Lifecore Biomedical Inc (LFCR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Landec Corporation nine-month and third quarter fiscal year 2008 earnings conference call.

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

Later we'll 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, Chairman and CEO of Landec's Corporation.

Sir, you may begin.

Good morning, and welcome to Landec's first nine-month and third quarter of fiscal year 2008 earnings call.

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

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

The webcast will be available for 30 days through May 10, 2008.

A replay of the teleconference will be available for one week by calling: (888)266-2081, or (703)925-2533.

The access code for the replay is: 1226274.

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 10K for fiscal year 2007.

Regarding recent events we announced last week our need to delay our third quarter release in order to give our new accounting firm, McGladrey & Pullen, time to complete their review of the accounting relating to a few past transactions.

McGladrey & Pullen has received feedback from both the company and Ernst & Young.

And while McGladrey continues to discuss the Monsanto transaction and the Apio suboption transaction with management and Ernst & Young, McGladrey has now completed its review of the company's third quarter financial statements without any changes.

There are some open issues that still remain with our new accounting firm regarding accounting interpretations and treatments.

It is our hope that we can resolve any remaining issues by the time McGladrey completes its audit of the company's financial statements for the fiscal year ended May 25, 2008.

At this point we cannot predict when and how these issues will be resolved.

We are working diligently along with outside experts to reach resolution on these issues as quickly as possible and we continue to focus on in advance our operating results.

Let's turn to our operating results.

Landec had a very good third quarter and we achieved our internal goals.

We are on track for meeting our financial and operating goals not only for the third quarter but also for the full fiscal year 2008.

Our business has grown to the stage where we are now generating considerable cash flow from operations based on continuing progress in our value-added vegetables specialty packaging business and our multiple licensing partnerships.

Overall Landec generated $15.1 million in operating cash flow during the first nine months of fiscal year 2008.

As reported in yesterday's press release for the first nine months of fiscal year 2008, overall revenues increased 14% to $181 million, while overall gross profits increased 25% from the years ago period.

Net income excluding $18.8 million of nonrecurring operating income recognized during the first nine months of last fiscal year increased $10.2 million during the first nine months of this fiscal year, up from $6.0 million during the first nine months of fiscal year 2007.

Notably during the first nine months of fiscal year 2008, Apio's value-added specialty packaging vegetable products business grew 10% to $125.5 million and value-added gross profits increased 12% to $18.6 million.

The gross margin in the value-added business for the first nine months of 14.8% is slightly higher than the 14.6% gross margin recognized during the first nine months of last fiscal year.

In our Apio packaging business for the first nine months, revenues increased 62% -- 63% to $2.2 million while the gross profit increased 65% to $2.1 million, primarily due to increased minimum payments in the Chiquita banana program.

In our technology licensing business for the first nine months, revenues increased 95% to $5.1 million, while the license fee gross profit increased 110% to $2.7 million compared to the same period last year, primarily due to the Intellicoat license agreement with Monsanto signed in December 2006.

Based on the results for the first nine 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 fiscal year 2008 which is to increase revenues by 10% to 15%, and, after excluding the $18.8 million of nonrecurring operating income from last year, to increase this year pretax net income by 45% to 55% and net income after tax by 30% to 40%.

When comparing the fiscal year to the prior fiscal year, we need to point out that virtually all of the income tax expense in fiscal year 2007 was recognized in the third quarter upon the sale of Fielder's Choice Direct with the effective tax rate for the fiscal year 2008 being 8%.

However, during fiscal year 2008, our current fiscal year, the income tax expense has been recognized more evenly overall the quarters based on an estimated effective tax rate for this year of 28%.

As a result the income tax expense for the fourth quarter of this year will be considerably higher than the fourth quarter of last year.

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

The expanded agreement additional exclusive fields for bananas.

In addition Landec and Chiquita entered into a new exclusive license agreement using Landec's BreatheWay technology for avocados for which market tests for food service applications are under way.

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 $2.1 million over Landec's next two fiscal years to $2.9 million in fiscal year 2008, and to two -- $2.2 million in fiscal year 2009.

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

Let me turn this over 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 nine months of fiscal year 2008 of $181.2 million versus revenues of $159.3 million for the same period a year ago.

The increase in total revenues during the first nine months of fiscal year 2008 was due to, first, a 10% or $11.7 million increase in revenues from Apio's value-added vegetable produce business.

Second, a 17% or $6.9 million increase in revenues from Apio's commission trading business.

And, third, a $2.5 million increase in license fee revenues primarily due to revenues from the Intellicoat license agreement with Monsanto.

For the first nine months of fiscal year 2008, the company reported net income of $10.2 million or $0.38 per diluted share, compared to net income of $24.8 million or $0.92 per diluted share for the same period a year ago.

Included in net income for the first nine months of fiscal year 2007 was $18.8 million of nonrecurring operating income primarily from the gain on the sale of Fielder's Choice Direct to Monsanto Corporation during the third quarter of fiscal year 2007.

Landec's net income for the first nine months of fiscal year 2008 increased to $10.2 million from $6 million during the first nine months of fiscal year 2007 after excluding the $18.8 million of nonrecurring operating income for last year.

