Lifecore Biomedical Inc (LFCR) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec Corporation second quarter fiscal year 2006 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 be given at that time. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Gary Steele, President and CEO of Landec Corporation. Mr. Steele, you may begin.

Good morning, and thank you for joining Landec's second quarter fiscal year 2006 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 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 2005. I also want to mention that a replay of this call will be available through next Thursday January 12th. It can be accessed by calling 888-266-2081 or 307-925-2533. The access code is 824475, and the Webcast will be available for 30 days via the Internet at www.landec.com.

The results for the second quarter and the first six months of fiscal year 2006 are in-line with achieving our fiscal year 2006 plan for continuing to grow revenues and profits through the growth in Apio's technology-based specialty packaging produce business, while at the same time continuing to improve company-wide gross margins. Overall revenues increased during the second quarter, and the first six months of fiscal year 2006 compared to the same period as last year, and gross profits increased 18% and 17% during the three and six months ended November 27, 2005 respectively. As a reminder, seasonality is inherent in our two core businesses; Apio, our food business, and Landec Ag our agricultural seed business. Apio is potentially subject to produce sourcing issues during our second and third quarters, and Landec Ag, which includes the recently acquired Heartland Hybrids seed company, 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 in our business and with the results from fiscal year 2005, we expected the first half of fiscal year 2006 would show losses, whereas the second half and full year are expected to be profitable. Before I elaborate more on our year-to-date operating milestones let me turn the call over to Greg Skinner who will comment on our financial results.

Thank you, Gary. And good morning, everyone. As outlined in yesterday's news release, Landec reported total revenues for the second quarter of fiscal year 2006 of $53.7 million versus revenues of 50.7 million for the same period a year ago. The increase in total revenues during the second quarter was due to revenue growth in Apio's value-added vegetable produce business which increased 6% to $30.5 million, compared to 28.9 million in the same period last year and due to an 8% increase in revenues from Apio's export trading business, which increased to 19.9 million during the quarter from 18.5 million in the same period a year ago. For the second quarter of fiscal year 2006, the Company reported a net loss of $1 million or $0.04 per diluted share, compared to a net loss of $808,000 or $0.03 per diluted share in the same period last year. Included in the net loss for the second quarter was a $553,000, or $0.02 per share loss from Heartland Hybrids, which we acquired on August 29, 2005. Heartland's loss was due to the seasonality of its corn seed business, which recognizes virtually all of its revenues and profits in February through April and recognizes losses in the other months of the year.

The increase in our net loss during the second quarter compared to the same period last year was due to several reasons. Items decreasing the net loss include, first, a $721,000 increase in gross profits from Apio's value-added business and, second, a $248,000 increase in gross profits from Apio's export business. The net loss was increased by a $1.2 million company-wide increase in selling, general, and administrative expenses primarily due to, first, selling, general and administrative expenses of 529,000 at Heartland Hybrids which was acquired at the beginning of our fiscal second quarter; second, plan increases in selling and marketing expenses at Apio and Landec Ag to generate increases in revenues; third, an increase in general and administrative expenses at corporate for business development consulting fees, legal fees, and Sarbanes-Oxley-related accounting fees; and fourth, accrual of bonuses and anticipation of achieving or exceeding our fiscal year 2006 plan for net income. Considering Apio's net income separately it is notable that Apio's overall net income grew to 2.4 million during this year's second quarter, an increase of 63% compared to the second quarter of last year.

Turning to the balance sheet, the cash balance of 6.5 million at the end of the second quarter as comparable to the cash balance of 6.4 million at the end of the second quarter last year. The cash decrease during the first six months of fiscal year 2006 of 6.4 million from 12.9 million at fiscal year end 2005 reflects the seasonal nature of our businesses and was primarily due to, first, net income used in operations of $10 million, primarily for the purchase of seed corn; second, the purchase of $1.5 million of property, plant, and equipment; third, the net reduction of long-term debt of $1 million; and fourth, the use of $3.6 million of cash to purchase Heartland Hybrids. These decreases in cash were partially offset by borrowings under the Company's lines of credit of $7.3 million to purchase corn seed that will be sold in our third and forth fiscal quarters. Additionally on the balance sheet during the first six months and consistent with the seasonal nature of our businesses, inventory increased 99% to 19.7 million, primarily due to the purchase of seed corn and seed corn acquired in the acquisition of Heartland Hybrids, deferred revenues increased to 3.6 million for 557,000 at the end of fiscal year 2005 due to deposits for future seed corn shipments for the 2006 planning season. That concludes my formal presentation. Let me turn it back to Gary.

Thanks, Greg. We have achieved several important milestones thus far in fiscal year 2006. First, as mentioned earlier, our Food Technology business, Apio, has performed very well during the first six months of fiscal year 2006. Apio grew value-added specialty packaged revenues by 9% and value-added gross profits by 19% due to the more profitable mix of products and better quality in the source produce compared to the first six months of fiscal year 2005. Notably, sales of the value-added vegetable tray line increased by 22% and the value-added 12 ounce product line increased by 13% compared to the first six months in the prior year. According to AC Nielsen for the three months ended September 30, 2005, Apio's market share for sales of vegetable trays to retail grocery stores in the U.S. was 47% up from 44% for the three months ended September 30, 2004. In addition, for the first six months of fiscal year 2006 Apio increased net income 52% to $4.3 million and generated 3.9 million of cash flow from operations.

