Landec Corp

F:LDE

Earnings Call Transcript 2021-Q2

[Operator]

Good afternoon, and thank you for joining Landec's Fiscal 2021 Second Quarter Earnings Call. With me on the call today is Dr. Albert Bolles, Landec's Chief Executive Officer; Brian McLaughlin, Landec's Chief Financial Officer; and Jim Hall, President of Lifecore.

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 the fiscal year 2020.

Let me turn the call over to Al Bolles.

[Albert Bolles, executive]

Thank you, and good afternoon, everyone. I'd like to start by wishing everyone a healthy and joyful New Year and take a moment to recognize the contributions of our essential workers at both Lifecore and Curation Foods who show up every day at our facilities across the country. While many of us have been asked to modify our lives and work from home, our essential operational employees have remained on the frontlines, and I am grateful for their perseverance.

Landec is a leading innovator in diversified health and wellness solutions comprised of 2 operating businesses: Lifecore Biomedical and Curation Foods. 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-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 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 packaged fresh vegetables and salads, O Premium artisan olive oil & vinegar products and Yucatan and Cabo Fresh avocado products.

At Lifecore, our employees are manufacturing pharmaceutical products and medical devices that improve patients' lives. And at Curation Foods, our employees provide access to fresh, delicious, nutrient-dense food for our customers to feed and nourish consumers across North America. Through our focus on safety, we put precautions and measures in place to protect all of our employees, their families and our communities at large. Together, we are ensuring that our company remains positioned to produce products that improve our collective livelihood and drive shareholder value during the global pandemic.

However, our focus on creating shareholder value goes further. We are motivated to deliver against our financial targets, invest in growth, drive top line momentum at Lifecore and implement our strategic priorities to improve adjusted EBITDA margins at Curation Foods. In order to execute against these initiatives, it is imperative that we have a capital structure in place to support our efforts. I'm pleased to share that on December 31, 2020, we entered into a comprehensive refinancing of the company's credit facilities.

This refinancing was made possible by the consistent, profitable growth at Lifecore and the significant demonstrated improvement in cash flow generation at Curation Foods that was brought about by Project SWIFT, which we launched 1 year ago. These efforts drove a $33.4 million year-over-year improvement in operating cash flow for the first half of fiscal 2021. Our business is back on track, and we are delivering significantly improved financial performance. And I am proud of our organization's resilience as we work together to accomplish this critical milestone.

As we look ahead, we continue to have confidence in delivering a strong fiscal 2021 for our shareholders and are reiterating our annual guidance for fiscal 2021 today. We continue to expect adjusted EBITDA in the range of $33 million to $37 million, which implies a 59% increase at the midpoint of the range versus prior year. Year-to-date, for the first 6 months of fiscal 2021, we have generated $11.8 million in adjusted EBITDA, which represents an increase of $10.6 million versus the prior year period.

At the segment level year-to-date, Curation Foods generated $4.7 million in adjusted EBITDA, which represents an increase of $7.3 million versus the prior year period. And Lifecore generated $8.7 million in adjusted EBITDA, which represents an increase of $3.7 million versus the prior year period.

We expect that this trend of improving year-to-date performance will continue to accelerate through the second half of this fiscal year as our Curation Foods segment marches towards the year-end. Steady state gross margin targets that we've detailed previously in the range of 11% to 14% and a fiscal 2021 gross margin performance at Lifecore of approximately 38%.

Before I share more details on our outlook and priorities for the second half of fiscal 2021 for Lifecore and Curation Foods, I'll turn the call over to Brian for the financial highlights and a deeper discussion around our refinancing and second quarter performance.

[Brian Mclaughlin, executive]

Thank you, Al. For the second quarter, consolidated revenues decreased by 8% year-over-year to $130.9 million. The decrease was driven by a 10% planned decrease in Curation Foods' revenues, which was partially offset by a 2% increase in Lifecore revenues. Lifecore's year-over-year performance was driven by a 2.5% increase in CDMO business which was partially offset by a 1.4% decrease in its fermentation business.

At Curation Foods, revenue performance was primarily driven by the planned reduction in our legacy vegetable and tray business in connection with Project SWIFT and ongoing softness within our foodservice business due to COVID. Combined, this resulted in a 12% revenue decrease in our fresh packaged salads and vegetable business. The planned reduction in the legacy vegetable and tray business is a key aspect to our strategy of focusing on high-margin products and on new innovation in the Curation Foods segment. Partially offsetting this was a 5% increase in revenue from our avocado products business, primarily due to ongoing retail distribution expansion of our innovative avocado squeeze product and growth in the Cabo Fresh brand.

