Landec Corp

F:LDE

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, and thank you for joining Landec's Fiscal 2022 Third Quarter Earnings Call. [Operator Instructions] Now I'd like to turn the call over to Jeff Sonnek, Investor Relations at ICR.

[Jeff Sonnek]

Good afternoon, and thank you for joining us today to discuss Landec Corporation's third quarter fiscal 2022 earnings results. On the call today from the company are Dr. Albert Bolles, President and Chief Executive Officer; Jim Hall, President of Lifecore; and John Morberg, Chief Financial Officer.

By now, everyone should have had access to the press release, which went out today just after 1:00 p.m. Pacific or 4 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, I'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 is important to note that the company's actual results could differ materially from those projected in such forward-looking statements.

Additional information concerning risk factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the company's filings with the SEC, including, but not limited to, the company's Form 10-K for fiscal year 2021. Copies of these filings may be obtained from the company's website.

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

[Albert Bolles, executive]

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

In fiscal third quarter, our Lifecore business grew revenue by 28% to $34.8 million. And we are excited to announce that we added 2 new projects to the development pipeline. Business returned to more normalized rates of revenue in fiscal third quarter following the drawdown of channel inventory that our customers worked through in fiscal first half.

As a reminder, this was expected and was a result of pandemic-induced delays to elective procedure volumes. We expect that the reversion to a more consistent operating environment at health care facilities will also create more consistent ordering patterns for Lifecore's products going forward.

However, I note that the degree of the rebound in fiscal third quarter exceeded our expectation. As a result, delivery timing and mix weighed on adjusted EBITDA generation in fiscal third quarter. Nonetheless, we expect this to reverse in fiscal fourth quarter, and we are confident that we are on track to achieve our guidance for full fiscal year 2022.

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

As we look ahead, we believe this business is well positioned for long-term growth. Our high-pressure processing or HPP investment is opening inroads with major customers for private label placements, which is an area of the industry that is experiencing recent growth that is more than 2x that of the industry as a whole. We think this asset has significant value. Our brands have a stronger consumer reception versus our competition. We have doubled the amount of repeat purchasers compared to our competition, and we have a best-in-class efficient and automated production facility in Mexico.

As it pertains to Project SWIFT, our team is working through the reverse integration process following our December 13 sale of our Eat Smart fresh packaged salad and vegetables business and making excellent progress. We remain focused on maximizing the value of our remaining assets, which we believe are each well positioned in their respective markets, both for avocado products and premium olive oil and vinegars.

Our Board and I remain committed to maximizing shareholder value as we seek to optimize our remaining Curation Foods assets, deploy excess cash toward debt repayment and fund growth initiatives to meet anticipated demand from Lifecore's accelerating development pipeline.

I also want to take a moment to characterize our financial reporting for the fiscal third quarter as well as our guidance for the balance of the fiscal year. With the sale of Eat Smart in fiscal third quarter, we have shifted that business into discontinued operations for the fiscal year-to-date period.

As you may recall, during the fiscal second quarter, we provided pro forma guidance for our Curation Foods segment, which assumed the elimination of the Eat Smart contribution for the full fiscal year as if it had been sold at the beginning of the fiscal year. As such, our guidance for the full fiscal year 2022 remains in place and reflects the continuing operations of the go-forward businesses within our Curation Foods operating segment.

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

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

[James Hall, executive]

Thank you, Al. We continue to operate in a dynamic CDMO industry with strong fundamentals, and Lifecore is perfectly positioned to take advantage of the growing CDMO opportunities to deliver attractive financial returns to all of our stakeholders.

We are a beneficiary of ongoing industry trends towards outsourcing of new drug development. Further, our syringe and vial filling capabilities align perfectly with the favorable trends in new injectable drug applications that are utilizing these capabilities. In fact, approximately 55% of all new drug applications are injectables. And prefilled syringe demand is growing at a 13% compound annual rate.

Given the industry's limited injectable drug manufacturing capacity, we intend to take advantage of this incredible opportunity to fill unmet demand with our existing capacity that we've been investing in over the past few years.

Our development pipeline continues to be very strong, which is supported by the initiation of new projects and advancement of existing projects. In the fiscal third quarter, we initiated work on 2 new early-phase projects, which expands our development pipeline to 24 projects with 21 different customers.

