Landec Corp

F:LDE

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, and thank you for joining Landec's Second Quarter of 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 Interim Chief Financial Officer; and Jim Hall, President of Lifecore, who is available to answer questions.

Also joining today in Santa Maria is Dawn Kimball, Chief People Officer; Glenn Wells, SVP of Sales and Customer Service; Tim Burgess, SVP of Supply Chain; and Lisa Shanower, VP of Corporate Communications and Investor Relations.

During today's call, we will 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 turn the call over to Al Bolles.

[Albert Bolles, executive]

Thank you, and good morning, everyone. As a leading innovator in diversified health and wellness solutions, Landec is comprised of 2 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, fill and finish of difficult-to-manufacture pharmaceutical products distributed in syringes and vials.

As a leading manufacturer of premium, injectable, 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 food service 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 fruits and vegetables.

Curation Foods 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.

For the second quarter of fiscal '20, consolidated revenues increased 14%, to $142 million, compared to the second quarter of last year. However, we experienced a greater-than-planned net loss and a decrease in gross profit and EBITDA during the second quarter of fiscal '20. This resulted in a second quarter net loss of $0.16 before restructuring and nonrecurring charges. We have an extensive operating plan that we've launched to improve performance at Curation Foods that I will discuss in a moment.

Lifecore, Landec's high-growth, high-quality CDMO business, focused on product development and manufacturing of sterile injectable products, had another tremendous quarter, with impressive growth in revenues and operating income, while EBITDA more than doubled versus the prior year. The business continues to move its customers through the product development life cycle toward commercialization and advance its pipeline of development customers that will drive long-term profitable growth.

However, Curation Foods negatively impacted our second quarter results as the business was faced with supply chain challenges. During the second quarter, we completed a strategic review of our Curation Foods operations to better understand its strengths and challenges, which revealed opportunities to make Curation Foods competitive and profitable again. The result is an ongoing action plan and value-creation program named Project SWIFT that will build upon the network optimization efforts that are already well underway as well as focus the business on its key strategic assets and redesign the organization to the appropriate size.

Project SWIFT, which stands for Simplify, Win, Innovate, Focus and Transform, will strengthen our business by improving Curation Foods' operating cost structure and enhancing EBITDA margin providing the foundation to improve the company's balance sheet and transform Curation Foods into an agile, competitive and profitable company.

While we have faced challenges in the first half of fiscal '20, we are reiterating full year guidance, which calls for consolidated revenue from continuing operations to grow 8% to 10% to a range of $602 million to $613 million, EBITDA of $36 million to $40 million and earnings per share of $0.28 to $0.32, excluding restructuring and nonrecurring charges. We continue to expect to generate substantial profit in the second half of the fiscal year, including the current fiscal third quarter, and we are well positioned to achieve our goals.

Before I share more details on Project SWIFT and our momentum with Lifecore and Curation Foods moving into the second half of the fiscal year, I would like to introduce a few new players to the management team. First, I would like to acknowledge Greg Skinner, whose planned resignation as Landec's Chief Financial Officer and Executive Vice President was announced last week. I wish to thank Greg for his years of service. On behalf of the Board and our employees, we wish him all the best.

With me today is Brian McLaughlin, who has been promoted from Curation Foods' Chief Financial Officer to Landec's Interim Chief Financial Officer; and Glenn Wells, who has been promoted from Vice President of Sales to Senior Vice President of Sales and Customer Service for North America. These new assignments, coupled with our previously announced strategic hires, give me great confidence that we have the right team in place and are well positioned to achieve our goals for fiscal '20.

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

[Brian F. McLaughlin, executive]

Thank you, Al, and good morning, everyone. First, a brief review of our second quarter results. We grew consolidated revenues by 14% to $142.6 million driven by a 48% and a 10% increase in Lifecore and Curation Foods revenues, respectively. Gross profit decreased 8% year-over-year, which was driven by a decrease at Curation Foods that I'll speak to in greater detail in a moment. This contraction at Curation Foods was only partially offset by Lifecore's strong performance, which posted a gross profit increase of 52% year-over-year.

EBITDA declined $5.3 million to a loss of $1.5 million for the quarter. Our loss per share was $0.23 and includes $0.07 per share of restructuring fees and nonrecurring charges. Excluding these charges, second quarter loss per share was $0.16.