Consolidated gross profit increased 33% to $20.6 million year-over-year, and gross profit margin increased 490 basis points to 15.8%. The gross margin improvement was primarily driven by the Curation Foods segment, which experienced a 360 basis point increase versus prior year to 9.4% and puts Curation Foods well on its way to achieving our steady-state gross margin goals by year-end in the range of 11% to 14%.

The improvement in second quarter was led by our avocado products business, which benefited from operational improvements and improved raw material sourcing compared to the prior year period. Additionally, the segment achieved gross margin expansion within its fresh packaged salads and vegetables business despite the planned decrease in revenues and from the positive financial impacts of consolidating operations plus the continuous improvement in operations associated with Project SWIFT.

Lifecore also contributed to the increase in consolidated gross margin as its business returned to normalized pre-COVID gross margin rates that were further bolstered by an advantageous sales mix, driving a $1.9 million or 21% improvement in gross profit year-over-year, resulting in gross profit margin of 45.1% compared to 37.8% in the prior year period.

Landec's second quarter net loss was $13.3 million or a loss of $0.45 per share, which includes $4.4 million of restructuring and other nonrecurring charges, such as legal and settlement expenses net of tax, and also include a noncash Windset fair market value adjustment of $9.4 million net of tax. Excluding these nonrecurring charges and Windset fair market value adjustment, after-tax charges of $13.8 million, adjusted diluted net income per share was approximately $0.02.

Adjusted EBITDA increased by $7.8 million versus prior year to $8.7 million during fiscal second quarter, primarily centered in year-over-year improvements in the Curation Foods segment. Despite the strong growth, this performance was muted by headwinds from increased corporate expenses associated with ongoing legal and settlement-related fees that were not part of our adjusted EBITDA add back.

On the segment level, during the fiscal second quarter, Curation Foods generated $2.4 million in adjusted EBITDA, which represents an increase of $6.7 million versus the prior year period. And Lifecore generated $7.3 million in adjusted EBITDA, which represents an increase of $1.6 million versus the prior year period.

Further evidence of our improving financial performance can be seen through the lens of our cash flow statement. Cash flow provided by operations was $18.5 million for the 6-month period ending November 29, 2020 compared to cash used by operations of $14.9 million in the prior year period, which marked a $33.4 million improvement year-over-year. Additionally, cash from investing activities improved $21.2 million versus prior year, driven by capital -- by a capital expenditure decrease of $8.6 million and fixed asset sales proceeds of $12.9 million.

Turning to our finance position. The company had cash and cash equivalents of $2.5 million as of November 29, 2020. Total debt at fiscal second quarter end was $170.2 million, consisting of its line of credit and long-term debt. The company's net leverage ratio was approximately 5.2:1 based on its trailing 12-month adjusted EBITDA, which is an improvement of 3.6 turns compared to fiscal year-end 2020 and due to the combination of improved adjusted EBITDA performance and lower net debt levels.

Subsequent to second quarter end, on December 31, 2020, we closed on a comprehensive refinancing transaction, which we believe provides our business the necessary flexibility to support Lifecore's long-term strategic growth plan, while we continue to build on the recent positive momentum of Project SWIFT in our Curation Foods business. This new structure includes a 5-year $170 million uni-tranche term loan, of which $150 million was funded immediately upon closing. The uni-tranche term loan carries an interest rate of LIBOR plus 850 basis points, and we will have access to an additional $20 million via an accordion feature so long as we maintain certain leverage requirements.

Importantly, borrowings under the term loan are interest only for the first 2 years. This provides a $6 million favorable annual impact to cash flows in the short term, primarily related to $12 million in lower annual scheduled principal payments. This was partly offset by estimated incremental annual interest expense of $6 million. The $75 million asset base line of credit carries an initial interest rate of LIBOR plus 225 basis points.

As a result of refinancing the company's existing credit facilities in the third quarter of fiscal 2021, Landec will record a $1.2 million charge as a result of the noncash write-off of unamortized debt issuance costs related to the refinancing under these new credit facilities.

Shifting to our outlook. We are reiterating annual guidance for fiscal '21 as follows: consolidated revenues in the range of $530 million to $550 million, representing a planned decrease of approximately 9%; Lifecore revenues in the range of $93 million to $97 million, representing growth of approximately 11%; and Curation Foods revenues in the range of $437 million to $453 million, representing a decrease of approximately 12%.

