Lifecore Biomedical Inc (LFCR) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec Corporation first half and second quarter of fiscal 2008 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 CEO of Landec Corporation.

Sir, you may begin.

Good morning and welcome to Landec's first half and second quarter of fiscal year 2008 earnings call.

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

This call is being webcast by Thomson/CCBN and it can be accessed at Landec's Web site at www.Landec.com on the Investor Relations page.

The webcast will be available for 30 days, through February 2, 2008.

A replay of the teleconference with the available for one week by calling 888-266-2081 or 703-925-2533.

The access code for the replay is 1176307.

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 Securities and Exchange Commission, including the Company's Form 10-K for fiscal year 2007.

As reported in yesterday's press release, for the first six months of fiscal year 2008, overall revenues of $121.6 million increased 14%, while overall gross profit increased 29% from the year-ago period.

Net income increased to $6.2 million compared to $122,000 in the first six months of last year.

Notably, during the first six months of fiscal year 2008, Apio's value-added specialty packaging vegetable products grew 11% to $78.7 million, and value-added gross profit increased 11% to $12.1 million.

The gross margin in the value-added business for the first six months of 15.4% is consistent with the year-ago six months' gross margin in the value-added business.

In our Technology Licensing business, for the first six months, revenues increased by $2.3 million, while the license fee gross profit increased by $2.5 million compared to the same period last year, which was primarily due to the Intellicoat license agreement with Monsanto signed in December 2006.

Overall, Landec generated $4.8 million in operating cash flow during the first six months of fiscal 2008.

Based on the results for the first six months of fiscal year 2008, we are on track for achieving our revenue and net income goals for fiscal year 2008.

Accordingly, we are not changing our original guidance for the fiscal year 2008, which is to increase revenues by 10% to 15% and, after excluding $18.8 million of non-recurring events from fiscal year 2007, to increase pretax net income by 45% to 55%, and increase net income after-tax by 30% to 40% compared to fiscal year 2007 results.

As a reminder from our last call, during the first six months of fiscal year 2008, we expanded our joint technology license and supply agreement with Chiquita.

The expanded agreement includes additional exclusive fields for bananas.

In addition, Landec and Chiquita entered into a new exclusive license using Landec's BreatheWay packaging technology for avocados for which market tests for foodservice applications are already underway.

Under this agreement, in exchange for expanding the exclusive license fields for bananas and adding an exclusive license for avocados, the minimum gross profit amounts from the purchase of BreatheWay packaging by Chiquita will increase by a total of $2.1 million over Landec's next fiscal years to $2.9 million in fiscal year 2008 and to $2.2 million in fiscal year 2009.

All in all, we are tracking well and barring any significant and extended adverse weather conditions during the second half of fiscal year 2008, our progress is in line with our internal plan for meeting our goals for fiscal year 2008.

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 six months of fiscal year 2008 of $121.6 million versus revenues of $106.3 million for the same period a year ago.

The increase in total revenues during the first half of fiscal year 2008 was due to, first, an 11% or $7.8 million increase in revenues from Apio's value-added vegetable business; second, a 14% or $4.9 million increase in revenues from Apio's commissioned trading business; and third, a $2.3 million increase in license fee revenues, primarily due to revenues from the Intellicoat license agreement with Monsanto.

For the first six months of fiscal year 2008, the Company reported net income of $6.2 million or $0.23 per share, compared to net income of $122,000 for the same period last year.

This increase in net income during the first half of fiscal year 2008, compared to the same period last year, was due primarily to, first, a $1.2 million increase in gross profits in Apio's value-added vegetable business; second, a $2.5 million increase in licensing gross profits as a result of the Intellicoat license agreement with Monsanto; and third, the elimination of $5.5 million of operating losses incurred by Landec Ag in the first six months of fiscal year 2007 as a result of the sale of Fielder's Choice Direct to Monsanto in December of 2006, and the fact that, under the Intellicoat license agreement, Monsanto is currently paying for all of Intellicoat's operating costs.

These increases in net income were partially offset by one-time net proceeds of $1.5 million from an insurance settlement received during the first six months of last year, which was recorded as a reduction of general and administrative expenses in the prior year, and from the increase in the book income tax expense of $2.4 million during the first half of fiscal year 2008 compared to the same period last year.

