Lifecore Biomedical Inc (LFCR) 2006 Q4 法說會逐字稿

Good day ladies and gentleman and welcome to the Landec Corporation Fourth Quarter and Fiscal Year 2006 Earnings Conference Call.

At this time, all participates in 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 welcome to Landec's fiscal year 2006 year end earnings call.

I have with me today, Greg Skinner, our CFO.

This call is webcast by Thomson CCBN and can be accessed at Landec’s website at www.landec.com on the Investor Relations page.

The webcast will be available for 30 days through August 23, 2006.

A replay of the teleconference will be available for one week until midnight Eastern Time Tuesday, August 1, 2006 by calling 888-266-2081.

The access code for the replay is 928645.

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.

Fiscal year 2006 was a noteworthy year for Landec with the achievement of significant milestones.

We grew our revenues to the record level of $232 million from $205 million in the prior fiscal year.

We reported the most profitable year in our history by generating $8.7 million in net income, achieving 60% growth over the prior year results, while generating $11 million in cash flow from operations.

We ended the fiscal year with $20.5 million in cash up from $12.9 million in the prior year, and we now have no debt, at least no long term debt.

Our specially packaging fresh-cut produce subsidiary, Apio, Inc., had an excellent year.

During the year, Apio sold over 100 different specially package fresh-cut produce food items under our Eat Smart brand to major US retail grocery and club store chains.

Year-over-year Apio sales for our value-added products increased 13% to $136 million.

We continued to be the number one specially packaged fresh-cut vegetable supplier in the US, and our specially packaged vegetable tray products now represent 46% of total US market.

Apio Tech, our food packaging division, began fiscal year 2006 with initiatives for new products based on our priority BreatheWay packaging technology to extend produce’s shelf life.

The business charter of Apio Tech is to sell our packaging products to partners.

For Apio Tech, we do not get involved in sourcing the produce or selling the finished product.

Apio Tech’s initial focus is on commercializing our BreatheWay packaging technology with our partner, Chiquita Brands International.

During this past year, Landec and Chiquita demonstrated with customers the ability to extend the shelf life of bananas by at least 5 days.

Our BreatheWay technology opens new markets for bananas, which include convenience stores, coffee chains, quick serve food retailers, drug stores, and mini marts, locations that have traditionally not sold bananas due to their short shelf life.

In February 2006, we announced that Chiquita and Core-Mark International, one of the largest North American distributors to the convenience retail industry, entered into an arrangement to distribute Chiquita bananas using our BreatheWay packaging technology to convenience stores throughout the Core-Mark network.

Chiquita and Core-Mark intend to expand the commercial sale of BreatheWay packaged Chiquita bananas to more than 7,500 retail locations by December 2006.

Landec intends to expand Apio Tech initiatives and the use of its BreatheWay technology in new areas outside of the bananas over the next two years with additional partners.

During the past year, Landec also has completed several strategic transactions in support of goals to expand future growth.

In August of 2005, Landec’s seed subsidiary, Landec Ag, acquired the assets of Hartland Hybrids of Dassel, Minnesota, which increased both our farmer customer base and our seed revenues by over 30%.

This acquisition of Hartland allows us to better serve the northern Corn Belt and strengthens our position as the leading direct marketer of seed based products in the United States.

In December 2005, we entered into an exclusive arrangement with a medical device company.

This agreement resulted in license fee revenues of $1.6 million in fiscal year 2006 plus a 19.9% ownership position in this newly established company.

In March of 2006, we entered into a worldwide exclusive licensing agreement with Air Products and Chemicals, Inc., a leading specialty chemical and performance materials company with $8 billion in annual revenues.

This new relationship is designed to accelerate the licensing and supply business opportunities for Landec’s proprietary Intelimer polymer materials in markets that include person care products, catalysts, and household industrial cleaners.

Looking ahead we are focused on 5 important milestones for building shareholder value over the next several years.

First, continue to grow revenues, profits, and cash flow.

Second, extend the commercialization of our banana packaging program with Chiquita for use by nationally known chains.

Third, commercialized new uses of our BreatheWay packaging technology for food products.

Fourth, continue to growth our seed business.

And fifth, enter into new licensing arrangements for our proprietary Intelimer polymer materials.

Let me turn to Greg Skinner for details of our results.

Thanks, Gary, and good morning everyone.

As outlined in yesterday’s new release, Landec reported total revenues for the fourth quarter of fiscal year 2006 of $71.3 million versus revenues of $56.2 million for the same period a year ago.

The increase in total revenues in the fourth quarter was due to several reasons.

First, a 17%, or $5.2 million, increase in revenues from Apio’s value-added vegetable produce business.

Second, a 63%, or $9.9 million, increase in Landec Ag revenues due to the acquisition of Hartland Hybrids in August 2005, and the fact that a higher percentage of Landec Ag’s seed shipments occurred during the fourth quarter this year compared to last year’s fourth quarter.

And third, a $1 million increased in licensing revenues primarily from the Air Products licensing agreement and from additional preferred stock received from our medical device partner.

These increases were partially offset by a decrease in revenues from Apio’s commission trading business of $1 million, or 12%, due to the company’s decision to discontinue its very low margin domestic commodity buy/sell business.

