Good afternoon. And thank you for joining Landec's Fiscal 2021 Third Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. At that time I will provide instructions on how to ask a question. Now, I would like to turn the call over to Jeff Sonnek, Investor Relations at ICR.

Good afternoon. And thank you for joining us today to discuss Landec Corporations third quarter fiscal year 2021 earnings results. On the call today from the company are Albert Bolles, President and Chief Executive Officer; John Morberg, Chief Financial Officer; and Jim Hall, President of Lifecore.

Thanks, Jeff. Good afternoon, everyone, and thank you for joining us today. On today's call, I will provide highlights from our third quarter fiscal 2021 results. Jim Hall will then review some of the exciting developments in the CDMO industry and John Morberg will discuss our financial results in more detail and update you on our fiscal 2021 guidance. We will then open the call for your questions. I like to start today by recognizing the contributions of all of our workers at both Lifecore and Curation Foods who show up every day in our facilities across the country. Our incredible operational employees remain on the frontlines of the COVID pandemic and I am grateful for their resolve, fortitude and contributions. Fortunately, we're now starting to feel like we are seeing a light at the end of this long tunnel, with many of our employees now getting vaccinated. We are working with our county administrators to facilitate the delivery of vaccine for our employees. Our organization has been working hard to manage against a variety of impacts from this terrible pandemic, and today, we feel like we are making good progress. The added complexity and resulting financial effects of the pandemic has negated the many areas of financial improvement in some instances. And in the fiscal third quarter, we were met with a more pronounced adverse financial impact on our Curation Foods segments, results of operations than anticipated. We experienced indirect impacts from canceled orders, shifting demand of SKUs and the related write-off of inventories for perishable products.

Thank you. As Al alluded, the CDMO market is enjoying significant favorable trends that are supporting Lifecore’s long-term strategy and growth plans. The market is funding important advancements in novel therapies that along with limited available peripheral manufacturing capacity are creating exciting opportunities for specialized CDMO partners like Lifecore. According to market research, in the last 10 years, approximately 75% of new drug development in small to midsize pharma companies has been outsourced. Injectable products represent approximately 45% of total products in development, which have a projected compound annual growth rate of 10.5% and prefilled syringes have a projected compound annual growth rate of 13% through 2023. Based on an expectation for an acceleration in injectable approvals, there are significant unmet demand for specialized CDMO vial and syringe capacity, which industry estimates will grow by an incremental 75 million to 100 million units. We believe that our strength with ophthalmic products and 30 plus years of experience handling how to manufacture products based on Hyaluronic Acid or HA and our ability to support both small and large molecule products has put us in an ideal position to be a specialty player in the CDMO space with very distinct capabilities. Therefore, we believe that Lifecore can play a pivotal role and we are well-positioned to meet the large incremental needs of this exciting industry. Our expertise and viscous materials, our long-term development and manufacturing partnerships, and our world class quality system enable us to stand out as a specialized leader in the CDMO industry. We are very pleased with the continued expansion of our pipeline, which currently consists of 17 active projects that are in various stages of their product development lifecycle. Many of our projects are reaching important late phase development milestones with their FDA clinical trials, giving us confidence in achieving our near-term and future growth plans. We are continuously working to expand our development pipeline and are in active discussions with five new partners that we believe will continue to support our long-term growth strategy. In fiscal year 2020, we manufactured approximately 6.5 million total units of syringes and vials, and project to manufacture 8.5 million total units by the end of our current fiscal year 2021 out of our aggregate total current capacity of a little more than 10 million units.

Thank you. It's great to be here as part of the Landec team, a team that is passionate and committed to the strategies, Al brought to the organizations, just a short time ago and formalized with the Project SWIFT framework. I'm looking forward to being part of the continued improvement of the business as we seek to unlock further value across the entire Landec business for its stockholders. Turning to the financial performance of the company, I'm going to begin with a detailed review of each segment before concluding with the consolidated financial review. Starting with our Lifecore segment in the third quarter, Lifecore generated record quarterly revenues of $27.2 million, a 7% increase over the same period of the prior year. CDMO revenues increased a robust 33% to $18.6 million from the prior year, driven by increased aseptic commercial business, which more than offset a 25% decline in fermentation revenues, which was primarily due to the timing of shipments within the fiscal year. Our strong topline growth drove a 6% increase in gross profit to $11.6 million with a hefty 42.5% gross margin that was essentially flat compared to the prior year. As a result, EBITDA totaled $8.1 billion for the quarter, a 5.9% increase over the prior year.