From an adjusted EBITDA perspective, we continue to expect consolidated adjusted EBITDA for Landec in the range of $33 million to $37 million, representing growth of approximately 59%. Lifecore to range from $22.5 million to $24.5 million, representing growth of approximately 17%. And Curation Foods to range from $12 million to $14 million, representing growth of approximately 193%.

In the second quarter of fiscal 2021, the total corporate overhead and public company management fees of $4.5 million were allocated to the 3 business segments as follows: $1.2 million to Lifecore; $1.4 million to Curation Foods; and the remaining $1.9 million to other.

The total consolidated capital expenditures in the second quarter were $2.8 million. Invested as follows: $1.7 million for Lifecore; $1.1 million for Curation Foods.

Regarding the seasonality, we are updating our statements from last quarter to help shape the sequencing in the second half. We anticipate that fiscal third quarter revenue will be greater than fiscal fourth quarter revenue for both operating segments due to variations in seasonality.

On gross margin, we believe that Curation Foods will continue to generate consistent sequential quarterly improvements in its gross profit margin as the business builds towards its steady state gross profit margin target of 11% to 14% by fiscal year-end 2021.

Lifecore has reverted to its pre-COVID gross margin levels and is managing the business to its annualized target of approximately 40%. However, taking into account its fiscal first quarter, which experienced a negative impact to margin due to COVID, we expect Lifecore to achieve full year fiscal 2021 gross margin of approximately 38%.

For consolidated adjusted EBITDA, we anticipate minimal quarterly variation between fiscal third and fiscal fourth quarters for consolidated adjusted EBITDA results.

With that, I'll turn the call back to Al.

[Albert Bolles, executive]

Thank you, Brian. Let me go into more detail about the progress we are making in our Lifecore and Curation Foods businesses to maximize shareholder value across our portfolio. Lifecore continues to benefit from a pharmaceutical market that is seeing increasing demand for new drug development, supported by an increasing number of drug products in various phases of clinical development. In addition, the CDMO market continues to see positive demand for services and drug developers continue to outsource development and manufacturing services in order to decrease time to market, save costs and reallocate internal resources.

As a highly differentiated and fully integrated CDMO, Lifecore is positioned to capitalize on these tailwinds and continues to establish high barriers to competition. Lifecore's speed and efficiency benefits its partners by decreasing their time to market, which has immense value in their ability to improve patient lives through the commercialization of their innovative therapies.

Looking forward, Lifecore will continue to provide long-term growth by taking advantage of positive market trends and will continue to expand its pipeline with new and existing customers, manage capacity to meet customer demand and deliver commercial manufacturing excellence.

During the second quarter, 2 of Lifecore's key partners reported positive data from their Phase II clinical studies and are transitioning to Phase III development activities. Lifecore also initiated construction at their leased site 3 location to provide additional warehouse and storage space for the growing business.

And finally, Lifecore successfully completed 3 audits with customers and received notification that the FDA approved a 30-day notice that allows Lifecore to serve as a complete testing and release site for raw materials and packaging components for a key customer with no questions, which is a testament to the world-class quality system Lifecore has in place to support its customers.

For Curation Foods, the exceptional outcomes of Project SWIFT which we launched on a year ago, have now stabilized the business, and we are seeing those results play out in our financial performance. While our work is not done, and we continue to focus on opportunities to improve our operating cost structure, we have built a solid foundation to profitably grow our business.

As you can see in our second quarter results, there is evidence of the gross margin improvement progression, resulting from continuous improvement in our operations and consolidation activities that we've implemented with Project SWIFT. Further, we are in the final stages of strategic analysis of outsourcing our logistics operations. We are targeting a late fourth quarter implementation of this strategy that will drive greater efficiency and margin improvement, while simultaneously improving effectiveness with more frequent deliveries to our customers. This will result in less customer inventory waste and extend product shelf life for consumers.

We have great confidence in margin improvement continuing through the balance of this fiscal year as we work towards the steady state gross margin targets we laid out in February of last year. This margin improvement is the key to improve cash flow generation and underpins our adjusted EBITDA guidance for this year.

We are also continuing to push forward on our focus around high margin, consumer insights driven plant-based food innovation. Our key current innovation, Yucatan and Cabo Fresh squeeze continues to deliver growth as we expand our distribution. And our existing high-margin Guacamole cub business is performing well. According to Nielsen Research, the Guacamole category is growing at 7% year-to-date compared to previous year. The Curation Foods brands continued to outpace the category. Year-to-date, all of Curation Foods' avocado products are growing at more than double the category growth rate with our Cabo Fresh brand leading the way, growing at 4x the category growth rate. Our innovative squeeze products now comprise 13% of Curation Foods' total avocado products retail sales.