Shifting to our commentary on first half results, we believe the first half results may be a more useful measure of our performance during this transitional period against our projections for fiscal year '20, which are back-end loaded in the third and fourth quarter. Revenues increased 13% to $281.3 million during the first 6 months of fiscal '20 compared to the same period last year primarily due to: first, $6.8 million or a 24% increase in Lifecore revenues; second, the acquisition of Yucatan Foods on December 1, 2018, which contributed $30.2 million in revenue; and third, the $8.4 million or 9% increase in our salad revenues. These increases were partially offset by a $9.7 million planned decrease in revenues in the packaged vegetable bag and tray business and by a $5.3 million decrease in green bean revenues due to limited supplies resulting from weather events in both the first and the second quarters of fiscal '20.

Weather issues continue to be the greatest challenge to our business. As discussed previously, we took decisive action to mitigate this risk with a green bean overplant strategy this summer to meet customer demand this holiday season. This strategy proved to be advantageous during Hurricane Dorian, where we felt little impact. However, the industry experienced yet another unforeseen challenge in the form of an early, widespread cold weather event in November that impacted our green bean supply availability for the holiday season.

Gross profit decreased 7% or $2.4 million during the first 6 months of fiscal '20 compared to the same period last year due to a $4.9 million decrease in the company's Curation Foods business. The drivers of Curation Foods' gross profit performance were as follows: first, the sell-through of high-cost avocado products during the fourth quarter of fiscal '19 and the first quarter of fiscal '20, when the cost of avocados were over 2x higher than current costs; second, weather-related events impacting raw material supply; third, lower gross profit resulting from a planned contraction of the packaged vegetable bag and tray business. These decreases were partially offset by a $2.5 million or 29% increase in gross profit at Lifecore driven by higher revenues.

Net income decreased during the first 6 months of fiscal '20 compared to the prior year due to: first, a $2.4 million decrease in gross profit; second, a $4 million increase in operating expenses resulting from the addition of Yucatan Foods; third, a $2.7 million increase in interest expense due to the incremental debt associated with the acquisition of Yucatan Foods; fourth, a $200,000 increase in the fair market value of the company's Windset investment compared to a $1.6 million increase during the first 6 months of prior year; and fifth, restructuring fees and nonrecurring charges of $2.4 million or $0.07 per share on an after-tax basis. These decreases in net income were partially offset by a $3.1 million decrease in income tax expense.

Excluding the $0.07 of restructuring fees and nonrecurring charges during the first 6 months of fiscal '20, Landec would have recognized a loss per share of $0.33. EBITDA for the year-to-date period was negative $1.2 million compared to a positive $7 million in the prior year. When excluding $2.4 million of nonrecurring charges, the 6-month EBITDA would have been positive $1.2 million.

Turning to our financial position. At the end of the second quarter of fiscal '20, Landec carried approximately $107 million of long-term debt. Our fixed coverage ratio at the end of the second quarter was 1.5, which is in compliance with our covenant of greater than 1.2. Our leverage ratio at the end of the second quarter was 4.9, which is in compliance with our debt covenant of 5.0 or less. We expect to be in compliance with all of our debt covenants going forward. Landec expects to have adequate liquidity for the balance of fiscal '20 to continue to grow its business and invest in capital to advance our strategies for both Lifecore and Curation Foods.

Shifting to our outlook. As Al mentioned in his remarks, we are reiterating our full year fiscal '20 guidance, which called for consolidating revenue from continuing operations to grow 8% to 10% to a range of $602 million to $613 million, EBITDA of $36 million to $40 million and earnings per share of $0.28 to $0.32, excluding restructuring and nonrecurring charges. We expect to generate substantial profits in the second half of the fiscal year and are introducing fiscal third quarter guidance, excluding restructuring and nonrecurring charges, as follows: third quarter consolidated revenues are expected to be in the range $154 million to $158 million, earnings per share in the range $0.06 to $0.09 and EBITDA in the range of $7 million to $11 million.

I will now turn the call back to Al to review to strategy.

[Albert Bolles, executive]

Thanks, Brian. We remain confident about our plans to drive profitable growth in fiscal '20. Let me go into more detail about the progress we are making in our Lifecore and Curation Foods businesses.

Lifecore continues to see momentum, benefiting from the 3 industry trends: number one, a growing number of products seeking FDA approval; number two, the increasing trend towards sterile injectable drugs; and number three, a growing trend among pharmaceutical and medical device companies to outsource the formulation and manufacture of products, spanning the clinical development stage to commercialization.

