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Edited Transcript of LNDC earnings conference call or presentation 3-Oct-18 3:00pm GMT

Q1 2019 Landec Corp Earnings Call

MENLO PARK Oct 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Landec Corp earnings conference call or presentation Wednesday, October 3, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory S. Skinner

Landec Corporation - VP of Finance & Administration and CFO

* Molly A. Hemmeter

Landec Corporation - President, CEO & Director

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Conference Call Participants

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* Anthony V. Vendetti

Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst

* Christopher Walter Krueger

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Gerard J. Sweeney

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Michael Morales

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Landec Corporation First Quarter 2019 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.

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [2]

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Operator [3]

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Ladies and gentlemen, please stand by. Your conference call will resume momentarily.

Good day, ladies and gentlemen. We apologize for the technical difficulties. Welcome to Landec Corporation's First Quarter Fiscal 2019 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.

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [4]

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Good morning, and thank you for joining Landec's First Quarter 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 the 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 2 businesses: Lifecore, our contract development and manufacturing, or CDMO business; and our Natural Foods business, which includes 3 brands, Eat Smart packaged fresh vegetables, O California-grown olive oils and vinegars; and our new brand called Now Planting, specifically targeted to the growing population of plant-forward consumers.

Our Now Planting brand began shipping its new line of pure-plant soups to retailers last week. As expected, Landec's consolidated revenues in the first quarter of fiscal 2019 increased 8% compared to the first quarter of last year with earnings of $0.01 per share. Lifecore's first quarter results were consistent with plans, generating revenues of $12.6 million and a gross profit of $3.0 million.

Lifecore revenues increased slightly compared to the first quarter of last year. And Lifecore's gross profit was down $555,000 compared to the first quarter of last year as a result of lower overhead absorption due to the timing of production and shipments within fiscal year 2019.

In Landec's Natural Foods business, revenues were $112.1 million and increased 8% in the first quarter compared to the first quarter of last year, driven by an 8% increase in our Eat Smart business. The increase in Eat Smart revenues was primarily due to growth of Eat Smart salad sales, which increased 17% in the quarter compared to the first quarter of last year.

Gross profit in our Natural Foods business was $13.4 million in the quarter, $1.9 million lower than the first quarter of last year due primarily to increased labor, freight and packaging costs in our packaged fresh vegetables business.

Landec continues to drive growth in each of its 3 strategic growth platforms, Lifecore, Eat Smart salads and our emerging Natural Foods products platform. Our Lifecore strategy has been to accelerate growth and profitability by expanding the Lifecore business beyond its historical capabilities as a premium supplier of hyaluronic acid, or HA. We have achieved this with the completion of Lifecore's transition to a fully integrated CDMO, providing differentiated fermentation, formulation, aseptic filling and final packaging services for difficult-to-handle pharmaceutical products. We will continue to expand Lifecore's CDMO development pipelines to drive commercial product sales.

The installation of Lifecore's new $16 million multipurpose filling line was completed during the first quarter of fiscal 2019, and validation will begin during the second quarter with commercial production projected to begin in fiscal 2020. The new line will further enhance Lifecore's growth strategy as a CDMO, which is specifically designed to align Lifecore's capabilities with the growing needs and market expectations of its partner.

This investment provides Lifecore the incremental capacity to fill commercial quantities of drug products in vials, which expands the breadth of products and markets that Lifecore will be able to address. Although the new line will be primarily utilized to fill vials, it can also be used to fill syringes, which provides significant versatility and increased capacity utilization. At full capacity, the new dual filling line has the potential to generate $40 million to $50 million of new product revenues annually. Revenues and net income contribution will vary due to the product mix manufactured on the new line during any given year.

In our Natural Foods business, we are transforming our packaged fresh vegetables business into an innovative Natural Foods company comprised of 3 brands: Eat Smart, O and the new Now Planting brand. The Natural Foods business has a unique combination of capabilities that makes it truly differentiated in the market. First, we have proven internal innovation capabilities with the ability to launch new product and disrupt market. Second, we have a refrigerated supply chain that allows us to rapidly deliver fresh Natural Foods throughout North America. And third, our direct produce sales force works closely with our strategic customers to ensure our products reach the consumer.

Together, these 3 capabilities make Landec uniquely positioned to deliver on-trend fresh and plant-based solutions to consumers.