Second, we established at the beginning of the fiscal year a division within Apio, we call it Apio Tech, to focus solely on the development and commercialization of unique applications for our BreatheWay packaging technology. We now have four initiatives under way, one of which is applying our packaging technology for bananas, such that bananas can last up to five days longer. Our first partnership using our BreatheWay technology is with Chiquita, a world leader in fresh produce sales. Apio has now successfully completed commercial market tests with Chiquita in approximately 300 stores with Chiquita's first customer and Chiquita continues to sell to these stores. Chiquita is currently working with this first customer on logistic support for expanding in the United States. In addition, Chiquita has started commercial sales using our technology with a second customer who has a significant number of potential sites, about 20,000 potential sites, to sell bananas using our technology. Chiquita brand bananas using our technology are now being sold in over 600 of the second customer sites. We expect to report our progress and plans jointly with Chiquita in the near future.

Third, Landec Ag purchased Heartland Hybrids Inc., the second largest direct marketer of seed corn to farmers behind Landec Ag's Fielder's Choice Direct brand. This acquisition will add approximately $7 million in revenues during fiscal year 2006, and is expected to generate a positive contribution to net income for this fiscal year. Fourth, Landec Ag introduced 37 new corn hybrids for 2006 bringing the line up to 121 hybrid seed varieties, 48 of which are hybrid offerings that will use our proprietary Early Plant Intellicoat seed coating technology. In addition, based on a recent study by a third-party, study -- results from the 2005 corn crop year showed that Landec Ag's Early Plant corn increased yields on average by 21-bushels per acre compared to late plant in corn and reduced drying costs by nearly $15 per acre compared to late planted corn due to Early Plant corn having a lower moisture content when harvested. The combination of higher yields and lower drying costs resulted in an average additional profit to the farmer of $49 per acre. We are now selling our coated seed technology for inbred seed production to over 38 seed companies and selling our coated hybrid corn seed through our own direct marketing and through nine other hybrid seed companies.

And fifth, we recently entered into a license agreement with a newly incorporated medical device company in which we received an up-front license payment of a $0.25 million. In addition, Landec received preferred stock initially valued at $1.5 million, which represents a 16.7% ownership interest in this new medical device company. Our ownership interest could increase to as high as 19.9% based on achieving certain milestones which are expected to be met within the next 12 months. We are also actively pursuing and continue to receive interest from potential partners and our supply customers for application of our technology in areas ranging from personal care to industrial coatings to institutional cleaning products. We have engaged a consulting firm to assist us in identifying and securing at least one new partner. We have assigned Dr. David Taft, Landec's Chief Operating Officer to lead our Intelimer licensing and supply team and to apply this demonstrated technology, operating expertise to this business. We are working diligently on entering into one additional new collaboration, hopefully, during this fiscal year 2006.

Looking to the future, we have five primarily objectives for fiscal year 2006, first, to continue to grow our value-added specialty packaging food business; second, grow our agricultural revenues for uncoated seed products, and more importantly, for our Intellicoat coated seed products; third, commercially launch our banana packaging technology with Chiquita; fourth, continue to add strategic partner relationships in each of our businesses with specific emphasis on opportunities for Intelimer polymer applications outside of our food and agricultural businesses; and fifth, grow revenues while increasing net income by 55 to 65% compared to fiscal year 2005 results. The revenue and net income goals include the additional revenue and net income of $550,000 from the change in the Alcon agreement in fiscal year 2006 and excludes the impact from the acquisition of Heartland, and excludes the gain from the sale of $713,000 which we reported in fiscal year 2005.

Let's talk about the challenges we are now addressing for the remainder of this fiscal year, and how they may affect our primary goals. Our first challenge, current prices for corn seed produced by farmers are very low. In addition, growing costs for farmers, specifically petroleum-based products and natural gas products are at an all-time high. Farmer incomes by example are expected to cut -- be cut in half for many corn farmers in the U.S. corn belt this year. Decreased farmer incomes coupled with huge surpluses from the recent corn harvest in North America are putting tremendous pressure on corn farmers resulting in farmers either delaying their purchase decisions, deciding to plant crops other than corn this year or in some cases exiting farming altogether. As a result, the U.S. corn market is currently in turmoil with major corn seed suppliers offering steep discounts and bundle deals in order to gain or maintain market share.

