Lifecore Biomedical Inc (LFCR) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Landec Corporation fiscal year 2007 earnings conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session, and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference call is being recorded.

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 third-quarter fiscal year 2007 earnings conference call.

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

This call is being webcast by Thompson 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 April 27th, 2007.

A replay of the teleconference will be available for one week until midnight Eastern time Wednesday, April 4th, 2007, by calling 888-266-2081 or 703-925-2933.

The access code for the replay is 105-6906.

As reported yesterday's press release, in our third fiscal quarter we recognized $53 million of revenue and significantly increased net income to $24.6 million.

The most significant development during our third fiscal quarter was the sale of our direct marketing and sales company, Fillers Choice Direct, to Monsanto for $50 million in cash (technical difficulty) additional amount of up to $5 million based on Fillers Choice Direct's results for the 12 months ended May 31st, 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.

As a result of the technology licensing agreement, Landec will recognize revenue and operating income of $3.4 million per year for five years and when combined with the $2 million per year in deferred gain on the sale of Fielder's Choice Direct, Landec will recognize revenue and operating income of $5.4 million per year over the term of the five-year agreement with Monsanto.

The net effect of both of these transactions is threefold.

First, after buying back the Landec Ag stock and options not owned by Landec and after taking into account expenses and taxes, these two Monsanto agreements contributed approximately $40 million in net cash to our balance sheet during the quarter.

Second, we will recognize $5.4 million per year in new license fees for the fiscal years 2008 through 2011.

We will recognize $2.7 million of license fees for 2007 and 2012.

Third, over the five-year term of the agreement Monsanto is paying for all of our Intellicoat seed coatings operating expenses, which include R&D expenses, and Monsanto is paying for any new capital expenses for our cutting facilities.

In addition to the sale of Fielder's Choice Direct and the Intellicoat licensing agreement with Monsanto, the third quarter was also noteworthy for the strong growth in Apio's specialty packaging value-added food business, in spite of the extremely cold weather in California during January.

Also our partner Chiquita is continuing to expand the Chiquita-to-go banana program to foodservice markets, and Chiquita is continuing its retail grocery store trials using our proprietary BreatheWay technology to extend the shelf life of bananas.

The first initial product for retail grocery stores consists of three individual bananas packaged in one consumer package using our BreatheWay technology.

The trials continue to show that our technology extends the shelf life of bananas by seven days.

Not too long ago, Landec had very little cash, significant data and minimal profits and cash flow.

This fiscal year, we expect to generate substantial profits and cash flow, ending the fiscal year with no debt and cash balances exceeding $60 million.

Importantly, we have 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 Fielder's Choice Direct should substantially eliminate the historical seasonality of our operating results as that business realized losses during the first eight months of each fiscal year and profits during the last four months of each fiscal year when seed products are shipped to farmers.

Barring major problems with weather we anticipate that we can be profitable each quarter going forward.

Looking at the first nine months of fiscal year 2007, we're pleased that we grew our specialty package vegetable revenues business 14%, our retail trade business 20% and our 12-ounce product line 17% year over year.

As stated in prior calls, we have decided to significantly reduce our marginally profitable domestic commodity buy-sell trading business, which, when combined with shortages affecting the export business, resulted in a decrease in total trading business revenue of $8.7 million or 17% compared with the first nine months of last year.

Our trading business consists of two businesses.

First is our domestic commodity buy-sell business, which exists primarily to support an important customer, and second is our export trading business.

Our domestic commodity buy-sell business is marginally profitable, and non-strategic, and therefore we decided to shrink this business from revenues of nearly $8 million in last fiscal year to roughly $3 million in this fiscal year.

We expect to maintain the $3 million revenue level for the next several years.

In contrast to the domestic commodity buy-sell business, the export trading portion of our trading business is predictably profitable, and it may be strategic as we begin to expand the use of our BreatheWay packaging technology into international markets.

We plan to grow this business but at a slower rate than our value-added business.

Overall, Apio generated $5.2 million in cash flow from operations during the first nine months of fiscal year 2007.

Let me now turn it over to Greg Skinner for more details.

Thank you, Gary, and good morning, everyone.

As outlined in yesterday's news release, Landec reported total revenues for the third quarter of fiscal year 2007 of $53 million versus revenues of $57.2 million for the same period a year ago.

