Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal Year End 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's program is being recorded.And I will now introduce your host for today's program, Dr. Albert Bolles, President and CEO of Landec Corporation. Please go ahead.

Good morning, and thank you for joining Landec's fourth quarter and fiscal year 2019 earnings call. With me on the call today is Greg Skinner, Landec's Chief Financial Officer.During today's call, we may make forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially. These risks are outlined in our filings with the Securities and Exchange Commission, including the Company's Form 10-K for fiscal year 2018.As a leading innovator in diversified health and wellness solutions, Landec is comprised of two operating business units; Lifecore Biomedical and Curation Foods.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 biopharmaceutical and biotechnology companies across multiple therapeutic categories to bring their innovations to market.Curation Foods our natural food business is focused on innovating plant-based foods with a 100% clean ingredients in retail, club and foodservice channels throughout North America. Curation Foods is able to maximize product freshness through its geographically dispersed family of growers, refrigerated supply chain and patented BreatheWay packaging technology, which naturally extends the shelf life of fruits and vegetables. Curation Foods brands include Eat Smart fresh packaged vegetables and salads, O Premium artisan oil and vinegar products and Yucatan and Cabo Fresh avocado products.Consolidated revenues and gross profits for both increased during the fourth quarter of fiscal year 2019 while adjusted EBITDA increased 19% during the fourth quarter compared to the fourth quarter of last year and slightly increased for the fiscal year compared to fiscal 2018.For the fourth quarter of fiscal 2019, our…

Thank you, Al, and good morning, everyone. Revenues in the fourth quarter of fiscal 2019 increased 8% to $152.8 million, compared to $141.1 million in the year ago quarter. The increase was due to a $7.9 million or 49% increase in revenues at Lifecore and from a $3.8 million or 3% increase in revenues at Curation Foods.Net income from continuing operations for the quarter was $367,000 or $0.01 per share, compared to net income from continuing operations of $6.7 million or $0.24 per share in the year ago quarter. The decrease in net income was a result of, first, a $7 million increase in operating expenses, primarily due to the acquisition of Yucatan Foods in the third quarter of fiscal 2019.Second, a $1.9 million decrease in gross profit at Curation Foods, primarily due to a decrease in Eat Smart revenues, driven primarily from a reduction in lower margin bag and tray sales at retail. And a decrease in salad kit sales, primarily at club, due to one less rotation this year compared to last year. The decrease in Eat Smart gross profit was partially offset by gross profit from Yucatan Foods.Third, recognizing no income from the change in our Windset investment compared to recognizing $700,000 of income during the fourth quarter of fiscal 2018. And fourth, a $1.4 million increase in interest expense. These decreases in net income were partially offset by a $3.3 million increase in gross profit at Lifecore and from a $1.4 million decrease in income taxes.Adjusted EBITDA for the fourth quarter of fiscal 2019 increased 19% to $11.8 million, compared to $9.9 million in the year ago quarter. Revenues for fiscal 2019 increased 6% to $557.6 million from $524.2 million in fiscal 2018. The increase was due to a $22.9 million or 5% increase in revenues…

Thanks Greg. We are confident about our plans to drive profitable growth in fiscal 2020. Let me go into more detail about the progress we are making in our Lifecore and Curation Foods business units. Lifecore continues to benefit from a growing trend among pharmaceutical and other medical material companies to outsource specialty services and manufacturing. 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.Lifecore differentiates itself by delivering the highest quality products and services for client needs in a reliable, timely and professional manner. These attributes, along with Lifecore's industry specialization and ability to fill products and syringes and more recently in vials empowers their ability to be selective in our business relationships and fosters long-term partnerships, in turn delivering consistent growth.To meet future demand, we will be investing in fiscal 2020 approximately $13 million for capacity expansion. We continue to expect Lifecore to generate on average low to mid-teen revenue growth over the next five years as they expand sales to existing customers add new customers and commercialize products that are currently in its development pipeline.We are set up for success at Curation Foods. We have finalized our transition from a packaged fresh vegetable company to a natural food company. We invested in our future by investing in people and bringing in new talent at all levels of the organization to drive meaningful change.Now, we will go the final mile and begin to execute with excellence focused on improving Curation Foods' EBITDA. We are committed to delivering long-term shareholder value. Our fiscal 2020 strategy focuses on growing our higher margin products growth that makes us better before bigger by delivering breakthrough product innovation while continuing…

[Operator Instructions] Our first question comes from the line of Mitch [Indiscernible] and Company. Your question, please.

