Good day, ladies and gentlemen and welcome to the Landec Corporation Fourth Quarter and Fiscal Year End Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Molly Hemmeter, Landec Corporation President and CEO. Please go ahead.

Thank you. Good morning and thank you for joining Landec’s fourth quarter and fiscal year end 2018 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 2017. As a leader, a leading innovator in diversified health and wellness solutions, Landec is comprised of Lifecore, our contract development and manufacturing, or CDMO business and our Landec natural foods business, which now includes three brands, Eat Smart packaged fresh vegetables, O Premium Olive Oils and Vinegars and the new brand specifically target to the growing population of plant forward consumers called Now Planting. We are introducing this new brand to our investment community today in conjunction with this earnings release and we will talk more about Now Planting after we discuss fiscal year 2018 results. Landec continues to drive growth in each of its three strategic growth platforms, Lifecore, Eat Smart salads and natural food products. In fiscal year 2018 and compared to last fiscal year, Lifecore revenues grew 10%, Eat Smart salad revenues grew by a tremendous 23% and natural food product revenues grew 12%. As a result, Landec consolidated revenues for fiscal year 2018 grew 12% compared to fiscal year 2017. For fiscal 2018, Landec’s earnings per share from continuing operations, excluding the one-time tax benefit from recently enacted tax reform, grew by 14% from $0.36 per share in fiscal 2017 to $0.41 per share for fiscal 2018. Let’s first talk about Lifecore, Landec’s CDMO business. Lifecore has completed its transition beyond its historical capabilities as a premium supplier of hyaluronic…

Thank you, Molly and good morning everyone. As a reminder, during the fourth quarter of fiscal 2018, the company discontinued its food export business. Therefore the operating results for the food export business are shown as a discontinued operation. Financial statements for the four quarters and the full fiscal years of 2018 and 2017 have been reclassified to exclude the financial results of the food export business. Revenues from continuing operations in the fourth quarter of fiscal 2018 increased 16% to $141.1 million compared to $121.3 million in the year ago quarter. The increase was primarily due to a $15.6 million or 14% increase in revenues in Apio’s packaged fresh vegetables business and from a $4.6 million or 40% increase in Lifecore revenue. Net income from continuing operations in the quarter was $6.7 million or $0.24 per share compared to $2.6 million or $0.09 per share in the year ago quarter. The increase was the result of first, a $4.1 million or 100% increase in gross profit in Lifecore; second, a $2.1 million or 14% increase in gross profit in Apio’s packaged fresh vegetables business; and third, a $500,000 increase in the change in the fair market value of the company’s investment in Windset for a $200,000 increase in the fourth quarter of last year to a $700,000 increase in the fourth quarter of fiscal 2018. These increases in net income were partially offset by a $1.7 million increase in income tax expenses. The $1.7 million increase in income taxes was net of a $606,000 tax benefit from the tax reform enacted in December 2017. For all of fiscal 2018, revenues from continuing operations increased 12% to $524.2 million compared to $469.8 million last year. The increase was primarily due to a $46.9 million or 12% increase in revenues at…

Thanks, Greg. Let me go into more detail about the progress we are making in our three continuing growth businesses, which include Lifecore, Eat Smart salads and natural food products as we positioned each for top line growth and enhanced profitability. Lifecore is benefiting from a growing trend among pharmaceutical and other medical material companies to outsource specialty services and manufacturing. With the growing number of products in the industry seeking FDA approval, Lifecore is well positioned as a fully integrated CDMO to augment its pipeline with new projects to fuel its long-term growth. We continue to expect Lifecore to generate low to mid-teen revenue growth on average over the next 5 years as Lifecore expands sales to existing customers, adds new customers and commercializes products that are currently in its development pipeline. Transformation of the Apio business is evolving rapidly. In the current transformation phase, we are expanding our product line from packaged fresh vegetables to include our fresh natural food products that meet evolving consumer needs with a commitment to 100% clean ingredients. These natural products will have higher gross margins and exhibit less sourcing volatilities than our historical vegetable bag product offering. We have been diligently working on multiple fronts to enable the realization of our natural foods vision. We have launched the Eat Smart 100% clean label initiative to ensure that all Eat Smart products, including salad toppings, dressings and dips are made from all-natural ingredients with no artificial ingredients. We are on schedule to deliver this commitment by the end of calendar year 2018. We also formed the Landec New Ventures Group to develop a natural food strategy and to lead new product development and acquisition initiatives in the natural food space. As the first step in the new ventures effort, we acquired O Olive…

[Operator Instructions] And our first question comes from Alexander Scharf with Maxim Group. Your line is now open.