This increase in net income during the first nine months of fiscal year 2008 compared to the same period last year after excluding the $18.8 million in nonrecurring operating income, was due to: first, a $2 million increase in gross profit in Apio value-added vegetable business primarily due to increased volumes and revenues.

Second, a $2.7 million increase in licensing gross profits as a result of the Intellicoat license agreement with Monsanto.

Third, an $835,000 increase in Apio packaging gross profits as a result of an increase in the minimums paid by Chiquita.

And, fourth, an $840,000 increase in interest income due to the cash received from the sale of Fielder's Choice Direct.

These increases in net income were partially offset by the increase in the book income tax expense of $1.8 million during the first nine months of fiscal year 2008 compared to the same period last year.

It should be noted that only $225,000 of the $3.9 million book income tax expense for the first nine months of fiscal year 2008 is expected to be paid in cash because the repurchase of the Apio 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 tax deduction is not considered a deduction when calculated in the income tax expense, because the options that were repurchased had never been included in prior periods as an expense for book purposes.

For the third quarter of fiscal year 2008 Landec reported total revenues of $59.6 million versus revenues of $53 million for the same period a year ago, an increase of 13%.

The increase in total revenues during the third quarter of fiscal year 2008 was due to: first, a 9% or $3.8 million increase in revenues from Apio's value-added vegetable business; second, a 28% or $2 million increase in revenues from Apio's commission trading business; and, third, a 44% or $575,000 increase in Apio packaging revenue due to increase in minimums paid by Chiquita plus revenues from Apio's research and development agreement with the U.S.

military, which started in the beginning of fiscal year 2008.

For the third quarter of fiscal year 2008 the company reported net income of $4 million, or $0.15 per diluted share, compared to net income of $24.6 million, or $0.92 per diluted share for the same period last year.

Included in net income for the third quarter of fiscal year 2007 was $22.3 million of nonrecurring operating income primarily from the gain on the sale of Fielder's Choice Direct to Monsanto Corporation during the third quarter of fiscal year 2007.

Landec's net income in fiscal year 2008's third quarter increased to $4 million from $2.3 million last year -- during last year's third quarter, excluding the $22.3 million in nonrecurring operating income recognized during the third quarter of fiscal year 2007.

This increase in net income during the third quarter of fiscal year 2008 compared to the same period last year after excluding the $22.3 million in nonrecurring operating income from the third quarter last year was primarily due to: first, a $780,000 increase in gross profits in Apio's value-added vegetable business, primarily due to increased revenues; second, a $591,000 increase in Apio packaging gross profit as a result of increase in minimums paid by Chiquita plus from the gross profits from the Apio's research and development agreement with the U.S.

military; and, third, a $234,000 increase in licensing gross profit as a result of increased gross profit from Landec's collaboration with Air Products.

Before turning to the balance sheet, I want to mention that capital expenditures and R&D spending for the first nine months of fiscal year 2008 are in line with our internal plans and are consistent with our revenue and net income guidance for fiscal year 2008.

Turning to the balance sheet during the first nine months of fiscal year 2008 our cash balance decreased by $7.3 million to $55.3 million.

Cash balances primarily decreased because of the repurchase of all of the outstanding common stock and options of Apio, not owned buy Landec, for $20.8 million, and the purchase of $2.4 million of value-added vegetable property and equipment.

These decreases in cash were partially offset by $15.1 million of cash generated from operations.

That concludes my presentation.

Gary?

Thanks, Greg.

Our first nine months and third quarter results reflect the benefit of Landec's 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 especially packaged vegetable products and on selling BreatheWay packaging to key partners for high value perishable products such as fruit targets.

In the technology licensing business the focus is on licensing and commercializing Landec's patent polymer materials to keep polymers outside of the food applications, such as our work with Monsanto and Air Products.

During the first nine months of fiscal year 2008, we have benefited: first, from the normal weather patterns; and second from increased demand for our specialty packaged fresh cut food products; third, from our licensing arrangement with Monsanto; fourth, from increased interest income from cash received from the sale of Fielder's Choice Direct to Monsanto in December of 2006; and, fifth, from the absence of loses from Landec Ag, which had historically occurred during the first eight months of each fiscal year.

We have hit our internal goals for revenue and income and we are pleased that both our Apio food technology business and our corporate licensing partnerships are growing and progressing.

Let me review some highlights thus far in current fiscal year 2008.

First regarding Chiquita, the Chiquita-To-Go program has expanded to well over 15,000 sites in North America, up from 7,500 sites at the same time last year last year.

Chiquita has also commercially launched Chiquita bananas and our packaging to three European countries.

In addition, Chiquita has recently commenced quick serve restaurant store trials in several cities and retail grocery store product development efforts continue to advance.

And further under our new exclusive licensing agreement with Chiquita using Landec's BreatheWay packaging technology, market sales of avocados and food service applications have commenced and our retail consumer package designs and product development for avocados are underway.

Following our expanded agreement with Chiquita announced in September 2007, Chiquita implemented a significant internal reorganization and restructuring.

