Good day, ladies and gentlemen, and welcome to the Landec Corporation Fourth Quarter and Fiscal Year-End 2017 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. And now, I'd like to introduce your host for today's program, Molly Hemmeter, President and CEO of Landec Corporation. Please go ahead.

Thank you, Jonathan. Good morning, and thank you for joining Landec's fourth quarter and fiscal year-end 2017 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 2016. We had a very productive fourth quarter. We began the quarter by acquiring O Olive Inc., a branded all natural and organic supplier of premium olive oils and wine vinegars, and we started the process of integrating O Olive within Landec to support O Olive's long-term growth potential. At Apio, we entered the single-serve salads kit segment by launching three new Eat Smart salads under the Salad Shake-Ups trademark. And also during the fourth quarter, we significantly expanded the distribution of our Eat Smart multi-served salad kits. For the 52-weeks ended May 27, 2017 ACV in US retail for Eat Smart multi-serve salad kits was 24%, up from 14% a year-ago, an increase of 10 percentage points. We expect the US retail ACV to further increase over the next three to six months and Eat Smart salads begin to fill the shelves of new customers. Our results in the fourth quarter and for all of fiscal 2017 demonstrate the benefits of our ongoing strategic commitment to innovation and to shifting our product mix to higher margin products, resulting in a record year for Lifecore and improved operating results for Apio. During the fourth quarter, gross margin at Apio's packaged fresh vegetable business increased a 130 basis points to 13.5% compared to 12.2% in the fourth quarter of fiscal 2016. For all of 2017, Landec consolidated…

Thank you, Molly, and good morning, everyone. Revenues in the fourth quarter of fiscal 2017 decreased 6% to $127.4 million from $135.3 million in the year-ago quarter. The decrease was due to a $7.1 million or 54% decrease in revenues in Apio's export business due to the Company's decision to discontinue selling certain low-margin fruit products, and a $4.1 million or 26% decrease in revenues at Lifecore compared to the above average revenues at Lifecore in the fourth quarter of last year due to a customer's request to ship their product in the fourth quarter of last year, which historically ships during the third quarter. These decreases in revenues were partially offset by a $3 million or 3% increase in revenues in Apio's packaged fresh vegetables business. Net income in the fourth quarter of fiscal 2017 was $2.5 million or $0.09 per share compared to net income of $4.7 million or $0.17 per share in the year-ago quarter. The decrease in net income was due to, first, a $4.3 million decrease in gross profit at Lifecore, resulting from lower revenues and an unfavorable product mix change, compared to the fourth quarter of last year. Second, a $1.7 million increase in R&D expenses for new product development. And third, a $438,000 decrease in gross profit in Apio's export business due to lower revenues. These decreases in net income were partially offset by $1.7 million or 13% increase in gross profit in Apio's packaged fresh vegetables business due to a 130 basis point increase in gross margin and due to a $2.1 million decrease in income taxes. Revenues for all of fiscal year 2017 decreased 2% to $532.3 million compared to $541 million last year. The decrease in revenues was partially due to a $15.8 million or 4% decrease in revenues in…

Thanks Greg. We are pleased to have the O Olive team as the US members of the Landec family. In early March, Landec announced the acquisition of O Olive Oil Inc. for $2.5 million in cash, plus an opportunity for the seller to earn an additional $7.5 million over the next three years based on O Olive achieving mutually agreed-upon EBITDA target. O Olive is based in Petaluma, California, is a premium producer of California's specialty Olive oils and wine vinegars. Its O-branded products are sold in natural food, conventional grocery and mass retail stores primarily in the United States and Canada. Retailers across North America are making clean label and organic products a priority. O Olive sells a variety of products, including certified organic options that are all-natural, high-quality, great tasting and with easily traceable ingredients for retailers to offer their consumers. Our initial efforts to support O Olive until developing a go-to market product and selling strategy for fiscal 2018 and beyond, as well as providing capital to enable growth and expand distribution of O Olive premium products. With capital, O Olive will be able to secure long-term organic olive oil supply, build inventories to maintain service for large customers, complete several new product development opportunities and bring vinegar production in-house for increased profitability. During fiscal year 2017, Landec extended its investment in Windset Farms for another five years. This extension will give Windset the financial flexibility to accelerate the expansion of its operations, thereby increasing Windset's market value, as well as the value of our investment in them. Windset has completed construction on its new 10-acre strawberry greenhouse and began harvesting strawberries in April. They plan to complete construction on their new 30-acre pepper greenhouse in August and begin harvesting this fall. As a result of the…

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

Good morning, Molly, and good morning, Greg. Question on the guidance. We have a 2% to 4% top line growth for fiscal '18. Help us bridge and understand Q1? Again so Greg, you said $120 million to $125 million, which is down about 7% to 8% in EPS to $0.05 to $0.07. What is it in the first quarter that's going to cause a decline on top line, and I guess, first of all, to the earnings [ph] that changes throughout the year?

