more about it.

Michael Petusky

Was that – Brian, with that $3.2 million, was that excluded from adjusted EPS and adjusted EBITDA or…?

Brian McLaughlin

Yeah, it was. You’ll also note and 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.

Michael Petusky

Okay, that’s all I’ve got. Thank you.

Albert Bolles

Thank you.


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

Albert Bolles

Hi Mike.

Mike Morales

Good afternoon Al, Brian and Jim. Hope you’re all staying healthy and safe with everything that’s going on, thanks for taking my questions.

Hey, 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 just using it?

Albert Bolles

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

Mike Morales

Okay, that’s helpful. And then I guess as it relates to the balance of CapEx, even on the reduced number, I mean the commentary is the least helpful as it relates to capacity utilization of Lifecore. Help us understand what that money is going toward?

Brian McLaughlin

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.

Jim Hall

Yeah, hi Mike. 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. You know 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 are 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 base products in our pipeline, that we will fill that capacity over the next three to four years, and are also starting to spend money on facility and infrastructure to go beyond that $17 million. If you remember, I talked about – you know it takes three to four, sometimes even longer years to put additional capacity by the time you get equipment ordered, installed and then go through the regulatory approval process. So that’s kind of a combination, but all focused on managing the capacity to meet future demand.

Mike Morales

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 in Lifecore whether the FDA could 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?

Jim Hall

We are not seeing anything right now, and you know 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, could cause delays with clinical trial approval. 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 manufactured, 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.

Mike Morales

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 may be have you guys most excited, nothing on the horizon that’s changing your expectation?

Jim Hall

No, we haven’t seen anything to-date, no.

Mike Morales

Alright, gentlemen thank you very much for taking my questions, and be well.

Albert Bolles

Thank you.

Jim Hall

You too.


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 Bolles

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


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!

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