The decrease in total revenues during the third quarter was primarily due to an 84% or $7 million decrease in revenues for Landec Ag as a result of the sale of Fielder's Choice Direct to Monsanto on December 1st, 2006.

In addition, during the third quarter revenues in Apio's trading business decreased 6% or $425,000 due to the planned reduction in Apio's domestic commodity buy-sell business.

These decreases in revenues were partially offset by 9% or $3.5 million increase in revenues from Apio's value-added vegetable produce business and by 158% or $795,000 increase in revenues from Apio Tech, which is primarily due to increase revenues in our banana program with Chiquita.

For the third quarter of fiscal year 2007 the company reported net income of $24.6 million or $0.92 per share, compared to net income of $3.5 million or $0.13 per share for the same period last year.

This increase in net income during the third quarter of fiscal year 2007 compared to the same period last year is primarily due to, first, $20.6 million of income net of expenses and taxes from the sale of Fielder's Choice Direct; second, a $760,000 increasing gross profits from Apio Tech; and, third, an increase of $1.3 million and operating income at Landec Ag after excluding the net income from the sale of Fielder's Choice Direct as a result of generating income of $1 million during this year's fiscal third quarter compared to a net operating loss of $312,000 in the same period last year.

Net income was decreased by, first, a $1.6 million decrease in license fees from aesthetic sciences,; second, a $781,000 decrease in gross profits in Apio's value-added specialty packaging business because of weather-related produce shortages; and, third, company stock option expenses of $122,000.

Included in net income for the first nine months of fiscal year 2007 were seasonal operating losses at Landec Ag of $5.8 million.

These losses will not be recurring in the future due to the sale of Fielder's Choice Direct to Monsanto and, as Gary mentioned, the historical seasonality of our operating results will be substantially eliminated.

Turning to the balance sheet, as a result of the sale of Fielder's Choice Direct to Monsanto, the assets and liabilities of Fielder's Choice Direct have been reclassified on the balance sheet as of the end of fiscal year 2006.

During the first nine months of fiscal year 2007 our cash balance increase by $43.1 million on a restated basis to $58.3 million.

Excluding the impact on the balance sheet from Landec Ag's operations during the first half of fiscal year 2007, the increase in cash was due to several reasons.

First, $49.4 million of net proceeds received from the sale of Fielder's Choice Direct; second, $5.2 million of cash flow provided by Apio operations; and, third, $2.6 million in license fees from the Intellicoat license agreement with Monsanto.

These increases in our cash balances were partially offset by, first, the repurchase of Landec Ag's subsidiary options and stock not owned by Landec for $7.4 million; second, capital expenditures of $6 million primarily to expand Apio's value-added facility; and, third, the payoff of $2 million of long-term that, completing the payoff of all of our long-term debt.

That concludes my formal presentation.

Gary?

Landec is on track to achieve its stated milestones for the fiscal year ending May 2007.

We are growing our specialty packaging value-added vegetable business.

We are extending our banana packaging sales to Chiquita for their Chiquita-to-go foodservice applications with over 200,000 potential sites targeted in the U.S.

Chiquita is currently testing the Chiquita-to-go concept using our BreatheWay technology into European countries, and thus far the tests are going very well.

Additionally, we're preparing for Chiquita's regional expansion for retail grocery stores.

In our licensing businesses starting in April, we will begin sharing in gross profits generated from the air product sales of products using Landec's Intelimer polymer technology, which happens to coincide with air products expanding sales to L'Oreal and Akzo Nobel, two key customers.

Also in our licensing business we have added an important strategic partner in Monsanto for our seed coating technology.

Looking to the future, we're planning to increase our investments in R&D as we work to develop and take advantage of future growth opportunities for products and partnerships that do not exist today.

With the sale of Fielder's Choice Direct, Landec management is now focused on growing our two core businesses.

Our Apio food technology business and our technology licensing business.

As we look forward to next fiscal year our biggest challenge and opportunity is to develop new revenue sources for long-term sustainable growth through innovation.

In our foods business we're beginning to look at new food market segments.

In fiscal year 2008 we expect to commercialize products for new market opportunities such as military, foodservice and international markets.

In our Apio Tech business, where we license and supply our BreatheWay packaging technology, such as what we have done with Chiquita for bananas, we plan to enter into new partnerships.

