Lifecore Biomedical Inc (LFCR) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter earnings release for 2004 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. (CALLER INSTRUCTIONS) As a reminder, this conference call is being recorded.

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

Good morning and thank you for joining Landec's second-quarter fiscal year 2004 earnings conference call and webcast.

I have with me today Greg Skinner, the company's Chief Financial Officer, who will discuss our financial results in just 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 2003.

I also want to mention that a replay of this call will be available through next Friday, January 16.

It can be accessed by calling 888-836-6074 or 703-925-2505.

The access code is 352577.

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 effective May 25, 2003.

Therefore the second quarter of fiscal year 2004 ended on November 30, 2003.

Landec's results for the second quarter and first six months of fiscal year 2004 are in line with our plan.

As a reminder, we have four primary objectives for our fiscal year ending May 30, 2004.

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

Second, increase profits.

Third, expand the commercial selling of our banana packaging technology to retail and foodservice companies.

And fourth, continue to strengthen our balance sheet.

Based on our year-to-date results and taking into account the seasonality inherent in our business, we are on our way to achieving these goals.

We expected our first half of fiscal year 2004 to have losses; and we expect our second half and full year to be profitable.

We remain positive about the second half of this fiscal year, even with current produce shortages, which I will elaborate on in a minute.

During June we sold our domestic commodity vegetable business to a group of Apio growers in exchange for future cash payments, a per-carton royalty, and a long-term supply agreement.

The sale of our domestic commodity vegetable business completes the refocusing of our food business, which will allow us to concentrate on our high-growth specialty package produce products that we currently sell under the Dole brand and our Eat Smart brand.

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 about 1/4.

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

Lastly and very importantly, although not eliminated, we reduced our exposure to losses from farming investments, which have been a problem for us during the winter months in recent years.

Overall in our Apio business we believe we have positioned ourselves to increase revenues, profits, and cash flows going forward.

In addition, in June we entered into an exclusive packaging and marketing agreement with Dole Fresh Vegetables 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 present in the fresh cut vegetable category.

We're currently offering retail and club customers and prospects the choice of purchasing our products under either or both our Eat Smart brands or the Dole brand.

We have begun selling 16 Dole branded bag and vegetable trade products to retailers and club stores.

Our initial market focus is on national chains in the northeast and the Midwest.

We expect the Dole line of products to contribute revenues and profits beginning in our third quarter of fiscal year 2004, the quarter we have just begun.

Also and importantly in the first half we have completed several retail grocery chain and foodservice trials using our banana packaging technology, with positive results.

More trials are planned to begin next month.

Let me turn this 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 second quarter ending November 30, 2003, of $43.3 million versus revenues of 38.9 million for the same period a year ago.

The increase in revenues during the second quarter was due to several reasons.

First, revenue growth in Apio's value-added vegetable produce business, which increased 18 percent to 22.8 million during the second quarter, compared to 19.3 million in the same period last quarter.

Second, an increase in revenues from Apio's export business, which increased to 15.9 million during the quarter from 8 million in the same period year ago.

These increases in revenues were partially offset by, first, a decrease in the Apio's service revenues to 1.1 million during the second quarter of fiscal year 2004 compared to 6.4 million in the same period of fiscal year 2003, due to the sale of Apio's domestic commodity vegetable business in June 2003.

Second, an expected decrease in licensing and R&D revenues to 204,000 during the second 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, and the completion of an R&D agreement with a medical device company in June 2003.

For the second quarter of fiscal year 2004, the company reported a net loss from continuing operations of 1.6 million or 8 cents per diluted share, compared to a net loss from continuing operations of 1.1 million or 6 cents per diluted share in the same period last year.

The net loss from continuing operations for the quarter was higher than the same period a year ago due to several factors.

First, a reduction in gross profits from licensing fees and development activities of 784,000 as the company shifts its focus to supply and royalty agreements.

Second, a reduction in gross profits from service revenues of 1.5 million, due to the sale of Apio's domestic commodity vegetable business in June 2003.

Lastly, a reduction in gross profits in the sale of Eat Smart bananas of $392,000.

These increases in our loss from continuing operations were partially offset by, first, an increase in gross profits from Apio's value-added specialty packaging vegetable business of $1 million, and second a reduction in operating expenses of $1.2 million.

The net loss from discontinued operations for the prior year quarter and first six months of last year was 1.7 million or 9 cents per share.