Thanks, John. Looking forward, we continue to be very excited about our business due to a number of factors. First, our Lifecore segment continues to produce outstanding results and it is well positioned to take advantage of strong industry dynamics that will support growth for many years to come. Secondly, as the adverse impacts of the COVID-19 pandemic subside, we expect consumer demand for our diversified Curation Foods product offerings to grow. And we intend to utilize our extensive retail network and proven track record of developing innovative products that once again be the industry leader in our categories. We also tend to use a strong research and development position to be in the forefront of industry opportunities, such as the rapidly growing plant-based product trends. Finally, we'll continue to focus on executing our strategy to deliver long-term value to our shareholders. Operator, we're now ready for questions-and-answer sessions of the call.

Thank you. Thank you. Our first question comes from Anthony Vendetti with Maxim Group. Please proceed with your question.

Thanks. I was just wondering, Al, Project SWIFT as you mentioned, something you implemented quickly as you came on board. It's been about 15 months. Where are you with that? How -- what's the magnitude of the annual saves -- annual savings that you've been able to enable to procure from that Project and how much do you think is left? And then, specifically, can you talk about the opportunity in your logistical operations?

Yeah. Sure. Hi, Anthony. How are you today?

Good. How are you?

We've cancelled -- we've accomplished a lot with Project SWIFT. I mean, we've cut our expenses. We've closed several offices. Right sized our FT&E, that all was around $12.5 million. We really focused on the Eat Smart cost out, if you remember the end of last year, we had invested a lot in automation that has led to at the end of last year about a $9 million improvement in cost out for us, primarily focused on a core vegetable side, which that along with what we changed in the sales force with the focus on really going after profitable growth, not just chasing revenue growth. That price increase allowed us to take our legacy core veg products to a load of single-digit, sometimes negative depending on the year gross margins to high single-digit gross margins. We improved Yucatan, Yucatan remember last year at this time still wasn't profitable for us and now we have turned that into a very profitable business for us and it's growing nicely for us. And we chose -- we closed Hanover, which we're going to start to see the benefits of that year-over-year, as well as shutting down Ontario. And those are the things, Anthony, that if we would not have done, the gross margin degradation would have been even worse for us in Q3. But as I'm looking here at Q4, the ball has bounced back. Our sales are healthy again, which gives me confidence that we're going to be in that 11% to 14% goal of gross margin range that we had set at the beginning of the year. You asked about logistics, COVID in Q3 slowed down some of the travel and things we had planned, so it hit, if you will, a bit of a pause button on that, that has started up as of March 1st, and we are still focused on making progress there where it makes sense for our business, we'll probably have more to report on that later. And you asked me like what inning we are in and it's maybe the sixth inning, could be the seventh inning stretch and but somewhere in there, because we continue to look at everything in our business and that's just the way we're going to continue to operate is to really simplify the business and make it far more profitable. And I'm really proud of what we accomplished. I'm not happy with financial results. But I'm happy with the resiliency of the team and the things we've done to get here, which gives me confidence that, Anthony, I wouldn't have done anything differently. Maybe if I would have had a crystal ball that would have helped with the COVID. But I didn't. And I believe and my team believes we're doing the right things that we need to do to improve the balance sheet here at Curation Foods.

Okay. And then just to follow up on, just one last question on product reset, now that we're moving past, hopefully, the worst of the pandemic. Are you seeing more of an opportunity this year to increase your penetration into your core customer base?

Oh! Yes. We have confirmed commitments. These aren't things I'm hoping are happening. These are confirmed commitments from major customers that were planned for earlier in the year, particularly Q3 spring time. We see the resets going in beginning now in the end of Q3 and into -- end of Q4 and into Q1 of next year. And the other thing, Anthony, that's opening up are more top-to-top meetings with me and our customers. But I say with confidence we have a robust pipeline of new products that are going in, and we're beginning to see some of the small changes that are going to have big impacts for us, for instance, the small slim sized bag that we put in. We're beginning to see improvements in terms of our velocities with that bag.

