Lifecore Biomedical Inc (LFCR) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec Corporation first quarter 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 conference, please press star then zero on your touch-tone telephone.

If anyone should disconnect and need to rejoin dial 1(800)283-1693.

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

I would now like to introduce your host for today's conference, Mr. Gary Steele.

Please go ahead, sir.

Good morning.

And thank you for joining Landec's first quarter fiscal year 2004 earnings conference call and webcast.

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

I apologize for Greg, he's got strep throat, but he's going to hang in here with us today; and do the best he can to not only tell us about the release but also answer any questions you might have.

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 2003.

Let me also mention that a replay of this call will be available through next Thursday, October 9.

It can be accessed by calling (888)266-2081, or (703)925-2533.

The access code is 6376538.

And the webcast 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 was effective May 25, 2003.

And, therefore, the first quarter of the fiscal year 2004 ended on August 31, 2003.

Landec had a good first quarter and it's in line with meeting our goal of increasing profits and cash flows, further strengthening our balance sheet.

We also started several retail grocery chain trials using our banana packaging technology during this quarter.

In addition, during the first quarter, we sold our domestic commodity vegetable business, excuse me, to a group of Apio growers in exchange for future cash payments, a per carton royalty and a long-term supply commitment.

The sale of our domestic commodity vegetable business completes our focusing initiatives, in our food business; which will allow us to concentrate on our high-growth, specially packaged produce products that we currently sell under our Eat Smart brand, and very soon, will be also selling under the Dole brand.

As a result of the sale of the commodity business, we will be more focussed, have lower operating risks, especially in the winter farming investments that we've had to deal with in the past, and we will be able to significantly reduce our selling, general and administrative expenses.

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

During our first quarter, we entered into an exclusive packaging and marketing agreement with Dole Fresh Vegetables; for Apio to sell and to 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.

We'll be offering to retail and club store customers the prospects of the choice of purchasing our products under either brand.

We are in the process of launching our Dole brand pre-cut vegetable products and examples of our products in packaging designs will be displayed at the upcoming Produce Marketing Association Fresh Summit Convention in Orlando, Florida, October 19 through 21.

Let me now turn it over to Greg Skinner who will comment on the financial results.

Thank you, Gary.

Good morning everyone.

As outlined in yesterday's news release, Landec reported revenues for the first quarter ended August 31, 2003, of $41.8 million, versus revenues of $44.8 million for the same period a year ago.

The decrease in revenues during the first quarter was due to several reasons.

First, Apio's service revenues decreased to $2.8 million during the first quarter of fiscal year 2004, compared to $6.1 million in the same period of last year.

Primarily due to the sale of Apio's domestic commodity vegetable business in June, 2003.

Second, revenues from the sale of bananas decreased to $487,000 during the first quarter from $2.1 million during the same period last year, due to no retail banana sales during the first quarter of fiscal year 2004 as the company focuses on its recently started retail market trials.

And third, an expected decrease in licensing and R&D revenues to $139,000 during the first quarter from $1 million during the same period last year, primarily due to the licensing and R&D agreement with UCB Chemicals being completed in December, 2002.

These decreases in revenues were partially offset by revenue growth in Apio's value-added vegetable produce business which increased 18% to $22.3 million during the first quarter, compared to $18.8 million in the same period last year.

For the first quarter of fiscal year 2004, the company reported a net loss of $624,000 or 3 cents per diluted share, compared to a net loss of $608,000 or 4 cents per diluted share in the same period of the prior year.

The net loss for the quarter was comparable to the same period a year ago, and reflects several offsetting increases and decreases.

Iteming lower the net loss include first first a $590,000 increase in gross profits from our value added specially packaged vegetable products, as a result of increasing sale and product mix changes.

Second, an $897,000 company-wide reduction in SG&A expenses, and third, a $160,000 reduction in interest expenses.

These decreases in the net loss were offset by first a $312,000 reduction in service revenue gross profit, due primarily to the company selling its domestic commodity vegetable business in June, 2003.

Second, a planned increase in operating investments of $185,000 in our banana program; and third expected decreases in licensing and research and development gross profits of $735,000.

In addition, during the three months ended September 1, 2002, the company sold its fruit processing facility and recognized a gain of $436,000 in June, 2002; which is included in other income in the Statements of Operation.

As a reminder about the seasonal nature of our business and our prior fiscal year ending October, the three months of February, March and April our previous second fiscal quarter are typically our best months for revenues and profits, due primarily to Landec Ag recognizing virtually all of its revenues and profits during that period.

In contrast, the months of November, December and January; our previous first fiscal quarter had historically been the company's weakest period for revenues and profits due to primarily produce sourcing issues at Apio during the winter months combined with virtually no revenues for Landec Ag.