By example, Pioneer Seed Company, which is owned by DuPont is offering "buy one bag of corn seed, get one FREE" deals. Pioneer is doing this to protect its market share which has eroded in recent years. Other major corn seed companies have entered into the fray. The cost of these external factors, at least through December 2005, orders for Fielder's Choice Direct brand corn seed are behind our internal plan. Our goal of growing our ag business in fiscal year 2006, excluding the Heartland Hybrids' acquisition, appears unlikely at this time. We are responding to this intense competitive environment with direct-to-farmer promotions while at the same time promoting the value of our unique coating technology. It is still too early to know where the year will end up in our ag business, but at this time, excluding Heartland, we see a flat-to-down year for our Landec Ag seed revenues, although, we still expect growth in our coated seed sales and we expect our ag business to generate positive cash flow from operations.

Another significant challenge is managing continued increases in our raw material costs which are expected to increase by approximately $2.5 million in fiscal year 2006 compared to fiscal year 2005. From a combination of sourcing costs, including the purchase of produce, film packaging and corn seed. We are working hard to offset these cost increases with improvements in our plant through automation, other operating efficiencies, and where possible selective price increases. An additional challenge for Landec management is continuing to grow market share in our value-added vegetable business, particularly, in our tray line now that we are close to 50% share of the market for tray products in the U.S. We are aggressively looking at numerous new product initiatives and market expansion opportunities to allow for our continued growth in the fresh-cut and wholly-packaged produce business.

And our fourth challenge, we are working to transition Apio Tech's BreatheWay packaging business into a highly profitable business based on successful commercial launch of packaging for bananas into new markets by our partner, Chiquita Brands International Inc. In addition, we have other non-banana initiatives under way which we expect to announce during calendar 2006. We will, however, rely heavily on Chiquita's effective launch and logistical support for penetrating new markets, such as, national coffee chains and convenience stores and quick-serve food outlets. Based on the excellent results in our food business during the first six months of fiscal year 2006, much of which we expect to continue during the second half of fiscal year 2006, along with recent positive successes in our non-food and non-ag licensing business, we believe that the planned goal of growing net income in fiscal 2006 by 55 to 65% is achievable. So let me summarize where we are.

Our seed ag business -- our ag seed business is implementing its growth plan in a market that is in disarray because of factors mentioned earlier. Landec Ag does have a cost-effective scalable business model and we own proprietary unique coating technology. We are responding to the intense competitive environment with direct-to-farmer promotions while at the same time promoting the value of our unique coating technology. It is just too early to know where the year will end up, but at this time excluding the acquisition of Heartland, we see a flat-to-down year for our ag business. At Apio, we are exceeding plans for our specialty packaging food business. We are aggressively looking for and investing in new areas of growth in the fresh-cut specialty packaging produce market, a market that is growing and expanding. People do want fresh conveniently packaged nutritious produce products. And our investments in our core technology are beginning to pay off for our licensing and supply business. We expect to enter into new partnerships with industry leaders outside of our core food and ag business. And last, but not least, we expect to continue to generate sizable amounts of cash flow from operations this year and beyond which gives us flexibility and capability for pursuing different avenues for continued growth. 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, sir. Ladies and gentlemen, [OPERATOR INSTRUCTIONS]. Our first question comes from Bill Gibson of Nollenberger Capital. Your question, sir?

Yes, I actually have a couple of questions, first off in the banana packaging, it sounds like we are moving into a major chain. Can I take that to be subway, 20,000 locations around the world?

We're going to comment on this in the near future, Bill, but it's a convenience store chain.

Oh, a convenience store. Okay, and we're expecting -- are we expecting more chains as well this fiscal year?

Yes, we're already with a third customer, and those numbers are -- in terms of sites is building. And I'm sorry to be vague, but we're looking to collaborate with Chiquita for some joint announcements here where we can tell you more about what we're doing.

Okay, good, and it will be good to see that. And in terms of just the tech business and the packaging business, are there applications coming beyond bananas? Are you already thinking of those modes? Did I hear that?

Yes, we're working on four to five initiatives right now that we're very excited about. They have nothing do with with bananas. In each case we will seek industry-leading partners to collaborate. Remember in that part of our business Apio Tech is focused on selling packaging only --.

Yes.

-- and that's a high-margin business for us.

No, understand. That sounds good. And it just sounds like the bag business is going to be a tough sell this year and --.

Yes, it's a market in chaos, really, Bill. They've got -- you have got so many factors that contribute to the farmer being really unhappy. He's delaying his decisions. He might not even plant corn this year, and as you know we're selling corn. The good news is that the Intellicoat coated seed technology is showing good results. These yield data are pretty powerful. We have got more people helping us sell it besides our own direct marketing and sales organization. So I do anticipate growth in that area but, boy, I'll tell you it is really brutal and tough out there. And everybody is scrambling and there are these big discounts that I mentioned; Pioneer being just one.

You talked about the increase in, I guess the bushels realized. How many -- I apologize for not knowing this -- but how many bushels does a farmer typically get off an acre?

Boy, it's really going to vary. But think of the data that we reported as being roughly a 10% to 11% yield increase.

Oh, okay.