In our Eat Smart salad business, we have several innovations that we have launched or are launching this month. First, we are rolling out a new slimmer bag design that we believe will increase velocity and drive incremental growth with product line expansion.

Second, we are having success in our plant-based innovation co-development partnerships with the club channel. We have 2 high-margin salads in test market with 2 separate retailers that are both showing promising sales trajectories. We believe the innovation and other new products in our plant-based protein platform will drive profitable growth in FY '22.

In summary, we have made tremendous progress and are starting to see the results. 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 and making strategic investments in growth. We intend to fully realize the potential of each business through the sound and thoughtful execution creating sustainable value for our shareholders, customers, employees and communities.

Operator, please open the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Gerry Sweeney with ROTH Capital.

[Gerard Sweeney, analyst]

Congrats. It looks like Curation is turning the corner here. So starting to come out in the numbers. So it's a nice start to the new year. My question revolves around Curation. I want to see if I can actually get this out in the way that makes sense here. So second half, we're guiding -- you're guiding to 11% to 14% gross margin by year-end, I get that.

Could you maybe bucket out some of the items that are going to drive that, just from an operational standpoint as well as market opportunity? Obviously, avocados are growing. I'm just curious about salads, it sounds like they have a little bit of a refresh coming next year. But just wanted to understand and just get a refresh per se on the opportunities in the second half of this year that are going to drive the margin?

[Albert Bolles, executive]

Yes. Gerry, you're right. I mean the avocado products business continues to double. We're having great success with our Cabo Fresh brands. So that's going to be a key driver for us as we continue in the second half of the year. We also have done a lot in our mix when it comes to the Eat Smart salad business. A big part of Project SWIFT was not only what we did on the core veg business, taking pricing and getting the cost down benefits that we've talked about before, Gerry. But we also are swapping out salads that are not profitable with more profitable salads that we think are going to turn better. So we're continuing to work that segment as well. And we've had a pretty good year thus far with the green bean category.

This is the first time in a long time that we were able to not prorate customers at Thanksgiving based on the strategy that we took with our growing strategy. We had a record number of hurricanes. We're minimally impacted. And we think we have figured out from a geographic standpoint, how to manage that better in the future.

And we anticipate as COVID begins to lift, none of us know exactly when that is, but with the vaccine, we're optimistic, that some of our businesses that have been affected by COVID, primarily in the food service sector will start to come back.

So it's just a continuous focus, and we have things going on with Project ZEST in our facilities in North America with Bowling Green, that, we believe, will help improve our overall margins.

[Brian Mclaughlin, executive]

Yes. Gerry, this is Brian. I just had a couple of other quick things to drop in. So one, we're going to benefit in the second half of the year for the full -- second half of the year with the closure of Hanover. We didn't close that until the beginning of the second quarter as well. Included in the $9.4 million are actually above the gross margin line some of the restructuring costs that go with Hanover. If you back those out, to sort of steady state, Curation would have had a 10.1%, second quarter 9.4%. Recognize 9.4% is the right way to report it, but just to give you that context.

Q4 is a big quarter for Yucatan, in particular, May, driven by Cinco de Mayo and Memorial Day. It's our highest margin segment. So they have lift in that quarter, which we've had thus far has been our experience with the company, also sort of helps lift things.

And then lastly, from a raw risk reserve standpoint, the fourth quarter is traditionally the quarter that is the mildest, the kindest. And so as a result, the company typically has a margin lift in the fourth quarter that way as well. So just add those things to what had Al just said.

[Gerard Sweeney, analyst]

Mother nature is most kind in the fourth quarter.

[Brian Mclaughlin, executive]

It is. Not always. 100% kind, but more kind.

[Gerard Sweeney, analyst]

More kind. The Curation, you said the 10.1% versus the [ 9.4% ] as reported, and that was my questions. In the prepared remarks, you did say there were some, I think, headwinds that weren't adjusted -- necessarily adjusted. Was that $700,000, it looks like, was that all of it? Or were there other sort of maybe not true onetime item, in fact maybe some...

[Brian Mclaughlin, executive]

No. Yes, there are other onetime items and restructuring that we had in the second quarter. But yes, adjustments, but above the gross profit line, it is about -- it was actually about $730,000 and -- that related to the Hanover closing. Yes.

[Gerard Sweeney, analyst]

Got it. And that shouldn't be there on a go-forward basis or some of that still triples into...

[Brian Mclaughlin, executive]

Yes. So we won't have that going forward, if that's what you're trying to say.