In our nonfood technology licensing business, we now have a core business that provide substantial revenues from license fees, product sales and royalties as a result of our collaborations with Monsanto, air products and net to net corporations.

The revenues from these collaborations should fund all of our corporate R&D and all of our corporate G&A operating costs in the near-term and should more than cover these expenses in the long-term.

Our focus over the next year will be on managing and growing these collaborations and simultaneously advancing our R&D as a basis for generating new programs and new partners in the future.

Lastly, we have a balance sheet that provides flexibility and opportunities not only for expanding R&D investments internally but also for allowing us to look for outside companies that may be synergistic with are technology and or channels of distribution.

We are on the lookout, while focusing on our primary goal to grow our core businesses from internal investments.

In summary, our results are untracked inconsistent with are fiscal year 2006 plant.

Regarding fiscal year 2008, we will update you honor milestones and our targets for revenue and earnings growth when we have completed our detailed budgets and plans for next fiscal year, which begins June first.

Thank you, and we're now ready for questions.

(OPERATOR INSTRUCTIONS).

Peter Black of Winfield Capital.

Great results again.

Some analysts have put out reports recently talking about potentially reduce liquidity or a problem with the liquidity at Chiquita comments and there has been some stories down about the settlement of the Justice Department investigation.

In your dealings with the management there, is there any sense and all that their focus on moving forward the relationship with your has been affected anyway by reports on the liquidity and things like that?

Not at all, and we're in fairly regular contact with them.

What we see is a continued fairly substantial investment on their part in the facilities, the packaging, the distribution channel setup, et cetera, et cetera -- the expansion of their marketing and sales, which now, by the way, includes not only the sales and marketing side of Chiquita but also is now bringing in the marketing and sales side of Fresh Express, which calls on foodservice operators.

So from our vantage point we just see growing in continued investments.

By the way, some of those recent announcements, as you know, were kind of old news that are just getting resolved finally, which we are thankful for.

So we're not seeing any adverse impact from that news.

Great job again.

Tony Brenner of Roth Capital Partners.

Landec has a potential earn out on the Fielder's Choice Direct business of up to $5 million, which I think relates to gross profits for this fiscal year.

Given the corn planting intentions that we are seeing, is it reasonable to assume that you would collect most or all of that earn out?

No, it's not reasonable.

Actually, I can't actually answer that question as to whether they will or won't.

But all I can tell you is that in the negotiation process, that was kind of an add-on for us.

That was put in what I would call the big stretch category.

So the fact that plannings are up, et cetera, et cetera, et cetera, should not lead you to assume that we will get that earn out.

It was a big stretch.

You talked about the potential for using Breatheway packaging on the export business, most or all of which, I think, goes to Japan, if I'm correct.

No, throughout Asia.

Throughout Asia?

Yes.

My impression had been that, because -- since 9/11, customs in various countries were being so much more careful with inspections that the risk was that any packaging was likely to be breached, therefore rendering the patch inoperable.

What's different that makes you think that this will work now?

Going to huge package sizes.

When you have small package sizes, which we were testing in the past, they were cutting those open to look for any type of bugs or whatever that might be imported to the country.

We are looking at very large containers, and that's a change.

There's no change in customs restrictions and limitations; that will still continue.

We're not going to change that.

But we changed our approach, which is to look at full containers and large -- what we call palette [trouts], as the way to deal with that issue.

So it's our changed approach, not their change in approach.

But even has a large container is ramped, I presented?

Imagine a shipping container that has air inflow and outflow circulation.

The membrane is associated with the container.

It goes with the container.

I get it.

Thank you.

[Shaun Boyd] of Westcliff Capital.

Apio Tech, at $1.3 million in the quarter, are there any upfront license fees or anything like that besides just straight bag sales that are in that number that I need to be thinking about?

No, but there is, Shaun, there is in the agreement -- and for obvious reasons, to protect shareholder entrance, there are minimums so that whenever we enter into an agreement with someone where there's exclusivity, we insist on minimums so they won't sit on the technology.

It's kind of a take or pay approach.

So that's the only other thing to consider is that they are minimums.

Greg, I think those minimums go out five years.

Is that correct?

Yes.

They ratchet up each year for the first three years, and then they stay flat after that.

We are in -- we just began the third year January 1 this year.