As a highly differentiated and fully integrated CDMO, Lifecore is positioned to capitalize on these tailwinds. Through Lifecore's 35 years as a global leader in manufacturing premium injectable-grade HA, Lifecore has developed the knowledge to process and manufacture difficult-to-formulate and fill pharmaceutical products in both syringes and vials. This has allowed Lifecore to establish high barriers to competition and create unique business development opportunities. Looking forward, Lifecore will fuel its long-term growth by executing against its 3 strategic priorities: number one, managing and expanding its product development pipeline; number two, leading customer demand by managing capacity and operational expansion to meet future commercial production needs; and number three, continuing to deliver on a strong track record of commercialization from their product development pipeline.

Regarding its product development pipeline, Lifecore made significant progress in the fiscal second quarter. Business development revenue in the second quarter of fiscal 2020 increased 49% year-over-year and contributed 36% of the increase in the Lifecore fiscal second quarter revenues. The business development pipeline has 15 projects in various stages of the product life cycle, from clinical development to commercialization, which aligns with the business's overall strategy.

To meet future demand at Lifecore, we will be investing approximately $13 million for capacity expansion in fiscal '20. As planned, Lifecore began commercial validation for the new multipurpose syringe and vial filler production in fiscal second quarter. When complete, this new line will increase Lifecore's current capacity by more than 20%. Lifecore business is well positioned to meet the future commercialization and development needs within its existing footprint, which can accommodate a doubling of its production capacity.

Further, Lifecore continued to make substantial progress in advancing its customers' late-stage, product development activities by supporting their Phase III clinical programs and commercial process scale-up activities. Currently, Lifecore has 1 product under review at the FDA with projected approval during calendar year 2020.

Looking to the future, Lifecore is targeting approximately 1 regulatory product approval annually and is on track to achieve this cadence beginning in fiscal 2022. We continue to expect Lifecore to generate, on average, low to mid-teen revenue growth over the next 5 years as they expand sales to existing customers, add new customers and continue to commercialize products that are currently in its development pipeline. Lifecore's team of cross-functional experts, coupled with a best-in-class quality system and facility, enables our partners to accelerate product development activities. Our speed and efficiency decrease time to market for our partners, which adds immense value in their ability to improve patient lives through commercialization of their innovative therapy.

Regarding Curation Foods, when I assumed the helm at Landec earlier this fiscal year, I established our strategic priorities and promised decisive action to help us achieve our short- and long-term financial goals. We have made excellent progress against these strategic initiatives. And through our activation of Project SWIFT, we will transform Curation Foods into an agile, competitive and profitable business. Curation Foods will continue to deliver the highest level of product quality and safety, while executing with excellence on its customer, grower and partner commitments. We remain focused on staying true to our mission of providing access to our nutritious and delicious food while protecting our planet for future generations with sustainable business practices.

At Curation Foods, we are launching project SWIFT today, a first step in our ongoing plan that will be implemented throughout fiscal '20 and '21, aligning our activities to simplify the business and improve profitability. Project SWIFT has 3 core components: first, a continued focus on network optimization; second, a focus on maximizing our strategic assets; and third, redesigning the organization to the appropriate size in order to compete.

The total annualized cost savings from these actions will be approximately $3.7 million or $0.09 per share.

Going into more detail on each core component. A continued focus on network and operational optimization is demonstrated with today's announcement that we are centralizing Curation Foods offices into its headquarters in Santa Maria, California. This will simplify the way we do business. It will make us more efficient and effective. Having the team centrally located in Santa Maria will allow for greater collaboration, streamline our communication and improve teamwork. This decision will result in the closure of the leased Landec office in Santa Clara, California, the leased Yucatan Foods office in Los Angeles, California and the sale of the Curation Foods headquarters in San Rafael, California.

Second. We are focusing our business on strategic assets and divesting noncore assets to continue to simplify the business. To that end, we are initiating the exit and sale of the company's Ontario, California salad dressing facility, which has yet to become operational.

Third. We have announced our new organizational design, which places team members in the right roles for our ongoing strategic initiatives, develops and elevates internal talent and begins to reduce headcount to a size that is appropriate for our business. I am grateful for the contributions that the employees affected by this plan have made at Curation Foods, and I sincerely thank them for their service.

As previously discussed, I believe we will deliver a strong performance at Curation Foods in the second half of fiscal '20 with our strategic pillars that focus on growing our higher-margin products, optimizing our operations, continuing to mitigate the cost pressures facing our industry and to delivering breakthrough product innovation, while continuing to strive for operational excellence.

Although the first half of fiscal '20 was met with a host of challenges that we are overcoming, we are advancing our initiatives and we will see this work reflected in the financials during the third and fourth quarter of fiscal -- of this fiscal year.

