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spk01: Good afternoon, and thank you for joining Landax Fiscal 2021 First Quarter Earnings Call. With me on the call today is Dr. Albert Bolz, Landax Chief Executive Officer, Ryan McLaughlin, Landax Chief Financial Officer, and Jim Hall, President of LifeCorps. 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 2020. Let me turn the conference over to Al Bowles.
spk03: Thank you, and good afternoon, 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. LifeCorp 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, LifeCorps 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. Creation 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 breathe-away 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 olive oil and vinegar products, and Yucatan and Cabo Fresh avocado products. We are focused on creating shareholder value by delivering against our financial targets, investing in growth, driving top-line momentum at LifeCorps, and implementing our strategic priorities to improve adjusted EBITDA margins at Curation Foods. Furthermore, we continue to work toward improving our balance sheet and net leverage ratio, which our organization is aligned around. We are taking a disciplined approach to strengthen our position through, first, the implementation of a formal capital allocation process with stringent return and investment criteria is in place to ensure that we are maximizing the dollars we are putting to work for shareholders. Second, with our company-wide focus On operational excellence, we believe we can reduce our CapEx budget while improving the efficiency of our operations, which is expected to drive greater free cash flow versus prior year. Third, as part of Project SWIFT, we have been executing on our commitment to divest non-strategic assets to strengthen our operations and pay down debt. On August 7th, we closed on the sale of our cell addressing facility, in Ontario, California, for $4.9 million. And on September 4th, we close on a sale of our Hanover manufacturing facility and related assets for $8.7 million. And fourth, our team is vetting long-term refinancing solutions to add stability to our balance sheet, and we look forward to communicating those to you at the appropriate time. We began to see the financial benefits from Project SWIS decisive actions reflected in our results in the fourth quarter of fiscal 2020, but it is much more visible in our performance during the first quarter of fiscal 2021. Even with some lingering COVID headwinds that we managed through, the dedication and hard work of our entire organization, from our essential frontline employees to our executive team, is ensuring that this momentum of improved outcomes continues. In the first quarter of fiscal 2021, LifeCorps continued to deliver on its track record of high-margin revenue performance, delivering 81% year-over-year growth, while Creation Foods delivered a planned decrease of 10%. At LifeCorps, this reflects the concerted effort to better balance the seasonality of the fermentation business While at Curation Foods, this respects our continued strategy of simplifying and strengthening the business by making it smaller and more profitable. On a consolidated basis, we drove a 7% increase in gross profit and a 890% increase in adjusted EBITDA. As I spoke about during the prior earnings call, we continue to have confidence in delivering a strong fiscal 2021 for our shareholders, which is the most visible in our adjusted EBITDA guidance of 33 to 37 million that we are reiterating today. This implies a 59 percent increase at the midpoint of the range versus prior year and puts us on pace to achieve the steady state margin targets that we've detailed previously. We are committed to maximizing the value of our portfolio through sound and thoughtful execution in each of our segments, while protecting the planet for future generations with sustainable business practices. Before I share more details on our outlook and priorities for fiscal 2021 for LifeCore and Curation Foods, I'll turn the call over to Brian for the financial highlights and a deeper discussion around our fiscal 21 outlook and related modeling considerations.
