Lifecore Biomedical Inc (LFCR) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec Corporation third-quarter fiscal year 2006 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. I would now like to introduce your host, Mr. Gary Steele, President and CEO of Landec Corporation. Sir, you may begin.

Good morning and thank you for joining Landec's third-quarter fiscal year 2006 earnings conference call and webcast. I have with me today, Greg Skinner, our 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 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 would also like to mention that a replay of this call will be available through next Wednesday, April 5. You can access this call by dialing 888-266-2081. The access code is 872422, and the webcast will be available for 30 days via the Internet at www.Landec.com.

We had a very good third quarter, particularly in our Apio food business and in our licensing business. Landec's overall consolidated revenues increased 11%, and net income increased 53% over the same quarter last year. In our Apio food business, overall revenues in the third quarter increased 14% to $47.4 million, and value-added vegetable products revenues grew 16% to $39.5 million. Apio's net income was $3.2 million for the third quarter and $7.4 million for the nine months, and for the quarter, that is an improvement of $2 million or 170%, and for the nine months, an improvement of $3.5 million or 87% compared to the same periods a year ago. This growth was driven by increased sales volume, a year-over-year improvement in produce sourcing resulting in lower cost of sales, and improved operating efficiency in our vegetable processing plant.

In our licensing business, our existing and new agreements generated 1.5 million in revenues compared to $160,000 in the year ago period. Our results for the third quarter and the first nine months of fiscal year 2006 are in line with achieving our goals of continuing to grow revenues and improve our bottom-line results. Consistent with the seasonality of our business and with the results from fiscal year 2005, we expected that the first half of fiscal year 2006 would share losses, whereas the second half and the full year are expected to be profitable.

We have five primary objectives for fiscal year 2006. First, continue to grow our value-added specialty packaging food business. Second, increase the growth of our agricultural revenues for uncoated seed products and, more importantly, for our Intellicoat coated seed products. Third, commercially launch and expand our banana packaging technology with Chiquita Brands International. Fourth, continue to add strategic partnership relationships in each of our businesses. And fifth, grow overall revenues by 10 to 15% while increasing net income by 55 to 65% compared to fiscal year 2005 results. We are well on our way to achieving each of these goals.

Before I elaborate more on our year-to-date operating milestones, 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 third quarter of fiscal year 2006 of 57.2 million versus revenues of 51.5 million for the same period a year ago. The increase in total revenue during the third quarter was due to revenue growth in Apio's value-added vegetable produce business, which increased 16% to 39.5 million compared to 34 million in the same period last year and due to a significant increase in revenues from our Intelimer licensing business to $1.5 million primarily as a result of increased revenues received from a license agreement with a newly established medical device company that will use our Intelimer polymer technology in a specific medical device field.

For the third quarter of fiscal year 2006, net income was $1.2 million higher than the net income during the same period last year due to several factors. Items increasing net income included, first, a $1.6 million increase in gross profits from Apio's value-added business. Second, 1.15 million in license fees from the medical device licensing agreement. And third, a $501,000 increase in gross profit from Apio's technology division, which we call Apio Tech, compared to the third quarter of fiscal year 2005.

Net income was decreased by a $1 million companywide increase in selling, general and administrative expenses, primarily due to selling, general and administrative expenses of $658,000 at Heartland Hybrids, planned increases in selling and marketing expenses at Apio and Landec Ag to generate increases in revenues, an increase in general and administrative expenses at corporate for business development consulting fees and legal fees, and lastly, the accrual of incentive compensation bonuses in anticipation of meeting or exceeding our fiscal year 2006 Landec plans, whereas in the prior fiscal year, bonuses were not recorded until the end of the fiscal year due to uncertainty.

The growth in revenues and gross profits during the quarter and first nine months of fiscal year 2006 was adversely affected by the timing of Landec Ag's seed shipments. Because many farmers across the U.S. have delayed their seed purchase decisions this year, only 24% of Landec Ag's projected sales for fiscal year 2006 were shipped during this year's third quarter compared to shipping 38% of fiscal year 2005 sales during the third quarter of last year.

