Landec Corp. (LNDC) Q1 2021 Earnings Call Transcript

Landec Corp  (NASDAQ: LNDC) Q1 2021 earnings call dated Oct. 06, 2020

Corporate Participants:

Albert Bolles — Chief Executive Officer

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

James G. Hall — President of Lifecore Biomedical

Analysts:

Brian Holland — DA Davidson — Analyst

Mitch Pinheiro — Sturdivant & Co. — Analyst

Mark Smith — Lake Street Partners — Analyst

Michael Petusky — Barrington Research — Analyst

Anthony Vendetti — Maxim Group — Analyst

Presentation:

Operator

Good afternoon, and thank you for joining Landec’s Fiscal 2021 First Quarter Earnings Call.

With me on the call today is Dr. Albert Bolles, Landec’s Chief Executive Officer; Brian McLaughlin, Landec’s Chief Financial Officer; and Jim Hall, President of Lifecore.

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 Bolles.

Albert Bolles — Chief Executive Officer

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.

Lifecore Biomedical is a fully-integrated contract development and manufacturing organization, or CDMO that offers highly differentiated capabilities in the development, fill and finish of difficult to manufacture pharmaceutical products distributed in syringes and vials. As a leading manufacturer of premium injectable grade Hyaluronic acid or HA, Lifecore brings over 35 years of expertise as a partner for global and emerging 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 foodservice 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 Food 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 Lifecore and implementing our strategic priorities to improve adjusted EBITDA margins at Curation Foods. Furthermore, we continue to work towards 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 on investment criteria is in place to ensure that we are maximizing the dollars we are putting the 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. At August 7, we closed on the sale of our salad dressing facility in Ontario, California for $4.9 million and on September 4, we closed on the sale of our Hanover manufacturing facility and related assets for $8.7 million. And fourth, our team is running long-term refinancing of solutions that added 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 SWIFT’s 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 manage through, the dedication and hard work of our entire organization from our essential frontline employees to our executive team is ensuring that this momentum improve, outcomes continues.

In the first quarter of fiscal 2021, Lifecore continue to deliver on its track record of high margin revenue performance, delivering 81% year-over-year growth, while Curation Foods delivered a planned decrease of 10%. At Lifecore, this reflects the concerted effort to better balance the seasonality of the fermentation business, while at Curation Foods, this reflects 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 million to $37 million that we are reiterating today. This implies a 59% 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.

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

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 10.1% planned decrease in Curation Foods’ revenues, which was nearly offset by an 81.1% increase in Lifecore revenues.

Lifecore’s improved year-over-year performance was impressive with 46% increase in its CDMO 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 foodservice 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 tray business is a key aspect of our goal on focusing on higher margin products and on new product innovation in the Curation Foods 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 product.

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 Lifecore segment where its significant first quarter revenue growth led to an increase in gross profit, it was nearly double than the prior year period. Further, Curation Foods avocado business delivered improved gross profit as a result of lower cost avocado as 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 Curation 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 operation.

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, Lifecore’s 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.

Landec’s first quarter net loss was $11 million or a loss of $0.38 per share, which includes $7.8 million of restructuring and other non-recurring charges net of taxes, 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 $0.27, adjusted diluted net loss per share was $0.11. Adjusted EBITDA increased to $3.1 million, up $2.8 million or 890% versus the prior year period. GAAP 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 Lifecore. Turning to our financial position, as of this 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 5.9:1 for the fiscal fourth quarter ended May 31, 2020 to 4.7:1 for the fiscal first quarter ended August 30, 2020, which was primarily driven by improved operating performance in 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 matures 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 Foods segment, while continuing to support the growth of Lifecore.

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%. Lifecore 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%.

Lifecore to range from $22.5 million to $22.5 million, representing growth of approximately 17% and Curation Foods from $12 million to $14 million, representing growth of approximately 193%. Additionally, we are reporting two new metrics in the first quarter 10-Q filing, which grates down, one, the corporate management allocation to each segment, Lifecore, Curation Foods and other. The other segment represents Landec’s 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 Lifecore; $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 Lifecore, and 41% for Curation Foods. Regarding seasonality, we are reiterating our statements from last quarter. We continue to anticipate minimal quarterly variation to the revenue seasonality for both Lifecore and Curation Foods through the balance of the fiscal year. And in terms of adjusted EBITDA, we expect to continue to deliver normalized growth and adjusted EBITDA margin, which at Lifecore means back to historical levels and at Curation Foods means we are marching forward our by year-end steady state goal as previously detailed.

