Landec – Curation Foods Missteps & Profitability Outlook
– 17 May 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Greg Skinner (GS)
Former CFO at Landec Corp
Agenda:
1. Landec (NYSE: LNDC) portfolio overview and new product innovation within Curation Foods
2. Project Swift execution challenges
3. Capitalisation on plant-based ingredient trends
4. Input cost inflation and profitability outlook
Contents
Q: Could you give an overview of Landec’s Curation Foods business, highlighting its main categories?
Q: Could you elaborate on Landec’s entry into fresh-cut vegetables to implement its BreatheWay
technology?
Q: Why would you say Landec has been unsuccessful with Curation while so many other produce players
have succeeded with innovations to preserve shelf life?
Q: When might things start to go downhill for Curation? You mentioned that Landec scaled the business
revenue up to USD 400m. Why not sell it and continue to licence out the technology now that it has been
proven?
Q: When do you think Landec realised that there are no synergies in the Lifecore business? You mentioned
that you tried to veer away from it.
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Q: One of the key requests following Landec’s activist investor pressure was to split the company and
increase shareholder value. Why do you think this has not happened, even with an activist pushing for it? If
the company can survive an activist investor, is it likely to ever happen? What could be the timeline? Could it
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be another 10 years?
Q: What do you think is holding back Curation’s profitability?
Q: Would you agree that Curation is just a commodity producer despite Landec marketing it as an
innovative plant-based food company?
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Q: Why do you think Curation has struggled when consumers are much more health-conscious? People want
fresh vegetables, salads and even guacamole – given it is so expensive at Chipotle these days – but Curation
seems unable to capitalise on this higher demand. Is the disconnect around the retailer relationships with big
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retailers who eventually sell the products?
Q: Does Curation get a better margin on its products when crop prices are higher or is it unable to subsidise
the volatility of the commodity market more broadly?
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Q: Curation has some flexibility to amend contracts and pass on price increases, as other suppliers and
produce companies do. Are there issues with Curation’s contract structure with retailers where it was not
able to negotiate better terms or where it can pass on price increases to the retailer in certain situations?
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Q: Are the products that Curation sells to retailers mostly private label? How would you describe the product
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mix between private label and branded?
Q: Could you elaborate on Curation’s retailer relationships? How much control do retailers have? How do
other industry players perceive the strength of retailers that control pricing or distribution, given this is
likely a fundamental, strategic problem for commodity suppliers?
Q: What do you think Landec should do over the next 1-2 years with its Curation and Lifecore businesses?
Should it leverage capital from Curation to further expand investment and R&D in Lifecore? Should it aim
for a split as soon as possible?
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Landec – Curation Foods Missteps & Profitability
Outlook
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Landec – Curation Foods Missteps & Profitability
Outlook. I’m Nyree Hinton, and I will be facilitating today’s Interview with Mr Greg Skinner, former CFO of
Landec Corp.
Greg, before we get started with today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information, and agree not to disclose any such
information, or any other information which is confidential, during this Interview?
GS: I agree.
NH: Could you start with overview of your background?
GS: I actually started as an accountant with Arthur Andersen way back in 1983. Did that for about five years,
manager level, I was going to be transferred, so I switched to outside of public per se, and jumped ship, and
went to Litton Industries, and was the Head of the West Coast Region Audit for about a year. I got tired of
travelling, took a job with one of their subs up here in the Bay Area, been up in the Bay Area ever since, for
about 33 years. Worked for that sub, Litton Electron Devices, probably about five years, and realised there was
just no upward mobility. Took a job as a corporate controller at a company called DNAP, and it was an ag
biotech company. They got acquired a couple of years later. That’s when I came to Landec as the Corporate
Controller, I took the Landec job vs others, because I could see a pathway to becoming the CFO, which
happened about three-and-a-half years into my tenure. I was CFO from December 1999 until I left in January
2020.
[00:02:07]
Q: Could you give an overview of Landec’s Curation Foods business, highlighting its main categories?