Included in net income for the third quarter and the first nine months of fiscal year 2006 was an expected loss of 286,000 and 840,000 or $0.01 and $0.03 per diluted share respectively from Heartland Hybrids, which was acquired on August 29, 2005. Heartland's loss was due to the seasonality of its corn seed business, which recognizes most of its revenues and profits during Landec's fourth fiscal quarter.

Seasonality is inherent in our two core businesses -- our food business, Apio, and an our agricultural seed business, Landec Ag. 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. Thus far in fiscal year 2006, Apio has not had any significant weather-related issues, and Landec Ag's shipments of seed products will be more heavily weighted toward our fourth quarter than in past years.

Turning to the balance sheet, during the first nine months of fiscal year 2006, our consolidated cash balance increased by $7.2 million to a cash balance of 20.1 million -- the highest cash balance Landec has achieved since its initial public offering. This significant increase was due to net cash generated from operations of $9.2 million, primarily resulting from a $16.5 million increase in deferred revenues from cash deposits for corn that will be shipped during our fourth fiscal quarter and from the sale of $3.1 million of common stock to employees upon the exercise of stock options.

These increases were partially offset by, first, the purchase of $2.4 million of property, plant and equipment primarily to further automate Apio's value-added processing facility. Second, the net reduction of long-term debt of $1 million, and third, the use of $3.6 million of cash to purchase Heartland Hybrids.

Additionally on the balance sheet during the first nine months and consistent with the seasonal nature of our businesses, inventory increased over 100% to 20.9 million, primarily due to the purchase of seed corn and seed corn acquired in the acquisition of Heartland Hybrids. Deferred revenues increased to 17.9 million from 557,000 at the end of fiscal year 2005 due to deposits for future seed corn shipments for the 2006 planting season.

That concludes my formal presentation. Let me turn the call back to Gary.

Thanks, Greg. I would like to highlight six important milestones that we have achieved thus far in fiscal year 2006.

First, as I mentioned earlier, our Food Technology business, Apio, has performed very well during the first nine months of fiscal year 2006. Apio grew value-added specialty packaging revenues by 12% and the value-added gross profits by 24% due to a more profitable mix of products, improved operating efficiencies and better quality in the source product compared to the first nine months of fiscal year 2005. Notably sales of our value-added vegetable tray line increased by 23%, and our value-added 12 ounce productline increases by 15% compared to the first nine months in the prior year. In addition, for the first nine months of fiscal year 2006, Apio increased net income 87% to $7.4 million and generated $9 million cash flow from operations.

Second, we established Apio Tech at the beginning of this fiscal year to focus solely on the development and commercialization of unique applications for our BreatheWay packaging technology. We now have four initiatives underway, 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. In February 2006 Landec announced that Chiquita Brands International and Core-Mark International, one of the largest North American distributors to the convenience retail industry, have entered into an arrangement to distribute Chiquita bananas using Landec's patented packaging technology to convenience stores throughout the Core-Mark network. Chiquita and Core-Mark intend to expand the commercial sale of BreatheWay package Chiquita bananas to more than 5000 retail locations by calendar year-end 2006.

Third, Landec Ag purchased Heartland Hybrids Inc., the second largest direct marketer of seed corn to farmers just behind Landec Ag's Fielder's Choice Direct brand. This acquisition will add approximately $7.5 million in revenues during fiscal year 2006, and it 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 productline up to 121 hybrid seed varieties, 48 of which are hybrid offerings that will be using Early Plant Intellicoat seed coating technology. We are now selling our coated seed technology for male inbred seed production to over 40 seed companies and selling Early Plant coated hybrid corn seeds through our own direct marketing and sales organization and through eight other hybrids seed company salesforces.

In addition, studies by third parties for the past three years verified that Early Plant corn increased yields on average by 21 bushels per acre compared to late planted corn and reduced drying cost by nearly $15 per acre compared to late planted corn due to the earlier 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 former of $49 per acre.