Is that a quarterly level, then, or is that some sort of a catch-up payment for the year?

Well, the year is a calendar year.

So if, at the end of the calendar year, they have not met the minimums, then Gary said take or pay, they pay it.

We get a nice big check.

That's why, if you go back to the third quarter a year ago, you'll see exactly the same situation, a big pop in revenues and gross margins in the third quarter a year ago.

In terms of the value-added business, I just want to make sure I'm doing the numbers right.

It looks like weather hit you for $780,000.

So your gross margin without that would have been around 15%?

Right.

Still a little bit below the historic levels.

Should we still be thinking about a longer-term target of 17% to 20% on that?

I think -- the value-added business?

I think you should think in the 15% to 16% range.

Last year was a phenomenally perfect year when it came to sourcing.

So if you are comparing it just to one year, that's not a fair comparison.

I think you need to think in the 15% and 16% range which, by the way, is a very good margin for this business.

Especially since the SG&A is very low.

I will tell you that the fourth quarter -- we are in the fourth quarter right now.

The supply situation is very good, and demand is quite strong this quarter for us.

Congratulations on making it through the California freeze there.

It was tough going, as you know.

Just one other detail here.

In terms of the way you guys are endorsing that 65% to 75% increase versus last year, I just want to make sure I am looking at this correctly.

That has basically to back out the $20.6 million net gain and then the $5.8 million [in] losses you would have had for Landec Ag?

Exactly.

And that goes to take it off of the projection for the year and then compare it to the $8.7 million last year, and you've got it.

Are you having any tax hit, then, in the May quarter or is that zero?

300,000.

Sal Kamalodine.

B.

Riley.

First, on the Monsanto deal there seems to be quite a bit of confusion out there.

So I want to make sure I'm thinking about this correctly.

First of all, is there any upside to the payments that you're recognizing now?

Is there anything that's volume-related, or are these payments fixed at what are currently?

They are fixed.

The only potential upside is a buyout, and at the time of a buyout that would be a $4 million upside.

Then at the same time, we would be entering into a long-term polymer supply agreement with them.

So that is the upside to this licensing part of the business.

So what, potentially, could the polymer payments be down the line?

I think they would be substantial.

I mentioned in a past call that my (indiscernible) spends $150 million on seed treatments.

These are chemicals that go on to their seed.

We would like to have some portion of that type of expenditures from Monsanto going into buying polymer coatings.

So it can be very substantial down the line, especially since Monsanto is the dominant portion of the business right now and are growing.

So I guess the follow-up to that, then, would be in the press release you talk about expanding the Intellicoat initiative with Monsanto.

What does that entail exactly?

What kind of additional revenue or earnings could we get from expanding the relationships there?

Well, ours is fixed.

Nothing in the five-year agreement.

We are talking -- unless they chose to buy out earlier than five years, and I wouldn't put that in your model.

But the upside is going to come after the buyout, with the expansion of the codings through a supply agreement.

But right now we essentially took the business that we launched to provide validation and credibility that the codings worked, but it was barely any market penetration.

We had not made it profitable.

We turned this into a five-year deal with Monsanto with substantial fixed payments.

So that transition was good for us, but we're capped on the upside during this interim period.

Then the packaged bananas -- Greg brought a sample at our conference in Las Vegas and had a chance to look at it.

One question that comes up is, who is the fact that the bag isn't sealable.

So once you do get seven incremental days of shelf life, but once you open up the package it looks like you are back to square one aware, if you don't consume all three bananas at once, your back with the same problem.

So why aren't we looking at a resealable package as opposed to a one-time use?

First of all, let me mention to you the way they're merchandising this in their trials.

It's a two package for X price approach.

The whole idea is that one of the packages of three bananas is ready to eat; you take it home, you would eat it.

The second package -- you don't need to open it until you're ready, and you can wait a week.

So they see most people by around five or six bananas at a time, so this two-package approach gives you the color, the taste and texture of a banana that's ready to eat in the first package, which is often not available to consumers because merchandisers tend to put out bananas that are on the green side.

Then they've got the second package, where they have got the flexibility to wait a week.

Or you can wait on both packages.

When you open up the package and reseal it, it takes some time and sometimes a lot of time to get back to the atmosphere that's ideal.

So we can't predict that the resealable approach is going to work for them every time, and that's why we're going with this approach initially.