The 4 key growth and profitability drivers are: first, our growing and successful Lifecore business is forecasted to recognize operating income of $8.5 million to $8.8 million during the fourth quarter, which will be the largest quarter of this fiscal year, with projected EBITDA of $9 million to $10 million; second, in line with advancing our Curation Foods innovation strategy, we will be delivering high-margin revenue in the second half of fiscal '20 with our packaging solutions and natural food products. We continue to be an innovative leader with our proprietary packaging solutions. We focused our resources to create value with our patented BreatheWay packaging solutions. The technology is now being used to wrap pellets of raspberries for Driscoll's.

As a result of its successful test in Driscoll's, California distribution centers, we have now expanded the program to wrap Driscoll's raspberry pellets in North America. In addition, Curation Foods has secured category exclusivity with the packaging company that produces our Yucatan Squeeze packaging in a flexible squeeze pouch. This company has the exclusive distribution rights in North America. This unique packaging solution allows for greater usage and convenience as well as extended shelf life and reduced waste.

We also continue to lead with product innovation. We have momentum in our branded avocado products and are expanding our test of our squeeze packaging into our Cabo Fresh brand. We are also enthusiastic about the launch of Eat Smart brand's re-stage, which is currently scheduled to be in market January of '20. Based on consumer insights, the new identity and packaging tested extremely well with consumers, both in the U.S. and Canada, and we have expectations for an uplift in sales velocity.

Our third strategic pillar for second half momentum is our continued focus on operational excellence to improve gross margin. The team has made significant improvement by initiating lean manufacturing practices at our operations located in Tanok, Mexico, where we manufacture our Yucatan and Cabo Fresh avocado products. The results of our actions include a 40% improvement in production conversion cost and a 50% reduction in raw fruit costs. In fact, beginning in January of '20, 80% of our inventory is projected to be manufactured with lower-cost fruit. These improvements will reduce projected overall costs by 28% in the second half of fiscal '20.

Importantly, as a result of these efforts, we are projecting to deliver fourth quarter gross margin of at least 28% for our Yucatan and Cabo Fresh avocado products.

As we have been communicating, our fourth strategic pillar is our focus on taking costs out of our business. 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. As part of this program, today, we announced that we are consolidating from 2 labor contractors to 1 labor contractor in the Guadalupe, California facility, which will provide an annual savings of $1.7 million. We will also benefit from Project SWIFT actions as savings from this program will begin to be realized in the fourth quarter of this fiscal year.

As mentioned in my opening statements, none of these achievements would be possible without the right people in the right jobs, focused and working together in one centralized location. I believe my team will advance our strategic agenda to simplify our business and improve profitability.

In summary, we have confidence in our guidance for fiscal '20. 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 margins at Curation Foods and at Lifecore, investing in growth and driving top line momentum. I am confident in our plan to make the changes necessary to be successful to secure long-term profitable growth, to deliver value to our customers, consumers and shareholders.

We are now open for questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Brian Holland with D.A. Davidson.

[Brian Holland, analyst]

First question, I guess, just making sure that we understand how we get from the Q2 shortfall to the full year guide being maintained. Obviously, the green bean revenue, and lost revenue and profit, you don't get back. So it sounds like the implementation of Project SWIFT and the facility consolidation that you just referenced, is that the whole of the -- sort of the offset for the Q2 shortfall that would, sort of, keep the guidance hold for the year? And if not, is there anything else that we should just be thinking about that, sort of, drives those numbers?

[Albert Bolles, executive]

Yes. Brian, it's Al. You're absolutely right. Project SWIFT is going to be a part of our focus, which is getting the rightsizing and getting the cost out. But we have also -- have been working on a number of incremental cost savings programs that are above and beyond the cost-out program that we talked about through our manufacturing site. So we knew we had a hole there. So we had started back in Q2 some projects to find some incremental savings. Brian, do you want to comment further?

[Brian F. McLaughlin, executive]

Yes. Brian, it's Brian. Yes. So in addition, just to, sort of, help us catch up here in the fourth quarter and make up for some of the slow pace here in the first part of the year, as Al mentioned: one, there's the rightsizing, cost savings that will be reflected in Q4. There's some additional cost-out items that we identified after the year started that we're tracking and going after. We also have stronger-than-planned salad revenues and margins. We're ahead of plan on that, and so we expect that to continue, and that's also helping us in the second half of the year. And we have better-than-planned Tanok conversion and production costs. And then through the salad items and improvements in our cost structure in general, along with product mix, our overall margin percent is also looking stronger in the second half of the year. So it's really a mixed bag of things. And you add them all up and they're, sort of, putting some air under our wings here in the fourth quarter.

