Landec Corp

F:LDE

Earnings Call Transcript 2022-Q2

[Operator]

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

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

[Jeff Sonnek]

Good afternoon, and thank you for joining us today to discuss Landec Corporation's Second Quarter Fiscal 2022 Earnings Results.

On the call today from the company are Dr. Albert Bolles, President and Chief Executive Officer; John Morberg, Chief Financial Officer; and Jim Hall, President of Lifecore.

By now, everyone should have access to the press release, which went out today just after 1:00 p.m. Pacific or 4:00 p.m. Eastern. If you've not received the release, it's available on the Investor Relations portion of Landec's website at ir.landec.com.

Before we begin today, we'd like to remind everyone of the safe harbor statement. Certain statements made in the course of this conference call contain forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning risk factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's filings with the SEC, including but not limited to, the company's Form 10-K for fiscal year 2021. Copies of these filings may be obtained from the company's website.

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

[Albert Bolles, executive]

Thanks, Jeff.

Good afternoon, everyone, and thank you for joining us today. On today's call, I will provide an update on our progress with Project SWIFT, Hall will then review recent developments at Lifecore and then John Morberg will discuss our financial results and updated fiscal 2022 outlook. We will then open the call for your questions.

We've been quite busy since we last spoke to you in September. As you can now see, our focus has been executing the sale of our Eat Smart fresh packaged salads and vegetables business, which closed on December 13 for $73.5 million in cash. This asset sale marked an important milestone in Project SWIFT and demonstrates ongoing efforts to extract value from our noncore assets within our Curation Foods business and reorients the company around our rapidly growing Lifecore Biomedical business.

We have already utilized the net proceeds from the transaction to pay down debt, which instantly reduced our balance sheet leverage. This puts the business back on a firm foundation and allows us the flexibility to channel our resources to more fully support the growth and expansion of the Lifecore business.

With the divestment of Eat Smart and while there's more work to do, management is laser-focused on the Lifecore business and the remaining Curation assets that are growing at a higher rate, produce more track to margins and have value that we believe is presently underappreciated. As such, we will be focusing most of our attention and discussion going forward during our quarterly update on Lifecore, which is generating the vast majority of our consolidated adjusted EBITDA and has provided Landec with a consistent and growing source, high-margin revenue since the acquisition of the business in 2010. In fact, Lifecore's revenue has grown at a compound annual rate of 15.4% since then, which is really impressive performance.

Before I pass the call over to Jim for a review of Lifecore, I also want to take a moment to characterize our financial reporting for the fiscal second quarter as well as our guidance for the balance of the fiscal year. Since the Eat Smart sale occurred subsequent to fiscal second quarter end, we are providing you with a pro forma look at the Curation Foods segment for the first half of fiscal '22 as well as the full year of fiscal '21 to aid in your modeling for the go-forward business. John will share some greater insights on the financials and related guidance. but I want to recognize the great performance at Lifecore.

Revenue growth accelerated to a 7% increase in second quarter, which understates the accomplishment given some of the channel inventory headwinds we were working through in fiscal first half and adjusted EBITDA growth was 26%. Lifecore continues to perform well. We are excited for a strong fiscal second half of the year and we couldn't be more excited about what lies ahead.

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

[James Hall, executive]

Thank you, Al.

We operate in the amazing CDMO industry with strong fundamentals and Lifecore is perfectly positioned to take advantage of the growing CDMO opportunities to deliver attractive financial returns to all of our stakeholders. We are a beneficiary of the significant industry trends towards outsourcing of new drug development, and our syringe and vial filling capabilities aligned perfectly with the powerful trends and new injectable drug applications that are utilizing these capabilities. In fact, approximately 55% of all new drug applications are injectables and prefilled syringe demand is growing at a 13% compound annual rate.

Coupled this backdrop with limited injectable drug manufacturing capacity and Lifecore is presented with an incredible opportunity to fill unmet demand with our existing capacity that we've been investing in over the past few years.

