Good day, ladies and gentlemen, and welcome to Landec Third Quarter Fiscal 2019 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 follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Molly Hemmeter, Landec’s President and CEO. Please go ahead.

Thank you, Amanda. Good morning and thank you for joining Landec's third quarter of fiscal year 2019 earnings call. With me on the call today is 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 2018. As a leading innovator in diversified health and wellness solutions, Landec is comprised of two businesses; Lifecore, our contract development and manufacturing or CDMO business, and Curation Foods, our natural foods business which now includes five brands that offer plant-based products with 100% clean ingredients. These brands include our flagship brand, Eat Smart packaged salads and fresh vegetable products and our four emerging natural food brands that include O Olive Oils & Vinegars, Now Planting pure-plant meal solutions, and our recently acquired Yucatan and Cabo Fresh guacamole and avocado products. For the third quarter of fiscal 2019, our consolidated revenues increased 7% to 155.7 million, consistent with the low end of our revenue guidance for the quarter. The earnings per share of $0.04 was at the top end of our guidance due to a $2.6 million or $0.07 benefit from the reduction in the earnout liability associated with the O acquisition which was partially offset by; one, incremental costs in our non-salad and vegetable business due to weather volatility; two, a shortage of drivers in our logistics operations resulting in increased shipping costs; and three, no increase in the fair market value of our Windset investment. During the third quarter, we made significant progress in our strategic objectives to drive long-term shareholder value. Lifecore completed the installation of its new multi-purpose vial and syringe…

Thank you, Molly, and good morning, everyone. Revenues in the third quarter of fiscal 2019 increased 7% to 155.7 million compared to 144.9 million in the year-ago quarter. The increase was due to a $10 million or 8% increase in revenues at Curation Foods primarily from the addition of Yucatan Foods during the quarter and from a 744,000 or 3% increase in Lifecore revenue. Net income for the quarter was 1.1 million or $0.04 per share compared to net income from continuing operations of 16.3 million or $0.58 per share in the year-ago quarter. The decrease in net income was a result of first, a 13.7 million or $0.49 per share one-time tax benefit from the new corporate income tax rate that went into effect during the third quarter of last year. Second, a $1.7 million of acquisition-related expenses. Third, a $2.3 million net increase in operating expenses, primarily due to the addition of Yucatan Foods and Now Planting soups this fiscal year and after including the $2.6 million benefit from the reduction in the earnout liability from the O acquisition. And fourth, a $1.2 million increase in interest expense. These decreases in net income were partially offset by a $1.4 million increase in gross profit at Curation Foods, primarily from the addition of Yucatan Foods during the quarter and from a $600,000 decrease in income taxes, excluding the tax benefit from tax reform recorded during the third quarter of last year. Revenues in the first nine months of fiscal 2019 increased 6% to 405.3 million from 383.2 million in the same period last year. The increase was due to a 19.6 million or 6% increase in revenues at Curation Foods and a 2.5 million or 5% increase in Lifecore revenues. Net income for the first nine months was 672,000…

Thanks, Greg. Our top priorities over the next one to two years are; first, to implement cost savings initiatives in our Curation Foods business. Second, to integrate the Yucatan Foods team in operations into our Curation Foods business. And third, to invest in innovation and growth at both Lifecore and Curation Foods. At Lifecore, we continue to invest in accelerating growth and profitability by expanding the Lifecore business beyond historical capabilities as a premium supplier of hyaluronic acid or HA. We have achieved this by investing in business development capabilities to expand into new markets. Landec has also invested in infrastructure and equipment to enable Lifecore’s transition to a fully integrated CDMO that provides differentiated fermentation, formulation, aseptic filling and final packaging services for difficult-to-handle, FDA approved pharmaceutical products. Most recently, we invested in the installation of Lifecore’s new $16 million multi-purpose filling line. The new line will further enhance Lifecore’s growth strategy as a CDMO, which is specifically designed to align Lifecore’s capabilities with the growing needs and market expectations of its partners and provides Lifecore with a capacity to fill commercial quantities of drug products in vials, in addition to its existing capacity to fill syringes. Lifecore has also initiated a capacity expansion of its HA fermentation process to increase overall capacity by 25%. This expansion is expected to be complete in fiscal 2020 in preparation for future HA demand driven by products currently in product development. The new multi-purpose filling line and the new HA capacity have the potential to drive $40 million to $60 million of incremental revenues annually once full capacity is achieved. We plan to continue to invest in Lifecore to meet its future demand requirements as product currently in development receive FDA approval and transition to commercial product. The mission of Curation Foods…

[Operator Instructions]. Our first question is from the line of Mike Petusky of Barrington. Your line is open.