Under our new fiscal year ending May our results will continue to be seasonal with Landec Ag recognizing all its revenues and profits during the third and fourth fiscal quarters; while rallying no revenues during first and second fiscal quarters.

For our fiscal year ending May 30, 2004, we expect that the first first half of the year should show losses; whereas, the second half and the full year are expected to realize a profit.

Turning to the balance sheet, during the first quarter, our cash balance increased by $671,000 to $4.4 million.

Increases in cash included net cash generated from operations of $1.2 million, and a $657,000 reduction in restricted cash.

These increases were partially offset by purchases of $689,000 of equipment to support the growth of Apio's value-added produce business and the net reduction in debt of $606,000.

At the end of the first quarter, in addition to $4.4 million in cash and $1.7 million in restricted cash we had $5.9 million available under our lines of credit.

The $1.7 million of restricted cash should become available for use over the next seven 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 reiterate the importance of our recent sale of Apio's domestic commodity vegetable business to a group of Apio growers.

First, and foremost, through this 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 reduced Apio's SG&A on a go-forward basis by at least one fourth.

Third, we will receive a royalty on the new entities carton sales running roughly $250,000 to $300,000 in the 1st year.

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

We are now focussed on growing our core food and ag businesses while completing and beginning to commercialize the banana trials and banana technology.

We're anxious to expand our market validation with our banana technology through recently started retail trials; and we are eagerly preparing for the launch our Dole-branded pre-cut vegetable products later this month.

We are constantly expanding our new products and our customer base.

In fact, during the last 12 months, we have added 1,200 new retail grocery stores through the expansion of our technology based value added products.

And according to a recent A.C.

Nielsen report, we were the number 1 supplier of vegetable party trays to retail grocery stores for the three months ended June, 2003, capturing 23% of the U.S. retail market.

In our ag business we plan to commercially launch 28 new products this fall, and the results of the early plant corn crop planted this past year look very good throughout the corn belt.

We're starting to build an impressive array of farmer testimonials regarding how the use of our early plant hybrid corn product positively impacts the economics and effectiveness of U.S. corn farmers.

The program for early plant hybrid corn increased three fold to over 40,000 acres in the spring of 2003, up from 13,000 acres in 2002, and early indications that are the acres to be planted in the spring of 2004 could more than double to close to 100,000 acres in this next spring.

To recap, our first quarter results are in line with expectations.

And we are generating positive cash flow from operations.

We have reduced our farming risk.

We continue to strengthen our balance sheet.

We are growing our core business and we are executing our plan for enhancing profitability.

In closing, we have four primary objectives for this new fiscal year which we have started.

First, to continue to grow our food and ag technology revenues.

Second, increase profits and cash flow.

Third, complete initial banana trials and if successful commercially launch our banana packaging technology for retail users.

And fourth, continue to strengthen our balance sheet.

We are positive about the remainder of the fiscal year.

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

We now believe we're in position where these past efforts should translate into improved profits and cash flow.

We are now open for questions.

Thank you.

Ladies and gentlemen, at this time if you have a question, please press the one 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're using a speakerphone please lift the handset before asking a question.

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

Thank you.

Good morning.

Will there be no service revenues after the first quarter?

There will be some.

It won't be associated with selling domestic commodity vegetable products, but the cooling operation is considered a service revenue.

But very minor, Tony.

Okay.

Also, regarding a Dole business, you say you're now launching it, that means it's currently in the market is that correct?

Being sold?

We are now actively selling, but we have not begun shipping products with the Dole label, Tony, because we needed to go through a very lengthy, elaborate, detailed set of inspections and discussions with Dole regarding our quality systems, making sure that our plant was meeting all of their expectations, et cetera, et cetera.

And that has been recently completed and thumbs are up.

So now what we will be doing is we're selling and starting to take orders and we'll begin shipping initial products later this month.

Since you can't, at least this year, service all the retail outlets that might want that product, how are you marketing it?

Is it geographical?

Is it -- are you cherry picking retailers where you initially don't have a presence?

Or where will the Dole product be sold?

First of all, let's talk about how we will sell the product.

We have five regional sales managers, we have a number of inside salespeople and support people.

They are selling the product, along with our Eat Smart product.

And in terms of our focus, without saying too much here, let's just say that you might expect us to focus on prospects that we have yet to penetrate; so that we can further expand our market position, market share.

So we want to take the Dole-branded products to new sites.

How many SKUs will there be to start?

I think the number of SKUs is 18.

Roughly in that category.