[Brian Holland, analyst]

Okay. That's helpful color from both of you. Just a follow-up and speaking towards the cost-out initiatives. Obviously, you're maintaining the targets, you're 1 quarter closer to year-end, so you've gone through another 3 months of working against these initiatives. I'm curious, I assume, I presume that there was some cushion in place given the scope of these initiatives and the number of initiatives that you have in place. I'm wondering if you can talk to specific examples of initiatives within those cost-out targets where you're getting greater visibility, greater sight. Where are the progress -- where is the progress on things that you currently had in place before this quarter?

Obviously, there's been some new stuff here that you announced this morning, but I'm thinking about stuff that you were doing beginning last year, kind of, where we are.

[Brian F. McLaughlin, executive]

Right. It's -- as we discussed, it's a very broad, granular list of items that add up. And so from a risk management standpoint, it really does, sort of, spread the risk out across that $18 million to $20 million. It's a wide variety of things: it's yield improvements in the plant, it's automation on our single-serves, it's pelletization automation, it's the automation of our case erectors, corrugated, it's just a wide, wide variety of things. Our master packs, our tray design, it just goes on and on. And so again, this is -- it's helped us quite a bit having that granularity. It's logistics into our plant from the field. So it's a wide variety of things. Fortunately, it's spread out across a broad spectrum of resources in the company, and so they really are, sort of, coming from a variety of spokes into the hub.

[Albert Bolles, executive]

Yes. And Brian, you could tell it's fairly complex, the number of things, but we are managing this through our new PMO office and focusing on making sure that we execute these things with excellence. We are into the third quarter. We are on track, and we're feeling good about being able to pull this together and hit our range of $18 million to $20 million.

[Brian Holland, analyst]

I appreciate that. That's -- I appreciate that was a pretty broad question. So helpful context there. I will leave it there. Best of luck, everyone.

[Operator]

Our next question comes from the line of Anthony Vendetti with Maxim Group.

[Anthony Vendetti, analyst]

I just wanted to focus on -- I wanted to focus on the gross margin. I know as we move through the year, particularly Yucatan's going to get up to 28%, Lifecore is going to continue to increase as they -- on track for their best quarter in the fourth quarter. So I see the ramp occurring. I was just wondering, if we look at the overall corporate gross margin in the fourth quarter, do we have a range of what we expect that to be at?

[Brian F. McLaughlin, executive]

Yes. Well, there are a number of projects that we are driving against, Project SWIFT and so on and, as well the cost-out. I would sort of shy away from giving you a precise number, but there are a number of things that we're working on here that we expect to continue to enhance our margin in the fourth quarter. As well the salad, the product mix and a more stable raw product sourcing environment.

[Albert Bolles, executive]

Yes. Anthony, when I took the helm, the salad margins were decreasing. Our revenues were good, but our salad margins were decreasing. Some of that was mix. We've got a single-serve product that is outgrowing the category. It's been a really nice innovation for us, but it started out in the mid-teens in terms of margin. And we've had a lot of effort here in the first half through a number of optimizations, including reducing some of the packaging in that product that has little impact on consumers. So we expect to get these single-serve packaging somewhere in the mid-20s is where we're targeting for. And that's going to help us tremendously with the margin improvement program. Plus, we're seeing a favorable mix this year, which is also helping us in our salads. So we see the salad improving. I think you get the -- what's happening down in Mexico in the avocado products. And we are really focused on driving the profitability of this business. Does that help?

[Anthony Vendetti, analyst]

Yes, yes, Al, and just in terms of -- I know the focus is on streamlining Curation Foods, and you've outlined a number of projects that you're undertaking, kind of, all at once. Are there any other obvious business lines that either need to be eliminated or changed dramatically? Or what you've now uncovered over the last 6 or 7 months is pretty much it?

[Albert Bolles, executive]

Well, I wouldn't say we're finished, okay? So Project SWIFT is -- we kicked it off today. It's our program for ongoing continuous improvement efforts focused on driving profitability and growing the EBITDA of Curation Foods. So it's not a onetime event, it's a process that we've kicked off, and we are focused and engaged on that. So probably more to come. We expect to get this business where it's really thriving for us.

[Anthony Vendetti, analyst]

Sure. That's helpful. Just real quick financial question for Brian. So the $2.4 million restructuring charge, as we run that through the model, what was that $2.4 million net of tax for the quarter?