Okay, great. I will hop back in the queue. I appreciate it. Thanks.

Thanks, Anthony.

Thank you. Our next question comes from Mike Petusky with Barrington Research. Please proceed with your question.

Good evening, guys. Thanks for taking the questions. Al, I guess, I want to understand -- I guess I want to reconcile a statement you just made with the guidance for Q4. You sort of just said that sales are bouncing back. We feel good about the momentum in the business, but the guide even at the higher end supplies material sequential decreases in both segments. So, I guess, I want to understand when you say sales are bouncing back, what does that mean?

Yes. So mid-January to the end of February we had a lot of our -- a good number of our sales. We just didn't hit the budget that we had because we just had zigzagging of orders. For instance, a customer call up for an order, a day later they'd cancel it, we're stuck with the inventory, we're stuck with the walk by, let's say the broccoli in the field, that's a double whammy for us. So what we're seeing now is we're back to budget in terms of sales. I think, what we're saying is though the operational impact of COVID, there are practices with increased PPEs that are going to be happening a higher degree of sanitations. For instance, that are going to be with us on an ongoing basis we believe. But we also know that we're getting the summer months versus the winter months and that's less risk for us in terms of the raw material risk of the weather that affects us. So we feel that the business momentum is going to get back. We've got some added cost that are going to with us. But certainly the January -- the mid-January through February COVID impact on food service and trays, we think those things are going to be starting to come back for us.

Can you quantify -- I heard what you said about sort of combining Eat Smart and vegetables, but can you quantify what eat -- sort of just year-over-year for the quarter, for nine months, Eat Smart its top-line performance relative to where it was a year ago?

Well, it's relatively flat versus a year ago at least I mean I'm talking about -- you mean with or without the COVID because with COVID it's down.

No. I mean, in absolute raw numbers, what is Eat Smart year-over-year?

I don't know if we have that.

Hi, Mike. We really -- in our segments, we've reported just fresh packaged salads and vegetable growth, which includes our salads, vegetables, trays, and everything combined. From a total perspective for the year, based upon our guidance today, we're seeing anywhere from negative 17% to negative 16%, which really implies in the fourth quarter negative 27% to negative 23%. And also you should remember last year we did have the 53rd week, so the extra -- the 14th week in the quarter last year, so excluding that we would be in the negative 14% to negative 15% for the full year.

I'm not sure what you're telling. Is that for Eat Smart or is that for some…

That's for fresh packaged salads and vegetable growth.

Okay. Well, I guess, I've always thought Eat Smart was sort of a core or was at least one of the parts of the business that was expected to grow like the core veg I never really thought was a part of the thesis here. And that's why I'm asking specifically about Eat Smart, unless that's not really considered. If I'm wrong about the long-term thesis, that's a part of the growth and then I don't, I guess, the question isn't as relevant, but to me it feels like that actually should be up. Like you're breaking out avocado, I'm not sure why you wouldn't Eat Smart's business that's I think 3 to 4x the size of avocado, right?

From a revenue standpoint, yes. The part of the thesis for growth has been getting a number of our new products going on the Eat Smart side and the packaged salad kits. You've heard us talked about plant-based proteins. All of that has been -- was essentially put on pause. During Q3, it has been moved out to the end of Q4 and into Q1 of next year based on customer resets.

Okay. I guess one more question turning sort of to CapEx and I guess at the end of last quarter, I think CapEx guidance was still around $30 million or possibly even a little bit more than that. Obviously, you guys are way behind that pace as we're in your fiscal Q4. Can you just talk about -- maybe I missed this, maybe you mentioned earlier, but what's the updated guidance for CapEx for this fiscal?

Yes. John, can you handle that?

