Lifecore Biomedical Inc (LFCR) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Landec Corporation first quarter of fiscal year 2007 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to introduce your host for today's conference, Mr. Gary Steele, President and Chief Executive Officer for Landec Corporation.

Sir, you may begin.

Good morning and welcome to Landec's first quarter for fiscal year 2007 earnings call.

I have with me today Greg Skinner, Landec's Chief Financial Officer.

This call is being 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 October 26, 2006.

A replay of the teleconference will be available for one week until Midnight Eastern Time, Wednesday, October 4, 2006, by calling 888-266-2081.

The access code for the replay is 962506.

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 our filings with the SEC, including the Company's Form 10-K for fiscal year 2006.

As reported in yesterday's press release, for the first quarter of fiscal year 2007, we achieved revenues of $51.1 million and break-even net income.

The strong growth in our specialty packaging food business was notable.

Increasing 18% year over year despite our need to extensively purchase produce on the open market at prices significantly above contracted prices due to weather-related shortages.

Overall, our food business generated $2 million in positive cash flow from operations during the first quarter.

In addition, we recorded the favorable settlement of our fire claims at Dock Resins totaling $1.3 million in net proceeds.

The results for the first quarter are consistent with our revenue and net income goals for fiscal year 2007.

Namely to increase revenues by 10% to 15%, excluding our Apio trading business, while also increasing net income by 35% to 45% compared fiscal year 2006 results.

Our progress in the second quarter is going well.

By the end of October we expect to complete the buildout and expansion of our Apio food processing plant capabilities, increasing our capacity by 60% in order to accommodate our expected continued growth in our food business.

We are already experiencing planned efficiency improvements in our processing plant, which we expect to carry through the rest of the year.

Our ag seed business is off to a good start with solid orders from U.S. farmers for corn, alfalfa, and soybean seed, including strong early orders for our Intellicoat coating products.

Our Chiquita collaboration is proceeding well, not only with the rollout of selling bananas to new, alternative retail sites but also with preparations to test new packaging product designs this year and both alternative and traditional banana markets.

We will have more to say regarding the Chiquita collaboration in future conference calls.

You will note that the revenues for our food trading business declined in the first quarter as part of the planned reduction in the commodities segment of our trading business in the United States, which is not profitable for us.

In the export side of things, which is profitable, our revenues were down due to produce shortages in the first quarter.

And that's all related to our trading business.

All in all, we are on track for the year.

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

Thank you, Gary, and good morning, everyone.

As outlined in yesterday's news release, Landec reported total revenues for the first quarter of fiscal year 2007 of 51.1 million versus revenues of 49.7 million for the same period a year ago.

The increase in total revenues during the first quarter was due to an 18% or $5.3 million increase in revenues from Apio's value-added vegetable produce business, despite significant produce shortages during the quarter.

This increase was partially offset by a decrease in revenues from Apio's commissioned trading business of $4 million or 20%, due to planned decreases in Apio's domestic commodity buy/sell business and lower export volume sales as a result of produce shortages.

For the first quarter of fiscal year 2007, the Company reported net income of 14,000 or $0.00 per share, compared net loss of 521,000 or $0.02 per share for the same period last year.

This increase in net income during the first quarter of fiscal year 2007 compared to the same period last year is primarily due to;

First, a $1.3 million settlement of insurance claims related to a fire that occurred at Landec's Dock Resins facility in 2000, which was recognized as a reduction in corporate selling, general, and administrative expenses.

Second, a decrease in selling, general and administrative expenses at Apio of 630,000, due primarily to lower sales and marketing expenses during this year's first quarter, compared to the same period last year.

And third, a $314,000 increase in nonoperating income due to increased increased income and reduced minority interest expenses.

Net income was decreased by;

First, a $1 million decrease in gross profits from Apio's value-added business due to significant produce shortages during the quarter.

Second, a $118,000 decrease in gross profits from Apio's trading business, due to lower planned revenues.

And third, from a loss of $626,000 at Heartland Hybrids, which was not acquired until the beginning of the second quarter of fiscal year 2006.

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

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

Turning to the balance sheet.

During the first quarter of fiscal year 2007, our cash balance decreased by 6.1 million to 14.4 million.

This decrease was primarily due to three reasons.

First, cash used in operating activities of $1.9 million.

