Lifecore Biomedical Inc (LFCR) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Landec Corporation second quarter fiscal year 2007 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Gary Steele, President and CEO of Landec Corporation. Sir, you may begin.

Good morning and welcome to Landec's second quarter fiscal year 2007 earnings call. With me today is 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 February 1, 2007. A replay of the teleconference will also be available for one week until midnight Eastern time, Wednesday January 10, 2007 by calling 888-266-2081 or 703-925-2533. The access code for the replay is 1011356.

As reported in this morning's press release, in our second fiscal quarter, we achieved $55.2 million in revenues, with net income of $108,000. The second quarter was a noteworthy quarter for Landec, with strong growth in our specialty packaging food business, two new agreements with Monsanto, completion of our 60% expansion of our Apio food processing facilities, and the initiation of retail grocery store trials with our partner, Chiquita, using our proprietary BreatheWay technology.

Four years ago, Landec had little to no cash, over $20 million in long-term debt, minimal profits, and minimal cash flow. This fiscal year, we expect to generate substantial profits and cash flow, ending the fiscal year with no long-term debt, and cash balances exceeding $60 million. Importantly, we improved -- we achieved greater focus going forward by now concentrating our efforts on two core businesses, our food technology business, and our technology licensing business. We expect both core businesses to be profitable and cash generators going forward.

The sale of our direct marketing and sales company Fielder's Choice Direct will substantially eliminate the historical seasonality of our operating results as Fielder's Choice Direct realized losses during the first eight months of each fiscal year and profits were realized during the last four months of each fiscal year when the seed products are shipped. We anticipate that we can be profitable each quarter going forward.

Looking at the first six months of fiscal year 2007, we are pleased that we grew our specialty package vegetable revenue business 18%, our retail trade business 23%, and our 12 ounce product line 19% year-over-year. As stated in prior calls, we are working to significantly reduce our domestic commodity buy/sell trading business, which combined with shortages of export produce, resulted in our trading business revenues decreasing 19% from the first six months of last year. Overall, Apio generated $2.1 million in positive cash flow from operations during our first six months.

As most of you know, we completed two significant deals with Monsanto in early December. We sold Fielder's Choice Direct to Monsanto for $50 million in cash, with a potential additional earnout amount of up to $5 million based on Fielder's Choice Direct's results for the 12 months ended May 31, 2007. In addition, we entered into a five-year technology license and polymer supply agreement with Monsanto, for the use of Landec's Intellicoat polymer seed coating technology, for minimum guaranteed payments of $17 million. The net effect of both of these transactions is four-fold.

First, after buying back the Landec Ag stock options not owned by Landec, and after taking into account expenses and taxes, we will add approximately $40 million in net cash to our balance sheet during fiscal year 2007 from these two agreements. Second, we will recognize $5.4 million per year in new license fees for the fiscal years 2008 through 2011, and we'll recognize $2.7 million in license fees for the fiscal years 2007 and 2012. Third, Monsanto will pay for all of Landec Ag's operating expenses, including all of the Intellicoat's R&D expenses. And fourth, Monsanto will pay for any new capital expenses we may incur for our expansion of coating facilities. Let me now turn it over to Greg Skinner for more details.

Thank you, Gary, and good morning, everyone. As outlined in this morning's news release, Landec reported total revenues for the second quarter of fiscal year 2007 of $55.2 million, versus revenues of $53.7 million for the same period a year ago. The increase in total revenues during the second quarter was due to a 17% or $5.3 million increase in revenues from Apio's value-added vegetable produce business. This increase was partially offset by a decrease in revenues from Apio's commission trading business of $4.2 million or 18% 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 second quarter of fiscal year 2007, the Company reported net income of $108,000, or break even on a per share basis, compared to a net loss of $1 million or $0.04 per share for the same period last year. This increase in net income during the second quarter of fiscal year 2007 compared to the same period last year is primarily due to a $932,000 increase in gross profits from Apio's value-added vegetable business, and $481,000 of license fees from the receipt of an additional 800,000 shares of preferred stock in Aesthetic Sciences Corporation. Net income was decreased by increased losses at Landec Ag of $370,000 prior to close, and stock option expenses of $136,000.