For the fourth quarter of fiscal year 2006, the company reported net income of $6.7 million, or $0.24 per share, compared to net income of $4.6 million, or $0.17 per share, for the same period last year, a 46% increase.

This increase in net income during the fourth quarter of fiscal year 2006 compared to the same period last year is primarily due to, first, a $644,000 increase in gross profits from Apio’s value-added business.

Second, a $2.3 million increase in gross profits of Landec Ag due to the acquisition of Hartland Hybrids and because a higher percentage of this year’s total corn sales was shipped in the fourth quarter compared to last year.

And third, $411,000 in license fees from the medial device licensing agreement and $300,000 from the Air Products licensing agreement.

Net income was decreased by $1.7 million company wide increase in selling, general, and administrative expenses, due to, first, selling, general, and administrative expenses of $757,000 at Hartland Hybrids.

Second, plant increases and selling and marketing expenses at Apio and Landec Ag to generate increases in revenue.

Third, an increase in general and administrative expenses at corporate for business development consulting fees and legal fees.

And fourth, the accrual of bonuses for exceeding our fiscal year 2006 internal plan.

For fiscal year 2006, Landec had total revenues of $232 million compared to $205.2 million during the same period last year.

This increase in revenues for fiscal year 2006 was due to several reasons.

First, revenue growth in Apio’s value-added vegetable produce business, which increased 13% to $136.1 million from $120.4 million during the same period last year.

Second, a 33% increased in revenues from Landec Ag seed sales, which increased to $34.1 million from $25.6 million during the same period last year primarily due to the acquisition of Hartland Hybrids.

And third, an increased in licensing revenues of $2.6 million primarily due to the Air Products licensing agreement and from the licensing agreement with a newly established medical device company.

These increases in revenues were partially offset by $670,000 decrease in revenues from Apio’s commission trading business.

For fiscal year 2006, the company reported net income of $8.7 million, or $0.32 per diluted share, versus net income of $5.4 million, or $0.21 per diluted share, for the same period last year.

The increase in net income during fiscal year 2006 compared to last year was due to first, a $4 million increase in gross profits from Apio’s value-added business.

Second, a $1 million increase in gross profits at Landec Ag primarily due to the acquisition of Heartland Hybrids.

Third, 2.1 -- 2.3 million in license fees from the Air Products and the medical device licensing agreements and 638,000 from the Alcon license agreement and, fourth, a $604,000 increase in gross profits from Apio Tech compared to fiscal year 2005.

Net income was decreased by $4.6 million company-wide increase in selling, general and administrative expenses due to first, selling, general and administrative expenses of $2 million at Heartland Hybrids.

Second, plan increases in selling and marketing expenses at Apio and Landec Ag.

Third, an increase in general and administrative expenses at Corporate.

And fourth, the accrual bonuses for exceeding our fiscal year of 2006 internal plan.

As a reminder, seasonality’s inherent in our two core businesses, Apio, our Food business, and Landec Ag, our agricultural seed business.

Apio’s 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 no revenues during our first and second fiscal quarters.

Turning to the balance sheet, during fiscal year 2006, our cash balance increased by 7.6 million to 20.5 million.

This increase was due to cash flow from operations at 10.9 million and the sale of 3.5 million of common stock from employees exercising options.

These increases were partially offset by the purchase of 4.7 million of property plants and equipment, the net reduction of long-term debt of 1.1 million and the use of 3.9 million of cash to purchase Heartland Hybrids.

That concludes my formal presentation.

Let me turn it back to Gary.

Let’s talk about Landec’s 5 priorities for the next 24 months.

Our first priority is to continue to grow revenues, profits and positive cash flow.

We believe that Landec is well positioned to grow profits and cash flow based on sustaining good top-line growth.

We currently have the business model management team, infrastructure, systems and personnel in place to support and advance our expectations for growth in revenues, profits and cash flow.

This last year we generated $232 million in revenues with an employee headcount of 186 people.

Our businesses are scalable and we do not need large capital expenditures or significant increases in overall headcount or sales force to grow our businesses.

Our focus is on new product development and partnering in order to grow.

By example, we are just launching a new line of products that are single-portioned vegetable salad servings.

These products will be sold in grocery stores, club stores and possibly food service outlets, all using our proprietary BreatheWay technology.

This new line of products includes pre-cut vegetables, accent toppings, dressings and even a fork for ready-to-eat convenience for consumers on the go.

We have recently begun shipping our new vegetable salad line to retail grocery stores.

We are in the process on expanding our Apio food processing plant capabilities by 40%.

We expect that expansion to be complete this fall.

Our Apio team is focused on plant expansion, automation and efficiency improvements.

Our highest priority is to grow revenues and we believe that growth in profits and cash flow will and can follow growth in revenues.

Our second priority is to work closely with Chiquita to expand the commercialization of our banana packaging programs for use in nationally known chains.

Our early commercial work with Chiquita has demonstrated that the Landec BreatheWay technology extends the shelf life of bananas 5 to 7 days.

Chiquita’s initial focus is on new markets outside of retail grocery chains, such as retail coffee, quick serve, convenience stores, drug stores, mini mart national and regional chains.

Chiquita believes that there are over 200,000 sites in the US that have the potential to sell premium priced individual bananas to consumers if the bananas can be reliably delivered through their distribution channels.