Second, capital expenditures of 2.3 million, primarily to expand Apio's value-added facility.

And third, the payoff of $2 million of long-term debt completing the payoff of all of our long-term debt.

That concludes my formal presentation.

I'll turn it back to you, Gary.

Let me elaborate on a few events that have occurred this far in fiscal year 2007.

First, we are glad to have the Dock Resins fire claim settled.

Our former wholly owned subsidiary, Dock Resins, experienced substantial fire damage in 2007 in our R&D laboratories in Linden, New Jersey.

It took over six years to settle this matter and we are the net beneficiary of $1.3 million.

We sold Dock Resins in the year 2002 but we continued to rigorously pursue this matter for settlement with our insurance carrier.

We are glad we did and this matter is now behind us.

Secondly, Chiquita, our strategic partner for commercializing our BreatheWay packaging technology for bananas, is investing considerable resources to put in place capabilities for the logistics, handling, marketing, and selling of premium priced bananas using our BreatheWay technology.

Chiquita recently announced steps to further strengthen its overall financial position and better position the Company for the long term, allowing Chiquita to better focus on value-added products and markets with less dependency on commodity businesses.

Third, we continue to work on initiatives to lessen the impact of raw material produce shortages such as those we experienced in California caused by the heavy rains this spring and severe heat this summer.

We are broadening and diversifying sourcing partners and working with closely with customers to offer flexible product mix changes when shortages occur in certain produce categories.

We cannot control the weather but we can work to minimize sourcing risk.

Fourth, much has been written and discussed in these past weeks regarding the spinach e-coli matter.

As you know, Landec is not in the leaf lettuce or spinach business and, thus, has not been directly affected.

We are, however, reminded that food safety is our number one priority, and we applaud and support any initiatives undertaken by growers and processors to ensure the highest levels of quality of any packaged produce items.

Looking ahead, our priorities are to build shareholder value by first growing revenues, profits, and free cash flow from operations.

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

Third, commercializing new uses of our BreatheWay packaging technology for new food product applications.

Fourth, continuing to grow our seed business.

And fifth, entering into new strategic partner and customer relationships.

We are now ready for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is from Bill Gibson of Nollenberger Capital.

Your question, please.

First up, I think my first question is pretty obvious because I think you answered it in the opening remarks, Gary.

And that relates to revenue guidance in fiscal year '07, that there was no change or was there a change?

No, Bill.

There's no change in our revenue guidance.

And our income guidance, as you know, is in the 35% to 45% year over year.

So, no change in our thinking at all.

Okay.

And then secondly, you mentioned hitting some contractual milestones on the medical device company where you've got stock.

What -- is that something they have to do, or what do you have to do to reach that milestone?

We have to file a patent.

That is a significant patent that underlies the license that we gave to this new company that's been started for the exploitation of our technology.

So, it is the filing of a patent that will trigger the further issuance of more shares, Bill.

And we see that happening in the next one to two quarters.

Okay.

And you talked about having maybe on future calls progress on the new sizes of packaging and forms of packaging for BreatheWay.

Actually, what I'd love to get is just a little more on this call on that very topic, of progress being made and sort of the timing of when it could potentially be introduced to the market?

We expect to introduce larger package sizes where we will just be selling the packaging this year.

Think of those in what I call the caseliner size, fitting inside cardboard boxes.

It allows the extension and shelf life of various types of produce.

So, we see that happening this year.

The much larger sizes, containers and pallets would probably be a year or two away, Bill.

In terms of my comment on further announcements on BreatheWay, it really was related more to the Chiquita collaboration, where we look to them to take the lead on announcing new customers and new initiatives.

And then we typically will follow with those announcements.

So we're dependent on when they want to make those announcements.

And I would expect a number of those in the next several quarters.

Okay.

Well, if I read the release right, it talked about at least one customer in four different segments, convenience stores, coffee shops, fast food restaurants, and drug stores.

Are in some stage of being qualified as customers, yes.

Okay.

So, maybe in the case of a drug store, it's not being shipped yet.

But it's -- somebody's far along the curve?

Yes.

Okay.

Thank you.

Thank you, Bill.

Our next question is from Jonathan Lichter of Sidoti.

Your question, please.

What are you hearing from the sales reps who are talking to farmers about how next year's planting season is shaping up?