Hey, good morning.

Morning.

So just two questions. The first sort of what surprised me the most in the release was the projection of a loss at Lifecore in the first quarter it prompted me, I went back in my model and I noticed the first quarter. Back in 2012 and 2013 were breakeven and in 2015 if I recall, your -- one of your HA customers was bought there was an inventory reduction during that transition and you lost money in fiscal 2015, I believe.But now that it's got this much -- Lifecore has grown, I kind of thought you could outrun any weakness in the first quarter. I'd love to understand the moving parts there with Lifecore in Q1.

Sure. Mitch, this is Greg. Well, it's a combination of really four things that come into play. One is their lowest revenue quarter; you'll see historically first quarter is always their lowest revenue. So, just that alone means they're going to generate less gross profit but in combination, it's a mix issue. So, it's a quarter in which most of the sales are the aseptic sales which is the lower margin and probably the biggest driver that's resulting in a loss is it's a very low production quarter. Which means your overhead that it's fixed over the course of the year probably a good example is say our overhead for the years -- and this is just illustrative these aren't real numbers, $10 million and you think you're going to produce 1 million units which means that's $10 of overhead per unit if in the first.If you're expensing $2.5 million a quarter, but in that first quarter, you're only producing a 100,000 units, that means only $1 million is going to inventory the difference the $1.5 million that goes to cost of sales and is therefore reducing your gross profit.That, in combination with the fact that your OpEx is fixed, means that you're just not generating enough in that first quarter in gross profit to cover your CapEx.So hopefully that explains why it's going to be a loss in the first quarters. Quickly turns around and comes profitable in the second, third and fourth and we have every reason to believe that they're going to hit their plan for the year.

And so -- so in Q2, that is -- does Q2 normalize or -- like Curation, you'll see a build through the -- I know the second half is stronger. So is that going to be -- just a -- building profitability throughout the year?

It is but is you know, historically this last year was somewhat of an anomaly, but historically Lifecore's best quarter is the third quarter, and that'll be the case this year. The second and the fourth will be pretty close as far as operating income.

Okay, fantastic. And then second question and I'll get back in the queue. Just could you give a breakdown of the revenue -- sort of guidance you gave for fiscal 2020, a breakdown of the volume price and acquisition for Curation, and then volume and price for Lifecore rough numbers, so with Lifecore 10% to 12% revenue growth. What kind of -- is that all volume? Is it pricing mix?

It's a combination. Do I have the exact percentages? No, I don't. I can get back to you on those percentages, but it is a combination. It's not driven by strictly volume. There is a price and volume component.

Okay, and same -- how about Curation?

And a mix component too.

Yeah, and always a mix component. So that's true of both company.

What kind of volume? I'm sorry to interrupt. But what kind of volume growth would you have at Curation of the 8% to 10%?

I don't have the exact percentage. I would guess that it's pretty close to 50-50.

Okay. All right. Well listen, I'll get back in the queue. Thank you.

Thank you. Our next question comes from the line of Gerry Sweeney from Roth Capital. Your question, please.

Hey, good morning. Thanks for taking my call.

Good morning, Gerry.

Good morning, Gerry.

So, I want to -- I have a couple of questions, and I want to focus on maybe some of the consistency and stability in the cost-out program. I think you highlighted $20 million of cost savings by year-end, so I'm assuming the full effect will be felt in 2021, and we'll see an incremental on impact on 2020. Is that fair to expect?

No, we actually expect all $20 million to be realized in FY 2020 and that will obviously build going into 2021. But no, we expect cost savings of $20 million this year, that's going to offset freight labor, raw material, which -- if you look at our cost of sales, it's well over $400 million. So that's really only an increase of $4.5 million or 4.5% I should say that we're covering with that $20 million in cost-out.