These alternative markets are our initial focus with Chiquita for this fiscal year and we know that the trucking logistics, product handling and customer training issues that Chiquita is focused on are vitally important in order to succeed.

In parallel, we intend to work closely with Chiquita over the next 24 months to introduce Landec’s BreatheWay packaging technology under the Chiquita to-go product concept in Europe and in retail grocery stores.

There is much work to do here, much testing to perform, but we are hopeful and optimistic about this program expansion.

Our third priority is to identify and exploit new uses for our BreatheWay packaging technology.

In Apio Tech, we have a dedicated group focusing on developing and selling our proprietary packaging to partner companies just as we are doing with Chiquita.

Examples of initiatives include packaged meals of poultry, vegetables and tasty herbs, new fruit targets, which tend to be highly perishable, bag liners for various sizes for large-bulk packages, such as case liners, pallet shrouds and shipping containers.

Additional initiatives that we’re looking at include solutions for customers who want to buy their own packages and put their own produce inside it.

Applications that require very long shelf life capabilities for transporting fresh produce globally.

These new initiatives will all take time to develop, test and commercialize.

Our goal is to develop and sell proprietary packaging solutions that generate gross margins of 50% or more.

Our fourth priority is to grow our Seed business.

We have a unique business model at Landec Ag that combines our proprietary Intellicoat temperature-activated coatings with a unique direct selling channel under two national seed brands, Fielder’s Choice Direct and Heartland Hybrids.

We are now the eighth largest seed brand in the US, but still a small player compared to the three largest seed suppliers, Monsanto, Pioneer and Syngenta.

We are launching new growth initiatives in our Ag business that includes selectively coating seeds on major seed brands, expanding our knowledge base of farmers seed-genetic profiles and expanding our proprietary data base for farmer-specific agronomic information.

Our direct selling business model is scalable and we begin the year with approximately 50 direct sales people all focused on growth.

Our fifth priority is to continue to identify licensing opportunities with partners for our Intelimer temperature-activated polymers in areas outside of Food and Agriculture.

Starting in fiscal year 2006, we asked Landec’s COO, David Taft, to focus on building these opportunities.

We have initiated two new licensing arrangements in 2006, one with ear products and another with a new start-up medical device company.

These new collaborations will keep our corporate R&D personnel pretty busy during the fiscal year 2007.

We will, however, also work to develop over the next 24 months new licensing opportunities broadly, intra delivery, medical devices, adhesives, and coatings.

We do not expect any major new licensing deals outside of our food and ag business in fiscal year 2007.

Lastly, let me comment on how we intend to use our cash.

First, we are expanding our food processing facilities and will invest $6-7 million this year to sustain our growth based on larger, more efficient processing operations for specialty packaged fresh-cut products.

Second, we have just paid off $2 million of the remaining portion of long term debt.

We now have no long term debt.

Third, we plan to spend $3 million or more in R&D to fund new product development projects.

And lastly, we will expand working capital to support our growth.

In summary, fiscal year 2006 was a very good year and we accomplished the goals that we set out to achieve.

We are enthusiastic about the current fiscal year 2007 and the opportunities we see and about our plans for expanding our businesses and technologies.

We thank you for your continued support and we are now ready for your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is from Peter Black of Winfield Capital.

Your question, sir.

First of all congratulations on the good execution beating the analysts at [indiscernible].

That’s the first time that’s happened, so congratulations on that.

One of your goals you stated was to increase your Apio Tech revenues and gross profit, to double them.

So, just looking at what the number was this year that would take your gross profit to about $1.2 million, which doesn’t really move the needle a lot from an earnings prospective.

And then in the Q&A, you say interestingly that you expect Chiquita to turn its attention to uses other than banana packaging technology to European applications and domestic retail grocery applications after initial focus on nontraditional markets.

I mean that seems like that would be the Holy Grail in terms of driving real growth and profit.

Has Chiquita told you specifically that they are now seriously considering entering into the retail grocery market with your packaging technology?

First of all, obviously the focus this year with Chiquita is to expand in the--what we call the alternative new markets that are traditionally not markets for bananas, and that’s the commercial focus.

What we know from Chiquita is that this will be a year of testing and measuring and monitoring how well our technology and their logistics and sourcing capabilities and brand, how well that will do in the more traditional banana settings here in the US and in Europe.

And that--I expect that that is going to take this year to really sort out, figure out, and I have to give Chiquita credit; they want to do things methodically and thoughtfully and get it done right, and there are quite a few logistics issues.

So, the needle moving is that, and I agree with you, the big one in the sky for us is getting back into the retail grocery stores, frankly, with different product concepts than the traditional pick-up a hand of bananas and buy it on a per pound basis.

So, this is the year of testing for those markets.

That’s the big opportunity, 99% of bananas are bought in grocery stores in the US.

And so that’s why we want to spend quite a bit of time getting that right, Peter.

And yes, we are in synch on this.

This is something we want to focus on this year.

Okay.

And then one question about your balance sheet.

Looking at the ending balance for inventory, it looks like it goes up about 40% year-over-year.

Is that seed inventory?

Yes.

Most of that, it’s a combination of two things, Peter.

This is Greg.

