Good day, ladies and gentlemen and welcome to the Landec Third Quarter Fiscal Year 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Mr. Gary Steele, Chairman and CEO of Landec Corporation. Please go ahead.

Good morning and thank you for joining Landec's third quarter fiscal year 2014 earnings call. I have with me today Greg Skinner, Landec's Chief Financial Officer. During today's call, we may make forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially. These risks are outlined in our filings with the Securities and Exchange Commission, including the company's Form 10-K for fiscal year 2013. For our third quarter fiscal year 2014 we exceeded our revenue projections for the quarter and met our income target. Our guidance for the year which includes net income guidance we revised last quarter due mostly to produce sourcing issues remains on track for the year. While the country struggled with harsh winter weather in our third quarter, we were able to return to more normal sourcing patterns and get our product shipments to customer distribution centers in a timely way, no small feat for Apio's team. We are currently in good shape to meet our projected fourth quarter and fiscal 2014 results. We are experiencing significant growth and demand for our new Eat Smart superfood salad line and we are currently bumping up against production capacity constraints. We are by example now shipping over $1 million per week with combined sales of Sweet Kale Salad and Ginger Bok Choy to club stores and retail grocery store customers. Our new products have margins that are twice the margins of our core value-added product line. We have recently achieved this run rate and we hope to continue to increase sales in this new category of healthy nutrient-rich salads made from vegetables. Just think of it; salads made from vegetables that taste great. We are finding that there is a first-to-market advantage based on the combination of great tasting healthy vegetable salads…

Thank you, Gary. Good morning, everyone. We reported yesterday that revenues for the third quarter of fiscal 2014 increased 7% to 126.4 million from 117.9 million in the year-ago quarter. This increase was primarily due to a 10% or $8.7 million increase in Apio's value-added businesses and a 2.8 million or 16% increase at Lifecore. These increases in revenue were partially offset by an expected $2.7 million decrease in Apio's export business due to a decline in sales volumes primarily resulting from Indonesian import quotas on fruit. Net income in the third quarter of fiscal 2014 increased 33% to 6.4 million or $0.24 per share compared to 4.8 million or $0.18 per share in the year-ago quarter. The increases in the net income in the third quarter of fiscal 2014 was primarily due to first; a $1.4 million increase in gross profit in Apio's value-added vegetable businesses as a result of increased revenues and a favorable product mix; second, a $1.5 million increase in gross profit at Lifecore as a result of increased revenues. And third, a $426,000 reduction in operating expenses primarily because of lower research and development expenses at corporate reflecting the transition away from corporate R&D and licensing collaborations. These increases in net income were partially offset by first a $195,000 increase in income tax expense; second, a $649,000 decrease in the change in the fair market value of the company's investment in Windset compared to the change in the year-ago quarter. And third, a $292,000 decrease in gross profit at corporate primarily due to a decrease in R&D revenues from Nitta. For the first nine months of fiscal 2014 revenues increased 6% or $21.3 million to $355.9 million from $334.6 million in the same period last year. The increase was primarily due to a $29 million…

Thanks, Greg. As stated in our press release, we are meeting our revenue goal for fiscal year 2014 in our revised earnings guidance. We are taking steps to mitigate adverse sourcing risks as much as we can. We're doing this by expanding our sourcing geography, expanding the array of produce commodities that we purchase under contract from growers and by modifying our contracting approach and frankly getting more realistic about the state of the world's weather conditions. And we certainly hope to lessen although we cannot eliminate variances due to weather in the future. Let me address three issues that we discussed in our press release. First, from one of Lifecore's key customers we expect substantially reduced purchases of Lifecore's HA materials in fiscal year 2015 based on a corporate policy change at this customer regarding inventory management. As described in our earnings release it is the one-time inventory adjustment. It has the material impact by reducing their purchases by 50% this next fiscal year. This key customer has communicated clearly to us that they will return to their previous annual purchasing levels in the following fiscal year 2016. While it wouldn't make any sense to discuss specifics of this customer, just let me say that our relationship is outstanding, we have a multiyear contract in place with this customer and we just have to bite the bullet for this one year and move on. Second, we support Windset's plans to take a pause in new construction for one year and then to resume construction beginning in calendar year 2016. Windset has spent the last five years planning and constructing and starting up the world's highest yielding hydroponic greenhouse operation with 6 million square feet of growing capacity in Santa Maria, California. In parallel, Windset has more than doubled its…

(Operator Instructions). Our first question comes from the line of Morris Ajzenman from Griffin Securities. Your question please.