The discontinued operations loss resulted from the sale in October 2002 of Dock Resins Corporation, which had been the company's specialty chemicals subsidiary.

As a reminder about the seasonal nature of our business, seasonality is inherent in our two core businesses, Apio and Landec Ag.

Apio is subject to produce sourcing issues during the winter months; and Landec Ag recognizes nearly all of its revenues and products third and fourth fiscal quarters, awhile realizing virtually no revenues during our first and second fiscal quarters.

If you exclude the financial results of our licensing and R&D activities and the domestic commodity vegetable business, our revenues grew 28 percent during the quarter and 15 percent for the first six months of fiscal 2004, and gross profits grew 20 percent during the quarter and 19 percent during the first six months of fiscal 2004.

In fact, Apio's net income for the quarter more than doubled to $828,000 compared to 379,000 for the same period a year ago; and for the first six months Apio's net income almost doubled to 2.1 million compared to 1.1 million during the first six months of last year.

Turning to the balance sheet, during the first six months of fiscal year 2004, cash balance decreased by $1.4 million to 2.3 million.

The decrease in cash was primarily due to, first, the purchase of 1.7 million of property plant and equipment.

Second, the net reduction of long-term debt of 1.2 million.

And third, the net reduction of payables of 5.6 million.

These reductions in cash were partially offset by, first, 5.9 million of net borrowings in the company's lines of credit; and second, a $657,000 reduction in restricted cash.

As of the end of our second quarter, we had availability under our lines of credit of 2.9 million.

In addition, 1.7 million of restricted cash should become available for use within the next four months as we pay off a capital lease and upon the release of funds held in escrow pursuant to the Dock Resins stock purchase agreement.

The significant increases in inventory, deferred revenue, and the amount outstanding under the company's lines of credit during the first six months of fiscal 2004 are due to the seasonal nature of our Landec Ag seed business.

Deposits on future seed shipments are recognized as deferred revenue when collected, and payments for seed corn using funds borrowed under the Landec Ag line of credit are recorded as inventory.

As the corn seed is shipped, which begins in February, the deferred revenue will be recognized as revenue, and the inventory as cost of sales.

The significant decreases in Accounts Receivable and payables during the first six months are directly attributable to the company's selling its domestic commodity vegetable business in June.

That concludes my formal presentation.

Let me turn it back to Gary.

Thanks, Greg.

Let's talk about where we are and where we're going.

The results for the second quarter and first six months of fiscal year 2004, which include the months of June through November, are on track with our internal plans for the fiscal year.

Our focus has been on growing revenues in our two core businesses, Apio and Landec Ag, and validating our banana technology.

For our specialty packaged foods business, we're growing rapidly.

We're expanding our customer base, store site penetration, market share, product lines, and market awareness.

Our key products are growing; and we now believe that the Dole branded products, which we just started marketing in late October, will help us grow even faster.

We now have 16 Dole branded products, and the combination of offering Dole or Eat Smart brands seems to be a good combination.

Our vegetable trade product line is frankly hot, and we're growing market share.

We now own 29 percent retail market share in the U.S., and we're building momentum.

Why?

Our trade products look great.

They taste great, and they present well.

And our trade product can deliver high margins for our retail and club store customers.

Some of those margins for our customers are up in the 50 percent range, which as you know is most high for those types of operations.

We now have different size and mixture formats that meet consumer needs, from pre-meal snacks to large parties.

What excites us most is that the category for precut, prepackaged vegetable products in the United States is now growing at a double-digit rate.

The American consumer is speaking with their pocketbook the words fresh, nutritious, convenient.

We see growth opportunities in the specialty packaging foods business, and as a result we're currently expanding our processing plant in Guadeloupe, California, adding production lines and some automation, all within our planned capital spending budget.

Now that we believe we have a viable and sustainable growth plan, we can turn our attention to margin improvements via selective price increases, product mix changes, plant automation, and economies of scale.

What is our biggest concern going forward?

Sourcing of produce.

We have developed an excellent grower base with good diversification of sources to meet both our current and our expected growth needs.

To address short-term supply issues, we have taken steps to protect ourselves in most short-term supply shortage situations.

During the past several weeks, however, the Imperial Valley of Southern California, Salinas Valley, San Joaquin Valley, and our favorite Santa Maria Valley have all experienced unseasonably cold and wet weather conditions.