Is there any reason, Gary, to think that over the course of the next several years that the Dole-branded produce won't eclipse the Eat Smart business and severely cannibalize it?

The honest answer is don't know.

Remember, the Dole product will be priced at a higher price than Eat Smart; because we are paying Dole a royalty.

If you want to ask me what my gut feel is, I think that the Dole brand will help us expand into national accounts that have been difficult for us to penetrate, and that there isn't going to be, there will not be a lot of cannibalization.

There are a number of people who really like the Eat Smart brand, don't want to pay the higher price and there are some that want that well-recognized name; so I think there will be minimal cannibalization and this will help us expand into areas we haven't been able to penetrate.

Okay.

Thank you.

Thank you, Tony.

Our next question comes from Bill Gibson of Nolanburger capital.

Good morning, Bill.

Good morning.

Looking over the numbers as you gave us last year's numbers on each of the quarterly breakdowns.

On a go-forward basis, I mean, there's no reason to think that Apio wouldn't be profitable every quarter, I mean, barring some unforeseen circumstance, would there?

Or is there a seasonal factor there as well in terms of --

We still have the desert timeframe where sourcing can be an issue, and we have to go to the Imperial Valley to get the large majority of our produce to feed the value added business.

And if for any reason that produce is short, you could end up in a situation where we did a few years ago; where we had to go out on the open market and purchase produce at a rather inflated rate.

That could have an impact, obviously, on the bottom line.

Okay.

And but, I know you had an initiative, and I forget the timing, it was quite a ways back on potentially developing new sources in South America.

Whatever happened there?

We're looking and still actively expanding our sourcing base beyond the Santa Maria Valley area, Bill, and that includes sourcing out of countries south of the border.

So that's an ongoing program.

In addition, we've been working internally on various techniques for extending the shelf life of inventory using various technology approaches.

So both of those are central to our sourcing strategy.

Okay.

And you know, I think following up on Tony's first question, just looking at the breakdown of Apio non-service and Apio service, what else is in -- I mean we've got our value added number which was $22.3 million in the quarter, what else is in there?

Are those party trays, do they use Intelipack?

Oh, yeah.

The value-added is pretty much any produce products that is chopped and washed and mixed and put into our package and that includes party trays.

What's the difference between- what's the nonvalue-added that's in there?

Primarily exports.

So that's export versus --

The difference is we take title or do we not take title.

Uhm-hmm.

If we don't take title and we're performing quote a service it ends up on that line.

If we take title and sell it it end up on the produce sales line.

Let's do the Apio non-service, that's still a bigger number than the value-added number.

So is the difference, would export wouldn't be there, that would be in the service line or in that line?

No, it's in that line.

Okay.

So that's the bulk of the difference?

Yeah, by far.

And is export all -- is that nonvalue-added or do you as have value-added in export?

No, value-added would not be using for the most part our technology.

That is just something that's beginning and we're working to make that technology component larger, but for the vast majority of export that would be nonvalue-added produce products that are shipped in containers by ship to Asia.

So at this point, Bill, the technology component or the value-added component is minimal.

Just intuitively I would think that's a big opportunity to add the value-added component?

I think your instincts are very good.

Okay.

And switching gears a little bit on the licensing front, which you didn't talk much about, could you just sort of -could you give us some feedback on your current thinking and what you're looking at there?

Yeah.

What -- we've basically, as you know, Bill, I think the third -- our third business is our licensing business in which we will engage with industry leaders outside of the food and ag business and enter into either an R&D or licensing agreement with them; in which they can use our technology, which leads to a supply agreement and a royalty stream for us.

We have a number of those programs in the works.

We have a medical program, we have a dental program, we have an adhesive program, et cetera, et cetera.

What we're finding is that commanding up-front R&D funding from third parties in this very tough economic environment; where these large companies are cutting back their own research groups and their own research expenditures, is increasingly more difficult.

So we've pretty much modified our approach in that we will do some of our own testing and our own sample development, and then move more quickly to a supply agreement.

And if they want an exclusive it has to include a royalty.

So we're doing something in the -- a good example of this is what we're doing in the cosmetic consumer products field; where we're going directly to a supply agreement and we expect that program to lead to commercial sales later on if fiscal year.

So you'll see more and more of that and less of the more traditional, gee, you got to fund everything and you've got to give us an exclusive license fee up front.

We're happy to go more quickly through that process directly to commercial sales, and that has a supply component to it, and once again, if they want any exclusivity, that has to include a royalty.

Thanks, Gary.

Thank you, Bill.

Our next question comes from Corey Baldwin of Redship Companies.

Good morning, Corey.

Good morning, guys.