Once the package is opened, the rate of browning is similar to standard bananas?

Or is it -- ?

Yes.

Now you are in your normal situation, but we have got it through the distribution channel and it's in the kind of color, texture and taste that is ideal for consumers.

As far as the timetable for the market trial, the Phase II of the market trials, is there anything you can give us there?

They have not publicly disclosed what their immediate plans are.

But it would probably be safe to say that, first of all, the trials seem to be going well.

We are gearing up, they are gearing up.

So I think it would be safe to say that you can expect a regional rollout.

When they announce what their specific plans are, we will pass them on.

I went to see if I can maybe extract some sort of guidance for Q4.

You had a hit from the cold snap in Q3 at APO Apio.

So that obviously hurt you.

Would you expect the revenue to be flattish sequentially at Apio value-added?

From last year or from --

No, from the current quarter.

So you had 43 in Q3.

Would you expect that to be consistent with what you're looking for the May quarter?

If you look at the history, the third quarter for value-added is from a revenue standpoint, at least, because to answer your question -- it's always our biggest quarter.

That's the quarter you have Thanksgiving, Christmas, the Super Bowl.

So it's a big revenue quarter.

It's just, quite often, a tough quarter from a sourcing standpoint.

Fourth quarter is usually a good quarter, but it's not as good as the third quarter.

It's certainly will be up year-over-year.

Based on what we see today -- obviously, we have still got two months to go.

But I would suspect it will be down sequentially just because that's the history of the value-added business.

In revenues.

In revenues -- not dramatically down but slightly down.

Profits ought to be --

Yes, our gross margins should bounce back.

To the 15% to 16% mentioned.

Okay, got it.

Then the SG&A expense related to Landec Ag in Q3 -- was that a one-timer?

Or are you guys going to have about $280,000 a quarter in SG&A related to that?

No, it's done.

Remember, the deal didn't close until a week or so into this fiscal quarter.

So we had a week's worth of expenses associated with the entire business.

Starting December 1st, Monsanto is paying for all of our operating costs going forward.

So it will be zero going forward.

Finally, the taxes, I assume, are going to be at the corporate level.

So when I think about the minority stake in Apio, should I be -- the way to model this -- is it to back the taxes out of Apio to some extent, or is it at the corporate level?

To some extent.

The tax-sharing agreement we have in place is a proportional, based on income.

So if Apio was 10% of our total for the year, they would get 10% of the income tax.

Jonathan Lichter.

Sidoti & Co.

Do you have any -- a ballpark number of supermarkets or nontraditional stores that you would need to be in before you would get above the minimum level, minimum payment from Chiquita?

I'd like to get back to you on that.

I don't have that one right on my fingertips, and that's a fair question.

One of the keys to answering that is how many bananas are each store selling.

We would have to make some assumptions, but I'm just going to have to get back to you.

I don't have it right hand; I'd hate to give you a lousy answer.

On the air products deal, have they developed any new products, or do you expect any new products in fiscal 2008?

Yes.

Yes and yes.

We are developing new products; and, yes, we expect new products in fiscal 2008.

Will they contribute to fiscal 2008, or do you see them more as a fiscal '09 kind of story?

I think it would probably be nonmaterial in 2008 and material in 2009.

Bill Gibson of Nollenberger Capital.

Just sort of following up on the prior question, where you are trying to figure out getting over the minimums.

What are the convenience stores averaging now, say on a daily sale basis?

About a box a day, a box of about 22 bananas to 26 bananas a day.

In terms of packaging on a go-forward basis, you talked about looking for new agreements.

What kind of areas are you thinking there?

Bill, say it again, please.

In terms of new packaging agreements or new partners, are you thinking other fruits besides bananas, or what is the thinking?

We're thinking in two ways.

We are thinking of going beyond vegetables and bananas to other produce category targets such as -- let me pick them out of the air -- tropicals or berries or whatever.

And then, secondly, going up in size, which means larger package sizes, which we are very good at because there's more respiration going on, there's more biomass going on.

So those are the two dimensions that we're talking about.

And the third is actually totally new market segments where somebody needs very long extended shelf life, military (technical difficulty) service, et cetera.

So it's those three dimensions that we want to exploit.

On the tax rate next year of 24% to 30%, does that hit every quarter, or do you work off the NOLs in the first half and it climbs in the second half?