We had been aware that this reorganization could adversely affect the development efforts of our retail grocery program and it did slow down the retail grocery store program, but we are now back on track with a Chiquita leadership team that is highly committed to our collaborative effort and we expect the next round of retail banana grocery market and consumer test to begin late this summer.

Second, Monsanto announced in February their newly formed seed treatment business and our seed coating programs are included in that business.

It is our hope that our polymer coating technology will be a key in integral part of Monsanto's plan for building a branded seed treatment business.

The current Landec focus with Monsanto is to develop a broadband technology platform that utilizes Landec's Intellicoat seed coating technology as a delivery system for seed treatments.

This is a relatively new focus for them and for us, and we will keep you apprised of our progress.

As we look to the fourth quarter we expect to achieve our internal plans and meet revenue and earning growth targets for the entire fiscal year 2008 that we set at the beginning of the year.

We are now turning our sites to the process of planning and budgeting for next fiscal year 2009 beginning in June.

We like others are concerned about the U.S.

economy and about the tough choices for the consumer in the face of much higher energy and housing costs.

We will provide more information regarding our plans for the next fiscal year as part of our fiscal year year end 2008 results release.

We stated earlier in the year that we are seeking a new strategic partner.

Our expanded agreement with Chiquita to collaborate on avocados is our first such agreement and is our first such move for BreatheWay packaging technology outside of bananas.

We expect to enter into an additional technology partnership arrangement with a new partner before the end of this fiscal year.

In summary, we are on plan for the first nine months and we anticipate a solid fourth quarter and the accomplishment of our fiscal year goals.

Our core business is in operatings -- operations are growing and progressing well as we continue to focus on opportunities in those businesses and on increasing shareholder value.

Thank you, and we are now ready for questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS) Our first question is from Jonathan Lichter of Sidoti & Company.

Your question, please.

Good morning.

I notice that it looked like there was a little bit more revenue in the packaging area this quarter.

I think had you mentioned on the last call that it was going to be split roughly evenly between the $2.7 million.

What occurred there?

Well, it -- well, in a nutshell it was our best estimate at the time at the end of the second quarter.

And as it turns out, approximately $300,000, which I had expected or we had expected to hit in the fourth quarter, actually ended up being revenue in the third quarter.

So what can we expect in the fourth quarter?

Well, it would be the difference between it's $2.9 million, right now we are assuming that we will achieve the minimums for the year, versus what we've recognized today.

Included in the Apio packaging number is approximately $80,000 per quarter from the U.S.

military.

So you could quickly do the math based on those numbers.

Okay.

And what's your best guess as to when we could exceed the minimums from Chiquita?

Boy, that's a tough one.

We are, Jonathan, we are going to go into our planning and budgeting cycle for next year assuming we are going to hit the minimums only for next year.

And the reason is we should be conservative because the next round of retail grocery store banana trials will not start until late summer, number one.

And, number two, the first quick serve restaurant chain store trials are just commencing as we speak.

So we don't have any better estimates of what that tracking will be, the growth rates will be, what the store sales will be.

So we are just going to stay on the conservative side until these trials are completed and we have better numbers.

So I would just put in the model the minimums for next year.

Okay.

And are there anything on the horizon for acquisitions?

Let's just say that we've said in the past that we are interested in acquisitions.

We are looking for those things that use our technology, are synergistic with our channeling of distribution.

Let me just say that we have identified several targets that meet our criteria meet our criteria, and so that tells that you we are still interested in acquisitions then we are making some progress, but I probably should stop there.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question is from Bill Gibson of Nollenberger Capital.

Your question, please.

Good morning, Bill.

Good morning.

One area I want to zero in on and has to do with the expansion of the Chiquita agreement.

You talked about the leadership team and retail stores.

But what about shipping to the stores?

Is Chiquita looking at using BreatheWay in the 40-pound boxes?

Interesting question.

The answer is they are starting to.

All of the attention as you know was initially ongoing to, what they've identified as 200 potentially alternative cites -- 200,000, excuse me, 200,000 alternative sites.

That was the first program to validate and demonstrate the technology and their ability to deal with fairly challenging logistics, because you are going to convenience stores and coffee chains, etc., etc.

And then they said they wanted to turn their attention because it was relatively similar packaging design to quick serve restaurants, and that's where they've turned their attention next.

In parallel they've been working on the retail consumer package, which as you know would be a smaller package.

But the -- recently the issue of how could the technology be used in the more traditional 40-pound boxes has reappeared.

And there is interest in that, and I would suspect that as we move through some of these other programs that would be on the drawing boards as well, Bill.

Okay.

Just as an outsider looking at it, it seems to me that would sure be a faster roll-out if they decided to go that route.

That's a very good thought.

Okay.

Thanks, Gary.

Thank you.

(OPERATOR INSTRUCTIONS) Sir, at this time I'm showing no further questions.

Okay.

Well, we thank everybody for their interest.

We will keep you apprised of our progress as well as the progress with the accounting issues, and thank you very much for joining us on this call today.

We appreciate it.

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

This concludes the program.

You may now disconnect.

Good day.