Hi, good morning. So when you think about fiscal year ‘19 salad kit growth, you are guiding to 4% to 6%, how much of that – can you quantify how much of that is expected to be from organic growth within existing doors and how much from incremental points of distribution?

Great. So, we are very focused in fiscal year ‘19 on making sure that the distribution that we gained in fiscal year ‘18 is selling through. So, our focus was going to be primarily on investing in trial and driving velocity in the products that we gained last year. So, a lot of – some of that and lot of that will be the year-over-year growth from the distribution that we gained last year and we really want to spend our time on making sure consumers get to know our brand in those new geographic areas. They love our products. We drive trial and we are building relationships with our strategic accounts by executing with excellence. So, most of those sales are going to be from just making the best of the new distribution that we have just gained.

Got it. And then in regards to the first quarter at Lifecore, you have talked about unfavorable timing and mix, are you expecting lower revenue, lower margins or both and then will the magnitude of that be similar to what we have seen in past week or quarters or is this going to be an especially unusual quarter for Lifecore?

Yes, we don’t expect the top line to shrink. The top line probably should be relatively flat with the first quarter last year. As I said, it’s more of a production and mix. In quarters where they don’t produce as much product particularly in the fermentation side instead of that costs end up in the balance sheet on your inventory, it ends up flushing through cost of sales. So, it impacts your margins in the quarters, where production is down, and that is what we are seeing in the first quarter this year. And in the first quarter last year, they had a fairly major movement of a couple of shipments from the second quarter to the first. So, I would say half of that change year-over-year is coming from the product mix and production at Lifecore.

Great. And then just lastly based on your fiscal year ‘19 guidance, you have cap at exceeding operating cash flow by about $13 million to $14 million, do you expect to fund that gap by drawing down your line of credit?

Right now, yes. We are planning that. We will be using our line of credit to pay for that excess.

Alright. Thanks for taking the questions.

Thank you. And our next question comes from Chris Krueger with Lake Street Capital. Your line is now open.

Good morning.

Good morning, Chris.

Hi. Just a couple of quick ones, on your new product rollout whether it’s salad kits or the new soup products, what’s the timing on that? Should we expect a new salad kit introduction every quarter like we have the last couple of years or what?

I would say that’s a good approximation. Keep in mind that we are constantly developing new products for rotations in some of our club stores. So, sometimes this is a complicated question to ask. Our retail partners typically have two launches per year, one in the fall and another one in the spring and we usually launch multiple SKUs during that time. So there is usually kind of two ways of new products on the salads, but on average, it’s usually one per quarter. That’s a good way to think about it.

Okay. On the new Now Planting soup product, could you give us little bit more of a description of it? Is it going to be sold in the produce section, is it a canned soup, I don’t think you gave a lot of detail in the press release?

Yes, we didn’t, because we are kind of holding back a little bit to tell you the truth. We are going to be starting to ship this to select customers in Q2. It will be sold in the produce aisle, which is very much a disruption. So right now, soups are primarily full, obviously, in the center of the island cans or in deli, but because of the nutritional profile, these soups, which are very much plant based and do have the lower sodium and other nutritional benefits, we truly believe that the consumer who will buy these soups is the one shopping in produce, not deli and our partners that we have already sold this into strongly agree with us. So, we are going to be learning a lot here. We are going to be taking this launch one step at a time. We are going to place these in produce and we are going to go after that plant forward consumer. This is not in a can. It is in a patented package, but I am going to kind of let the rest evolve since we haven’t launched it yet.

Okay. And last question last couple of years, you have had a lot of volatility in sourcing, whether it be droughts, floods, hurricanes, things like that, that’s completely out of your control, how do you look at that in your guidance for the following year? Do we assume at least some unknown negative factor or how should we look at that?

Right. So as you have just stated, we have had these abnormal weather conditions for multiple years. And internally, what we are saying to ourselves right now is we need to quit calling these abnormal and we need to call these normal. We need to plan our business accordingly. So this year is a huge investment year on multiple fronts. It’s an investment year in the food business on many new ventures. It’s an investment year in systems, but it’s also an investment year in cost out. And right now, we are working to get cost out of the system and in fiscal year ‘19 that means any cost out that we can get above our plan is going to go towards these potential weather events that are going to happen in the winter. So, we are trying to create cost out events this year to help counteract any of those and set us up for next year, so that we have basically more contingencies in our budget and count on these happening, so that it doesn’t affect our guidance. So, that’s how we are looking at it this year and that is how we are going to approach in fiscal year ‘19.