Activity within our pipeline remains strong. In the fiscal second quarter, we initiated work on 2 new projects that we established development agreements for late in the first quarter. This maintains our development pipeline at 23 projects with 19 different customers, which are spread across early phase clinical development with 5 projects, Phase I and II clinical development with 8 projects and Phase III clinical development and scale-up commercial validation activity with 10 projects.

Moving forward, as we continue to build and prepare the organization to advance and expand our development pipeline, activity remains strong, and we are in active discussions with many potential new project candidates to continue to expand our pipeline. In addition, development activity for the existing pipeline continues to advance with several new statements of work being initiated in the first half of this fiscal year to continue advancing the projects through their development cycle.

Lifecore also received 3 key FDA approvals during our fiscal second quarter: First, Lifecore was approved to manufacture a key product in 1 of our existing commercial customers' product portfolios; second, Lifecore received FDA approval for a new manufacturing process that we designed and validated to support commercial scale manufacturing for 1 of our customers recently approved drug products; and finally, we received FDA registration for our new state-of-the-art raw material warehouse to support increased raw material requirements and volumes as we continue to grow. All of these approvals were key components to support our future growth and provide continued validation of Lifecore's world-class quality management system.

We also see an opportunity for Lifecore to grow and extend our reach through investments in new capabilities to meet the industry's ever-growing needs. Our expertise in viscous materials and our world-class quality management system that supports drugs, biologics, medical devices and combination products enables us to stand out as a specialized leader in the CDMO industry.

We are preparing for this through operational and capital investments. The $1.6 million investment in the P&L this fiscal year is focused on sales, marketing and development resources to expand our reach with new customers and to increase our development services, which ultimately allow us to continue to expand our pipeline and open new sales channels that expand and complement our existing capabilities.

From a capital investment perspective, we are focused on maximizing the revenue generating capacity within our current infrastructure and looking to the future to source and qualify the necessary equipment to keep up with an expected capacity needs. We continue to expect capital investments in fiscal '22 of approximately $2 million towards expanding our operational filling capacity beyond our current 10 million units to reach full utilization of the 22 million units of theoretical capacity that we built infrastructure alone. More specifically, it is this enhancement in capacity utilization that will allow us to drive continued growth in the years ahead.

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

Now I would like to turn the call to John.

[John Morberg, executive]

Thank you, Jim.

Lifecore had a great fiscal second quarter. The business realized total revenues of $24.9 million or a 7.4% increase versus the prior year period. driven by a 17% increase in its CDMO business, partially offset by a 27.8% decrease in its fermentation business, which was a result of timing of shipments within the fiscal year.

Additionally, consider that we face headwind from excess channel inventory in the fiscal first half of the year which we've largely moved through here early in the fiscal third quarter. Gross profit margin improved by approximately 185 basis points versus the prior year to 47% largely due to improved revenue mix. Segment EBITDA totaled $9.1 million for the quarter, a 25.6% increase over the prior year with an EBITDA margin of 36.6%.

The Lifecore business is on track for a strong step-up in growth in the fiscal second half of this year as we move past the excess channel inventory and we are supporting that with the reiteration of our Lifecore segment guidance on both the top line and EBITDA. We are guiding Lifecore revenues to a range of $105 million to $108 million, representing growth of approximately 7% to 10%, and adjusted EBITDA in the range of $26 million to $27 million representing an increase of approximately 6% to 10%. As a reminder, the difference in growth rates this year where EBITDA lags revenue is entirely due to the $1.6 million of P&L investment that we are utilizing as we prepare for our next phase of growth.

Let's now shift to Curation Foods and related financials. We've recast our Curation segment results and have provided pro forma results for the first half of fiscal '22 and full year fiscal '21. Our hope is that this will provide the necessary basis to understand the go-forward segment, which is now comprised of our avocado products business, our O Olive oil and vinegar business and BreatheWay. Together, this represents approximately $75.5 million of annual revenue at the midpoint of our new segment guidance with avocado products representing approximately 85% of the mix.