It's going to be very by the type of soil and everything. But we're -- a materiality in this business is when you can deliver something that has 10% or higher yield improvements and so we're material. The other thing I mentioned -- I hope I didn't get lost -- is that when you harvest your corn and you are preparing it for sale, et cetera, you are going to have to dry it down. There's moisture that you have to take out of the corn. Our early planted corn has less moisture in it and, therefore, there's less dry-down cost, which with energy prices going through the roof is becoming a material factor. So we think the story is improving all the time. It's always been there, but we're being able to show it and demonstrate it, and now we just have to sell it.

Yes, but in terms of acreage versus the industry, I mean, you barely show up on the radar screen.

Yes, we're below the radar screen at this point. And remember it's -- we don't have a major brand. We don't have one of the big three guys selling this coated seed technology for Early Plant corn yet, and we're using a very good, solid group of alliance partners that are at the second tier, plus we're selling it directly ourselves, and we have to establish the credibility and get the market base and get on the radar screen.

Yes. Now is this something that potentially gets Pioneer's attention? I mean they have got their hands full losing share any way. But could they potentially look at this as a tool to gain that share back?

The answer -- the honest answer, Bill, is I don't know. Obviously, we have talked to the big guys. They are so consumed in their traits market share, and who is going to win what trait battles, and patent battles, and now with this deep discounting chaos going on here, there's a lot of distraction in the industry. So I don't know how to answer your question, but I can certainly tell you that when we start converting their large farm customers to coated seed technology, I would think that somebody is going to start paying attention to this and that's what is happening.

Okay, good. Thank you, Gary.

Thank you, Bill.

Our next question is from Tony Brenner of Roth Capital Partners. Your question, sir.

Thank you. A couple of things, Gary. First of all, regarding Apio value-added, revenues in the second quarter were up, I think 5.6%, a little less than 9% in the -- for the first six months of the year. You mentioned the difficulty you are having growing revenues rapidly given the current market share, yet you maintain a goal for this year of more than 10% revenue growth for the full 12 months. And I'm wondering if that goal is considered achievable because of the severe sourcing problems late last year or for some other reason?

We still see it as achievable for a number of reasons. First of all, we have a number of new product launches, Tony. We average about 12 new products a year that we launch. And for us some of that is in the second half. Second, is that we have had good fortune so far, knock on wood, in terms of sourcing availability and quality. Third, is you may we recall that a lot of the action for us for Apio is in the Thanksgiving through Super Bowl time frame, which -- much of which is in our second half. And so a combination of things tell us that that goal is still achievable. We've got to work to get it. But I would say we're on track.

Okay. Secondly, the banana revenues or tech revenues, which I presume are just about all bananas, are recognized in the second quarter that $83,000 essentially reflects the 300 store test market; is that --?

Yes, that's right. And you'll see those numbers going up as we --.

Well, I understand. But my question is as they go up to tens of thousands of stores I know that the margins on that business are about 5.5 times Landec's total gross margins. Are those margins scalable as the volume increases hundreds of times?

Yes.

That could move the needle?

Yes.

Okay. And lastly --.

It's going to be -- remember this is going to be more -- more of a margin business than a revenue business.

Are you selling bags or simply patches?

Both.

Okay. Lastly, you mentioned that the -- or you say that the net income objective for the year is achievable, which is worded a little differently than it was worded previously, I think. Is the major variable here the avoidance of severe sourcing problems over the next three months? Is -- assuming that those are avoided, is that objective highly likely to be achieved in your opinion?

In my opinion, yes.

Okay. I'm sorry --?

See but you always have the wild card. You live in Southern California, and you remember last winter, which did occur in the February/March time frame, February/March hasn't happened yet.

Right.

So keep your fingers crossed, but so far the weather has been decent, reasonable, and the crops are looking good and the quality is high. And just as a reminder our packaging technology cannot turn bad quality produce into good quality produce, so we have to have good raw material inputs. So the answer to your question is that the unknown, of course, is getting through those several months, and just doing the [expletive] best we can in our ag business in a market that's in disarray. And so there's some uncertainty there because many farmers have deferred and delayed their purchase decision. So we've got to get our fair share of those guys.

Okay. Thank you.

Thank you, Tony.

Our next question is from Peter Black of Winfield Capital. Your question please.

Hi, guys, I just have a quick question about the cash balance. You mentioned a decline in the first six months of 2006 was due to seasonal factors. But if you look at the burn from operations of 10 million versus the 1.6 million you burn in the first half of last year, it sort of begs the question of whether -- and you sort of alluded to this -- an inventory number. But it begs the question of whether you purchased too much seed corn given the current market conditions.

Hi, Peter, this is Greg. Well, at this point in time it's a combination of things. One, the actual purchase of corn happened at a faster rate and earlier this year than in the prior year. The second answer to your question is obviously, it depends on how well we do on the selling. I mean we had bought corn planning on it hitting certain goals, and those goals were previously disclosed, and if we fall short of it, then we'll have excess corn. But it will be corn that will still be good for several years, so it will just mean that we'll have to purchase less corn a year from now in order to meet next year's needs.

Okay. But this in no way effects your -- Gary made the statement that cash from operations would be -- continue to be strong for the full year?

Yes, we still feel very strongly about that.

