Good afternoon and thank you for joining Landec's Fiscal 2021 First Quarter Earnings Call. With me on the call today is Dr. Albert Bolles, Landec's Chief Executive Officer; Brian McLaughlin, Landec's Chief Financial Officer; and Jim Hall, President of Lifecore. 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 2020. Let me turn the conference over to Al Bolles.

Thank you. And good afternoon, everyone. As a leading innovator in diversified health and wellness solutions, Landec is comprised of two operating businesses – Lifecore Biomedical and Curation Foods. Landec designs, develops, manufactures and sells products for the food and pharmaceutical industry. Lifecore Biomedical is a fully integrated contract development and manufacturing organization, or CDMO, that offers highly differentiated capabilities in the development, fill and finish of difficult-to-manufacture pharmaceutical products distributed in syringes and vials. As a leading manufacturer of premium injectable grade hyaluronic acid, or HA, Lifecore brings over 35 years of expertise as a partner for global and emerging pharmaceutical and medical device companies across multiple therapeutic categories to bring their innovations to market. Curation Foods, our natural foods business, is focused on innovating plant-based foods with 100% clean ingredients to retail, club and foodservice channels throughout North America. Curation Foods is able to maximize product freshness through its geographically dispersed network of growers, refrigerated supply chain and patented BreatheWay packaging technology, which naturally extends the shelf life of fruits and vegetables. Curation Food brands include Eat Smart fresh packaged vegetables and salads, O premium artisan olive oil and vinegar products, and Yucatan and Cabo Fresh avocado products. We are focused on creating shareholder value by delivering against our financial targets, investing in growth, driving top line momentum at Lifecore and implementing our strategic priorities to improve adjusted EBITDA margins at Curation Foods. Furthermore, we continue to work toward improving our balance sheet and net leverage ratio, which our organization is aligned around. We are taking a disciplined approach to strengthen our position through: First, the implementation of a formal capital allocation process with stringent return on investment criteria is in place to ensure that we are maximizing the dollars we are putting to 2work for shareholders. Second,…

Thank you, Al. I will start with a review of our first quarter financial results. Consolidated revenues decreased 2.2% to $135.6 million. The decrease was driven by 10.1% planned decrease in Curation Foods' revenues, which was nearly offset by an 81.1% increase in Lifecore revenues. Lifecore's improved year-over-year performance was impressive, with a 46% increase in its CDMO business and a 620% increase in its fermentation business. The exponential growth of the fermentation business during first quarter reflects our efforts to balance shipment timing throughout the fiscal year to mitigate some of the seasonality that we've experienced historically. At Curation Foods, revenue performance was primarily driven by the planned reduction in our legacy vegetable and tray business in connection with Project SWIFT, continued softness experienced by our foodservice business due to COVID, and to a lesser extent by our single-serve salad business as consumer shopping and dining patterns have shifted during the COVID-19 pandemic. Combined, this resulted in a 12.4% revenue decrease in our fresh packaged salads and vegetable business. The planned reduction in the legacy vegetable and tray business is a key aspect of our goal on focusing on higher margin products and on new product innovation in the Curation Foods segment. Partially offsetting this was a 5% increase in revenue from our avocado products business, primarily due to incremental growth in the retail distribution of our innovative Avocado Squeeze product. Consolidated gross profit increased 6.6% and gross profit margin increased to 12.1%, up 100 basis points compared to the prior period. The gross margin increase was primarily driven by the Lifecore segment where its significant first quarter revenue growth led to an increase in gross profit that was nearly double than the prior-year period. Further, Curation Foods avocado business delivered improved gross profit as a result of lower…