[Brian F. McLaughlin, executive]

That -- the $2.4 million net of tax is probably about $0.05 or $0.06.

[Operator]

Our next question comes from the line of Gerry Sweeney with Roth Capital Partners.

[Gerard Sweeney, analyst]

I had a question on Lifecore, actually, a couple. But starting on the CapEx side. CapEx's been pretty substantial in Lifecore the last 5 years. I've actually gotten a couple inbound questions on this. I assume this CapEx should mitigate post completion other expansion efforts. I think they expanded their facility a couple of years ago, the actual structure, and now they've got the vial filling line. What is the maintenance CapEx level for Lifecore once all this expansion is done?

[James Hall, executive]

Gerry, this is Jim. Typically, our maintenance CapEx yearly is in the $4 million to $5 million range. And you're right, the majority of the CapEx that we spend is to manage capacity as our volumes increase with commercialization of our development pipeline.

[Gerard Sweeney, analyst]

Got it. And fair to say, you could -- I'm not sure if this is correct, but essentially, double revenue prior to any large CapEx investments. Obviously, you would actually invest sooner than that. But post completion, you have a lot of capacity is really what I'm getting at.

[James Hall, executive]

Right. Like, we're -- usually we [ doesn't ] invest unless the business dictates. But I'll give you an example, like putting in a new filling line is a 3- to 4-year process. So we spend a lot of time evaluating where our potential capacity needs need to go based on the products that we're working on in our pipeline and have to make some investments especially on larger filling equipment or packaging equipment well ahead of when the expected capacity is needed. So -- but it's always weighed in against the business opportunity, what the return on that investment would be, et cetera.

[Gerard Sweeney, analyst]

Got it. That's helpful. And then switching gears back to Curation Foods. The one thing I'm having a little bit of trouble squaring off is you talked about lower revenue in the veggie and tray area, which obviously, you want to deemphasize, but this also led to, I think, an impact on the gross profit side. I was previously running under the impression that some of this business was low-margin or even no-margin. So if you want to deemphasize this business and there is an impact on the gross profit line, and back of the envelope, I was, I think, when using our discussion earlier, I think about $1 million was from -- on the gross profit, maybe from the veggie and tray area. This was decent gross profit dollars that went out the door. And if you want to deemphasize it, how does that square up longer term in terms of deemphasizing that business without really whacking your gross profit dollars? I'm just having trouble connecting it to if that makes sense?

[Albert Bolles, executive]

Yes. So what we're -- when we say deemphasizing, we have been going through a process of SKU rationalization with our customers, and that's not something you can just do overnight. You have to work with them. So there will be an effect on the other business. So what we're really trying to do, and it's work in process, is to have a minimum margin that we are going to require before we'll sell the product. So that's really what we're trying to do here is put hurdles into the sales organization, work with our customers on improving the overall profitability by the limelight, kind of, what I call addition by subtraction. You take some things out and you actually improve your margins. So it's really having a very conscientious focused effort. Once again, our eyes are on driving profitability, not driving revenue.

[Gerard Sweeney, analyst]

Got it. I was just surprised by how much the gross profit -- the addition by subtraction, I actually would have thought that gross profit may have been flat to up with the removal of the veggie and tray business. But if I'm looking holistically or taking a step back...

[Albert Bolles, executive]

Yes, well, we have -- it's in there too, we had some weather-related issues, okay, that affected our gross profit. So it wasn't just green beans, but you had a number of other things, and then the avocado products as well.

[Gerard Sweeney, analyst]

Got it, got it. That makes sense. I appreciate it. Probably on -- yes, sorry.

[Albert Bolles, executive]

So in the first half of the year, and as we've said, we are going to -- that's going to turn around. The avocado products will turn around in the second half of the year.

[Gerard Sweeney, analyst]

Got it. And then finally, just speaking about Yucatan. A little bit detail on the rollout of the new squeeze packaging. It's a process getting it into the -- into I think, the supermarket chain. Maybe just some commentary on how many stores are going to roll out? And how do we look at that 2020 and 2021?

[Albert Bolles, executive]

Yes. So we rolled it out at Walmart. It's achieving the velocities in Walmart that they expect for the category. It's actually selling at the same velocities as our current products that are in Walmart. We have a test-and-learn program going on in Chicago, Jewel-Osco given that Jewel is a different consumer than a typical Walmart consumer. So there are a number of things going on there we have presented to a large number of the major retailers in the U.S., and we'll work with them now on getting them into their category resets. That could be happening within the next 6 months. So we feel pretty good about that.

