Good morning, and thank you for joining Landec's Second Quarter of Fiscal Year 2020 Earnings Call. With me on the call today is Dr. Albert Bolles, Landec's Chief Executive Officer; and Brian McLaughlin, Landec's Interim Chief Financial Officer; and Jim Hall, President of Lifecore who is available to answer questions. Also joining today in Santa Maria is Dawn Kimball, Chief People Officer; Glenn Wells, SVP of Sales and Customer Services; Tim Burgess, SVP of Supply Chain; and Lisa Shanower VP of Corporate Communications and Investor Relations.During today's call, we will 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 2019.Let me turn the call over to Al Bolles.

Thank you and good morning everyone. As a leading innovator in diversified health and wellness solutions, Landec is comprised of two operating businesses; Lifecore Biomedical and Curation Foods. Landec designs, develops, manufactures, and sells products for the food and pharmaceutical industry.Lifecore Biomedical is a fully integrated Contract Development and Manufacturing Organization, or CDMO, that offers highly differentiated capabilities in the development, fill, and finish of difficult-to-manufacture pharmaceutical products distributed in syringes and vials. As a leading manufacturer of premium, injectable Hyaluronic Acid, or HA, Lifecore brings over 35 years of expertise as a partner for global and emerging pharmaceutical and medical device companies across multiple therapeutic categories to bring their innovations to market.Curation Foods, our natural foods business is focused on innovating plant-based foods with 100% clean ingredients to retail, club, and food service channels throughout North America. Curation Foods is able to maximize product freshness through its geographically dispersed network of growers, refrigerated supply chain, and patented BreatheWay packaging technology, which naturally extends the shelf life of fruits and vegetables.Curation Foods brands include Eat Smart fresh packaged vegetables and salads, O Premium artisan oil and vinegar products, and Yucatan and Cabo Fresh avocado products.We are focused on creating shareholder value by delivering against our financial targets, strengthening our balance sheet, investing in growth, implementing on strategic priorities to improve operating margins at Curation Foods, and driving top line momentum at Lifecore.For the second quarter of fiscal '20, consolidated revenues increased 14% to $142 million compared to the second quarter of last year. However, we experienced a greater-than-planned net loss and a decrease in gross profit and EBITDA during the second quarter of fiscal '20. This resulted in a second quarter net loss of $0.16 before restructuring and non-recurring charges. We have an extensive operating plan that we've launched to…

Thank you, Al, and good morning, everyone. First, a brief review of our second quarter results. We grew consolidated revenues by 14% to $142.6 million driven by a 48% and a 10% increase in Lifecore and Curation Foods revenues respectively. Gross profit decreased 8% year over year, which was driven by a decrease at Curation Foods that I'll speak to in greater detail in a moment. This contraction at Curation Foods was only partially offset by Lifecore's strong performance, which posted a gross profit increase of 52% year over year.EBITDA declined $5.3 million to a loss of $1.5 million for the quarter. Our loss per share was $0.23 and includes $0.07 per share of restructuring fees and non-recurring charges. Excluding these charges, second quarter loss per share was $0.15.Shifting to our commentary on first half results, we believe the first half results would be a more useful measure of our performance during this transitional period against our projections for fiscal year '20, which are backend loaded in the third and fourth quarter. Revenues increased 13% to $281.3 million during the first six months of fiscal '20 compared to the same period last year, primarily due to; first $6.8 million or a 24% increase in Lifecore revenues; second, the acquisition of Yucatan Foods on December 1, 2018, which contributed $30.2 million in revenue; and third the $8.4 million or 9% increase in our salad revenues.These increases were partially offset by a $9.7 million planned decrease in revenues in the packaged vegetable bag and tray business, and by a $5.3 million decrease in green bean revenues due to limited supplies resulting from weather events in both the first and the second quarters of fiscal 20.Weather issues continue to be the greatest challenge to our business. As discussed previously, we took decisive action…