Okay, and then the other question, I may have just missed the way you phrased this. But when you talked about in the calendar year announcing four or five other potential -- I don't know if it was licensing partners or markets. Would it be -- could it be companies within the same market or are you actually talking about totally different markets outside of ag and food?

Okay. Peter, this is Gary. Good morning.

Good morning.

Let me make -- clarify some things. I mentioned that in our Apio Tech packaging business we had four or five initiatives under way and that we will look to have partners with them over time. So park that over on the left side. On the right side, I mentioned that we do seek to add an additional partner in our non-food, non-ag licensing and supply business, and in that area we would like to have an additional partner, we hope, in this fiscal year. We have already announced one, this medical device collaboration, and we would like to add one more. In terms of the Apio Tech initiatives, I can't tell you what the timing on those partnerships are, but it certainly will add to Chiquita in other areas in the food packaging area as well.

Okay. All right. Thanks.

Thank you.

Our next question is from Jonathan Lichter of Sidoti & Company. Your question, please.

Yes, hi, guys.

Good morning, Jon.

In your forecast for the second half of fiscal '06 are you including any up-front payments from a second licensing deal?

Yes, but modest.

How much are you looking for?

Would -- like not to disclose that at this point.

Okay.

We're in a sensitive phase, so that would not be smart on my part to start talking about that. But it's not -- we're not expecting that to be very material for this fiscal year. And, obviously, you know how these things work, you -- sometimes they happen in your time frame, and sometimes they don't. But, yes, we do have some dollars in there for that.

Okay, thanks. Also just to clarify, I think you had mentioned that the margins on the banana business could be scalable from -- is it -- would it be this quarter, which I guess indicates about a 70% margin or is it more towards the first quarter which is somewhere in the 50% range? I guess which is --?

Better? The latter.

The latter. Okay.

Yes, think of it, if you are putting any of this into a model, I would use the latter, and give us the benefit of presently surprising you down the road.

Okay. Thanks.

Thank you.

Our next question is from Al Durfy of Smith Barney. Your question, please.

Good morning, Al.

Hey, Gary, how are you?

Good. Thank you.

Just one question for you. Why do you exclude the impact of the Heartland Hybrids acquisition in your forecast for this fiscal year? It's an ongoing operation, right?

Yes, just out of a sense of fairness, it's an apples-to-apples comparison that we want our investors and shareholders and stakeholders to have. We expect Heartland to add $7 million in revenues and to make a positive contribution to net income, but to be fair we should be -- we want at least for now to compare apples-to-apples because last year we didn't have Heartland. So that's the only reason, Al.

Okay. All right, thank you.

Thank you.

Your next question is from Paul Dietsch of Dietsch & Field. Your question, please.

Thank you. On your relationship with Chiquita, how are they promoting the product? Are they making advertising claims in the area, and could this be for the moment restricted to their miniature bananas?

Good morning, Paul. Nice to hear from you. First of all let me address the second part of that first. They do have a mini banana program that they have launched. It's an interesting program because Chiquita is aggressively trying to change the mindset, frankly, and the economics of the banana business from a commodity cents-per-pound world to one that is a value-added sense-per-banana world. And the mini program is part of that, and so we're pulling for them. But let me see, the first part of your question, somebody guess?

Advertising.

Oh, advertising. Okay. So this is not a phase when Chiquita is broadly marketing and advertising. It's not using a shotgun, it's using a rifle with a scope. They have identified -- remember they are the marketing partner here. We are the technology partner. They have identified a hit list of key customers that fall, Paul, into four categories, national coffee chains, national fast-food chains, national convenience store chains, and national drugstore chains. So it's a very, focused marketing and sales effort on their part. You are not going to see this on television or hear it about it on the radio. So think of it as a very, focused marketing and sales, and they want to go after industry leaders, names that are well-known to most anybody.

Right. And is it possible they eventually might extend this -- that you're packaging to all their banana products?

Okay. That's the big question in the sky. We -- you know the answer that we want is absolutely, yes. Realistically, let's establish credibility of the concept of a value-added banana, I will tell you without mentioning names that the average price of bananas being sold coming out of our package technology right now is roughly $0.80 per piece, per banana. So that's a different ball game. So let's establish credibility with Chiquita that we can do this in these new markets that have not had bananas before; establish that Chiquita can handle the logistic support, which is not trivial, our technology is consistently working; and then let's come back into the retail markets, which are still selling bunches of bananas on a table, on a per pound basis, and let's find avenues to bring it back into the retail market on a value-added premium price basis. So that's the strategy, Paul, and our hope is that that will happen in our lifetimes, and that we can see the results of that in the not too distant future. But it's a staged approach.

Thanks very much

Thank you, Paul.

Our next question is from Hank Feinstein of Gagnon Securities. Your question?

Good morning, Hank.

Good morning, Gary. My first question relates to the savings that you mentioned of $49 an acre to the average farmer who is using our product.

Yes.

Is that a net savings after the cost of the -- the incremental cost of our seed versus an ordinary seed or is that before the cost?

No, it's net. And --.

Net after the cost?