Hi. Good morning. A couple of questions. So, Molly, on the salad numbers, to me it looks like you guys are below 5% through nine months in terms of growth there, and I know that you guys are targeting a more upper single digit towards 10% figure there as you look forward, and you’ve sort of discussed innovation and the introduction of new products. And I was just wondering as you’re looking over the next 6, 12, 18 months, do you guys feel like you’re teeing up some things that consumers will respond to positively and will drive you towards something closer to 8%, 10% growth in the salad category?

Hi, Mike. Thanks for your questions. So right now, in fiscal year '19, we are projecting about a 2% growth in our salad sales, but I think as we’ve said in past calls, a lot of that is due to headwinds in both club rotations and private labels, specifically in the mass channel. As we’re looking forward, we’re not quite ready to give our growth projections for salads next year, but we do see growth and we do see – we are going to be launching innovation in our fourth quarter. And so I think as we launch that innovation in our salads in the fourth quarter, we’re going to start to see kind of how that is received in the market and be able to give better projections and more accurate projections for that at our July call.

Are those going to be sort of innovation in sort of a limited release or is it going to be fairly widespread introductions?

Well, we typically try to release our products to a few strategic customers first to test them and learn and make sure before we scale that we’ve got the right recipe for success. And so, I see it more in a few strategic customers moving forward so that we can test them, learn, and see how that goes.

Got you. And sort of on a related subject, so you guys have now had several months of Now Planting in Publix and maybe one or two other retailers. Yet any traction – I’m not looking necessarily for a quantification, but do you feel like you’re getting traction or have you learned things there that will help you going forward or is there anything you can just talk about in terms of Now Planting?

Yes. So, we’ve actually been learning quite a good deal with our Now Planting and we’re very happy that we’re testing it with our strategic customers because we’ve seen really a wide variety of results, and I can give an overview of that. So, I would say we’re now in about – we’re in three different customers. We are in – well, we were in three different customers. So we launched into Publix, we launched into Loblaws in Canada, and we also launched into a natural store up in Minneapolis area called Lunds & Byerlys. And we’re seeing three different results from those three stores which is why we like to test and learn. So in Publix we actually are no longer being carried there. And what we found is that in Publix, they do not have a high percentage of our plant-based consumer and they are in a very low market as far as indexing pursuit. A lot of that has to do that we were selling when it was over 90 and 100 degrees in the Florida area. So in Publix we have determined that that’s not the right market for us. In Loblaws, it’s going very well in Canada. Now we know and in past calls we’ve talked about how the Canadian market actually indexes very well for plant-based consumers and we are the market share leader with our salads in Canada with our Eat Smart brands. And so in Loblaws we see that it is doing very well. And then in the natural channel, it’s a small chain called Lunds & Byerlys, we’re actually also performing very well. So I think what we’re finding as we kind of move and we’re learning with those consumers is we really want to expand to where we believe the plant-based consumer is and we’re working on specific customer marketing programs to grow awareness of the brand and the product.

Okay, great. And just one quick one for Greg. Greg, as you sort of look at and I appreciate the Q4 guidance in terms of cash flows, but as you sort of look at and I know you’re not giving official guidance, but as you sort of look out over the next several quarters, is there a quarter or is there a fiscal year where you’d say, hey, this is sort of where we are targeting where we get cash flow positive on a consistent basis?

Yes. And without getting into specifics given that we haven’t even finished our budget, I think the peak of at least our leverage ratio will be the fourth quarter of this year. And the first half of our years tend to be as a result of some seasonality and some cyclicality specifically at Lifecore are usually the lower quarters of the year. So when we’re looking out, I think the second half of next year. But we’d give more specifics in the July call.

Okay, great. Thank you. I appreciate it.

Thanks, Mike.

Thank you. Our next question is from the line of Anthony Vendetti of Maxim Group. Your line is open.

Thanks. Good morning.

Good morning, Anthony.

Good morning, Molly. Just wanted to talk a little more about Lifecore first. So I know you’ve increased the capacity. Just remind me, what was the cost to do that and what’s the timing of some of the new business now that that capacity is online?