With that foundation, I'll make just a few comments on the pro forma Curation Foods segment results versus the comparable pro forma prior year period. First, revenue increased 10.6% in fiscal second quarter, comprised of a 4.5% increase in avocado products to $15.4 million, with the balance representing O Olive sales. Note that O Olive has historically been included in the fresh packaged salads and vegetables business categorization that we use prior to the sale of Eat Smart.

Curation Foods generated a pro forma adjusted EBITDA loss of $0.4 million, which compares to a loss of $0.2 million in the prior year period. However, as you think about adjusted EBITDA production from the remaining business and on a pro forma basis, please consider that we are in the midst of a reverse integration. The separation of the Eat Smart business will require us to rightsize our go-forward infrastructure with a smaller revenue base. This work commenced with the sale but will take 6 to 9 months to fully execute.

And as we work through the transition services agreement with the buyer of Eat Smart and our reverse integration efforts, there will be stranded corporate costs that weigh on the segment margin in the near term, which could amount to approximately $2 million in annual savings. As it pertains to the updated outlook for fiscal '22, we are providing you things on a reported basis and a pro forma basis to help clear up some of these nuances brought about by the sale of Eat Smart.

The bottom line message here is that we are not materially changing the key underlying assumptions for the remaining business, avocado products, O Olive and BreatheWay. The primary change in revenue guidance on a like-for-like basis is the second quarter underperformance of the now sold Eat Smart business as well as the anticipated loss contribution of that business in the fiscal second half.

Additionally, I'd point out that we have reallocated approximately $3.5 million in corporate expense allocation from the sold business back to our corporate other segment. Once again, we will be working through a rightsizing of our corporate structure over the next 6 to 9 months and expect some additional savings in time.

The Eat Smart sale has significant impacts on our balance sheet as well. Net bank debt on a reported basis for fiscal second quarter as of November 29, 2021, was $165.1 million. However, on a pro forma basis, adjusting for the utilization of the Eat Smart sale net proceeds of $67.9 million, net debt would have been approximately $97 million. This compares to net bank debt at the end of fiscal '21 of $192.6 million, an improvement of nearly 50% or $100 million in the year-to-date period, which reflects the sale of our Windset investment in the first quarter and the Eat Smart disposition in December.

We still have some more work to do, but our cash flows are significantly more stable. Our margin structure is significantly more attractive and our growth profile is greatly improved. We believe this set of attributes provides a solid foundation for our team to begin demonstrating consistent operating results that could be better appreciated by the investment community as we work to deliver shareholder value.

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

[Operator]

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

[Gerard Sweeney, analyst]

I wanted to start on, obviously, Lifecore because that's the focus and congratulations again on the Eat Smart sale. But curious if this sale actually -- how do we say this. Just curious maybe if Lifecore, obviously, there's a lot of capital-intensive and there may have been some constraints on the capital side. But also curious if this also constrained maybe some customer acquisition opportunities. A lot of these potential opportunities are have not written in, but are part of the Phase III trials, et cetera.

Will this open up more customer opportunities, in other words, some customers will get the food business as a drag and cause a little bit of caution in coming to Lifecore for opportunities?

[Albert Bolles, executive]

Yes. Gerry, let me just start out here by saying, this year, we have mentioned that it's an investment year at Lifecore. We have plans. We've already implemented some capital, close to $30 million in capital investments to grow those future opportunities. And as Jim mentioned, we've invested $1.6 million more in the new business development pipeline to attract more customers. And we've invested not only money, but we have added resources at Lifecore to bring in some new talent to really continue to drive that investment pipeline and bring more customers onboard in the future. Jim, anything more you'd like to add to that? Or John?

[James Hall, executive]

Yes, sure. Gerry, this is Jim. To directly answer your question, I don't think it's going to have an impact one way or another. I think we're really happy and confident on where things are heading with Lifecore. The activity in our development pipeline remains strong. Every aspect of our development pipeline continues to transfer and transition through the development phases, which ultimately turn into commercial opportunities for us.

