Lifecore Biomedical Inc (LFCR) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Landec's new fiscal year end 2003 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will follow at that time.

If anyone should require assistance during the call, please press the star then zero key on your touch-tone telephone.

If anyone should disconnect and need to rejoin, please dial 1-888-413-4411.

And as a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Gary Steele, President and CEO of Landec.

Please go ahead sir.

Good morning and thank you for joining Landec's new fiscal year ended May 2003 earnings conference call and web cast.

I have with me today Greg Skinner, the company's Chief Financial Officer, who will discuss our financial results in a moment.

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 yesterday's news release as well as in our filings with the Securities and Exchange Commission, including the company's Form 10-K for fiscal year 2002.

Let me also mention that a replay of this call will be available through next Wednesday, August 20th.

You can access that call by calling 888-266-2086 or 703-925-2435.

The access code is 215634 and the web cast will be available for 30 days via the Internet at www.landec.com.

As previously disclosed, Landec changed its fiscal year end from the last Sunday in October to the last Sunday in May and that is effective as of May 25th, 2003, and therefore fiscal year 2003 is for a seven-month period that began October 28th, 2002 and ended on May 25th, 2003.

Since our last earnings conference call in June that reported on our former second quarter, the most important milestone to report is the sale of our domestic commodity vegetable business to a group of Apio growers in exchange for cash, a per carton royalty, and very importantly -- a long term supply commitment.

Included in our results for the seven months ended May 25th, 2003 is a charge of $1.1m or the equivalent of $0.05 per share for the write-down of assets previously associated with this business that we just sold.

The sale of our domestic commodity vegetable business completes our focusing initiatives in our food business and allows us to concentrate on our high-growth specialty packaged produce products, which we currently sell under our Eat Smart brand.

And very soon we would be selling also under the Dole brand.

As a result of the sale of the commodity business, we will be more focused, have lower operating risks, especially in winter farming investments and be able to significantly reduce our selling, general and administrative expenses.

We have positioned ourselves to increase revenues, profits, and cash flows going forward.

In addition, as announced during our last conference call in June, we have recently entered into an exclusive packaging and marketing agreement with Dole Fresh Vegetables, Inc. for Apio to sell and distribute a line of fresh cut produce under the Dole brand in the United States.

This agreement should expand Apio's presence in the fresh-cut vegetable category through the sales and distribution of both the Dole brand and our existing Eat Smart brand.

The Dole brand vegetable and party tray lines, which is expected to be introduced next month, will utilize Landec's proprietary Intelimer packaging technology in order to extend shelf life, reduce product shrink, and compensate for temperature fluctuations that may exist through the cold chain.

Now let me turn it over to Greg Skinner, who will comment on the financial results.

Thank you Gary and good morning everyone.

As outlined in yesterday's news release, Landec reported revenues for the seven months ended May 25, 2003 of $112.3m versus revenues of $114.1m for the same period a year ago.

The decrease in revenues for the period was due to several reasons.

First, revenues from Apio's `fee-for-service` commodity produce business decreased to $12.8m in the seven months ended May 25, 2003 from $15.9m in the same period of fiscal 2002, because of the company's efforts to exit this business, which culminated in its sale in June of 2003.

Second, revenues from Apio's export business decreased to $17.9m during the period from $21.6m last year, due to lower sales of fruits and broccoli to Asia.

And third, a $1.5m decrease in banana sales from the year-ago period as the company focuses on the upcoming retail market trial.

These decreases in revenues were almost completely offset by revenue growth in Apio's value-added vegetable produce business, which increased 15% to $15.4m (ph) during the seven months ended May 25, 2003 from $47.1m in the same period last year, and from the growth in Landec Ag revenues, which increased 8% to $21m for the seven months of fiscal 2003 from $19.5m in the same period a year ago.

For the seven-month period of fiscal 2003, the company reported net income of $1.8m or $0.07 per diluted share, a 19% increase in net income compared to $1.5m or $0.06 per diluted share in the same period of fiscal 2002.

The increase in the company's net income was due to several factors.

First, a $2.3m increase in gross profits generated from Apio's value-added vegetable business and Landec Ag's seed business.

Second, a $1.3m company-wide reduction in selling, general and administrative expenses, and third, a $455,000 reduction in interest expense.

These increases were partially offset by first, a charge of $1.1m from the write down of domestic commodity vegetable assets as a result of the sale of this business; second, increased investments in our banana program of $464,000; and third, a winter season farming loss associated with the sourcing of produce from Apio's previously-owned domestic commodity vegetable business.