Good morning, Morris.

Hi, Morris.

Hi, guys. First question, Lifecore Biomedical do you have a little bit of feel for the one customer reducing purchasing by 50%? Can you give us an idea of how much of that $0.20 reduction that will translate into the Lifecore Biomedical reduction purchases?

Yes, and Morris while we don't want to go into a lot of detail here, it's a valued customer and et cetera, et cetera, but about 60% of the $0.20.

Okay. One other question, this year for the first six months of this year and I believe is in the third quarter, gross margins impacted by 7.4 million from sourcing which translates to about $0.25, $0.27 on a pre-tax basis if that was to all fall through on a normalized basis, but then you talk about next year increasing product sourcing. I'm not exactly sure. Shouldn't we have a dramatic rebound returning to normalcy in weather in fiscal '15?

Well, there's three things. First of all, we're not assuming where we – we're planning is normal going ahead is abnormal. There is no reason to believe in my opinion I think would be naïve for us to believe that the weather is going to be normal next year, so we have to – I don't think it will be as severe as the year we just had, it's the most severe we've ever had, but we are anticipating that there is going to be weather disruptions more so than we've had in the past and we will put that into our budget. That's number one. Number two is that of the growers, as you know we contract growers at the beginning year, we know our fixed cost on a per pound basis, the product that we buy from growers, that price per pound is going to go up for everybody in the industry because the growers' input cost are going up, they've got water issues, they've got fuel cost increases, they've got labor increases especially in California with the newly enacted minimum wage, et cetera, et cetera. So we know that our cost per pound is going to go up. That's number two. Number three, you'll recall that one of our mitigation strategies is to go beyond California, Arizona to further away places for sourcing to diversify our risks. And as you move away from California which has the highest yield per acre in vegetable growing, you're going to have produce costs that are higher and then you've got some of the transportation issues of getting it to our processing facilities. So those are the three things that we mean when we say that we anticipate sourcing costs to go up. Yes, we can't expect that the weather is going to be as crazy as it was this last year but I think we should not – neither expect it to be "normal" next year.

Let me just summarize that. So what you're saying looking at the fiscal '15 increases in sourcing costs with the sort of trend line being sourcing costs to fade this year into next year and from there increases based on farmers' cost going up and looking to other regions? Is that a fair accuracy for a reflection of your statement?

Yes, Morris it's right. I just want to make sure we're not saying that the costs that Gary just described are additive to the 7.4 this year. The 7.4 this year was in excess of what we had planned. So therefore we expect some of that to come back because of less severe weather next year, but in addition to whatever comes back we're going to have increases for the produce from growers and labor on top of that. We're in the process of putting our budget together now. This is more of a heads up that it's not all going to come back. I think there was an impression out there that, hey, the 7.4 one-time anomaly added back to next year's numbers and that is not going to be the case.

Thank you.

Thank you, Morris.

Thank you. Our next question comes from the line of Tony Brenner from ROTH Capital Partners.

Good morning, Tony.

Good morning. Thank you. A couple of things. First is the reduction that we saw in the third quarter in R&D a sustainable rate of spending now?

Yes.

1.7 a quarter?

Yes, that's pretty – [factoring] (ph) in place…

Let's just be clear in terms, so yes on your question about R&D. We mentioned in our comments that we're going to step up marketing and sales at Apio substantially and a fair amount of that is new product development efforts. We're not calling that R&D but it's looking at new combinations of salads, new mixtures, new things that we can use with our BreatheWay packaging technology. So you'll see that as an increase in marketing and sales but we do think that the current rate of R&D is one that you should use.

Okay. And last quarter you indicated that Windset would recognize an increase in fair market value in the second half of this year of between $3.3 million and $3.8 million. Is that still a viable…?

Yes, I think it is. There are a lot of various inputs as we've all talked about in the past on what goes into this calculation and obviously one of the keys for looking at their fair market value is how are they doing so far this year in comparison to budget, but we're not going to know that until they get through the end of their first quarter which is until March. So this particular quarter was fairly conservative as far as how we looked at fair market value. I think assuming that they continue to track the plan, they get planned for their first quarter, we will hit that estimate for the year so you should see a 3 million impact in the fourth quarter.