The Lifecore filling line – go ahead, Greg.

Go ahead, Molly. Okay. So the cost of the line was about 16 million, Anthony, and right now it’s looking like the – at least the initial use where we’re in testing right now will be in the first half of fiscal 2020.

And there’s business already lined up for that, correct?

Yes.

Okay. And in this quarter some of that would ex that capacity, but just Lifecore in general there were some revenue pushed into the upcoming fiscal fourth quarter. Any reason for that or is it just timing of contracts?

It seems to be more of a change historically if you look back at Lifecore lion share of their revenues and profits were in the third quarter. We started seeing it last year and we’re seeing it again this year that it’s been more evenly spread over the third and fourth quarter. And that could be the new trend going forward. Obviously, we’re still in the process of putting our plan together for '20. But that could be the new norm.

Okay.

They’re in line with our expectations and internal expectations for the year. We knew that some of the revenues that historically had hit in the third quarter were going to happen in the fourth quarter this year.

Okay. And then if we look at the non-salad revenue, it looks like that was down around 6% in Q3. Is that correct? And if so, what’s the reason for that?

The core revenue is down mostly because of the supply issues we’ve been having. So it especially hit us in the first quarter with green bean as we were not able to – and again was an industry wide thing. And so we were not able to meet all the demand and we did short some customers unfortunately. We’re back in on green bean now and that looks very strong. But over in Q3 and Q4 with the heavy rains that we spoke about in the front part of this call, cauliflower and broccoli have been going in and out of availability and it has just really hurt our ability to service our customers. That being said, I do want to reiterate we haven’t had any shortages in our salad business and that business really continues to not have the volatility we see in core. We’ve been in salad business maybe five or six years now and we have yet to have to short any customers in those five or six years on salad. So the vegetables we’re using in those products are much more robust and not susceptible to the volatility we see in our quarterback [ph] business.

Okay, great. All right, thanks.

You’re welcome.

Thank you. Our next question is from the line of Chris Krueger of Lake Street Capital Markets. Your line is open.

Good morning, guys.

Hi, Chris.

Hi, Chris.

Hi. You guys indicated that you had significant sourcing issues from bad weather in California I think in the month February and into March. Has that done better in recent weeks? And also how are the green bean growing regions?

All right. So the green bean growing regions are doing well right now. So we’re back into green beans. We don’t see any issues there. We’ve been in and out as I said previously on our cauliflower and broccoli and we do see some in the fourth quarter – we have seen some shortages due to the rains that were earlier and the inability to get in the fields right away. So we do see some shortages which those shortages are included in the projections we gave in the press release.

All right, got it. There has been a talk in recent days really about the Mexican border and whether or not it could potentially be shutdown. How should we look at that risk as far as the avocado and guacamole, the two businesses you acquired?

Right. So obviously this is an evolving situation and prices have spiked with Haas avocados in the last couple of days on the news. That being said, there also is a pretty large supply of Haas avocados. So there is no shortage of avocados, but people are stocking up and buying avocados in anticipation of any border closure. We’ve done the same. We are also stocking up on avocados. We have our own ripening rooms, so we are making sure that we have those and are ripening our own avocados. And as soon as we create finished goods at our Mexico facility, we actually transport those finished which is guacamole into the United States. So we are building our inventories at our warehouses in the United States in anticipation of anything happening and that will at least give us a temporary cushion in the event that something does happen. So hard for me to predict if that is going to happen, but we’re doing everything we can in the event that it does.

Got it. Okay. And then on the salad kits, I don’t – haven’t really checked lately but in the past you’ve talked about having roughly one new product per quarter. Is that still kind of the pattern?

It is. And we will be launching new innovation in the fourth quarter. So I look forward to talking about it. I’ll probably be putting some news out on LinkedIn about the new products if everybody follows LinkedIn. And we’ll be talking about it in our next earnings call.

All right. Thank you.

Thank you.

Thank you. [Operator Instructions]. Our next question is from the line of Mike Morales of Walthausen. Your line is open.

Hi. Good morning, guys, and thanks for taking my questions.

Good morning.

Good morning, Mike.

One of the things I’d like to dig into a little bit more is the Lifecore and the HA capacity expansion there. So I guess at the outset, could you give us a figure on what the typical growth in just the HA market is per year?