Yes, it's after -- we add about 11 to $12 per acre of cost --.

Okay, and they say 49 after that $11?

-- a netting effect. Now remember this is a -- this is third-party studies. This is as reported to us. In farming there is nothing that works 100% of the time, just the way you want it, but this -- these studies are large enough for us to confidently report on them, and the results are pretty [expletive] impressive. I will tell you the farmer is overwhelmed right now with claims and deals, and so all that noise, they have to hear our message. And back to Paul's question about marketing and promoting, we are not spending 3 to $4 million in marketing and promoting this technology. You could argue we should, but we're not. So we have to do it by directly selling to our Fielder's Choice Direct organization and using these eight alliance partners. And I wish we could do it bigger and faster. On the other hand, there's an offset with spending this kind of marketing and sales dollars at this point, but the results are looking very promising.

It sounds excellent. My second question is probably aimed towards something Gary -- towards something Greg might be able to answer. You've mentioned that you've accrued for your year end bonuses in the operating results for the first six months. Ergo, if you don't hit your targets you are going to reverse those in the fourth quarter?

Yes, that's exactly what will happen.

So you have enough confidence to make those accruals now even though you haven't hit any significant numbers in the first two quarters?

Well, from -- let's say external reports out there, that obviously are not our numbers -- from an internal standpoint we are exceeding our internal plan currently, and we expect that we'll exceed it or beat it -- or meet it for the year.

I think that's great.

If we don't, obviously, they don't get paid.

Obviously. Yes, no, I think that's great.

Hank this is --.

Very conservative.

-- [multiple speakers] improvement in our accounting. Last year we didn't accrue bonuses. We weren't sure about the year and so this year we said if we feel like we are hitting plan, we ought to be accruing it as each quarter goes buy.

I think that's great and it's very conservative. And I compliment you on it.

Thank you.

The other -- the next question I have relates to the license income that was reported, the $250,000 and the roughly 18 or 17% equity in this new venture. When will that be recorded on your books and how much will be recorded in each of the quarters in dollars? How does that 18% translate into dollars on your books?

Well, right now, the 250 is -- will be recorded in the third quarter. We are looking at the accounting -- because it's not simple accounting -- on how exactly the 1.5 million will be recorded. But whatever recording will occur the initial piece will be recorded in the third quarter, and it may be the entire amount. It's going to be some portion of the 1.5 million. Because this is an illiquid stock, so there's going to be discounts and so on and so forth. So a portion of that will either be fully recorded in the third quarter or it will begin in the third quarter and be stretched out over some time.

[multiple speakers]. What kind of capitalization does this new entity have?

At this point in time, I -- well, they haven't disclosed that and I think it's probably best we just -- we keep that as confident.

Okay. But the 250 has been paid to you in cash?

Yes, 250 we have in our bank.

Okay. And the shares -- so their capitalization is really up to them to get the products, their manufacturing launched and so forth? We have no financial commitment to this entity?

No, we have no involvement. We literally gave them a license to our technology for use in specific fields, and it's up to them to make it successful.

So it's pure profit for us?

Pure profit.

Excellent. And my last question relates to the Chiquita, perhaps you've mentioned it and I just missed it. But at some point, I thought that the Chiquita people were considering shipping their bulk bananas up from South America using our technology and replacing the wax-lined containers. Is that still on the drawing boards?

Could you say that again, please.

Yes, at one point you were talking about the Chiquita people using our technology in packaging and replacing the wax-lined containers that are used to ship bananas up from South America to the United States.

Yes.

Is that being considered by them at this point or is it --?

Boy, Hank, I'm going to pass. I don't want to talk about the actual way in which we're shipping the bananas, if you don't mind please.

Okay.

That's a sensitive subject for Chiquita. We want to respect their confidentiality on that. What we have said separately from Chiquita is that we are very interested in the long-distance transport of produce using our BreatheWay membering technology, and that would involve container shipping. So if you don't mind I'm going to leave it at that

Okay. Very good. Thank you so much.

Thank you.

Again, ladies and gentlemen, [OPERATOR INSTRUCTIONS]. Our next question comes from Kevin Thompson of 033 Asset Management.

Good morning. Kevin

Hi, guys. I was just curious, regarding your goal of increasing net income, the 60 to 65% number you have out there, are you including a contribution from the bananas?

Contribution from selling banana packaging?

Yes.

Sure, it's part of our operating business.

Right. So how meaningful is that number in that product?

It's not at the material stage yet, Kevin, --.

[multiple speakers]. And that's my other question.

-- because of the nature of the market testing that we're doing. The numbers are so -- it's not significant for this fiscal year.

Right. Okay. And secondly, the Apio margins were quite strong. Can you just drill down a little more into that -- into the reasons why?

Sure. We have a management team at Apio that's doing a very superb job at looking at automating our plant. Looking at improvements and efficiencies everywhere from raw material sourcing to the way we do our QC and QA, and the way that we package our products. And that effort is really taking hold. And remember we have to offset some fairly sizeable cost increases in the business. So that's succeeding. And we also have the benefit of a year where the quality of the raw materials that we're buying is higher than last year. When you get stuff coming to you that needs extra floreting or extra handling because you are worried about the quality, that can really drag you down. So we have good work and good effort combined with some good luck that's helping us out, Kevin.