You guys were saying that you expect the early plant hybrid corn to reach about 100,000 acres for '04.

Somewhere in the 80,000 to 100,000 acres.

We're in the early part of the sales season, Corey.

Farmers will not be planting until next March, March, April or May.

And so the early part of that.

But we're starting to see really terrific farmer testimonials who used the early plant last spring, and we will -- we believe the way to market and promote this is product is through the testimonials of our customers.

And so you'll start to see us releasing in the public domain a number of these testimonials.

Because frankly, farmers don't believe anybody's research trial results anymore.

They just -- they don't -- they know it's garbage.

What they want to hear is actual results from their comrades.

And so that's what we're doing.

And so somewhere in that 80,000 to 100,000 acre range is probably a pretty realistic estimate, Corey.

Are you guys seeing a pick up with some of or other ag products or mostly with the early plant hybrid corn?

That's been our focus but we sell, gosh, we sell about 80 different products some which are corn seed, and it's hard to answer your question because we're so early in the sales season.

Okay.

So farmers are just getting ready for harvest, et cetera.

But I wouldn't be surprised if we did.

Okay.

And I guess shifting back to Apio, you said that the Eat Smart products grew to 55% of total revenues for the quarter.

Do you see that as a trend going forward?

The Eat Smart products making up that large of a percentage?

Or do you see it coming back down to what it's been in the past?

Now, do we get to -- when you say Eat Smart brand do we get to include Dole in this or not?

Yeah, I guess you could.

Yeah, I'd say the -- our branded technology-based products as a percentage of total sales will continue to go up.

Okay.

Thanks, Corey.

All right.

Thank you.

Once again if you have a question, please press the 1 key on your touch-tone telephone.

Our next question comes from Lenny Brecken of Brecken Capital.

Good morning, Lenny.

Good morning.

I've got to say for a company of your size to give the amount of disclosure is a refreshing and, let's put it this way, appreciated effort on your part.

Thanks.

Thank you.

I wanted to say that up front.

Can you just give me -- I have a whole litany of questions but I'm going to -- I guess I'll come back in the queue if I have to.

But the Eat Smart specially packaging business can you give me an idea of what the penetration rate is at this point?

At retail?

Yes.

In the party tray arena, in retail stores, I think we said we were 24% market share.

In the bag product for retail stores, we're roughly 16% market share.

In club stores we are somewhere in the -- club stores would be Sam's and Costco, we're somewhere in the 60% market share.

Food service we're close to zero.

Since that's a new initiative for us, and we're just starting that up.

And remember, our competition could be the back room of a grocery store, it could be a regional supplier, it could be a company called Mann, it could be a number of other possibilities.

Our unique play is to bring fresher, better-tasting, better-smelling, better-appearing produce to the consumer who is demanding convenience, nutrition and freshness all at once.

So that's why we're growing, that's why we believe this is a growth opportunity for us, Lenny.

Okay.

But the market share, does that correspond to basically your penetration rate of the potential retail outlets?

Yeah.

Okay.

What was -- just remind me, value-added specialty business, the comp number was 22.3 versus what sequentially?

18.8.

It was year-over-year, I think?

Yeah, 18.8 was the year ago.

Now, is that -- I mean sequentially, from.

Oh from the last quarter?

Yeah.

The May quarter.

Unfortunately, I'm under the weather at home, I don't have that information in front of me, I'd have to look at the last press release.

If it's in the last press release, I'll dig it out.

It is.

The export gross margin versus the specially packaging, can you give me a sense of where the margins for differential is?

Oh, yeah.

First of all, we have to differentiate these as very distinct businesses.

The value-added business is a make and sell business.

We process the produce, package it, ship it and sell it.

And that business going forward, that's roughly a 20% gross margin business, very low SG&A, you don't need an army of salespeople, and it can generate quite a bit of cash.

The export business is more of a -- of a -- think of it more as a broker commission business in which there's very little, almost no risk in this one, customers are well-known to us, long-standing, and what we do is we take a 5% or 6% commission on that.

So it's quite a different business.

Okay.

So the gross margin should, as per the last question or two, should begin to start creeping up?

Yeah.

As we grow our value-added business, and as we change the product mix, such as more party trays, less bags, et cetera, et cetera, those two things in itself should be moving gross margin up overall.

Okay.

Great.

And the party tray contribution to gross margins, is that roughly it, the 20% or is that higher or lower?

Well, now you're getting into the bowels of our company, but just say they're north of 20%.

All right.

So the Dole business, then, should be in that category, then?

Well, it depends on whether the Dole products are party trays or bag products.

Because we'll be -- we'll have that same type of mix, some will be north and some will be slightly south.

Okay.