It is the fact that we acquired Hartland Hybrids, so we end up acquiring inventory there, and then our seed business didn’t do as well as we had originally planned and that our production schedule set out to sell, and so we have carry over inventory.

There’s no issues with the inventory; it’s all good; it’s all sellable.

And we plan to sell it next year.

So, you’d be able to work through that, I guess, if you get the expected ramp up in corn seed orders for ethanol use.

Well, that’s a good point.

It’s hard to know what impact ethanol will have on demand.

But let’s just say that compared to a year ago, the farming community seems to be more optimistic.

Pricing for corn is better.

And so, let’s just say that we enter this year hopeful.

Okay.

Alright thanks.

Good job.

Our next question is from Bill Gibson of Nollenberger Capital.

Your question, sir.

Actually, my big question on retail on bananas got answered.

So thank you for that.

Could you give us an update on product development at Air Products or what’s your sense of that?

My sense of that is that, well, let’s just go back a little bit in time, Bill, and I think you may recall that we’ve been working on certain applications for our temperature activated Intelimer polymers that could be used in personal care products.

Because of our limited bandwidth, in terms of areas outside of food and ag, we had developed a relationship with one company, which we publicly announced and that was L’Oreal.

And so, we were going to be in a real slow mode on our own and so we joined forces with Air Products who had sales and marketing and technical support capability in 33 countries, $8 billion in sales, and is a very savvy product developer.

What we’re doing is we’ve expanded our site from 1 or 2 products to half a dozen, and now we can call with Air products on a broader array of customers globally, major players in personal care.

So with them and by the way if you followed Air Products new releases, they feel that the Landec technology is kind of their platform initially for getting into high end personal care additives and things like that.

We’re broadening the customer base with them.

We’re broadening the product line.

Additionally, they’re looking at our technology for other areas outside of personal care that include uses of catalysts, inputs for what’s called non-wovens, and then also products that can go into industrial cleaners and household cleaners, things like that.

Things that can be temperature activated in the wash cycle, those types of things.

So I would say that we’re past the initial honeymoon of helping them understand our technology and now we’re into the commercial phase and so we’re feeling pretty good about this.

It’s a good start and -- so we can work with not only L’Oreal but other players.

And just one follow-up question and this related to Ag.

I think I heard you mention a program to coat major seed brands.

How does that work and is that the farmer turning over his seeds to you or -- ?

Yes, what -- one of the real limitations of us expanding our coating technology for seeds and we’ve reported this in the past is that the technology works, it does provide value, but in the farming community you’ve got two issues.

One issue is, “Gosh, it’s new-fangled and I’m a little nervous about trying something that’s untested and I haven’t tried it yet” and that kind of thing, so you’ve got to overcome those obstacles obviously.

But the other one is that people in the farming community are pretty loyal to their brands and you know, there’s some big brands out there that have been around a long time and the farmers’ dad used them, and his granddaddy used them, that kind of thing, so we have not been able to reach any type of a working collaborative agreement with one of the big three seed companies for our coatings for a couple of reasons.

One, is it’s new-fangled and we had to test it and prove it that it worked and secondly, they’ve been so focused on the genetic engineering of traits in seeds and that’s where they’ve been putting their R&D and commercial dollars.

So, we have recently said, “Hey, we feel confident enough in our technology that we’d like to work with one or more of these major companies -- major branded companies”, and work with them so that logistically they -- a farmer can buy his major brand and we’ll coat it.

So, instead of coating it on our brand, Fielder’s Choice Direct or Heartland, additionally, we can now -- we will now look at coating on at least one of these major brands and work it that way, Bill, so that together we can see the results and prove that this technology really works.

That may be a slow-mo way of commercializing this technology, but we think it’s the smart way, to build acceptance and credibility.

Your next question comes from Tony Brenner of Roth Capital Partners.

Your question, sir.

Good morning.

A couple of questions.

What is -- does this nameless medical device company have a product that’s ready to be sold commercially in the market place?

No.

When we announced that deal, that was -- that was a raw start-up.

That was Landec licensing its technology, and I’m just going to call the company Newco for the time being, a management team being assembled to run it and some very seasoned venture capital veterans who know the medical device world all coming together in a raw start-up.

And so, we licensed the polymer technology but the application development work is now under way and so just as with any medical device, you know there’s a -- you know, you’ve got product development, you’ve got some testing.

It does look like it’s -- when it does get to regulatory approval, when and if it does, it’ll be a 5-10K, which is you know, Tony, is a faster process.

But no, it’s not at all ready.

Okay.

Second question, is there the potential this year for cost reduction and consolidation of the Heartland business with your own Ag business?

Well, we -- the answer is yes, but it’s -- I don’t want to mislead you, Tony, into thinking these are huge things.

These are combining two sales organizations primarily.

No, it’s not as though you’ve got a lot of SG&A -- G&A going on.

You’ve got a lot of S. So we started doing that already.

There’s some -- there was some overlap, there was some efficiency improvements.

So, some of that has already taken place.

There’s some more of that, but the focus here is really on increasing sales.

That’s where the leverage is.

And as you know, because we use a direct marketing and selling approach, we don’t have folks running around the countryside driving in cars, trying to find a farmer.