The work we've done to expand that pipeline with our investment and how we go out and target opportunities is on track. We've hired 10 out of the 11 key positions that we had identified to build up not only the development resources to accelerate the development pipeline. But I've also brought in a new VP of Corporate strategy from the CDMO world to help us expand that. Darren [ Heber ] is his name, and he's onboard now and digging in and really helping us look differently at how we go out and target opportunities. And the knocks on the door are still really, really frequent. There's a lot of things we're in discussion with that hopefully will onboard soon.

So more to come on that front, but we're very happy where things are at. We spent a lot of time over the last quarter trying to balance out the quarters and when we're doing development work, and the development activity and the investment has allowed us to do that as you see the performance in the second quarter and projections for the rest of the year. So we're very comfortable with where Lifecore is at right now and where we're headed.

[Gerard Sweeney, analyst]

So suffice to say that $1.6 million in business development is increasing the pipeline base or opportunity, I guess is the way to put?

[James Hall, executive]

Yes. It's allowing us to react quicker and go after more -- And our intent was to have that start impacting the back half of this fiscal -- or later in the second half of this fiscal year, but really start kicking in FY '23 and beyond. But we're very, very happy with where we're at.

[Gerard Sweeney, analyst]

What is the -- I mean, obviously, '23 projects in the pipeline and -- Some of those may filter out depending on how those trials go, et cetera. But how much capacity do you have? And the other -- I guess the follow-on is I think you're at 10,000 -- what was it 10 million units, then you're going to 22 million.

To hit that 22 million how -- what does that pipeline have to look like? I know it's like a multiyear process, but just trying to get an idea of how that sort of all plays out over the next couple of years.

[James Hall, executive]

Yes, really, I mean, it's ultimately our goal to have that pipeline continue to build, and we add resources to support that when needed. We still have room to expand and grow the pipeline with what we're adding now. To give you a specific number of projects is tough just because it depends on the workload and where things are at and how long they take to go through as an example.

One of the projects that are in our late phase here, is going very, very well, and I just signed the 43rd statement of work for that project. So you can see how long we take to develop in various stages. But overall capacity to drive the 22 million, the things that really drive that are already in our pipeline. The investments focus to fill that out. And we're also, as you know, because that we've talked about in the past, looking at beyond that and starting to get the fill lines in to go beyond the 22 million.

[Gerard Sweeney, analyst]

Again, congratulations on Eat Smart and look forward to seeing Lifecore grow faster -- or further, I should say.

[Operator]

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

[Mark Smith, analyst]

First question for me is, can you just walk through any remaining headwinds within Lifecore and kind of as you move through those, anything that's remaining?

[Albert Bolles, executive]

Any headwinds in Lifecore?

[Mark Smith, analyst]

Yes. Just as you talked a little bit about the industry, some of the things that slowed some of the growth this year, kind of how you're working through those and kind of your outlook.

[Albert Bolles, executive]

Yes. Well, the -- our growth was impacted once again by the $1.6 million in investment in building a more robust pipeline for us that we went through. The other impact was we were sitting on a high degree of inventory late in Q4 and Q1 of HA. That -- and that was primarily driven by our customers, primarily international in COVID. We have moved to that more rapidly than what we had planned for. And we don't see any slowdown with the last phase here of -- or the next phase of COVID. So that -- those are the 2 headwinds that we have that I think we are pretty comfortable with and we're moving forward. Jim, anything you want to add to that?

[James Hall, executive]

Mark, Al covered it pretty well. Listen, we went into the year, especially in the ophthalmic side of our business, with heavier inventories because of the slowdown due to COVID. We implemented frequent meetings and planning meetings with supply chain groups from both our customers in Lifecore. So we're getting a lot more real-time data. And we're happy to say that we have worked through the heavier inventories, orders have picked back up, demands picking back up, not in all markets, but generally overall picking back up, haven't seen any impacts related to this latest phase of COVID.

And if we do, we'll be all over it since we talk very frequently with our customers on the inventory planning side of things. But it's worked through, you should start seeing the HA side of the business start picking back up in the second half. We're happy with where that's headed and things are on track as we laid out the fiscal year.