Good morning, Morris, like you said earlier. Well it's mainly driven by what we said that is happening in our core export business in that they are going to decrease $20 million to $25 million next year. Our export business is very much front-loaded. Two-thirds of those revenues occur in the first half of the year. So a majority of that decrease, the 10 to 13 that we've put in our press release is going to happen, in fact all of it actually will happen in the first half and a big chunk of that's going to happen in the first quarter and the same is true for the core. We're expecting the rightsizing to be done probably half way through fiscal '18. And so a lot of that's also going to happen in the first quarter. So those are the main drivers for the year-over-year change.

Okay. And a question for Molly. Costco, you lost some business when they went multi-sourced in the past fiscal year, couple of DCs shut down on that. You talked about getting additional SKUs for Costco. How is that playing out?

Well, it has played out actually. So Costco's returned the favor, I guess, we could say and again in line with their corporate multi-sourcing strategy, one of the top-selling salad after Sweet Kale Salad is the Taylor Asian salad. You've probably seen them in the Costco. So we were awarded a couple of DCs of the Taylor Asian salad and we began shipping those last month.

Okay. Thank you.

Okay.

Thank you. Our next question comes from the line of Anthony Vendetti from Maxim Group. Your question please.

Thanks. Just a couple of questions. On the Eat Smart salad kits, that and the Salad Shake-Ups or the higher margin business that's growing faster. What percent of that of your Apio revenue is from those categories? And I know it's right now mostly the Eat Smart salad kits.

Well, I think we stated in previous press releases that our salad kits business is approximately $150 million in revenue and we ended around that this year. So you can - I don't have a calculator in front of me.

40%.

There you go.

Okay. And Kroger, Molly you said you are going to be in 2,000 stores. You sign them up for both salad kits and the Salad Shake-Ups. They have like a little over 2,700 stores. Is that initial rollout and then they may roll into others or some of those stores aren't appropriate for the salad kits. Is that the reason?

Well, actually we are already in. We've been in some of the Kroger stores all along. Harris Teeter is a part of the Kroger, one of the Kroger banners, and they've been a big fan of Apio Eat Smart salads for a quite a long time. And so we've already been in those stores. So we are in a couple other smaller banners and have been, and so really this is the remaining stores, that at least makes sense for our salads, right, because you want to make sure you're going to start stores that have this similar consumer that are going to buy salad kits and buy the Eat Smart salad kits. So this is the incremental doors for getting in Kroger and I consider this full distribution at Kroger.

Okay. And then on the vegetable shortages, is that pretty much played out now or will that drip into the first half of fiscal '18?

That's pretty much played out. So we are experiencing saying normal sourcing conditions right now and don't see anything in the immediate future that would rather that should hamper us knock on wood.

And during the Lifecore tour, we saw some of the plant expansion and the area for that. Can you talk about the capital investment, a little bit about the timeline of how long that's going to take to build out and how much money it's going to take to build that out?

So this year in the project, we specifically mentioned, we have about $12 million and that's again to install equipment. We built last years, which you saw when you went on the tour, the infrastructure in the walls. So now it's about bringing in equipment for additional capacity. And we only want to do that when we feel that we've met milestones in the FDA approval process that we feel our risks are sufficiently mitigated. And so we will be spending that $12 million. It will be sparsed out by quarter over the next four quarters, so it is distributed throughout the year. We are also increasing aseptic filling capabilities, which is some more capital at Lifecore this year.

Okay, great. Thanks.

Did I give you enough?

Yes, that's perfect. Thanks Molly.

You're welcome. Thanks.

Thank you. Our next question comes from the line of Colin Radke from Wedbush Securities. Your question please.

Hi, good morning. Could you talk a little bit about the gross margins you're expecting on the Salad Shake-Ups. I think the expectation is that they would be a little lower than the salad kits but higher than the legacy packaged vegetables. But that still leaves a pretty big range. I mean, should we think about these as sort of low-teens, high-teens or are there may be more in the 20%-plus type of range?

We don't like to give gross margins by specific product segments. So we are going to stay away from that. I'll give you - relatively speaking though because directionally they are going to be a little bit lower margins than the multi-serve salad kits, mostly because of packaging. You have a lot more packaging on these kind of products, and that's kind of an industry-wide. So they're not going to be as high but there is still nice margins and we are still expecting the overall margins of our salad business to remain high and be much more - and be much higher than our core product. We also can see the gross margins of our single-serve salads increase over time with volume. So we put in new lines for these single-serve salads, and as we make those lines more efficient, our volume increases, the profitability of those products is going to also increase, which is one of the great wins with Kroger that we had. We're bringing a lot of volume to help that profitability.