As a reminder, seasonality has been inherent in our Apio food business and Atlantic Ag, our agricultural seed business. Apio is subject to produce sourcing issues, primarily during the winter months, and Landec Ag has historically recognized nearly all of its revenues and profits during our third and fourth fiscal quarters, while recognizing no revenues and losses during our first and second fiscal quarters. Included in net income for the second quarter and the first six months of fiscal year 2007 were seasonal operating losses at Landec Ag of $3.1 million and $5.5 million respectively. These losses will not be recurring in the future, as mentioned earlier. The sale of Fielder's Choice Direct will substantially eliminate the historical seasonality of our operating results.

Turning to the balance sheet, as a result of the sale of Fielder's Choice Direct to Monsanto on December 1, 2006, the assets and liabilities of Fielder's Choice Direct have been reclassified on the balance sheet. During the second quarter of fiscal year 2007, or during the first six months I should say, of fiscal year 2007, our cash balance decreased by $3.4 million, or $11.8 million on a restated basis. This decrease was due to several reasons.

First, cash used in operating activities, excluding Landec Ag of $1.6 million; second, capital expenditures of $4.7 million, primarily to expand Apio's value-added facility; and third, the payoff of $2 million of long-term debt, which completed the payoff of all of our long-term debt. These reductions to our cash balance were partially offset by borrowings under Landec Ag's line of credit, which was assumed by Monsanto and the sale of Fielder's Choice Direct, and $1 million from employees exercising their stock option. That concludes my formal presentation. Gary?

Thanks, Greg. What do we expect for the remainder of this year and for next year? First and foremost, we want to get our Intellicoat seed coating collaboration off to a very good start. While coating seeds with polymers is relatively new for Monsanto, applying chemical treatments to seeds is not new, with over $100 million a year in treatments applied to seeds by Monsanto companies every year. We have much work to do to define targets and to do the development work and to commercialize the technology. We fortunately have a head start with our early plant corn and pollinator plus commercial programs already on the market.

In parallel, our second priority is to continue to growth our specialty packaging vegetable food business, which we can now accomplish more efficiently with Apio's expanded and reconfigured processing facility. Third, we are working closely with Chiquita as they expand their Chiquita-to-go food service program, which was targeted to be in roughly 7500 sites by calendar year end, and continue the current retail grocery store trials, which we expect will run through our May fiscal year end. We will report on progress during our third and fourth quarter earnings conference calls. Fourth, we look to grow and increase our licensing business revenue and income, including our air products collaboration, in which we begin to receive 40% of gross profits of product sales from that collaboration, commencing in March of 2007. Fifth, based on our healthy balance sheet and greater focus on two core businesses, we will use the next two quarters to better define areas for increased investment in technology development, and in partner and customer alliances. Our financial objectives for fiscal year 2007 are to grow overall revenues by 10 to 15%, excluding Landec Ag and Apio's commission trading business, while increasing net income by 65 to 75% compared to fiscal year 2006 results, after excluding any gains or losses related to Fielder's Choice Direct.

In summary, we are having a very good fiscal year thus far and we are on track to achieve our objectives for all of the fiscal year. We believe Landec is positioned well for continued good revenue and net income growth going forward. We thank you and we are now ready for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is from Tony Brenner with Roth Capital Partners. Your question, please?

I have two questions. One is related to Apio. Are apio's revenues, have over the past few years been increasing at a mid- to upper teens rate generally, and you've just increased the operating capacity significantly, I wonder if you can talk a little about what is going to drive those revenues at a similar rate over the next couple of years?

Good morning, Tony. Well, one word, innovation. The new products will primarily be the driver. We have a new line of products that we are testing. We always have a new line of products that are in development, and we would take those first to our existing customer base, because that's a good launch platform for us. So first and foremost, product innovation. We're spending over $1 million a year just in that type of work. And as I mentioned, we will be looking at stepping that up. We think that a bigger investment there might pay off for us. The second is--.

Are you talking about marketing investment or some other sales investment, or what?

It's -- this is an interesting business. Yes, we will expand our marketing and sales somewhat, but it doesn't require a lot of expansion. We've got an already-existing food broker network, we've got field salespeople already in place, I think we've got the capacity to grow our product line and our revenues without having to significantly increase our marketing and sales expense. The second is, we're always in pursuit of new customers. We're looking, not only domestically, but we're making headway north and south of the border. That will be small initially, but it represents additional growth for us. Third, is we actually have taken some steps here recently to enter, in a limited way, into some foodservice applications. You may recall that our focus has been exclusively on grocery store chains and club stores and have not had a presence in foodservice, but we now have a product line or two that seems to be better fit for food service, such as that salad line that we mentioned recently. So those are three growth opportunities for us that we hope to sustain -- that will help sustain revenue growth that we've been experiencing over the last several years. We will look outside of North America, but I will tell you that that's going to be an early look for us. We're based in the woods in terms of Asia and Europe, but we are in discussions with some folks regarding that possibility as well.