[Mark Smith, analyst]

Perfect. And then you guys gave a lot of info on the pipeline. It sounds like it remains very strong. Maybe just big picture, walk us through how selective you can be in deals and new partnerships? And how much of this is really people knocking on your door versus having to go out and work for these new partnerships?

[James Hall, executive]

Yes. I mean we're fairly selective in that. We want to make sure we're partnering with people that we can provide value to. And typically, we look at in Lifecore's niches in the complex-type formulation products. Whether they're viscous, whether they're complex to formulate or synthesize, those are things we look at. We want to make sure we add value. We want to make sure we're working with people that have experience and have a product with a market that we can support. And -- but really, we're agnostic. If it's something we can provide value to and we can partner with, we do it.

And historically, Lifecore's primary driver was our performance. Our project pipeline, as you can see, is 23 projects with 19 different customers. And so we have a lot of repeat customers. And we have some customers in that pipeline that are referred to us from people we've worked with.

What the investments tended to do is start focusing more of a hunting style for us to go out and actually find things that are in development and be more aggressive in going after them. We think that's going to be a key part to expanding the pipeline beyond where it is today.

[Albert Bolles, executive]

Yes. And Mark, based on our activity and our track record of high-quality facilities, the work and how well we execute at Lifecore and our relationships with FDA, we have a pretty high hit rate of folks that get in our pipeline that we end up keeping their business.

[Mark Smith, analyst]

Perfect. And that leads really to my next question. Just as we look at projects and commercialization. Any update there? It sounds like we've seen good things out of this project. Any updates there on those that have really advanced through approval and now in commercialization?

[James Hall, executive]

Yes. I mean the things that are in late Phase III, I mean, I can't report on data or anything like that. But I can tell you they are progressing well and on the time lines that we have laid out in our projections internally. You also heard me talk about 3 key FDA approvals. The first of those was for an ophthalmic product in 1 of our customers -- commercial customers product portfolio as it was the only 1 we were not approved to manufacture yet, but that approval will be key for us to continue to expand business with them moving forward.

The process approval was a key approval for not only Lifecore, but for our customer, and that allows us to really scale up to feed their -- not only their U.S. launch but OUS launch as well. And then the other key approval is our warehouse. We needed the additional space, temperature-controlled space for the -- to handle the increase in raw materials with the increase in our our manufacturing capacity. So all 3 of those support where Lifecore is heading longer term and were key approvals for us as we continue to grow.

[Mark Smith, analyst]

And then last question for me. I just wanted to ask one on the remaining piece of Curation. Those businesses look pretty solid. Can you just talk a little bit more and about the outlook and maybe insight into the timing or expectation on disposal of some of those assets?

[Albert Bolles, executive]

Yes. Well, let me talk a bit about avocado products. Mark, we launched this test market in Cincinnati on Guacamole now. We got very, very strong results. We've doubled our velocities, 54% of households that purchased the product came back. So we have a very high repeat rate of 20%. The gain of 4% of households had not ever tried the product. So our key issue has always been trial. And once they get trial, we have very strong repeat. So we're very excited about the Guacamole now product, and we're looking at converting that nationally in March, right to be completed before Cinco de Mayo.

We also launched a new product called Only Avocado, so just avocado without all the spices in it. And we were pleasantly surprised that we increased incremental sales by 60%. We brought a lot of new buyers in the category, and we are looking at extending that nationally here in the beginning of -- or the end of January, early February.

So we're excited about the things that we're doing on the avocado products business. And part of Project SWIFT has been for us to look at everything. And we're really pleased, the Board is very pleased with the sale and the price we got at $73.5 million on Eat Smart business that really helped us in the last 6 months to really get our balance sheet in a much better spot by taking down $100 million in debt. And we continue to work the process that we continue to work.

[Operator]

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

[Mitchell Pinheiro, analyst]

So I have a bunch of questions, but sort of a follow-up to what Gerry was asking, I guess, to Jim regarding capacity. You are currently at 10 million going to 22 million. Does that capacity -- does it kind of go up linearly or does it go up based on how your project pipeline? And when does the capacity actually -- is there any -- can you give us some time line on that? And then also, of the 10 million, what is your current -- what are you currently running? Are you at 50% of that 10 million or higher? Any color would be helpful there.