[Gerard Sweeney, analyst]

Got it. Yes.

[Albert Bolles, executive]

And Gerry, as we progress with Project SWIFT, we believe the heavy lifting restructuring costs are behind us as we move forward.

[Gerard Sweeney, analyst]

Got it. The other question I had was, Al, you touched upon it for there, but the foodservice, how much of an impact -- can you quantify how much COVID is sort of impacting it? I know it's little early across the country and every place is different right now. But yes...

[Brian Mclaughlin, executive]

yes, it's about $2 plus million in margin that goes with being headwind. Yes.

[Albert Bolles, executive]

And we also have margin impact, Gerry, on our tray business because people are not gathering. So we've seen a significant drop-off on channel trays. And a small amount, but not insignificant was our single-serve salads just because people aren't going into work, they're eating at home.

[Gerard Sweeney, analyst]

Yes. Got it. That's really helpful. Then finally...

[Brian Mclaughlin, executive]

Yes. If you were to roll all those up, it's about $3.5 million to $4 million that goes with that in terms of margin impact to what Al just described.

[Gerard Sweeney, analyst]

On an annualized basis, I would assume.

[Brian Mclaughlin, executive]

No. That's just for the first half of the year.

[Gerard Sweeney, analyst]

First half. Okay. So that's considerable. I mean that...

[Brian Mclaughlin, executive]

Yes. It is considerable. Yes.

[Gerard Sweeney, analyst]

It's a COVID world, so we don't know what's happening. But vaccine being rolled out, things get back to normal, that becomes less of a headwind next year, maybe even adds a little boost to profitability potentially next year. Is that a way of potentially...

[Brian Mclaughlin, executive]

Yes.

[Gerard Sweeney, analyst]

I'm not looking for guidance but -- okay. Got it. And then just real quick on logistics. That strategic review, would that also free up cash? I'm not sure if you leased trucks or do you own them? There's a lot of cost...

[Albert Bolles, executive]

Yes. We have 30-plus trucks, Gerry. And the project I'm wanting to get at since I came on board and we've had so many other things that we've had to do, we just didn't have the resources to do them all at once. So we started this study several months ago. And we're in the final stages of compiling the results, but they're fairly compelling for us.

So we have 30-plus trucks that we do lease. Don't think we need all 30-some trucks. And there's going to be a play there for us that we believe is going to improve our margins. But as, if not more important, our effectiveness to our customers are greatly improved. We're going to be able to deliver 6 times a week versus 3 times a week. That's going to lead to better product freshness. It's going to lead to less shrinkage at the customer level.

And that, combined with the launch of our new slim bag, we believe that's going to have an impact for us on shelf, that will impact velocities as well as allow us to achieve more facings with the slimmer bag, which will, by the way, have the same amount of ounces as our current bag has. So it's all kind of wrapped up in a big efficiency and effectiveness program that is going to start happening here in the second half and really give us benefits in FY '22.

[Gerard Sweeney, analyst]

Got it. I will have one just follow-up, and then I'm done. I'll jump back in. On that logistics side, is there a service benefit, right? So you can service your customers 6 times instead of 3 times. Your spoilage, shrinkage. I look at your salads when I go to the grocery store, right, sometimes the dates are a little near, things like that. So if you improve that, could that get you into more stores, improve and obviously improve the services but make sales easier or retention better?

[Albert Bolles, executive]

Yes/. I'll tell you, the sales force is very excited about this logistics program and the slim bag together to do what you just said all of the above. So we expect to get more sales. We expect to be able to expand in the new customers that we couldn't get to and meet their requirements as well as we have some significant shrinkage at some of our customers that we're not going to be able to get after, Gerry.

[Operator]

Our next question comes from Mitchell Pinheiro with Sturdivant & Co.

[Mitchell Pinheiro, analyst]

Just a couple questions here. First, the gross margin goals. So 11% -- in Curation, 11% to 14%, that's somewhere by the fourth quarter? Or is that a second half average? And then what I wanted to ask is, is that 11% to 14% range going to be something that we could count on for the following fiscal year?

[Albert Bolles, executive]

Yes. Yes, -- you can give the details. But, Mitch, as we've talked before that we are really committed to getting this business at a steady state. And the 11% to 14% is what we expect to achieve in the fourth quarter. And Brian said, we're at 10.1% now. We've seen we've had significant improvements in our margins. So -- and we expect that to carry over into fiscal year '22. And our job isn't done. Our focus on margin expansion will continue into FY '22 as well, Mitch.