We have creative ways of finding the farmer and when we find them, we know just about everything we need to know about that farm without having to be in his kitchen.

So, I’d say there are some further efficiency and scale -- scaling opportunities, but not dramatic.

Okay.

All right, does your guidance for fiscal 2007 assume meaningful business for Apio Tech beyond Core-Mark?

In other words, does it assume that Chiquita will be selling significant or a reasonable amount of business to other customers besides Core-Mark this year?

The -- I’d say yes.

There are other customers that are in the queue.

It does not -- so yes, in the alternative, non-retail grocery store market, yes is the answer.

None though for the retail grocery chains.

As I said earlier, this is a year of testing.

No, I’m not talking about retail.

I’m talking about coffee chains, drug stores, convenience stores an so on.

Yes.

There is an assumption that we will roll that out and have new customers and they’re all important.

All right, my last question, I believe that you hit your guidance for this year that you said at the beginning of the year, the -- about 50 to 60% in net income, right?

Well, we -- it went up 60%.

Our comments early in the year was that we were hopeful to increase net income between 55 and 65%.

We hit 60.

Okay.

Then why are there incremental bonuses for exceeding the internal plan if you did not exceed the external plan?

That -- well, we were -- the internal bonuses were 50%.

I’m sorry, 55%, the low end.

I see, so your public guidance is just wildly optimistic and you’re real conservative in house or --?

This is art and science and we made our best guess as to, well, we beat our plan, basically, Tony, is what happened.

Our next question is from [Sullivan Demaloti] of B. Riley & Co. Your question, please.

First, a clarification on the guidance, I just want to make sure I’ve got the EPS guidance right because you guys have some distortions from the subsidiary options, etc, etc, so, what does the EPS guidance work out to?

I’ve got $0.39 to $0.42 for next year.

If you take the high end of the guidance, it’s closer to like 39 range, 39-40.

If you just do the math that we outlined in the press release, that’s what you end up with.

Right.

Okay.

Sullivan, just for example, we’re expecting about $500,000 in expensing from options this next fiscal year, so we’re putting that in the guidance if you want to use that.

Okay.

On the guidance for CapEx, should we except that to be first half’s loaded so that in the second half we might already start seeing some margin improvement at Apio?

Yes.

That’s a very good question.

The spending is clearly first half loaded.

We’re in the thick of it right now.

And the whole idea is that we would immediately see the benefit of that.

Now, keep in mind, if you read the Q&A, we need to do that regardless because we’ve got some increases in our operating expenses in terms of raw material costs that we’ve really got to deal with and they’re not insignificant.

So we expect to see these efficiency improvements in our second quarter.

Second half or second--

Second half, I’m sorry, second half, excuse me.

Okay.

And then the reduction in revenue at Apio Trading, clearly that’s low margin business for your guys, but the fact that it’s not going to be a focus area in 2007, does that have any implication as to your ability to bring the Intelimer technology abroad?

No.

We view those as independents.

That trading business is two components.

There’s export business, which we, frankly, manage for profitability and it’s a flat growth business.

It’s predictable.

And that is still a platform down the road for launching our international technology.

And then there’s a more domestic buy/sell business, which was commodity, low margin, and we just decided that we shouldn’t mess around with this anymore.

So we’re just not going – we’re diminishing that dramatically, and I think that reduction is roughly about $7 million in revenues, but it wasn’t profitable.

And that had no impact on our technology development and commercialization.

Okay.

And then final question, you guys were looking for a bit of improving in pricing at Landec Ag.

When do we actually see whether or not that’s going to panning out?

Is it as early as Q2?

That’s a terrific question again.

And we start taking orders very, very seriously August 1st.

And so by the 2nd – let’s see, we’re June, July, August – by the second quarter, we’ll have a pretty good feel if thinks are sticky.

So I’d say second quarter would be good early indications and certainly by third quarter, you know where you stand.

Because you’ve obviously got to look at what competitors are doing.

And last year there was some very strange things going on price wise in the industry.

Okay, perfect.

Thanks a lot.

Our next question comes from Jonathan Lichter of Sidoti.

Your question, sir.

Can you talk a little more about the large package and containers initiative?

What’s likely to be commercialized first and a time frame and the sales potential?

The order, I think, is going to go by size.

I think that probably the – when we talk about larger packages, you’ve seen the kind of products that we sell.

They’re consumer oriented, consumer-friendly, small packages for retail grocery stores, slightly bigger for club stores.

The first think that I think that you can see rolling out will be what I call case liners, things that would be inset in a cardboard box.

They can hold 40-50 lbs. of produce, that kind of thing.

And we’d like to see that begin commercialization this fiscal year.

It may be small initially, but we feel that that’s the first order of business.

Then the second order of business would be to go to a slightly larger scale, which imagine those boxes stacked up on a wood pallet and then surrounded with what we call a pallet shroud.

And I see that coming out, if things go well, not this fiscal year but the next fiscal year.

We might be able to do better than that, but that’s kind of the order of things.

The container work it probably a couple of years away, Jonathan.

There’s a lot of testing there.

You need the right kind of partnering.

We don’t want to do that on our own, and so I see that coming later.

So that’s the case liners, pallet shrouds, and then shipping containers in the sequence, and that’s the rough timing.