Robust.

The -- first of all, you've got to be careful.

Farmers can swing from pessimist to optimist and back to pessimist in a heartbeat, Jonathan, as you know.

But what we're hearing is optimism, as much as you can find from farmers.

Remember, they generally view the world rather cynically and for good reason because they have a lot of risk.

But I think that the 38 ethanol plants coming on line, the fact that they probably had a shortage of plantings this last spring, etc., etc., seems to suggest.

And look at some of the commodity future prices for corn, etc., seem to suggest a more bullish outlook for the American farmer.

So, that's what we're hearing indirectly from our people.

Okay.

Do you have any further insight into Chiquita's goal of 7,500 convenience stores by the year end, given that they're probably around 4,000 now?

Yes, I think they're -- I think that will be a goal achieved.

Do you have any feedback from Chiquita in terms of how they're -- if the acceptance is pretty strong, or are they having to do anything promotionally to get them in there?

What little I can say is that the acceptance is strong, the product works, the extension of shelf life seems to be better than we even originally thought.

We thought it would be five days extended shelf life.

It looks like it's more like seven or more days.

I think they're learning that there are challenging logistics to some of these alternative sites where the trucks can have different refrigerated temperatures, people who are not used to handling perishable produce have to learn not to drop the box, those kinds of things.

So I think they're learning how to deal those logistic handling issues.

And they're gearing up, they're investing a lot of money in terms of what they call the Chiquita-To-Go program.

And from everything we hear the acceptance is very good.

And this is truly at a premium price.

Bananas are being sold on a per-piece basis as opposed to on a per-pound basis, and that's what they want to pursue.

Okay.

Thank you.

Thank you, Jonathan.

[OPERATOR INSTRUCTIONS] The next question is from Salomon Kamalodine of B. Riley & Company.

Your question, please

morning, guys.

What should we expect the balance sheet to look like as you exit Q2, and stock up on seed inventory?

Well, what you'll see is obviously the inventory going up, as you just mentioned because we'll be purchasing inventory through the quarter.

I wouldn't expect much other changes to the balance sheet other than inventory.

And possibly some of the use of cash to buy that inventory.

What do you feel is a safe level of inventory to have in Q2 given that it sounds like the outlook is a little more bullish than it was last year with the corn business, and now that you've got Heartland Hybrids in the mix, as well?

Well, we had them last year, in the second quarter also.

So, the year-over-year change, there shouldn't be a big change in our inventory.

It will be up slightly because we plan our revenues being up.

The end goal or the -- the peak of our inventory is about January because that's when we first finish bagging -- finish purchasing the inventory.

And then it starts, obviously, dropping off as we start shipping in February.

So, if you look at last year's second quarter, our inventory will be slightly higher but not significantly so.

Okay.

Got it.

There was some language in the press release last quarter related to Chiquita's expansion of the packaged bananas in Europe.

And that language has dropped in this press release.

Has there been any developments on that front, just given the news that came out of Chiquita last week?

Is the expansion into Europe still in the cards?

Yes.

Okay.

A couple more questions.

When do you guys start recognizing an effective tax rate?

Well, we have 40 to 45 approximately in NOL's. $40 to $45 million in NOL's, so it will be a few years.

Right.

But at what point do you actually have recognize an effective tax rate on the P&L?

When do you have to reverse that DTA?

Well, I think we need to have at least another year of taxable income under our belt before it's going to be required.

I would guess that probably at the end of this fiscal year we would be recognizing a deferred tax asset.

Okay.

So in the model we should probably tax earnings for fiscal '08?

Yes, you probably should.

I haven't given that a lot of thought.

Now, when we get closer to year end, I'll give some guidance on that.

Okay.

And then final questions.

The revenue guidance, does that assume any contribution from the Air Products partnership?

It does, but under the terms of our deal, that kicks in starting March.

Starting in March.

So, it doesn't -- and our fiscal year ends May.

So, we don't have a lot of time really to have much effect on that.

So it does formally start kicking in in terms of our sharing of gross profits, 60% to them, 40% to us.

Contractually, that starts in March.

Okay.

Thanks a lot, guys.

Thank you.

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

Good morning, Tony.

To begin with, as long as we're on Air Products, could you mention what products using your technology currently are commercialized by Air Products?

I could.

Give me a minute.