These projects are spread across early phase clinical development with 6 projects, Phase I and II clinical development with 9 projects and Phase III clinical development and scale-up commercial validation activity with 9 projects. We also continue to make progress with advancing projects within our pipeline with one early phase project advancing to the Phase I and II stage and one of our late-phase scale-up projects advancing to full commercial stage.

Beyond our existing pipeline, we continue to push ahead and convert new potential engagements. We have dozens of opportunities that we are pursuing, which span multiple end markets, multiple classes of drugs and medical devices and with an assortment of companies, both large and small.

As you may recall, we invested $1.6 million into the P&L this fiscal year to fortify our sales, marketing and development resources in an effort to expand our reach with new customers and to increase our development services, which ultimately allows us to continue to expand our pipeline and to open new sales channels that expand and complement our existing capabilities. There's no question that this has had an immediate impact to the expansion of our prospective pipeline of opportunities.

Our expertise in complex and viscous materials and our world-class quality management system that supports drugs, biologics, medical devices and combination products enables us to stand out as a value-added and specialized leader in the CDMO industry. We continue to feel confident about delivering a multiyear acceleration in our revenue growth trajectory, which is supported by known projects within our existing pipeline. As we work to attract new customers and projects, we'll further enhance our long-term growth opportunities.

In terms of operational updates, we continue to advance our CDMO platform in several respects. Quality and safety are hallmarks of the Lifecore culture that we take seriously and have been critical in building trust with our partners over nearly 4 decades. In February, we received recognition from OSHA for our operating sites 2 and 3, which now joined site 1 as [ min SHARP ] certified facilities. This is a great win for our quality and safety program, and I want to recognize our team for their long-term commitment to safety and excellence.

We've been working on an expansion and enhancement of our quality control labs since January 2022, and we are making great progress with completion targeted for May of 2022. This expansion enhances lab capacity and capabilities and improves workflows for both our team and products.

The lab expansion will be combined with the implementation of our new laboratory information management system in June of 2022, which we expect to provide additional enhancements to our analytical development and data visibility with our clients. Again, this is another example of the sort of continuous operational improvement that drives Lifecore and allows us to be more effective partners with our customers.

Finally, in past calls, we've shared some initiatives around human resources and talent development, which we call Lifecore University. Since its initiation in late 2021, we've been able to expedite the training and onboarding process for key technical manufacturing level positions.

As an example, we have reduced the time it takes to qualify aseptic filling and formulation technicians by 80%, which plays a key role in ensuring Lifecore has the necessary resources to support the growth of our business in a timely and effective manner.

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

From a capital investment perspective, we continue to focus on maximizing the revenue-generating capacity within our current infrastructure. In addition, we are looking to the future to source, qualify and optimize our facilities and equipment to ensure we meet our expected capacity needs to drive continued long-term profitable growth.

To this end, we've been able to shift approximately $5 million of CapEx to next fiscal year and now expect our CapEx spend to be approximately $27 million for fiscal 2022. This keeps us on track to expand our operational filling capacity from our current 10 million units to 22 million units and beyond to meet expected demand with our pipeline.

In summary, we are very excited about the excellent position that we are in today. We continue to take advantage of the strong industry trends, and our investments in capacity will allow us to continue to generate strong, sustainable growth in years ahead. Now I would like to turn the call over to John.

[John Morberg, executive]

Thank you, Jim. As we anticipated, Lifecore had a very strong fiscal third quarter. The business realized total revenues of $34.8 million or a 27.9% increase versus the prior year period, driven by a 33.1% increase in our CDMO business and a 16.4% increase in our fermentation business, which is consistent with our expectation for improved sales in the second half of fiscal 2022 as we move past the channel inventory drawdown. However, as Al noted, the step-up in fiscal third quarter revenue was greater than anticipated due to timing of deliveries to customers. Furthermore, the complexion of those revenues was geared toward some of our lower-margin SKUs, which resulted in a gross margin decline of approximately 540 basis points versus the prior year to 37.1%.

In turn, this resulted in segment-adjusted EBITDA growth of 5.9% to $8.6 million for the quarter, representing an adjusted EBITDA margin of 24.6%. The combination of timing and mix is expected to largely reverse in fiscal fourth quarter, making for lower relative revenues and higher relative adjusted EBITDA in fiscal fourth quarter as compared to our reported fiscal third quarter results.