[Mitchell Pinheiro, analyst]

Yes. I'm sorry....

[Brian Mclaughlin, executive]

Yes. No, I just going to -- the second part of your question is just at what we're looking for next year, yes, there's just a lot of moving parts, as Al mentioned, this year. So the idea is to get to that steady state going forward by the end of this calendar year -- or by the end of this fiscal year.

[Mitchell Pinheiro, analyst]

With Windset, the charge, is that related to the put/call date? I mean when is the -- could you remind me when the put/call date is?

[Albert Bolles, executive]

It's March of '22. Yes.

[Mitchell Pinheiro, analyst]

Okay. So it was a substantial write-down. What drove that?

[Brian Mclaughlin, executive]

Yes. Al, I'll just jump in on this, and apologize. It's really targeted around some situational issues, in particular, the extensive West Coast fires that resulted in very dense smoke, all up and down the West Coast, affecting sunlight, production volumes, and as a result, revenue and earnings in all of their greenhouse facilities from California all the way up into British Columbia.

The model is still very solid. I think they're going to work through some of these situational issues. The way that the discount model works is close and impacts way very heavily, this lowered earnings, correspondingly. Lower earnings increased the debt in the discount modeling and the combination of those 2 being closed in and right now is what really drove it. As we go towards the put/call date, the true value will be a function of trailing 4 or 8 quarters, we get the greater of the average of whichever is more favorable to us.

So if the events from the trailing 4 quarters in March looking backwards are stable and they're not dealing with some of these issues, apart from just whatever business model and competitive issues they may have, then we may have a recovery on the number that we just put -- that we just wrote down. We may not, but we may. It will depend on actual numbers and events in March of '22.

[Mitchell Pinheiro, analyst]

Okay. Just one -- okay, very helpful. One more question. With regard to the new financing, so I'm not a fixed income guy, but 850 over LIBOR seems high. Doesn't it? Or is that just not -- am I just -- I haven't really refinanced $100 million tranche of debt lately.

[Brian Mclaughlin, executive]

Yes. No, I'm actually very happy with that. If you look back over the last 9 months, the credit markets have changed quite a bit with COVID. Credit underwriting for senior lenders has changed quite a bit. This is on a blended rate. So when you blend them together, our average rate, we think, is going to be somewhere around 7.5%.

I'm very happy with this type of rebucketing in financing and the flexibility that provides to the company, our ability to support the growth platforms, in particular, the growth platforms at Lifecore. And to be able to get that kind of financing without some sort of an equity component warrants or whatever that would be dilutive to the shareholders, I'm thrilled with that.

[Mitchell Pinheiro, analyst]

Okay. But with -- and I noticed like a lot of the covenants relate around Lifecore. I mean it's almost -- I'm not sure what it is, but is -- obviously, Lifecore has some CapEx needs down the road here. So I understand that. But the fact that it sort of relies and it's called out in the covenants that Lifecore gross profits need to be $29 million, it's just it was kind of odd that it wasn't Landec gross profit. And I was curious if you could comment on that.

[Brian Mclaughlin, executive]

Well, when you look at this type of debt, it's really a mezzanine piece. It's sort of sitting somewhere between shareholders and a senior lender. So there's definitely an enterprise value focus on the components. Clearly, Lifecore adds a lot to that equation. If you're sort of in that space behind the senior lenders. And so it made sense that they would get as we -- as the numbers have had than they are today, I think they're going to continue to shift favorably going forward and be more balanced between Curation and Lifecore. But it makes sense given sort of where they are in the capitalization equation, that they would rely heavily upon sort of the enterprise value and the intrinsic values there. And accordingly, that puts a big focus on Lifecore.

[Operator]

Our next question comes from Mark Smith with Lake Street Capital Markets.

[Mark Smith, analyst]

First one for me. You gave us some good insight into kind of foodservice environment what's been happening there with COVID. Any additional insight into kind of grocery and club, what you're seeing from kind of those customers as well as from consumer behavior here recently?

[Albert Bolles, executive]

Yes. Mark, the club business has been affected primarily through trays. That's been a big impact as we sell most of our cut veg tray business to club stores. So that business is down 50% or more for us and has remained down. The other issue that we have seen at some of the club stores is in their order patterns based on the lines that maybe forming to go into the stores, there's been sort of a zig zagging of ordering that we're seeing recently.

And the other big impact for us has been in launching our new products, we're not able to do sampling programs that are important to us and the ability to be as aggressive as we want to be to expand our new products, they are not as aggressive as they have been. And that flows over to the retail side, which is -- a lot of the customers are not doing resets on new products like they only do. They're delaying them a bit based on the COVID environment. But we see that beginning to lift here, we believe, in the Q4 and into Q1. So those are the big impacts that we see at the retail level and club level.