As a result, the entire produce industry is reeling, including us.

This timing is not the best, as we are in a very high-demand period, while at the same time we're expanding our customer base.

Some companies have FDA risks, others technology risks.

Ours is periodic sourcing risks.

We need to feed our increasingly hungry plant with over 130 million pounds of produce this year.

We expect to do that.

We have a challenge right now, and we will keep you posted, but we believe that we can work through this in the next several weeks and be back on track.

Turning to our Ag seed business, we are in the tail end of our selling season with the launch of 28 new seed products; and we will begin to ship bag seed products to our customers beginning in February through May, when, under GAAP accounting, we will record our revenues.

It appears at this point that we are tracking according to our internal growth plan for the year.

Especially pleasing is our trend for increasing average unit selling prices, as we can offer an expanded seed product line with new traits, polymer coatings, and chemical treatments.

We can do this very cost effectively and directly with farmers through our direct selling company called Fielder's Choice Direct.

Large seed companies usually don't talk to their end customers, the farmers.

This is what we do six days a week, 14 hours a day.

The Early Plant corn yield results from last spring's planting, which was just harvested this fall, look very good.

What we have learned working directly with farmers is if something does not work for them, they will tell their friends.

If something does work for them, they will tell their friends.

Our coated corn product is working, and our farmer customers are telling their friends about our coated seed technology.

Our marketing approach is to let our farmer customers tell our story.

Since we send out 4.2 million pieces of collateral marketing materials every year, our customer testimonials will be a big part of our message.

So our growth plan for seed is underway through our own sales organization, and our focus can now turn to obtaining alliance company partners, big and small, to become comfortable with our seed coating technology and begin to sell our coated seed technology through their own sales organizations.

We now have three seed companies, alliance partners, that are selling our coated seed technology under their brand this sales season.

Let me turn to our third business, our technology licensing business.

What we have learned over the last year is that the days of consummating large corporate sponsored R&D and upfront licensing programs, such as the $2 million plus deal we did in 2002 with UCB, those days are probably over.

Big corporations are shrinking internal R&D budgets, not expanding them.

Big upfront license fees outside of pharmaceuticals seem to be few and far between.

Yet we believe people are still interested in accessing our technology, so we have had to adjust.

And we have.

We're currently working, for example, in the personal care arena with one major global player who has just recently launched products outside the U.S. using our temperature-activated materials as a critical ingredient in their products.

We currently are operating under a nonexclusive supply arrangement; and if our partner wants to move to exclusivity, they will pay us a royalty.

This approach is new for us and works better given the global realities of limited corporate R&D and licensing budgets.

Let's turn to our favorite subject, bananas and our specialty packaging technology for extending shelf life.

I am constantly asked the questions, when will you begin expanding the sales of your banana technology?

The answer is, by the end of this fiscal year.

When will you realize substantial volumes, revenues, and profits?

That answer is, probably not until our fiscal year 2005.

Our recent trials have confirmed shelf-life extension not only with retailers and foodservice operators, but now we know that consumers who take the bananas home in our package can see the shelf-life extension.

We can now turn to several major banana companies, some nonbelievers before, to become our suppliers, so that we can concentrate on being the provider of packaging technology; and begin to focus on important customers who need to add nutritious new products to their product offerings but who have historically not been able to reliably inventory and sell bananas because of shelf life and handling issues.

Much of our 2 million to 2.5 million in annual expenditures for our banana program has historically gone into buying and taking titles to bananas, paying for their freight, and ripening the bananas.

We are mostly done with that phase.

We had to build our knowledge base with R&D and market trials, and then get others, such as large banana shippers and retailers, to believe that we had something valuable.

Although there is much work ahead, we believe this investment will be worth it.

In summary, our core business revenues are expanding and growing, as are our gross profits and operating income.

Our focus centers on making sure we can source adequate supplies of produce needs in the short-term, while allowing us to grow long-term with only limited risk.

In addition, in our banana program we need to implement well our approach to targeted customer testing, which lead to commercialization of our banana packaging technology.

We are now open for questions.

Thank you, Mr. Steele. (CALLER INSTRUCTIONS) Bill Gibson.

I want to zero in a little bit on bananas, our favorite topic.

It sounds like you are winning over the banana companies, and we talk about commercial rollout next year.

Would that be with a current banana company doing the sourcing?

Yes, absolutely, Bill.