Given the timing nuance, it's more informative to look at the fiscal second half, which, based on the year-to-date performance and the guidance we've reiterated today, implies fiscal second half revenue growth of 10% to 15% to meet our full year guidance that calls for growth of 7% to 10%.

Similarly, for segment-adjusted EBITDA, our year-to-date results and guidance implies a second half decrease of approximately 7.5% to 1.5% to meet our full year guidance that calls for growth of 6% to 10%. The primary variable here is gross margin, which is expected to decrease by approximately 400 basis points versus the prior year period in the fiscal second half.

However, our guidance implies a sequential improvement from fiscal third quarter to fiscal fourth quarter of approximately 200 basis points. Again, the normalization of our HA business in second half and the margin mix impact largely explains this phenomenon. Nonetheless, as the figures imply, we are well on our way to achieving our full year guidance, which we are reiterating today.

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

As a reminder, our continuing operations reflect the go-forward segment, which is now comprised of our avocado products business, our O Olive Oil & Vinegar business and BreatheWay. Together, this represents approximately $75.5 million of annual revenue at the midpoint of our segment guidance, with avocado products representing approximately 85% of the mix. With that, I'll make just a few comments on the Curation Foods segment results versus the comparable prior year period.

First, revenue increased 4.6% in fiscal third quarter to $18.3 million. This was comprised of a 32% increase in sales velocity from O Olive and a 1.9% increase in avocado products. Curation Foods generated an adjusted EBITDA loss from continuing operations of $0.9 million compared to an adjusted EBITDA of $1.2 million in the prior year period, driven by temporary margin headwind associated with inflation, which is expected to be offset by price actions in fiscal fourth quarter. Thus, we remain confident with our full year guidance for the Curation Foods segment.

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

Now turning to our balance sheet. Our net bank debt on a reported basis for fiscal third quarter as of February 27, 2022, was $117.6 million compared to net bank debt at the end of fiscal '21 of $192.7 million, which reflects the repayment of $67.9 million in borrowings following the Eat Smart disposition. However, I'd like to emphasize that we've repaid a total of $109.1 million in borrowings so far this fiscal year through the utilization of the net proceeds from our Windset investment sale and the Eat Smart disposition.

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

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

[Albert Bolles, executive]

In summary, we are marching ahead and have made significant progress in improving our balance sheet through some strategic actions. We now have the advantage of a significantly more stable cash flow stream due to an improved margin structure, and we believe our growth profile is also greatly improved with the focus we brought to the business through Project SWIFT.

There's still work to be done, but we have a solid foundation for our team to deliver consistent operating results that can be better appreciated by the investment community as we work to maximize shareholder value.

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

[Operator]

[Operator Instructions] Our first question is from Mark Smith with Lake Street Capital Markets.

[Mark Smith, analyst]

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

[Albert Bolles, executive]

Yes. This is Al. John, do you want to take that?

[John Morberg, executive]

Yes. Mark, thanks for the question. I think when you look at margins, you really have to step back to the beginning of the year. As you know, we had to work through the inventory rebalancing due to the fewer procedures being performed during COVID. And that created a mix and timing of normal ordering patterns for the first half, a majority in our ophthalmic viscoelastic products.

And as Al said earlier, fortunately, that's now all been worked through, and we're back to more typical ordering patterns here in the second half. But as a result, our first half gross margins were approximately 280 basis points higher this year than in the prior year first half. And then that, in turn, also created back half change to our gross margins in comparison to the prior year second half due to timing and mix.

So overall, I think it's best, which I said in my remarks to really view gross margins in Q3 combined with Q4 since we're reiterating guidance today. And as you look at Q4, we're now estimating Q4 margins of approximately 42%, which is a sequential increase of 500 basis points, about 150 to 200 basis points less than the prior year, assuming the midpoint of the guidance range.

And this would then imply second half gross margins in the 39 percentages and full year in the 38 percentages, which is consistent with our expectations. So I think that, Mark, is probably the best way to look at it. You've got to kind of look at the back half, and I think pretty much aligns with our expectations.

[Mark Smith, analyst]

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

[John Morberg, executive]

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

[Mark Smith, analyst]

Maybe one last one from me. I didn't do the math. Maybe I'll ask you to do it for me quickly. The 2 projects that were added, were these with new customers or existing relationships?

[James Hall, executive]

This is Jim. Yes. Sorry, Al, do you want me to take that?

[Albert Bolles, executive]

Yes, go ahead. Go ahead, Jim.

