Lifecore Biomedical Inc (LFCR) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec's first quarter 2004 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 [Operator 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, President and CEO of Landec Corp.

Mr. Steele, you may begin your conference.

Good morning and thank you for joining Landec's third-quarter fiscal year 2004 earnings conference call and Web cast.

With me today is 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 the fiscal year 2003.

I also want to mention that a replay of this call will be available through next Thursday, April 8.

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

The access code is 406290.

And the Web cast can be available for 30 days via the Internet at www.landec.com.

As previously disclosed, Landec changed fiscal year end from the last Sunday in October to the last Sunday in May, effective May 25th, 2003.

Therefore, the third-quarter of the fiscal year 2004 ended on February 29, 2004.

Landec's results for the third-quarter and first nine months of fiscal year 2004 are consistent with our goals.

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

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

Second, increase profits.

Third, expand our banana packaging technology to retail and food service 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.

Seasonality is inherent in our two core businesses.

Apio, our food business and Landec Ag our agricultural business.

Apio was subject to produce sourcing issues during the winter months and Landec Ag recognized virtually 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 our fiscal year ending May 30th, 2004, we expected that the first half of the year which show losses and we continued to expect the second half and full year to be profitable despite the negative impact of the net income of approximately $1.5 million in the third-quarter due to weather-related produce shortages in December 2003 and January 2004.

As a reminder about our Apio food business during June 2003 we sold our domestic commodity vegetable business to a group of growers in exchange for future cash payments.

A [inaudible] royalty and a long-term supply [inaudible].

The sale of the domestic commodity vegetable business allows us to more fully focus on our growth businesses and our opportunities.

When we refer to our growth businesses, we include our value added specialty packaging produce business under our Eat Smart brand and more recently our Dole brand.

Our banana packaging business, our agricultural seed and our supply and licensing business for applications outside of the food and ag arena.

I will discuss these growth businesses and opportunities in more detail later in this conference call but want to briefly mention two recent and important events that have developed over the last nine months of this fiscal year -- one with Dole and the other with L'Oreal.

In June 2003 we entered into an exclusive packaging and marketing agreement with Dole Fresh Vegetables Inc. for Apio, our food subsidiary 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.

We are currently offering retail and club customers and prospects a choice of purchasing our products under our Eat Smart brand for the Dole brand.

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

Our national (ph) market focus is on major national chains in the Northeast and the Midwest.

In February 2004, we announced that L'Oreal is the first customer of Landec's Intelimer materials for cosmetic and personal care applications.

This is an example of growing opportunities for our technology to provide key and unique ingredients in two new applications.

In addition to growing our food and agricultural seed businesses we are committed to building our supply and licensing business which uses our proprietary temperature activated polymer technologies.

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

Thank you Gary.

An good morning everyone.

As outlined in yesterday's news release Landec reported revenues for the third-quarter ended February 29, 2004, of 48.6 million versus revenues of 46 million for the same period a year ago.

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

First, revenue growth in Apio's value added vegetable produce business which increased 22 percent to 28.6 million during the third quarter compared to 23.5 million in the same period last year.

And second an increase in revenues from Apio's commission trading business which increased to 9.7 million during the quarter from 7.8 million in the same period a year ago.

These increases in revenue were partially offset by a decrease (ph) in Apio service revenues to 815,000 during the third-quarter of fiscal year 2004 compared to 6.1 million in the same period of fiscal year 2003 due to the sale of Apio's domestic commodity vegetable business in June 2003.

For the third quarter of fiscal year 2004, the Company reported net income of $725,000 or 3 cents per diluted share compared to a net loss of $435,000 or 3 cents loss per diluted share in the same period of last year.

The improvement in our results for the third-quarter of fiscal year 2004 of 1.2 million compared to the same period last year is primarily due to first an increase in growth profit from Apio's value added specially packaging vegetable business of $1 million which includes the $1.5 million reduction in gross profits from produce shortages.

Second, an increase in net income at Landec Ag of 489,000 and third, a decrease in company wide operating expenses of 1.3 million.