Do you have any idea of what the sales potential could be for the case liners?

No.

Other than to say that there’s a lot of shipment and movement of produce.

By the way, this would be both whole and cut produce.

But I think that it has the nearest turn potential, but since we haven’t done it yet and people don’t typically use these case liners, I can’t refer to a market and tell you, by the way, there’s $27 million market and we’re just going to display something.

So we don’t have a good feel for that yet, other than the fact that it fits very nicely in our existing business.

We don’t have to build a separate sales and marketing infrastructure.

But don’t have a good feel for the size of that right now.

We will – this is the year to get a better handle on that.

Right.

And also, so you have any further thoughts on what you might do with the cash now that you’ve paid off the debt, I guess besides CapEx?

The--First of all, I’m not trying to be cute here when I say this, but it’s not burning a hole in our pocket.

It’s–We--The first thing we do is pay off the long term debt.

Secondly, we are going to self-fund the $6-7 million in CapEx.

Okay?

So that’s something that is for sure.

We want to make sure that we have enough working capital to expand.

Let me just say that opportunistically it something made a ton of sense in our food business that was synergistic with our packaging technology.

We wouldn’t rule out a smaller acquisition or an equity play, but I’m not saying, hey, that’s pending or imminent.

But that would be something we would consider if it fits extremely well with our technology.

So those are the things that we are looking at.

Our next question is from Will [Lauber] of Sterling Capital Management.

You question, sir.

I had a couple of question.

The first one is that I’ve noticed that Monsanto has been buying a lot of smaller seed companies lately.

And just wanted to kind of get your reaction to that as to how that would affect you competitively.

And then also why–just blaming Monsanto people for a second -- why they would be buying these companies with, as near as I can tell, they’re just basically buying the customers where this -- maybe with your seed business so they can get the technology as well as the direct sales model?

So, that’s the first question.

There were a few questions in there.

Let me see if I get them all but let me start with Monsanto and remember I’m just giving you my thought -- personal thoughts.

I don’t have any particular insight but they formed and declared a couple of years ago that they were going to acquire companies.

They formed a group called ASI, which is an umbrella for them to acquire companies and in theory at least, maybe in practice, maintain the same management, let them operate their businesses.

Now, why are they doing that?

The reason they’re doing it, I believe, is the end gain from Monsanto is to license their traits technology.

These are genetically engineered traits and their seed genetics and they want to make darn well sure down the road when other people come out with competitive traits, that they have a certain portion of their -- of the market place dedicated solely to buying their traits.

Okay, that’s where the action is for Monsanto.

They’re making hand-over-fist money on these traits and royalties, and so if they know that a certain portion of the market is captured and dedicated and committed to buying their traits long-term, that’s where the victory and they’re doing a very good job of that.

So, they’re buying up both small and medium sized companies.

Let me tell you, they’re not a lot of medium sized companies left, frankly, and so that begs the question, well, what are we going to do with our Ag business?

And I will just tell you we’re going to look at everything this year, everything, including growing in our business and maintaining the current plan.

We’ll look at other opportunities and so that includes everything.

Because it is a market place that does have M&A activity and we owe it to our shareholders to look at all possibilities.

But Monsanto is a real major force out there.

Let me remind you that we are a licensee of Monsanto traits and genetics and we’re one of their best licensees and we send them a lot of money every year in royalties and fees.

So, they’re both -- they’re our friend and partner and they’re also a competitor in the market place through their seed company called DeKalb, primarily.

But they are buying up companies and it doesn’t appear to us that they’re slowing that down at all.

Now, did I answer your questions?

Yes.

My other question was that I saw that Amazon.com is getting into the food business but they’re not doing perishable items right now and I was wanting to get your take as to whether it was feasible, used in a brief way, packaging technology, whether somewhere down the road that might be an option?

It’s a very interesting option to look at.

And the problem with shipping produce is it’s highly perishable and it’s a really tricky business and it needs to be refrigerated and so you’ve got to have refrigerated distribution centers and trucks, etc.

But we like to dream like anybody else.

There’s some interesting things that one could consider and imagine for getting fresh cut produce delivered to the home.

And those are things that are down the road for us.

They’re not here and now.

The other opportunity for us is we have absolutely no play in food service today.

And when I mean food service, I mean schools and hospitals and airports and restaurants, etc, and I like the looks of this fresh cut salad, veg salad line, it looks like it might be a good pioneering product line for us to look at food service and if we can do that, then we can look at some of these other alternative markets that you’ve mentioned, down the road for us, not impossible to think about.

And then the final question, it seemed like, as far as the new initiatives, you said that the R&D people are pretty constrained with the current projects.

Is that something that you could add more R&D people to get kind of ramp up the Apio Tech business or what are the constraints there?

No, the answer to your question is yes we can.

And with the right opportunities we can and we will.

Our next question is from [Rick Federman of Federman Investment].

Your question, sir.

Do you -- with regards to Air Products, do you expect revenue other than license fees to be a fiscal 2008 event or later?

The beauty of the way we structured this deal is that we are taking some license fees over 3 years.

We publicly announced that that was a total of, I think, $2.4 million over 3 years, but the beauty of this is that we also will share in the gross profits.