GS: Landec is in primarily three categories within food. Salads, Landec actually developed and created the
Sweet Kale Salad, and it was unique in the fact that it was really the first salad, I think it was the first salad out
there, that didn’t have any lettuce. No lettuce, no spinach, none of the traditional salad mixes. It was a
vegetable salad, so it had broccoli, it had brussels sprouts, and I’m talking about the julienne stalks of the
broccoli. Brussels sprouts, radicchio, kale obviously. It had a topping, it had a dressing, so it was a kit, and it
was unique. It was the only one like it out there, and it became the number one salad in North America very
quickly, and I think it still holds that today. I can’t say that for a fact, like I said, I’ve been gone for well over a
year now, but if it’s not number one, it’s one of the top two or three for sure. We, or they now, I guess I have to
say they, developed a whole line of those types of salads. You have an Asian salad, you have a Southwest salad,
there’s a whole line of vegetable-based salads. That is their primary business, that’s the one that has the most
revenues.
Number two, from a revenue standpoint, is probably green beans. It might be the guacamole now, but I’m
assuming it’s probably still green beans. We acquired a company back in 2013 called GreenLine at the time,
and they were doing, on the East Coast, exactly what we were doing on the West Coast, they were just doing it
with green beans. They were getting fresh green beans, putting them in a package and selling them to retail.
We acquired them, and that got us into the green bean business. Then, about three years ago now, we acquired
Private and confidential 3
a company called Yucatan, they’re actually based in the central part of Mexico, and they make guacamole.
You’ll see the Yucatan guacamole and Cabo Fresh, those are their two brands in stores throughout North
America. We acquired that because guacamole is one of the fastest-growing categories in retail.
Those are the three main businesses. The historical, fresh-cut vegetable business, which is the whole reason
we ended up ultimately buying Apio way back in 1999, was to get our BreatheWay technology into the
industry. They had a fledging value-added business that was based on our technology, and it just made sense
to buy them and grow that business, which we did tremendously, I think it was about a USD 13m business
when we bought them, and the last I heard, it’s over a USD 400m business, so it’s grown tremendously over
the years. That, the fresh-cut vegetable piece of the business, is where all the volatility came in with weather,
sourcing issues, so on and so forth, and we took that from a USD 300m business to, I bet you it’s down to a
USD 60m-70m business these days. There are still some retailers out there that wanted us to continue to
supply them with that, but I think it’s a pretty small group now, and I think that they’ve now got it to a point
where it’s pretty manageable from a weather-risk standpoint.
[00:06:29]
Q: Could you elaborate on Landec’s entry into fresh-cut vegetables to implement its BreatheWay technology?
GS: Yes. The BreatheWay technology, we developed it back in the ’90s. The first real company to adopt the
technology and take it to market was Apio, the former name of Curation Foods. Their only customer at the
time was Costco, and this technology is unique, it’s patented. Some of the patents have probably expired, but
there are so many trade secrets around it, and it would cost anybody millions and millions and millions of
dollars to try to replicate it, they’re not going to do it. I was never worried about that as a CFO, of any
competition coming in and being able to knock off our technology. It’s a technology that, it’s based on
permeation really, and it has to do with, when produce is in the ground, it’s taking in CO2 and giving off
oxygen. Once it’s picked or harvested, just the opposite happens, it’s called respiration. It’s giving off CO2 and
it needs oxygen. When you put that into a bag, the CO2 is building up in that bag, so you need a mechanism to
get the CO2 out and the oxygen in. Produce wants to live in a way different atmosphere than what we’re
breathing, so broccoli, for instance, wants to be in an atmosphere of 8% CO2, 3% oxygen. What our technology
does, is it allows so many parts of the CO2 out of the package, through the hole in the membrane, and so many
parts of O2 in, oxygen in, so that you could get that atmosphere of 8%, 3%, When produce is living in its ideal
atmosphere, you’re slowing down the respiration rate, so you’re slowing down the dying process, and that’s
how the technology works.
It’s all natural, Mother Nature helps us out, because Mother Nature wants to live in equilibrium, so the CO2 is
constantly wanting to get out, and the oxygen is constantly wanting to get in, and we just regulate the flow.
That was a technology that we thought we were going to be able to sell to everybody in the industry. We were
apparently a decade before our time, because you would knock on a door of certain big guys, banana
companies, and they’d look at you and say, “Why the heck would we want to extend the shelf life of a banana?
Our number one customer is the trash can.” That was the commodity mentality back then, when we discovered
the technology. That’s why we ended up ultimately buying Apio, now Curation, so that we could get our
technology into the industry. There’s the background of the technology.