These improvements in operating profits during the third-quarter were partially offset by a reduction in gross profits from service revenues of $1.1 million due to the sale of Apio's domestic commodity vegetable business in June 2003 and a reduction in gross profits from the sale of Eat Smart bananas of 208,000.

For the first nine months of fiscal year 2004, Landec had revenues of 133.7 million compared to 130.6 million during the same period last year.

This increase in revenue during the first nine months of fiscal year 2004 was due to revenue growth in Apio's value added vegetable produce business which increased 20 percent to 73.7 million from 61.6 million in the first nine months last year and from the increase in revenues from Apio's commission trading business which increased to 44.4 million during the first nine months of fiscal 2004 from 36.9 million in the same period a year ago.

These increases in revenues were partially offset by first, the decrease in Apio service revenues to 4.7 million during the first nine months of fiscal year 2004 compared to 18.7 million in the same period a year ago.

Second, a reduction in revenues from the sale of Eat Smart bananas of 2.5 million during the first nine months of fiscal year 2004 compared to the same period a year ago and, third, an expected decrease in licensing and R&D revenue to 376,000 during the first 9 months of this year from 2 million during the same period last year.

For the first nine months of fiscal year 2004 the Company reported a net loss from continuing operations of $1.5 million or 9 cents per diluted share.

First is a net loss from continuing operations of 2.1 million or 12 cents per diluted share for the same period last year.

The decrease in the net loss from continuing operations during the first nine months of fiscal year 2004 compared to the first nine months of the prior year were due to several factors.

First, increases in gross profits from Apio's value added specialty package vegetable business of 2.7 million which includes the 1.5 million reduction gross profits from produce shortages.

Second, a decrease in the net loss at Landec activity of 555,000.

And third, a decrease in company wide operating expenses of $3.3 million.

In addition, the prior year nine-month loss was reduced by the $436,000 gain in the sale of Apio's proof (ph) processing products and facilities.

These improvements in operating profits during the first nine months of fiscal year 2004 were partially offset by, first, a reduction in corporate growth profits from licensing fee and research and development activity of 1.7 million as the Company shifts its focus to supply and royalty agreement.

Second, a reduction in gross profits from service revenues of 2.9 million due to the sale of Apio's domestic vegetable business.

And, third, a reduction in gross profits from the sale of Eat Smart bananas of 684,000.

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

This continued operations loss resulted from the sale in October 2002 of Dock Resins Corporation which had been the Company's best lead (ph) chemical subsidiary.

In summary if you exclude the financial results of our licensing and R&D activity and the domestic commodity vegetable business, our revenues grew 21 percent during the third quarter and 17 percent for the first nine months of 2004.

And gross profits grew 20 percent during both the third-quarter and the first nine months of fiscal 2004.

Turning to the balance sheet, during the first nine months of fiscal year 2004, our cash balance increased by 2.5 million to 6.2 million.

The increase in cash was primarily due to cash flow from operations of 6.7 million and a $2 million reduction in restricted cash.

These increases were partially offset by, first, the purchase of 2.8 million of property plant and equipment; second, the net reduction of long-term debt of 2.3 million and third, the net reduction of borrowings under the Company's lines of credits of $1 million.

As of February 29, 2004, the cash balance was 6.2 million and we had availability under our lines of credit of 9.4 million, up from 2.9 million at the end of our second quarter.

The increases in inventory in deferred revenues during the first nine 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 are reported as inventory.

As the seed corn ships which began in February the deferred revenue will be recognized as revenue in the inventory cost of sale.

The decreases in Accounts Receivable and payables during the first nine months are directly attributable to the Company selling its domestic commodity vegetable business in June 2003.

That concludes my formal presentation.

Let me turn the call back to Gary.

Thanks, Greg.

I would like to further discuss three areas of current focus at Landec.

Our finance program, our value added special packaged vegetable business and the evolution of our supply and licensing business opportunities.

We will discuss our seed business in detail next quarter after we have finished our full sale season.

Now first about bananas.