We have no business being in the shipping, handling, and ripening of bananas.

You may recall that when we started on this venture a couple years ago and went to the big banana shippers, their reaction was, first, we don't believe you have anything; and their second reaction was, if you did, we're not sure we are happy about it.

So we realized at that time that the whole validation process would have to be done by us, including the setting up of trials, the purchasing of bananas, the delivery of those bananas.

And Bill, that is not fun.

We're not that good at it.

But it was a necessary evil.

But we had to get some tests out there.

We had to get some people talking.

We had to get some people seeing the shelf-life extension and the benefits, and frankly, knocked them on the side of the head just a little bit.

Those days are now occurring.

This is with two large banana shippers, not three, but two is a good start.

We want them to be the supplier of our bananas.

And we will provide the packaging technology, and we will make our money on packaging.

Good.

But they agreed to go for it?

Let's just say that that is where we're going right now.

We've got a head of steam here.

We have the customer targets.

And yes, it is still more in what I would call the prelaunch trial phase, but we have moved them off the dime.

And when you start the new trials, the people that did the first round of trials, are they then going to keep with the program?

Or do they go off the program for a while?

How does that work?

Some are going to stay with us.

One, for example, we would prefer not to go with immediately, because the volume requirements are a little scary for us in a start-up mode.

They're all candidates.

But let's just say there are some very targeted, hot prospective customers that we would really like to focus on initially; and frankly the banana shippers would too.

So they are all in play, but some more short-term than others.

Could you share with us who you are going to be testing with in California?

No.

Come on.

I am not the only person tired of brown bananas here, Gary.

Bill, when we can, we will.

One last sort of housekeeping question.

You released a number for Apio value-add in the quarter, which was 22.8 million.

And if I remember correctly, we're coming into the third quarter which, the one we just started, is the seasonally best.

Can you share with us what that number was last year?

I don't have that readily available, Bill.

Can we get it to you?

Let us get that to you.

We will.

Sorry we don't have that right at hand, but we will get that to you.

You did hear me say we have got to get out of this three-week produce shortage situation here, which is really frustrating for us.

But we think we can see the light at the end of the tunnel.

But it has not been fun the last couple of weeks; and of course that is primetime for us because this is holiday season.

Right, okay.

Thank you.

Tony Brenner.

A couple of things.

First of all, let me follow up on bananas first?

Beginning with your commercial launch, let's say in the first quarter of fiscal '05, you will be out of the banana business.

Is that correct?

You will essentially only be selling the packaging or just the patch to banana companies?

Can I give you a qualified 95 percent plus yes?

There may be a few situations -- and I mean they have to be the exceptions, where we just have a very special interest in a small study or a small trial or a small supply agreement, and a banana shipper may not, that we just think is worthwhile.

But Tony, we just don't want to be in the handling and shipping --

I understand.

That was the idea all along.

But it changes dramatically the way that the income statement will look versus doing it yourself, obviously.

I hope so.

Because all we have been showing on the income statement is a couple million bucks off of income to fund this program.

So we're hoping for substantial change.

Will you be selling the bag or just a patch?

Or it probably does not make much difference.

I can tell you there’s pros and cons to either, and we're flexible for both.

There are circumstances in which, frankly, there is a strong argument for us to only supply the patch, and source the bag from down in the tropics.

But either way the margins are going to be the same for us, in terms of absolute dollar margins.

Could you tell us how extensive the launch will be initially?

And how quickly that might ramp up during the course of the year?

It is going to be very focused.

Whatever we do it is going to be very focused; it is going to be gradual.

We learned a lesson a couple years ago where we went too fast, too far; and we got ourselves in trouble.

And pardon the bad language, we ain't doing that one again.

So this one is a steady as you go.

I'm not sure what steady as you go means.

One customer at a time, a handful of stores, then it goes to double that, and it's not going to be a massive launch.

Okay.

That is why I said that any material impact to our financials is most likely not until '05.

We're talking about '05, though.

You mean fiscal '05?

Yes, but towards the latter end of that.

Because this thing is going -- we're going to steadily grow it and not get ahead of ourselves this time.

When you say focused, will you be concentrating in specific regions?

Or can this be national, but in only selected stores during the year, let's say?

It is going to be more specific customer oriented; and if that specific customer has a national presence, then that is what we will do.

Okay.

Secondly, can you give us an idea as to the pace of the increment that Dole will provide to your business during the year?