[Mark Smith, analyst]

Okay. And then as we look purely at kind of the avocado products, what are you seeing in that market as far as pricing? And how confident are you in kind of where the avocado pricing is today and that helping you get to your gross profit margin goals?

[Albert Bolles, executive]

Yes. Well, this is the first full year that we've been able to run the plant with the model that we have, where we buy avocados at low cost in the fall and be able to put them away on low cost. And we were operating at -- very,very efficiently, we're able to put away a lot of the low-cost avocado products, which helps us on our margin and pricing. And our innovation, as I mentioned, the guacamole squeeze is working very well for us. We have some programs in place where that's currently our lowest margin product, but it's growing the most, that we are going to be significantly improving the gross margins of the squeeze product now that it's successful.

And Cabo Fresh is getting a lot of good traction. I've talked before, Mark, that this brand really resonates with millennials. And we're seeing that in terms of the growth rate that we are experiencing with the Cabo Fresh brands.

[Mark Smith, analyst]

Great. And then this might be too broad of a question. But following the refinancings, what are kind of next steps that we look at in the turnaround of this business as we've moved through a lot of SWIFT? Kind of what are the big picture items that we should looking at now?

[Albert Bolles, executive]

Well, we still have a few things to do on the SWIFT program, as I mentioned. I would say this is a baseball game, we're probably in the seventh inning. But the heavy restructuring costs that we've gone through with what we did in this past year with closing Hanover, taking down a production overhead, consolidating our offices, rightsizing our FTEs. I would say a majority of that is behind us. We'll probably have some restructuring with logistics project, but we think the paybacks are tremendous.

But for me, the big focus now is we've got a pipeline loaded with innovation. And as we move forward into Q3 and into Q4, we really began to transition the Curation Food business from one of getting there by cutting cost to really growing profitably in our categories of avocado products and our salads primarily based around our plant-based protein salad. So it's really set us up for growth, Mark. That's where we're really looking forward to having the momentum take us from second half of the year into FY '22.

[Mark Smith, analyst]

Okay. So really a transition from turnaround to now kind of operating and growth?

[Albert Bolles, executive]

Right. I would say we're at an inflection point right now. And we have really improved the relationships with our key customers. They're very healthy now, and we've got a lot of innovation that we are planning on launching and a lot of innovation that we're working directly with them on in a very collaborative way.

The relationship -- we don't really talk about this, Mark, but the relationship with our customers, where we were a year ago versus today is absolutely night and day. So I remain very confident that as we move forward, that we're going to be growing this business through our innovation, while we continue to have a cold eye on cost.

[Operator]

Our next question comes from Anthony Vendetti with Maxim Group.

[Anthony Vendetti, analyst]

So just a couple questions. One is you talked about the logistics review. Can you quantify what you found when looking at the logistics of your operations? And what were the quantifiable benefits that you were able to extract from that?

[Albert Bolles, executive]

Well, we don't have all the numbers figured out yet, but I will tell you, just where we are right now, there is several million in savings, we believe we can achieve. We also believe there's, as I said, just not only the efficiency standpoint of the logistics but there's an effectiveness rate, which we really won't know what that is until we get into it, but it's pretty clear for us by decreasing shrink, getting fresher product on the shelf, the opportunity to expand our facings. Holistically, we think this program will have a really great payback for us. So that's where we're at with this. And it's going to take us a little bit of time. It's not something I can just turn the light switch on. But as I mentioned, Mitch, we're going to be out in Q4 with doing this.

[Anthony Vendetti, analyst]

Okay. And then just on new innovations, Al, the single serve, nice improvement in the Curation gross margin, higher margin products. That seems to be starting to bear fruit. Can you talk about the incorporation of plant-based alternatives? What's the opportunity that you see there? And when can we expect to see that start to be a contributor for you?

[Albert Bolles, executive]

Yes. So our focus has been on really gaining insights here with our consumers, working with our customers. And we know there's a growing flexitarian consumer out there that's not vegetarian, but they're trying to eat less meat. So we have really focused our innovation around that. We've launched -- at the club store level, we had 2 launches that happened here just recently. They are very promising. These are higher-margin products for us and we've normally launched 4 new products.

So we've got a lot of discipline in our processes about what we send out the door. It's not only got to be the right product, but it's got to be at the right margin level for us. So we're betting that we're going to start to see impact of that into Q4, while -- and then begin to really pay off for us in FY '22. COVID has slowed us down in terms of the rate that we would like to expand. But the feedback that we're getting from our customers says that we have very strong products here.