It should be noted that only $150,000 of the $2.4 million book income tax expense is expected to be paid in cash, because the repurchase of Apio's options resulted in a tax deduction of $19.7 million, which reduced Landec's cash tax liability to the minimum owed under federal AMT.

However, for book purposes, the $19.7 million is not considered a deduction when calculating the income tax expense because the options that were repurchased have never been included in prior periods as an expense for book purposes.

For the second quarter of fiscal year 2008, Landec reported total revenues of $59 million versus revenues of $55.2 million for the same period a year ago.

The increase in total revenues during the second quarter of fiscal year 2008 was due to a 10% or $3.5 million increase in revenues from Apio's value-added vegetable business and a $940,000 increase in license fee revenues, primarily due to revenues from the Intellicoat license agreement with Monsanto.

These increases in revenues were partially offset by a $761,000 or 4% decrease in revenues from Apio's commission trading business due to the timing of export shipments.

The growth in overall revenues during the second quarter of fiscal year 2008 was lower than the overall revenue growth during the first quarter of fiscal year 2008 due to the timing of Apio's trading revenues, which are subject to seasonal fluctuation.

During the second quarter of this fiscal year, Apio's trading revenues decreased 4% compared to the second quarter of last year, whereas during this year's first quarter, trading revenues increased 36% compared to the first quarter last year.

For the second quarter of fiscal year 2008, the Company reported net income of $3.1 million or $0.12 per share, compared to net income of $108,000 in the same period last year.

This increase in net income during the second quarter of fiscal year 2008, compared to the second quarter last year, was primarily due to a $1 million increase in licensing gross profit, which is primarily due to the Intellicoat licensing agreement with Monsanto, and the elimination of $3.1 million of operating losses incurred by Landec Ag in the second quarter of fiscal year 2007 which is non-recurring due to the Monsanto deal.

These increases in net income were partially offset by, first, the increase in income taxes of $1.2 million during the second quarter of fiscal year 2008 compared to the same period last year; second, a $391,000 decrease in gross profits in Apio's value-added vegetable business, primarily due to seasonal produce supply shortages during the second quarter of fiscal year 2008 which required Apio to purchase some produce on the open market at prices above contracted prices, compared to the year-ago quarter when shortages were insignificant; and third, a $188,000 decrease in gross profits for the trading business, primarily due to the timing of export shipments.

As Gary mentioned, during the second quarter of fiscal year 2008, gross margins for the value-added vegetable business were 15.4%, which is in line with historical gross margins for the business.

In the second quarter of last fiscal year, when there were virtually no supply shortages, the value-added business generated gross margins of 17.9%, which is well above the historical average for Apio's value-added business.

Turning to the balance sheet, during the first six months of fiscal year 2008, our cash balance decreased by $17.4 million to $45.3 million.

Cash balances primarily decreased because of the repurchase of all of the outstanding common stock and options of Apio not owned by Landec for $20.8 million and the purchase of $1.5 million of value-added property and equipment.

This decrease in cash was partially offset by $4.8 million of cash generated from operation.

That concludes my formal presentation.

Gary?

Thanks, Greg.

Our first-have results show the benefits of Landec's increased focus on its two core businesses, the Apio food business and the Technology Licensing business.

In the food business, the focus is on selling value-added specialty packaged vegetable products and on selling BreatheWay packaging to key partners for high-value, perishable produce products.

In the Technology Licensing business, the focus is on licensing and commercializing Landec's patented polymer materials to key partners outside of food applications.

During the first half, we benefited, first, from normal weather patterns; second, from increased demand for our specialty packaged fresh cut food products; third, from our licensing arrangement with Monsanto; fourth, from increased interest income in from the cash received from the sale of Fielder's Choice Direct to Monsanto in December of 2006; and fifth, from the absence of losses from Landec Ag, which have historically occurred during the first six months of each fiscal year.

As we look forward in our Apio business, a key driver of future revenue growth is to continue growth in our value-added specialty packaged fresh cut product business to retail grocery stores, club stores, and foodservice outlets.

To date, our business has grown at rates above market category growth, and we have been able to take marketshare using our proprietary BreatheWay packaging technology and that extends shelf life of perishable products.

As consumers make better choices about their health and eating habits and continue to look for healthy, fresh-prepared food products, we envision our category continuing to grow.