The reason we have confidence in that is that -- we started -- we started the cost-out program in 2019, and we over delivered close to $1 million in that by delivering $7.2 million. So that momentum and that focus, it's primarily automation in our facilities, gives us confidence that we can meet that $20 million and culturally this is just going to be a way of continuous improvement for us in years to come.

So fair to say, so we have $20 million of savings going into 2020, that's the expectation.

Yes.

Is there opportunity to build on that?

It's a good example of focus, and it's one of the areas that I think we've done a really good job at Curation and having a dedicated team focused on just getting the cost-out, and that's why I'm confident and that's -- that frankly is a standard we're holding up in a company to start doing other projects, the way we are doing cost-out programs.

Okay. So, I assume going forward there is also an opportunity to take out additional costs.

Yes.

And any -- and are we -- on the CapEx side? What's your plan for CapEx for this year maybe specifically -- maybe breaking it down between maintenance as well as maybe some cost out and growth?

Well, our ongoing maintenance CapEx. Now that we -- especially since we just added a major plant in Mexico is probably north of 15 now. The -- as I said in the script, where -- think along the lines of what we spent this year, which I think it was around $43 million for next year. So the rest of that is going to be dedicated, and it's almost split evenly between the costout initiatives at Curation and the capacity expansion at Lifecore that's where the monies are going to go.

Okay. And then on the sourcing on the green bean side, it sounded like you have a new strategy. I mean obviously it sounds great when you talk about it, but what are the challenges on implementing this and how confident are you in that sourcing strategy working out.And then the follow-up at that would be the -- you know the growth opportunity. How are you seeing this and 12% a nice chunk for -- move forward -- any -- if you give a little bit more detail on that?

Yeah, well one of the things I discovered here was green beans is a really good margin product for us. And I almost look at what we're doing in green beans like launching a new product that's going to be highly profitable for us. It's our approach of not so much focused on the weather. But let's look at it from a customer standpoint and when you do that, change your frame of reference we as a team decided that we're going to change some of our geographic locations. Add more geographic location. So we have a diversity across United States working for us in the second half and really being in an oversupply situation, because our sales force is very bullish on selling our branded green beans. We have not done a good job in the past of always meeting our customer demand.So our strategy is to different locations and over plant and be in a situation where it can meet our needs. And if we have excess, we won't put it -- keep in the ground, we will sell it to other customers. And the foodservice channel is one that we're very focused on because that also gives us protection from an Act of God standpoint in pricing if indeed. There is a weather -- as one channel. You can actually take pricing in.

That makes sense. One final question I'll jump back in line. I know you've been on the board for a while there Al, and just been CEO probably a little over 60 days or so. But the -- one of the bigger challenges it's always been this core vegetable business and getting the most out of that. Any thoughts, ideas on shrinking that business, it's always part of the plan but where could it go and maybe other opportunities on that side? Thanks.

Yeah that's a good question, short answer is yes. Okay.

Okay.

We're very focused on it. We are now going through by SKU, by customer, what our profitability is and we've had some cases where we just walked away. I call it addition by subtraction. We actually become more profitable by not doing something in that business. So we are going through that SKU-by-SKU and really focused on trying to maximize our profitability. But also there are cases where the core veg business helps us with customers to get other products in. So we are focused on rationalizing it.

Got it, okay. I appreciate it. Thank you very much.

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

Sure. Thanks. Good morning. So – hi, how are you? Good, good. So the Yucatan is going to be in for the full year of fiscal year 2020. If we took Yucatan out, what would be the growth rate for Curation Foods without Yucatan, so it's sort of an apples-to-apples?

It would be relatively flat just because of the growth in salads and the growth in green beans both expected. We now expect will be offset by a reduction in our core. As Al just said, we are going to be doing a rationalization of our core, so from just an absolute dollar standpoint, yes most of the dollar growth is coming from Yucatan because we'll have it for a full year.

Okay.

There is also growth. I should also say though that there is also growth at O. We expect those revenues to almost double next year but it's a very small base, so.

