Lifecore Biomedical Inc (LFCR) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec first-quarter fiscal 2005 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. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded.

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

Mr. Steele, you may begin your call, please.

Good morning and thank you for joining Landec's first-quarter fiscal year 2005 earnings conference call and Webcast.

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 risk 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 2004.

I also want to mention that a replay of this call will be available through next Wednesday, October 6, and can be accessed by calling 888-266-2081 or 703-925-2533.

The access code is 549186, and the Webcast will be available for 30 days via the Internet at www.landec.com.

Landec's results for the first quarter of fiscal year 2005 were consistent with our goals of growing our technology-based, value-added produce business; advancing our banana packaging technology by entering into an agreement with a large banana shipper, in this case Chiquita Brands International, with a view towards commercially launching our banana packaging technology by the end of fiscal year 2005; and lastly, continuing to reduce our operating costs.

Our food technology business, excluding the domestic commodity portion, which was sold in June 2003, grew 17 percent compared to the same period a year ago.

We entered into a worldwide technology and licensing agreement with Chiquita to supply our proprietary banana packaging technology for Chiquita Brands bananas.

We have reduced general and administrative expenses by $324,000, or by 11 percent compared to the same period last year.

As a reminder, seasonality is inherent in our two core businesses, Apio, our food business, and Landec Ag, our agricultural seed business.

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

Consistent with the seasonality of our business and with the results from fiscal year 2004, we expect that the first half of fiscal year 2005 should show losses and the second half and the full year are expected to be profitable.

Before I elaborate more on our first-quarter operating milestones and the recently announced banana packaging supply agreement with Chiquita, let me turn the call 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 total revenues for the first quarter of fiscal year 2005 of 46.9 million versus revenues of 41.8 million for the same period a year ago.

The increase in total revenues during the first quarter was due to revenue growth in Apio's value-added vegetable produce business, which increased 13 percent to 25.2 million during the first quarter compared to 22.3 million in the same period last year, and a 40 percent increase in revenues from Apio's export trading business, which increased to 17.7 million during the quarter from 12.6 million in the same period a year ago.

These increases in revenues were partially offset by a decrease in Apio's service revenues to 1.2 million during the first quarter of fiscal year 2005, compared to 2.8 million in the same period last year, primarily due to the sale of Apio's domestic commodity vegetable business in June 2003.

For the first quarter of fiscal year 2005, the Company reported a net loss of 692,000, or 3 cents per diluted share, compared to a net loss of 624,000, also 3 cents per diluted share, in the same period last year.

The slight increase in our net loss during the first quarter compared to the same period last year is primarily due to several offsetting increases and decreases.

Items increasing the net loss include first, a $582,000 reduction in service revenue gross profits, primarily due to the Company selling its domestic commodity vegetable business in June 2003.

Second, planned increases in direct marketing costs for Apio and Landec Ag of 302,000.

And third, a $139,000 reduction in value-added gross profits, primarily due to discontinuing lower-margin value-added products in preparation for new product introductions.

The gross margins on these discontinued products were considerably lower than our average value-added margins.

In addition, certain packaging inventory associated with these discontinued products was written off.

These increases to the quarter net loss were offset by first, a 288,000 increase in gross profits from Apio's export business.

Second, a 324,000 companywide reduction in general and administrative expenses.

Third, a $203,000 decrease in research and development expenses, primarily due to a greater emphasis in the banana program on sales and marketing.

And fourth, a $158,000 reduction in interest expense.

Notably, Apio's overall net income grew to over 1.3 million during this year's first quarter, an increase of 8 percent compared to the first quarter of last year.

Turning to the balance sheet, during the first quarter of fiscal year 2005, our cash balance decreased by 873,000 to 5.6 million.

The decrease in cash is primarily due to net cash used in operations of 538,000, primarily from the purchase of seed corn inventory and export inventory in transit, and from the purchase of 889,000 of property plant and equipment for planned production expansion at Apio.

These uses of cash were partially offset by an increase in net borrowings under the Company's lines of credit of 565,000.

As of August 29, 2004, we had availability under our lines of credit of 10.5 million.

That concludes my formal presentation.

Let me turn the call back to Gary.

Thanks, Greg.

The most important milestone thus far in fiscal year 2005 was our recently announced joint technology and licensing agreement with Chiquita.