Turning to our non-food technology licensing business, we are busy first with our partnerships with Monsanto and Air Products as well as our internally funded corporate R&D efforts focused on our unique polymer chemistry.

We are expanding our R&D staff and filing more patents.

In implementing our licensing strategy, we are dependent on our partners, such as Chiquita, Monsanto and Air Products, to develop, launch and market new products using our technology.

In our food business, our business plan does make provision for some weather variability issues, but not for extreme conditions such as prolonged freezing or heat waves.

We are working to stay ahead in our markets and applications through innovation, uniqueness and new products.

We are pleased about our expanded relationship with Chiquita; that does include a wide range of license applications for bananas using our BreatheWay technology.

We are impressed with Chiquita's brand, logic, logistical support, customer relationships, international presence, and strength in technology development.

Although the Chiquita-To-Go program is still relatively small, Chiquita nearly doubled the unit volume sales in calendar 2007 compared to 2006.

Chiquita's focus is to aggressively expand the Chiquita-To-Go convenience store program in North America and Europe, to identify quick-serve restaurant chains that can benefit from having bananas on their menu, and to continue to develop an array of products that will allow a successful roll-out of retail products to grocery store chains.

In avocados, our focus with Chiquita is to package avocados to extend the shelf life of ripe and ready-to-eat avocados.

Chiquita recently started foodservice market trials for avocados packed in our BreatheWay technology.

Retail grocery store products designs for avocados are now in development.

In November of 2007, Chiquita announced a major reorganization and restructuring of its company with the objective of reducing annual operating expenses $30 million to $40 million per year1 to increase the focus of the Company on innovation and technology.

Chiquita has told us that Landec's BreatheWay technology is their number one priority for creating value-added businesses for bananas and avocados for both foodservice and retail markets.

The reorganization initiatives at Chiquita appear to be positive for Landec.

In the short-term, there is going to be a transition period while Chiquita completes its reorganization, and thus it will take some time for the new team to come fully up to speed as it relates to our retail grocery store banana applications.

We will keep you posted on Chiquita's progress.

Our work with Monsanto is progressing well.

Monsanto is in early stages of assessing how Landec's polymer technology can be used for seed coatings in broad areas, including corn, soybeans, cotton and canola.

In addition, Monsanto is interested in evaluating how active ingredients, such as insecticides, fungicides and pesticides, can be effectively delivered as a component within our Intellicoat coatings.

We are obviously prepared for spring trials.

We stated earlier in this year that we would be seeking new partners or expanding current partnership agreements for selling our BreatheWay packaging technology for new product targets.

Our first such agreement is the expanded agreement with Chiquita to collaborate on avocados, and that's our first move outside of bananas.

We do expect to enter into an additional technology partnership arrangement with a new partner this fiscal year and hopefully during our third fiscal quarter.

Looking forward, we continue our search for possible acquisition targets in the food arena that can utilize or are synergistic with our technology and that uses our channels of distribution.

We will be very selective in our search.

As stated earlier in this year, we are expanding our R&D efforts with a focus on delivering unique polymer systems that can deliver large and small molecules based on changes in temperature, time and pH.

Thank you.

We are now ready for questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS).

Tony Brenner, Roth Capital Partners.

Thank you.

Gary, can you indicate what the reason for the auditor change was?

Tony, it's economics, and solely economics.

I've worked with Ernst & Young, or Arthur Young, their predecessor, for over 20 years, so this was not done casually.

But we just found that the fees were well above what we wanted to pay.

We are going with what I guess would be called the number five accounting firm in the country, McGladrey, who has much more reasonable fees.

We have no disagreements with Ernst & Young whatsoever; this is strictly economics and we felt this was in the best interest of shareholders to work with McGladrey, so we made the decision and made the change.

Okay, one balance sheet question -- what's the reason for the increase in the accumulated deficit year-over-year?

That was the repurchase of the Apio options.

That's where it was recorded.

Recall that it's a tax deduction but not a book production, so it didn't go through the income statement.

Everything was balance sheet.

So you had a debit to your retained earnings and a credit to cash.

Gary, judging from your comments regarding Chiquita, it sounds like, at least over the short-term, that this is ramping up at a moderate pace.

Does that mean they will be writing a check in the fourth quarter to meet their guarantee?

Yes.