We are in transition as we move from testing and validating technology all on our own to now working collaboratively with (indiscernible) banana shippers who can take the responsibility for sourcing, shipping, ripening and delivering bananas in our proprietary package.

We have spent nearly $5 million over the past three years to search, develop, test and optimize our banana technology.

It is an expensive and resource-intensive effort for Landec to source and handle bananas.

Our interest is in commercializing and generating revenues and profits by selling our packaging in a variety of package formats for food service and retail applications.

What do we know?

And not know after three years and $5 million of investment?

What we know.

We can extend shelf life of yellow bananas for two days up to as long to seven days.

We know we can operate within the normal industry practices of packing, shipping, ripening and distributing bananas.

We know we can extend shelf life of bananas, regardless of the country of origin.

We know that with extended shelf life we can reduce shrink.

Shrink is the amount that the industry throws away.

We know we can reduce shrink in a tangible and quantifiable way.

And because we place bananas in a sealed and breathable bag in the tropics and keep the bag sealed until the retailer or consumer opens up the bag, our package bananas stay at the optimum color and ripeness longer.

Also the bananas retain their moisture better and, correspondingly, hold most of their weight resulting in an additional favorable benefit to the retailer when selling on a price per pound basis.

We have learned a lot and we have validated the technology.

What do we believe is true but requires more time to validate?

First, we believe that bananas with longer shelf life allow new possibilities for selling bananas into traditionally hard to reach or impossible to reach markets such as quick service restaurants, schools, remote retail grocery store sites, shipping lines, etc.

We are currently working to validate this.

Second, we believe that a segment of consumers will be interested in bananas purchased in a consumer bag that has an easy opening and closure method such as the zip-lock method that allows them to experience shelf life extension in their home.

With premium might they be willing to pay and what percentage of these consumers will accept bananas in a bag?

This is still unknown to us at this point.

Third, we believe that there is a value added proposition of sales uplift, combined with potential cost savings through the use of our technology.

But the quantitative statistical measures to prove this will take commercial scale experience of several years.

And, fourth, we believe we might be able to create and hold a desirable atmosphere of carbon dioxide and oxygen -- not only in a small package but also in a shipping container.

We believe that this will allow us to ship bananas and extend their shelf life by using shipping containers globally.

We will need one to two years to validate this and we will do this particular work with partners who deal with containers all the time.

We believe we have moved several large banana shipping companies from noninterest and disbelief to a conviction that the technology works.

With the remaining question, how can we best grow and expand markets and make money for everybody?

So where does that leave us today?

Beginning in our new fiscal year -- June 1st -- Landec will not be sourcing, shipping, and handling bananas.

Our partners will.

Our focus is now on commercial trials and commercial samples initially in food service and then to extend this to retail grocery chain customers, using partners for sourcing bananas while using their brands.

We have four platforms for our technology.

A consumer bag, a food service bag, a retail bag, and then our shipping container R&D program.

We are hopeful that our commercial trials with our partners will translate into sales with a limited number of customers in fiscal year 2005.

This allows us to focus exclusively on proving the overall value added economics of our technology, lowering the manufacturing cost of our packages, and further optimizing the bag's performance.

Things that we're good at.

How big could this opportunity be?

Sizable.

How long will it take?

Several years.

We expect a $2.5 million drain on our income statement in fiscal year 2004 for this program to continue in fiscal year 2005.

No.

Not at all.

In fiscal year 2005, which you may recall begins this June, based on continued successful market trials, we plan to begin the commercial sales of our consumer size banana package and one other packaging format for bananas.

The second area of discussion today is our growing value added specially packaged produced business.

As mentioned in our press release on Feb. 17, 2004, we are the number one supplier of vegetable trays in the United States -- now with a market share of 36 percent for the three months ended December 31st, 2003, up from 17 percent for the same quarter in 2002.

During the third quarter, revenues, margins, and market share continued to grow in our specialty packaging produce business.

And as a result we are currently expanding the production capacity of our processing plant in California by approximately 20 percent.