My second question relates to the Landec Ag business. Part of the agreement is that Monsanto would pay for any additional capacity expansion that's required to fulfill your obligation for coated seed. What is the current utilization rate of that facility, and what sort of volume or sales increase might be required to make you build some additional capacity?

It's a good question and a hard one for us to answer in the following way. Actually, we have two sites, Tony. One is a continuous coating site and the other one is a batch coating site. And there are certain weeks out of the year when we're at absolutely full capacity. Right before the planting season, it's every man and woman 24/7 kind of stuff, because you're getting people's seeds in the facilities for coating. It's absolutely a crazy time of the year. Then there are other times when you're not doing that. So it's -- you have kind of a peak loading problem, very similar to what utilities have when they reach the month of August. So we have that same situation. We don't have much room to do more volume through those facilities as they're currently configured during those very tight months. So if we could spread out that coating capability so that it's spread out over more months, that would really relieve our constraints. We could probably grow the business maybe 20%, maybe 30% without any major expansion, but beyond that, Tony, we'd have to make some investments, and that's where Monsanto would kick in.

Would the batch facility be converted to a continuous coating facility--?

Yes.

-- and if so, would that increase your capacity.

Yes, it would.

Okay, thank you.

Thank you, Tony.

Our next question is from Bill Gibson of Nollenberger Capital. Your question, please?

Yes. I wanted to just see if you could help us size the grocery store test for banana packaging. Is this like a one-store test or a twenty-store test or -- just how serious is Chiquita?

Well, Bill, good morning, and sorry to be oblique here. They haven't announced anything on this. All I can tell you is it's in three different -- it's [Expletive] serious, really serious. It's in three different geographic regions in the United States. There are a significant number of stores, and if I could just stop there, I sure would appreciate it because they have not publicly disclosed anything beyond that.

Okay. And then on the 7500 store target on the convenience stores, or the alternative sites, was that a year-end '06 target?

Yes, that was a December 31, -- that was their public statement. I don't have the latest information, I would suspect they're close to that, but I don't have the exact numbers, but that was a December 31, number.

Just one last question. Regarding your guidance on net income, was that off a base of as-stands on last year's net income? In other words, fiscal year '06 income as reported, including the loss of Ag?

Yes -- Bill, it's Greg. It's on the 8650 number, which was last year's net income. You have to take out the losses from Landec Ag during the first half of the year, through the close, then the change really. That's what -- our previous guidance of 35 to 45, the real change to 65 to 75 was the difference between the 2.7 we're going to make in the second half as a result of the new licensing agreement versus what we thought we were going to make for Landec Ag as a whole for the year, plus the interest we're going to make on the cash we received from the sale. That's really what caused -- what brought the guidance up 30% on the high and low range.

Got it. Good, thanks, Greg.

Thanks, Bill.

Next question is from Salomon Kamalodine of B. Riley & Co. Your question, please?

Good morning, Salomon.

Good morning. A quick follow-up on the guidance. The incremental $2 million per year that you're going to recognize for revenue, that's not going to be a cash item, is it?

No. We already received the cash in the $50 million.

Right. Okay, just wanted to clarify--.

Purely accounting. Because it was a multiple contract agreement. You had to go through this exercise, and what dropped out was the $10 million of the gain is going to be recognized over the next five years.

Got it. So you're giving guidance really just for Apio and the licensing business, but we're not getting anything on where the trading business is going to go, and I understand it's not a big area of focus for you guys, right now, but just for modeling purposes, where do you expect that business to end up at year-end?

It will be down year-over-year. And most of it -- or at least half of that was planned from an aspect of the buy/sell business, as we described. And the export business, we hope is going to bounce back in the second half. First half we had some produce sourcing issues, but it will certainly be down year-over-year. It may be -- it will be probably down a little bit less than it is right now through the first six months, but it's not going to be dramatically different by the time you get to year end. Then going forward -- and remember it's not material from a bottom line standpoint at all, it's a 4 to 5% margin business. Going forward, we see it growing again.