[00:09:44]
Q: Why would you say Landec has been unsuccessful with Curation while so many other produce players have
succeeded with innovations to preserve shelf life?
GS: We were obviously successful, because we took it from USD 13m in sales to well over USD 400m. We
elected to, once we acquired Apio, we were trying to sell it to the entire industry, that’s before we bought them.
Once we bought them, we wanted to own and maintain the technology, so we did. We did a few licence deals to
companies that did not compete against us. Windset Farms, for instance, which, by the way, Curation owns
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27% of it. They’re in greenhouse still, in tomatoes, cucumbers and peppers. We’re not in any of those products,
so no issues licensing our technology to them. Licensing outside of the United States, in all of Curation, I guess
we do have some going out to Canada, a little bit down to Mexico, so let’s say outside of North America, we’re
not going to be shipping vegetables from here to Europe, or Asia, or anywhere else for that matter, so sure,
licence to them. I don’t know of any licenses that they have outside of North America. They may have been
successful since I left, I know that’s certainly something that we were looking at. That really then became the
focus of the BreatheWay technology, give us a competitive advantage in the lines that we were in within
Curation, but then licence to others in areas that we were weren’t competing.
[00:11:58]
Q: When might things start to go downhill for Curation? You mentioned that Landec scaled the business
revenue up to USD 400m. Why not sell it and continue to licence out the technology now that it has been
proven?
GS: I’m not saying that’s not what the current group is thinking. I could tell you that, for years, people asked,
and you can go back and look at past conference call scripts, I think we’ve even discussed this within the script,
a Q&A session the day of the conference calls are, “Why are these two businesses together? We just don’t get it.
Where are the synergies between these businesses?” I can tell you right now, there are none. There’s no
synergy. When we acquired Lifecore, we thought that there might be some synergies with our Intelimer
Technology, which was the genesis of Landec, it was the side-chain crystallisable polymers that change their
physical characteristics based on a change in temperature, very pre-set change, so I could go from a solid to a
liquid at 60, and because it’s a physical change in the polymer, not a chemical change, if it goes back to 59, it’d
go back to being a solid, so it’s infinitely reversible. Think of water, it’s called a phase transition. Water can go
from ice to water, to ice, to water, to steam, to water indefinitely. This polymer is the same thing, so it was very
unique.
We thought that maybe there were some synergies between encapsulating their HA, which is a polymer by the
way, hyaluronic acid, hyaluronan, is a polymer, with our Intelimer polymers. If you’ve ever had an HA shot,
one of the issues is usually it only works for a few months, and you have to go back and get another shot. We
thought that maybe there was a long release, because one of the things about the Intelimer polymer is it’s a
matrix system, and you can encapsulate molecules within that system, and then you could slowly release them,
either based on time, temperature, whatever, and have a shot that could last a year or two years. Once we
investigated that some more, it was going to be very, very expensive to go down that route, and there was no
guarantee you were going to get FDA approval, so we decided not to do that.
Therefore, the two companies just operated independently. Lifecore is in Chaska, Minnesota, just outside of
Minneapolis. It’s a biomaterials company, it started with HA, it discovered the fermentation of HA back in the
mid ’80s. That was unpatented until 2002, and then subsequent to that they’ve got into drugs, they’ve got a
few different drugs. The partners had a few different drugs. Lifecore, it’s a CDMO, so it’s a contract
development and manufacturing organisation, where someone will come to Lifecore with a problem. If you
just need to have water filled in a vial or a syringe, you don’t need to come to Lifecore, but if you have
something that’s very tacky, hard to handle, difficult to handle, and you need it to go into a syringe to come out
a 16-gauge needle, that’s when you come to Lifecore. They’ll sit and spend years in some cases developing the
product, getting it to a point where it can be manufactured and put into a syringe, and come out the other end.
HA was where it started, it still has HA. If you get cataract surgery in the US, and then you get the drops in
your eyes that keep your eyes lubricated and away from infections, that’s most likely ours, since Lifecore, I
think, has a 85% market share in the US, and over 50% in Europe. More recently, they’ve gotten into drugs.
The same idea, somebody comes with a problem, they figure out how to develop it, manufacture it, put it in a
syringe or a vial, and sell it to their partners, who then turn around and sell it to the hospitals, doctors,
whatever, of the world. The two businesses, there are no synergies. The food business is based down in Santa
Maria, and Lifecore is based in Minneapolis.