With this milestone, we entered into a license agreement with a newly incorporated medical device company in which we received an upfront license payment of $250,000. In addition, Landec received preferred stock initially valued at $900,000 on a discounted basis from the medical device company's valuation of 1.5 million. The preferred stock represents a 16.7% ownership interest in the 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.

The sixth milestone, we just recently entered into an exclusive license and research and development agreement with Air Products and Chemicals Inc. Under this agreement, Landec received an upfront licensing fee of $800,000 at close, and we will receive up to an additional $1.6 million of license payments that will be paid in quarterly installments of $200,000 each during years two and three of the agreement for the exclusive rights to use Landec's Intelimer materials technology in specific fields worldwide. The license fees will be recognized as license revenue over a three-year period beginning March 2006.

At the close, Landec also received a $100,000 license technology transfer fee for transferring work to be performed by Landec during Landec's fourth quarter of fiscal year 2006. Landec will provide research and development support to Air Products for three years with a mutual option for two additional years.

Additionally in accordance with the agreement, Landec will receive 40% of the gross profits beginning in March 2007 that are generated from the sale of products by Air Products that incorporate Landec's Intelimer materials.

In summary, these milestones demonstrate that we are doing what we said we wanted to do for this fiscal year -- namely grow and expand our core businesses, form new partnerships, further strengthen our balance sheet and build earnings.

Let's talk about four challenges that we are currently addressing. Our first challenge is that recent annual growth in the U.S. corn seed industry has been flat, and current prices for corn seed produced by farmers are quite low. In addition, growing costs for farmers, specifically petroleum-based products and natural gas, are at an all-time high. These costs coupled with huge surpluses from recent corn harvest in North America are putting tremendous pressure on corn farmers, resulting in farmers either delaying their purchase decisions or in some cases deciding to plant crops other than corn this year.

Current estimates indicate that the 2006 planted corn acres will be down 3 to 4% compared to the previous year. As a result, the U.S. corn market is currently experiencing extreme competitive pressures with several major corn seed suppliers offering seed discounts and bundled deals in order to gain or maintain market share. Despite these negative influences on the seed corn industry this year, Landec Ag has responded to aggressively to this intense competition with direct to former sales and promotions, while at the same time promoting the value of our unique patented coating technology. The result of our aggressive promotions has been a late-season pickup in sales and net income.

Although we will not reach our original year-to-year revenue growth goals for our seed business, based on current orders in our pipeline, revenues for our seed business, excluding the acquired Heartland Hybrids business, should grow 3 to 4% for this year, which is an improved situation from what we stated in our second-quarter conference call. Including Heartland Hybrids and Intellicoat sales, Landec Ag's overall revenues are expected to grow 30 to 35% in fiscal year 2006 compared to fiscal year 2005.

A second significant challenge is managing continued increases in our raw materials costs which are expected to increase by approximately $2.5 million in fiscal year 2006 compared to fiscal year 2005, resulting from a combination of sourcing costs including the purchasing 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 selected price increases.

The third major 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 market for trade 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 whole specialty packaging produce business.

And our fourth challenge is working to transition Apio Tech's BreatheWay packaging business into a highly profitable business based on the successful commercial launch of packaging for bananas into new markets by our partner, Chiquita Brands International. We will rely heavily on Chiquita's effective launch and logistical support for penetrating new markets such as national coffee chains, convenience stores and quickserve food outlets.

In spite of these challenges, based on the excellent results in our food business during the first nine months of fiscal year 2006, much of which we expect to continue during the last quarter 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 year 2006 by 55 to 65% is achievable. 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.

(OPERATOR INSTRUCTIONS). Tony Brenner, Roth Capital Partners.

A couple of things. Gary, you indicated that Early Plant corn is being marketed by eight other seed companies. The release indicates it is nine. I wonder which is the correct number?

The ninth one is (multiple speakers) Fielder's Choice Direct. So it is eight outsiders plus our own internal direct sales company, Fielder's Choice Direct, adds to nine, Tony.