Thanks, Brian. We remain confident about our plans to drive profitable growth in fiscal '20. Let me go into more detail about the progress we are making in our Lifecore and Curation Foods businesses.Lifecore continues to see momentum. Number two, the increasing trend towards sterile injectable drugs. And number three, a growing trend among pharmaceutical and medical device companies to outsource the formulation and manufacture of products, spanning the clinical development stage to commercialization.As a highly differentiated and fully integrated CDMO, Lifecore is positioned to capitalize on these tailwinds. Through Lifecore's 25 years as a global leader in manufacturing premium injectable grade HA Lifecore has developed the knowledge, the process of manufacturing difficult to formulate in still pharmaceutical products in both syringes and vials. This has allowed Lifecore to establish high barriers to competition and create unique business development opportunities.Looking forward Lifecore will fuel its long-term growth by executing against its three strategic priorities. Number one managing and expanding its product development pipeline, number two meeting customer demand by managing capacity and operational expansions to meet future commercial production needs.And number three, continuing to deliver on a strong track record of commercialization from their product development pipeline. Regarding this product development pipeline Lifecore made significant progress in the fiscal second quarter. Business development revenue in the second quarter of fiscal 2020 increased 49% year-over-year and contributed 36% of the increase in the Lifecore fiscal second quarter revenues.The business development pipeline has 15 projects in various stages of the product lifecycle in clinical development to commercialization which aligns with the business' overall strategy. To meet future demand at Lifecore we will be investing approximately $13 million for capacity expansion in fiscal '20.As planned Lifecore begin commercial validation for the new multipurpose syringe and vials production in fiscal second quarter. When complete…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brian Holland with DA Davidson. Please proceed with your question.

Yes, thanks. Good morning. First question, I guess just making sure that we understand how we get from the Q2 shortfall to the full year guide being maintained. Obviously, the green bean revenue and loss revenue and profit you don't get back.So, it sounds like the implementation of Project SWIFT and the facility consolidation that you just referenced, is that the whole of the -- sort of the offset for the Q2 shortfall that would sort of keep the guidance hold for the year? And if not, is there anything else that we should just be thinking about that, that sort of drives those numbers?

Yeah. Hi, Brian, it is Al. Good morning. You're absolutely right. I mean, Project SWIFT is going to be a part of our focus of which is getting the right size and then getting the cost out.But we also have been working on a number of incremental cost savings programs that are above and beyond the cost out programs that we’ve talked about through our manufacturing side. So, we know we had a hole there, so we had started back in Q2, some projects to find some incremental savings. Brian, do you want to comment further?

Yes. Hi, Brian it is Brian. Yes. So, in addition, just to sort of help us catch up here in the fourth quarter and make up for some of the slow pace here in the first part of the year, as Al mentioned, one there's the right sizing of cost savings that will be reflected in Q4.There is some additional cost out items that we identified after the year started that we're tracking and going after. We also have stronger-than-planned salad revenues and margins. We are ahead of plan on that and so we expect that to continue, and that's also helping us in the second half of the year.And we have better-than-planned Tanok conversion and production costs. And then through the salad items and improvements in our cost structure in general along with product mix, our overall margin percent is also looking stronger in the second half of the year. So, it's really a mixed bag of things. And you add them all up in there, and they're sort of putting some air under our wings here in the fourth quarter.

Okay, thank you. That's helpful color from both of you. Just a follow up and speaking towards the cost out initiatives. Obviously, you're maintaining the targets, you are one quarter closer to year-end. So, you've gone through another three months of working against these initiatives.I'm curious, I assume, I presume that there was some cushion in place given the scope of these initiatives and the number of initiatives that you have in place. I'm wondering if you can talk to specific examples of initiatives within those cost out targets where you're getting greater visibility, greater sight, where is the progress on things that you currently had in place before this quarter? Obviously, there's been some new stuff here that you announced this morning, but I'm thinking about stuff that you were doing beginning – kind of where we are?

As we've discussed, it's a very broad granular list of items that add up. And so, from a risk management standpoint, it really does sort of spread the risk out across that $18 million to $20 million. It's a wide variety of things.It's yield improvements in the plants. It's automation on our single serves. It's palletization automation. It's the automation of our case erectors, corrugated. It's just a wide, wide variety of things. Our master packs, our trade design. It just goes on and on.And so, again, it’s helped us quite a bit having that granularity. It's logistics, into our plant from the field. So, it's a wide variety of things. Fortunately, it's spread out across a broad spectrum of resources in the company. And so, they really are sort of coming from a variety of spokes into the hub.

Yeah. And, Brian, you could tell us it's fairly complex, the number of things, but we are managing this through our new PMO Office and focusing on making sure that we execute these things with excellence. We are into the third quarter. We are on track, and we're feeling good about being able to pull this together and hit a range of $18 million to $20 million.

I appreciate that. I appreciate that. That was a pretty broad question. So helpful context there. I will leave it there. Best of luck everyone.

Thanks Brian.