Yes. Just a couple of things for the quarter, we spent $2.6 million at Lifecore and $1.1 million at Curation for a total of $4 million in Q3. So we're looking at spending an additional $6.9 million at Lifecore in Q4 and $1.7 million at Curation in Q4. And the Lifecore CapEx certainly keeps us on to our growth plans for the -- and the Curation spend is for HPP system. A variety of avocado products will benefit our guacamole gross margins by 2 percentage points or more going forward in the next year. Now, I'll just add onto that from a cash flow perspective. Our operating cash flow of $10.6 million. For the year-to-date lesser CapEx of 11.4, add back 12.9 for a fixed asset sales and the closing of Hanover and the Ontario facilities. And we do have a positive free cash flow of $12.1 million year-to-date. And even based upon the guidance today, we would be flat to positive $2 million for the year. So -- and hopefully that answered your question. In total, we're about just under $25 million of expected CapEx for the year.

Okay. So the guide for Q4 you're telling me is roughly $8.5 million, right?

$6.9 to $1.7 , yes.

Okay. To me it looks something…

Yeah.

To me it looks like it's coming closer to 20 than 25 off of that, but maybe my math is wrong. Okay. All right. I think that's all I've got. Thank you.

Yes. Thank you.

Thank you. Our next question comes from Mark Smith with Lake Street Capital Markets. Please proceed with your question.

I guess, first question from me, can you give us some detail on what you're seeing from a clinical trial standpoint and any potential impact on Lifecore?

Yes. I'll let Jim to go into detail here, but as we mentioned, we have 17 active projects, a number of them are in the late stages of a clinical trial for FDA approval and still continue to add discussions with numerous customers on more of the pipeline build as we continue to build that out. But I'll let Jim answer any more details you may have around that. Jim?

Hi, Mark. How are you doing?

I am doing okay.

I'm assuming your question is, are we experiencing any delays with our partners, clinical trials? Is that your exact question?

Yes. Any delays that you're seeing any impact there and then maybe any update post quarter end on kind of what trends you're seeing today.

Yes. For the most part things are staying on track, some of the early phase projects that are in Phase 1, Phase 2 clinicals depending on what indication they're going after and what kind of clinics are in, did experience some delays, but things are starting to fire back up again. More importantly the main things, the late phase things in our development pipeline continue to move forward. And several of our partners had reported fairly strong and very strong Phase 2 and Phase 3 data and continue to advance their studies according to what our plans are. We're working with some of the top pharmaceutical and med device companies that are out there. These guys are performing in the top of their market with products that have been in the market for a long time and are going anywhere. And a lot of these people are who we are working within our development pipeline as well. So it's a strong group of people and a strong group of partners and they're advancing well. We did just with one of the things we were working on. I think in the last quarter I mentioned we were expecting an FDA approval later this year. We were just notified that one of the products we were working on received approval. So that was exciting news for us. And as you know one of the other late Phase 3 projects we're working on as the PDUFA date coming up here in May, that's still on track and we're busy preparing to help them with the eventual launch. So things are on track and continue to build. We're very happy with the activity in our pipeline as it continues to build and see things continuing to progress.

Okay. And then just staying on Lifecore, any additional insight on the delayed shipments in fermentation business is just more shift beyond Q4 and I assume that that's fully built into the revenue guidance.

Yes. Actually, Mark, the shifts were earlier into our fiscal year. So you noticed our year-to-date numbers we've at 10% or just a hair under 10% growth in our HA business. So the growth is there as increased orders from our commercial customers. It's just a timing of shipments actually earlier in the fiscal year. So there are no delays. Things are on track with our HA business. Just remember we were doing a lot of work to try to flatten out our quarterly variances in revenue and this is just an offset of that. Things that normally shipped -- in the third quarter shipped and primarily the first quarter of this year and again in the second.

Okay, great. And then just one question for me as we look at Curation, you guys have talked more about new products, plant-based protein. Any additional insight you can give us on that and then especially any potential increase in R&D spend.

Our R&D spend remains relatively flat, Mark. And that's just driven by the fact that we are very focused and selective on what projects we work on. And we have made a shift from just working on a number of projects based on what we think are the right things to work on based on trends and consumer trends to taking those insights and working much more closer with customers and develop products that are more specific to their needs. I will give you a tangible example. We launched earlier in the year our Mediterranean plant-based protein product with Sam's Club. It has performed extremely well. It's a rotational product for us. So that means it goes in for four or five months, and we've replaced them with another product. The last time we had a rotational product was three, four years ago, it was strawberry harvest. And our Mediterranean protein product is doubling that in revenue. Sam's is very pleased with us and we will continue the rotational program with them as we go into the next fiscal year. A number of other products just have been delayed because of resets, but we're in conversations now and as I mentioned firm dates for those to go in and once again it's just not products. We think there's opportunities in packaging for us with the same products, but maybe the right size, the right format, the right usage occasion. And we were really excited about some of the packaging innovations that we have in our pipeline.