[Albert Bolles, executive]

Yes. Jim, do you want to take that for Mitch?

[James Hall, executive]

Sure, Mitch. So break down your question here. Currently, we're staffed and ancillary equipment to handle 10 million units. We typically try to keep our capacity ahead of demand and don't like demand over to reach more than 80% of capacity if we can help it to handle fluctuations in demand, especially on the upside. So this fiscal year, with everything we got running through from a commercial standpoint and later phase development fills are doing approximately 8 million units, maybe a little bit more than that.

And as far as fill rates from the capacity, it's not linear. It just depends on the approval rate and the demand of those approvals. But it's our goal to fill that capacity as fast as we can. We haven't provided any forward-looking guidance yet on how fast that gets filled. But the one thing I have talked about in the past that you've heard is that we're already investing in capacity beyond the filling capacity and the filling equipment beyond 22 million units. We have 2 fill lines on order now. It takes 3 to 4 years to get those in place. So that should give you some guidance in where we see and how fast we think we're going to need the additional capacity beyond 22 million units.

[Mitchell Pinheiro, analyst]

And so the $32 million that you're spending this year, does that -- that doesn't take you to the 22 million, does it?

[James Hall, executive]

Part of that is to fill out the 22 million units. Part of it is to go beyond for some of the longer lead time filling equipment. It's a relatively pretty even breakout from about 35% or so of our capital spend this year fills out the 22 million units. We'll need to continue to spend capital over the next few years to continue to fill that out, like I talked about, when we don't.

If lead times on equipment, like lab equipment or mixers or filters or things like that are a lot shorter lead times, so we don't spend the money until we need it and always keep our capacity to handle the 80% demand equation I talked about earlier. So the other parts of it are to go beyond 22 million units. We also spent capital this year to expand our development capabilities and expand our equipment offering there. And then the rest of the capital is just what we refer to as base or maintenance CapEx. So it's kind of broken out in those 4 buckets.

[Mitchell Pinheiro, analyst]

Do you think -- I know you're not giving forward guidance, but from a capital spending perspective, is next year going to be lower than the $32 million then this year?

[James Hall, executive]

John, do you want to cover capital at all?

[John Morberg, executive]

Yes, sure. Mitch. Yes, as Jim said, we haven't yet given out guidance on our forward plans. We're still looking at those. And I think we've said in the past, our capital is going to be somewhat chunky depending on the year and depending on the needs, depending on the lead times. So we're still kind of working on that plan to have and be speaking towards that very soon, though.

[Mitchell Pinheiro, analyst]

Okay. And then back to Jim, we have 23 projects in the pipeline. That was the same number as in Q1. The 2 new projects that you add, does that imply that 2 of the other projects moved into commercial production?

[James Hall, executive]

Yes. We had 1 move into commercial production. We had 1 preclinical product that is -- we don't consider active right now. So we took that off the list. It's not going away. It's just in a phase where we're not spending any time on it. And the 2 new ones that we added, we basically signed the agreements right towards the end of our first quarter and work really began this fiscal year.

And so yes, the number is the same as I reported in Q1, but the activity is a lot higher now because of the work actually started.

[Mitchell Pinheiro, analyst]

Okay. And then when it comes to HA and not in the fermentation side, but sort of as a strategic competency, core competency that you have, you had mentioned a year ago or so that about 60% of your pipeline was HA related. And that, to me, just as I read up on HA, it seems like that would be a big strategic advantage and a large element of your pipeline build, having the expertise with HA being a drug delivery system.

Is that where a lot of the activity you see coming from the HA part? Or is your pipeline going forward going to significantly diversify away from HA and related derivatives?