Okay. And what's going to drive the return to growth?

Well, one, no produce shortages. That was unexpected. And we don't plan to reduce the domestic buy/sell business any more after this year.

Okay. And then, finally, it looks like you have already gotten some pretty nice margin improvements from the expansion of the Apio facility. Is there any way you can quantify the benefits of the expansion and the modernization of the facility, as far as what you expect gross margin to do over the next year, year and a half?

I would say because of the increases that we're realizing in the areas of raw materials, not only the produce, but packaging and cartons, that what we hoped to achieve from the operating efficiency is to maintain our margins. So to offset the raw material increases.

Okay. And finally, can we get an update on the tax situation? Have you figured that out yet?

No. I gave my best estimate in the press release that we expect it will be somewhere in the 2 to $2.5 million for this year. We expect it to have some federal NOLs carry over. We don't expect to have any state NOLs carrying over. But a final number won't be known until I get final '06 numbers, because our taxes aren't due for a another couple of months, and then we need to finalize our estimates for '07. I should have a much better handle on it in the third quarter.

Okay, thanks.

Thank you.

[OPERATOR INSTRUCTIONS] Our next question is from Jonathan Lichter of Sidoti & Company. Your question, sir?

Hi, guys.

Hi, John.

Just a follow-up on the taxes, do you have a breakdown in the next two quarters on the 2 to $2.5 million?

Breakdown as to how much will be in the third quarter versus the fourth quarter?

Right.

No, I really haven't looked at that. But it would be fair to say, since we're break even right now, just split it.

Okay.

Probably in that ballpark.

Okay. I know you mentioned north and south of the border, can you give a little more color into what kind of initiatives you're looking at there?

Boy, I sure don't want to overstate this one, because it's very preliminary, but some of our customers are operating north and south -- in Mexico and Canada, and we've made good headway with them in the United States. Continental United States, so by extension, when they open stores or properties in those countries, we go with them.

So essentially, you're just talking about Costco, let's say, or Sam's Club.

Yes, right. Right.

Okay. Do you have any indication from Air Products as to what could be expected in the next year?

They seem pretty bullish. Still pretty early on, but their revenue base is increasing, orders are increasing. They're marketing products using our additive technology to people beyond L'oreal. So I would say, it's very early, but they feel like they're on their internal plan for growth, so it's looking pretty good at this point. We have some new products in development with them that we haven't announced, that they hope to introduce in, I believe it's April there's a big cosmetics show, so so far, so good.

So during fiscal '08, you would expect some contribution from there?

I would, I would. And you may recall from our agreement with Air Products, we commenced the gross profit sharing formula, 60% for them, 40% for us beginning in is the end of March or first of March?

Like the middle.

Two months, middle of March.

Okay, thank you.

Thank you.

Next question is a follow-up from Salomon Kamalodine of B. Riley & Company. Your question, sir.

I want to understand how the balance sheet is going to look going forward now that the seed business is gone. Clearly you have a less working capital intensive business now. If we look at the metrics in the quarter that you just reported, is that a good working base going forward?

Because of the fact that the seasonal aspect of Landec historically has all been driven by the Ag business, the balance sheet isn't going to fluctuate dramatically quarter to quarter anymore.

It will not.

It will not. So when you're looking at the current balance sheet, if you just took the assets held for sale out of the equation, and the liabilities out of the equation, it's going to be in that general ballpark on a quarterly basis. Except for you're going to continue to build cash as we're profitable.

Right. Okay. And so next quarter, you'll have an inflow of $50 million from the sale of the business, correct?

Yes.

Okay, thanks.

Sir, at this time, I'm showing no further questions -- I apologize, we do have a question now, a follow-up from Jonathan Lichter with Sidoti. Your question please.

Yes. Just on that cash question, is that including that $7.3 million?

No.

He asked from the sale. We did get $50 million from the sale.

Right.

Then we turned around and we had some expenses, obviously, associated with it, and we ended up buying back all of the stock and options of the Ag that weren't owned by Landec. So the net amount at the end of the day when you wash everything out is about $40 million.

Okay. Okay. Thanks.

Thank, John.

At this time, I'm showing no further questions from the audience.

Well, in closing, we'd like to thank all of you for your ongoing interest in Landec, and we look forward to talking with you during our next earnings conference 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.