Right. Okay. And then Al, you talked about some of the things Tim Burgess is going to do in terms of improving the operations in Mexico for Yucatan. Can you layout -- I guess layout the specifics of what needs to be done there. Specifically or what are the -- what's the low hanging fruit that can be easily fixed?

Well, last year we bought the business and we knew this, they were really short on cash and they weren't ready for the season. They were ready from a labor standpoint and they were not ready from just having raw materials like the packaging on hand, nothing but inventory to get started.So number one is to get the team right down there. We've made changes and our focus is to bring people in earlier. We have kept a staff of about 40 people through the season now that we are not running, and we're going to be bringing our folks in and training them ahead of the scheduled production, which starts probably end of September with the fruit, so that we're ready when the fruit comes in at the lowest cost to really put away as much as we can.And then secondly, we are putting in what does success look like from a metric standpoint. So we're driving KPIs down to the, if you will the shop floor. We would have clear metrics on how much throughput we expect per day. And what kind of yields -- we're going to be primarily focused on throughput and yields.But it first starts with getting the people right. And we weren't ready last year, but we will be ready this year. And our plan is to run this plant and shut it down, probably the end of April or early in May.So we don't get caught in a situation. We got caught into this year, where we have to run in June and July which causes our first quarter issue of having high fixed costs. We will not repeat that this year.

Okay. So is it just one factor down there that, you have to get right? Or is it more than one?

Well, we have one factory that we own. And we also have a co-packer down there that we have a relationship with. So, where it makes sense for us to and it's a co-packer that, I would say, Yucatan has 15-year history with, that one make sense based on the cost of the fruit. We will put away product at the co-packer as well.So our focus is strictly on improving our yields, growing our labor, and there is a automation playbook that we have to get right down there. And in the future where in second half of the year, we're going to be looking at how we can even automate more at Yucatan that will empower -- enable us to take our labor down and improve our margins. But that won't be …

…Okay.

…that will be a second half initiative that goes into '21.

…Okay. And then just one last question, before I have, -- just a couple of questions for Greg on the financials, so we've all seen beyond meat and the stock, and right now the market cap just probably -- just looked at it a couple of minutes ago is $11.7 billion.And obviously, with your network of farms and so forth and plant-based products vegetables, and so forth, is there any thought or strategy to get into that market in any way, or is it even possible that you could do that with your current infrastructure?

We believe plant- based proteins are on trend and growing here to stay. So, we have some innovation that we are working on and we'll be testing with a major customer, in the second half of the year.That is plant based protein related, that fits within our current infrastructure and requires no capital. So that's part of our new, as I mentioned, small changes to big things, part of our new innovation playbook that we're putting in at Curation.

Okay, great.

I can't tell you we are going to have the same impact on our meat packaging, but at certainly where the PUC is going.

Okay. And then Greg on the financials, first half, obviously is a loss but you said second quarter -- fiscal second quarter '20, would be profitable on a net income basis. How should we look at that? Is it going to be just barely profitable? Or should it offset most or all of the loss in the fiscal first quarter?

It will not offset the loss in the first quarter. Well, it depends on where the loss comes in at. I mean if we can do better than what we're currently forecasting obviously, will get closer.But now will be profitable but think more along the lines of a small profit. Lifecore will definitely have a big turnaround, and a good quarter. It's still going to be a tough quarter for Yucatan, until we get through and start producing with. Because we're going to be selling this higher price fruit through most of the second quarter, first quarter most of the second quarter.We're not going to start really producing the lower cost products until maybe the last month of second quarter. So it's going to be a drag and Eat Smart tends to have a much better second half than they do at first half. So I think small profit.

Okay. And then lastly, you mentioned on the call $32 million credit facility, you working with the banks to repay some of the debt, as you're going through that process. Just the timeline do you feel like you have enough capital? Or is it possible it will be somewhat capital constrained until you until you renegotiate this?

Yeah we're fine. In the meantime, if -- I'm feeling fairly bullish. At this point we still got the details and work through, but I would say, expect an announcement hopefully within the next 30 day to 60 day.

Okay great. All right guys. Thanks. I will hop back in the queue.