Okay. So year-over-year in the quarter that increase in Windset's recognition, the fair market value it equates to about a $0.03 a share increase on the bottom line. The R&D reduction year-over-year in the quarter is roughly $0.02 a share. In the fourth quarter of last year, Apio evaluated its profit declined versus an easy comparison because of a six-week freeze that affected GreenLine. And so I'm wondering how you can get to a guidance of flat earnings in the fourth quarter? What else is in there that just fell through the floor?

From a year-over-year standpoint?

Yes.

Lifecore should be flat to slightly down from a year ago. Export is still expected to be down from a year ago. I don't remember the exact Windset numbers from last year…

Windset number in the fourth quarter last year was 1.8 and we're looking at 3 million plus in the fourth quarter of this year, so that's about $0.03 a share.

Yes. So right now our guidance is obviously to continue to hit the year.

Okay, so you were looking at the year not the quarter?

And being a little conservative in the fourth quarter.

Yes, a little. Okay. And this is the first time, Gary, you've talked about 15% to 20% long-term growth. Previously, it's always been 10% on the top line, 20% on average, on the bottom line. Why the change?

When you go through several quarters like we did at the beginning of the year with weather-related events, you get a little bit squirrely. Our goals are still the same. It's 10%, 20%, Tony, that's what we're striving for, that's what we believe we can do over the long haul. And if we can continue to launch these types of products that are generating $1 million a week that should be sustainable and doable, so that's just – you get a little squirrely after you've had a couple of quarters of weather beating you up.

Okay, so your fourth quarter guidance is abnormally conservative, it sounds like. And your next year guidance is just coming from having been battered all year long from the events that we've seen recently?

No, next year we're just saying…

No, I understand. There are some Windset and the Lifecore…

We've learnt some new things in the last couple of weeks that tell us that we have a change with one customer and we…

Right, I understand.

So that's just news that we want to get out there because we know it and we share it as soon as we learn these things.

Got it, okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Andrew O'Conor from Bank of Montreal.

Good morning, guys.

Hi, Andrew.

Congratulations on your progress. I may have missed this. How do we dissect the $0.20 per share earnings reduction to Lifecore, Windset and Apio? I think I heard in response to a prior question that Lifecore is 60% of the $0.20 reduction?

The smaller increase in fair market value Windset we're estimating to be $0.40 of that $0.20.

Okay.

So those are the only two buckets that go into the $0.20.

Okay.

The cost increases we're going through the planning process, we don't have the specificity of it. Pick up any newspaper, everybody is saying food cost are going up, et cetera, et cetera, so we're going to experience that as well. We just don't have the plan of the budget finished at this point. We'll report that as we give guidance in our year-end release.

Okay. And then if I might just a couple of other things. What's the nature of the increase in the contract labor compensation and benefits for Apio? Has Landec signed a new labor contract with Apio workers?

No, it's just two things driving this. One is, California likes to be in the lead for regulating things and so we have – Governor Brown has signed an increase in the minimum wage here. Just so you know this isn't affecting our salary workers. We have 550 salary workers. We use contract labor in our plants and most of these are in California and so it's an increase in the labor rates. And as you know it's not just the lower level people that when you have a minimum wage increase, it kind of ratchets up everybody that's in the direct labor pool. So that's number one. And number two, we are anticipating that this contract labor group will be impacted by the Affordable Healthcare Act sometimes known as Obamacare and those cost increases will be passed on to us. So those are the two things that affect labor for anybody out here in California that is working with hourly employees.

Okay, thanks for that. And then lastly, from this point on how feasible is it for Lifecore to expand its customer base for HA material? How should investors think about it? Thanks again.

Yes, I think that they will continue to expand their customer base for HA materials and they've shown that in the last – since we've owned them in the last few years, their EBITDA when we bought them was 2.9 million and this year it's roughly 14 million. So in a couple of years they've obviously shown that they can do that and that's been largely on expansion of HA materials. But also since we've owned them maybe we just had a fresh pair of eyes but we noticed that they did a remarkable job because HA is a highly viscous difficult material to purify, extract and to package. We felt that those capabilities were of great value to people such as pharmaceutical companies who were developing and trialing new chemical entities that are highly viscous, and so we're working with several pharmaceutical companies now where we either formulate or we package the materials and put them in syringes and there aren't many people who can do it. So we see growth coming from not only the core HA business but outside that area as well with their capabilities.