Got it. Okay. Just in terms of the Eat Smart ACV. I know in the press release, you say it's up to 24% now. I assume that doesn't include the Walmart rollout. So given that as well less Kroger and some of these other opportunities, where do you expect that number to be maybe a year or so from now?

So that probably does - that number probably does include some of the Walmart rollout because that was a couple of months ago. What it probably doesn't include is all the Walmart rollout or Kroger so we just started shipping. As you know, Nielsen is also delayed a bit. It takes a couple - two or three months until they kind of catch-up with the shipping and the data roles in. I can give you back of the envelope estimate. If I look at the new customers that we have brought on over the last quarter, I would expect our ACV over the next six months let's say, to get to be between 35% and 40% in US retail for our salad specifically.

Got it. Okay. That's helpful. Maybe just lastly, could you perhaps quantify what sort of revenue contribution you're expecting either from the Salad Shake-Ups specifically or maybe more broadly just from adding Kroger? And I think previously you talked about a $5 million opportunity from the Sweet Kale SKU across Walmart, and given that you have a few months now, is that still the expectation or has anything changed there?

So this is the way I would think about it. So we said double-digit growth in our overall salad segment for fiscal year '18 and we just stated that the $150 million business. Keep in mind, we expect our - if you look at - it's mostly coming from retail, so we don't expect the growth from Costco. And so we are going to be looking at a flat type of business at Costco but in over 25% growth in our at least US retail business. So with the double-digit growth on a $150 million, you're talking $15 million to $17 million. I did previously say that the Sweet Kale Salad in Walmart would be about $5 million opportunity. That was total, keep in mind. So we are already distributing the little in last year. So the year-over-year increase is smaller. So if you look at that, call it a few million, at Walmart and we are trying to get to $15 million to $17 million. That's a lot of other new customers coming online.

Got it. Okay. Thanks. I will leave it there.

You're welcome. Thank you.

Thank you. [Operator Instructions]. Our next question comes from the line of Chris Cooper from Lake Street Capital. Your question please.

Hi, good morning.

Good morning, Chris.

Good morning, Chris.

Hi. You talked about HelloFresh and Amazon Fresh becoming partners. Can you talk about - is there a pipeline of other potential online partners and what do you see as the opportunity for that segment?

Right. Thanks for the question. Yes, we are reaching out. We want to be our products to be used ubiquitous, right. That's our goal. So we are reaching out to all the retailers and we are working with several of the direct-to-consumer meal kit companies and we are going to reach out to every single one of them to try to get our product in. Keep in mind that some of these are still small and in their opportunity, and so - but we do - so we don't see huge increases from those as these partners. At the same time, we really believe that there has been a lot of change in consumer purchasing behavior. We want to be in the ground floor of these - with these partners reaching consumers in new ways of their purchasing. And so we are trying to be, as I said, ubiquitous in available to consumers to buy everywhere. So we are going to continue to reach out to every meal kit company and continue to try to build our business with Amazon Fresh.

Okay, got it. Then my other question is little bit different but now that you guys have been exiting some of these low-margin SKUs, my understanding is that your products with your breed way patch, stay fresher much longer than your competitors and since you're leaving those markets, is there any opportunity to partner with any competitors and sell the patch to them?

We're not leaving the markets in anyway. So we are just making sure that we are partnering with the right customers and we're making the partners who value the service that we provide to them and the high quality. Eat Smart products have - if you look at our core business and when I'm talking core, I'm talking our trays or I'm talking our bagged broccoli, have the highest velocity of any other brand in the market. And so we truly believe that our brand in this product still has value but we just want to partner with those customers that value our service and our brand and we are able to get a price for them, makes sense to do business. So we are not leaving those markets. And so I guess the short answer is no, we are not looking at licensing our technology to any competitors because we believe that is a true differentiation for us.

Got it. Thank you.

You're welcome. Thanks for the question.

[Operator Instructions]. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Molly Hemmeter for any further remarks.

Thanks Jonathan. Thanks to everyone for joining the call this morning. We believe that we have an extremely strong foundation for growth going forward. We have one year left in our transition of Apio to a truly innovative company. And Lifecore3 is poised with the work they are doing this year. We're trying to double-digit growth next year and we are continuing to look at other products in the natural products space to bring to market. So we are excited about what this year will bring. And thanks for joining us today.

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