If you look at some – and I’m not sure how current these stats are, but just from the aging demographics the lion’s share of Lifecore’s HA is in the ophthalmic space and primarily in cataract surgery. So you get a kind of focus on what the growth of cataract surgeries are and at least the last statistics I saw was it was growing in the 5% range per year. So with that growth you can pretty much bank on that level of growth in our HA just as the base and then anything additive would increase that growth.

Sure. So 5% growth in the lion’s share of the HA market, so it sounds like 25% HA line expansion, a large part of that is going to support operations of the new filling line? Is that correct?

I’m not quite sure I followed your question, but yes. A lot of the use of the new line is and the main purpose for the new line is for vials and that’s primarily directed toward the pharmaceutical drug market.

Sure. So maybe another way of saying it, with only 5% growth in the typical HA market, a 25% capacity expansion on HA wouldn’t be just going to fill the natural growth in the HA market and could be used to support the new filling line. Is that correct?

Yes, and new customers and new products.

Sure. And so --

Growth in market share is the primary driver there.

Okay. And you’re getting rolling forecast from your customer that go out how long?

12 months.

12 months, okay. So at least on this new filling line then, can you help us understand the economics of how that’s comparing to the existing work that Lifecore is doing? Is it on a per unit basis above what Lifecore has historically done?

Since we haven’t started up yet, ask me that question in July and I may have an answer for you.

Okay.

That being said, in general as we look out even three years with Lifecore and we model all the new businesses in the product development pipeline, we expect Lifecore to continue to deliver 40% to 45% gross margins. So there’s an obvious product mix there that has HA in the fermentation space which is high and our product development margins are very high. The mix continues to deliver 40% to 45% gross margin.

Okay, that’s helpful. And then lastly for me would be engagement of The Hackett Group. Can you give us an update on maybe specific areas that they’re looking at as far as opportunities to takeoff that business and continue to make more progress?

Sure. So we’re very optimistic about the cost-out program and we consider this the top priority in our food business. As we’ve all seen the cost of doing business in the food business are ever increasing and we need to acknowledge these costs. First and foremost, our cost increases are going up year-over-year and our goal is to build more cushion and contingency in our business every year against weather volatility so that we can deliver a more predictable earnings. So I think that’s what our initial goal of cost-out program is. As far as examples, we have a tremendous amount of cost-out opportunity. It’s one of the things when I look at this business that is extremely positive is that we don’t have to – it’s not a 100-year business where you have to dig and dig to find cost-out opportunities. In the past it didn’t make sense to automate a lot of the process and a lot of unit operations. And the reason was that the labor was cheap enough or it just didn’t make sense when the ROI was not there. With the increasing labor costs, it really starts to make automation just make a lot of sense. And so in our plant in Guadalupe and then our plant in Bowling Green, we are automating a lot of the unit operations that we did not previously automate and we will be doing that next year. We are also seeing – I’m very optimistic about some of the cost out that we can gain by our Yucatan acquisition. We’re finding that in our logistics and if you really think about internal logistics instead of outbound, so as we are shipping products from Mexico up into the United States into the different warehouses, we’re finding that we can use our own internal trucks for the Yucatan products that are already going on those routes. And let me give you an example. We do currently grow during – about nine months out of the year we currently grow broccoli in Mexico for our current customers and we have our own trucks bringing that up through Texas. That is the same route that the guacamole is using. So we’re very excited that we’re going to be able to put the guacamole on the same truck as our broccoli and bring it out through Texas and leverage those logistics synergy. So those are just a few of them, examples, but I think automation is going to be a big one for us in the food business.

All right. Thank you very much, Greg. Thanks, Molly.

Thank you. And at this time, I would like to turn the call back over to Ms. Hemmeter.

Thank you. Well, thank you everyone for joining our call today. We continue to be very optimistic about our Lifecore and our food business. Lifecore continues to develop and deliver growth. They’re projected to hit their 14% to 16% growth that we projected for this year. In Curation Foods we’re continuing to work through our transformation. I truly believe that we have our strategic portfolio and line. We are in product segments now in the market that are poised for growth and are on trend with consumers, so the top line feels very strong and our focus now turns to cost out and integration of Yucatan and Cabo Fresh brands into the rest of our systems. And I think fiscal year '20 and beyond we’re going to be very focused on getting cost out in order to deliver more predictable earnings in our food business and we’ll be doing this simultaneously with growing market share. So thank you for joining us today and keep supporting Landec.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Have a great day.