And what about mix? [multiple speakers].

Mix is also working to our benefit. We have been able, obviously, proactively to get rid of some SKUs that are not as profitable for us and introduce some new products that have higher margins. So the mix is certainly a good factor, a big factor in this improvement in margins.

Okay, great. Thanks a lot.

Thank you.

Our next question is from Rick Federman of Federman Investments. Your question.

On the value-added is the increase in revenue strictly a function of volume, and is the pricing to your customers stable?

Rick, the answer to your question is the increases are due to volume and mix. We just mentioned the mix issue where some are higher priced, higher margin, but it really is not due to price increases. We have not either been able to or selected to use price increases for -- at this point for growing topline. It's really volume and mix.

In the -- on the ag side with this independent study that's determined the additional profit that farmers are able to get, have you gotten any -- has there been any verbal or any measurable response? I understand the problems in selling the product right now, but from either farmers or anything from the agricultural press? The magazines that these --.

Well, that study just was -- that study is just coming into our hands, so the impact of that has not been -- I mean, hasn't been really fully reported yet. So the answer is no.

Would you expect to get some --?

Yes, I would say that in a normalized environment, yes. But I can't even begin to tell you how chaotic it is out there. It's -- there's a lot of noise going on. Can that message be heard this sales year? I have got my doubts. I think that we've got to get through this craziness and then really -- not that we won't start spreading the word, but I don't think it's going to get heard this year. I just have to be honest with you.

Lastly, is there any progress or any change in the venture with L'Oreal?

Yes. It's going well.

Okay. But nothing to really to report as yet?

Well, no I don't -- I have to manage your expectations here. We just want to grow that supply business and keep them as a valuable customer, and keep expanding and adding new formulations to the mix, et cetera, et cetera. So view that one as a steady-as-you-go kind of a business for us.

Okay. Thank you very much.

Thank you.

Our next question is from Brad Safalow of River Edge Capital. Your question.

Hi, good morning.

Good morning, Brad.

The first question would be on the Fielder's Choice business, can you help us understand, I guess the difference between conversion rates and lead flow? You had talked about in the past about changing some of your lead sourcing techniques. I want to see how -- or if you can comment on how effective those were and whether you can feel confident that perhaps next year if you get a more normalized environment that you can -- because of the lead generation changes you've made that perhaps you can see a recovery in growth.

Well, that's a really terrific question. And, Brad, I think you've been to the site. So you can see the power of what we're doing. I guess the best way I would answer your question is that last year we had -- we really were -- in the last couple of years we were struggling to generate leads. Leads is a farmer who has indicated a strong interest in talking to one of our seed consultants about buying our product. He has raised his hand so to speak and so we view that as a qualified lead. And some of the methods that we had been using in the past, direct marketing methods, were running out of gas, frankly. And so in the last couple of years we were in the 4 to 5,000 lead arena, and then, that was for new prospects. And then we had our existing customer base that we could call on and hope that they would come back to us. So that was the business last year.

This year our leads have been in the 12 to 15,000 range, and so we have got to -- we've got more names and more folks to go after. The problem is, is that you got guys out there calling those same people and saying I'll give you one bag free if you buy one, and that's a craziness -- that's not a sustainable kind of situation for anybody including the big guys. But it has created chaos and it has made the lead conversion rates, which are normally high for us, lower. And that's why we're giving a heads-up here to this crazy year. People need to know it's a crazy year for us and so the traditional conversion rates and the traditional methodology that we use is -- it's chaotic. And so we don't know exactly how this is going to end up, but we want to give a heads-up that this could be, on a revenue basis, a flat to a slightly down year.

Okay. And in terms of the conversion rates, I mean have you guys responded with dramatic price cuts in kind or are you trying to preserve some pricing? [multiple speakers].

No, we haven't responded with dramatic price cuts, let me give you -- the reason is -- let's just do the math on a "buy one, get one FREE." That's, obviously, a 50% discount. The good news for us is we have a different cost structure. We start at a lower cost structure because we don't have all of these dealers and sales guys running around America. As you know our people are in one room in Monticello, Indiana and we sell directly using telemarketing, electronic marketing. So we don't have to do these crazy, steep price discounts to be comparable. However, it is very confusing out there. So we're actively promoting -- and we do have some special promotions and deals, no question about it -- and we're actively promoting this Intellicoat coating results and technology, but it's just a confused marketplace. The farmer is cynical and not happy, and it's affecting us all. So I just think this is going to be a crazy year for us and for others.

Okay, so assuming you are flat on a revenue basis organically speaking. I guess based on your comments we can -- there will be some gross profit margin and compression but maybe not -- I guess something highly dramatic that you would associate with some serious price discounting?

Well, it's not a fun year for us, and obviously, the margins and the net -- I mean the net income is going to be affected. And it's our hope that our food and licensing business offsets this so that we are hitting our plan, and that's what we're trying to communicate today. It looks like that, but we still have five months ahead of us.