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[00:17:12]
Q: When do you think Landec realised that there are no synergies in the Lifecore business? You mentioned
that you tried to veer away from it.
GS: Pretty early on. Within the first couple of years. When we made the decision that it was going to be way
too expensive, we knew the food business and the biomaterials business had zero synergies on the day we
bought them. We thought that the biomaterials business and Landec, the polymer technology potentially had
synergies, but we knew the food and the biomaterials had no synergies to begin with. We were a mini
conglomerate, a very, very, very, very mini conglomerate from day one. Everything was based on polymer
chemistry, which was the genesis of Landec, so we understood polymer chemistry. The key people all there at
the time, the CEO, the VP of Technology, that was their background, was polymer chemistry, so they
understood HA, how HA was made. From a corporate standpoint, we certainly understood both businesses,
but as far as the two businesses themselves, no, there were no synergies whatsoever, and we knew that from
the very beginning. We just thought these are two different platforms to grow from. We also had a side
licensing business, so it was kind of a third business at the time, and that petered out pretty quickly.
We kept finding that every time we’d licence something to somebody, they would give us a bunch of R&D
money, we’d get to a point where we proved that the technology worked, then they would look to see what they
needed to do from a manufacturing operation standpoint to adopt our technology, and almost every single
time they pulled the plug, because it was going to be too expensive in their mind. Why they even pursued it to
begin with, you’re scratching your head afterwards, because they would give us millions of dollars in R&D
money, and it was like, “You knew you were going to have to change you operations when you started all of
this,” so it never made sense to us. As a result, we gave up on the whole licensing thing, other than the
BreatheWay, we continue to licence that, but as far as other Intelimer uses, we quit that business, so we had
just the two businesses for probably the last 10 years. That question has been asked for years now, is, “Why
don’t you spin off the Lifecore business, or why don’t you sell off Lifecore, why don’t you sell off Curation?” I’m
sure that question is still being asked, I can’t imagine it’s going away, and with the change of the board, which
has pretty much completely turned over in the last three years, I can’t imagine them not having that discussion
at the board level.
[00:20:38]
Q: One of the key requests following Landec’s activist investor pressure was to split the company and increase
shareholder value. Why do you think this has not happened, even with an activist pushing for it? If the
company can survive an activist investor, is it likely to ever happen? What could be the timeline? Could it be
another 10 years?
GS: I think it’s sooner rather than later. That’s just my opinion, I have no idea, like I say, I’ve been gone well
over a year now. Activists don’t come in to operate a company. They come in to do something more dramatic,
like split a company, sell off pieces. They brought in a new CEO, who you could see from all the press releases
and everything that’s happened, his mandate, apparently, from the board, was to cut costs, to get rid of
overhead and to streamline the operation, and you could see that that’s what he’s been doing. Sold off a couple
of facilities, moved logistics from being internal to external, cut a lot of heads, so reduced overhead. His job
was to streamline Curation and to make it more profitable, so one has to assume that, once that is completed,
at least the initial phase one, two, whatever phases they’re on, and Curation is back on a growth path from not
only a revenue standpoint but more importantly an EBITDA standpoint, then I think the powers that be will
start thinking again at looking at the timing of a spin-off or a sale. You needed to fix Curation and get it more
profitable, otherwise you would just be firesaleing it, and I don’t think anybody would want that.
NH: Do you think the revenue that Curation provides and the ability to take that revenue source and invest in
the Lifecore business is one of the key reasons for keeping the business together?
GS: I think there are a lot of reasons. One, certainly early on, it’s becoming less and less so now, is that if you
sold off Curation, what would be left would be Lifecore, a very profitable company, but very small. It wasn’t
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too long ago, it was a USD 50m company, I know there are USD 50m profitable companies out there on the
market, but that’s still pretty small to be a public company. Lifecore need to be bigger. They’ve got to be
nearing USD 100m now, I don’t know if they’ll do it this year because of COVID, but certainly it can’t be that
far off, where now suddenly you’re a USD 100m company, and if they maintain their EBITDAs, which were
over 30%, more like 32-33% when I left, you now have a very, very profitable company, and those type of
companies, their multiples are somewhere between 15-20%. You could ask any investment banker now, that’s
a year-plus ago, before COVID, so a lot of things have changed with COVID, I don’t know if their multiples are
going up or down as a result of COVID, but you would have a viable, public company if Curation was no longer
around. That was one consideration for quite a while, is that Lifecore is just too small to be a standalone.