spk08: Thank you, Al. I will start with a review of our first quarter financial results. Consolidated revenues decreased 2.2% to $135.6 million. The decrease was driven by a 10.1% planned decrease in Curation Foods revenues, which was nearly offset by an 81.1% increase in LifeCorp revenues. LifeCorp's improved year-over-year performance was impressive, with a 46% increase in its EDMO business and a 620% increase in its fermentation business. The exponential growth of the fermentation business during first quarter reflects our efforts to balance shipment timing throughout the fiscal year to mitigate some of the seasonality that we've experienced historically. At Curation Foods, revenue performance was primarily driven by the planned reduction in our legacy vegetable and tray business in connection with Project SWIFT, continued softness experienced by our food service business due to COVID, and to a lesser extent by our single-serve salad business as consumer shopping and dining patterns have shifted during the COVID-19 pandemic. Combined, this resulted in a 12.4% revenue decrease in our fresh packaged salads and vegetable business. The planned reduction in the legacy vegetable and trade business is a key aspect of our goal on focusing on higher margin products and on new product innovation in the curation food segment. Partially offsetting this was a 5% increase in revenue from our avocado products business, primarily due to incremental growth in the retail distribution of our innovative avocado squeeze products. Consolidated gross profit increased 6.6%, and gross profit margin increased to 12.1%, up 100 basis points compared to the prior period. The gross margin increase was primarily driven by the life course segment, where its significant first quarter revenue growth led to an increase in gross profit that was nearly double the prior year period. Further, Curation Foods' avocado business delivered improved gross profit. as a result of lower-cost avocados compared to fiscal 2020, as well as operational improvements derived from our ZEST framework. However, these gains were partially offset by three key factors, which we believe we have addressed for future quarters. First, at Curation Foods, we experienced unplanned operational inefficiencies due to an automation equipment installation delay in turn due to travel restrictions during the COVID-19 pandemic. Second, weather impacted our profitability at Curations Foods due to higher raw material costs resulting from extreme heat in the west and cold in the east. Historically, we have not had a pattern of extreme weather impacting first quarter operations. Going forward, we feel we have adequately forecasted potential weather impacts into our guidance for the remainder of the fiscal year. And third, as we discussed during the fiscal fourth quarter call, LifeCorp experienced headwinds in gross profit during the first quarter due to the sell-through of higher-cost inventory manufactured during our prior year fiscal fourth quarter. And as a result, segment gross margin was approximately half of what it has been traditionally. That high-cost inventory has now been sold through, and the business has returned to its historical gross margin run rates. Landex first quarter net loss was $11 million, or a loss of 38 cents per share, which includes $7.8 million of restructuring and other non-recurring charges net attacked to, which are primarily associated with the sale of our Hanover facility and ongoing legal matters at our Yucatan avocado facility in Mexico. Excluding these non-recurring charges of 27 cents, adjusted diluted net loss per share was 11 cents. Adjusted EBITDA increased to $3.1 million, up $2.8 million, or 890% versus the prior year period. Gap cash flow from operations was $17 million in fiscal first quarter, an increase of $22.2 million versus the negative $5.2 million in the year-ago period. As Al mentioned in his remarks, our first quarter performance demonstrates the improving consistency of our operations at Curation Foods, as well as the more balanced seasonal contribution from LifeCorps. Turning to our financial position, as of the fiscal first quarter end on August 30, 2020, we are in compliance with all of our financial covenants under the company's credit agreement. Our total leverage ratio, as calculated under our credit agreement, improved from 5.9 to 1 for the fiscal fourth quarter ended May 31, 2020, to 4.7 to 1 for the fiscal first quarter ended August 30, 2020, which was primarily driven by improved operating performance and the recent asset sales. As of August 30, 2020, we had $173.9 million in borrowings outstanding under our credit agreement, including $69 million under our revolving credit facility and $104.9 million under our term loan. As previously disclosed, the company's borrowings under our credit agreement mature September 23, 2021. Deleveraging the balance sheet continues to be our primary focus, and in the near term, refinancing of our debt is a top corporate priority. We remain confident in our ability to drive significantly improved adjusted EBITDA generation in fiscal 2021. following the operational turnaround efforts we implemented during fiscal 2020. Our aim is to continue to demonstrate consistency in our operating results this year and reestablish baseline profitability within our curation food segment while continuing to support the growth of LifeCorps. Shifting to