Okay, and last question -- as I recall, at the time you signed that revised licensing agreement with Chiquita, you indicated that that agreement was included in your guidance but additional licensing deals were not.

So, when you announce this new licensing deal, assuming it involves some sort of upfront fee or ongoing licensing fee, would that be just added up to your guidance?

Let me just say that the collaboration that we're working on and we hope to consummate is very oriented towards technology access for Landec, and it's not something that would be upfront license fees and it would be, therefore, not incremental to our guidance.

Could you say anything more about the agreement?

No.

Thank you.

Bill Gibson, Nollenberger Capital.

Yes, I want to head into Chiquita as well on the retail.

You know, they completed the initial market and consumer testing and they are moving forward.

Are they still using the technology in the test markets, or has this come to a complete halt, or what's sort of the nature of this?

The first phase was finished.

So right now, we are in development of new product formats and new configurations.

So currently as we speak, we are not in the test mode, but when we go back into the test mode, they are clearly going to be using Landec BreatheWay technology.

Are the number of markets likely to expand?

When you say number of --?

Well, I think Chiquita was testing in three markets.

Do we go to five?

Do we go to ten?

Well, Bill, I will have to tell you that I don't know.

Part of that answer is that there are some new players and some new people involved in our collaboration.

It looks like they are going to be the right folks focused on the right things, but there is a transition here with Chiquita that is going to take about a quarter or two for some of this to sort out.

Will they go into more expanded trials?

I don't know.

I would guess they start with about the same number that we left off with, which was about 80 store sites, but I really don't know for sure, Bill, and we will know more in the next quarter.

Okay, thanks, Gary.

Jonathan Lichter, Sidoti & Co.

You mentioned it would take about a quarter or two to sort out, so does that mean we're looking at some time in '09 before they could possibly roll this out to supermarkets?

Are you referring to (multiple speakers) or calendar?

Calendar year.

I would hope it's earlier than that.

You know, it's hard for me to tell, Jonathan, with this transition, but I think our hope and expectation is that it could be sooner than that.

Okay.

How many locations is Chiquita-To-Go in currently?

You know, I don't know.

They've just reported that they've doubled or nearly doubled their sales volume, unit volume.

I'm not sure what the sites are, so I would hate to give you a bad number, but I think the last time they reported -- I'm trying to remember.

Greg, can you remember the last time they [published] reported sites?

It's at conservatively over 12, so that would indicate 12,000.

Over 12,000 sites.

So they are in more than that, Jonathan, but we don't have a precise number right now.

Okay.

Can you break out how much of that $177,000 is from Chiquita versus from the military?

It's about 50-50.

Okay.

Should we read anything into the fact that you reported the six-month results before the Q2 results?

No, other than to say that whatwe've said all along is that we're trying to build shareholder value over the long term, and the way we measure ourselves and the way we run the business is to meet annual goals.

We are just not a quarter-by-quarter company.

I mean, anybody that gets too worked up on a quarterly basis, really, this is not us.

So our format going forward would be to report, first and foremost, year-to-date results, which is consistent with the way we're running the company, and then we will report the quarterly results.

So I wouldn't read anything into it other than that.

(OPERATOR INSTRUCTIONS).

Steve Denault, Northland Securities.

Good morning, everyone.

The management turnover within Chiquita, did that fall after or before the new fields of bananas, that agreement was struck and the avocado agreement was struck?

The order was the new agreement was struck and then the reorganization was announced in early November, and it was significant.

Fernando Aguirre, the CEO of Chiquita's Charter, which he's been very clear about is to revitalize Chiquita into an innovation company and a company focused on value-added products and less so from commodity businesses.

So the order was, the agreement was struck, some time went by and then they reorganized and announced that reorganization in November.

But, I am sure, I'm sure the senior team knew about the reorganization at the time of doing our deal.

Okay.

How recent was their decision to trial the intelligent polymer within the foodservice channel?

You mean our packaging technology for bananas?

Yes, within foodservice.

They've been actually -- this Chiquita-To-Go program which we referred to that has almost doubled in the last year, is really, it's foodservice.

So they've been at that for over 18 months, maybe 24 months, and they focus on convenience stores, coffee chains, mini-mart gas stations, so that would all be viewed as foodservice.

So they've been at that for a while.