And, the way that works is that when we -- when Air Products sells finished products that use our technology they will sell fund the marketing and sells and technical support cost out of their nickel but after we sell a product using our technology, we split the gross profits, not the net profits, the gross profits.

They take 60%, we take 40%.

So we will start to see that in our income statement this fiscal year.

It’s going to take a little while to build that up.

So not only will we have license fees for 3 years, we’ll also have a split of these gross profits that is ongoing and that’s --and by the way, there’s also minimums that set in for them to keep exclusivity.

So, I think it’s a good structure for both of us and we look forward to sharing those gross profits.

All right.

On to the packaged meals and salads, you mentioned in the release the Foster Farms has a -- I guess it’s a pilot project, but with Costco, when did that begin and what kind of reception has there been?

That began a few months ago and I honestly can’t tell you how well and fast that’s going.

It’s just limited to a certain number of Costco’s in the western United States and I think we need a little bit more time, Rick, to comment on that.

I just -- I think it’s too soon to call.

Okay.

And, can you say which stores or what chain the single-serving salads are being tested in?

At this -- no and it’s not a test.

I mean, we’re going for it, it’s not a test.

When we start shipping, and we’ve just started shipping, it’s going to be fully merchandised and sold.

So, this is not a test or pilot program.

We announced in Chicago not too long ago and there was a lot of interest and what you find in this business is getting from a lot of interest to actually figuring out where it’s slotted in the store, where’s the real estate, where does it actually get put, how does it merchandise?

That takes a little bit of time, but we’re not doing this as a test, we’re just, we’re just going to roll it out.

But it would be very premature for us and, and for competitive reasons it would be silly for us to mention any names at this point.

All right.

Thanks a lot and good luck.

[OPERATOR INSTRUCTIONS].

Our next question’s from Bill Gibson of Nollenberger Capital.

Your question.

Yes, just one quick housekeeping item.

On the subsidiary options, what was the number for the fourth quarter?

The -- the backlog for the fourth quarter?

Well, the -- you know how you backed out of minority interest on the subsidiary options that, to the two subsidiaries?

Well the best way to essay, or right off the top of my head I don’t remember, Bill, but if you take about 6% of Apio’s net income for the fourth quarter, that would be close to the number.

Okay, and so you didn’t take out anything in the quarter on Ag because of the annual loss?

Right.

The next question is from Craig Kinger of Wells Capital Management.

You’re question.

Pieringer.

You mentioned no more licensing agreements expected in 2007, is that accurate?

And I was under the belief you had some outside consultant shaking the bushes for those sorts of opportunities which--which seem to be plentiful.

The first comment is that the--what I said was don’t--we shouldn’t expect outside of our food and Ag business is what I said.

Outside of our core businesses, I don’t think we’re going to have a year like we just had, where we landed two of them, Craig.

And so that’s just trying to manage expectations if we--if we get fortunate here and something pops outside of Food and Ag great, but I would say unrealistic at this point.

In terms of licensing and partnering in the food and Ag business, absolutely.

That those are actively pursued.

But outside of Food and Ag, this--this new area, we need a little bit of time to--to figure out where we’re going to play and where we’re going to have licensable products in the medical devices, adhesives, coatings here, so give us some time on that.

Do you still have a consultant looking for those opportunities?

And secondly, that consultant was hired and used for getting the eventual end, end point of that was the air products deal.

It was very helpful.

They are still available to us but right now we are pretty consumed in terms of [indiscernible].

And, and I’m talking about outside of Food and Ag.

But we are, we’re looking real hard at how our technology can be used in medical devices and coatings and adhesives and things--drug delivery.

And if it was in the right space, where this consultant is strong, we would use them gain.

Okay.

And in the retail grocery environment, you were talking earlier about; the nearest term opportunity seems to be these case liners.

Previously I had a discussion with someone about the possibility of a roll of bags utilizing BreathWay technology that would be fine tuned to either vegetables, fruit, bananas, whatever, that a consumer could buy off the shelf, take home and then used to extend the shelf life of their produce in their own refrigerator.

Is that a pipe dream, is that still on going, is that a possibility?

Yes it is.

That--that’s being--that testing and evaluation process is right now going on with a well-known partner.

We have not announced who that is, but that, that’s not a pipe dream.

No.

Okay, so that’s outside the Air Products also?

Oh yes, that would--we do that.

Okay.

That’s right.

That’s in our food space, that’s in our food business because this would be used for perishable produce.

When I say we’re looking at licensing opportunities in Food and Ag, that’s an example.

And then outside of Food and Ag, we’re going to digest here a little bit and really support Air Products and look at these other opportunities and not expecting a new deal in that area this year.

So you mentioned testing, is that something that’s going on currently obviously.

And when--when might that test be done?

I think that--I’m trying to recall what the bench marks and milestones are, but I think it’s, I think we’ve got probably six to eight more months of that.

It’s a pretty broad based test of consumers and, and costing and pricing and how many membranes would you need?

Do you need eight, do you need two, do you need five?

That kind of thing.

Our final question comes from [Jerry Heffernan] of Lord Abbett.

You’re question sir.

Good morning everybody.

I’d like to ask about the Ag area, the seed business in particular and I was just wondering if you could help me understand the year-over-year effects on your revenue mind of the difference in volume of seeds sold and the differences in price year to year?