our outlook, as Al mentioned, we are reiterating annual guidance for fiscal 21 as follows. Consolidated revenues in the range of $530 million to $550 million, representing a planned decrease of approximately 9%. Life core revenues in the range of $93 million to $97 million, representing growth of approximately 11%. And curation foods revenues in the range of $437 million to $453 million, representing a decrease of approximately 12%. From an adjusted EBITDA perspective, we continue to expect consolidated adjusted EBITDA in the range of 33 million to 37 million, representing growth of approximately 59 percent. Life score to range from 22.5 million to 24.5 million, representing growth of approximately 17 percent. And curation foods from 12 million to 14 million, representing growth of approximately 193 percent. Additionally, we are reporting two new metrics in the first quarter of 10Q, filing, which breaks down, one, the corporate management allocation to each segment, life core, curation, foods, and other. The other segment represents LandEx corporate operating costs that are not allocated at the segment level. And we are providing you with capital expenditures at the segment level on a quarterly basis. In the first fiscal quarter of fiscal 21, The total corporate, overhead, and public company management fees of $6.1 million were allocated to the three business segments as follows. $1.4 million to LifeCorps, $1.9 million to Curation Foods, and the remaining $2.8 million to other. The total consolidated capital expenditures in the first quarter were $4.6 million, allocated as follows, approximately 59% budgeted for LifeCorps and 41% for Curation Foods. Regarding seasonality, we are reiterating our statements from last quarter. We continue to anticipate minimal quarterly variation due to revenue seasonality for both LifeCorps and Creation Foods through the balance of the fiscal year. And in terms of adjusted EBITDA, we expect to continue to deliver normalized gross and adjusted EBITDA margins, which at LifeCorps means back to the historical level, and at Creation Foods means we are marching forward our by-year-end steady-state goals previously detailed. With that, I'll turn the call back to Al.
spk03: Thank you, Brian. Let me go into more detail about the progress we are making in our LifeCore and Curation Foods businesses to maximize shareholder value across our portfolio. LifeCore continues to see momentum benefiting from the three industry trends. Number one, a growing number of products seeking FDA approval. 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. As a highly differentiated and fully integrated CDMO, LifeCorps is positioned to capitalize on these tailwinds and continues to establish high barriers to competition. LifeCorps' speed and efficiency benefits its partners by decreasing their time to market, which has immense value in their ability to improve patient lives through commercialization of their innovative therapies. Looking forward, LifeCorps will fuel its long-term growth by executing against its three strategic priorities. Number one, Managing and expanding its product development pipeline, LifeCorps has 16 business development projects in various stages of product lifecycle, from clinical development to commercialization, which aligns with the business's overall strategy. Number two, managing capacity with a detailed capital management plan to meet current customer demand while building appropriate capacity and operational expansion to meet future commercial production needs. And number three, continuing to deliver on a strong track record of commercialization from its product development pipeline. LifeCorps currently is planning for one to two products in development to be approved by the FDA for commercialization annually, supporting their goal of long-term double-digit growth. For curation foods, the exceptional outcomes of Project SWIFT have created a foundation for future profitable growth. We are now strongly positioned to deliver on-trend, plant-based food solutions to customers with a combination of unique capabilities that make curation foods truly differentiated in the marketplace. Curation food priorities moving into fiscal 2021 include, number one, operational excellence in Project SWIFT. We will continue to focus our efforts on network optimization, lean manufacturing principles, and the ongoing strategic review of all aspects of our business. In fiscal 2020, we tackled the major issues that were facing the business. And during the fiscal year, we are more surgical in our approach and are looking at the next layer of opportunities for improving operations. This begins with carrying through the successful principles of ZEST across our entire operations network. ZEST, initially implemented in Mexico, is our lean manufacturing program, a key aspect of which is to support and engage with our employees who are critical in our ability to deliver sustainable, continuous improvement. In addition, now that we have streamlined our organization through our network optimization work in Project SWIFT, We will also look at all internal operations and functions to ensure that they are functioning at maximum efficiency and profitability. For example, we are embarking on an analysis of our logistics operations to ensure that this department is effective and efficient at serving our customers in our now right-sized organization. Number