With that, I’ll turn the call back to Al.

Albert Bolles — Chief Executive Officer

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 toward 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, Lifecore is positioned to capitalize on these tailwinds and continues to establish high barriers to competition.

Lifecore’s speed and efficiency benefits its partners by decreasing their time to market, which adds immense value in their ability to improve patient lives through commercialization of their innovative therapies. 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. Lifecore has 16 business development projects in various stages of product lifecycle, from clinical development to commercialization, which aligns with the businesses’ 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. Lifecore 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 Foods’ 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 tackle the major issues that we’re 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 the Mexico is our lean manufacturing program, a key aspect of register 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 and 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 rightsized 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 US 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 shoppers demand.

We are currently testing a co-developed on-tray salad kits featuring unique plant protein ingredients, such as protein from seeds, grains and legumes paired with hardy vegetables and grains 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. So 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 that fits alongside our sustainability mandates 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 the mindset of successfully moving forward together.

In summary, we have made tremendous progress and are starting to see the results. The Landec 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.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]

Thank you. Our first question comes from Brian Holland from DA Davidson. Please proceed with your question.

Brian Holland — DA Davidson — Analyst

Yeah, thanks. Good afternoon, everyone, and congrats on the progress. Just a couple of quick ones from me. Firstly, you talked about a few — a few small issues in the quarter related to operations, and then obviously are sort of related to raw materials due to weather. Just on the production inefficiencies, you expressed confidence that that maybe is an industry going forward.

Can you just help us understand, are you just backed up fully to where you were previously to this issue and maybe if you could just talk us through what exactly happened, and the confidence that this doesn’t going forward? And then may be the same thing on the weather side that there is no carryover here in subsequent quarters.

Albert Bolles — Chief Executive Officer

Yeah. Hi, Brian. It’s Al. How are you today?

Brian Holland — DA Davidson — Analyst

Good, and how are you?

Albert Bolles — Chief Executive Officer

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 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 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 continued — at that time period, there was more outbreaks of COVID in the Santa Maria area and we enhanced our sanitation and PPE accordingly. It will cost us money, and that being a very positive move for us Santa Barbara County health visit, we had several weeks ago said that, we have become the gold standard, and an example for them to want to use. So that’s something we just did to stay ahead of this pandemic. Foodservice, we saw — we were expecting a little bit more of a bounce in foodservice and green bean but we’ve had some softness there. That is now behind us, Brian. It’s starting to pick up to where we thought it would be, and we had you know just continued downward pressure on trays primarily from COVID some of our suppliers.

But all in all, I mean the operation is back running where we expected. July was good, August is better, and I have no qualms about where we are in terms of running the operations. In terms of the weather, 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 and that we have the right amount of seasonality built into our Q2 and Q3 numbers.

Brian Holland — DA Davidson — Analyst

Appreciate the color. Yeah, appreciate the color. And then just if I could ask about Avocado Squeeze, sounds like good news, there was some retail distribution. All this quarter end, shelf resets, generally speaking, what I’ve heard is that it’s a little bit later this year, September-October timeframe. So I guess what I’m asking is, should we expect more progress here in the first — in your second quarter? Are there more distribution gains coming out? 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 CTG is, relatively narrow assortments, consumers going to these large brands, they trust retailers narrowing the assortments to favor these larger brands.

So first, congratulations on getting a coming through that noise with this new product, but just curious how you plan to support that here kind of in this sort of crowded backdrop?

Albert Bolles — Chief Executive Officer

Yeah. So, Brian, as you know last year, we tested this Squeeze product in some test markets and customers. We won’t confirm that we were doing well. We learned some things that we can 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 I see that a steady growth for us throughout the rest of the year along with our continued growth in our top business.

We have, you know we have some real upsides Brian because [indecipherable] ACV, we have this Cabo Fresh brand. 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 we’re going to have, we’ve had a couple of 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 shelf talkers, specific promotion programs, we are even working now with some other companies where we are co-branding it together, I’ll call merchandise, I should say. So if you buy, 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 going the grocery store, that area is growing. So it’s a potpourri of things, Brian, we’re very targeted on making sure of what we do, gives us the right return on our marketing dollars.

Brian Holland — DA Davidson — Analyst

I appreciate all the color. I’ll leave it there. Congrats again and best of luck going forward.