I'm reaching for some of them.

Kiehl's, is a brand of L'oreal's.

My wife covets this stuff.

And it's a firming eye treatment product in which we are an additive in this product.

And I'm holding a jar that is really teeny and it sells for $33.

Then there's the Lancome thermal control product, which Tony I believe you've seen, that's an antiaging skin cream.

The -- our materials are triggered by the warmth of the skin.

And that sells for, I think, it's $60 to $70.

And then I've got in front of me L'oreal's dermoexpertise collagen filler, which reduces wrinkles with collagen biospheres.

And it uses our temperature-activated technology.

I don't know what the price is but you can imagine it's high.

So, there's at least three that I have in front of me and there may be more.

Okay.

Are there no products yet in the other categories for which Air Products have exclusive rights?

No.

Open disposables or household cleaners or any of those?

No, no.

That's starting from scratch.

And that will take some time, Tony.

So, don't expect to any products in those categories this fiscal year.

Okay.

Secondly, what was the nature of the sales and marketing expense decline at Apio in the first quarter and is that sustainable?

Last year we -- if you've seen our products recently, we did a complete redesign of our packaging.

Not only our membrane where we coined the trademark "BreatheWay," but also the entire packaging design.

And all -- the large majority of those expenses were incurred in the third quarter a year ago.

So, it's a one-time pickup really because it was expense last year that we don't have this year.

I see.

Okay.

So, the current level of expenditures can be expected to be sustained with Landec Ag picking up as the year goes on, the percent?

Yes.

Okay.

Thirdly, you mentioned -- you alluded to new applications for your packaging technology in the process of being developed.

If you could tell us what those are, that would be great.

But I'm curious whether these are being developed in conjunction with partners or are any of these close to commercialization?

In general, if it -- we have two ways of capturing value in our packaging technology.

One, is through what I call our captured food business where we actually buy produce from farmers who grow it.

We process it, we package it, we brand it, we sell it.

And you know that business, Tony.

And that's the business that's growing 18%, 20% quarter over -- year over year.

And then the other way, which started recently and started with the Chiquita collaboration, is Apio Tech, where we will just sell packaging alone.

We will only pursue a packaging application if we have an identified partner who will accept it and sell it and put it together with their products.

Some examples of that are, besides Chiquita, we're working with a partner to put meat products together with vegetable products so that you would have a full meal.

And that could be heated on the stove, or it could be microwavable.

The other products that we're looking at involve caseliners.

Where targets that range from,and I'm picking these out of the air so don't take me too literally, from avocados and papaya to melons can be shipped in our packaging in a standardized package in which we offer.

And you have standardized package a, b, and c, and you can pick from those three.

So, that's in development and that would be with leading produce partners, as well.

Then as you get into the bigger package items, the pallet [trouts] and those, that would be partnering in that arena, as well.

Those are in R&D as we speak.

So, we're also looking at consumer package sizes where consumers can just buy the package.

They can put their own produce in it.

That would also be with a partner.

So in the area of where we're only selling packaging, it's always with a partner.

The plant expansion at Apio, just by being able to carry increased inventories, when completed would this help protect you against the kind of product shortages that you're incurring now?

No, it would help us if you had a shortage for a day or two.

But when you go into a situation -- and you live on the West Coast so you know what was going on.

When last spring you had torrential rains and flooding, at times when farmers were trying to plant, and then this summer you had several weeks over 100 degrees when people were trying to harvest, there's no plant that you could build that would address or circumvent that problem.

Very short-term swing maybe, yes, but the type of thing we incurred in the first quarter, you just can't do it by expanding your plant, Tony.

Okay.

The last item that I have a question about is your comment regarding Chiquita's intention, or what you assert is its intention, to focus on domestic retail grocery applications.

And I'm real curious because I'm aware of the background here, why Chiquita initially went to now nontraditional markets.

How scared all these banana companies were of this technology in their main market.

And does this comment imply that Chiquita has satisfied itself, that this technology is no longer -- is not a risk to it but rather can happen its business in that channel?

Are they at that point there?

It's dangerous for me to speak for Chiquita or comment on what their intentions are.

But they are investing heavily in the technology.

It will include looking -- going beyond alternative markets, which are the fast food chains, the coffee chains, etc., etc.

To look at the more traditional market for them, which is the retail grocery stores.