two, plant-based food innovation launches. We continue to focus on plant-forward innovation designed to provide delicious and nutritious food for consumers who define themselves as flexitarians. Our flexitarian consumer is an actively decreasing meat and animal protein consumption and eating two to five meatless plant-based meals per week. According to the power of produce study conducted by the Food Marketing Institute in 2019, This consumer segment will represent 56% of U.S. population by 2023. In addition to our existing salad kit business that delivers on this trend, we are actively in co-development with our customers to meet their shopper's demand. We are currently testing a co-developed entree salad kit featuring unique plant protein ingredients, such as protein from seeds, grains, and legumes. paired with hearty vegetables and greens that our consumers have come to expect from Eat Smart. We are also actively pursuing new product expansion for the Eat Smart brand into adjacent categories with innovation delivering on the consumer desire for increased plant-based protein meal options. We have also achieved some exciting distribution growth for our avocado squeeze product. We have substantially grown the avocado products business to over 6,000 points of distribution in the grocery and mass channel and is reflected in the avocado products overall growth, which is approximately 14% year-over-year, versus the category, which is growing at about 5%, according to Nielsen. These are high-margin growth opportunities for curation foods business. and we will support these product launches with strategic spending to drive trial and brand awareness. Number three, focus on culture. As previously stated, the health and safety of our people and products has always been a priority and is foundational to all of our actions and sits alongside our sustainability mandate to reduce our impact on the planet. This has not and will not change. We are working on building a winning culture as we transform and simplify the way we do business. The team is focused on accountability and teamwork with a mindset of successfully moving forward together. In summary, we have made tremendous progress and are studying to see the results. The Land Act team is focused on creating value by delivering against our financial targets, strengthening our balance sheet, implementing our strategic priorities to improve operating margins and make strategic investments in growth. We intend to fully realize the potential of each business through sound and thoughtful execution, creating sustainable value for our shareholders, customers, employees, and communities. Operator, please open the call for questions.
spk01: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from Brian Holland from DA Davidson. Please proceed with your question.
spk00: Yeah, thanks. Good afternoon, everyone, and congrats on the progress. Just a couple quick ones from me. First of all, you talked about a few small issues in the quarter related to operations and then obviously fruit related or raw materials due to weather. Just on the production inefficiencies, you expressed confidence that that maybe isn't an issue going forward. Can you just help us understand, are you just back fully to where you were pre this issue? And maybe if you could just talk us through what exactly happened and the confidence that this doesn't end going forward. And then maybe the same thing on the weather side, that there's no carryover here in subsequent quarters.
spk03: Yeah. Hi, Brian. It's Al. How are you today? Good, good. Yeah, we had a piece of equipment that came from an Italian supplier that we had planned to have installed at the end of Q4 and a fully operational in Q1. And because of COVID, the travel restrictions, we couldn't get it installed. So it's installed now. We had to use Zoom with the technicians. with the equipment supplier in Italy to get it installed, but we found a creative way to get it up and going. So that was primarily a big impact for us in the June timeframe. We also, you know, continued at that time period there was, you know, more outbreaks of COVID in the Santa Maria area, and we enhanced our sanitation and PPE accordingly. Even though it cost us money, it ended up being a very positive move for us. The Santa Barbara County health visit we had several weeks ago said that we have become a gold standard and an example for them to want to use. So that's something we just did to stay ahead of this pandemic. Food service, we saw, you know, we were expecting a little bit more of a bounce in food service and green beans, but we've had some softness there. That is now behind us, Brian. It's starting to pick up to where, you know, we thought it would be. And we had, you know, just continued downward pressure on trays primarily from COVID from some of our suppliers. But all in all, I mean, the operation is back running, you know, where we expect it. July was good. August is better. And, you know, I have No qualms about where we are in terms of running the operations. In terms of the weather, you know, as we said that we typically see our weather, significant weather events in Q2 and Q3. Due to the recent heat in California and some coldness, we got a little bit more of a weather hit than we were expecting. But Brian and I are very comfortable in that we have the right amount of seasonality built into our Q2 and Q3 numbers.