Because of the confidential nature of this collaboration and for competitive reasons, I cannot go into much detail.

What I can say is that this is a global licensing agreement and we will be selling Chiquita our proprietary breathable membranes in various sizes, depending on the quantity of bananas in the package.

We will be selling the membranes to Chiquita on an exclusive basis in selected applications and for other applications on a nonexclusive basis.

Annual purchase minimums must be met by Chiquita to maintain their exclusivity.

This is a multiyear agreement and we expect to start selling membranes to Chiquita during the second half of our fiscal year.

We are also hopeful that success under this agreement can lead to additional follow-on collaborations in the future.

With this new relationship, Landec can focus on what we do best, which is polymer development and packaging innovations.

We already have in place the ability to manufacture polymers, membranes, and packages, and we can do this without additional capital investments.

We are excited about joining forces with Chiquita, one of the largest banana producers in the world, and a major supplier of bananas in Europe and North America, and the best-known brand in bananas globally.

The first quarter of fiscal year 2005 has set the groundwork for the rest of fiscal year 2005.

In addition to entering into joint technology and licensing agreement with Chiquita, we have numerous achievements thus far in this fiscal year.

First, contributing to Apio's value-added revenue increase of 13 percent, sales of the value-added vegetable tray line increased by 100 percent, and the value-added 12-ounce product line increased by 10 percent compared to the same period in the prior year.

According to AC Nielsen, for the three months ended June 30, 2004, Apio's market share for sales of vegetable trays to retail grocery stores in the U.S. was 37 percent, up from 23 percent for the three months ended June 30, 2003.

Second, contributing to Apio's overall revenues, we grew our produce export revenues by 40 percent and export gross profits by 38 percent compared to the prior-year quarter.

Third, Landec Ag introduced 26 new corn hybrids for 2005, bringing the lineup to 116 hybrid seed varieties, 49 of which are hybrid offerings that will be using Early Plant Intellicoat seed-coating technology, up from 36 hybrids last year.

And fourth, we reduced companywide operating expenses by $225,000, or 4 percent compared to the first quarter a year ago.

We reduced companywide interest expense by $158,000, or 57 percent compared to the first quarter of fiscal year 2004, and established a new $10 million working capital line of credit and a $6 million equipment line of credit with better terms and more favorable financial covenants.

Looking to the future, we have five primary objectives for fiscal year 2005.

First, grow our value-added specialty packaging food business.

Second, grow our Ag seed customer base and corresponding revenues for all of our seed products.

Third, commercially launch our banana packaging technology with Chiquita.

Fourth, continue to add strategic partner relationships in each of our businesses.

Fifth, at least double net income compared to fiscal year 2004 results and increase revenues to over $200 million.

As we mentioned during the last conference call, we had several challenges this fiscal year, including increases in our raw material produce and packaging costs for our food business, which we are factoring into our plans.

As for the growth drivers in our specialty packaging produce business, we will focus primarily on branded products for the retail grocery market, where we see substantial opportunity to expand our store presence, as well as work to expand our presence in food service.

In our banana program, because we entered into this agreement only recently, it is difficult for us to forecast how rapidly we can grow our banana packaging sales to Chiquita.

Given the startup costs and development costs associated with initiating commercialization, we are still estimating that our loss in the banana program during fiscal year 2005 will approximate our original estimate of $1 million, which is substantially below our fiscal year 2004 loss of $2.4 million.

In summary, for fiscal year 2005, we plan to increase revenues to over $200 million and at least double net income compared to fiscal year 2004 results.

We continue our commitment to grow profitably and deliver highly differentiable, branded products that provide increasing value to our customers in order to enhance shareholder value.

We appreciate your ongoing support and we are now open for questions.

Thank you. (OPERATOR INSTRUCTIONS) Peter Black (ph).

Good morning.

Just two quick questions.

First, on the gross margins in your value-added business for Apio, would you expect that as your discontinued lower margin products run off and you transfer into some of these new value-added products in the second quarter that you will be able to get your Apio value-added gross margins back up to the 18 or 19 percent range that we've seen in the past?

Or are you anticipating that some of the raw material cost increases that you alluded to are going to -- could challenge that?

Peter, this is Greg.

I'll answer that question.

We do anticipate that our margins will improve in the second quarter over the first quarter.