This farming loss reduced net income by approximately $1.1m in the seven-month, period ended May 25th, 2003, compared to a benefit from farming income of $926,000 in the same period of fiscal year 2002, a negative change of $2m or $0.09 per diluted share.

As a reminder from our last call, the three months of February, March, and April (our previous fiscal second quarter) are typically our best months for revenues and profits due primarily to Landec Ag recognizing virtually all of its revenues and profits during the period.

The months of November, December, and January (the previous fiscal first quarter) have historically been the company's weakest periods for revenues and profits due primarily to produce sourcing issues at Apio's during the winter months and virtually no revenues for Landec Ag.

With the new fiscal year end, our results will continue to be seasonal with Landec Ag recognizing all of its revenues and profits during our third and fourth fiscal quarters, while realizing no revenues during our first and second fiscal quarters.

For fiscal year 2004, we expected that the first half of the year should show losses whereas the second half and the full year is expected to be profitable.

Turning to the balance sheet, during the seven months ended May 25th, 2003, our cash balance decreased by $4.1m to $3.7m.

This decrease was due to several reasons.

First, the purchase of $1.2m of equipment to support the growth of Apio's value-added produce business, enhanced Apio's new ERP business system, and Landec Ag's proprietary telephony system.

Second, the reduction of $2.9m in net borrowings under our lines of credit; and third, the pay down of $1.2m of long-term debt.

These decreases in cash were partially offset by cash generated from operations of $2m.

At the end of fiscal year 2003, in addition to $3.7m in cash and $2.4m restricted cash, we had $8.4m available under our lines of credit, which does not include the recent $4.5m increase in Landec Ag's line of credit.

The $2.4m of restricted cash should become available for use over the next eight months.

For now, we are comfortable with our cash and debt position.

That concludes my formal presentation.

Let me turn the call back to Gary.

Thanks Greg.

Let me elaborate a little bit on the importance of our recent initiative to sell Apio's domestic commodity vegetable business to a group of our growers.

First and foremost, through this recent transaction, we locked into a substantial supply of produce with high quality, very stable and reliable growers for the next four years to support and help grow Apio's value-added business.

Second, we have reduced Apio's SG&A on a go-forward basis by about one-third.

Third, we will receive a royalty on the new entities carton sales, running roughly $250,000 to $300,000 in the first year.

Fourth and very importantly, we greatly reduced our exposure to farming losses, which affected us during winter months in recent years.

As Greg mentioned, we incurred a $1.1m worth of farming losses during the seven month period we are reporting, virtually all of it was associated with our domestic commodity business,that is now sold.

We can now focus on growing our core food and Ag businesses and commercializing the banana packaging technology.

We are anxious to expand our market validation in the upcoming retail banana trials and we are eagerly preparing for the launch of our Dole branded pre-cut vegetable products in September.

We are constantly expanding our products and customer base.

During the last 18-months in our food business, we have added 16 new product offering and over 2,200 new stores to the expansion of our technology based value-added product.

In our Ag business, we have plan to launch 28 new products this fall and the result of the early planned corn crop, planted this past spring, looks very good throughout the corn belt.

To recap - we are making money and we are generating positive cash flow from operations.

We have reduced our farming risk.

We have strengthened our balance sheet.

We are growing our core businesses and we have a plan for enhancing our profitability.

In closing, now that we have sold the commodity vegetable business, which will reduce our farming risk (one of our previously announced goals for fiscal year 2004), we are now focused on our remaining four goals for our new fiscal year.

First, to continue to grow our food and Ag technology revenue.

Second, to increase profits.

Third, to commercially launch our banana packaging technology for retail applications while expanding our food service banana business.

And fourth, to continue to strengthen our balance sheet.

We are excited about the upcoming fiscal year.

We have spent the last couple of years focusing the operations of the company, developing our banana technology and significantly strengthening our balance sheet.

We believe we are now positioned where we can expect these past efforts to translate into improved profits and cash flows.

We would now like to open the discussion for any questions.

Thank you.

Ladies and gentleman, at this time if you have a question, please press the '1' key on your touch-tone telephone.

If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

If you are using a speakerphone, please lift the handset before asking a question.

Our first question comes from Tony Brenner of Roth Capital Partners.

Good morning, a couple of questions that all relate to bananas, if I may.

First of all, what were banana revenues in total in fiscal '03?

In the seven-month period?

Right.