Thank you. Our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Thanks. Good morning. I just wanted to focus on the gross margin. I know as we move through the year, particularly Yucatan is going to get up to 28%. Lifecore is going to continue to increase as they are on track for their best quarter in the fourth quarter. So, I see the ramp occurring.I was just wondering if we look at the overall corporate gross margin in the fourth quarter, do we have a range of what we expect that to be at.

Yes. Well, there are a number of projects that we are driving against, Projects SWIFT and so on and – I mean well. The cost out, I would sort of shy away from giving you a precise number, but there are a number of things that we're working on here that we expect to continue to enhance our margin in the fourth quarter as well, since the salad product mix in a more stable, raw product sourcing environment.

Yeah, Anthony. When I took the helm, the salad margins were decreasing. Our revenues were good, but our salad margins were decreasing.Some of that was mix. We've got a single serve product that is outgrowing the category. It's been a really nice innovation for us, but it started out in the mid-teens in terms of margin, and we've had a lot of effort here in the first half through a number of optimizations, including reducing some of the packaging in that product that has very little impact on consumers.So we expect to get the single serve packaging somewhere in the mid-20s is where we're targeting for. And that's going to help us tremendously with the margin improvement program, plus we're seeing a favorable mix this year, which is also helping us at our salad.So we see the salad improving. I think you get what's happening down in Mexico the avocado products. And we are really focused on driving the profitability of this business. Does that help?

Yes, Al. And just in terms of I know, the focus is on streamlining Curation Foods. And you've outlined a number of projects that you're undertaking kind of all at once. Are there any other obvious business lines that either need to be eliminated or, or changed dramatically or what you've now uncovered over the last six or seven months is pretty much pretty much it?

Well, I wouldn't say we're finished. Okay. So Project SWIFT is, we kicked it off today. It's our program for ongoing continuous improvements efforts, focused on driving profitability and growing the EBITDA of Curation Foods. So it's not a onetime event. It's a process that we've kicked off. And we are focused and engaged on that.So, probably more to come. We except to get this business where it's really thriving for us.

Sure, that's helpful. Just real quick financial question for Brian. So the $2.4 million restructuring charge. As we run that through the model, what was that $2.4 million net of tax for the quarter?

The $2.4 million net of tax is probably about $0.05 or $0.06.

Okay. Okay. Great. Thanks. I'll hop back in the queue.

Thank you. Our next question comes from the line of Gerry Sweeney with Roth Capital Partners. Please proceed with your question.

Good morning, everyone.

Good morning Gerry.

Good morning, Gerry.

I had a question on Lifecore. Actually a couple. But starting on a CapEx side. CapEx's been pretty substantial likely in last five years. I've actually gotten a couple inbound questions on this. I assume this CapEx should mitigate post completion other expansion efforts.I think they expanded their facility a couple years ago, the actual structure and now they got the bowl filling line. What is the maintenance CapEx level for Lifecore once all this expansion is done?

Gerry this is Jim. Typically our maintenance CapEx yearly is in the $4 million to $5 million range. And you're right, the majority of the CapEx that we spend is to manage capacity as our volumes increase with commercialization of our development pipeline.

Got it. And fair to say you could -- I am not sure if this is correct but essentially doubled revenue prior to any large CapEx investments. Obviously you would actually invest sooner than that. But post completion you have a lot of capacity is really what I'm getting at.

Right. We usually don't invest unless the business dictates. But I'll give you an example --like putting in a new filling line is a three to four year process. So we spend a lot of time evaluating where our potential capacity needs need to go based on the products that we're working on in our pipeline and have to make some investments, especially on larger filling equipment or packaging equipment, well ahead of when the expected capacities needed.But it's always waiting against the business opportunity, what the return on that investment would be, etcetera.

Got it, that’s helpful thanks. Then switching gears back to Curation Foods. The one thing I'm having a little bit of trouble squaring off is, you talked about lower revenue in the veggie in tray area, which obviously was deemphasized, but this also led to an impact on the gross profit side.I was previously running under the impression that some of this business was low margin or even no margin. So if you want to deemphasize this business and there is an impact on the gross profit line?And back at the envelope I was thinking from using our discussion earlier think about $1 million was, on the gross profit maybe from the veggie in tray area. I mean, this was decent gross profit dollars that went out the door. And if you want to deemphasize that, I mean how does that square up longer term in terms of deemphasizing that business without really whacking your gross profit dollars? I’m just having trouble connecting the two if that makes sense?