We continue to invest in development programs and capital to make this transformation successful. These investments will negatively impact profits in our Natural Foods business in the short term but are establishing a path to meaningful profit growth and enhanced shareholder value in the long term.

Our O brand is off to a good start in fiscal 2019. As you may recall, we completed the construction of a new in-house vinegar production facility located in Petaluma, California at the end of fiscal year 2018. The start of the -- of this new facility took longer than expected due to permitting delays and the impact on the historic fires in Northern California during the second half of last fiscal year. However, with the facility operational, O is now experiencing very positive results in the sale of its broad offering of premium wine vinegars with its modernized new bottle design that truly elevates the entire category on shelf.

Leveraging this new facility, the O Olive innovation team has developed and introduced O Organic Apple Cider Vinegar during the first quarter of fiscal 2019. O's Apple Cider Vinegar is full of bright, fresh apple flavor without a harsh aftertaste. With no artificial flavors or preservatives, O Organic Apple Cider Vinegar is raw, unfiltered and contains live cultures. The market for apple cider vinegar in the U.S. retail -- in U.S. retail has increased rapidly over the last 3 years, reaching $245 million in U.S. consumer retail sales according to Nielsen for the 52 weeks ended June 2018. And that market is growing at an average annual rate of 20%, driven by a 44% growth in organic products. O intends to penetrate this market with a better-tasting organic product option. O began shipping its Organic Apple Cider Vinegar to Safeway, Harris Teeter and other accounts during the first quarter of fiscal 2019.

As discussed in our last earnings release call, our Eat Smart sales delivered tremendous year-over-year growth of 23% during fiscal 2018 compared to fiscal 2017. This growth was higher than we anticipated early in fiscal 2018 as much of the new distribution actually occurred earlier than expected.

In a short period of time, we have been able to demonstrate to retailers with data that Eat Smart salads are attracting a new consumer to the packaged salad category within the U.S. grocery channel. As such, we are focusing our efforts on building brand awareness and driving consumer trial in these stores.

As previously stated, Eat Smart salad grew 17% in the first quarter of fiscal 2019 compared to first quarter of last year. During the first quarter of this fiscal year, we have continued to gain new accounts and add incremental salad sales to existing customers. For each of the next 3 quarters of fiscal 2019, growth in salad sales relative to the year-ago quarter will be impacted simultaneously by first, the significant growth in salad sales in the last 9 months of fiscal 2018; and second, certain account-specific headwinds in our salad business.

There have been several strategic shifts regarding private label assortment strategies among our customers in the Mass channel, resulting in a gain of distribution in some accounts and a loss in others. As a result, we are projecting a net reduction in salad sales in the Mass channel in fiscal 2019 due to private label initiatives in that channel.

Our Club customers have also reduced the number of their salad rotations this year, negatively impacting Eat Smart salad sales. Even with these reductions in distribution, however, we are currently estimating that our Eat Smart salads will grow by 2% to 4% this fiscal year compared to fiscal 2018 due to continued new business in other accounts and the launch of innovative salad items in the second half of this fiscal year.

With a 2% to 4% growth in fiscal 2019, Eat Smart salads are projected to grow approximately 25% to 27% over 2 years for an average annual growth of 12.5% to 13.5% per year for fiscal 2018 and fiscal 2019.

We enter fiscal year 2019 with a focus not only on top line growth but also on a strong and concentrated effort to reduce costs in our food operations.

The entire food industry is facing considerable headwinds due to weather volatility and increasing costs in labor, freight and packaging. Recent tariffs have also significantly increased the costs of select raw materials in our food business. We have engaged the Hackett Group, a third-party consulting firm with considerable experience in the produce industry, to identify cost reductions in our food operations above and beyond the cost savings that have already been identified by the Landec team to offset these increasing costs. The Landec operations team is working diligently with the Hackett Group to identify, quantify and implement cost savings initiatives beginning in fiscal 2019 with full year impact in fiscal year 2020 and beyond.

Before I go into more details of the launch of our Now Planting soups that is occurring during the second quarter of fiscal 2019, let me turn the call over to Greg for some financial highlights from our first quarter of fiscal 2019.

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Gregory S. Skinner, Landec Corporation - VP of Finance & Administration and CFO [5]

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Thank you, Molly, and good morning, everyone. Revenues in the first quarter of fiscal 2019 increased 8% to $124.7 million compared to $115.8 million in the year-ago quarter. The increase is primarily due to an $8.5 million or 8% increase in revenues in Apio's packaged fresh vegetables business driven by an increase in salad sales.