All right.

And the licensing business, it doesn't sound -- it sounds like you've got some things in the hopper; but should that number move much on a sequential basis throughout the quarters?

What you want to -- licensing revenues are bumpy.

You know, you could spend eight months cultivating someone and then it pops.

And then you could go another 12 months and nothing happens from a licensing-fee point of view.

But as I mentioned, our focus is really changed to building product revenues that come from selling our materials to third parties.

And that's really a change from a year or two ago where we were just focusing on these very lengthy licensing R&D funding deliberations, and the reality of the world out there is that folks just aren't spending the money they used to spend on R&D, either internally or externally.

So that bumpiness should go away as we start to build product revenues.

Okay.

But that -- you don't foresee that happening within the next four quarters, do you?

Not in any material way.

I see it becoming material next fiscal year.

Okay.

The jump up in shares, the share count, is that just because of the stock price?

The shares, you mean the number of shares outstanding?

The fully diluted number.

Well, remember, that's because it's a loss, fully diluted does not include any of the preferred that's outstanding.

The increase you see is that the series A automatically converted to common in November of last year.

And so it's included in this year's outstanding common but it wasn't included in last year's outstanding.

When you turn profitable, what would be a share count that would be fully diluted?

Approximately 2 million.

Add 2 million more?

Approximately.

So it would be around 23 million?

Approximately, yes.

All right.

There's a 1.6 million in B out, and probably anywhere between 200 to 400 in diluted options depending on where our stock price is on the day you do the calculation.

All right.

Okay.

Thanks Lenny,.

I'll go back a into queue, thanks.

Once again, if you have a question, please press the 1 key on your touch-tone telephone.

We'll pause for one moment.

Our final question is a follow-up from Lenny Brecken of Brecken Capital.

You shouldn't have let me go.

That's all right.

Banana trial, the second trial that you said you were going to undergo, can you just explain, assuming the first trial goes well, why would you go into a second trial before we know what the rollout's like?

First of all, there are different things that we're testing, and we want to make sure that we have -- and by the way, there's also different geographic locations.

Some people have back rooms that are temperature controlled, some don't.

Some unstack the pallets when they come in, some don't.

Some like to display the bananas a certain way and others a different way.

We want enough time to see and track not only the retailers' practices and how the banana packaging is responding and performing in the grocery store, but some of these tests involve a consumer bag that's going home.

And so we want to be able to conduct follow-up phone calls with consumers, understand how amenable they are to buying bananas in a bag.

Does the technology continue to work in the home, et cetera, et cetera.

So Lenny, we want to do a lot of trials to get a better handle on what we have here.

And we also have different sources for our bananas, some from Ecuador, some from Costa Rica, others that will be coming later from other countries.

So we'll be doing quite a bit of trials for some time.

And you want to build enough data to be confident that you have it.

So that's what's going on here.

So it's not necessarily a second set of trials with the same retailers?

No, no.

No.

We've got some tests in the southeast, some tests in the northeast, we'll begin some tests, additional tests in the northeast, different retailer in the not too distant future.

We'll do in the next couple of months tests out on the West Coast.

That's what we're up to.

One last question on the value-added specially business, as you mention earlier, the margins are somewhere around 20%, north or south, depending on the product.

Is there anything you're going to be doing in the next, you know, couple quarters to enhance that in any way?

Yes.

The main thing is to -- is that this growth of our trade business which is a good margin business for us, will tend to, if we do things right and execute things well, will tend to push up the gross margin percentage.

So that's the main thing we can do in the shortest period of time.

That and coupled with the fact that with our new line of credit, we have an equipment line and we're going to use some of the monies from that equipment line to further automate the value-added plan which could obviously drive down production costs.

All right.

But that sounds like the latter point is a, you know, it's going to take some time to --

That doesn't happen overnight.

That's a fourth quarter kind of a event.

It doesn't sound like that's going to be, you know, usually significant to do that?

I mean, what kind of impact are we talking about?

Time will tell, obviously, but if you automate processes that are now very manual, you know, in the long run you're going to increase your margins as a result.

And that's what that equipment line's going to be used for.

I know but were you talking an order of magnitude 20 going to 25, or a couple of percentage points?

We don't have enough information at this point to say that.

All right, guys, keep it up, thanks again and I hope someone appreciates the fact that your core business is already at 25% annualized; if you exclude the seed business.

Right, thanks a lot guys.

Any other questions?

I'm not showing any further questions at this time.

Would you like to proceed with any closing remarks?

Just that we appreciate people being on this call, we appreciate folks remaining interested in this story as it evolves; and we think that this is the beginning of a good year.

So thank you all.

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

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