I get it. Sorry for that confusion. One point of clarification. Your guidance of 55 to 65% net income growth I presume includes the real estate gain that you recorded in the fourth quarter of last year in net income, right?

Yes.

Okay. Thirdly, Apio Tech has four applications. You said one is bananas. A second one, according to your release, is in commercial market trials at present. Could you talk about that one?

In vague terms, and I apologize, but we are interested in what we call meal solutions. Produce represents an important and nutritious part of a person's meals, but there are other types of products that can be added to a meal, including protein-based products, and we are in trials with a partner to test the attractiveness and the consumer response to a microwavable meal that includes protein and produce.

I see. And lastly, could you talk a little -- put a little color on the change in the Dole licensing agreement?

Yes, you know, we have been working on this for a while. We had two parts of this licensing agreement. One involved the use of the Dole name in club stores, and you may recall that we have a very very strong position in club stores at Costco and Sam's Club, 50 to 60% penetration. And then we also took a license separately in the retail side. And the club stores side will continue because we are so strong in that area.

And the retail side, a combination of things. Dole has taken a point of view that it would likely be in more control of its brands and its name in the retail grocery chains and is pulling back on some of its licenses including ours. So it can have its sales force better represent the name directly to its customers rather than through other people's sales force such as ours.

And secondly, Tony, the name just -- the brand just was not pulling the product. People were choosing generally our brand Eat Smart over the Dole Brand. The Dole Brand, as you know, was a little bit more expensive to a purchaser, and as a result, Eat Smart was winning the day. So those combination of events said, hey, let's keep going on club stores where we have such a dominant position, but for those two reasons, let's discontinue the retail brand license.

Okay. So I take it that sales of the Dole Brand are significantly larger in club stores than they were at the retail sector?

I would not use the word -- no, not significantly. It is just that the potential is so much greater there with our penetration.

Okay. Thank you.

Jonathan Lichter, Sidoti & Co.

A question about how will inventories look at Ag at the end of the fourth quarter? What do you anticipate?

Well, I expect that inventories will be higher than they were at the end of last year just from an aspect that we had planned on, if you recall, a 10 to 15% growth in that business, and therefore, you had to order the seed production to meet that growth plan. And instead, we're going to be 3 to 4% growth. And, in addition, we acquired Heartland Hybrids.

So a combination of those tells you that our inventory will be higher than it was a year ago, but none of it is at risk. All this inventory is still good inventory and can be sold next or the year after.

Then I just wanted to clarify again, I think in the past you had said that the 55 to 65% growth would exclude -- was excluding the gain on the sale of land last year? I think you may have said that it --?

That is what we had, but it was also including this and excluding that. It was getting pretty confusing, so we made it simple.

So now you're saying that it is including that?

It will be a 55 to 65% growth over last year's net income.

Peter Black, Winfield Capital.

Would the improved outlook at Landec Ag that you're seeing now versus the second quarter, do you anticipate potentially being able to breakeven for the full year?

Bottom line or (multiple speakers)

Bottom-line net income.

Operating income?

Bottom-line.

Well, remember the bottom-line also includes a bunch of corporate charges.

Okay. All right. (multiple speakers)

-- excluding (inaudible) they will be profitable.

Okay, that is good. That is a great change from a couple of months ago.

Yes. As you know, Peter, we were quite concerned a few months ago with some of the deep discounting and some of the competitive actions, etc. They are still there. It is just that our team has done a very very good job to handle that situation.

That is good to hear. What is it about -- is 3 to 4 million a decent number to use for your maintenance level of capital expenditures going forward?

Yes.

Okay. It seems to me that you guys on a kind of conservative basis should be able to generate between, say, 10 and 12 million in free cash flow going forward. Given that you basically totally delevered your balance sheet, how do you plan on allocating that excess cash? Are you guys looking at acquisitions? Can you conceivably repurchase shares? I mean you do have a lot of excess cash.