spk00: Does that help? Yeah, I appreciate the color. And then just if I could ask about the avocado squeeze, sounds like good news there with some retail distribution. You know, August quarter end, shelf resets, generally speaking what I've heard is it's a little bit later this year, September, October timeframe. So I guess what I'm asking is, you know, should we expect more progress here in the first or in your second quarter? Are there more distribution gains coming? How quickly can that product get bigger? And then just kind of remind us how you're supporting, you know, the thing you keep hearing about CPG is, you know, relatively narrow assortments, consumers going to these large brands they trust, retailers narrowing assortments to favor these larger brands. So first, congratulations on getting – cutting through that noise with this new product. But just curious how you plan to support that here, you know, kind of in this sort of crowded backdrop.
spk03: Yeah. So, Brian, as you know, last year we tested the Squeeze product in some – some test markets and customers. You know, we learned some things that we were doing well, and we learned some things that we could do better. That's why we tested it. And we've implemented those things, and we're seeing really good growth now with the avocado squeeze product. We've got over 6,000 points of distribution. And, you know, I see that as steady growth for us. throughout the rest of the year, along with our continued growth in our tub business. We have, you know, we have some real upsides, Brian, because when it looks at an ACV, we have this Cobble Fresh brand that we have both on tubs and on the squeeze product. And that brand really resonates with the millennials. And we only have 20% ACV. And on the squeeze side, we only have 6% ACV on Cabo. So we see that, you know, we're going to have – we've had a couple years of double-digit growth in this product line, and we see that continuing to grow for us this year. We're supporting it by working primarily with our customers, with, you know, shelf talkers, specific promotion programs, We're even working now with some other companies where we are co-branding it together, or co-merchandising, I should say. So if you buy some chips, you can also get some guacamole. Those are the kind of things that we're doing. And we are also working on the e-commerce side through mechanisms like Instacart now, because we know not everybody is, you know, going to the grocery store. That area is growing. So it's a potpourri of things, Brian, but we're very targeted on making sure what we do gives us the right return on our marketing dollars.
spk00: I appreciate all that, Tyler. I'll leave it there. Congrats again, and best luck on board.
spk03: Thanks, Brian.
spk01: Thank you. Our next question comes from Mitch Pinero of Sturdivant and Co. Please proceed with your question.
spk02: Hi. Good afternoon. Just a couple of odd and end questions here. First, so based on even seasonality or, you know, more balance and based on your guidance that you've given, It looks like Q2 should be solidly – I know you don't give quarterly problems, but Q2 should be on an earnings per share basis that we suggested should be positive. Is that correct? That's correct. Otherwise, it really wouldn't be balanced. Okay.
spk03: Yeah, Brian, we're expecting a very solid, strong Q2 as we move forward, Q3, Q4 as well.
spk02: Okay.
spk03: We have a lot of confidence in that number.
spk02: Okay. And the plan reduction, is that also going to be fairly steady, the same kind of level that we had here in the last quarter?
spk03: Yes. You're going to see a fairly steady reduction. We've reiterated before that we see core veg sort of coming in around the $100 million business from the $160 million that it was.
spk02: Just changing the subject here back to LifeCorps, just looking, it's interesting, I appreciate the numbers you handed out there with their capacity and how it breaks down and the anticipated needs into 2030. When I look at through 2025, based on the numbers that I did a quick back of the envelope math, it looks like the five-year TAGR in capacity is going to be somewhere, or demand, is going to be somewhere around 22%.
spk03: That's pretty close. Jim, why don't you talk through the capacity that we have built in? It can be kind of confusing for everybody to figure that out.
spk05: Yeah, Mitch, you're pretty much spot on. In reality, you know, we're looking at the commercialization rate of our development pipeline and how that translates into needed capacity over the next four to five years, and we should be approaching that 22 million unit theoretical capacity by FY25.
spk02: So, okay, if I look at what you're looking at into 21 going from $6.5 demand, $8.5 million. But overall revenue is only in your guidance is what is up right around double digits, right, up 8% to 13%. Can you just – is that something – is that a sort of a rebalanced year that should we expect a higher rate? And we're going to see acceleration in 22-23 to get to that higher CAGR. How should we look at that?