Got it. Thank you. That’s all I got.

Thank you. Our next question comes from Gerry Sweeney with ROTH Capital. Your line is now open.

Good morning, Molly and Greg. Thanks for taking my questions.

Hey, Gerry.

Good morning, Gerry.

I wanted to maybe look at the natural – the Landec natural foods ventures sort of from a funnel perspective, obviously, you have Eat Smart now you have O and then Now Planting, what’s your sort of internal process of looking at opportunities? I’m sure you are looking at maybe analytics and potential growth, but maybe you could walk us through how you look at opportunities and maybe what the pipeline potentially could be for ideas maybe from rough ideas to something in the next couple of years, if that makes sense?

Yes, it does. Thank you. So, as most people on the phone know, we started our new ventures group just in 2017. So, it’s a very new group. It’s only – we just have – it’s just been growing a little over a year, 1.5 years and yet they have been extremely busy. And really the first thing we did was to look out at the consumer. It all starts with the consumer and we really immersed ourselves in what is going on with the consumer as we know just eating habits are changing considerably. And so the first half was to define who is that consumer and gets not only the demographics, but the psychographics and mindset of this consumer. That’s where it all started. When we started to understand that consumer, we started to come up with a plethora of different ideas. So that was one development path. There is also another path in our new ventures group that we look at our existing capabilities and technologies and we say how do we leverage those to bring new ideas to the market and so that comes from an entirely different thought process. So, as those ideas come into a funnel and believe me we have no shortage of ideas, that’s what’s great about this group and this entire company, we then have a set of criteria that we use and we develop business cases to say where are the ideas that have the biggest return on investment and that’s how we prioritize all the ideas that we have. So, just over the last couple of years, we have created a significant pipeline of new venture ideas. These have required investment. So, the investment you are going to see this in our SG&A, you are going to see this…

And then obviously, the Now Planting was internally developed, how about on the acquisition side, is that still an opportunity for you to go out and acquire another natural food group that may fit some of that criteria?

We are always looking. So, we are looking at acquisitions. We again have a very specific process that we go through to look at acquisitions. Again, it comes back to ROI. We don’t want to throw a crazy multiple out there for something that we know will never return – make a return on investment. So, when we find the right company that’s right for us strategically and we believe we can get it for a price that makes sense to drive shareholder value, we will jump on it, but again it has to be – we are not going to push, we are not going to force it. And so we are very much focused. Our first priority is organic growth, because that’s under our control and we believe we are extremely good at it and so we are going to focus on organic growth and opportunistically, if we find an acquisition, we will do that as well.

Okay. And then switching gears a little bit, you talked about some of the, I guess, cost-out initiatives or at least exploring initiatives for that historical vegetable business. Can you give us any details or ideas of what some of those initiatives maybe or is it still too early?

Yes, it’s pretty early in the process, but let me talk to you more about the process. So first, I want to start with our company has always been focused on productivity enhancements and cost-out. Obviously, in this kind of business with increasing prices every year, we are implementing prices and you see that in the capital to get cost out, okay, but I think the costs are starting to grow at a faster rate than the current initiatives that we had in our pipeline. And so we have brought in a third-party, it’s always good, bring in a fresh pair of eyes and say what are we missing and so we are just starting that process. So in the first half of fiscal year ‘19, we are going to be focused just like on our innovation side. To me this is innovation just the same, right. We are going to be focused on creating a funnel of ideas for cost reduction and we have a funnel of those ideas. Now, we have to go through the process of quantifying, looking at the ROI on all of those ideas, prioritizing because they will take capital and resources and creating a timeline for their execution. I am hoping some can be done quickly in their low hanging fruit and others are going to be required investment in additional automation and systems that we don’t even have in our current budget perhaps. We are going to have to make some trade-offs. So, that’s the process we are going through. I see over the first half of this fiscal year that we are going to be defining and quantifying and we will be able to share more about that in the second half of the fiscal year and then it will be a one to three – it won’t be one – it will be two to three execution on these ideas and we will see the benefits of those cost-out programs over the next 2 or 3 years.

Got it. I appreciate it. Thanks for taking my questions.

Yes, thank you.

Thank you. [Operator Instructions] Our next question comes from John Walthausen with Walthausen & Company. Your line is now open.

Yes, good morning. My questions were really about Lifecore trying to understand it better, you have made significant investment and I take it a bit to your capital spending this year will include more. Are these on the basis of business that you have in in-house that’s been committed to you or is it on an expectation that the market is developing your way?