[James Hall, executive]

Yes. Actually, the -- with the current product mix in our pipeline, 70% of them utilize HA. It's a strong tool for us and really what really has built our capabilities in our niche and all is going to be very important. And really, I know in the several things we're talking with this potential projects, a good percentage of those kind of in that same neighborhood is what we're actively working on or HA.

We want people that are developing products with pharmaceutical injectable grade HA to come to Lifecore. The things we're working on, obviously, Lifecore is the major player in the HA world in the ophthalmic market for viscoelastic. We have several things in that pipeline. -- from the ophthalmic realm, age-related macular degeneration, dry eye advancements in viscoelastic formulations, those are things we're working on. But there are also quite a few things in management of general surgery, drug delivery, things like that, that utilize HA that are expanding beyond our historical ophthalmic focus.

A few things in orthopedics, cancer tumor therapy, things like that. So from a drug delivery standpoint. So it is a focus. You've heard me talk that we sell research HA out of the research community to several hundred different researchers annually. That kind of seeds the future development in the HA world, sometimes that takes several years before something materializes into the product, but we're still happy with where things are going in our pipeline.

I think longer term, more non-HA-based products will be joining that pipeline, not taking anything away from the HA, but there's just so much being developed in several applications that doesn't -- don't utilize HA but utilize our skill set. So I think it will start balancing out in the coming years.

[Mitchell Pinheiro, analyst]

And then just 1 more question probably for John and Al, perhaps. But when it comes to the corporate overhead and you talked about stranded costs and you're rightsizing the corporate structure, what -- right now, Lifecore absorbs about $5 million of your overhead. And is that -- when you think of it, when all's said and done, we're 9 months into the process as you get through some of the Curation expenses.

I mean where -- what does that $5 million look like? It's going to grow. Obviously, there's corporate expenses. But of your sort of other corporate expenses, where -- how much can you take that down? You mentioned the $2 million number in annualized savings. I wasn't sure how that fit in. If you could just talk a little bit about that, it would be helpful.

[Albert Bolles, executive]

Yes. Let me give you a high level, and I'll let John get into details with you. We just closed the Eat Smart business here in December. We're working through a reverse integration process right now, Mitch, where looking at rightsizing the corporate overhead, rightsizing the avocado business as we go forward.

So that's going to be a process that, as we stated, as we take 6 to 9 months. We've estimated around $2 million in stranded costs. But right now, we're really just working through the reverse integration. We have a TSA with a buyer that we're working through to make sure that we have a smooth quarterly transition of the business to them with no customer interruptions, no quality issues. So we're in the midst of evaluating all of those costs right now, Mitch.

John, anything you want to add there?

[John Morberg, executive]

Yes. I think you handled it pretty well there. And Mitch, we've also had this corporate structure. We've been operating a basically holding company with 2 different companies working underneath it. So for one point on Lifecore, we don't see changing that management fee or that allocation, certainly for the rest of this fiscal year, that's not impacting them. Instead, we'll see cost of the integration, reverse integration costs on the corporate line structure.

So we see an opportunity there as we reverse integrate to make that structure fit within the platform that we have. And we'll also see on the Curation side, those stranded costs also be reverse-integrated. So there's really kind of 2 buckets of potential savings here that we'll be working through over the next 2 to 3 quarters.

[Mitchell Pinheiro, analyst]

Okay. Helpful. And that actually prompted one more question. So we have right now about $97 million of debt. When -- obviously, you're going to generate cash. You still have another $15 million, $20 million of capital spending to do based on your 6-month spend so far. So when we get done this fiscal year, how do you think that's going to look? Considering the -- meeting your TSA and things like that, are we going to -- is it -- are we going to see sort of a cash flow breakeven for Curation for the rest of the year?

[John Morberg, executive]

Yes, let me first tell you about where I think that's going to end up. The $97 million will obviously go up from there with the CapEx spend. If you think about it, we're spending $32 million at Lifecore, and we said we would spend up to $7 million at Curation. That number is now down to about $1 million, obviously, with the sale.

So if you add that, we're also at a period of time we're investing in our working capital, and it's on the curation side primarily on the avocado products seasonally. This is where we're buying, picking and treating our guacamole. The same on the O Olive side. We're now into the picking and the crush season. And then obviously, we use that working capital over the summer months and into next year.