Understanding that you need to kind of pull out the acquisition and, and normalize for that?

I just want to have a complete understanding because apparently we had two things happen.

We had fewer acres of seed planted, I don’t know how to take that number in and bring that directly into your customer base.

We had very competitive situation where prices were dropping and additionally revenues went up primarily because of an acquisition.

Let’s see.

Basically, and if you want more details, just ask, but volumes were down roughly 10% and price--price due to mixed changes and more valuable feed products being sold, went up about 11%.

And I’m--I’m removing the Heartland acquisition impact.

Because I don’t think that increased things about 30% but that’s--those are--that’s a one time kind of a change.

So volume and price were acting in opposite directions.

Volumes were down because acreage was down, one of the major companies, for reasons not clear to many other folks in the industry, decided to give away a bag of seed free for every bag you purchased and from what we could tell that, that effort didn’t work very well, but anyway they did it.

So there was some confusion.

Farmers were unhappy with their situation.

Energy prices going up, corn prices down.

So it was, it was pretty miserable year.

I think Monsanto, back to the other question.

I think Monsanto did well because they’re collecting royalties and fees from a lot of folks.

But for most folks it was a, you know, pretty down year.

In terms of mix, however, we were selling higher priced products, some with genetics technology, some with coatings and so that had kind of an offseting effect.

Certainly below our expectations for the year but in, all in all, our team really scrambled and did a--did a good job to recover from a tough situation.

Could you give us an idea of what happened year to year on price between like products?

Understanding the effect in your overall numbers.

Was it upward movement in price but just understanding what like, beyond the prices and like products.

Right.

If you were to take--let’s say we lined up a 100 of our hybrids from the year before.

You’re talking about this past year compared to the year before, correct?

That’s correct.

Okay, if we took 100 hybrid and we compared then year over year, the pricing would have been flat.

Okay.

Mixed change though, more valuable product, you know, higher priced products in the mix kind of won the day.

But in terms of price, it was--it was a flat year.

For us.

Okay.

So I, see I misunderstood from your--from your release where you mentioned the highly competitive pricing that, I was expecting you to say that pricing was down in like products.

So you’re saying just in hybrids it was flat.

Was –

No.

No, it just, we chose, we chose to keep flat and others chose different approaches.

Okay.

So we--we slugged it out with comparable pricing and the result was we had lower buyings.

But we weren’t, let’s just say we weren’t going down into the depths of these deep price reductions and things.

That was a choice, conscious choice on our part and that’s what we did.

So would that explain the difference in your volumes being down 10% and the commentary of total acres planted being down 5%?

If I could use acres planted as a proxy for volumes sold.

I don’t know, to be honest with you, I don’t know that you should do that.

If you wanted to, I’d say that it explains-- explains at least part of, of the year.

I can’t tell you that it explains all of it, but I don’t know that I’d use that proxy though.

Okay.

Early indications?

I mean the ethanol business, certainly from a Wall Street prospective, there seems to be a whole lot more talk of ethanol, certainly a lot of people raising for ethanol plants and talk of new ones.

But I don’t know how many actual new plants are in existence for this upcoming growing season versus last year?

Do you have any feel for that?

A little bit and just know that this is--I’m reading the same stuff you are and I’m talking to our Ag guys and all I can tell you is that there is a feeling and a belief and I think the USDA is even reported on this that perhaps too little corn seed was planted this year to deal with the oncoming -- and I’ve heard 39 new plants, that kind of stuff, I don’t know the exact timing.

But there may be for the first time in the corn business for a number of years, there may be a situation where supply and demand are in the right way for the farmer.

And a happy farmer certainly is not going to do us harm, we hope it will be good for us.

But that’s what we’re hearing is that it is a factor, it is affecting mind set of farmers that probably suggest that they’ll be back to their--their, their more reasonable planting of--that they were back to their more reasonable planting of corn.

Now remember we’re--the year we’re starting, we’re talking about selling seeds for next spring.

So we’re hopeful that this supply/demand situation is favorable for suppliers such as us.

And we are the eighth largest brand in the US, so hopefully it affects us positively.

One final question on the--on the topic, you’re comment of your cost of seed is increasing as the mix of hybrid seeds changes to higher percentage of hybrids with traits of higher tech and royalty fees--

Our, our price is increasing, I think is--

Right.

Yes.

Well it’s says your cost.

The cost that your paying for, you’re, it’s in a section where you’re talking about the raw material cost increasing.

That’s right.

Okay.

Yes.

Is there not a, an equal increase in the price for those seeds?

I mean I would expect usually the--the higher tech, higher involved product, yes has a higher price, does the distributor usually gets a better margin on it also, is that not the case with this?

Assume that, assume that if as these fees, tech fees and things like that go up, assume that on a minimum we’ll pass that along to our customers.

Assume that as a minimum.

And if there are opportunities, reasonable opportunities for us to also improve our margins, we’re going to do it.

And this is the year that we’re, we’re looking at doing that.

Okay.

So while in an absolute basis you’re costs will go up because of this situation, we should not see that as something that’s going to crimp margin?

If things are going to go according to plan, that’s correct.

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 our shareholders for their continued interest in the company and we look forward to reporting on the results for this new fiscal year.

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.