[Operator]

Our next question comes from the line of Mitch Pinheiro with Sturdivant & Co.

[Mitchell Pinheiro, analyst]

A couple questions here. So as -- with the back-end loaded nature of the -- of this fiscal year's performance, what kind of margin of safety do we have in the forecast? I thought there was something built-in to this fiscal year. And has that been used? Has it -- was it inadequate? Is it yet to be used? Could you talk about that?

[Brian F. McLaughlin, executive]

Yes, yes, this is Brian. So much of that is -- it's really the conservatism in the guidance that we're building in. We are building that into the second half of the year, in particular, in the third quarter. But as well, one of the huge items that is very favorably affecting the margin swing and had actually burdened us in the first part of the year, and it may be confused in some of the stuff we're talking about. We had $30 million in revenues in Yucatan in the first half of the year. And because of the issues with our avocado costs and fruit costs, it was roughly a breakeven business. In the second half of the year, and in particular, in the fourth quarter, given the changes to that operating model that we see on a sustaining basis going forward, we're looking at margins in the fourth quarter at 28% or greater for the avocado product area. That is huge. And that is going to really change the overall margin structure in the second half of the year versus the first half of the year. And so it's a -- it's sort of embedded in the press release. It might be a little tough to pull out. But it is a major, major driver along the cost-out in terms of swinging things.

[Mitchell Pinheiro, analyst]

So you have your -- so you have the favorable Yucatan, what you just described, you have some of the cost-out, 45% of the $18-plus million, you expect to achieve. You have Project SWIFT ongoing progress and efforts. You're moving the -- this might be part of the original, but you're moving corporate headquarters to Santa Maria, closing Los Angeles, closing Ontario. All of that builds into the fourth quarter. There's not going to be -- is this something where we still have margin of safety beyond all this? Because every -- the only thing consistent about Landec over the last 10 years has been its inconsistency. And all driven by just very difficult supply chain issues. It's -- and so if we get a really hot and dry summer or really wet and cold summer, is the fourth quarter still going to be there in terms of guidance?

[Albert Bolles, executive]

Yes. So let me just add a little bit here to that. So right now, we have momentum on our salad kit business, and that's coming in better than planned in terms of the second half of the year. We're going to continually see the margin improvement in our salad business. And then we have -- most of the risk from the weather standpoint is in Q3. And we have worked cross-functionally here and feel that we have the appropriate risk built into the...

[Brian F. McLaughlin, executive]

Guidance.

[Albert Bolles, executive]

Into the guidance for the -- for Q3. So we feel that the second half plan -- or at least I feel, and I know my team does, that the second half plan is tighter than the first half plan. I've only been here 6 months and really have gotten to know the business. And with the new team that we've put together, we're feeling pretty good about how we have the flow of the second half going.

[Mitchell Pinheiro, analyst]

Okay. Very helpful. Couple of other little things. BreatheWay. We'll start to see revenue from BreatheWay in Q3?

[Brian F. McLaughlin, executive]

Yes. This is Brian. Yes, in the second half of the year, we're expecting to have continued improvement and expansion in BreatheWay. The first half of the year was really focused more on the tests as we were kind of coming through this time of the year. And into the latter part of the winter and spring, we're going to be expanding our overall volume and picking up some additional coolers and distribution centers of raspberries.

[Mitchell Pinheiro, analyst]

Is that in the Curation Foods segment?

[Brian F. McLaughlin, executive]

Yes.

[Mitchell Pinheiro, analyst]

Okay. In terms of Capex, where -- what does the full year look like, still on plan for $30 million?

[Brian F. McLaughlin, executive]

Actually, the full year plan, at this point, we're looking at a range of between $38 million and $42 million, or $16 million in the first half of the year. Second half of the year has a range of $22 million to $26 million. That could swing around depending upon timing, and we'll see how -- obviously, we want to make sure we're hitting our numbers in the fourth quarter, which will end up accelerating or slowing things down. So about -- and of that $22 million to $26 million in the second half of the year, about 2/3 of that is in the fourth quarter and centered on Lifecore.

[Mitchell Pinheiro, analyst]

Okay. And then how about cash from your asset sales? What do you expect to net out?

[Brian F. McLaughlin, executive]

I'm sorry, what was -- cash from...

[Mitchell Pinheiro, analyst]

Cash from asset sales, from the sale of Ontario, the...

[Brian F. McLaughlin, executive]

Yes.

[Albert Bolles, executive]

Yes.