[James Hall, executive]

All right. Mark, yes, they're with new customers. So the total project load now is at 24 with 21 customers. So we're really excited with the amount of activity we have in our pipeline right now. I think we're really seeing the benefits of the investment that we've made into our sales and marketing and development efforts to enhance that.

Not only with the addition of new opportunities, but the advancement of products within the pipeline moving through the various stages of development continues to go very well. And really, we're also seeing a continuous build in the amount of projects that we're evaluating. And that continues to go well with a lot moving forward and close to signing deals. So a lot of activity, it's very positive, and I think we're really paying -- or seeing benefits for the investment that we've made.

[Operator]

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

[Mitchell Pinheiro, analyst]

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

[Albert Bolles, executive]

Yes. Jim, why don't you go through the mix one? Or John, either one.

[John Morberg, executive]

Yes. Mitch, it's primarily on the CDMO side. Again, back to our kind of the legacy of our business, the ophthalmic viscoelastic products really which were impacted in the first half with the inventory level. So it really has to do with the CDMO side.

[James Hall, executive]

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

[Mitchell Pinheiro, analyst]

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

[John Morberg, executive]

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

[Mitchell Pinheiro, analyst]

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

[John Morberg, executive]

Yes. Mitch, we have kept the overhead allocations or the corporate allocation essentially the same for Lifecore. We've not adjusted that. And the only thing we've done is we really have now taken what used to be under Eat Smart and have now allocated it back really to the corporate overhead line or corporate other segment line.

[Mitchell Pinheiro, analyst]

Okay. The -- switching to Curation. So you still have that services contract with Taylor. Is that still happening? What's the status of that?

[Albert Bolles, executive]

Yes. Mitch, that's in the process of winding down for us right now. So we still have it, but I would say that it's pretty well winding down for us here in the next 2 months.

[Mitchell Pinheiro, analyst]

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

[Albert Bolles, executive]

Yes. John, do you want to clarify that?

[John Morberg, executive]

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

[Mitchell Pinheiro, analyst]

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

[John Morberg, executive]

That's correct. And as Al said, the reverse integration that we've been doing has been ongoing. And so we've been going through essentially a rolling riff of employees that were associated with the Eat Smart business. We're very happy that many of them did get jobs with the buyer itself.

And -- but we've also had to let folks go as we're rightsizing for the size of the business that we have. And that will continue. As I think I said last quarter, we'll probably see that for a couple of quarters as we rightsize because we still have to operate the remaining businesses of $75.5 million of revenues, and we'll continue to, again, rightsize that over the coming quarters.

[Mitchell Pinheiro, analyst]

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

[Albert Bolles, executive]

Yes, Mitch. So we run a model. The volatility, I think you're talking about, would be in fruit costs. We run our model. So we buy our fruit when it's low cost. So typically, the plant starts to operate late August, early fall when the fruit is at its lowest price, and then we put away fruit as much as we can. Our yields are very good. We had record yields this year.

We've gotten hit with inflation like most companies have here in the third quarter. However, we've been very aggressive on taking pricing. We took around an 8% price increase. 95% of our customers accepted it. And that is going to start to roll in here in Q4. It takes 90 to 120 days to have pricing stick in the food retail side. So -- but we're really pleased with how the pricing has gone in.

We've got some exciting things that we're doing on the operational side to improve our efficiencies there. And I would like to also mention that the HPP side, we're starting to get traction here on private label. And in fact, April 1, we just shipped to a major private label provider, [ our squeeze ] for the first time in private label.

So we have a lot of positive momentum going on. So it's exciting. The private label business is growing twice as much as the branded business. We just were not in a position before this year to go actively bid on private label since they declared the HPP technology. So we all feel really good about where the asset is. We feel really good about the growth aspects for that asset.

[Mitchell Pinheiro, analyst]

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

[Albert Bolles, executive]

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

[Mitchell Pinheiro, analyst]

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

[Albert Bolles, executive]

John, do you want to answer that?

[John Morberg, executive]

Yes. Sorry, Mitch, I was on mute here. No, it's allocated to the corporate, not the Curation.

[Operator]

Our next question is from Anthony Vendetti with Maxim Group.

[Matthew Bullock, analyst]

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

[Albert Bolles, executive]

Yes. Well, as you know, at the beginning of the year, that was part of our strategy to invest more in sales and marketing to drive that part of the business. And I think we, myself, Jim and John, were very pleased with the impact that, that investment is having for us. And I'll let Jim add some more color around the 2 customers that we have landed this year.