Net income from continuing operation in the first quarter of fiscal 2019 decreased $2.2 million to $190,000 or $0.01 per share compared to $2.4 million or $0.08 per share in the year-ago quarter. The decrease is primarily due to, first, a $2.4 million decrease in operating income at Apio due to a $1.8 million decrease in gross profit from increased labor, packaging and freight costs and from a $664,000 increase in operating expenses. Second, a $475,000 decrease in operating income at Lifecore due to the timing of production and shipments within fiscal 2019. Third, a $339,000 increase in the net interest expense. Fourth, a $161,000 increase in the operating loss at O. And fifth, a pre-commercialization loss of $190,000 at Now Planting.

These decreases in net income were partially offset by $1 million increase in the fair market value of the company's Windset investment during the first quarter of fiscal 2019 compared to a $900,000 increase in the year-ago quarter and from a $1.2 million decrease in income tax [expenses.]

We are reiterating our fiscal 2019 guidance. We continue to expect consolidated annual revenues to increase 5% to 7% in fiscal 2019 compared to fiscal 2018. However, the mix of revenue growth has changed. We now expect Lifecore to grow 16% to 17%, versus 14% to 16%. In our Natural Foods business, we now expect Eat Smart salad products to grow 2% to 4%, versus 4% to 6%. Our core bags and trays business to grow 2% to 3% and O and Now Planting combined to generate $9 million to $11 million of revenues, versus $7 million to $9 million of revenues, resulting in an overall growth in our Natural Foods business of 3% to 5%.

We continue to project consolidated net income from continuing operations to increase 10% to 20% in fiscal 2019 compared to fiscal 2018, resulting in an estimated earnings per share range of $0.45 to $0.50. We expect consolidated cash flow from operations of $32 million to $36 million and capital expenditures of $45 million to $50 million.

For the second quarter of fiscal 2019, we expect revenues to be in the range of $125 million to $129 million and net income to be breakeven to slightly positive.

This guidance reflects the timing of production and shipments within the fiscal year for Lifecore, O and the recently launched line of Now Planting soups and the seasonality of our Eat Smart revenues and margins.

Let me turn the call back to Molly.

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [6]

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Thanks, Greg. The transformation of our food business is evolving rapidly. We are quickly expanding our product lines from packaged fresh vegetables to include other fresh natural food products that meet evolving consumer needs and with a commitment to 100% clean ingredients.

These natural products will have higher gross margins and exhibit less sourcing volatility than our historical produce vegetable product offering. We have been diligently working on multiple fronts to enable the realization of our vision for our Natural Foods business. We launched the Eat Smart 100% Clean Label initiative to ensure that all of our Eat Smart products, including salad toppings, dressings and dips, are made from all-natural ingredients with no artificials or preservatives -- artificial flavors or preservatives.

Our commitment was to complete this transition by the end of calendar year 2018, and we are on track to meet that commitment. Through extensive research of consumer motivations, lifestyles, eating, purchasing behaviors throughout North America, the Landec New Ventures Group has identified a large and underserved target group of consumers who define healthy eating primarily as plant-based. To meet the needs of this plant-forward consumer, Landec has launched Now Planting. Now Planting will offer pure-plant meal solutions for the fresh refrigerated sections of retail and club stores.

Plant-forward consumers are eating less meat with approximately 70% of their diet coming from plants. As this consumer segment continues to grow and build the U.S. where it represents approximately 17% of the population, in Canada where it represents approximately 23% of the population, more people are searching for and finding pure-plant meal solutions outside of traditional grocery. They are shopping at fast-casual restaurants, through direct-to-consumer meal kit solutions and by cooking their meals in their homes.

Landec is uniquely qualified to partner with retail and club stores to deliver pure-plant meal solutions to this consumer. Landec's entrepreneurial innovation team, refrigerated supply chain and direct produce sales force will develop and deliver fresh, pure-plant solutions to meet the needs of the plant-forward consumer and increase consumer foot traffic in retail and club stores over the coming years.

Just last week, we began shipping Now Planting foods in Canada to Loblaws, one of our strategic innovation partners. Now Planting soups are extremely differentiated from anything currently in the market with a nutritious ingredient profile that does not contain dairy or animal ingredients of any kind and is naturally lower in sodium, sugar and fat, allowing you to celebrate the natural flavors of plants with a unique combination of ingredients.