Okay. Great. Thank you.

Thank you, Mark.

Thank you. Our next question comes from Mitch Pinheiro with Sturdivant & Co. Please proceed with your question.

Hi. Good afternoon. A couple of questions.

How you doing?

I’m doing okay. I’d be better if I understood the fourth quarter for Curation a little better. So I just trying to what the guidance you gave for the year. We’re going to see a decline in Curation in the fourth quarter in revenue of near 20%. Is that correct?

Yeah. We’re going to see a decline in the fourth quarter of 23% to 27%.

Okay.

And if you exclude the 53rd week last year, it’d be 17% to 22%.

Okay. And so I just want to -- just can you talk about the 17% to 22% decline? Just break that out the puts in takes relative to last year, why it’s down, it’s down more than I would have thought. I know you probably went through it in the prepared remarks, but if you could just go through that again, I’d appreciate that?

Well, one of the things last year at this time went into Q4 Mitch, we had a pretty full lineup of core veg products, and it wasn’t until the end of Q4 and into Q1 when we got the cost out through, and the price increases through that we really started the aggressive SKU rationalization of our legacy core veg business. So that’s a big driver for us. Is it still falls? I know it seems like a long time ago, but it really wasn’t. Our planned reduction in the core veg business and to move it to be more profitable, so that’s a big part of the revenue reduction year-over-year in Q4.

It seems like. Yeah, it seems like though to your point. It seems like we’ve been like ready to lap the reduction of that already, but I guess not, it was starting to come down, looking at my numbers. It’s been coming down the non-core business, and it seems like it’s fallen more than the plan reduction. Is that not, is that true or is that fair?

It was coming down last year. I remember we were looking at SKU, so we just didn’t make any money at all. And so we started SKU rationalization in the core veg business, and then our salad business as well, where we were just spending a lot of money and trying to keep products on the shelf. So we started some of them, but we got, so that’s been happening. It’s probably why you feel like it’s been happening for a long time, because it’s one of the things I first initiated when I got here, but we really went through last year through the Q4 of last year. We were still on the fence on whether we were going to remember. We had the dual path of reducing and trying to manage a more profitable smaller core veg business, or we’re going to sell it. And we made the decision at end of Q4 early Q1 that our productivity went through. It hit the bottom-line. Our sales team was able to go out and secure the higher prices. We hadn’t taken a price increase in some cases in 20 years which is part of the problem. And we were able to get pricing, increases through significantly improved our contribution margins on the business. And that really was in Q1 of last year. So I know it seems like mentioned it’s been a long time, but really, as you look back at it really hasn’t been down.

Okay. And then avocado products in the fourth quarter are they going to be, I mean, we going to look in sort of flattish you had a good quarter a year ago, what’s your expectations?

Yeah. We continue to see growth for growing at Nielsen data we’re growing about 8.3%. Internally we’re growing at five versus our plans, but John there’s a 53rd week in there too. John will explain it.

Yeah. So we actually look, we kind of look flat against it because of the 53rd week, but if you exclude that what is consistent with what we have been growing.

Okay. Helpful. And then just one more on Curation, what was your adjusted, is there any adjustments to gross profit for Curation in the third quarter?

No.

$8.1 million? No justice. Okay. Moving on to Lifecore.

Hey, Mitch.

Yes.

If I could just answer in more detail. You really, aren’t going to see a lap in the core veg business till November, okay, because we had to give customers lead times and whatnot. So just to say on an ongoing basis, we won’t really be lap in the numbers. You want us to be lapping until about November.

Okay. Thank you. And then with Lifecore, so Jim, could you, so what should we expect to happen to revenue or gross margins if one of your near-term pipeline drugs gets approved? What happens is there revenue smoothing? Is there going be an initial jump in shipments? Will you see a spike in the quarter that it’s approved? Have you already been building inventory for that? And second, what are the margins on the initial shipments? Having figure your margins on that? And would that be -- would we see any margin pressure or something on the launch of a new drug? Can you talk about that a little bit, please?