Their focus now -- obviously, they're going to continue to roll that out.

Their focus now is to really go after some large, quick-serve restaurant chain which you might call fast-food outlets, etc., and so that's a priority for them.

Then the other priority is to get -- learn from the market research that we did in the last couple of quarters for retail grocery stores, get that information, incorporate it into some new product configurations, new product formats, and then get that back into testing as soon as possible.

So that's their list of priorities.

Okay.

Remind me again, Chiquita does the Apple Bites for which QSR?

I think they do it for McDonald's, don't they?

I think Subway also.

Subway and McDonald's, so yes, that's Chiquita.

Okay.

Considering that we are I guess well into the third quarter, there is a little bit in the way of sourcing shortages in the second quarter.

How is the sourcing looking, third quarter to date?

Well, it was looking really good.

We've got, in the Northern California area, we've got four days of horrendous storms.

We had a contingency plan here in case our power went out as to what we were going to do with this call.

Whether that makes its way and affects the central growing areas, we won't know for a while, but so far, the sourcing has been just fine, Steve.

Okay.

Then if I could ask one final question?

Within value-added, if we look at the 9% or 10% growth, how much of it was organic versus new distribution?

If you know what I mean.

Could you elaborate just a little bit?

I think the growth with 10% to when you say organic, sometimes we get confused with organic produce.

Right, right -- meaning, how much of it was -- what would the same-store sales number have been, versus new doors of distribution?

Let me get back to you because Greg and I don't know that.

It's a fair question.

We owe you an answer and I just don't have it right now.

But I understand your question and we will get back to you.

Okay, thank you.

Sal Kamalodine, B.

Riley & Co.

Can you comment on your licensing pipeline beyond this deal that you expect to announce before the end of February?

The licensing, in my experience, and I've done it for a lot of years, is kind of a bumpy -- you know, it comes in fits and starts.

We have been focusing on this next technology access license for some time, so that's been a priority for us.

I would say that, of our priorities, obviously we will have other things that we're working on, but I don't know if any of those would materialize this year and I would ask you not expect those, not this fiscal year.

But we were putting more attention and time in the M&A area, and so that's a priority for us, but we're going to be darn picky and choosy about that.

So if I had to steer you, I would say imagine that more and more of our emphasis and focus is in the M&A area right now, because we see an opportunity to extend and expand our technology more quickly that way.

Would that take the form of acquiring a company that is currently generating revenue, or would you be buying patents or what should we think about?

No, our orientation is to real companies making real earnings, which is part of the challenge, because there are a lot of companies out there that are just "one year away from making money", if you know what I mean.

Right, but where the technology would be complementary (multiple speakers).

Our technology could be directly applied the next day; that's what we're looking for.

Okay.

As far as what you're looking at today, do you internally, the way you work, do you just focus on one or two large opportunities, or at any given time, do you have several opportunities that you are involved in?

Are we still in the M&A area or are we -- (multiple speakers)?

No, this is just the licensing area.

Oh, okay.

We look broadly and as I mentioned earlier, we are stepping up R&D spending and we are really interested in how our technology -- to date, our technology has been primarily relying on the triggering of a temperature switch, an on/off switch that, in the case of packaging, is helping us control an atmosphere as we go through a volatile temperature cycle, through the cold chain and the distribution cycle.

We are increasingly finding that we can do similar types of things with changes in pH or changes in time, so we're putting more emphasis in our R&D on expanding our [patented state] and looking for new applications.

By the way, some outside of the food area -- not all are in the food area.

So that's a step-up emphasis for us and I gave guidance to that earlier in the year that we would be doing this, and we are.

Okay.

Can you give us a little bit of guidance on what the take-or-pay payment will be from Chiquita next quarter?

Well, for the entire year, as we report, it's $2.9 million.

As you can see, based on the results from Apio packaging for the first half of the year, there was very little.

So if you can assume that most of that $2.9 million is going to occur in the second half.

I think it would be safe to say it's about 50-50, third quarter to fourth quarter.

Okay.

Then finally, can you comment on the opportunities that you have in front of you to expand the margins (technical difficulty) value-added on a longer-term basis, either by sourcing maybe south of the border or anything of that sort?

Let me cut to the chase and say that our goal and objective is to maintain the current margins.

You've got -- we've got quite a bit of pressures on cost side.