spk05: Yeah, I mean, I think that, like we said, that our revenue CAGR over that period of time is going to be, you know, in the mid-teens. And some years, obviously, are going to be a little bit higher and some a little bit lower to average that out. But in reality, it's going to be pretty consistent mid-teens. teams double-digit growth over the next five years.
spk02: Okay. And then, how do you think about your capital spending as it relates to that? Is it going to be spread out over, you know, the four or five years, or how do you, as you look at 2030?
spk05: Yeah, and like we've described in our, you know, our discussion on capacity and capital investment. Life Corps basically needs to continue to invest to fill out the needed short-term investments to make that 22 million units, things that don't require long lead times. We fill out as the business and capacity dictate. We're also going to need to start to invest in additional filling capacity since the filling capacity takes three to four years from start to finish. And we project we're going to need more than our 22 million units and pushing towards 30 million units over the next 10 to 12 years. So the capital spend will kind of follow the investment of the needed additional capacity.
spk02: Okay. And then I guess, Brian, you did $4.6 million in capital spending in the quarter. Are you still on track for $34 million for the year?
spk08: Yes. Yeah. We expect it to be more back-end loaded than in the first half, but that's our anticipation at this point.
spk02: And last question is just on – So Hanover sale closed after the quarter?
spk08: Is that right? Yeah, it closed just after the quarter end. I'll let Al jump in on that one.
spk02: Yeah. I just want to ask, so we'll see a reduction there in debt, the $8.7 million. Will there be any capital, any working capital use or return? source in the upcoming quarter? Just trying to figure out where your debt will be.
spk08: Yeah, I'm just trying to make sure I understand the question. So we definitely generated quite a bit of cash flow from operations in the first quarter. It's just, I think, due to the, as well, just the cadence of Yucatan, where they build up their inventories and then Over the course of the summer and into the fall, we deplete those inventories before we start up manufacturing again. That, but just, I think, coupled with the strength of the business, improved margin structures that Al's referred to with cost out and such has given us a pretty strong cash flow in Q1. You know, we expect that as we move into Q2, we'll also have, you know, favorable cash flow positions as we move into the latter part. of the year and we start building up on the balance sheet, that safety stock for Yucatan, um, there will be a, um, use of funds that happens there. But, um, at this point over the course of the year, um, as best as we can see at this point, um, we believe that we'll, we will be, um, slightly positive overall to, um, cashflow from operation versus CapEx spend. And that is before factoring in the asset sales. Okay.
spk03: Yeah. Mitch, uh, And I'll just say that the movement of production away from Hanover into Bowling Green in Guadalupe has gone very well for us. And we've managed to do that without any hiccups to our customers. And we will start seeing the benefits of that consolidation in P&L here in Q2 and the savings.
spk02: All right, well, thank you for the time.
spk03: Thanks, Mitch.
spk01: Thank you. Our next question comes from Mark Smith at Lake Street Capital Markets. Please proceed with your question.
spk06: Hi, guys. First off, I just wanted to ask about food innovation and new products. Can you just give us more updates? It sounds like decent growth in the avocado business. But walk us through kind of new products, where they're at, how that business is going then. Any insight into new product launches or anything else coming out this year?