This expansion is included in our planned capital expenditures and will be completed by the start of our new fiscal year in June.

When we enter fiscal year 2005, we will be selling over 120 value added produce products under two brands -- Eat Smart and Dole.

We will have expanded our manufacturing capabilities, we will be strongly positioned in both club stores and retail chains.

And we will have improved our capabilities for translating store growth into enhanced margins through more efficient production facilities.

In addition, we are actively expanding our plan to deal with produce shortages during the winter months by improving production and inventory controls, obtaining produce sourcing from geographically distributed and dispersed regions, developing a system to store produce while in inventory for a considerable time before processing, and diversifying our product mix to become less reliant on any one type of produce.

What will we be emphasizing in our value added produce business going forward?

First, behind nutrition, freshness, and convenient aspects of our products.

If you're looking for food that is low in carbohydrates and high in freshness and convenience, we have them.

We also plan to build up our produce and product formats that allow our customers to consume our products easily.

Between meals, during meals, at parties, or when they are in a hurry.

Our key message is for a healthy alternative to traditional high carb snacks, (inaudible) Apio's value added produced products.

Let's turn to our third topic of discussion today -- the development of our (indiscernible) and supply business for applications outside of the food and Ag arena.

The recent announcement of our L'Oreal collaboration is an indicator of the types of collaborative relationships that we see.

Relationships in which our Intelimer temperature activated polymer technology can be the key differentiating component of finished products developed and commercialized by industry leaders in areas outside of our core food and Ag business.

L'Oreal is a company that typically develops its own formulations and conducts its own R&D with a veil of secrecy that has served them well for many years.

The fact that we can announce our relationship is in our opinion noteworthy.

However we won't be discussing what we are doing with them specifically or where we're going with new applications for confidentiality reasons.

But we do know that it will take several years for the buildup of sizable volumes to L'Oreal.

The potential use of our materials and personal care products such as lotions, creams, color cosmetics, lipsticks, and hair care could be significant over time.

Beyond personal care and cosmetics, we can begin to look at other high value applications for our technologies.

Examples include easily removable coatings such as paints and floor coverings, delivery system activated by temperature for delivering enzymes or metal catalysts, unique transformation of fibers that respond to changes in atmosphere or body temperatures, and so on.

We can now spend more concerted effort on our supply in licensing business and we are.

In summary, we're growing our core businesses and we are transforming Landec's unique technology into revenues and profits and cash flow from operations, including the $6.7 million in cash flow generated from operations during the first nine months of this fiscal year.

And we have initiatives in the pipeline that we believe will augment the future growth of Landec.

We are now open for questions.

+++ q-and-a.

[Operator Instructions].

Lenny Brecken.

Guys, again, thanks for the full disclosure.

What's going on in the business and level detail.

I just wanted to just clarify the -- you have, in the past when I've spoken to you guys on the consumer banana front, never really got a sense that the consumer thing was a near-term thing and now it seems like it is.

What's happened to give you more encouragement that that would be a commercially viable product?

Let's make a distinction, Lenny.

Thank you for the question by the way.

Imagine the traditional format for bananas is a cardboard box open-air.

Instead we would have a package inside it that would be sealed and that would go up to hold 40 pounds of bananas.

For those of you who have followed the Company that was our initial thrust, frankly, not because of our sophistication but that was just the way the industry did things.

As we were developing the product over time, we would look at smaller package sizes.

For example food service doesn't need 40 pounds of banana typically, it prefers something like 20 pounds and as we went down in scale we noticed that the extension of the shelf life continued the benefits that we've talked about but some of us started taking these smaller bags home.

And, you ignore them for a few days and bananas continue to look good and we're thinking, well this might be (inaudible) format not only for the retailer but for the consumer.

But we also noticed that in a number of food service tests that we were doing they liked the small format as well -- it was easier to handle, had a unit size that they could move around more easily.

So, I think it's more just from our own experience Lenny, at seeing what works and what doesn't, what people like.

And we did a trial back on the East Coast and I'm not going to tell you it's the most statistically significant trial in the world but it was quite a few consumers.