Well, we are going through that evaluation right now as you can imagine, Peter. We are enjoying for the moment this strong balance sheet, so it is not like we are burning a hole in our pocket. But obviously the central issue for management is growing our core businesses and investing in new product development and looking for businesses that are complementary to what we are doing today both in channels of distribution, and applications for our patented technology are at the top of the list. So yes, new product development investments and outside potential acquisitions are things that we are discussing.

Okay. And then last question, I think you had a nice improvement in your gross margins at Apio. Assuming that you had another year, full year with outsourcing issues, are there additional operating kind of efficiencies that you can ring from your production facilities, where that gross margins improvement could be sustainable, or is it kind of getting a flat line?

Well, it is going to be a real challenge, Peter. We've got countervailing forces. I don't need to tell you what the cost of petroleum-based products is doing in terms of films and trays and things like that. Raw material costs of produce are going up as farmers costs are going up. So that will continue.

But, at the same time, we're just initiating a fairly major expansion of our plant. We will be expanding our plant by a third, and that activity will be commencing as soon as the rains end here hopefully in the next couple of weeks, and we hope to have that done by September. In that plan expansion, we plan and anticipate being much more efficient in our plant operation. So we hope to counterbalance these increased costs with improved efficiency. So I think the way I look at it is we hope that they will mesh and match.

Okay, okay. Well, thanks. You did a good job on the execution.

[Al Jerfie], Smith Barney.

Hey, Gary. It was a good quarter.

Good morning. Thank you.

The question has to do with your license agreement with Air Products. You state in the personal care area that this market area will expand our developing product sales to L'Oreal.

The second part of the question is L'Oreal made a recent acquisition of I believe Body Shop, and I'm wondering if this will have any impact on your relationship and the business that you do with L'Oreal?

Well, first of all, let me say that we expect this relationship with Air Products to expand our breadth and depth of products in the personal care arena in general, not just to L'Oreal. The nature of this deal, and now I don't know if you know Air Products, $8 billion company, well-managed, Allentown, Pennsylvania has $1 billion performance materials group, which we are working with, and they have global reach that obviously we don't have. And so they will apply their sales and marketing and technical service and customer service support people on a global basis to the types of technology that we have in personal care and in the field of catalyst products. And so we expect that we will have a better reach and a faster reach to expand our product lines.

So that is the hope, that is the dream, and then we share in the gross profits. You may recall from the release we will get 60% of the gross profits -- I'm sorry, 40%. And their products will self-fund the sales and marketing and support costs on their own nickel. So it is a good deal for us.

And regarding the acquisition of Body Shop, I just have to confess that I don't know of any reason why it would have any negative effect on us. If anything, it is probably a positive effect.

(OPERATOR INSTRUCTIONS). Michael Mork, Mork Capital Management.

Good quarter. My question is a little bit follow-on to the last one. Does Air Products -- that 40% of growth seems high. What could this mean in three or four years?

Gosh, I wish I knew. Sorry to be vague. Well, I think it is fair to say that from a materiality point of view don't expect huge things in the first couple of years. I think that the two companies will be meshing their capabilities. We will certainly be -- the good news, Michael, is that we have a good start in that we already are selling product to L'Oreal. We are already selling some products in the catalyst area.

Could it be material in three to four years? They think so. That is why they are doing this deal and why they are willing to share in the 40% range, which, as you said, is a very attractive arrangement for us. How big it can be? We just started. Literally we just had the kickoff meeting last week. How about asking me that in about six months?

Sounds good. Okay. Well, thank you.

[Paul Deats], [Deats & Field].

A question on when might the timing out look for your relationship with Chiquita? In other words, the impact on the bottom line, would that be gradual, or do you see something such as in the next fiscal year picking up substantially?

Paul, that is an excellent question, and you can imagine I'm asking that one every week. The way you ought to look at this is I think in the short-term we're going to hit some -- our goal is to hit some solid singles using baseball analogies. And the announcement of Core-Mark a couple of weeks ago is an example of a very solid hit to get on base. Core-Mark has something like 18 to 20,000 sites in the U.S.