I don't need to tell you about fuel costs going up and how that affects farming, etc.

So, we've got quite a bit of pressures to offset cost increases.

So, while we would love to expand margins on the existing fresh-cut specialty package [V-8] veg business, I think realistically our goal and objective is to try and maintain those.

Where we want to change the margin mix for the Company is by having a higher percentage of our future margins coming from licensing revenues and royalties and from our packaging-only business, where we're selling only packaging at very high percentage margins to partners such as Chiquita.

So within the [v-8] veg business, realistically, boy, we sure would like to try to maintain that as we face these increasing costs, but overall, over time, we want the margin mix to change to help increase the overall margins of the Company, as I mentioned.

Sure.

Okay, thanks.

Tony Brenner, Roth Capital Partners.

You answered half of this regarding third-quarter sourcing, but it seems to me it's kind of unusual for you to have sourcing problems in the second quarter.

What was the nature of that?

There weren't any major sourcing problems.

Maybe we confused you a little bit.

If you are referring to maybe the export revenues being down?

There weren't any huge sourcing problems in the second quarter, Tony; it was more related to the timing of export.

We had a huge first quarter in export; I think it was up something like 34% or 36%, and in the second quarter it was down 4%.

It's just the timing of when shipments are recorded.

In the Apio value-added business, you referred to seasonal supply shortages which caused you to have to purchase some product on the open market and which hurt your profit margins.

Well, it didn't -- if you look at it, Tony, our margins are actually in line with what the first quarter was.

We factor in that we're going to have produce shortages.

I mean, that's just the nature of the business.

The real issue is, when you compare it to last year's second quarter, last year's --

I'm just wondering what the issue with the shortage was.

I'm not quite -- (multiple speakers).

It was just normal shortages.

I mean, it's typical.

Our average margin in this business is around 15%.

We did 15.4% in the quarter, so the issue is, when you compare it to last year's second quarter when all of the stars were aligned and everything was perfect and we had virtually no shortages, our margins were almost 18%, which is well above the historical average.

So it's just --.

The question was that it's unusual for you to have those shortages in the second quarter.

What event caused that?

Nothing spectacular.

It was modest, very modest impact.

It could be for anything.

I mean just timing of products coming up or maybe the yields were down in some fields.

You know, a year ago, we got hit in the first quarter.

I mean, that doesn't normally happen.

So it's just the nature of the business.

And it was in the normal range and that's why our margins are 15.4%, which is the historical average.

Okay, thank you.

Craig Pieringer, Wells Capital Management.

At the end of your prepared comments, and you just addressed this with the last caller, I perked up when you started to talk about temperature, time and pH for the large and small molecules, but I didn't catch the context in which you delivered that, Gary.

Could you address that?

I'm just saying that we are increasing our R&D spending, filing more patents, and what we are discovering is that there is more breadth to the technology than perhaps we realized.

We've been totally dependent over the years and focused on the use of the temperature activation feature, and we're finding that there is some things we can do.

We can make our polymers water-loving and oil-loving and turn them on and off and go back and forth, which gives us some interesting applications in terms of time release.

We now learn that we can deliver -- holds things and not release them at one pH, release them at a different pH, so that gets you into some interesting thoughts as to how you might be delivering a drug or a catalyst or an insecticide, or a food ingredient, etc., etc., with these different triggers.

So this -- and I want to caution that this is R, Craig.

This isn't D yet.

But you can't get the D unless you do the R.

So I mentioned early in the year that we felt it was time to invest more in our technology, and we are discovering that it has more breadth than perhaps we realized.

You answered pretty much what I was asking without me asking it, which was it sounds exactly like a pharmaceutical delivering technology, so you are onto that.

You have always been very insightful.

Shawn Boyd, Westcliff Capital Management.

Just a few for you -- if I could, Greg, I want to come back to the minimum payments to Chiquita.

Did I hear you say we should think about that being split 50-50 in the February and May quarters?

Yes.

Okay, and that's related to the expansion of the deal because of the avocados?

Well, it's mainly the expansion of the fields for bananas.

Is the primary reason for the increase, the $2.9 million this year, but there is a small component in there for avocados, yes.

Okay, but I mean versus, say, previous years where it all hit in the February quarter.

Exactly.

Got it.

Okay.

On the value added, I think on the gross margins, we've hit that pretty well.