I know you are adding capacity presumably to in part allow for that.

How big of an impact might that be?

I'm going to not answer that question.

And the reason is I would risk giving you the wrong answer.

But I will make a commitment; and that is that at next quarter's conference call we will share with you what we know at that time.

We just started selling the product in late October.

We have a list of customers and customer prospects that is growing.

I will tell you that our Dole friends, and we, think that this is going to be a good year.

But I would be misleading you by throwing out any numbers at this point.

But I will tell you that at the next conference call we will share with you what we know at that time.

Okay.

Lastly regarding the shortage of produce as the result of cold weather, is this a situation whereby you are simply not delivering produce?

Or are you having to pay above what you yourselves are going to be paid in order to meet contractual arrangements, and losing money on every transaction in the process?

That is a very good question.

The shortage is so severe.

Tony, I do not know about down your way, but for the last three weeks we've been waking up with frost in our grass.

It is in the 60s here.

It is really awful.

Break our hearts.

But anyway.

And heavy rain.

We have a good diversified sourcing plan.

We can go to two areas of the San Joaquin Valley.

We can go to Santa Maria; we can go to Salinas; we can go to Imperial Valley; we can go to Yuma Desert.

We've really done a good job diversifying.

The only problem is they all have been hit with heavy rains and freezes.

So this is a case where we just don't have the product.

It is not a case of going out and taking purchase price variances.

So that's good.

That's better than if you had to go out into the market.

In other words, you will lose less than if the product was available but at very high prices.

Yes, but we're not shipping product during this, fortunately, we believe, brief time.

We're not shipping product that was demanded.

We're having to tell our customers we can't ship it.

So it is painful either way.

I agree with you.

I don't like purchase price variances.

But you just can't get the product.

And we use 60 million plus pounds of broccoli alone.

How long does it take for a situation like that to correct?

It takes a couple weeks, Tony.

But you've got to have some favorable acts of God here.

The good news is the desert is warming up right now and they have not had rain in the last few days.

And these things can swing both ways.

We could have a lot of product in two weeks.

Our people tell us that we know we have been hurting the last couple weeks; and we think we will be hurting another week or two.

But we think then we will be out of it.

Is this an impact severe enough to throw you off plan in the second half of the year?

Let me put it to you this way.

We don't know what the impact is right now, because we certainly don't know if -- there is going to be an impact of this.

That's why we're talking about it.

It is material.

We do not know how to measure it quite yet.

But there's some other things that we are working on, Tony, in terms of -- I mentioned margin improvements and some selective price increases and some product mix changes.

We would like to believe that maybe we can make up much, if not all, of this.

And we're not going to know that for a while.

So we don't know.

But we are still pretty bullish on the second half.

Okay, thank you very much.

Lenny Brecken.

I just wanted to go through -- I have several on my list of questions, but I wanted to go back to what was already discussed, since this is a topic.

Why can't you call your farmer sources and see if crop has been damaged to the extent that you can not get product?

I don't understand why you can't assess that, since you had two or three weeks to do that?

We know exactly where the product is and what shape it is in.

So what is the question, Lenny?

Why can't you assess the impact, given the demand schedules that you have?

Tell me what the weather is going to be for the next seven days?

It's going to be warmer in California.

If that is the case, then we will be out of this, as I said, in about a week and a half.

Then you are out of it.

Believe me, I am an avid weather freak, if you want to call it that.

I'm going to quote you on this, okay?

Okay, I'll bet you some warrants.

All right?

So assuming it's warmer in the next two weeks there, the weather stays okay, we are okay?

If we can get back in business here fully, -- it is not only the heavy season for us, but you have got this growing business that has taken off for us.

So it is the combination of those things that makes this a little bit painful.

But if it is just very short-term --

But the crops have not been damaged?

Sorry, I did not elaborate well enough on this.

You've got two problems.

The cold stunts the growth of new crops.

But there is plenty of broccoli, for example, but it has pin rot, and it doesn't meet our quality standards.

You would not buy it. (technical difficulty) some people trying to sell it, but not us.

Then how is it going to be corrected if the weather is stable or better?

You have always got crop in the ground, Lenny.

You've got other crops maturing that were young enough not to be exposed to this pin rot.

So we have got, remember, we've got 130 million pounds of produce that we have to collect and process.

So we have growers all over these four growing regions that are staging their crops.