The rollout limitations are logistics. It has nothing to do with our technology. Our technology is working just fine. It is just that these are remote sites in many cases. They are not used to having bananas delivered to them. So for awhile, as we focus on these new markets that include coffee chains, (inaudible) store chains, quickserve chains and convenience store chains, think of those as just solid singles that keep adding to a good profit margin, which we have said publicly will generally be 50% gross margins or higher.

And then the big one, then the next phase is to get into Europe. Chiquita is very strong in Europe. One would argue stronger in Europe than in the U.S.? And then that adds more men on base. And then real materiality, I mean big numbers can come if we can segue back into the retail grocery chain. That is where the lion's share of bananas are sold and consumed today. It is $4 billion of retail value in the U.S. alone. And so the segue back into the retail area is where people can get very excited. It has not happened yet. It is a strategy that will evolve, and I don't see that being something that we will do with Chiquita -- certainly not doing it in the next year. So if you were willing to think of this as steady evolution with the prospects that a retail hit could make a very material difference for our shareholders.

Right, very good. I appreciate that. And just a second question, ethanol demand for corn, I may be off-base on this, but what impact is this having? I read a sentence saying that the corn seed companies with a strong biotech effort are particularly in a good position. Does this impact you anyway?

Well, indirectly it does, Paul, in the sense that a healthy corn industry is good for us because we sell corn seed. We have a unique way of selling it, and we have a unique way of coating it. And so as the farmer benefits from increased demand or different outlets for his corn products, we're going to be a winner because we are well-positioned be a part of that. So we are hopeful, and there is encouraging signs. It is not having any material impact on us now, but our Ag guys are watching it closely and think that it is a very very positive trend.

Bill Gibson, Nollenberger Capital Partners.

Actually most of my questions got answered, but I do have one on coated seeds where you had some pretty good numbers and you have had good data on putting more money in the farmer's pocket, and yet while the percentage increase in your sales may be significant, it is still just such a tiny part of the corn and seed market. What will it take for that business to really start growing, or is that in the cards at some point?

The short answer to your question, Bill, is if we wanted a big pop fast, it would be that one of the big three seed companies endorses it and starts selling our coatings on their branded seed. When we did our market research for Intellicoat coatings a number of years ago, and I'm just going to pick on Early Plant corn because it happens to be what we think is the most promising near-term application where a farmer can plant his corn seed a month earlier, have it protected in the cold, wet soil and then catch the yield curve just right. The farmer said to us, I catch the concept of -- I see the benefit of planting early.

A), I want to believe that it works. I want to see enough data that says that it works, which we have been assembling. And secondly, I would like it on my major brand.

Well, Fielder's Choice Direct, which is our brand, albeit it is the eight largest brand in the U.S. right now, it is not anywhere close to having the brand awareness or clout that a Monsanto or a Pioneer or a [Sanjesta] has. So we never give up, but we are not waiting for the big guys to realize how valuable this technology is. But if you wanted a quick pop, that would be the best way to do it. And that is to have the coatings on one or more of these major seed companies' brands.

In the absence of that, our strategy is to sell directly to farmers through Fielder's Choice Direct, work with the second-tier seed companies, these eight companies we mentioned earlier, and what we have been doing recently is actually going to the big three customers themselves, the large farmers who are buying DeKalb and Pioneer seed and saying we will coat it for you. You can buy it from wherever you want. We will coat it for you.

Now that will have some logistics limitations over time, but our whole purpose is to sell more of it each year, make it profitable, bring the credibility, get the word out. And so there is a slower route and there is a faster route. We are pursuing both.

Have many of the farmers gone from that? Has somebody turned over his brand name seeds (multiple speakers) at coated?

Yes, this is the first year we have tried doing it, and yes, that is happening.

Good. Thank you.

Wes Cummins, B. Riley.