Each soup contains plant-based toppings and delivers an amazing and unique-tasting experience. The Now Planting patented packaging design holds all these plant-based toppings within the lid, separate from the soup itself, to keep them fresh and crunchy, allowing the consumers to add toppings as desired. Now Planting will initially offer 5 16-ounce soups, Red Pepper Bisque, Sope Verde, Cajun Tomato Rice, Lemongrass Curry and Hominy Bean. Loblaws will initially be offering all 5 Now Planting soups in approximately 550 of their retail stores.

Our focus in our Natural Foods business is on developing and offering products that are on-trend with consumers and that deliver higher margins and a higher return on invested capital. We have successfully implemented this strategy with our entry into the multi-serve salad kit category, our recent disruption of the single-serve salad kit category, the addition of O California-grown olive oils and vinegars, including the now -- new O Organic Apple Cider Vinegar, and making its debut in fiscal year 2019, our Now Planting pure-plant soups.

The Landec New Ventures Group continues to focus on initiatives to grow our natural products offering through acquisitions and additional internal innovational effort. A second half of these initiatives is scheduled to launch later in fiscal 2019. More details of this initiative will be shared in the upcoming month.

Switching to Lifecore. In our Lifecore CDMO business, we are experiencing strong double-digit annual growth and we are increasing our expectations to Lifecore's fiscal 2019 revenue growth to be 16% to 17% compared to fiscal year 2018, up from the previously expected 14% to 16%. Lifecore is benefiting from a growing trend among pharmaceutical and other medical material companies to outsource specialty services and manufacturing, especially for difficult-to-handle biomaterials.

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 double-digit revenue growth on average over the next 5 years as Lifecore expands its sales to existing customers, adds new customers and commercializes products that are currently in its development pipeline.

Looking to fiscal 2019 and beyond, we will continue to innovate. At Eat Smart, we will continue to launch new packaged fresh vegetable products that make it easy and delicious for consumers to eat vegetables. We will continue to grow distribution of our O products, including the new O Organic Apple Cider Vinegar. We will launch our Now Planting pure-plant soups focused on the plant-forward consumer. At Lifecore, we will continue to adjust new processes and capabilities to meet the needs of our customers for the difficult-to-handle pharmaceutical and medical materials, and we will begin filling products in vials in addition to syringes.

We are also focused on increasing production volumes in each of our businesses to drive efficiencies and increase our return on invested capital. Finally and very importantly, we are focused on increasing efficiencies and driving down costs in our food business in order to offset the rising cost and continued weather volatility that is affecting that business.

In summary, we will continue to focus on delivering value to our customers, consumers and shareholders. As we continue to transform our businesses, we will focus on driving our 3 growth platforms, the Lifecore CDMO business, Eat Smart salads and our emerging Natural Foods products platform, while simultaneously reducing costs and increasing efficiencies. Our balance sheet remains strong and provides us the resources for executing on our strategic objectives and reaching our financial goals.

We are now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Anthony Vendetti with Maxim Group.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [2]

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Yes, I was just wondering on Lifecore. Molly, if you could just talk a little bit about the process now that the installation is complete. I know you said there's a validation period, but is it possible that commercial production will begin before fiscal 2020? Or is it after the validation, there's a lag between that and getting new customers online for this? Or is there a pipeline ready to go?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [3]

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Hello, Anthony. So yes, installation is complete, but the main milestone here is final FDA approval of the new drug that we will be manufacturing. So through the rest of this fiscal year, we're expecting to go through validation [batches] and supporting the company with remaining clinical trials. But ultimately, we're expecting the FDA approval to become -- to come more towards the end of the fiscal year so that we can start commercial production next fiscal year. I guess there's a possibility we could get early approval, but that's our expectation.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [4]

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Okay. And then is there -- I know you've put a number in the press release about the potential. Is that because there's a pipeline of customers that you have -- that are ready to start once you do have FDA approval?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [5]

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Yes, so we have a customer that is ready to start and also other ones that would come at a later date to be able to utilize that piece of equipment.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [6]

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Okay, great. And then just to switch gears to the O and Now Planting and particularly, Now Planting. Obviously, you had a lot of success with the Eat Smart salad kits and the Salad Shake Ups! And now, with the soup line, are you following the same rollout plan? How many SKUs do you think retails will initially carry? And do these have the same sort of margins as the Eat Smart salad kits and the Salad Shake Ups!?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [7]