spk03: Yeah, so, Mark, last year we spent a fair amount of effort redoing our innovation process. You know, we had lost our way with we were previously focused on if we had the capability to run romaine lettuce and put, you know, olive oil and vinegar on it, that's what we did. as opposed to does consumers really want to have that product. So we have really spent our time building our insights capability, both with the consumer through behavioral research along with our customers. So what's really different about our approach now is we're bringing consumer behavior insights and we're partnering with our key customers on, if you will, customizing innovation for their shopper. And you're going to see more of that for us, particularly on the salad side, the salad kit side. So we think we really have an insight here with this flexitarian consumer. As I mentioned, it's growing very rapidly. And we have just launched a plant-based protein salad with a major customer here in Northern California. and it's off to a terrific start. And our goal is to grow that one out. We also have another plant-based protein. The customer is Costco, which is great because it's a partnership that's very important to us. We also have a launch with another major customer in December that's much broader with a different type of plant-based protein product. We have a pipeline of plant-based protein products that we will be bringing out this fiscal year. We also have launched in Q4, we're seeing a benefit now in Q1, a couple of new co-developed flavors with Kroger that are doing much better than our previous innovation has done, and those are also launching up in Canada. We also have presentations going on with some other more basic salads that we think are priced right with the right customers that we have that we're in the process. We really think we're going to operate and get the salad business growing, but our approach isn't going to be everything to everybody. It's going to be very targeted with co-development with customers and linking their insights with our insights. On the avocado product side, as I said, you know, we're going to continue to support Squeeze this year. We're expecting, you know, a lot of growth from Squeeze. We have redone our graphics. We think the graphics in that whole category is somewhat confusing. So we have some insights there that we're cleaning up the graphics. And we really think our Cobble Fresh is a brand that we can get behind both in the tub category and in the squeeze category as we move forward. So, you know, our innovation is going to be very targeted. We don't have deep pocketbooks, so we have to be very strategic and smart about how we spend and get behind it. But I am very happy versus where I was a year ago. with what our innovation pipeline looks like for this year.
spk06: Okay. And you brought up Costco. Can you give us more update on kind of how that club business performed during the quarter and even sequentially any trends that you're seeing as we go into this next quarter?
spk03: Yeah. As, you know, we talked about in Q4 with COVID that, you know, there was a lot of zigzagging going on at the club business, right? You know, people didn't want to – necessarily stand in line, wear masks, and they were going there less often and buying more, if you will, shelf-stable products. We've seen the business has come back. I think the customer has figured it out. The consumer has figured it out. So, you know, we are expecting to see solid growth with that customer growth. this coming year. And we have other products that we are working with them on. And the same goes with SAMS.
spk06: Okay. Then the last one for me, can you guys just walk through a little bit on cost initiatives going forward, especially as we look at SG&A? You know, are there continued opportunities to maybe cut a bit there?
spk03: Yeah, we did a lot of right-sizing of SG&A last year. I think the two big initiatives that we have underway is our continued productivity program. That's driven primarily by us focused on improving the operating efficiencies of our equipment. Sweater assets do a better job of improving our yields across both segments, the avocado products and the salad and business. But we also are As I mentioned, doing a deep dive into logistics, we think there's opportunities there. Now that we have right-sized our network, we want to take a look at what's the right way to right-size the logistics program that we have. There's no sacred cows here, Mark. What might have been a competitive advantage in the past may or may not be one now. So we're really focused on the logistics side. Okay.
spk06: Excellent. Thank you.
spk03: Thank you, Mark.
spk01: Thank you. Our next question comes from Mike Petusky of Barrington Research. Please proceed with your question.
spk09: Hey, guys. Good evening. Hi, Mark. Hey. If you mention this or comment on it, I missed it. Have you guys said anything about fires, how that might impact sourcing, et cetera, on the West Coast?
spk03: No, we haven't talked about fires, but the heat has had some impact on the broccoli primarily. We have experienced some broccoli issues, but we have the right amount of seasonality built in. But in terms of losing farmland or anything like that, we have not seen any impact. It's just been the extreme heat that's been a problem. And ash has not been a problem for us either.
spk09: Okay. So that's not, you know, at least at this point in time, that's not perceived to be an issue moving forward?
spk04: Correct.
spk09: All right, and I heard an allusion to it, but I think I missed the number if it was actually quantified. What was the cash flow ops number in the first quarter?
spk08: Yeah, Brad. $17 million. Yeah, it's $17 million within our initial comments versus a negative $5.2 million prior year, so a favorable swing of $22 million. Okay.
spk09: And then what was the gross margin in the avocado business in Q1?