Yeah. So when we say deemphasizing we have been going through a process of SKU rationalization with our customers and that’s not something you can just do overnight, you have to work with them, so there is been effect on the other business. So what we really try to do it's work in process is to have a minimal margin that we are going to require before we will sell the product.So that's really what we're trying to do here is, but hurdles in to the sales organization, work with our customers on improving the overall profitability by the line by kind of what I call addition by subtraction. You take some things out and you actually improve your margins.So it's really having a very conscious focus after, once again our eyes on driving profitability, not driving revenue.

Got it. I was just surprised by how much the gross profit addition by subtraction actually was thought that gross profit may have been flat to up with the removal of the veggie in tray business, but if I’m looking holistic there, step back…..

There too, we had some weather related issues that affected our gross profit. So it was not just green beans but you have a number of other things and then the other counter product as well.

Got it. That makes sense. I appreciate it. And then finally on… yeah, sorry.

In the first half of the year and as we said we're going to turn around the other kind of products and turn around in the second half of the year.

Got it. And then finally just thinking about [indiscernible], a little bit detail on the rollout of the new squeeze packaging. It's a process getting it into the supermarket chain. Maybe some commentary on how many times it can rollout and how do we look at that 2020 and 2021.

So we rolled it out at Walmart. It's achieving the velocities in Walmart that they expect for the category. It's actually selling at the same velocities as our current products that in Walmart. We have a test and learn program going on in Chicago [indiscernible] different consumers and typicalWalmart consumers.So the number of things going on there. We have presented to a large number of the major retailers in the US. And we're present now on getting them into their category resets that it could be happening within next six months. So we feel pretty good about that.

Got it. That’s helpful. I appreciate it. That’s it from my end.

Thank you.

Thank you. Our next question comes from the line of Mitch Pinheiro with Sturdivant and Company. Please proceed with your question.

Good morning. Couple of questions here. So it's the back end loaded nature of this fiscal year's performance. I mean what kind of margin of safety do we have in the forecast? I thought there was something built in to this fiscal year. And has that been used? Was it inadequate? Is it yet to be used to be tucked in [ph]?

Yes, yes, this is Brian. So much of that is, it's really the conservatism and the guidance that we're building in. We are building that into the second half of the year, in particular in the third quarter. But as well, one of the huge items that is, very favorably affecting the margin swing and actually burdened us in the first part of the year and it may be confused in some of the stuff we're talking about.We had $30 million in revenues in Yucatan in the first half of the year and because of the issues with our avocado costs and fruit costs, it was roughly a breakeven business. In the second half of the year, and in particular in the fourth quarter, given the changes to that operating models that we see on a sustaining basis going forward.We're looking at margins in the fourth quarter at 28% or greater for the avocado products area. That is huge. And that is going to really change the overall margin structure in the second half of the year versus the first half of the year. And so it's sort of embedded in the press release, it might be a little tough to pull out, but it is a major, major driver on the cost out in terms of swinging things.

So, you have your -- so you have the favorable, Yucatan we just described, you have some of the cost out, 45% of the $18 plus million you expect to achieve. You have Project SWIFT ongoing progress and efforts. You're moving -- I mean, despite the part of the original but, you're moving corporate headquarters to Santa Maria and closing Los Angeles, closing Ontario.All that built into the fourth quarter, there's not going to be -- I mean, is this something where we still have margin of safety beyond all this? Because every -- the only thing consistent about Landec over the last 10 years has been its inconsistency. And all driven by just very difficult supply chain issues.So if we get and really hot or dry summer or really wet and cold summer is the fourth quarter still going to be there into the guidance?

So let me just add a little bit here to that. So, right now we have momentum on our salad kit business. And that's coming in better than plan, in terms of the second half of the year. We're going to continually see the margin improvement in our salad business.And then we have most of the rest from the weather standpoint is in Q3. And we have worked cross functionally here and feel that we have the appropriate risk built into the guidance for Q3. So we feel that the second half plan or at least I feel, and I know my team does that the second half plan is tighter than the first half plan.I've only been here six months and really have gotten to know the business and what's the new team that we put together. We're feeling pretty good about how we have the flow of the second half going.

Okay, that's very helpful. Couple of little things. BreatheWay. We'll start to see revenue from BreatheWay in Q3?

Yes, this is Brian. Yes, in the second half of the year, we're expecting to have continued improvement and expansion in BreatheWay. The first half of the year was really focused more on a test as we're kind of coming through this time of the year and into the latter part of the winter and spring. We're going to be expanding our overall volumes and picking up some additional coolers and distribution centers of raspberries.

Is that, is that a new Curation Foods segment?

Yes.

Okay. In terms of CapEx, where -- what does the full year look like still on plan for $30 million?