And they took the bags home and I think it was something like 86 percent when called with follow-up calls said that they got appreciable shelf life extension that was noteworthy, they could see it and it was demonstrated in their hands.

So this encouraged us to go forward.

So the smaller bag versions could be our initial flagship not only for the retail side but also for the food service side and so long winded answer to your question is trial and error and experience.

Okay.

And the refocus on this food service versus the mainstream supermarket, can you explain what that subtle shift was about?

Well it's pretty subtle because we've always said that our initial sales would come in the food service side and we still do say that.

The shift here and I don't frankly think it's subtle -- I think it's pretty blatant -- is that we don't believe that our further validating or testing on our own and you recall we went on our own because banana companies frankly didn't want us to succeed or didn't think we would several years ago.

We're now at a point where we're saying there's no point in us going further sourcing and shipping and handling and logistics of bananas and doing more trials.

Let's do these with the big guys.

Make sure they're comfortable and see the same results we do and let's help them begin to think about value added selling.

And I don't know how many on this call have been in commodity sales in the past, but trying to move people who have sold commodities with no differentiation to something that is unique and different, that's a major transition for people and so we're in that mode and we're now no longer interested in sourcing bananas.

That's not something we're good at.

So this last quarter looks like it hasn't been active but it's been very active and working with and negotiating, frankly, with several banana companies as to how we want to go forward.

And I think their interest is to look at some segments of the market that are not well served today and that will pretty much include and focus on some food service applications.

We're still interested in retail.

We're still going after retail.

The main change is a reliance on banana companies who do this every day, to source our bananas.

Michael Grossman.

I have three questions.

First question has to do with moving into other -- diversifying into other vegetables and the value add business.

Where do you think the opportunities are there?

And how competitive are those new areas?

The second question has to do with the banana revenues in '05 and if you can give us some order of magnitude, that would be great.

And the last one is just gross profit growth in the value add business was pretty impressive and where does that start (inaudible) out at?

Okay, Michael, we've had too much dependence on frankly the historical in nature.

When we bought Apio in 1999 -- late 1999.

They had a high dependency on broccoli as a mainstay of their commodity business, which we have since sold.

And when you look at our products today, you'll still see a lot of broccoli in our trays and our bags etc. etc.

And today you'll see much more diversification with carrots and celery and tomatoes and snap peas and green beans etc. etc. with the exception of lettuce which is mostly water and very slow respiring.

Which really our technology is overkill.

For at least small quantities of lettuce.

We see a full spectrum of vegetables and fruits that are good targets for our technology that range from avocados and asparagus to green beans etc., etc., so the sky's the limit with the exception of the leaf family which might be something we're interested in down the road when we're shipping large quantities of either head lettuce or chopped lettuce to maybe other suppliers.

In the fruit area, the bananas is just the tip of the iceberg.

We're very interested in mangoes and papayas and pineapples and you may know that in fruit the perishability of fruit is very very high.

The sourcing and the logistics of fruit is very difficult.

And so, bananas is just the beginning.

So we have a broad list of targets that will keep us busy for a number of years.

So I hope I've answered your first question.

Can't tell you about '05 because I don't know what the revenue buildup will be.

I think it's going to be a function of how quickly we can get to of these banana collaborative suppliers sourcers for us to really get moving.

Is it in re-- is it going to be in the consumer bag side?

We're starting in that size.

That doesn't mean necessarily that the person opening that bag is in the home.

That could very well be in a quick service outlet.

So I want to make that distinction.

Maybe I didn't with Lenny.

But that format looks pretty damned good and one of the reasons is as long as that bag is closed or resealed that son of a gun is still working.

Okay?

Whereas in the 40 pound bag when the produce manager opens that thing up and starts the bananas out on display, we're done.

Did you have some QSRs lined up to test it?

Oh yeah.

(MULTIPLE SPEAKERS)

We're long on testing.

They're just getting ready -- they want us to start selling and we feel the same way.