And those crops that were at the mature end that were hit with heavy rain got pin rot.

Why shouldn't -- since the supply is obviously damaged, why shouldn't the prices than go up and adversely affect demand or your margins?

I don't understand why everything (technical difficulty) if the weather stays the same --

You just can't get it.

There isn't any product to get.

You're saying if the weather stays the same or better, then our supply issue is not going to be a problem?

But what I am asking is that we took some supply, because of the pin rot issue, out of the market.

Why shouldn't that drive up prices?

Oh, in terms of our finished product, the bags and trade products?

We are in fixed-price contracts right now.

No.

Why shouldn't it drive up the price of broccoli?

It did.

Why should that not adversely impact margins regardless of whether the weather gets better or not?

I'm sorry, okay.

Not only do we sell our products under fixed-price contracts, our suppliers are obligated to supply us under a fixed-price contract.

Okay, you're not taking any pricers (ph).

All right.

Only if we have to go out and buy it, as Tony was saying, on the open market.

We take a killing in these situations.

That's called purchase price variances.

Then let me move on, then.

On the bananas, if we just sell the patch, what is the gross margin/ASP potentially?

We have not set prices.

And the last place I would like to discuss prices right now is on this conference call.

All right.

The dollar a bag that has been bandied about, that is the patch plus the bag (technical difficulty) ?

That was for a 40-pound format.

And where are you going to sell the patch for individual?

Is that the proposed (multiple speakers) ?

We have different product configurations.

We have a consumer bag that holds approximately two to three pounds of bananas; like (technical difficulty) hand.

And in a 40-pound box equivalent, you would have about 13 of those guys.

For foodservice we have a 20-pound version, which is more amenable to their needs.

So those all have different prices.

But the margins and the pricing has not been firmly set yet.

Can you just describe, without telling us who they are, the banana people that you're talking to, what percentage of the market share they represent at this point?

No, because some of these people don't purchase bananas today?

So they would represent zero market share.

They desperately need bananas.

They want something to be added to their product line that moves them into a more nutritious profile, which the U.S. consumer is demanding.

So I could not tell you what their market share is because they don't have any market share.

These are distributors, right?

No.

They are the actual people growing the bananas or people who are in the fruit business?

These our customers that would use bananas in their products and sell them to a consumer, for example.

All right, just make it perfectly clear, you're not talking to the existing -- for the fiscal '05 period, you don't think you're going to be able to crack the existing infrastructure guys.

The distributors, the Chiquita Bananas, the Doles, the guys who are actually --

I'm sorry.

Now we are confused.

We are going to be working with Dole and Chiquitas and DelMontes and people like that.

Okay?

They will be the supplier of the bananas.

Yes, but the packages are going to be different?

I am talking about the end customer.

They don't consume the product.

They just deliver the bananas.

But you are going to sell the patch to whom?

To retailers, foodservice operators.

Not the people who are actually distributing the bananas?

Right.

All right.

I'm just trying to gauge what (technical difficulty).

So it is all going to be end-demand driven.

I can't look at it and say, all right, you're talking to the people who are actually packaging the bananas, whether it be the banana manufacturer or someone else that takes Dole bananas and packages them; and they represent 25 percent share.

We are not saying you're going to get that all in one year.

But that is the potential of the people you're talking to.

It is all going to be, if you block and tackle, at the local A&P or Kings to take a product?

Correct?

Yes.

All right, I will circle back on the queue.

Thank you.

Nelson Oves (ph).

This is Peter Black.

I just had one question.

If you could clarify your statement about the technology licensing deal that you have with this personal care company.

You mentioned that it was nonexclusive.

But that means that there are other people out there that have similar temperature control products that a potential customer could use instead of yours?

No, Peter.

This arrangement, (multiple speakers) supply agreement, nonexclusive, in which we're providing an additive that is the critical component for our partner's products.

At this point it is not exclusive.

There is no other source of materials like ours.

It is patented.

It is protected.

But that does give us the flexibility to work with others.

So we could have other customers selling these materials or similar materials to other personal care companies.

So that gives us flexibility.

In the event that this one partner comes back to us and says we really don't want you to do that, we want to work with you exclusively, then this will move from a straight supply agreement to a supply, licensing, and royalty agreement.

Okay, great.

So this as good as you could hope for?

Okay.

Terrific, thanks.

It is a good start.

They a are pretty big company.