As to whether we will get all the way back up to the historical margins, time will tell.

We are still in the process of changing over some of these new product introductions, so we will see how quickly and rapidly they are commercialized.

Okay, great.

The other question I had, just in trying to understand how to look at your balance sheet, the deferred revenue number.

You have mentioned in the past that I think the number was like 60 percent of your seed orders were taken by September 30th.

So I'm just assuming, since the deferred revenue number is pretty small, that the bulk of those orders come in September.

Does that mean that in the next quarter's balance sheet, you would expect, if your Ag business is doing well, to see a big jump in deferred revenue, or is that not the way to look at it?

Deferred revenue as far as balance sheet standpoint, peak months as of (ph) quarter end are the second quarter -- but then again, also in the third quarter.

So we're just a starting to see -- by the time we get to the third quarter, you've only got one month of shipments, about.

By then, you have collected most of your cash.

But you will see a significant rise in the revenue next quarter.

Okay, great.

Thanks.

Bill Gibson.

I want to follow up a little on the discontinued value-add that Peter was asking about.

Is this something you blew out at extra low cost or what exactly was going on there?

Bill, we saw that we were going to be introducing new products and basically discontinuing the old products.

There was inventory associated with those old products, and so we aggressively marketed them to be able to sell them, even if we were selling them at low margins versus just throwing the inventory away and moving to the new product introductions.

So this quarter we will be introducing new products.

We plan to phase out a lot of these discontinued, so as I mentioned earlier, you should see a rebound in our gross margins in the value-added business.

Your cost of produce is going up.

At least to my mind as a consumer, I always see it rising in the stores.

Is this something you cannot pass along?

It has been tough, Bill, to pass some of these along.

There is some compression going on there and we will pass along what we can.

But we have experienced raw material cost increases, and so partly what we're doing here is changing product mix (technical difficulty) some higher-margin product lines.

And you did not comment on the potential of picking up some retail stores with the Dole brand.

Is this something that is on the priority list?

Absolutely.

We have done some adjusting on pricing with Dole.

We went out pretty darn high initially with the Dole brand, and got a little bit of pushback on that.

We were probably out of line in terms of pricing on the Dole brand, but we wanted to start high and get calibrated.

I think we have got it right now, and that is a high priority for us in terms of taking new retail stores that we have not been in.

And you may have seen -- one of the questions in our Q&A, Bill, that we're doing pretty well there.

Okay.

And now to switch businesses, in terms of Ag and Early Plant, do you have an acreage estimate for 2005, fiscal '05?

Well, from a sales standpoint, we stated that we anticipate that overall Intellicoat revenues should increase at 50 percent or greater, but we have not gone into details as far as how many acres we estimate.

It's just if I look at it, the acreage is so tiny compared to the potential market that --

It is.

More importantly to us is to start to leverage -- as you know, the way we have entered that marketplace was to first introduce Early Plant corn in our own direct marketing and sales organization, called Fielder's Choice Direct, which is a direct selling organization to farmers.

But the real focus this year is to sell Early Plant corn through other seed companies.

And we're doing that with seven seed companies, one of which is in what I would call the large category, two of which are in the middle category.

The others are in the smaller category.

And those are going into those seed companies' product catalogs and being sold through their own dealer networks.

So this is kind of a first for us to do it that way, so this is really a transition year.

And that is the most important thing that we're doing with Early Plant corn this year, is to show that this technology can be sold through other sales organizations.

So that is the key test this year, Bill.

Okay.

And then can't let you go without a banana question.

I knew you wouldn't.

We have got Chiquita.

Are you doing any other tests away from Chiquita to try to bring in the other banana companies or testing with retailers?

Yes, but it is minimal.

Given our small size and our excitement and enthusiasm to be working with Chiquita, we want to consolidate our resources to make this successful.

You are not going to the very happy with us if we don't make this very successful with Chiquita.

So the answer to your question is yes, but limited.

So it is a function of your resources being spread too thin?

Right.

We're going to give this a real go, because we are very excited about the Chiquita collaboration.

They've got a lot of good ideas.

They are a great organization and that's where our focus should be.

Thank you.

Thank you.

Tony Brenner.

Gary, one of the opportunities that you cited early on was partnering -- acquiring additional partners in each of your product areas.

And I am wondering with respect to Apio, you have currently got two partners, Dole and Chiquita.