So right now, we see our debt somewhere around $130 million by the end of our fiscal year at the end of May. And from a cash flow perspective, you're right, on the Curation side, we see that being essentially flat. So our use of debt in the end is really, at this point, CapEx and working capital for the balance of this fiscal year.

[Mitchell Pinheiro, analyst]

And of that move at 30 -- if you get up to $130 million of debt, is that $33 million -- that incremental $33 million, like basically half the capital spending and half working capital increase?

[John Morberg, executive]

Yes, that's about right. And if you recall, we thought we would be closer to $180 million plus our last conference call for a year-end debt figure. So certainly, the balance sheet is getting a lot better.

[Operator]

[Operator Instructions] Our next question is from Anthony Vendetti with Maxim Group.

[Anthony Vendetti, analyst]

Okay. Yes, I just have -- most of the questions have been asked, but just a couple of quick follow-ups. Just on the strategy officer, I guess, Jim, is that the only hire you're intending to make or are you looking to -- is this the first hire in an effort to expand the sales force, expand the marketing to try to drive even more projects into that funnel?

[James Hall, executive]

Anthony, yes, this is the first call, the strategic hire. I wanted somebody to come in, could then do an assessment and work with the rest of my executive team and me to look at what our strategy is, where we're going, where we want to go and then what kind of gaps we have within the organization across the board, right, with project management, development services and then marketing and sales to support an expanded effort to bring more and targeted opportunities in here.

So we're actively putting that together. There will be more, and we have that plan for later this fiscal year and early next year. But the first step was to get that position filled and we've done that and are running full speed ahead.

[Anthony Vendetti, analyst]

Okay. So just before I have a quick question on the gross margin, just do you have a number of people that you're targeting to hire? Is it a couple more? Is it 10 more, any range? Or is that process still ongoing to determine?

[James Hall, executive]

Yes, the process is still ongoing to determine. We've made some estimates that I don't want to talk about yet until we actually do it and finish the analysis, but it's been taken into account for our operating plans moving forward and will for future fiscal years as well.

[Albert Bolles, executive]

Yes. Anthony, we also added a -- Anthony, we also add head of HR, we brought in a real talented people pro. So that's helping Jim build out the team more. And as you said, he's working through that process right now and more to come later. Those were the 2 big hires that we just did.

[Anthony Vendetti, analyst]

Okay, great. And then just lastly -- okay. Excellent. And then just lastly, on the gross margin, a little bit better than we were expecting. Is that -- should that be considered the new base sort of a mid -- low to mid-30s or mid-30 combined, I guess, corporate gross margin. Is that how we should look at the combined business at this point?

[Albert Bolles, executive]

Yes. John, you want to take that?

[John Morberg, executive]

Yes. I mean, look, on the gross margin side, obviously had a great quarter and so much of that had to do with the revenue mix for the quarter. We had very strong development services revenue that really drove the gross margin story in the quarter. So and I think 1 of the interesting things that Jim could speak to is what he's trying to do in balancing out the revenues for the year with a lot of our customers that would help generate kind of a more consistent profile in the gross margin and in the EBITDA margin side so.

I don't know, Jim, you want to speak to that?

[James Hall, executive]

Yes. I mean, in general, we had a strong margin performance in Q2 related to shifting of some of the development work into that quarter. But overall, we still manage the overall blend of the business and the margins to be in the upper 30s, where we've historically done, and that's where we should come out this fiscal year as well.

[Operator]

We have reached the end of the question-and-answer session, and I will now turn the call over to Dr. Bolles for closing remarks.

[Albert Bolles, executive]

Yes. We are really looking forward to the new business here as we look forward to higher margin, more profitable and a far more stable, high-growth business. So we're very excited about the future here at Landec.

So thank you again for your interest in Landec Corporation and your participation on the call today. We look forward to talking to you once again when we release our fiscal third quarter results. Thank you.

[Operator]

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