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Okay. Thank you. So we just started shipping our soups -- our pure-plant soups last week. Our first customer that we can start shipping to is Loblaws up in Canada. We're launching 5 SKUs, and I think I gave the names when I read previously and I think they're in -- well, I don't think the names are, but we're launching 5 SKUs. They're actually 16-ounce tubs with a patented container because of the toppings. So we are launching 5 SKUs and Loblaws is taking all 5 SKUs. I got confirmation this morning that I was allowed to talk about our second customer that will be launching them. I had to get the okay from my sales team that met with our customer. But we also started shipping Publix. And Publix is also going to be taking all 5 SKUs of the soups in 600 of their 1,100 doors. So we're going to be starting in Canada with Loblaws, and we're going to be starting in the U.S. with Publix, very -- both very strong partners of ours. And really, the process is about going out with these 2 strong partners of ours to really believe that there is this segment of plant-forward consumers. We believe we're completely on-trend and we want to get out and get these products out there. And remember something we're doing very different is we're going to be merchandising soups in the produce and grab-and-go categories -- departments of these stores. So we're very much partnering with these stores to go after the plant-based and plant-forward consumers and that's what we're testing with them together.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [8]

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No, that's awesome, and if I could ask just one last question on the Hackett Group. Did you ask them to figure out and identify and implement some of these savings initiatives in fiscal 2019? And then you expect some of the savings in fiscal 2020 and beyond. Are they -- do they have like a specified end date? Or will they continue to be consulting beyond 2019?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [9]

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Our bigger and immediate goal is, first, just to get fresh eyes on costs. We've been working aggressively to -- internally to offset all the cost increases from weather volatility and raw materials over several years. But we continue to see cost rise. And so I think we just wanted to get fresh eyes on it. And their goal right now has been to come in, assess the situation, actually have very specific projects that we can target, which we can quantify and we can start time-lining in order to execute them over the next several years. My hope is that we put these in place. Our team can, over time, execute these. But I think it's a good practice to continue to have fresh eyes on this. It's a big part of our business. And so right now, the Hackett Group's involved. We'll probably be adding a couple of people internally to help execute some of the projects that we're coming up with. And we'll just see, after this set, if -- what Hackett's Group, their involvement will be ongoing. But I think, fresh eyes, consistent fresh eyes is always a good thing.

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Operator [10]

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And our next question comes from Gerry Sweeney with Roth Capital.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11]

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A question on the salad side. You talked a little bit about the shift, I think, at some of the supermarkets. Is this an effort by the supermarkets to maybe fight some of your growth? Or is this just a standard sort of maybe repositioning of products? And any thoughts on how this maybe moves forward into next year?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [12]

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Yes, so I think you're referring to the private label trend we're seeing. And we're really seeing this mostly in the Mass channel right now. So it's not all over, it's in the Mass channel. And it's definitely not about fighting our growth because when we grow, our partners grow. So we're in this together sort of thing with retailers. So I think it's -- the private label trend is the way I think a lot of retailers are looking to differentiate themselves against the Amazons in -- and that world, and some people are employing, some accounts are employing a private label strategy that they think can do that. Now everybody's private label strategy is different, right? Everything from we're going to 100% private label to, oh, we're going to go cap private label and then stick with 2 brands that could go more heavily into -- with those brands. So there isn't just one strategy, and we're seeing, depending on the account, we're seeing in some cases, we're gaining distribution because they've decided to focus on our brand. And in some other cases, we haven't lost it yet, but we're projecting that we will lose it. So it's a mismatch out there. Again, just in the Mass channel, but that's what we're seeing and it's -- these kind of accounts try to differentiate themselves.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

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Got it. And then on the Now Planting. Obviously, I think you talked about before you had some focus group tests and the soup is very good, I've tasted it, it's great. I mean, how does that play off in terms of leveraging your existing channel? Can you go to them and highlight -- this will almost fight some of the meal kits that are developing, that may be taking some other -- your revenue, et cetera? And what has been the response from the -- some of the channels beside Publix and the Canadian group?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [14]