Sure, and then on the food side of the business, obviously, you did see some deceleration in some of your or at least in the vegetable tray product. Is that kind of the new, new growth levels for that 11%? I know you were facing some difficult comps. You're already at 47% market share. Can we assume that that's where you're going to grow, and it's really incumbent upon you launching newer products to drive growth going forward?

I couldn't have said it better.

Okay. And can you give us any sort of hints or what type of new products are some of the key products for the remainder of this year?

No.

Okay. Fair enough. I'll turn it over. Thanks.

Thanks for asking Brad but let us launch them first.

Sure.

Okay, thanks.

Your next question is from Craig Pieringer of Wells Capital Management. Your question.

Good morning, Craig.

Good morning. The new license agreement with the newly-formed medical device company, is this product something that is already pretty well-developed; i.e., could it have been something that another company was working on via with Landec previously and now this is an offshoot of that product effort or is this something totally new, which will take a while to see introduction?

That is really a terrific question, and the answer is, is that it's in a totally new space of anything we have ever done before, and it's a substantial market opportunity and that's why this company has been formed and some very prominent group of investors have put money into it. So it is a new space. However, the work that we have done in the opthalmology and in the dental area with some other partners in terms of the formulation work, the -- some of the regulatory work, the composition of the Palmer work, some of that is very usable, and useful for this application. The -- obviously, there is further R&D work that has to be done. It is a different area but it's not like we're starting from scratch, Craig. So we can -- I think we have a good starting point here to help this medical device company with the license of our technology.

Good that's exactly what I was getting at. And moving back to the Chiquita business, obviously the 300 stores of the first customer is -- the test is ongoing. There was some expectation that maybe we would have heard something more about that by the end of the calendar year. And, of course, that's come and passed. Is there any reason why we're still waiting? And what is your best guess as to when that might be rolled out and a formal announcement made?

Well, I'm not going to comment on that, but I will say that the reason we're waiting is because we're good business partners and Chiquita is going to take the lead on this, and we would like to do it jointly with them. And when they decide that, frankly, they are comfortable with the logistic support -- that's the rate limiting step; logistic support. Because remember this is -- these are new markets, Craig, this is not -- these are not the old grocery stores where trucks are going every day. When they are ready and feel comfortable that they have got enough of the logistic issues in hand, they certainly -- I don't think there are any questions about the usefulness of our technology, it's working, then they will -- they'll let us know. And that's what we're waiting on. And so I'm not going to speculate on when that is, but things are going well.

So it's more of an issue of them getting it right and wanting to make sure everything is going to launch perfectly?

Yes, and you can -- I'm sure you can understand that. This is new and they want to get it right.

Okay. Thank you.

Thank you.

And our final question comes from Greg Vena of Smith Barney. Your question, sir.

Good morning. On the Chiquita, is that an exclusive between you and Chiquita in the United States and/or global or do you have the ability to joint venture with other -- like the fresh Del Montes or the Doles?

The short answer is yes, Greg. But let me explain. There is -- it is an exclusive license with Chiquita on a worldwide basis in certain applications. Those applications are A, B, C, and D. They haven't been publicly disclosed. And as long as it's in that application field, and as long as Chiquita is hitting or exceeding certain minimum purchases of our packaging technology then it stays exclusive. Outside of those application areas -- and there are many -- we can work with other banana companies or produce companies using our technology. Our focus is to work closely with Chiquita and see that succeed first and foremost within -- for banana packaging. We have other initiatives outside of banana -- the banana world that we're working on that I mentioned earlier. But it is exclusive in some areas, and we can work with others in other areas.

I don't know if you can describe -- bananas basically would be shipped in a 40-pound box. Is the bag of 40 pounds -- for 40 pounds of bananas, or are the bags -- or is a 40-pound box broken down and then put into smaller bags?

All I'm going to say at this point is your -- the latter is what we're doing, not the former.

Okay, so part of the distribution is taking a 40-pound -- 40 pounds of bananas in a box and -- it has to be repackaged?

Yes.

And that's part of the logistics that you are talking about?

Yes, I'm getting it on the right trucks with the right refrigeration, and in the right package format, and priced and promoted in the right way, and making sure that the store managers know who to call and how frequently, et cetera, et cetera.

Okay. And so the real key -- and Chiquita probably doesn't distribute to these convenience store locations?

No one was selling bananas to them before because no one could get the product through the distribution pipeline in time to have enough shelf life to sell it to the consumer.

So the real key is getting the distribution, which has nothing to do with you nor Chiquita. It has to do with whomever is supplying a coffee shop or convenience store or a drugstore getting them to pick up that line?

Yes, that's generally correct. There's some exceptions to what you just said, but you're generally right.

Okay. All right. Thank you very much.

Thank you.

Sir, at this time we have no further questions.

We very much appreciate your joining us today, and we certainly appreciate our ongoing shareholder support, and we look forward to reporting more progress and our plans in the future. So thank you all very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.