Albert Bolles — Chief Executive Officer

Thanks, Brian.

Operator

Thank you. Our next question comes from Mitch Pinheiro of Sturdivant & Co. Please proceed with your question.

Mitch Pinheiro — Sturdivant & Co. — Analyst

Yeah, hi. Good afternoon.

Albert Bolles — Chief Executive Officer

Hi, Mitch.

Mitch Pinheiro — Sturdivant & Co. — Analyst

Hey, just a couple of admin questions here. First, so based on even seasonality are more balanced and based on your guidance that you’ve given, it looks like Q2 should be — I know you don’t give quarterly probably, but the Q2 should be on an earnings per share basis as you suggested, should be positive. Is that correct?

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

Yeah that’s correct.

Mitch Pinheiro — Sturdivant & Co. — Analyst

— would be down. Okay.

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

Yeah, Brian, we’re expecting a very solid strong Q2 as we move forward, Q3 and Q4 as well.

Mitch Pinheiro — Sturdivant & Co. — Analyst

Okay.

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

But a lot [Speech Overlap]

Mitch Pinheiro — Sturdivant & Co. — Analyst

And the planned reduction, does that, is that also going to be fairly steady, same kind of level that we had here in the last quarter?

Albert Bolles — Chief Executive Officer

Yes, yes. It’s a fairly steady reduction. We see that we’ve reiterated before that we see core veg sort of coming in around $100 million business from $160 million than it was.

Mitch Pinheiro — Sturdivant & Co. — Analyst

I want — just changing the subject back to Lifecore. Just looking, it’s interesting. I appreciate the numbers you hand it out there with their capacity and how it breaks down, and the anticipated needs in the 2030. When I look at through 2025 based on the numbers that I did a quick back on the envelope math, it looks like the five-year CAGR in capacity is going to be somewhere, you’re going to, where demand is going to be somewhere around 22% as —

Albert Bolles — Chief Executive Officer

Yeah that’s pretty close. Jim, why don’t you talk through the capacity that we have built in. It’s something — can be kind of confusing for — for a way to figure that out.

James G. Hall — President of Lifecore Biomedical

Yeah, Mitch, you’re pretty much spot-on. In reality, we’re looking at the commercialization rate of our development pipeline and how that translates into needed capacity over the next four years to five years, and we should be approaching that 22 million unit theoretical capacity by FY ’25.

Mitch Pinheiro — Sturdivant & Co. — Analyst

So, okay, if I look at what you’re looking at in the ’21 going from $6.5 million demand either heavily but overall revenue is only in your guidance is what is upgrade around double digits right up to 8% to 13%. Can you just — is that — is that something, is that a — is that a sort of a rebalanced year that should we expect a higher rate? Are we going to see acceleration in ’20 through ’23 to get to that higher CAGR? How should we look at that?

James G. Hall — President of Lifecore Biomedical

Yeah, I mean I think like we’ve said that our revenue CAGR over that period of time is going to be 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 double-digit growth over the next five years.

Mitch Pinheiro — Sturdivant & Co. — Analyst

Okay. And then as you — how do you think about your capital spending, as it relates to that? Is it going to be spread out over the four years or five years or how do you — as you look at 2030?

Albert Bolles — Chief Executive Officer

Yeah. And like we’ve described in our, in what — in the — in our discussion on capacity and capital investment, Lifecore 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 be going to need to start to invest in additional filling capacity since the filling capacity takes three years 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 years to 12 years. So, the capacity or the, excuse me, the capital spend will kind of follow the investment of the needed additional capacity.

Mitch Pinheiro — Sturdivant & Co. — Analyst

Okay. And then I guess, Brian, with the $4.6 million in capital spending in the quarter, are you still on track for $34 million for the year?

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

Yeah. Yeah. We expect it to be more back-end loaded than in the first half. But that’s our anticipation at this point.

Mitch Pinheiro — Sturdivant & Co. — Analyst

And last question is just on the Hanover sale close after the quarter, is that right?

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

Yeah, it closed just after the quarter end. I’ll let Al jump in on that one.

Mitch Pinheiro — Sturdivant & Co. — Analyst

Yeah, I just want to ask if you will see a reduction there in debt, the $8.7 million? Will there be any capital — any working capital you saw or source in the upcoming quarter. Just trying to figure out where the debt will be?