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So we've been going out showing the soups to a wide variety of customers. And to your first question, how do we leverage our existing debt business to help us more efficiently launch these soups. We do that it in 2 ways. First of all, we can use our refrigerated supply chain. So one of the things about these soups is that they are refrigerated, fresh, no preservatives. And so no artificial preservatives. So we can use our existing refrigerated supply chain, meaning our trucks mostly, to get these soups to our accounts, to get them on shelf with enough code date left so that consumers can truly enjoy them. And so we're able to put the soups on the same truck with our salads, which is phenomenal from a logistics standpoint, right, and it also helps our overall business by utilizing our trucks. So that's part of it. Also, our customers are totally on board and realize the impact of this plant-forward consumer. And they believe that that plant-forward consumer is shopping in produce, okay? And because that shopper shops is in produce, they really believe that these soups go in produce. And so we're working with our existing partners and buyers in the produce department to sell those in. So it's another way we're getting leverage in our existing infrastructure business and relationships to launch something fresh to consumers.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [15]

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Got it. Okay. And then another question on the -- or at least the Natural Foods line. I think in the commentary, you mentioned there was going to be another launch of -- I'm assuming in Natural Foods. Is this an add-on to Now Planting? Or is this a whole -- another type of brand that you're going to be pushing out there, if you want to discuss that that far out?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [16]

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Yes. It's revealed, but it's not advancing, and it's not another brand either. It's a completely different initiative. I think the bigger message that I'm trying to send is that our new venture group is very busy and we're on the move and we have momentum and we're aggressively going after this consumer that's asking for fresh. And so that was the nature of my comment.

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Gerard J. Sweeney, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [17]

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Okay. That's what I assumed. And then final question just around the costs. I know you have engaged the Hackett Group. But maybe, can you talk a little bit about some of the initiatives that may already be in place or ideas that you have looked at in terms of mitigating some of the labor, freight and packaging?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [18]

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Yes, so the main thing is automation. So automation in the past hasn't always made sense when you pencil out to ROI. If you do the math with the cost of innovation and the labor, it's just -- in all honesty, the math just didn't make sense. Now with labor costs continuing to rise, there is no doubt that the ROI is there on automation that we would not have considered before. And so that's what we're looking into. And so that's some of the CapEx we're seeing this year, too, is because of these cost-out initiatives. So that means you have to spend on automation to get the costs out. So we believe for the long term, it's the right thing to do. So some of it is in automation. Other things are in continuous improvement activities. So it's not all on innovation, but those are a couple of examples.

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Operator [19]

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And our next question comes from Chris Krueger with Lake Street Capital Markets.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [20]

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Looking at Now Planting, I know you said it's going to sell in the produce section. Where within the produce section would that be? Would it be like a special display? Or any kind of marketing plans to drive awareness of it?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [21]

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Yes. We're trying it in a couple of places. And you know what? I'm not sure where Loblaws or Publix ended up. So I'm going to leave that. Let me -- let's try to get on shelf because I don't even think it's on shelf yet. It's getting delivered right now. So the account makes the final decision. We know it's being in produce. But maybe next call, we can discuss more where it specifically is within the [place.]

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [22]

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All right. Then looking at the Lifecore, your pipeline potential with new customers. If you look out like to the end of 2020, fiscal 2020, what kind of capacity utilization percentage do you think you can get to by then? And do you have any potential like large, like $10 million or more year type of customers in that pipeline?

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Gregory S. Skinner, Landec Corporation - VP of Finance & Administration and CFO [23]

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Yes. Hey, Chris, it's Greg. Potentially. We can't go into any detail. It wouldn't be overnight. But as we've said, just the one line alone, that should be up and operational in 2020 and bringing in a full capacity, an incremental $40 million to $50 million in revenues a year. And there is space because if you recall back in [2010], we significantly expanded the Lifecore building. There is space already set up within that building to actually add another one of these lines. So that's what you want to hear from us, is that we're going to be adding another line. And I think that will tell you what we expect going forward.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [24]

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All right. There was your Windset investment. There's been some talk that greenhouses in Canada have been targeting the hemp or cannabis or whatever, market. Is Windset able to gain some share there and take advantage of that?

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Gregory S. Skinner, Landec Corporation - VP of Finance & Administration and CFO [25]

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Yes. One of the advantages is that this Windset business has no intent at this time to get into cannabis. But what is happening is a lot of their competition has moved wholeheartedly into marijuana. And as a result, there is somewhat under-capacity right now for greenhouse-grown products, specifically the products that Windset grows. So they believe they're going to have some pricing power going forward as a result. It hasn't happened yet, but we'll see. But that's their belief.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [26]

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All right. And last question, any impact in the Southeast U.S as far as the hurricane goes?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [27]

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We did -- we have minimal impact. The impact -- it didn't affect any costs specifically, but it did increase our costs slightly because of the heavy rains. Some of it did get into Ohio and some of our plantings in North Carolina. We did anticipate it a bit and we were able to plant more beans in Texas and California. So we were able to take care of our customers for the most part. But that did with some increase in costs. And that's what you see a little bit in the first quarter is part of that gross margin, that gross profit shortfall in the first quarter was due to higher green bean pricing.