At some point we want to ask them permission -- we will ask them for permission to disclose our relationship.

At this point they want to keep it secret since it is new and our ingredient is pretty significant, in terms of adding properties to their product line.

Okay, thanks a lot, Gary.

Lenny Brecken.

A follow-up, can you disclose what market share that manufacturer represents?

You're talking about the personal care?

Yes, and their respective market.

Is it a newcomer with a new product, or an incumbent?

It is an old, well-known company with a new product using our technology.

And we hope there is a whole host of follow-on products.

And we respect the confidentiality of our partners who need and ask for that and demand it and blah blah blah.

So that's why I can't say more.

But this is a well-known company.

Okay.

Let me get to my other questions.

If I look back on your deferred revenue, you did 3.6 million.

In the prior period you did, in 10/02 call it 3.2, roughly.

Should that be a gauge of how much you are -- it's really, I know.

It may not be the best indicator -- but I ask nonetheless -- of your seed business come the next quarter?

Lenny, not necessarily.

Because of the deferred revenue that would be there at the end of October or at the end of November is a result of our early-order program, where our farmer customers will put a deposit down.

And so it is somewhat of an indicator, but it is not a direct correlation.

Some will put a deposit down.

Some won't.

Some will wait to just pay it all when they order the seeds.

So there is not a direct correlation.

And the fact that -- I know it is encouraging that the acres of corn are going to double.

That number is still relatively small.

Can you just update us on adoption beyond corn?

And how you do think you're going to grow that business, the coated seed, the Intellicoat business?

I think the way we want to grow this business is we think we have a unique business model for selling seed-based products.

We have 40 to 50 people in a room today, right as we speak, talking to thousands of farmers.

And they never get in a car, and our efficiencies are just extremely high.

And our philosophy is that seed is a carrier.

It is a carrier of genetics, new traits, such as Roundup ready traits and corn rootworm prevention traits that can be engineered into seed.

It can include coatings, polymer coatings like ours.

Increasingly the industry is moving to put insecticides, pesticides, on the seed as opposed to just spraying chemicals all over the place.

And when you listen to one of our sales calls, Lenny, to a farmer, we are bringing all of that to bear.

We're selling the seed with all those properties and all those components.

And that is raising our average unit selling price, because we are adding more value to the seeds.

So number one, we're growing because we are adding more value.

And I would say this year over half of the bags of seeds that we're selling have some component of technology in them, albeit the polymer coating part is small at this point, and that will take some time in.

So that is number one.

Number two is we have a platform that we think is scalable.

Add 10 more salespeople, add 20 more salespeople.

And we can do it all in the same infrastructure that we are in right now.

Number three is we are now having people approach us and ask about selling.

I am talking about other seed companies.

We're now for the first time having people ask us about selling some of their products through our channels.

Now whether we want to that or not, or can take that on or not is a side issue.

But those are additional growth opportunities.

Next, behind Early Plant corn, we have our sights on doing the same thing with other seed targets, such as Early Plant soybean or cotton or canola.

Those are multi-year R&D programs, field trials.

They're not next week.

So we have a plan that we think can continue to grow this business for years to come.

But the 34 versus 8 that you cited in '03 over '02 in terms of the trials, I'm just trying to understand, why isn't that translating in this season?

I assume they went through -- they started early last season, they went through a season.

And I am just trying to understand the decision point, in those 34 that convert over to real customers.

How long will it take?

You're talking about the 34 seed companies? (multiple speakers) The 34 seed companies are buying what is called Pollinator Plus, which is a coated seed product that they use for their own field production of their own seed that they're going to resell.

And then within those 34, we have about six people that are in the queue for what we call alliance sales partners for Early Plant corn.

And of those six, we have able to convert three pretty rapidly.

But it takes a couple years for these guys to get comfortable.

They did not invent this technology.

They did not think about it.

So they have got to get the testing done and comfortable.

So we think we can qualify and work with about six alliance partners at a time.

We have now converted six of those into three actually using their own salesforce for selling our Early Plant corn.

And we expect in the first year very limited sales from them, but at least they are starting.

So you think is going to be '06 before most of those 34 if at all then translate into real customers of the Intellicoat Early Plant hybrid corn tech?

As seed partners, yes, I think that is a fair statement.

Obviously our own salesforces will keep expanding and building.

But to really get to the penetration of the market that we want, we would like a high percentage of the U.S. corn farmer to plant 25 to 30 percent of his acreage early.