Thank you, Brian. Let me go into more detail about the progress we are making in our Lifecore and Curation Foods businesses to maximize shareholder value across our portfolio. Lifecore continues to see momentum benefiting from the three industry trends. Number one, a growing number of products seeking FDA approval. Number two, the increasing trend toward sterile injectable drugs. And number three, a growing trend among pharmaceutical and medical device companies to outsource the formulation and manufacture of products. As a highly differentiated and fully integrated CDMO, Lifecore is positioned to capitalize on these tailwinds and continues to establish high barriers to competition. Lifecore's speed and efficiency benefits its partners by decreasing their time to market, which adds immense value in their ability to improve patient lives through commercialization of their innovative therapies. Looking forward, Lifecore will fuel its long-term growth by executing against its three strategic priorities. Number one, managing and expanding its product development pipeline, Lifecore has 16 business development projects in various stages of product lifecycle, from clinical development to commercialization, which aligns with the business' overall strategy. Number two, managing capacity with a detailed capital management plan to meet current customer demand, while building appropriate capacity and operational expansion to meet future commercial production needs. And number three, continuing to deliver on a strong track record of commercialization from its product development pipeline. Lifecore currently is planning for one to two products in development to be approved by the FDA for commercialization annually, supporting their goal of long-term double-digit growth. For Curation Foods, the exceptional outcomes of Project SWIFT have created a foundation for future profitable growth. We are now strongly positioned to deliver on-trend, plant-based food solutions to customers with a combination of unique capabilities that make Curation Foods truly differentiated in the marketplace. Curation…

[Operator Instructions]. Our first question comes from Brian Holland from DA Davidson.

Congrats on the progress. Just a couple of quick ones from me. Firstly, you talked about a few small issues in the quarter related to operations and then, obviously, few related to raw materials due to weather. Just on the production inefficiencies, you expressed confidence that maybe isn't an issue going forward. Can you just help us understand, are you just back fully to where you were previously in this issue and maybe if you could just talk us through what exactly happened and the confidence that this doesn't hang going forward? And then, maybe the same thing on the weather side that there is no carryover here in subsequent quarters.

We had a piece of equipment that came from an Italian supplier that we had planned to have installed at the end of Q4 and fully operational in Q1. And because of COVID, the travel restrictions, we couldn't get it installed. So, it's installed now. We had to use Zoom with the technicians, with the equipment supplier in Italy to get it installed, but we found a creative way to get it up and going. So, that was primarily a big impact for us in the June timeframe. We also continued – at that time period, there was more outbreaks of COVID in the Santa Maria area and we enhanced our sanitation and PPE accordingly. It won't cost us money. It's been a very positive move for us. Santa Barbara County health visit we had several weeks ago said that we have become the gold standard, an example for them to want to use. So, that's something we just did to stay ahead of this pandemic. Foodservice, we were expecting a little bit more of a bounce in foodservice and green beans, but we've had some softness there. That is now behind us, Brian. It's starting to pick up to where we thought it would be. And we had just continued downward pressure on trays primarily from COVID from some of our suppliers. But all in all, the operation is back running where we expected. July was good. August was better. I have no qualms about where we are in terms of running the operations. In terms of the weather, as we said, we typically see significant weather events in Q2 and Q3 due to the recent heat in California and some coldness, we got a little bit more of a weather hit than we were expecting. But Brian and I are very comfortable that we have the right amount of seasonality built into our Q2 and Q3 numbers.

If I could ask about the Avocado Squeeze, sounds like good news there with some retail distribution. August quarter-end, shelf resets, generally speaking, what I've heard is that it's a little bit later this year, September-October timeframe. So, I guess, what I'm asking is, should we expect more progress here in the first – in your second quarter? Are there more distribution gains coming? How quickly can that product get bigger? And then, just kind of remind us how you're supporting – the thing you keep hearing about CPG is relatively narrow assortments, consumers going to these large brands they trust, retailers narrowing the assortments to favor these larger brands. So, first, congratulations on getting – cutting through that noise with this new product, but just curious how you plan to support that here kind of in this sort of crowded backdrop?

Brian, as you know, last year, we tested this Squeeze product in some test markets and customers. We won't confirm that we were doing well, and we learned some things that we can do better. That's why we tested it. And we've implemented those things, and we're seeing really good growth now with the Avocado Squeeze product. We've got over 6,000 points of distribution. And I see that a steady growth for us throughout the rest of the year along with our continued growth in our tub business. We have some real upsides, Brian, because when I look at – in ACV, we have this Cabo Fresh brand. We have both on tubs and on the Squeeze product. And that brand really resonates with the millennials. And we only have 20% ACV. And on the Squeeze side, we only have 6% ACV on Cabo. So, we see that we're going to have – we've had a couple of years of double-digit growth in this product line and we see that continuing to grow for us this year. We're supporting it by working primarily with our customers, with shelf talkers, specific promotion programs, we are even working now with some other companies where we are co-branding it together – I'll call merchandising, I should say. So, if you buy some chips, you can also get some guacamole. Those are the kind of things that we're doing and we are also working on the e-commerce side through mechanisms like Instacart now because we know not everybody is going to grocery store. That area is growing. So, it's a potpourri of things, Brian. We're very targeted on making sure of what we do gives us the right return on our marketing dollars.