I don’t think that’s true anymore. Curation needed to become more profitable, you’ve done the streamlining, I
don’t know if they’re done, but he’s done a lot of streamlining, Al Bolles, the new CEO, so I would assume
you’re going to see, because I know they have been affected by COVID, they’ve stated it in their press releases,
once that pressure is off, and the streamlining has a full year of benefit to them, I think you’re going to see an
increased, or you should see an increase in profitability in FY22, which begins, by the way, in two weeks. They
may just be waiting to see what happens with the profitability, and if it’s on the right trajectory, and if it’s
going in the right direction, and you think a buyer is going to be enthused with what’s going on, and they’re
going to get a decent multiple, who knows? They may put it up for sale sooner rather than later, or maybe they
wait a few more years to maximise the sales value.
[00:27:04]
Q: What do you think is holding back Curation’s profitability?
GS: There’s no doubt there were a lot of weather-related issues, and the historical core commodity business, it
became a commodity business, it was still value-added, you cut up broccoli and put it in a bag, so there was
still some value added to it, but the margins in that business, which used to be in the teens, were almost non-
existent. You had to really downsize that business, but you couldn’t do it all at once, you couldn’t just say,
“We’re out of it,” because then you would lose a lot of customers for your salads and your green beans, so it
had to be a slow, strategic, customer-by-customer getting out of that business, and so it took a while. In the
meantime, you still had the volatility, you still had weather issues, so you were still taking hits on that
business. When we acquired Yucatan, we knew the first year was going to be difficult, because we knew that we
were going to have to go in and make a lot of changes. They had a good business, they just weren’t operating
near as efficiently as they should be operating. We needed to sign up more growers and packers for avocados,
we need to get them at better prices, we need to get more efficient in the plant, get greater yields out of each
avocado, get greater yields going through the processing steps to get a greater yield at the end in the avocados.
We needed to get higher prices, there was a whole list of things that needed to be done. We knew the first year
was going to be difficult, it sounds to me like it’s taken longer than what they thought it was going to take, at
least from everything I’ve read, so there’s going to be continued work in that area to get the avocado business
more profitable.
They’ve come out with a new line of salads, I’ve seen them in Costcos. It’s Beyond Salad, so that’s a protein
salad. I don’t know if it uses Beyond Meat’s protein, or somebody else’s, but that’s the name of the salad line.
They’re introducing a new line of products. Then, green beans have been whack for a couple of years in a row
because of weather on the East Coast, so they needed to shore up that piece of the business too. It was still
profitable, it just wasn’t as profitable as it should have been. I think that is what they’re in the process of doing,
is shutting down plants to reduce overhead, and streamlining operations to become more efficient, changing
logistics from being internal to external is a good example, and really getting down to just some core
processing plants that can be operated more efficiently, and that’s why Al was brought in. He’s only been there
two years, I’m sure he thinks it’s been a lot longer than that, but it’s only been two years.
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[00:30:49]
Q: Would you agree that Curation is just a commodity producer despite Landec marketing it as an innovative
plant-based food company?
GS: I think we have been pretty innovative. Mann’s actually was the very first to put produce in a bag, but
their business didn’t go too far. We took it and ran with it, and with the BreatheWay technology, we grew that
to a USD 300m business before competition came in and just drove the margins down to nothing. That’s why I
said we had to slowly get out of that historical value-added business, but the Sweet Kale Salad, that was
completely innovative, nobody had ever thought of something like that before. That’s why, literally overnight,
it became the number-one salad kit in all of North America, and then we’ve continued to grow that salad line
without using lettuce, without using spinach, so it’s all been vegetable-based salads with different ingredients.
Unfortunately, blends can’t be patented, but if they could, that would have definitely been a patented item,
because no one had ever done that before. Green beans, yes, okay, so that’s pretty much a commodity, there’s
no doubt about it, you just get green beans and put them in a bag.