spk08: The gross margins in Q1, and we guided this or certainly spoke to this at the end of Q4, during the summer when we closed the plant, the gross margins in that business are a bit compressed because we're carrying and having to expense through the fixed costs of the plant. If you pull that out, which is actually what's happening now. So we're now starting to plant back up again, and we'll be absorbing that cost. But if you sort of pull that back out, then the gross margins are within the range and the territory that we've spoken to in the past, which is up in sort of the mid to high 20s.
spk09: Did that business outside of the squeeze growth, did that business actually grow in the quarter at all, or was it sort of flat?
spk03: No, it actually grew. It grew 5%.
spk09: Oh, outside of the squeeze it grew 5%?
spk03: Yeah, we're seeing increased distribution of our Cabo Fresh tub line along with the squeeze. So, you know, we're emphasizing, you know, squeeze, but at the same time we are not de-emphasizing our tub business.
spk09: And then you mentioned softness, I think, in both green beans and salads. Can you just give a sense? I mean, were they down low single digits? Were they up slight? Can you just talk about what softness means in green beans and salads?
spk03: Yeah, it's primarily in green beans and the food service side. It was down – that business is down about a third of what it should be. The good news, though, it's coming back. We're starting to see it. but we still had more softness in Q1 than what we had projected.
spk09: Okay. When you say down about a third of what it should be, was it a third of the number that you would have expected?
spk08: No. It's two-thirds of the number that we would have checked. It's down. About a third of our business is food service related. Okay.
spk09: Okay, and this is the last question, and I know you guys are limited in what you can say around this litigation in Yucatan and all the rest, but it seems, at least in the press release that you indicate, there's sort of no reason to believe that a resolution is, you know, in the near term. I mean, is sort of modeling roughly a million dollars of legal evidence Does that feel about right, or can you just comment on that if you can?
spk03: Yeah, the best I can say is, you know, it got slowed up here with COVID. We were expecting to have this issue behind us by now, but the process is back working, and we expect to have resolution here by the end of the year. And that's about all I can say. I mean, I have – No concerns about us being able to operate the plant or, you know, any disruption in our business. You know, Mike, I have a lot of things that keep me up at night. This one is not one of them.
spk09: Okay. And just for clarification, when you say end of year, you mean end of calendar year, correct?
spk03: No. We're anticipating calendar, but it could be fiscal. Okay. But we're nearing the end. It's always hard to predict these things. Okay.
spk09: All right. That's all I've got. Thank you.
spk03: Thank you, Brian. Mike.
spk01: Thank you. Our next question comes from Anthony Vendetti with Maxim Group. Please proceed with your question. Thanks.
spk07: I was wondering if you could talk a little bit more about the plant-based product I know the timeline is sometime this fiscal year. Is it more towards the end of the year? And then is that going to be code developed, or is that going to be LandEx only for those products?
spk03: Yeah, so we're already out with a product right now, Anthony. So we have launched to do a test with Costco now. So we have it out. It's doing well. Our goal is to expand that after the test period is over. We have another major launch coming up. It's much bigger with SAMs in December. So they're going to be starting to come out and gain distribution throughout the year. But we were able to... do most of the development during Q4, and that enabled us to launch these in Q1, and then, as I said, in December, and then we have other customers we're working with as well.
spk07: So I'm sure at current volume levels, the gross margin may not be greater than the corporate gross margin, but do you anticipate – the gross margin for these plant-based products once they get up to a certain volume level need to be as good as the corporate gross margin or better?
spk03: We expect them to be better. You know, we've put in some last year some stricter controls on what goes out the door in terms of having to reach a gross margin target. And we expect these to be better than our average. Okay, great.
spk07: All right. That's all I have. Thanks.
spk03: Okay. Thanks, Anthony.
spk01: There are no further questions at this time. I would like to turn the floor back over to Albert Bolt for closing comments.
spk03: Thank you, everybody, for your time today and for your continued interest in LANDEC. Have a good day.
spk01: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and support.
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