No; it's on an effective rate basis.

So if you determine for the year that your effective tax rate is going to be 25%, to your estimate for the year, you can apply 25% to your income each quarter.

Then you would true it up at year end.

Jeff Osher.

GMP Asset Management.

Congratulations.

Thanks for taking my question.

Just a question along the lines of R&D in absolute dollar terms, between BreatheWay and your Intellicoat and just your polymer expertise in general.

Is that a sustainable number of $663,000 per quarter going forward, or is that something -- I just want to understand how we should be thinking about on a go-forward basis whether you're going to have to spend to maintain your technology lead there and your expertise in the polymer-based codings.

If I can go at the corporate level, the macrolevel, we need to be spending in the $3 million to $4 million a year range to sustain -- more than sustain -- accelerate the rate of innovation that we're interested in seeing.

The good news is that the mix is changing.

A few years ago it was heavy in R and small d.

Now it's small r and big D.

So your return on investment, such as big, should be higher because you are more focused on development activities as opposed to just basic research.

Obviously, we do some research here.

We're interested in new polymer platforms, and we're investing in that.

I would say the $3 million to $4 million range with a change in this mix to heavy d is what would be sustainable for us.

So roughly exiting the -- call it 50% higher than the run rate this quarter.

Monsanto didn't pick up -- that number is not artificially low, though, because Monsanto picked up R&D in Q3, is it?

That's a real number.

Not on a forward-looking basis.

On an historical basis, yes, because you use to have R&D at the sea level that's now being paid for by Monsanto per se but what Gary was saying is strictly the corporate expenses, which is the licensing business and the Apio Tech business, on a go-forward basis, we will be spending $3 million to $4 million a year on those two businesses.

[Brad Zaffalo] of Riveredge Capital.

Not to beat this Chiquita relationship to death, but in terms of how we think about the fourth quarter, given that you have had kind of a -- I don't want to call it a one-time, but the annual true-up with your contracts, should we expect kind of a return to the type of royalty level that you have seen outside of your fiscal third quarters, both this year and last year, kind of those bigger royalty numbers that you see in the third quarter?

Yes.

So in terms of even into next year, until things change in terms of the size of your opportunity with them, we should probably think of modeling along the same levels?

I think so.

And the real unknown here in -- Chiquita chose, and we agree with this decision, to focus on foodservice places that don't normally have bananas under what they call their Chiquita-to-go program.

It's a good validation; if you can get through those difficult distribution channels, you can certainly get through the retail grocery side.

But the big numbers and the big volumes come with the regional rollout of the retail package, which is beginning in fiscal year 2008.

So those are the big numbers, and it's hard at this point, given the fact that they are still in testing to really get a sense of how fast that will roll out.

But that's where the numbers get substantial, and we will never be talking about minimums again because we blow right by them.

Let me clarify one thing.

You had mentioned royalties.

This is really a supply agreement, so I just want to make sure everyone understands we're getting paid for supplying a membrane; it's not a royalty base.

I got that part.

[Craig Pender] of Wells Capital Management.

Just furthering the previous caller's -- or your answer about rolling out to the retail grocery chains, are you talking about Chiquita-to-go, or are you talking about 40-pound type (indiscernible)?

Neither.

The Chiquita-to-go is, as you know, a foodservice program.

It is focused on coffee chains and convenience store chains, mini-marts, et cetera, et cetera, some fast food operators.

That's the 200,000 sites that Chiquita has identified in the United States.

It's the Chiquita-to-go program that I mentioned where they are testing into countries in Europe, which is going well.

So think of that as foodservice box sizes that can range from 20 to 40 bananas for example, in a box that has our packaging technology around it.

I also mentioned in the call on the retail side there are smaller package sizes oriented to the consumer.

The first product has three individual bananas put into a package that has our technology, and that's the retail market.

And those are the trials that are underway right now on the East Coast.

Then, you said something about rolling out the really big numbers, surpassing the minimums in fiscal 2008.

I said that it's the retail side that's going to drive the large numbers because 99.5% of all bananas are purchased in grocery stores today.

So that's the big market, and that's the market that, as we roll out and as we achieve success, those are the big numbers.

That was just a follow-on for clarification.

My real question comes from the Wall Street Journal article on Monday addressing Sara Lee and Kraft getting into a meat and lettuce-free fresh-cut and vegetable market.