Guacamole, what they’re doing there is different than how other people process guacamole, has a longer shelf
life as a result. It allows them to shut down for several months during the summer, when avocados are at their
highest prices, so they could build up a lot of inventory, sell it during those months, and then start up when the
avocados are cheaper, so they do have something that’s unique at Yucatan that their competition doesn’t have.
I do think that Landec has been innovative over the years. I can’t tell you what they’re doing now from an
innovation standpoint, but at least when I was there I felt that we were quite innovative, in an area that there
are not a lot of major earth-shattering innovations within fresh vegetables. It is what it is, they grow in the
ground, and they have to be shipped into store and bought and eaten, so there’s not a whole lot you can do, but
we’re as innovative as anybody else in the industry, if not more so.
[00:34:15]
Q: Why do you think Curation has struggled when consumers are much more health-conscious? People want
fresh vegetables, salads and even guacamole – given it is so expensive at Chipotle these days – but Curation
seems unable to capitalise on this higher demand. Is the disconnect around the retailer relationships with big
retailers who eventually sell the products?
GS: There’s no doubt that, for one, all of our competition is private. Virtually all. Their biggest competitor is
Taylor Farms, they’re private. Being private, all you really care about is how much cash I have at the beginning
of the year, how much cash do I have at the end of the year. If it went up, you had a good year. You don’t really
care about margins. They don’t care about net income and all the stuff they’ve got to worry about being a
public company. You can focus more on market share, and quite often, to get market share, you come in and
you offer a lower price. Part of it is competition, there’s no doubt. People out there competing at a lower price.
You may have a better-tasting sweet kale salad than their sweet kale salad, but if they’re going to sell it for
USD 1 less, they’re probably going to get the business. Retailers have pretty much all the power these days.
There’s maybe slight shifting, but the Walmarts of the world, they want to keep their vendors profitable, but
not too profitable, so you’re always competing against not only your competition, but what they’re willing to
pay.
I think the infrastructure that we had built out at Landec was based on volumes that we just didn’t get to, and
so that’s why Al has been coming in and streamlining, and getting rid of facilities that weren’t needed
anymore. I think that’s where you’re going to start seeing the profitability going forward, is that the cost
structure is going to be lower. With the same revenue, you’re going to get greater EBITDA and better margins.
They’re continuing to innovate, coming out with new lines, so revenue should start picking up. I know they’re
doing a lot in the guacamole area to increase revenues there. I think you had just a step back for the last couple
of years, streamlining, cutting cost, getting out of unprofitable lines of business, unprofitable SKUs, and
therefore revenue has decreased, but I think, I don’t know it for a fact, but at least from what I’ve read, it
sounds like a lot of that is behind them now, and that you should start seeing at least revenues flattening out, if
not growing, while EBITDA should definitely be growing going forward.
Private and confidential 8
[00:38:11]
Q: Does Curation get a better margin on its products when crop prices are higher or is it unable to subsidise
the volatility of the commodity market more broadly?
GS: The cost of the produce goes up, that’s a hit, because you’ve got set contracts with the retailers on what
you’re going to sell it for. Just take a simple one, broccoli, if you’ve got contracts with growers to buy your
broccoli at, I’ll just pick a number, USD 0.60 a pound, and you’ve based your retail prices on that, because
that’s the average cost, then all of a sudden you have a weather event, and your growers can only supply you
with 80% of the contract, and therefore you have to go out in the open market and buy the other 20%, you may
be buying it for USD 1 a pound. You still are selling it to Walmart at the same price that you were before, so
that extra cost is hitting your bottom line. That’s why we’ve reduced that side of the business from USD 300m
down to whatever it is now, but it’s considerably less because of that volatility. You don’t have that so much
with salads. Salads are more stable. For one thing, there are a lot more ingredients in salads, so you’ve got a lot
more people you’re getting things from, you could substitute stuff out. Broccoli is broccoli. If it’s 12 ounces of
broccoli in a bag, that’s the only thing that can go in that bag. Salads, you could change the mix a little bit,
maybe a little bit more of this, a little bit less of that if one thing is short, so you don’t tend to have the issues
with salads from a sourcing standpoint that you do with the historical commodity business.