Actually the full year plan at this point, we're looking at a range of between $38 million and $42 million or $60 million in the first half of the year. Second half of the year has a range of $22 million to $26 million. That could swing around depending upon timing. And, we'll see how.Obviously, we want to make sure we're hitting our numbers in the fourth quarter which ends up accelerating or slowing things down. So about -- and of that $22 million to $26 million in the second half of the year about two thirds of that is in the fourth quarter. And it's centered on Lifecore.

Okay. And then how about cash from your asset sales? What do you expect to net out?

I'm sorry.

Cash from asset sales.

Cash from asset sales and the sale of Ontario.

It's really too early to know. But we're in the process at this point of assessing path to liquidating those items. So there will be more to come on those in the coming quarter.

Yeah. This is all part of Project SWIFT we're looking at continue to optimize our network. And we are very focused on the balance sheet.

Is new Olive Oil and Vinegar. Is that still part of your plan? We haven't heard anything about it. Was just curious where that stands?

Yeah, well, we're working on improving the EBITDA at Olive. So, right now that's our focus for the year.

Okay. Alright. That’s all I had.

It's not a really big growth area for us right now. No.

Thank you. [Operator Instructions] Our next question comes from the line of Mike Petusky with Barrington Research. Please proceed with your question.

Good morning. Lot of information and some hard to follow, but in terms of Q4, I mean is 75% or 80% of sort of the margin pickup associated with pickup in gross margin. Are you getting much leverage on the SG&A line? Can you just sort of speak to that?

I'm sorry, say that again. Could you please?

Yeah, sorry. So in the fourth quarter, obviously, you're expecting a huge, huge number in the fourth quarter. Obviously, expansion of margins. From an operating margin standpoint, does most of that comes, I'm assuming most of that comes via the gross margin line.But I mean, the split between gross margin and SG&A pick up mean is that like 80-20 most of it going to the gross margin line.

Yeah. The vast majority of it is centered at the gross margin line. And again, just back to the avocado statement that I made earlier, most of that inventory already. We hold about 60 to 90 days' worth of inventory.So most of the inventory that we actually see coming through at this point in our model through the latter part of Q3, and through the beginning in the middle of Q4, it's already in our warehouses. It's there, we absolutely no cost. So the mystery of that has really been taken out.It's just a matter of us continuing to do what we're doing in the revenue line. But yeah, the vast majority of the improvement is at the gross margin line, though we have been I think doing a very good job this year, relative to plan on managing our SG&A.

Okay. And I know you can't comment on this extensively. But the legal issue down in Mexico with Yucatan. Has that resulted in meaningful changes in leadership down there, in terms of the operations of that facility?

Really. It's an environmental permitting issue. We have resolved the issue. We're working with the regulators, now on the next step. So it's ongoing.In terms of the operations, the operations are running as good as they've ever ran with our decreasing conversion costs by 40%. Our yields are as high, throughput from the plant is record highs for us and is consistent and the operation is running very well.

Sorry. But have you had meaningful changes in leadership down there?

We put meaningful leadership in there beginning of the year to put on our lean manufacturing practices. So the leadership that’s there now was what we had put in. We have changed the leadership out back in the beginning of May, we changed the leadership.

Okay, so nothing since.

Nothing has changed in terms of leadership there now. But we have changed leadership that it was prior.

Yeah. And then just last question. I didn’t hear it if it was said. What were the O Olive revenues for the second quarter, roughly?

The O Olive revenues for the second quarter?

Yeah.

Yeah. Hang one just one second. Below $1.5 million.

Okay. All right. That’s all I got. Thanks.

Thank you. Our next question comes from the line of [indiscernible] Investment Management. Please proceed with your questions.

Hi, thank you. Just one quick general question. These third two very different businesses here, so I was wondering if you could just comment on how you think these two units fit together. And then whether or not you think it makes sense to keeping together in the long-term.

Well, so Lifecore is a well-oiled machine, so as I would say it's operating very, very well. Curation Foods is not a well-oiled machine at the moment.However, we really like the categories that we are in terms of where the consumers are going. We believe that Curation Foods are in categories that should have tailwinds for us being around the premium store in health and wellness.So the focused that we have is to drive the profitability of Curation Foods and get it back on track. And I continually work with my board on the opportunity that we have but right now our two focuses are to fix the profitability at Curation Foods and make sure that we are providing the capital needed to continue the great momentum growth at Lifecore.

Great. Thank you.

Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to Mr. Bolles for any closing remarks.

Thank you very much for your interest in Landec. And Happy New Year to everybody.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.