It sounds vaguely familiar to what product I thought that you had already out there with your fresh-cut vegetables and adding meat.

Does my memory serve correctly that you had an existing product in this category?

We did, with a company called Foster Farms.

It was tested in club stores, and it was backed off because, in my -- I'm going to give you my personal opinion.

Club stores were the wrong venue for launching that product.

We're aware of Kraft and Sara Lee, their focus on salads, the leaf lettuce family.

What they are really trying to do is sell more meat, so that's not -- we're not in the salad business.

We don't want to be in the leaf lettuce business.

So let them go at it.

But if our program is going to be resurrected and successful it's going to need to go to the retail side, not the club store side.

I can't tell you whether or not Foster Farms is positioned to do that or not.

It sounds the same, but the difference is Kraft and Sara Lee are thinking of this as kind of a salad.

I got to tell you, that is already a crowded market, and I wish them good luck.

Shaun Boyd.

When you mentioned the rate on the Chiquita program being at about a box a day, is that from the current 7500 outlets?

Roughly how many stores are contributing to that?

I was just giving you a rough number on -- by the way, they ended last year at 7500 as they announced and we just reported.

So I'm talking about the Chiquita-to-go program.

I am talking about the foodservice outlets.

I am talking about the 7500 that could expand to 200,000.

When you mentioned selling into two European countries, that's also foodservice outlets?

Yes.

On the rollout that is going out on the retail, that would start in fiscal 2008?

And just more details to follow on that as we get them?

Right, as we learn more.

In terms of thinking about your answer to my question earlier on the take-or-pay contracts, and you've got an escalation each year there, can we expect a similar rate of growth in fiscal 2008 as we have seen here in 2007 versus the '06 take-or-pay them out?

We certainly hope so.

You mentioned commercializing more technologies in 2008.

You mentioned military foodservice.

I apologize because I was catching something else at that time.

Can you give me more detail there?

I would like to wait until we have specifics.

It would be premature to give you more detail.

It's areas that we're looking at.

You will hear some announcements during 2008 as to what we are specifically doing, so I would like to put that off, please.

William Lauber of Sterling Capital Management.

Being here in the St.

Louis area I always kind of wondered why you guys hadn't gotten into the local grocery stores here with your Eats More products as they mainly had been in the Costco and the Sam's here.

Nonetheless, last month I noticed in the Shop N Save, I guess one of the divisions of Supervalu, you've got in there with some of your -- I guess it's the mini vegetable tray as well as some of your salads.

I was wondering; I know you guys have had a relationship with Albertson's and since that merger, are you starting to get a lot more business out of the Supervalu Midwest stores?

Boy, I'm not sure.

I'd say probably not yet, but we're aware that we're not in every store in the Midwest.

There's some in St.

Louis that we would dearly like to be in.

Historically, there was an issue for some of the chains about our what I call loading and staging location.

We're down in the Santa Maria Valley, and most of their trucks were going to Salinas Valley, which was a couple hours north.

So I know we have some historical issues about logistics.

But we want them all.

Greg is from the Midwest, so he is determined that we're going to start expanding in the Midwest.

We already have good penetration in the Chicago area, et cetera.

So I can't tell you exactly where we are right now -- actually with Albertson's, we're in most of the their locations nationwide.

But we seek further expansion.

Then I guess, going forward with selling the seed business, one of the things you had mentioned is management attention on the two areas.

Would we see -- are you going to be focusing more, I guess that's more the salesperson's time.

But would part of the benefit of selling that business be that you would be expanding into more grocery stores?

Absolutely.

That's our hope and intent, that we need to grow.

We have -- Nielsen tracks grocery stores sites in the United States; there's roughly 30,000 of them.

We have roughly 46% site penetration, meeting we have products in 46% of those sites, of some kind.

So we're not happy with 46%, we want more.

Plus, in some of our sites we only have limited product lines.

We would like to expand our product lines.

Then, last but not least, we are always innovating.

As a matter of fact, we are launching for new products as we speak.

So we are always doing that.

So absolutely expect and need and want to expand the penetration of grocery store sites.

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

In closing, thank you very much for your ongoing interest in Landec, and we look forward to talking to you during our next earnings conference call.

Thank you.

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

This concludes the program.

You may now disconnect.

Good day.