Yeah. Sure, Mitch. So I’ll start with for -- and I assuming you are talking about the project that has a PDUFA date coming up here in May and we’ve been actively working with that partner to manufacture material and preparation for launch, should they receive approval, which everybody is fairly competent in. But as far as pricing and margin and any shifts in margin, we typically price, especially the indoor non-legacy type products at contribution margins that easily support our overall gross margin objective, which is to maintain overall gross margins in the 40% range. So we’re not going to see any pressure on margins. If anything, it should help a little bit in the overall scheme of things. Typically when a product like this, like or products like these launch they have a bolus and material a lot to feed the -- and feed the market. So there’s a buildup of inventory and then slowly sells through and we supply on a more steady rate. But this is all figured into our numbers for this fiscal year. And when we present next fiscal year, it will be included in all those, but it’s our overall goal. Like we discussed the last couple of calls to do what we can to balance our revenue and profitability from quarter-to-quarter, I think we’ve done a good job with that this year. And I think the more we get approved in the more products that turn commercial and are successful, they’re only going to help us with that. So no margin pressure, we’ve been actively verbing already to prepare for this launch or manufacture that material. And long-term, we hope to have it helped flatten our quarterly performance. So hopefully that answers your question.

It does. Thank you. Appreciate that. And then when you look at your -- you said 17 active projects. What percentage of those projects sort of use your HA and proprietary knowhow around HA?

Yeah. It’s just a little bit depending on what we’re working on. But right now it’s about 60% of the products in that portfolio utilized HA 40% don’t several other things that we’re in discussion with to add to that 17% don’t use HA some do. So it’s, we see, as we continue to grow the pipeline and continue to grow our business that the HA number will start coming down and it’ll be more even with other polymers and other types of products.

And when it comes to HA you’re obviously a leader, but are there any other companies out there specializing in HA and formulations within the CDMO sector?

I’m fairly certain at least, I’m not aware of any other CDM, all that actually has the HA capabilities to manufacture HA various molecular weights to support their product portfolio and to support the customers in that avenue. There are other CDMOs out there that work with HA that formulate and fill products that utilize HA, but we’re the prime player and the only CDMO that has a standalone HA, but HA raw material business that I’m aware of.

Well, as you pointed out, I guess in presentations, the HA is I’m seeing an increasing number of drugs and therapies using HA using that polymer for all the reasons that, all the positives and that you put it in your presence, excuse in your presentation, but it seems like that's a very rapidly growing area. And I guess one last question, are you going to see what we expect pipeline growth in the upcoming 12 months?

We, like you’ve heard we mentioned in the past in other presentations, I’ve done, our primary markets in the atomic space, and there’s a lot of development going out in that space, especially in the back of the eye. It’s the three page-related macular degeneration and other retinal type diseases, and we’re doing a lot of work in that. There are a lot of the projects now, there’s three to four in our pipeline that are atomic based products that will support future growth. Our primary market is an ophthalmic visco-elastics. We work with the top three players in the industry there we have for a long time, and there’s a projected low to mid single-digit growth for those applications just simply based on the aging demographics for the population. So we see growth in our HA business. We’re also spending more time now not just focused on the growth of our CDMO pipeline, but also looking at what we can do to expand our HA offerings to take advantage of some of the development work that’s going on there as well. So we’ll see growth. They won’t be the primary goal driver or for life for moving forward. They’ll still be driven by our CDMO business like we’ve discussed in the past.

All right. Well, thank you. I appreciate the time.

Okay. This is John. I just wanted to update a couple of things on our guidance for CapEx for the year, for the quarter. It just to make it clearer for Q4 or guidance on CapEx is a $10.1 million spend for Lifecore $1.7 billion for Curation for a total of $11.8 million. That that then equates to approximate year-to-date spend or year estimate spend of $17 million at Lifecore, $6.2 million at Curation for a total of $23.2 million overall estimate for the year end CapEx.

Thank you again for your interest in Landec and your participation. And we look forward to talking to you again at the end of the fiscal year. Thank you very much.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.