We don't disclose that but it's in the $1.5m to $2m range.

Okay.

Remember, last year the bulk of the sales, Tony, came when we had the retail contract with one of our first customer and that really kicked in, in the May-June timeframe.

So, remember this was for a period that ended in May.

Okay, something then for the previous year would -- on a 12-month basis, with retail included it might have been in the high single-digits, millions -- seven, eight -- something like that?

Well last year, I recall, through October, we did $6m.

We have reported that.

Yes, the prior 12-month was $6m, and that's when we were going full out and then backed off when we discovered that we had sourcing issues and some applications development work still to do.

Okay.

Second, in the release you talked about alternative packaging for bananas and you referred to the retail business as well as food service; you talked about the reasons for doing that in food service but why -- what kind of alternative packaging for retail are you...

We are discovering Tony is that -- first of all, in food service, the standard unit of packaging in the banana industry is a 40-pound (ph) cardboard box, as you know.

Correct.

And you just put the bananas in there and you hope for the best.

I am going to get to the retail question in just a minute.

In the food service arena, we are now offering and have recently gone to a big food service show, where this was received very nicely, formats that are really more applicable to food service.

They don't need these 40-pound boxes, so we have had new products introduced in the 20-pound and 25-pound versions.

Some are called singles -- we have individual bananas that can be put on a plate in a restaurant -- others are clusters.

And that is now just being offered and the initial reception is quite positive.

On the retail side, let's just say that what we are learning Tony, is that if you have bananas in an individual bag, such as a single hand of bananas that can be put on display in a grocery store.

It prevents the customer from manhandling these bananas, picking up one or two, cherry picking them, and etcetera.

The bag can be barred, scanned as opposed to weighing, but very importantly what we are discovering is that if that bag is taken home with the bananas in it, our technology is still working.

So it goes beyond the stores in terms of extending shelf life, but it will continue to work in the home.

Even if you open the bag and reseal it, we will recover the atmospheres of Oxygen and CO2.

It will take a little bit of time but we will recover that atmosphere that is extending shelf life in the home.

So, smaller package formats that go home with the consumer are of tremendous interest to us and, frankly, to some of the partners we are working with.

If you want send me a couple, I'll test them.

I will.

Okay.

I will, seriously.

I'll send you a couple.

You got to promise to use the scientific method, have controls, report your daily results and send them back to us, is that okay?

You know me.

Okay, fair enough.

What do you estimate the cost of the banana program to be in '04?

You said it was $1.6m last year?

Right.

For seven months.

For the seven months?

Right.

A couple of million.

And how long would you be in a trial phase for bananas?

There are two answers for that, the first answer is forever and the second one is intensively in the next six months.

But, I don't mean to be factitious (ph) with the first one but, there are new applications that we are looking at such as using our membrane technology in containers that deliver various types of produce including bananas from the tropics to the states.

We'll be testing consumer formats; we'll be testing different types of food service formats.

So, I don't see our testing ending ever, but this high-level of investment of $2m a year better start to translate into some revenues and margin here because that's not a sustainable level of effort for Landec.

Okay, last question.

As I recall, initially you expected to resume retail trials last March, and it now looks like it hopefully will be in September and you qualified Costa Rica and Ecuador early in the calendar year.

No additional countries have been qualified.

It just seems like to an outsider that you have more or less stood still for six months?

What has happened?

Some times to an insider it feels like we've stood still for six months.

So, I won't pretend to say we are not somewhat frustrated by this.

We've been working with one or two large banana companies, and we're delighted to do that.

Sometimes their progress is a little bit slower than we would like.

We've had bags, the packages that held up in customs in some of these wonderful tropical countries for months.

We are asking retailers to do some very large, scientifically-based market trials which require them to do no promos, no ads, while we're doing the trials to clear out their stores, to have their people help us monitor results and that is not easy to get retailers to agree to those types of significant trials.

We've had some engineers that keep wanting to tweak some things.

Tony, it's a combination of things, I won't pretend to tell you that we're on our original schedule, but we are making headway, there is progress and these trials are beginning, and we are continuing to sell and scale up our food service business.

Okay, thank you.

Thank you.

Once again if you have a question please press the one key on your touch-tone telephone.

Our next question comes from Lenny Brecken (ph) of Brecken Capital (ph) .

Hi guys.

Good morning.

Good morning.

In terms of the banana trials, what kind of retailers do you think you are going to be trialing in and if you can give us a hint on that?