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

So — 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, but 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 just start up manufacturing again. That, but just I think coupled with the strength of the business improved margin structures that Al referred to with cost out in such as given us a pretty strong cash flow in Q1, we expect that as we move into Q2 will also have favorable cash flow position as we move into the latter part of the year and we start building up on the balance sheet that safety stock for Yucatan there will be a use of funds that happens there, but at this point over the course of the year as best as we can see at this point, we believe that will be slightly positive overall to cash flow from operations versus capex, and that is, before factoring in the asset sales.

Mitch Pinheiro — Sturdivant & Co. — Analyst

Okay.

Albert Bolles — Chief Executive Officer

Yeah, Mitch, and I’ll just say that the move into production away from Hanover into Bowling Green and 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 the P&L here in the — in Q2 in the savings.

Mitch Pinheiro — Sturdivant & Co. — Analyst

Okay. All right, well, thank you for the time.

Albert Bolles — Chief Executive Officer

Thanks, Mitch.

Operator

Thank you. Our next question comes from Mark Smith at Lake Street Capital Markets. Please proceed with your question.

Mark Smith — Lake Street Partners — Analyst

I guess. First off, to talk about. Wanted to ask about food innovation and new products. Can you just give us more update? It sounds like a decent growth in the avocado business but walk us through kind of new products where they are at, how that business is going? And any insight into new product launches or anything else coming out this year?

Albert Bolles — Chief Executive Officer

Yeah. So Mark, last year we — it’s been a fair amount of effort, but we’re doing our innovation process. We had lost our way with — we were previously focused on, if we had the capability to run Romaine lettuce and put olive oil and vinegar on it, that’s what we did as opposed to the 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 and if you will, customizing innovation for their shopper.

And you’re going to see more of that for us, particularly on the salad side and salad kit side. So we think we really have an insight here with 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.

So 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 the 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 and we also have presentations going on with some other more basic salad that we think are priced right with the right customers that we have that we’re in the process. So we really think we’re going to operate and get to sell business growing, but our approach is it 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 are expecting 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 Cabo Fresh is a brand that we can get behind both in the tub category and in the Squeeze category as we move forward. So our innovation is going to be very targeted. We don’t have deep pocket book, so we have to be very strategic and smart about how we spend and get behind it. But I am very happy versus where it was a year ago with what our innovation pipeline looks like for this year.

Mark Smith — Lake Street Partners — Analyst

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.

Albert Bolles — Chief Executive Officer

Yeah. As we talked about in Q4 with COVID that it was a lot of zig-zag that’s going on at the club business, right? People didn’t want to in a fairly stand in a line and wear a mask 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 — we are expecting to see solid growth with that customer that’s coming here and we have other products that we are working with them on. And the same goes with Sam’s.

Mark Smith — Lake Street Partners — Analyst

Okay. And then 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. Are there continued opportunities to maybe cut a bit there?

Albert Bolles — Chief Executive Officer

Yeah, we got 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, sweat our assets, do a better job of improving our yields across both segments for the avocado products and the salad business, but we also, as I mentioned doing a deep dive in the logistics. We think there’s opportunities there. Now that we have right-sized our network, we want to take a look at how can we, what’s the right way to right size the logistics program that we have. There is 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.

Mark Smith — Lake Street Partners — Analyst

Okay, excellent. Thank you.

Albert Bolles — Chief Executive Officer

Thank you, Mark.

Operator

Thank you. Our next question comes from Mike Petusky of Barrington Research. Please proceed with your question.

Michael Petusky — Barrington Research — Analyst

Hey guys, good evening.

Albert Bolles — Chief Executive Officer

Hi, Mike.

Michael Petusky — Barrington Research — Analyst

Hey, so if you mentioned this or commented on, I missed it. Have you guys seen anything about fires, how that might impact the sourcing etc in — on the West Coast?

Albert Bolles — Chief Executive Officer

No, we haven’t talked about fires. But the heat has had some impact on the broccoli primarily. We have 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 haven’t seen any impact, it’s just the extreme heat that’s been a problem, and ash has not been a problem for us right there.

Michael Petusky — Barrington Research — Analyst

Okay. So that’s not at least at this point in time that’s not perceived to be a an issue moving forward.

Albert Bolles — Chief Executive Officer

Correct.

Michael Petusky — Barrington Research — Analyst

All right. And I heard an allusion to it, but I think I missed the number if it was, if it was actually quantified. What was the cash flow ops number in the first quarter, if you have that?

Albert Bolles — Chief Executive Officer

Yeah, Brian.