So it's a lot of questions about '05 but we will clearly be in the commercial sales mode in '05 now with banana sourced by others, not by us.

So we will get a larger versatile then in $2.5 million drain in '04.

That was all costs and R&D (MULTIPLE SPEAKERS)

... you're not going to see a $2.5 million loss again in '05.

If so, somebody else will be on this call besides me.

Could you restate your last question?

You've seen real impressive growth on the gross profits of the value add business and I guess when I've spoken with you in the past it seemed like the profit margins on that had (indiscernible) had peaked out what you were talking about -- 18 to 20 percent gross margin and we're almost there now.

So why does -- is that growth going to continue or is 18 20 percent kind of a conservative estimate?

The -- let me do justice to your question.

On the negative side there's quite a bit of pressure on the cost of materials such as films, and those types of things, there's also some pressure from growers to get their raw material prices up etc. etc.

So, obviously, in this world of today's economics, we've got to watch these cost increases and make sure they're under control.

I do see improved gross margins continuing through a couple of sources.

One is, as we increase our volume and expand our plant which we're currently building, we're just getting more automated and more efficient.

More machines less people, basically.

Second is, our mix is changing.

And as we change our mix to more trade products and less bag products, as a percentage of the overall mix, that tends to help our gross margins as well.

Third, from a net margin point of view, we've invested heavily in business systems that allow us to grow our topline business and not grow our SG&A or G&A much at all.

We had to have the basic infrastructure in place, finance accounting, IT, etc., but we should be able to hold that line pretty modestly and the good news in this business is that the selling effort -- we have five regional sales managers that are supporting this whole business -- and we feel we can grow with five with a few inside dedicated people such as our folks calling on Wal-Mart etc. so site you don't have to have a lot of SG&A to support this business.

So at least our own expectations are that the improvement in gross margins will continue.

And that there's still a lot of leverage on the operating line.

I think so.

Thank you very much.

Thank you, Mike.

Bill Gibson.

I actually got a gross margin question on value add as well.

Now you were up year-over-year in the quarter but you know, down versus what we saw in the prior two quarters and significantly.

Is there a seasonal factor in this time frame?

Or I think specifically the number was 11 percent for the third quarter versus 14 9 for 9 months.

Greg, you want to take a shot at it?

Yeah.

Bill, recall that Gary mentioned it and that I mentioned it, went out on a press release about a month ago that said as a result of produce shortages in late December, early January, our value added costs were impacted by 1.5 million.

Okay so that was in the cost of sales line.

Exactly you add that back (MULTIPLE SPEAKERS)

Okay, I thought I just read it on net, I though maybe it was volume.

No, on cost of sales you add that back in and we're at about 16 percent on (MULTIPLE SPEAKERS)

I was more curious on modeling going forward.

Secondly could you go into the three items on the other item on the income statement essentially so I can understand the various pieces there?

In other words, you got a $331,000 expense.

I'd like to understand the three pieces.

Okay, if you go to actually the income statement, Bill, it's comprised of net interest which is interest expense less interest income and the other is primarily minority interest and our cooling sub which we are (inaudible) Apio.

Okay, in other words the 874,000 Apio is minority interest.

That 874 if you're looking back at the breakout --

Yeah, I'm looking at the breakout.

Most of that is the corporate management fee from Menlo Park to Apio and Landec Ag.

Oh, okay.

Then why the positive -- what's the corporate... ?

And that's why we're corporate.

It's positive in the (MULTIPLE SPEAKERS)

Expenses are up in SG&A but for this corporate charge is down in other.

Okay I got you and then, lastly, you talked about L'Oreal.

What's happening on the medical front with the Alcon product and also any news on the dental and when we can expect royalties from that?

They're in a mode where, I don't know if this is good news or bad news, but they're pretty quiet and secretive, Bill.

And I suspect that they're in the FDA submission mode but they're pretty mum and ...

But no indications that they might have buried the product?

We have neither indication that they buried the product or that they're going forward into sales I mean, obviously they have to notify us if and when they do.

I know there's some people that think, well why don't you know all the gory details?