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Operator [28]

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(Operator Instructions) Our next question comes from Mike Morales with Walthausen & Co.

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Michael Morales, [29]

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One of the things that I noticed from the Now Planting soup line is it seems like it would certainly be a product that's used towards a younger customer base in my mind. Has the company thought about maybe taking a more direct-to-consumer approach on marketing? Or maybe looking into the future, longer-term potentially selling those products in a more direct-to-consumer way?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [30]

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We're looking at that. I'm not going to touch specifically what we're talking about. But you can buy Eat Smart -- on the West Coast, you can buy Eat Smart products online now, so we could put Now Planting soups on that same system. We're already selling through direct meal kit company companies, including companies like HelloFresh. But we're also selling our vegetables to meal kit companies through retailers. So a lot of retailers are starting their own meal kit companies, and we're already selling our vegetables to those companies. So I think what we want to do is get these soups out there, start to build awareness. And as we see where the business is coming from, we can definitely include it in those programs. I will say though that it does -- it is for a younger consumer, but it's not really about the demographics of it being younger. It's more about the psychographic. And what we found is that there's a psychographic in this plant-forward consumer that kind of transforms age. And it's about a kind of eating lifestyle and belief system where you do want to eat most of your meals that are plant-based. So not all, it doesn't mean you're a vegan. It doesn't mean you're a vegetarian. But about 70% of what people are eating in the plant-forward segment are plant-based ingredients and food. And so I just want to emphasize, it really isn't just the millennium population. It really is across age demographic.

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Michael Morales, [31]

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Sure. That's helpful. And then I think one of the comments that you had made was that you're looking to take some efforts to remove sourcing volatility through new products in packaged fresh vegetables. Can you just refresh us on maybe what some of the details on those initiatives to remove that volatility might be?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [32]

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So our biggest initiative to do that is to move into other products and shift our product mix. So the way we're removing some of the volatility is shifting our products from just being about fresh vegetables to other products that still use plants and vegetables in their base that have longer shelf life. And so the foods, because they are cooked even though they're still fully refrigerated, they are cooked, they have a slightly longer shelf life of 45 to 55 days and they have ingredients that can be stored on a longer basis. And someone asked earlier, I didn't think I got to that answer about our margins on the soups. The target as we gain volumes, so we have to get volume to get there, was over 30% gross margin, which is obviously higher than any of the products we have today in Fresh. So -- and our O Olive products are the same way. We're moving away from kind of the daily volatility of the fresh vegetable line. In O Olive, target margins there, again, they have to get some volume to get there first, is also over 30% gross margin. And they also have much less volatility on the supply side. So that's our main strategy, is to continue to add products to our portfolio to correct volatility. I will say our salad business has not had much volatility either. Our salad business has been pretty consistent ever since we entered the salad business about 5 years ago. We -- I don't think we've ever shorted a customer on salads or have experienced much volatility with mother nature with those types of vegetables. Most of the volatility is in our bag vegetables business.

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Michael Morales, [33]

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Sure. And then just last for me. One of the levers that you were looking to pull to mitigate some of these rising costs was called out as a price. Is there any detail that you can give on the magnitude of what you're contemplating for that?

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [34]

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Right now, we're going out with price increases through this year in our core bag business. I'd say, we typically don't go out with how much we're doing price increases for. But we are actively, and we set a target for price increases this year. And we've already gotten about 75% of that target, and we're working on the remaining 25%.

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Operator [35]

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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.

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Molly A. Hemmeter, Landec Corporation - President, CEO & Director [36]

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I just want to thank everyone for joining us on the call today. We are working aggressively on continuing to grow our 3 platforms: Lifecore, salads and our emerging Natural Foods products. But I also want to emphasize that we are very focused on reducing costs in our food business. This has become an ever-increasing focus of ours, and we know it's essential to the fundamentals of the business. So we'll be giving updates on that on each call. Thanks for joining us today.

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Operator [37]

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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.