And on the Intellicoat side, can you give us an update on when do you think some of these trials will be converted into real sales?

The last question was Intellicoat?

Yeah.

The seed coatings, okay.

Right.

We have not announced any of the names of the retailers.

The first trials will be a couple of retailers on the East coast, one in the Southeast and one in the Northeast.

Then we will start in Southern California with sourcing that.

You want a source out of Southern California - I am sorry you want to source out of Ecuador for the West coast, and Costa Rica is more convenient and more direct shipments for East coast.

So, I haven't revealed the names but these are large, well-known retailers.

In terms of Intellicoat, Lenny we planted and we began selling our Intellicoat Early Plant corn seed coatings with the seed a year ago, and this spring those plantings went in, and all reports that I have received are very encouraging and meaning that the farmer was able get in two to four weeks earlier than he normally could.

We are getting quite a bit impressed on this, if you don't mind just a segue (ph) here.

One of the reasons we're getting impressed is because, neighbors of some of our farmer customers had been accusing these guys of losing their minds because they were planting seed a month early and they thought that may be Old Joe was hit in the bottle again, when in fact he was planting seed with our coat protected coatings, and the way we follow these customers is we, we go out and do field checks.

We measure the height, the uniformity of stance, we look at the adverse controls, we look at projected yields that should come in the fall, we look at the health of the plant etcetera.

And it looks like the product is working as advertised.

So we're getting quite a bit impressed on this.

And obviously beginning to gear up for our next sales season.

So the coatings are working, the challenge to our company now is to scale it, which we can from a coating point of view, and to begin to expand our sale.

So, we're really gearing up for a pretty extensive year of selling the coating technology along with our non-coated seeds.

Of the 34 seed companies that are trailing on the corn side, can you just help us quantify what potentially that could mean and you growing your overall business?

No, because I don't think I could you give you a good answer.

You are talking about the four alliance partners?

No, it's in your press release it's 34 U.S. seed companies are conducting separate evaluations of the Intellicoat Early Plant hybrid corn technology.

Okay, no, I can't.

I don't know what that would be, just have no feel for that at all.

It is just too early.

Is there no way to help quantify - with your businesses is ex (ph) now, what that can add if you roll out all 34?

There is 75m acres of corn seed planted every year.

If we were to get 25% of that, that could be 200m or 300m a year opportunity.

But that is pretty broad brush.

And this is reselling that's - all 34, is this for the resale of the seed yourself or is that licensed?

The answer is yes, both, there are regional seeds - first of all there is 200 regional seed companies, which basically in my opinion are the best early targets because they are looking for new products and differentiation.

They haven't had the wherewithal to invest in the `new genetics`.

So they are hungry for new products.

In those cases, they would be looking to us to provide them with coated seed.

The majors, the pioneers of the world etcetera, they would expect that within some time frame, we would license them the ability to coat the seeds themselves, we would provide the polymer coating.

All right.

Can I just one follow-up, so, assuming that a 20% share you get over some period of time.

Let's say that we translate into a license, what would that mean to the company on a royalty?

Roundabout.

With 200m in seed sales, 20% of the corn market, give me an idea what the royalty rate would be on that?

We have no idea.

We don't have a royalty strategy in place here.

But initially all 34 will be resale of the seed by yourself?

I think that the early adopters on this are going to be the smaller regional companies; therefore, yes.

All right.

Thanks for helping me understand that.

Thanks.

All right.

Other questions.

Our next question comes from Neal Goldman of Goldman Capital Management.

Hi Gary.

Good morning Neal.

In the seven months, you showed non-recurring loss of $0.05 and the swing a $0.09 for `fee-for-service` commodity business, okay, right?

Yes.

Going forward, what kind of range would that be between -- positive or negative on that part of the business that remains?

Are we taking about the farming portion of it?

Yes.

Well the result is, the sale of the recent business, which is - with the cost of last year's sales, we are not expecting large farming losses at all.

Our expectation is zero, Neal.

Okay.

So in series for that seven months you would have earned close to $0.06 to $0.07, plus the gain of the year before plus the other $0.07 for the non-recurring loss.

So it's $0.14 plus $0.08 is $0.22, right?

I think it's probably $0.10 plus $0.07 is probably more like $0.17.

Okay. $0.17, and then for those five months, round numbers what would have been the recurring loss, because that's the last part of the year, right?

I am just trying to get a sense of what a pro forma last full 12 months would have been, would it be a dime, would it a nickel, would it be $0.15, would it be a $0.17?