Aside from bananas, what are the partnering opportunities in that business?

I am wondering how much I want to say here, Tony.

Lay it all out.

Let's just say that we only participate with our packaging technology in the U.S. market, okay?

There is a big world out there.

And so obviously, we get inquiries from around the world as to how we might -- how our technology might be used outside the U.S.

We only participate in the vegetable business and now the banana business.

There is a bigger world out there.

We sell produce that is basically standard produce, so there are a whole host of dimensions that we're looking at that represent very exciting expansions on our core technology, our core competencies.

So we are aggressively looking at -- by the way, we should do this with partners.

We should not be doing these by ourselves.

So that is as much as I can say today, and partnering is in our future, and you are going to hear more about it when we can talk about it.

(OPERATOR INSTRUCTIONS) Bill Gibson.

One follow-up question, just so I understand it better and speaking of partners.

Dealing with Incotec and Pollinator Plus in Europe, how does that work?

Are they paying you a loyalty or are you selling them polymers?

Bill, Incotec is a well-grounded, very competent coatings company and seed company and it is very strong in Europe.

We have been working with them for several years to get them comfortable with our Intellicoat coating technology, and primarily with a focus on what is called Pollinator Plus, to be distinguished from the Early Plant corn coating technology.

And Pollinator Plus is a very useful coating technology for seed production companies.

And it is a non-exclusive license.

And under this non-exclusive license, they have a right to coat seed and pay us a royalty.

We have the right to work with others if we choose.

At this point, because of limited resources and we don't want to get too defocused, we are only working with them in Europe.

And they're doing a good job.

But it is still at an early stage, Bill.

Got it, but it is a royalty model.

It is a royalty model in this case.

Thank you.

Actually one follow-up on royalty model.

I noticed in your objectives for '05, you did not mention new licensing agreements or was that part of the strategic partners (multiple speakers)?

That was more of an oversight than anything else.

That is still of great interest to us.

It is still in the forefront.

If anything, there is more activity there than in past years.

So there's opportunity there for taking the Intelimer temperature-activated polymer technology and working with others, and we have a group of dedicated people doing that, Bill.

And the lead times in talking to companies, figuring out what the right field of collaboration is, negotiating those types of deals can take time.

So, that was just our oversight in terms of not mentioning it.

It is still of great interest to us.

When those happen, how those happen, that takes time.

Thanks, Gary.

Bill, just a follow-up on that.

That is a piece of what we mean when we say strategic partnering relationships.

It could be a licensing deal, it could be a supply contract.

Right.

In the example of the L'Oreal agreement, which is expanding by the way, that turns out to be a supply relationship as opposed to an exclusive licensing relationship.

So we will do it either way.

Okay, good.

Thank you.

I show no further questions of this time.

Actually, I do have a question from Michael Goldsmith (ph).

A couple questions.

First, just on the value-add line.

So in terms of where you are with inventory in your old products and the new product on the comp, should we see an acceleration of growth in the value-add business to your growth targets, which I believe to be about 15 to 20 percent in that division from the 13 percent that you were at this past quarter?

We still expect to fall in that range for the year.

Secondly, what was the big driver in export?

It was up a lot more than I would have anticipated.

I think there was a combination of last year not being the best quarter and this year being a very good quarter.

And we had -- there was no shortages of produce.

We had good quality produce.

Our volumes were up and we were able to get higher prices.

It was just an ideal combination of factors.

And our export guys just doing a superb job.

On the margins of the Dole business, I know you priced it up and then kind of that accounts for the royalty fee that you have to pay.

But with the pricing coming down, are the margins still going to be at least on par with your other value-add products?

I'm sorry.

The margins of what?

Of the Dole business.

Yes.

Will they still be even -- with the pricing coming in a little bit, will that still be at least on par with the other value-adds?

Yes, we do not expect the Dole margins to be any different or any less than our Eat Smart margins.

Okay.

And in terms of the Ag business gross margins, where do you expect those to fall out?

About 40 percent.

Okay, 40 percent.

Thank you very much.

Thank you.

I show no further questions, sir.

You may continue.

We just want to thank everybody for their continuing support and we look forward to keeping people posted on our prospects and progress.

Thank you all.

Thank you, ladies and gentlemen, for attending today's conference.

This concludes the program.

You may now disconnect.

Good day.