Congrats again and best of luck going forward.

Thank you. Our next question comes from Mitch Pinheiro of Sturdivant & Co.

Just a couple of admin questions here. First, based on even seasonality or more balanced, and based on your guidance that you've given, it looks like Q2 should be solidly – I know you don't give [indiscernible], but the Q2 should be on an earnings per share basis, as you suggested, should be positive. Is that correct?

Yeah that's correct. Yeah, Brian, we're expecting a very solid, strong Q2 as we move forward. Q3 and Q4 as well.

Okay.

We have a lot of confidence in our numbers.

And the planned reduction, does that – is that also going to be fairly steady, same kind of level that we had here in the last quarter?

Yes, yes. It's a fairly steady reduction. We've reiterated before that we see core veg sort of coming in around $100 million business from $160 million that it was.

Just changing the subject back to Lifecore. It's interesting. I appreciate the numbers you handed out there with their capacity and how it breaks down and the anticipated needs into 2030. When I look at through 2025 based on the numbers that I did a quick back on the envelope math, it looks like the five-year CAGR in capacity is going to be somewhere – the demand is going to be somewhere around 22%.

Yeah, that's pretty close. Jim, why don't you talk through the capacity that we have built in. It can be kind of confusing for everybody to figure that out.

Mitch, you're pretty much spot-on. In reality, we're looking at the commercialization rate of our development pipeline and how that translates into needed capacity over the next four years to five years, and we should be approaching that 22 million unit theoretical capacity by FY 2025.

Okay. If I look at what you're looking at into 2021, going from $6.5 million demand to $8.5 million, but overall revenue is only – in your guidance is right around double digits right, up 8% to 13%. Is that a sort of a rebalanced year? Should we expect a higher rate? Are we going to see acceleration in 2022, 2023 to get to that higher CAGR? How should we look at that?

Like we said that our revenue CAGR over that period of time is going to be in the mid-teens and some years obviously are going to be a little bit higher and some a little bit lower to average that out. But in reality, it's going to be pretty consistent mid-teens double-digit growth over the next five years.

Okay. And then, how do you think about your capital spending as it relates to that? Is it going to be spread out over the four years or five years as you look at 2030?

Like we've described in our discussion on capacity and capital investment, Lifecore basically needs to continue to invest to fill out the needed short-term investments to make that 22 million units. Things that don't require long lead times, we fill out as the business and capacity dictate. We're also going to be going to need to start to invest in additional filling capacity since the filling capacity takes three years to four years from start to finish. And we project we're going to need more than our 22 million units and pushing towards 30 million units over the next 10 years to 12 years. So, the capital spend will kind of follow the investment of the needed additional capacity.

Okay. And then, I guess, Brian, I see the $4.6 million in capital spending in the quarter. Are you still on track for $34 million for the year?

Yeah. Yeah. We expect it to be more back-end loaded than in the first half. But that's our anticipation at this point.

And last question is just on the Hanover sale closed after the quarter. Is that right?

Yeah. It closed just after the quarter end. I'll let Al jump in on that one.

Yeah. I just want to ask, if we'll see a reduction there in debt, the $8.7 million? Will there be any capital – any working capital use or source in the upcoming quarter? Just trying to figure out where the debt will be.

I'm just trying to make sure I understand the question. So, we definitely generated quite a bit of cash flow from operations in the first quarter, but just I think due to the – as well just the cadence of Yucatan where they build up their inventories and then over the course of the summer and into the fall, we deplete all those inventories before we just start up manufacturing again. That, with just I think coupled with the strength of the business, improved margin structures that Al has referred to with cost out and such as given us a pretty strong cash flow in Q1. We expect that as we move into Q2, we'll also have favorable cash flow position as we move into the latter part of the year and we start building up on the balance sheet, that safety stock for Yucatan, there will be a use of funds that happens there. But at this point, over the course of the year, as best as we can see at this point, we believe we will be slightly positive overall to cash flow from operations versus CapEx end, and that is before factoring in the asset sales.