Thank you. Our next question comes from the line of Chris Krueger from Lake Street Capital. Your question, please.

Hi good morning.

Good morning, Chris.

Hi. Just a couple of quick questions. As far as the current vegetable supply situation in California and other key growing regions, how is that currently and are you able to maintain strong margins for your salad kits?

So far we're looking really good right now for our supply. We have no major issues. And Q3 is always the one that we are concerned about. But as I said we have built a large contingency to help us with any weather related events. So that we don't -- so that we could continue to supply with our customers and not sacrifice margins.

Okay. As far as salad kits go, I know in the past the goal was to launch roughly one new SKU per quarter. Has that continued? And have there been any particular SKU standing out like the Sweet Kale did? I know that's been a growth driver.

Well, I'm not a believer in setting a metric with one salad kit per quarter. I'm more of working at more to try to find the one big one that's going to stick in the year and have the most impact. So we're really focused on the strategy that sort of fewer bigger better and are going through that.We do have some that we're pretty excited about and have gotten some positive customer feedback on that we're going to test before we scale because it's important in new products to get it out there make sure the pricing is right.At the end of the day consumers vote with their wallet and to make sure that the products we have are indeed working for both us and the customer then we will scale from that standpoint. But I don't have any one particular philosophy at one per quarter. I will tell you our Chopped and Crumble that we just recently launched is doing very well. We're very excited about that and have plans to expand that product.

Okay. Last question on Lifecore in your press release you indicated there are approximately 15 FDA regulated drug and medical device products in your development pipeline at various ranges, if we look back one year what would that number have been roughly a year ago?

About the same. Our goal is to keep between that and as high as 20, but that's a manageable number.

Okay that's all I have. Thank you.

Thank you. Our next question comes from the line of Mike Petusky from Barrington Research. Your question, please.

Hi. Good morning, guys. Just a couple of questions on Yucatan are you guys assuming any organic growth from Yucatan in fiscal '20?

Yes.

Yes, absolutely. As I mentioned Cabo Fresh, we have a relatively low ACV on Cabo Fresh. And it's an area that's growing in the produce section. So we have plans to expand that product for sure and we also have a couple of new products that we are going to be launching in the second half of the year, as well.But if you just step back and look at it we did -- last year we did around $27 million and that was for half the year. So if you multiply by 2 you got $54 billion. The category is growing around 18% to 20% just by itself without launching any new products.So organically we can get to the mid-60s in terms of revenue and growth. But it's also a very, very fertile area for innovation and we are all over that. So we expect organic growth and growth that's going to continue for us.

Okay. And then what did O Olive actually do and you said you expected near doubling of revenues there, but what did it actually do in fiscal 2019?

Around 5.

Yeah about, 5 yeah. We can sell every drop of oil we can get and that's why we have taken action to get more orchards. We were the first mover in California. I think we're in a really good position. I know it's small, but it's profitable for us and we -- our customers want it. What we make our customers will take and don't forget vinegar -- our vinegar is doing extremely well for us as well.

Okay. All right, very good. And I guess this is more of a question around investment and longer term free cash generation so obviously another year of elevated CapEx. This year you disclosed that maintenance CapEx is around $15 million plus. Is there, sort of, a longer beyond fiscal 2020 a longer-term target in terms of what normalized CapEx should be and where you guys start actually generating free cash? Thanks.

Yeah -- this year because the cost-out program and the needed capacity expansions at Lifecore will be elevated. I would think on a go-forward basis. A number in the 30 to 35 range is a more reasonable expectation -- absent something really taking off which obviously you're going to put money behind it if you need more capacity. And we should start generating free cash flow in the second half of this year certainly by the fourth quarter and I expect to generate. We expect to generate free cash flow next year.

Okay, very good. Thanks guys.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Yes, I just want to -- on behalf of Landec, thank everybody for your -- for listening and for the questions. And I just want to restate that I'm very excited to be here. I know the first half is a little rough, but that was totally expected and we are very focused on making the second half work and I have a high-degree confidence along with Greg as well as my ELT that we can achieve as planned. So thank you and thank you for your continued support.

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