[Anthony Vendetti, analyst]

So that -- it's a -- you said you launched at the club store level, but that opportunity is still, would you say, in the nascent stage because of COVID? And eventually, as we go forward here, this could become -- is it fair to say you believe this could become a significant opportunity in the not-too-distant future?

[Albert Bolles, executive]

Yes. We've launched in the club stores, but we haven't been able to expand like we normally would be in this COVID environment. And we are expecting and have commitment for expansion in the second half of the year. And this is a big, big platform for us that we've invested in and that we believe is going to be a differentiator for us as we move forward.

[Anthony Vendetti, analyst]

Excellent. And then just last question. I don't know if you gave this number, but on the avocado squeeze product, you had 6,000, I believe, points of distribution on the last call. Where is that now in terms of points of distribution? And do you have a goal by the end of this fiscal year in terms of how many points of distribution you want to be in with that product?

[Albert Bolles, executive]

Yes. We're actually focused on the percent ACV. And right now, squeeze is at 19% and our goal is to -- just to kind of give you a point on that, Yucatan is 46.5% ACV. So we continue to see squeeze grow in ACV for us. And as I said, we have some things planned that we see margin expansion on a squeeze product as well.

[Operator]

Our last question comes from Michael Morales with Walthausen & Co.

[Michael Morales, analyst]

I want to start it off on the Windset portion. And understanding the operational challenges that they've had with everything that was going on. Help me understand, as we get closer to this put/call date, where is the confidence coming from that Windset is going to actually be able to afford a redemption of the preferred if you guys actually do put it to them. With all the operational challenges, it's not unreasonable to think that, that creates financing needs that they might need. Where is the confidence coming from?

[Albert Bolles, executive]

Yes. Brian, why don't you take that one?

[Brian Mclaughlin, executive]

Yes. Yes, exactly. Well, there are a few things. My sense is, we're just poking at this with them is that they are going to substitute us out somewhere in their capital structure behind their senior lenders. We -- the way that our formula works, it's a very low multiple in that segment of EBITDA. I am very confident. I think there are all sorts of folks lining up, at least from my initial discussions with them and the different advisers that they're talking to and that it's -- that, that is a very likely way for them to take us out.

I don't see them writing a check. It's a very asset-intensive business model. If you have the greenhouse space, your platform is going to grow. There's a lot of demand for that space. Some amount in greenhouse space has reverted over to the cannabis world, which is putting more a demand on Windset's model. They're an excellent player. Their operational model is very, very solid. They're doing very well. They do have a fair amount of debt, not too much given, honestly, close to their ratios, which I am.

But I do think that if they have the ability to tap into senior regulated bank financing that they're going to use that to continue to expand their platform and their growth model. And I believe they have many options to -- behind a senior lender group and then being able to finance their growth to find someone to substitute us out.

[Michael Morales, analyst]

Sure. Sure. And I guess, mindful that you guys were just talking to creditors about this whole refi. Do you anticipate -- so you're not anticipating them having any problem with the debt load that they do have and arranging more financing?

[Albert Bolles, executive]

I do not. I think that they are financeable. They just actually put a brand-new financing arrangement in place. And it's a very strong model. So I'm very close to it.

[Michael Morales, analyst]

Sure. Understood. Turning over to the credit agreement. Bear with me on this one, but a few interesting things stuck out to me in this one relative to previous agreements. A previous question noted that consolidated gross profit is really just defined in Lifecore's gross profit. So not reconsidering Curation in that at all. I know you guys have a specifically defined term for what a permitted Curation sale might look like. And I found it interesting that there was a clause for allowing equity awards in anticipation of a spin-off of Lifecore.

So all of that taken together and mindful of the good work that you guys have done in kind of improving Curation's operating structure. This certainly seems like much more tangible language than we've seen in the past as we think about value creation. So apologies for that long question, but I guess the total of it is, can you guys just give an update on how the Board is thinking about value creation, mindful of this refi and the work that you've done to improve the operating structure of the businesses?

[Albert Bolles, executive]

Well, I'll answer that. I continually work with my board. You know that we've expanded the Board, added some more life science folks on their expertise, if you will. And as we move forward, I continue to work with my Board to how we can enhance and create more shareholder value, so it's part of our strategy.

Thank you very much. And I thank everyone today for having their interest in Landec and happy new year to everyone. Stay safe. Thank you very much.

[Operator]

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