It's because Alcon doesn't tell us and that's -- when you go into licensing agreements that's the deal you sign up for.

And on one extreme, L'Oreal never says anything to anybody and on the other some people are more open.

On the dental program?

That is proceeding.

They do anticipate going into clinical studies in our fiscal year '05 and whenever they trigger that at a year.

Okay so it's one -- so in terms of me looking for anything I'm out to 2005?

Second half or '06?

If you want to be safe I'd assume '06.

We like licensing deals.

We get upfront monies, R&D funding, and all that and nice royalty rates but you know they're in the driver's seat.

They're taking the product forward.

Good.

Thanks, Gary.

Okay, great, thanks, Gary.

We should hear something from Alcon reasonably soon, I would think, Bill.

Cory Baldwin (ph).

My question has to do with the commission business.

I know I talked to Greg and he was saying the contracts going to change.

Did they reverse back to their original state then with how you recorded their revenue and then also the cost?

First of all Greg (inaudible) (MULTIPLE SPEAKERS)

The export and the buy sell piece with Wal-Mart.

And no there was a change in some of the contract, Cory, where historically we recorded only the commission fees and because that's we didn't take title.

We moved it, we recorded our 5 percent of revenue there's no cost sales.

This year all of our contracts are now under a taking title type of contract where you record the revenue and the cost of sale.

So that's why you're not seeing big movements in our gross margin but you're seeing increases in our revenue.

Okay and then another one was with -- you're talking about sealed containers then with the patch?

Did you guys also see that, also, in the commission business?

You have seen the work with the bananas in the sealed containers.

That is an absolutely terrific question and I'd see that more in the -- well first of all it would very much be in our food business and would involve the movement of living perishables food produce locally but so from the business strategy point of view, the people managing this program point of view, it's all in our food business, Cory.

In terms of how you'd structure our receiving compensation for this, since a large -- think of a large patch of membrane being associated with a container.

It would be reusable for some period of time and therefore we're not going to make money on selling large membranes.

We're going to make our money in charging our royalty or some type of a percent of the value of the shipments.

So from a structure point of view it will probably look much more like a royalty business than a product sales business.

Okay, will this also be a way to protect from sourcing issues like what you guys had with the winner -- this year's winner?

Yes.

One more question, you guys in last conference you'd give us a little more information between the like Dole revenue and Eat Smart revenue for your value added.

Is there any sort of breakdown that you guys could provide us with?

Between those two?

No.

Dole is hypersensitive to this and I know that's a frustration for a few folks on this call.

When and if we can get permission to do that we would be glad to do that.

I will tell you that I think we're off to a good start.

I expect more.

And the reason I expect more is because we're learning as we go here.

We went out with a pretty damned high price on the Dole label.

Our view is always that you can lower prices easier than raise them.

We also think there might be some logistics synergies here with our Dole friends who have various types of distribution centers and shipping lanes etc. etc. so the relationship is good.

It's off to a very good start but I frankly expect more in '05 because we're going to learn, we are learning how to use this relationship and the Dole name is pretty powerful.

So you guys see any more than 20 percent topline growth then for '05, kind of what you guys have been saying?

I think we, Cory, the tricky part of this projecting stuff -- I think we still feel confident in the 20 percent topline and the wild-card here is as Mr. Gibson will tell you is when the hell is the banana stuff going to take off?

And you know we're working on it.

[Operator Instructions].

Any idea how many bags in the food -- the service business that you're actually targeting are potentially available?

And what would be the gross margin roughly at this time?

On the product?

We can answer the second one better than the first one.

We are not interested in anything in the bag business that's less than 50 percent gross margin.

Why would we spend all this money if it was less than that?

But on the food service side Lenny, the problem here is you're talking about untapped markets.

There are a lot of sites that just don't serve or use bananas in their operations.

And it's always difficult to quantify untapped and latent markets in terms of their potential size.

So it would just be so speculative I think we would be doing you a disservice.