I don't have an answer for you right now because it would - one, I haven't done the calculation; but two, you are looking at some apples and oranges here.

One, you are not in a business that you are in.

Okay.

And you are right there is five months worth of expenses associated with the seed business.

That obviously makes the seven months look better than the 12 months we have looked with those expenses in.

But the question is as far as the factor in is, what impact would this sale of this business have during that same seven to five months period.

That's the issue.

Well, is that operating at a loss also?

When you are factor in the farming loss, yes.

One of the reasons we want to get out of that business.

Right.

So, in series the losses in the first half of this new fiscal year will be less than a pro forma loss of the year-ago, whatever that number would have been?

Well, yeah, year-ago we had actually farming income and that's why we had this $2m.

But after a year ago, in those seven months, but not in the five months prior, right?

Not in the subsequent five months, no.

Because we are at pretty much out of farming by the time you get to May.

All right.

Okay, thank you.

Thanks Neal.

Our next question comes from Bill Gibson (ph) of Nollenberger Capital.

I've got a follow up question to Lenny's earlier and that relates to the coated seed.

What kind of gross margin should we expect on those?

50%.

That's it 50%, thanks.

Yeah, it is higher now Bill, but we entered the market with the belief that it is easier to lower prices than it is to raise them.

But they are relatively high gross margins.

We are getting much better at scaling the coating process itself and as we scale and build volume are unit costs will go down quite substantially.

And then one follow up on bananas, on these initial tests on the Northeast and Southeast, will you be testing the retail packages in other wards the small packages that consumers can take home.

It will be part of our testing.

Great thank you.

Once again if you have a question, please press the one key on your touch-tone telephone.

Our next question comes from Steven Becker of Special Situations.

Good morning Steve.

Hi guys.

Can you discuss the launch of the Dole product and when that is going to start and what sort of magnitude in terms of stores and product offerings?

We will do our best, given the fact that it is in front of us.

The first thing is just so you know, since we announced the kind of things that we have to do.

As you would expect since Dole is putting its name and its trust in us, we are going through significant number of quality evaluations, plant inspections and things like that, that Dole is doing with us.

I see this as nothing but healthy, this is good for us to go through.

Dole has very high standards, our standards are high, but we got to make sure that they are meshed.

So we have had a number of visits and joint efforts to check everything from process controls to documentation etcetera.

So that is proceeding and we hope to have that, the last of those for before we launch in the next two weeks.

Second is we obviously have to agree on the packaging and printing and labeling formats.

You actually make plates, you have printers print the materials, you look at it etcetera.

We have that all now worked out and we will be receiving the first Dole packages in the next several weeks as well.

Third is we have to get our own sales force trained.

We obviously want to make sure that we are using the Dole name in the right wave for us, which is to basically penetrate markets and customers we haven't penetrated before and last but not least is pricing.

The customer will pay more for the Dole package than they will for the Eat Smart package; because we do pay Dole a royalty.

So all those things have been in the works Steve for the last month and will be for the next few weeks and we will be gearing up to sell our initial products with both Eat Smart and Dole name in approximately two to three weeks.

Can you talk about how you expect it to roll out, how many stores, what regions that sort of thing?

Boy, Steve, I'd be just picking that one out of the air.

All I can tell you is that, where we think that this name could be most helpful is in what I call the national accounts; the nationwide retailers, the Safeway's and the Krogers, etcetera, where it has been more challenging to us to have a broad penetration.

We have done particularly well in regional chains and in club stores, but you get one of these accounts and you are talking 200-800 stores.

Any one of these could be a big blip and have impact in the short-term or it may just take a while to roll this thing out.

I really don't have a good feel for that, but we have been adding a couple thousand stores a year.

So I would like to see that number substantially go up after we have had a chance to introduce the Dole products and there is some things that we are doing, where we will uniquely introduce some new products first with the Dole name as opposed to the Eat Smart name.

So, it is a trial area for us to learn how well we can do this, how fast we will penetrate, but it certainly should help our goal of growing top line revenues at least by 20% a year.

Great thank you.

Thank you.

Once again, if you have a question, please press the one key on your touch-tone telephone.

We will pause for one moment.

There are no further questions at this time.

Would you like to proceed with any closing remarks?

Just want to thank everyone for joining us today, and continuing to have an interest in Landec.

We look forward to keeping you posted, many thanks.

Ladies and gentlemen that does conclude the conference call for today.

Again, thank you for participating and you may all disconnect.