All right, thanks again.

Thank you.

Thank you. Our next question comes from the line of Chris Krueger from Lake Street Capital. Your question please.

Hi, Chris.

Hi. Good morning. Looking at the salad kits, it sounds like you're doing over $1 million a week in sales. I know in the past it was primarily at a large club store chain. Can you just tell us where that's at – other additional retail grocery chains that are taking that on, or is there a lot more to go after?

We have several new large retail chains that are taking on that line and you betcha! as they say there are – this is at the beginning of our aggressive campaign to transform traditional salads which are made of leaf lettuce inputs to vegetable salads which are really tasty and conveniently prepared. So we feel that we're just at the beginning of this and so we have the large club store customer both in the U.S. and Canada and then we have several retailers that are taking it on and we are making our sales approach to other large retailers in the salad line and our dream would be a salad a day. You can come into a store and see seven of our salads and you pick which one you want for that day. They are all healthy as can be and you don't have to buy all the inputs and waste all the product and deal with the labor, it's all ready to go including the topping. So we think we're just at the beginning of a wave here and over the next 24 months, our goal is obviously to change the product mix so that a higher percentage of our products are from new products not only the salad line but some other things we're coming out with. We're launching nationally a Stir Fry Kit that we think is going to be a burn burner and we want more of those. And so to offset some of these cost increases that we expect, we have to boost volumes and change product mix to higher margin price. So that's our game plan and we also have to quickly expand our salad line capacity. We're right up against – we're going seven days a week now. We're really challenged to keep up with demand.

As your next expansion, is that going to increase capacity by 50% or how should we look at that?

We need to double it. So we don't want to go 50%, we want to double it.

Okay. Changing gears here, I know this past year has been really tough on sourcing and it's probably delayed your ability to cross-sell with your GreenLine acquisition and your Eat Smart brand. But can you give us an update on those activities or where you're at?

Yes, you're right. It's hard to go out there and pitch cross-selling to formally GreenLine customers that we didn't have or Apio customers that GreenLine didn't have when you've got one hand tied behind your back and you know you can't deliver on it anyway because of the weather sourcing issues. And by the way we also had some start-up issues in our salad lines, so I don't want to put all the [monkey] (ph) on the sourcing issues, but anyway to make a long story short we now feel as we're in better shape and the cross-selling is going full-bore and we're starting to see the fruits of that, and we'll report on that over the next four quarters. We'll tell you more about that but we're going at it and we have the benefit of combining these two customer bases and cross-selling them.

Okay. That's all I got. Thanks.

Thank you.

Thank you. Our next question comes from the line of Walter Schenker from MAZ Partners. Your question please.

Hi, Walter.

Thank you. Good morning to you, midday to me. I understand historically, this is just generally about the vegetable business that in the worst year we can ever remember in weather and sourcing we have a problem, what I don't understand is going forward just as a general commentary, if there are known cost increases coming to your suppliers be it minimum wage in California, and California is a very large factor in sourcing for the whole country; Obamacare, et cetera, et cetera, why does pricing in the industry not move up to reflect known cost increases? And so why – I understand why you eat it because you have commitments to supply and pricing commitments in what may or may not be an abnormal year, depending on how one looks at weather. But in a normal business knowing there was a steady trend in cost increases for minimum wage or something and therefore your suppliers are telling you, I'm going to be charging you more, why aren't you selling to your customers because your competitors are facing the same thing, pricing is going up?