[Brian F. McLaughlin, executive]

It's really too early to know. We're in the process at this point of assessing path to liquidating those items. So there will be more to come on those in the coming quarters.

[Albert Bolles, executive]

Yes. This is all part of Project SWIFT. We're looking at continuing to optimize our network, and we are very focused on the balance sheet in terms of improvement.

[Mitchell Pinheiro, analyst]

Is O Olive Oil & Vinegar, is that still part of your plan? Is that still in the plan? We haven't heard anything about it. Was just curious where that stands.

[Albert Bolles, executive]

Yes. Well, we're working on improving the EBITDA at O Olive. So right now, that's our focus for the year. It's just not a really big growth area for us right now.

[Operator]

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

[Michael Petusky, analyst]

A lot of information and some of it hard to follow. But in terms of Q4, is 75%, 80% of, sort of, the margin pickup associated with a pickup in gross margin? Are you getting much leverage on the SG&A line? Can you just, sort of, speak to that?

[Brian F. McLaughlin, executive]

I'm sorry, say that again. Could you, please?

[Michael Petusky, analyst]

Yes, sorry. So in the fourth quarter, obviously, you're expecting a huge, huge number in the fourth quarter, obviously, an expansion of margin. Does -- from an operating margin standpoint, does most of that come, sort of, via -- I'm assuming most of that comes via the gross margin line. But the split between gross margin and SG&A pickup, is that like 80-20, mostly going to the gross margin line?

[Brian F. McLaughlin, executive]

Yes, the vast majority of it is centered at the gross margin line. And again, just back to the avocado statement that I made earlier, most of that inventory already -- we hold about 60 to 90 days' worth of inventory, so most of the inventory that we actually see coming through at this point in our model through the latter part of Q3 and through the beginning and the middle of Q4, it's already in our warehouses. It's there. We absolutely know the cost. So the mystery of that has really been taken out. It's just a matter of us continuing to do what we're doing on the revenue line. But yes, the vast majority of the improvement is at the gross margin line. Though we have been, [indiscernible] I think, doing a very good job this year relative to plan of managing our SG&A.

[Michael Petusky, analyst]

Okay. And I know you can't comment on this extensively, but the legal issue done in Mexico with Yucatan, has that resulted in meaningful changes in leadership down there in terms of the operations of that facility?

[Albert Bolles, executive]

Really, it's an environmental permitting issue. We have resolved the issue. We're working with the regulators now on the next step. So it's ongoing. But in terms of the operations, the operations are running as good as they've ever ran. With our decrease in conversion costs by 40%, our yields are at highs, our throughput through the plant is a record high for us and is consistent and the operation is running very well.

[Michael Petusky, analyst]

Okay. Sorry, but have you had meaningful changes in leadership down there?

[Albert Bolles, executive]

We put meaningful leadership in there beginning of the year to put on our lean manufacturing practices. So the leadership that's there now was what we had put in. We had changed the leadership out back in the beginning of May. We changed the leadership.

[Michael Petusky, analyst]

Okay. So nothing since -- nothing's been...

[Albert Bolles, executive]

Nothing has changed in terms of leadership there now. But we have changed leadership but it was prior.

[Michael Petusky, analyst]

Yes, yes. And then just last question, I didn't hear it if it was said, what were the O revenues for the second quarter roughly?

[Brian F. McLaughlin, executive]

The O Olive revenues for the second quarter? Yes, hang on just one second here. Below $1.5 million.

[Operator]

Our next question comes from the line of Hunter Hillstrom with Pohlad Investment Management.

[Unknown]

Just 1 quick general question. These are 2 very different businesses here. So I was wondering if you could just comment on how you think these 2 units fit together. And then whether or not you think it makes sense to keep them together in the long term?

[Albert Bolles, executive]

Well, so Lifecore is a well-oiled machine. It is, I would say, it's operating very, very well. Curation Foods is not a well-oiled machine at the moment. However, we really like the categories that we're in, in terms of where the consumers are going. We believe that Curation Foods are in categories that should have tailwinds for us being around the perimeter of the store and in health and wellness. So the focus that we have is to drive the profitability of Curation Foods and get it back on track. And I continually work with my Board on the opportunities that we have. But right now, the 2 focuses are to fix the profitability at Curation Foods and to make sure that we are providing the capital needed to continue the great momentum growth at Lifecore.

[Operator]

We have reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Bolles for any closing remarks.

[Albert Bolles, executive]

Thank you very much for your interest in Landec, and a happy New Year to everybody.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.