I have a couple of questions. First, Greg, on the balance sheet, did you give any guidance on what the balance sheet would do sequentially as far as the cash balance goes into Q4?

Sorry, I missed the first part of that. Could you (multiple speakers) your question?

Just looking at some guidance on the direction of the cash balance from Q3 to Q4 on the balance sheet.

Well, if you take -- let's just talk about seed. Assuming Apio continues to grow at the pace it has been growing at, which 12% during the first nine months, all right, you assume additional cash coming from Apio. The licensing deals, we have got a chunk of cash in from Air Products here at the licensing business. Then if you shift over to seed, you can see that seed we sold about 8 million during the quarter. We have about 18 million in deferred revenue. If you do the math on what their growth is, the difference is going to be cash that would be coming through for the fourth quarter. So there should be growth in our cash line during the fourth quarter over the third quarter.

Okay. And then a follow-up on that, either Gary or Greg. Anything or any plans for that cash, any opportunities like Heartland or anything like that that we could look forward to during 2007?

Well, as Gary said earlier, we are looking at investing in the product development, primarily in the technology side of our businesses, and anything that could be synergistic either with our distribution system or our technology could be a potential acquisition candidate. So yes, we are looking for uses of that cash. Investing it at 4% is not what we intend to do for the long term.

Okay. The other question I had is, Gary, just looking at your pipeline on the licensing side of the business, you guys had a couple of nice wins over the last few months. I was just wondering what the outlook is there for 2007 if we can expect that momentum to continue, any guidance you can give me on that?

You know, I'm sure you have been familiar with licensing arrangements. They are really lumpy. You can go a year and have nothing, and then in the case of Landec, recently we popped two of them. So they are very hard to predict, but we are constantly looking for licensing opportunities. We have signed our Chief Operating Officer, David Taft, to really focus on this business, which is to focus on our technology outside of the food and Ag arena. But we also have licensing opportunities in our food and Ag business. We're doing nothing outside the United States, for example, with our packaging technology. It is kind of a shame.

So I would not -- don't get set for two deals happening every six months, but know that we are looking at licensing and partnering in all of our businesses -- our food, Ag and our non-food and Ag licensing business. So we believe this is part of our future. We have invested in it. We have got the leadership there now. We have a very strong patented position with our technology. We are a technology company. So it is part of our future. So expect more of it, but just know that it is hard to predict.

Okay. Thanks. That is all I have.

Hank Feinstein, Gagnon.

Gary and Greg, great numbers. I'm really very very pleased to see your numbers. You may have covered this earlier, and I apologize since I got on the call a bit late, but I'm curious to know if you could add a little color to the footnote or comment with respect to the license for the medical device company? The fee is 250 according to the note here, and you will own between 16.7 and 19.9% of the Company. But I'm not quite sure exactly what it is they are making, and could you give us a little clearer picture of what that is all about?

The short answer is no. Sorry to have your first question end with a no, but by mutual agreement with the investors and the principles of this new company and for reasons that will become obvious down the road when we can say more, we are in an area that is exciting. It involves a medical device. It is not a drug. It does not go down the PMA route. If anything, it will go down the 510-K route. It is early stage. It is core technology. It is built on our polymer chemistry and our patents.

Well, let me ask the questions a little differently then. Are we protected in terms of our equity interest from an antidilution point of view in the event they have to raise additional capital so that we remain somewhere between 17 and 20%?

Not on future rounds.

Not on future rounds.

(inaudible)

There are no royalty schemes coming out of this arrangement? It is strictly an equity play?

No, eventually when they have a commercial product (multiple speakers)

There is royalties. (multiple speakers). There is royalties.

Okay. I did not see anything about royalties in there. (multiple speakers)

We failed to mention it, and thank you for reminding us because that was an oversight. But there were upfront dollars. There is ownership in the Company, and there is future royalty.

And are they anywhere near the magnitude of the royalties you disclosed on the other arrangement with Air Products? Are they in that ballpark?

Well, gosh, you know -- (multiple speakers)

Are they double digits? Mid double digits?