But if we can start to show that something nutritious and healthy like bananas can work your way into some of these restaurants chains or quick service chains the numbers could be -- I mean, I think just the back of the envelope would tell you they could be appreciable.

Can you just review with me on the impact of Dole in terms of the Apio specialty gross margin.

Would it be an enhancer, the same or negative?

The easiest part is it won't be a negative.

I think we might have started out a little bit greedy here thinking we could price pretty darn high and maybe use this to enhance our margins and I think we might have overshot just a tad.

We would expect this to be at a minimal, a neutral.

Certainly, this is not going to be a negative and even with some of our adjusting, I think that we're still going to be somewhere between a neutral and a positive contribution to our gross margin percentage.

When do you expect your first revenues for the bananas to be is it (MULTIPLE SPEAKERS)

We're actually shipping some bananas right now, Lenny, in the food service segment and we're actually shipping some small quantities just as we speak with one of these banana companies just to get started and get acclimated and get comfortable.

So, (MULTIPLE SPEAKERS) technically, we've already done it.

And you're recognizing it on your new models -- next quarter we shouldn't see any banana package revenues?

Okay, next quarter we should not seek any packaging revenues?

Is that what you said?

Revenues with the packaged bananas?

You would just get, just be recognizing the bag?

So to speak.

Yes.

I think we're flushing out right now some of those shipments that we -- we're just at the tail end, aren't we Greg?

In some of the (MULTIPLE SPEAKERS) involve us taking (MULTIPLE SPEAKERS) bananas.

Yes we should be done well ... now.

That -- the answer to your question is by the first quarter '05 that should be fleshed out and we should be strictly in the packaging only mode.

Okay and again, you're selling the bag not just the patch?

We're selling the bag with the patch on it.

Okay, so you're actually buying the bag and (MULTIPLE SPEAKERS)

We make the polymer -- we have it -- we're virtual in terms of manufacturing which is what you want us to be.

We have the patch made to our specifications under our patented technology.

And that is delivered to a bag converter that will make the film, punch a hole in it, put our patch over it and convert that into a bag.

We're doing that now in the States and then obviously with scale and time we will be doing that probably down in the Tropics.

Okay and so when are you going to find -- the two banana companies that you're -- is it negotiating or is it a signed deal since you're already starting to do business?

Let's get away from the word deal because this is understandings of how we are going to work together and I don't want to set this up as some major deal announcement here.

We're just asking them to do what they do every day which is ship bananas but just do it in our bags.

Well, when are we going to -- I mean, there's not many players out there so I guess it's an irrelevant question so you know -- when are we going to know which banana company you're working with?

Let's put it that way.

Well probably in the first half of '05 because you start to see the tags on the membranes and their brand on it.

[Operator Instructions].

Peter Black.

Just one question with respect to your ag business.

You mentioned in your commentary that you booked orders for and began shipping 27,000 bags which was an increase of 50 percent versus last year.

I just wanted to understand the deferred revenue number.

I realize that it's not a perfectly comparable year because last year the quarter ended January 26th but the number looks like it was down year-over-year about 20 -- a little over 20 percent and I am just trying to reconcile how you have that decline in deferred revenue but you're looking at 50 percent increase in ag revenues.

Remember most of the deferred revenue is driven from the uncoated portion of their business.

That's the majority of their sales to date.

And their model is they collect 100 percent before they ship the bag and that's why it's referred to as deferred revenue because you now have a commitment to ship the bag to the farmer and we start shipping in February.

So it goes to reason that the peak of your deferred revenue will be at the end of January before you start shipping product.

The second you start shipping that deferred revenue becomes revenue and you'll note that during the quarter I think they realized about 9 million in sales at some point that was in deferred revenue.

Okay, all right -- that makes perfect sense.

Great.

Thanks a lot.

I'm showing no further questions at this time, sir.

You may proceed.

Say again please.

I am showing no further questions at this time you may proceed.

Thank you everyone for joining us on this quarterly conference call and we look forward to keeping you posted.

Ladies and gentlemen, this concludes the program.

You may all disconnect and have a wonderful day.

Thank you.