I just want to go to the growth.

We've talked, in the past, about 10% to 15% revenue growth on this business.

We are just a hair under the midpoint, kind of the low end of that, for the first half of the year.

I'm looking back and I'm saying, well, you know, first half of '07 was 17%, 18% growth.

So, is it kind of an issue of difficult year-over-year compares here and then we would expect to see that maybe a little above the midpoint in the back half of the year?

Good question.

There could be a combination of things here, Shawn, and it's hard for us to judge.

But you know, one of the challenges is when you're getting up in the market share territory that we are in, each new customer and each new share gain is a little tougher, so there may be some of that going on.

I can't tell you if there's any impact from folks worrying about recession, etc., etc., and how we will be impacted by that, or are impacted by that.

But it could just be a combination of things.

We've also got some tough competitors out there who want to do things on a regional basis and say I can get it to you the next day.

So I think there's a combination of things going on here that we have to address in order to keep the growth engine going.

Got it.

At this point, is this still a 10% to 15% growth business?

Yes.

Well, it has been.

Let's just put it this way.

Historically, we get what's called Nielsen data, which is fairly -- it's very reliable, actually.

To date, it has been.

Does that predict the future?

No.

But you know, we've got -- the good news is people, even in recessions, people need to eat, and they want to eat in a healthy way.

So I think that's going for us.

Maybe on that point, in terms of consumer spending, your industry data showing your competitors, kind of showing the categories as we think about prepackaged produce and fresh-cut produce, are you seeing any slowdown on the industry data, not just Landec?

There was one quarter where there was a slowdown, and our guys warned us that you can't really make any predictions based on one quarter.

But there was, I think it was a couple of quarters ago, there was a slowdown in the category.

But it was a head-scratcher, Shawn.

(multiple speakers)

Ask this question next quarter, and let me see if we've got some better data on that.

I got it.

Moving to another point, the first half on operating expenses, Greg, would you say that the run rates that we've got now on SG&A and R&D for the first half, are those fair proxies for the second half or, given the commentary on increasing R&D, should we be thinking about that being up a little bit in the second half?

It will be up a little bit in the second half for the reason you just --.

Okay.

SG&A?

SG&A should pretty much track with the first half.

Okay, thank you.

Moving back for a second, Gary, could you give us just a little -- I came onto the called late and I apologize, but maybe you could address in a little more detail on where we are now with the military and kind of timing on what you see on commercial development there, and then also with Air Products.

Military testing this year, I mean, you know, you've got the -- we know the technology works so it's the issue of how do you get our technology through their distribution channels in a practical way?

If a ship is deploying, how does that all work?

Where does the produce and the packaging come together?

Where is it stored?

Those types of things.

The view this year is the practical testing of our technology in real people's hands, not in laboratories, and then hopefully that would lead to commercialization, not this year but -- now, I'm talking about calendar year, not this calendar year but the next calendar year.

It could happen faster, I don't know.

Air Products is -- we are growing the business.

I will tell you honestly it's slower than I'd like to see.

They are good folks; we are developing new products for them.

In the personal care area, it's not as awful as drug development, but it's a pretty tedious process of going through safety and tox studies and going through what's called a coding process where it has to be accepted by the customer and go into their system.

So it's just, man, it takes time and we'd like to turn on the afterburners here but there's just a process you have to go through.

So the sales are expanding.

They are still relatively small for us.

But they are positive and we are positive, and all we can do is crank out new material, and that's what we're doing.

So in the meantime, we've got at minimum some Air Products and then maybe just a little beyond?

Yes.

right.

Then the last point, the M&A discussion that we had earlier, Gary -- I just want to think about this a little bit more.

You mentioned you want real revenues and real earnings, places where Landec technology can be applied day one.

Right.

We've talked in the past about the frustrations over our partners moving fairly slowly.

Is this another example of where you're trying to acquire a partner, so to speak?

I mean, not anything of the size that we're talking about with Chiquita but something where you would have more control going forward over the timetable, and being able to accelerate the commercialization of your technology?

Well, I like the way you stated that.

I know a lot of our investors and shareholders like licensing deals and I do, too, and I think it's good to have a good, healthy mix of that.

It helps us improve our margin mix over time.

I think that we're working on that and I think we're getting a good mix in our revenue and margins.