[James Hall, executive]

Yes. Thanks, Al. So really, what the initial investment was focused on was expanding our sales and marketing focus. We had 11 key positions identified that involved sales, marketing as well as development to handle and broaden our bandwidth and our development capabilities. We're in very good shape. We've added those key positions. And what we're starting to see is more activity within the pipeline. So as an example, the 2 we just added are new customers. They're not customers that we've worked with in the past.

And I think what we're more excited about is the number of potential opportunities that we're evaluating. So the group is able to take advantage of the market tailwinds that we've talked about and get more opportunities to the table and in the door. And year-over-year, from a development standpoint, we're seeing nice gains in our development revenue and overall CDMO profile.

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

[Operator]

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

[Michael Petusky, analyst]

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

[John Morberg, executive]

No. Actually, I think it's going to be closer to $13 million for $27 million overall. I have nothing right now really lined up for Curation. We're not spending capital there. If we did, it would be in the few hundred thousand range or something. So overall, that would put us at about $31.5 million for the full year for everything combined on what we spent even back during the Eat Smart. So -- but I think the focus one, to be honest, is the $27 million for Lifecore, $13 million for Q4.

[Michael Petusky, analyst]

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

[John Morberg, executive]

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

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

[Michael Petusky, analyst]

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

[John Morberg, executive]

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

[Michael Petusky, analyst]

Okay. All right. I guess, Al, I want to understand on the 8% increase that you were able to get 95% of your Yucatan customers to accept. How is that generally -- or if you have any sense, how does that sort of flow through to the end-user customer?

I mean does that then get sort of marked up again by the grocery store? How -- like essentially, what's the customer going to see on their end as far as a price increase? I mean is that going to be like low double digits? Is that going to be 8%? I mean what -- do you have any sense for that, do you have any sense for that, in order to get a sense for demand?

[Albert Bolles, executive]

It's between 8% and 10% thereabouts, and that's pretty much in line where our competition is. So it's mainly to cover inflationary issues that we're seeing. And we also evaluate everything for cost, as you know.

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

[Michael Petusky, analyst]

Okay. And I guess just one quick one for Jim. Jim, when you think about Lifecore, the facilities, what you guys are doing in terms of building out your capabilities, I mean, is it reasonable to think over the next couple 2, 3 years that the projects may be 35 or 40 projects?

Or how do you sort of think about that as you sort of think over sort of the multiyear investment you're making there and what you sort of hope to be running through that facility over the next couple of years? And it's not formal guidance, I'm just trying to get a sense of what's reasonable to think about.

[James Hall, executive]

Yes. Thanks, Mike. That's a good question. And obviously, we're setting the organization up to handle more and more and more without building too far ahead. But really, it's the whole reason we're putting in a more targeted sales and marketing approach to get more people to Lifecore and get more of them onboarded.

And while it's hard to project specific numbers, I can tell you we have targets every year on new projects to add. What's hard to characterize is what may fall off the existing pipeline. But the overall goal is to get that continuing to increase.

It wasn't that long ago, 5, 6 years ago, we had less than 5 projects. Now we're at 24. We have out of the 40-plus that we're currently evaluating, I think there's somewhere between 4 or 5, 6 that are closer to onboarding that we hope we can. They meet our criteria in what we -- in our niche offering that we have.

So the number will go up. It's hard to say how much, but the overall goal is to build that pipeline to make sure we're continually backfilling and, then more importantly, making sure the organization is built to handle it and support the increase in projects.

[Michael Petusky, analyst]

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

[James Hall, executive]

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

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

[Michael Petusky, analyst]

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

[James Hall, executive]

We continually refine the time line and need for capital. It's just a balancing of capital. Most of that will shift into next year, but we're continually doing evaluations on when it makes sense to pull the trigger on capital based on what we're seeing.

It's not a reduction in capital, and it definitely doesn't have an impact on us meeting our capacity needs for growth objectives. But a good chunk of that will be in next year. But like I said, we haven't provided guidance into what next year's CapEx is yet, but that will come as part of our FY '23 plan.

[Operator]

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

[Albert Bolles, executive]

Thank you again for your interest in Landec Corporation, and we look forward to talking to you once again when we release our fiscal fourth quarter results.

[Operator]

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