And the only way he can do that without taking enormous risk is with our technology.

All right, thank you.

Tony Brenner.

Can I just clarify one aspect of the banana launch?

Gary, in your comments initially, you said you would work in conjunction initially with two large banana shippers.

And then later you said that you would be selling the packaging directly to the retailers.

That seems like two different things to me.

Let me clarify.

Remember, this is fluid and dynamic, Tony.

There is an end customer, customer X. They have got to believe that the technology works and that it brings value.

It allows them to do something they cannot currently do, either bring bananas into their operations or to reduce the high level of shrink that they have or whatever.

And they are going to be the starting point.

They have got to be convinced and they are going to specify, I want this technology and I am willing to pay for it.

We're going to ship the membrane or our package to one of these banana shippers in the tropics, to their facilities.

So the cartons coming in will be lined?

Right, and it is going to have the shippers' brand.

But at the end of the day, our end customer is not the banana shipper.

It is (technical difficulty) the other party, the foodservice operator or the retailer.

Okay, but you're going to be paid by the banana shipper, not by the retailer?

Well, Tony, I can't tell you, because I could give you both scenarios as to how we might be paid.

But it could be from the shipper.

It could be directly from the retailer or foodservice operator.

That is to be worked out.

If it is foodservice, that is a different situation.

I'm thinking more of club stores and grocery stores.

That may be a case where the retailer pays the shipper, the shipper pays us.

But we are learning as we go.

Our focus has been, does the technology work?

And where do we want to start?

But once the proposition is proven to the satisfaction of the retailer, then the shipper presumably can provide value-added packaged bananas directly to the --

Right, that's right.

The other thing that we have learned is that on the retailers side there does seem to be a brand sensitivity.

You would prefer to have the well-known brands, not to your surprise.

But on the foodservice side (technical difficulty)

It doesn't matter. (technical difficulty) Okay.

Thank you.

Lenny Brecken.

I know over the last three months you've been communicating a level of optimism for the banana business, but I still find it a little bit disheartening that you are still not convincing -- to make this thing happen you've got to convince the banana grower and the packaging community that -- to push the product, acting as your salesmen, into the store for the product to really take off.

It seems like you're trying to pull the product into the channel rather than push it.

So I guess what I'm trying to ask you is, why are you so optimistic if you're still trying to pull it through the channel versus push it?

You still have not signed on and said, you know, Dole has said yes, we're going to trial it in certain stores; we will put it on our packaging for our bananas; and we will roll it out for the first three, six months and then we will roll it out further.

Rather than going to the local grocery stores and having them demand the product.

You understand what I'm getting to?

Probably not fully, Lenny.

I would just say that we are optimistic enough to keep spending at a fairly high rate here on this program.

We think we learned that the shelf-life extension does extend to different product formats and different types of customers.

We do have an interest of a couple large banana shippers that we did not have before.

So is that stating high optimism?

I don't know.

Do we know a lot of things about how to position the product, how to price it, exactly what the economic benefits are?

No.

So, how about us saying we are cautiously optimistic, but we're not there yet.

All right.

But in the next 12 months, you think it is going to be, again, in my terminology, pulling the product through the channel rather than getting one of these either packaging/distributor companies or the actual grower to sign on to the product, in a limited distribution methodology?

I will tell you the only reason a couple of these shippers, in my opinion, are interested in working with us now is not because they have concluded it is great stuff.

It is because some other people are calling them and saying, I really want to work with this technology.

I call that pull.

Isn't that pull?

That's pull, not push, isn't it?

That is pull through the channel, yes.

We are experiencing limited -- let's not overstate this.

There is some pull emerging out there.

It still has to perform, and we still have pricing discussions ahead.

The bottom line, it is still a revolutionary type of product rather than an evolutionary in the minds of probably the people who actually control the distribution.

I think is very fair.

And there is another consideration here, Lenny, and that is the sale of bananas is basically a commodity sale.

There is very little differentiation.

And we're hopeful that in picking the right targets and working with the right partners, this can be thought of as a value-added selling proposition.

And you know that is a tough transition.

Yes, absolutely.

Thanks.

I appreciate all the disclosure in the quarter as well.

I am not showing any further questions at this time.

Thank you all for being with us today and we look forward to keeping you in touch.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may all disconnect.

Everyone have a great day.