That’s a great question. The short answer is both. So, we have existing customers that are growing and that we are partnering with them to expand capacity and make sure we are there for them, but we also have an extremely strong development pipeline, with again existing customers and new customers. The challenge in this business is that these are all FDA approved products and so there is a pretty lengthy development time on all these – for all these products to go through clinical trials. So, what we do when we are looking at CapEx and supporting our customers is that we map out a pretty disciplined process for investing in that spending. So, as the company goes through clinical trials and we see the results of those trials and we gain more and more confidence that is when we start investing to make sure that we have the capital and the capacity in place when those products are commercialized. You have to – in the end you have to make a bet, right, because it takes time to order equipment and get it installed and you have to be ready and have that equipment on order prior to it actually being commercialized. So, there is a little bit of a bet in here, but we work extremely closely with our partners and we think we have good sight on that. And so the capital that we have in the plan is for both existing and new customers that have been in our product development pipeline.

Is the R&D spend that goes with that segment, is that basically for qualifying on these new products, is that where the spend is?

Yes.

And that’s an out-of-pocket for us that’s not a reimbursed R&D?

Well, Lifecore is actually reimbursed for – we could pay for all the development projects. So, that’s actually a revenue stream. So, we typically have three different revenue streams. We have development products, fermentation and then our CDMO business, which includes the development and the vial and syringe formulation and fill.

Okay. But I shouldn’t take the fact that R&D has been relatively slow growth compared to the revenues, is it indication that we are going to see a ramp-up of R&D spend and then we will see the revenue growth or when you talk about the revenue growth, it’s not all 3 years out type thing, it’s something that as this year unfolds, it’s reasonable to expect double-digit revenue growth?

Yes. No, we are staffed for the projects we see in the pipeline and the growth projections that we are giving, which is low to mid-teen growth on an annual basis are with those staffing in those R&D projects that we currently have.

Right, okay. I mean, I am highly impressed with Lifecore’s profitability and the outlook, I am just trying to get the better understanding, if we lookout at within your timing horizon, I mean originally this was an ophthalmic product line basically. What would you see as the mix out 3 years?

What mix?

The mix of markets that you are servicing in Lifecore.

Okay. Well, the markets we tend to mention we don’t mention all the markets externally, but the markets we have mentioned is the HA market, which mainly goes as ophthalmic and orthopedic. And then we have a lot of other general purpose products that are in, we have some on oncology and other markets as well, but we see that our non-HA business is going to be 35% to 40% of our business in about 5 years. So, you see there is a dramatic shift. And just a few years ago, it was 100% HA. Now, it’s going to more 35% to 40% will be non-HA in 5 years. So that tells you that the amount of new products that we have in the pipeline that are going after other markets using other biomaterials.

Okay, that’s very helpful. And then sort of an accounting as I look at obviously the bulk of the questions, the bulk of the sales, the bulk of the assets overall on the food side of the business, but how do you arrive at the allocation of corporate overhead, because it seems like you are generally allocating about a third to Lifecore, but it seems like it’s a small product?

Well, we have to go through a fairly detailed analysis of the corporate department. It ties in with our external SEC reporting. You are required to allocate corporate cost and how the management team looks at it to the subsidiaries. So we literally go line by line. And in the cases where it’s an actual expense like stock options, for instance, stock-based compensation, that’s very easy. And in other cases, we allocate, we come up with a methodology that makes sense. And so it’s actually – it’s not at high level just divide everything by one number and apply that to the corporate. We actually go through the detailed analysis and in this particular release, because we are gaining or looking for transparency and we want to make sure that everyone can see how our numbers in detail tie back to our SEC reports, we decided to take the allocations and the numbers all the way down to net income.

Right, okay. Okay, thank you. That’s very helpful.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session for today’s call. I would now like to turn the call back over to Molly Hemmeter for any further remarks.

Thanks. I guess when I look at fiscal year ‘19 I see this as first of all an incredible year of growth for Lifecore. And we are looking very forward to Lifecore’s growth this year and beyond. And then when I look at the food business, I really look at it as we are in the core of our transformation and we are making happy investments in fiscal year ‘19 in new ventures, in cost-out initiatives, in new systems in order to drive long-term growth in our natural foods company that we will start to see in fiscal year ‘20. So – and it’s all part of a transformation, which isn’t just words, but a substantial transformation of the business from a package vegetable company to a true value-added natural foods company, which is right on trend. So, we are extremely excited about both of our businesses, our Lifecore CDMO business and our food business and the prospects for the future. So, thank you for joining us on our call today.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program and you may all disconnect. Everyone have a wonderful day.