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

$17 million. Yeah, it’s $17 million within our initial comments versus a negative $5.2 million prior year, a favorable swing of $22 million.

Michael Petusky — Barrington Research — Analyst

And then what was the gross margin in the avocado business in Q1?

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

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, we’re sort of — 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, if you pull that out then, which is actually what’s happening now. So we’re now starting to plan back up again. It will be absorbing that cost, but if you sort of pull that back out and then the gross margins are within the range in the territory that we’ve spoken to in the past, which is up in that sort of the mid to high 20%.

Michael Petusky — Barrington Research — Analyst

Is that business outside of the Squeeze growth? Does that business actually grow in the quarter at all or was it sort of flat?

Albert Bolles — Chief Executive Officer

No, it actually grew. It grew 5%.

Michael Petusky — Barrington Research — Analyst

Oh outside of the Squeeze, it grew 5%?

Albert Bolles — Chief Executive Officer

Yeah, we’re seeing increased distribution of our Cabo Fresh tub line along with the Squeeze. So we’re emphasizing Squeeze but at the same time, we are not de-emphasizing our tub business.

Michael Petusky — Barrington Research — Analyst

And then you mentioned softness. I think in both green beans and salads, what, can you just give a sense, I mean were they down low-single digits, were they up slight. Can you just talk about what the softness means in green bean and salads?

Albert Bolles — Chief Executive Officer

Yeah, probably in green beans, and the foodservice side, it was down. That business was down about a third of what it should be. The good news though it’s coming back. We’re starting to see it come back, but we still had more softness in Q1 than what we had projected.

Michael Petusky — Barrington Research — Analyst

Okay. When you said down about a third of what it should be. It was a third of the number that you would have expected?

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

No, it’s two-thirds of the number that we would expect it — down about a third of our business is foodservice related and —

Michael Petusky — Barrington Research — Analyst

Yeah, okay and just the last question, and I know you guys are limited in what you can say around this litigation in Yucatan and all that, but it seems, at least in the press release that you indicate there is sort of no reason to believe that a resolution is in the near term. I mean is it — sort of modeling, roughly a $1 million of legal a quarter — does that feel about right or can you just comment on that if you can?

Albert Bolles — Chief Executive Officer

Yeah. The best I can say, as you know, it got slowed up we here with the COVID. We were expecting to have this issue behind us by now, and but the process is back working and we expect to have resolution here by the end of the year and that’s what I can say. I mean, I have no concerns about us being able to operate the plant or any disruption in our business. Like I have a lot of things that keep me up at night. This one is not one of them.

Michael Petusky — Barrington Research — Analyst

All right. Okay and just for clarification, when you say ended, end of calendar year, correct?

Brian F. McLaughlin — Vice President of Finance and Administration and Chief Financial Officer

No.

Albert Bolles — Chief Executive Officer

We’re anticipating calendar, but it could be fiscal, but we’re nearing the end, it’s always hard to predict these things.

Michael Petusky — Barrington Research — Analyst

All right. That’s all I’ve got. Thank you.

Albert Bolles — Chief Executive Officer

Okay. Thank you, Brian — Mike.

Operator

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

Anthony Vendetti — Maxim Group — Analyst

Thanks. I was wondering if you could talk a little bit about — 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 co-developed or is that going to be Landec’s only for those products?

Albert Bolles — Chief Executive Officer

Yeah. So we’re already out with the product right now, Anthony. So we — we have launched test with Costco now. So we have announced, it’s doing well. Our goal is to expand that throughout the after the test period is over, we have another major launch coming up, but it’s much bigger with Sam’s 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 enables us to the launch these in Q1 and then as I said in December and then we have other customers who are working with us as well.

Anthony Vendetti — Maxim Group — Analyst

So — I’m sure at current volume levels, the gross margin may not be — 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 levels you need to be as good as the corporate gross margin or better?

Albert Bolles — Chief Executive Officer

We expect to be better. 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.

Anthony Vendetti — Maxim Group — Analyst

Okay, great. All right. That’s all I have, thanks.

Albert Bolles — Chief Executive Officer

Okay, thanks Anthony.

Operator

There are no further questions at this time. I would like to turn the floor back over to Albert Bolles for closing comments.

Albert Bolles — Chief Executive Officer

Thank you everybody for your time today, and for your continued interest in Landec. Have a good day.

Operator

[Operator Closing Remarks]