So, they're making that commitment, they're making those investments.

I can't speak for them in terms of exactly how they're think being this, Tony, but their actions suggest you that they feel comfortable enough with this technology to be looking at it in all their core markets.

When you say they're making investments with respect to the grocery market --?

No, investments in how to -- well, yes.

But also how to deal with the sourcing of the bananas, the packing of the bananas, the packaging of the bananas, and the marketing and sales and distribution of the bananas.

The whole infrastructure, they're making sizable investments.

And it's not just because they're interested in alternative markets.

Thank you.

Thank you, Tony.

The next question is from Rick [Federman] of Federman Investments.

Your question please.

Go back on to a previous question when you were referring to Chiquita and Core-Mark's distribution so far to 4,000 and expanding number of nontraditional stores.

The acceptance that you referred to they receiving.

Does the activity from them suggest that the acceptance at the ultimate customer level, fellow going in for coffee and a banana for breakfast, is this stuff selling through, they're continuing to order and reorder?

Yes.

And we referred to the alternative markets as coffee chains, drug store chains, Mini-Marts, the gas station chains, convenience stores, fast food.

Where we are -- where Chiquita is selling those products, the acceptance is very good.

And the reordering is there.

Okay.

The other question is to the vegetable tray business, you had -- the release said there was a 23% increase in the revenue.

Can you quantify at all the -- or break down the price in part that would be the result of price increases and how much was volume increase?

All volume.

Thank you very much.

Thank you, Rick.

Your next question is from Jerry Heffernan of Lord Abbett.

Your question, please.

Thank you very much for the call.

This might be a rehash and I apologize if it is.

I just want to understand for the Apio trading business, revenues are down 4 million.

It's a business that you were looking to reduce.

What's our anticipated time of -- if my understanding is correct, of looking to be out that business completely?

Greg and I are looking at each other.

I'll start it and Greg will finish it.

Let me break the training business into two pieces, Jerry.

One is, a couple years ago we agreed to help a well-known, large customer, in the sourcing and the buying of certain commodity products.

We took a commission.

We're not using technology.

And frankly, we're not adding a lot of value here.

It's just kind of a service.

And we're really not good at things that don't use our technology or don't really uniquely -- where we don't uniquely add value.

And so we want to wind that down, and we want to be done with that this year.

The other part of our trading -- this fiscal year.

So I hope I answered that question.

The other part of our trading business is our export business where we -- similarly we source produce products for a number of well established, long-standing Asian customers who are reliable, they pay on time, etc., etc.

And we bridge the sourcing and their needs together.

We take a commission and that is predictably profitable.

We're not seeking to grow it, though.

And the reason is, is we don't want to get to a point where we're worrying about receivables or worrying when we're going to get paid.

We're just going to stay with this business, which is predictably profitable.

And it's one risk is that if there are severe produce shortages, like we just incurred in the first quarter, we can't get it to them.

So, that partly explains the dip in the revenues in the first quarter.

So, one business we're out it this year.

The other business we want to sustain.

Okay.

So not looking to grow, but not looking to exit either the export business.

Right.

And can you give us a normalized run rate of the export business so we have an idea on a longer term where that training business should level out at?

Yes.

It's around 50 to 55.

Million.

Year in, year out.

$50 million to $55 million in revenues.

Equally distributed amongst quarters?

No, it's usually first half probably 60%, 65%, somewhere in there in the first half of the year.

And 35% to 40% in the second half.

Okay.

Fiscal year.

Fiscal year.

Okay.

And that has to do with fruit.

One H fiscal year.

Okay.

Now, you just said for the trading business, that for the -- just the commodity trading business that it is a commission-based business.

But I thought earlier in the call you said that they're -- it's generally not a profitable business.

That was be domestic piece.

Right.

Even though there's a commission on it, the -- that commission isn't covering your total costs?

Yes.

It's like a break-even, yes.

Just, isn't worth it to us to continue it.

I'm trying to understand at what point in the P&L am I seeing this as a zero-sum game?

Is it at the operating margin line or the gross margin line?

For break-even even, it would be bottom line.

Net margin.

Okay.

Okay.

Very good.

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

We want to thank everyone for being on this call today.

We appreciate your support.

And we look forward to updating you in our next earnings call.

Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may now disconnect.

Good day.