No, no, no --

But it is a lower royalty then?

It is a lower royalty, but it is a very attractive royalty. We did mention this. The press release did mention, Hank, that Landec will also receive royalties on future product sales.

Oh, it did? Okay. I missed it.

Yes, we just did not say the amount. Sorry to be vague on these things, but I'm sure you can understand and respect that we want to keep this confidential at this point.

But it's a very high-value area. We may have something extremely unique here. The principles running this business are seasoned veterans in the markets that these applications would pursue. The financial investors are strong, experienced, talented people, and we take an equity position. We do not have a board fee. We do not have controlling interest obviously. But we like this combination. We thought this was a unique way of capturing value not only with upfront monies, but with ownership position and also a royalty stream.

I think it is fabulous, frankly. I think you should be looking to do more of exactly that type of arrangement where if it is a homerun, it can even be a grand slam. I compliment you on it, and when the time is right, I'm sure you will make the appropriate announcement so that we can get a little more color on exactly what type of device it is and so forth. But I again want to thank you for doing a great job.

Great. Thank you, Hank.

Craig Pieringer, Wells Capital Management. (technical difficulty)--. (OPERATOR INSTRUCTIONS)

You are exactly right. Good morning. Gary, earlier you spoke about the retail grocery channel and how the results could be material there once Chiquita and other banana manufacturers decide to move in that direction. But I think you also said not anytime during this year or during the coming year.

My question is, early on the banana companies including Chiquita I believe were skeptical of the value of the Intelimer solution due to the fear that less waste at the point-of-sale or the store level could lead to less demand. Do you think they still harbor that kind of concern, or do you have any evidence that they have overcome that and they might be believing that the Landec Intelimer solution is a benefit to them in the long run?

One part of my answer I'm sure of and the other is conjecture. Regarding Chiquita, if you look at the investment they are making in packing and shipping and logistics and branding and labeling and marketing to use our technology, they are convinced. I mean they believe that this technology can be a cornerstone of their future. So they are putting their money where their mouth is.

Regarding other banana companies, I suspect that they are starting to scratch their heads a little bit and wonder maybe they ought to be thinking about this thing a little bit differently because they are just stuck in the commodity world. You know, commodity bananas is not a lot of fun. And so I suspect, and I'm doing this on conjecture, that they are starting to wonder a little bit about how they are going to participate in what we call the value-added banana business. Which is a business that is not priced on a per pound basis, but on either a bunch or a per piece basis or a prepackaged basis. So I think that success will breed awareness and success.

I agree that Chiquita is obviously embracing the alternative channel, but when you speak about the big hit, as you did earlier in the retail grocery channel and you said well, don't expect much there anytime soon, why do you think they are dragging their feet?

I'm sorry, well, you misunderstood me. If you want, I'm doing this hypothetically, Craig, to be a little cautious here, but if you wanted -- if you decided today you wanted to look at the retail channel using our technology, you would go through one year of trialing and packaging designing and merchandising. You would be doing all that. It would take you a year to get all that assembled. And so that is why I'm saying I don't expect it to be material from that segment in the next year. Don't hear that to read that we're not pursuing that in the next year.

That is the clarification I wanted to hear. (technical difficulty)--

Don't hear for a second that somebody is sitting on this. That is not the case. It's just that it takes some time. Think of the challenge here.

The banana world has been pretty set in its ways for a long time, and we are talking about disrupting that and doing something very differently. So the reason I mentioned I don't see that part being material interest in this nature is because the time it would take to do the testing and the logistics, handling and all the other marketing mix things that I just mentioned.

And taking it one step further, 12 months out we might start to hear more about it because they would have accomplished some of that preliminary work and some of that testing may be ongoing as we speak?

We would certainly hope so.

Mr. Steele, at this time I'm showing no further questions. Would you like to proceed with any closing comments?

We just want to thank again our shareholders and our investors for your loyalty and your participation in today's call. So thank you very much, and we look forward to future calls.

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