Avocados, it’s just a matter of having a lot of different sources to get the avocados from, which, at least when I
left, we had. We weren’t having issues with sources of avocados. The price of avocados can swing pretty
dramatically in the course of the year, but because of their processing, they could process when avocados were
cheaper vs more expensive, so they did have some flexibility there. Green beans is probably the last one where
there is definitely weather-related issues. You have a freeze in the winter in southern Florida, and the green
bean crop gets damaged, you’re not going to have green beans to sell. That’s probably the last piece of their
business that still has issues, or potentially has issues, with weather, or more so than the other two, let’s put it
that way.
[00:41:30]
Q: Curation has some flexibility to amend contracts and pass on price increases, as other suppliers and
produce companies do. Are there issues with Curation’s contract structure with retailers where it was not able
to negotiate better terms or where it can pass on price increases to the retailer in certain situations?
GS: No, they’re standard. They’re the same as Taylor is going to have, or any of our competition is going to
have. There are always act-of-God clauses, not always, but in some contracts there are act-of-God clauses,
good luck getting those to ever come in. Occasionally, back with, I think it was 2016-17, where you had the
major weather events out here, just everything under water, we were able to get some price increases, but they
were very limited and very short in duration, so a month or two, you got maybe a 10% price increase. It just
doesn’t happen very often in this industry.
[00:42:58]
Q: Are the products that Curation sells to retailers mostly private label? How would you describe the product
mix between private label and branded?
GS: The majority was branded when I left. I can’t remember the percentage, I want to say probably north of
70% was either Eat Smart, Yucatan, Cabo Fresh, one of those brands. Most of it was branded.
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NH: Do you think there was a missed opportunity in going for private label?
GS: Yes, but it’s not good for the processor. It’s good for the retailer. They expect you to come in for less, so
sell you the same damn product in the bag for less, if it’s private label.
[00:44:16]
Q: Could you elaborate on Curation’s retailer relationships? How much control do retailers have? How do
other industry players perceive the strength of retailers that control pricing or distribution, given this is likely
a fundamental, strategic problem for commodity suppliers?
GS: When it was just, way back, a value-added business starting, it was just us and Mann, we just stayed in
our own lanes. We started off with Costco, more East Coast because of our technology, so we could get the
product further, because we had a longer shelf life. They owned the West, and there was no collusion, and it’s
not like we had any discussions with them, “We’ll stay out of here.” That’s just naturally how it evolved. There
would be certain competition when things would come up, but it was more a friendly type of competition. We
might beat them here, they might beat us there, but we lived in a nice coexistence, but then Taylor came in and
bought a value-added business called Foxy in 2006, 2007, something like that. Their whole modus operandi is
to capture market as fast as possible. That’s just how they’ve grown their business over the years. They just
came in and just undercut prices, and margins immediately plummeted literally overnight. It set a new price
level within retail, and then it became very difficult after that to try to start increasing prices, as your costs
went up or whatever, it’d be like, “Hold on, you charge us X, we expect the same amount this next year.” There
was definitely a change in dynamics at that point.
Then, you’ve got 10 retailers that own 80-85% of the market, so the top 10 are everywhere. That tells you
virtually everything. If you’ve got 10 retailers out there that have over 80% of the market, you as a processor
don’t have a lot of ability to get increase in prices. What you need to do is innovate, and that’s what we did over
the years, is we kept coming up with new things, so they would want to try the new things. New things sold for
more than the old stuff. When Sweet Kale Salad came out, we were able to charge a lot more for that than we
were for our other products, because it was new and everybody wanted it. As that became ubiquitous, and it
was around for four or five years, suddenly you’ve got the competition coming in, and now the price for Sweet
Kale Salad has gone down, so you had to come up with new stuff. The way you have to stay ahead of the game,
at least from a margin standpoint, in this industry, is to continue to innovate, come up with new product.
You’re not going to be able to get Walmart to agree to many price increases. They will see at times the cost of
broccoli has gone up, and that, in order for us to make a good margin, they’re going to have to pay us more,
but that takes a lot of work, a lot of negotiating, and it doesn’t happen all that often, so you’ve got to innovate,
you’ve got to come up with new product.
NH: How would you describe the opportunity in food service?
GS: That’s really low margin. The only place we have any food service business is in green bean.
[00:48:48]
Q: Could you describe previous input costs inflation vs the current environment with commodity prices
skyrocketing? How would you compare Curation’s ability to manage those input costs? What were those input
costs outside of the commodity pricing? I know labour issues exist. What cost challenges did you encounter
during your time at the company?