Mitch, I'll just say that the move into production away from Hanover into Bowling Green and Guadalupe has gone very well for us and we've managed to do that without any hiccups to our customers and we will start seeing the benefits of that consolidation in the P&L here in Q2 in the savings.

Our next question comes from Mark Smith at Lake Street Capital Markets.

I wanted to ask about food innovation and new products. Can you just give us more update? It sounds like decent growth in the avocado business, but walk us through kind of new products, where they are at, how that business is going? And any insight into new product launches or anything else coming out this year?

Mark, last year, we spent a fair amount of effort redoing our innovation process. We had lost our way with – we were previously focused on, if we had the capability to run Romaine lettuce and put olive oil and vinegar on it, that's what we did as opposed to if consumers really want to have that product. So, we have really spent our time building our insights capability, both with the consumer through behavioral research along with our customers. So, what's really different about our approach now is we're bringing consumer behavior insights and we're partnering with our key customers on, if you will, customizing innovation for their shopper. And you're going to see more of that for us, particularly on the salad side, on salad kit side. So, we think we really have an insight here with the flexitarian consumer. As I mentioned, it's growing very rapidly and we have just launched a plant-based protein salad with a major customer here in Northern California and it's off to a terrific start. And our goal is to grow that one out. We also have another plant-based protein. The customer is Costco which is great because it's a partnership that's very important to us. We also have a launch with another major customer in December that's much broader with a different type of plant-based protein product. So, we have a pipeline of plant-based protein products that we will be bringing out this fiscal year. We also have launched in Q4, we're seeing the benefit now in Q1, a couple of new co-developed flavors with Kroger that are doing much better than our previous innovation has done and those are also launching up in Canada. And we also have presentations going on with some other more basic salads that we think are priced right with the right customers that we have that we're in the process. So, we really think we're going to operate and get the salad business growing, but our approach isn't going to be everything to everybody. It's going to be very targeted with co-development with customers and linking their insights with our insights. On the avocado product side, as I said, we're going to continue to support Squeeze this year. We are expecting a lot of growth from Squeeze. We have redone our graphics. We think the graphics in that whole category is somewhat confusing. So we have some insights there that we're cleaning up the graphics. And we really think our Cabo Fresh is a brand that we can get behind both in the tub category and in the squeeze category as we move forward. So, our innovation is going to be very targeted. We don't have deep pocketbooks, so we have to be very strategic and smart about how we spend and get behind it. But I am very happy versus where I was a year ago with what our innovation pipeline looks like for this year.

And you brought up Costco. Can you give us more update on kind of how that club business performed during the quarter? And even sequentially, any trends that you're seeing as we go into this next quarter?

As we talked about in Q4 with COVID that it was a lot of zig-zag going on at the club business, right? People didn't want to necessarily stand in a line and wear masks and they were going there less often and buying more, if you will, shelf-stable products. We've seen the business has come back. I think the customer has figured it out. The consumer has figured it out. So, we are expecting to see solid growth with that customer that's coming here and we have other products that we are working with them on. And the same goes with Sam's.

And then, last one for me. Can you guys just walk through a little bit on cost initiatives going forward, especially as we look at SG&A? Are there continued opportunities to maybe cut a bit there?

We did a lot of right sizing of SG&A last year. I think the two big initiatives that we have underway is our continued productivity program that's driven primarily by us focused on improving the operating efficiencies of our equipment, SWOT [ph] our assets, do a better job of improving our yields across both segments, the avocado products and the salad business. But we also are, as I mentioned, doing a deep dive into logistics. We think there's opportunity there. Now that we have right-sized our network, we want to take a look at how can we – what's the right way to rightsize the logistics program that we have. There is no sacred cows here, Mark. What might have been a competitive advantage in the past may or may not be one now. So, we're really focused on the logistics side.

Our next question comes from Mike Petusky of Barrington Research.