Excellent, excellent question, Walter. You must be listening in on some of my conversations with our team. A couple of things. One is as you know we are in multiyear contracts with a number of our customers. Those multiyear contracts usually two years have us locked in on pricing, there's no wriggle room, it is what it is until you come out of those contracts. So just keep that in mind, number one. Number two, and I'm going to give you a personal opinion here but I see our customer base which are these large retail chains and club stores have been consolidating, they're getting bigger, they're getting more powerful. They are moving to more and more private labeling, they are looking for their margin improvements and they are powerful, powerful customers and they are bifurcating. Some are still very interested in quality, service, innovation and others are gravitating more – I don't give a rip as long as it's cheap, give me the cheapest supplier out there. And we have lost a couple of customers in the last year because of that bifurcation and because of our unwillingness to get down and dirty as they say. So we will make the efforts – you were asking the right question. If we could just pass these things along, life would be terrific. There are no act of God clauses. This is just the way the industry works. There is some competition out there. There are a couple of competitors that are willing to do things that perhaps we aren't willing to do. So, Walter, I can tell you is we will do everything we humanly can to pass on these cost increases as we come out of some of these contracts. And it's not a mystery what's going on. I mean the customer base and the buyers know what some of these cost increases are because they are experiencing it themselves. So all I can tell you is you are right on in terms of having that as a central challenge for Landec and other food companies and we will try our darndest to pass these on. It's not easy.

And just a quick second question. If one remembers Landec, Landec was a technology company which also happened to sell fruits and vegetables, at least in some people's mind, and now is a fruit and vegetable company. Is there anything interesting happening or relevant from the technology side that you've developed over the years away from the…?

Yes, our packaging technology is now being used by Windset Farms in peppers and cucumbers. It's a real growth opportunity for them and for us. We are working with an unnamed partner in the area of berries and it looks as though there is certain types of berries that can – where we can help them extend shelf life considerably. We are working with a partner in the avocado field where this would allow the partner which is one of the leading avocado suppliers to provide avocados that are already ripened and ready to eat. And we are also looking at citrus, specifically limes and lemons, where we seem to be able to extend shelf life considerably. So we have an active program in that regard. Without saying too much our R&D efforts, some of our R&D efforts will be starting to merge with Windset's R&D interest in terms of longer term ideas and how our capabilities in packaging, processing packaging, branding, selling can combine with their hydroponic greenhouse technology capabilities. So there is – and as I mentioned with Lifecore we're investing quite a bit in the area of formulation know-how and vialing and packaging know-how which is highly differentiable, highly unique to us. So we are an innovation company. And so maybe it may not look like it did 10 years ago in terms of a pure polymer chemistry play, but we're investing heavily in new product development and innovation. So, you'll continue to hear about this as we go along.

Okay. Thank you.

You're welcome.

Thank you. (Operator Instructions). Our next question comes from the line of Will Lauber from Sterling Capital Management.

Hi, Will.

Hi, Will.

I saw that Windset is going to start growing strawberries now. Is that – when you had mentioned berries, is that something that…?

Will, when I was talking about berries I was talking about a partner we're working with that will use our BreatheWay packaging technology for berries. Windset is looking at strawberries. It's very early. I couldn't even tell you where that's going because I don't know. They could tell you where that's going, but we're obviously interested as they are in looking at totally new targets for hydroponic growing. I mean let's be realistic here. The world would love – it would be better if everything were grown hydroponically in greenhouses as long as it was cost effective to do that and the reasons are very clear. Buyers want safe products, they don't want products that are grown in dirty if they can avoid it, they want products that can be grown year round and don't get calls from suppliers who say, man, we just can't get it because of weather. And the quality that comes out of these greenhouses is just unsurpassed. So, if we can identify – if Windset can identify or we can identify with them other targets, but let me just say strawberries is really early on, don't know where that's going and I would hate to mislead you and tell you that that's going to be huge. We just don't know yet.

There's another possible partner besides Windset for berries?

On the BreatheWay side, yes.

Okay. And then on Lifecore, I don't know if I'm reading too much into this. But I saw that they are advertising a job opening for regulatory affairs specialist with experience in submission for new products and product changes. Are they hiring up in the kind of FDA compliance area or is that just replacing people that have left or do you know?

No, it's just – I think we had something like 22 FDA audits and visits last year and it's just the workload as they expand their sales and their – by the way this is not the senior person of regulatory affairs. We're very happy with our management team out there, but it's just bandwidth issues.

Okay. All right, thanks.

Thank you, Will.

Thank you. I'm not showing any further questions at this time. I'd like to hand the program back to management for any further remarks.

We just appreciate you being on the call today and thank you for your interest in Landec and we look forward to keep you apprised of our progress and our plans. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.