GS: About 65% of their cost of sales, at least when I was there, was the underlying product. You’re talking the
packaging, the produce itself, so on and so forth. Probably closer to 70%, for all of that, what went into the
product. Then, about 15% was labour, which had doubled over the last 6-7 years, just because of the labour
shortages out here, California, especially farm labour. If you want people to work in your plant or your growers
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to have people working in their fields, you had to pay above minimum wage, that was all there was to it,
because you weren’t going to get it otherwise. Labour, which we didn’t really even care about too much years
ago, because it was 8% of your cost of sales, it was like, “Just throw more people at it.” Now, suddenly, it’s
doubled, now suddenly labour became a bigger issue. It’s one of the reasons we’ve done a ton of automation
over the last five years, was to reduce the labour, the amount of people in the plant. Then, of course, overhead
is the rest. If you really want to reduce your costs, you’ve got to focus on the produce, the packaging. We
contract with a lot of growers to get our produce, so it’s usually a weather-related event that hit them hardest.
Now, they’ve mentioned COVID, I think with COVID, this is just my guess, I don’t know this for a fact, but it is
probably labour. Trying to get enough people to get into the fields to harvest their crop. If everybody is worried
about getting COVID, or they had COVID, you probably had a severe labour shortage. That would be my
biggest guess from a cost side where COVID hit them. Then, of course, from a revenue side, it’s people going to
the store and buying produce. A lot of people, they were just loading up on stuff that lasts forever. Early on,
you’d go out, you couldn’t find toilet paper. Jesus Christ, come on, you need 500 rolls of toilet paper? They
were doing the same thing with canned goods. I remember early on, in March-April last year, and you’d go
into a store, the entire canned good shelves were completely empty. You couldn’t find a can of green beans or
corn, or anything. Anything that lasted a long time is what people were loading up on. They weren’t loading up
on produce that they’re going to have to eat in four or five days, or they’re going to have to throw it away. They
were putting their money in stuff that they knew that would not go to waste. I’m sure COVID had an impact on
revenues also. Like I said, that’s one of the things that Curation needs to get past, is the effect of COVID. Then,
all of the efforts in the streamlining. For all that’s happened over the last year, year-and-a-half, so we haven’t
really seen a normal quarter, if you will, for Landec in a long time. Hopefully, starting in FY22, you’re going to
start seeing that. I’m a major shareholder, so I definitely want to see Landec do well.
[00:53:28]
Q: What do you think Landec should do over the next 1-2 years with its Curation and Lifecore businesses?
Should it leverage capital from Curation to further expand investment and R&D in Lifecore? Should it aim for
a split as soon as possible?
GS: I think, to maximise shareholder value, once Curation gets on a growth path, and it’s obvious they’ve
turned the corner, that the streamlining has cut the fat out, if you will, and margins are increasing, and
EBITDA is increasing, and you’ve seen it for several quarters and you could see it continuing going forward,
and so you’re past the COVID hangover, personally, I think they should sell Curation. I think that would
maximise the shareholder value, because I don’t know what they could get for it, but at last I saw they had
USD 190m in debt, you would hope they would be able to get at least that if not more, so by the time they sell
of Curation, pay any taxes, which I don’t think there’ll be a lot, because they have a fairly high cost basis with
all the assets that they bought over the years, and all the companies they bought, they would have enough to
pay off debt. Now, you’ve got a tax- or a debt-free Lifecore that, by then, hopefully, over USD 100m in
revenues and very high margins, that would have a much, much higher valuation than Landec with Curation,
and I think it becomes a pure play at that point, and a target. I think, within a year or two after that, someone
will come in and acquire Lifecore to get another bite at the apple. That, I think, would be the best for Landec. I
don’t know what the board is thinking, what their timing is, whether that’s even the thought process. I can’t
imagine it at least not being discussed, but I think that’s where you maximise shareholder value.
[00:56:11]
NH: Greg, I think that is a great place to end the Interview. Let me close by saying thank you very much for
your input. Clients, thank you for joining Third Bridge Forum’s Interview. If anyone would like to speak with
Greg in a private call or meeting, please let your relationship manager know. Greg, thanks again.
GS: Alright, take care everyone. Bye now.
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Transcription ends at 00:56:27 of the recorded material
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