If you mentioned this or commented on, I missed it. Have you guys said anything about fires, how that might impact the sourcing, et cetera, on the West Coast?

No, we haven't talked about fires. But the heat has had some impact on the broccoli primarily. We have experienced some broccoli issues, but we have the right amount of seasonality built in. But in terms of losing farmland or anything like that, we have not seen any impact. It's just been the extreme heat that's been a problem. And ash has not been a problem for us either.

Okay. So that's not – at least at this point in time, that's not perceived to be an issue moving forward.

Correct.

And I heard an allusion to it, but I think I missed the number if it was actually quantified. What was the cash flow ops number in the first quarter, if you have that?

Yeah, Brian.

$17 million. Yeah, it's $17 million. Within our initial comments versus a negative $5.2 million prior year. A favorable swing of $22 million.

And then, what was the gross margin in the avocado business in Q1?

The gross margins in Q1, and we guided this – or certainly spoke to this at the end of Q4. During the summer, when we closed the plant, we're sort of – the gross margins in that business are a bit compressed because we're carrying and having to expense through the fixed costs of the plant. If you pull that out, which is actually what's happening now, so we're now starting the plants back up again and we'll be absorbing that cost. But if you sort of pull that back out, then the gross margins are within the range, in the territory that we've spoken to in the past, which is up in the sort of the mid to high 20s.

Outside of the Squeeze growth, did that business actually grow in the quarter at all or was it sort of flat?

No, it actually grew. It grew 5%.

Outside of the Squeeze, it grew 5%?

Yeah, we're seeing increased distribution of our Cabo Fresh tub line along with the Squeeze. So, we're emphasizing Squeeze, but at the same time, we are not de-emphasizing our tub business.

And then, you mentioned softness I think in both green beans and salads. Can you just give a sense? Were they down low-single digits? Were they up slight? Can you just talk about what the softness means in green bean and salads?

Yeah. It's primarily in green beans and the foodservice side. That business was down about a third of what it should be. The good news, though, it's coming back. We're starting to see it come back, but we still had more softness in Q1 than what we had projected.

When you say down about a third of what it should be, was it a third of the number that you would have expected?

No. It's two-thirds of the number that we would expect. A third of our business is foodservice related.

This is the last question. And I know you guys are limited in what you can say around this litigation in Yucatan and all the rest. But it seems at least in the press release that you indicate there is sort of no reason to believe that a resolution is in the near term. Is sort of modeling roughly a $1 million of legal a quarter – does that feel about right or can you just comment on that if you can?

Yeah. The best I can say is it got slowed up we here with the COVID. We were expecting to have this issue behind us by now. But the process is back working and we expect to have resolution here by the end of the year, and that's about all I can say. I have no concerns about us being able to operate the plant or any disruption in our business. Like I have a lot of things that keep me up at night, this one is not one of them.

Just for clarification. When you say end of period, end of calendar year, correct?

No.

We're anticipating calendar, but it could be fiscal. But we're nearing the end. It's always hard to predict these things.

Our next question comes from Anthony Vendetti with Maxim Group.

I was wondering if you could talk a little bit more about the plant-based product. I know the timeline is sometime this fiscal year. Is it more towards the end of the year? And then, is that going to be co-developed or is that going to be Landec's only for those products?

So, we're already out with the product right now, Anthony. So, we have launched into a test with Costco now. So, we have been out. It's doing well. Our goal is to expand that throughout the – after the test period is over. We have another major launch coming up. It's much bigger with Sam's in December. So, they're going to be starting to come out and gain distribution throughout the year, but we were able to do most of the development during Q4. And that enabled us to the launch these in Q1 and then, as I said, in December and then we have other customers who are working with us as well.

I'm sure at current volume levels, the gross margin may not be greater than the corporate gross margin. But do you anticipate the gross margin for these plant-based products, once they get up to a certain volume levels, need to be as good as the corporate gross margin or better?

We expect them to be better. We've put in some – last year some stricter controls on what goes out the door in terms of having to reach a gross margin target and we expect these to be better than our average.

There are no further questions at this time. I would like to turn the floor back over to Albert Bolles for closing comments.

Thank you, everybody, for your time today and for your continued interest in Landec. Have a good day.

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