But I still like having parts of our business where we are in control of our destiny, and we have that today in much of our Apio business.

The targets and where we are looking in acquisition would put us, put the new acquisition, if we ever do it, into the bucket where we are controlling our destiny.

So to answer your question, yes, that's our focus.

Will it happen?

I don't know.

It's got to be the right target; it's got to be the right time, and the right terms, but we sure are focusing on it.

Yes, that would be wonderful.

Good enough.

It sounds interesting and I appreciate the answers.

Thank you.

Jeff Osher, JMP Asset Management.

It sounds like you continue to do a good job building the R&D pipeline.

With regard to one of the previous caller's questions about AN OpEx run-rate, and I know that -- well, let me ask, what is the gross R&D?

In other words, what is it?

I know you only spent $785,000 out of your own coffers.

What's Monsanto subsidizing?

Well, let me mention to you that our total R&D, if you look at R&D broadly across Landec, it's about $4 million -- $3.5 million to $4 million.

A quarter?

No, no, no.

That's a year.

Well, I mean, that's just -- in the scheme of things, it's a small number when you start talking about drug delivery, or I know you didn't say that per se, but one of our fellow shareholders mentioned that.

Can we expect that number to go up?

I mean, you spent $788,000 as far as your income statement.

I guess what I'm asking you is, was any of that subsidized by Monsanto, or is there a gross number that you don't report on the income statement that Monsanto is paying the delta between the gross number and the $788,000 R&D you spent this quarter?

Yes, the number that we are showing is strictly the Landec expense.

The amount that Monsanto is reimbursing is a net, so it's not grossed up here.

So, they pay for the Intellicoat group; that's a direct reimbursement of costs so it doesn't show up as an expense.

What's that number?

It's about -- it's historically averaged about $1 million.

Okay, but that's dedicated solely to Intellicoat?

Solely to Intellicoat, paid by Monsanto, does not show up on our income statement at all.

So how many engineers do we have, have working on product development?

I would say that we've got about 20.

The whole company is 150 people, not counting our direct, contracted labor in our plant.

I also want to address a question that you had, but I want you to finish this point, but you had another question in there that I want to address.

No, that's really helpful, Gary, that you have 20 engineers.

That's a good number.

Well, they are more scientists than they are engineers.

We do tolerate engineers in our buildings (LAUGHTER).

Okay.

You mentioned something about how could you do anything like drug development or things like that when we all know that those things cost many millions of dollars a year once you get into full development?

Let me just say that Landec has its strengths and weaknesses, but I will say that one of our strengths is that we are good at doing deals and trying to shape and structure shareholder value.

At least, I think we are.

We did this earlier in an area called the Aesthetic Science Corporation, which we came up with the idea of how it might be used in a specialized area of dermal fillers.

It's a hot area; it's a growing area.

There's some key people that are running that business that were attracted to this idea.

Some venture capital funders came in and we took a 19.9% equity position.

We don't bear any of the expenses now; they bear all of the expenses, etc., etc.

There's different ways of getting programs and projects that have a lot of merit, to a certain point, and then you spin them out or carve them out or whatever, and we still capture value.

So we are always thinking that way.

We are not expecting -- if Craig is right about this being drug delivery or drug development, we're not going to be spending $20 million a year in R&D on drug delivery, so we are going to get it to a certain point and then we will seek partnerships.

Okay, that's very helpful, that clarification.

I guess one follow-up, if I may?

With regard to OpEx, I know you guys manage the business on an annual basis, so is there any seasonal reason for the sequential drop in OpEx from Q1 to Q2?

Because I guess if we would have held OpEx flat, you would have made $0.10 as opposed to the $0.115.

So should we think about that OpEx run-rate of $5-ish million going forward, or are you guys going to continue to whittle OpEx out of the Company?

It was just a timing issue.

Remember, during the first quarter, they were going through our year-end, you've got accounting, you've got legal fees.

And you get some big pops in patents.

Those can come in little boluses, so don't read anything into that.

Okay, so the $5 million then, that's a pretty good number to model in the back half on a quarterly basis?

Yes, yes.

Okay, thanks a lot, guys.

Keep up the good work.

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

Thanks, everybody, for being on our call and we look forward to keeping you posted on our progress and results.

Many thanks.

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This concludes the program.

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