Lifecore Biomedical Inc (LFCR) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec Corporation Fiscal Year 2008 and Fourth Quarter 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, Chairman and Chief Executive Officer for Landec.

Sir, you may begin.

Good morning, and welcome to Landec's fourth quarter and 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 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 September 5, 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 1262936.

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.

During this conference call we may make references to adjusted net income and earnings per share for fiscal year 2008 and 2007, which represent non-GAAP financial results.

Reconciliations of these non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with generally accepted accounting principles in the US are included in the fourth quarter and fiscal year 2008 results press release issued yesterday specifically in questions 1, 2, 3, and 16 in the Q&A section.

In fiscal year 2008, we realized record annual revenues of $238.5 million, an increase of 13% from our prior fiscal year and in line with our goal of growing revenues 10% to 15%.

Net income in fiscal year 2008 was $13.5 million or $0.50 per share, which represents a 30% increase from fiscal year 2007 after you exclude the $18.8 million of nonrecurring operating income realized last year.

The 30% increase in the net income for continuing operations is in line with our fiscal year 2008 goals.

Our overall consolidated gross margins increased 18% year-over-year and Landec generated $17.5 million in positive cash flow from operations.

We started fiscal year 2008 with $62 million in cash of which we used nearly $21 million to repurchase Apio outstanding subsidiary common stock and options not owned by Landec.

After the repurchase, Apio is 100% owned by Landec.

We replenished almost all of this cash we used for the repurchase by generating significant cash flow from operations achieving a fiscal year-end cash balance of $59 million and accomplishing our goal of maintaining a strong balance sheet.

From fiscal year 2004, Landec's first full year fiscal year of positive net income through this last year, fiscal year 2008, net income has grown at a compound annual growth rate of 47%.

A key contributor to our grow in net income and cash flow from operations is our food technology business, Apio, which in fiscal year 2008 generated close to $19 million in EBITDA on revenues of over $231 million.

In addition, Apio continues to expand market share in the specially packaged produce business.

Apio is the market leader for fresh cut vegetables in North America with products in over 12,000 club and retail store sites.

The growth of Apio's value-added specially packaged vegetable products continues to exceed the overall growth of retail produce sales, which was 5% in calendar year 2007.

During fiscal year 2008, Chiquita has broadened the rollout of its Chiquita's Go Banana packaging program both in the United States and now in Europe.

In addition, major players such as Starbuck's and McDonald's are expanding the sale of banana products, such as banana smoothies using Chiquita bananas delivered in Landec's packaging technology.

Last week, Chiquita mentioned in it quarter conference call that they are a major supplier of bananas to Starbuck's for the blended banana-based beverage Starbuck's launched in July name Viviano, and that supplying bananas for Viviano is the result of Chiquita's ongoing relationship with Starbuck's that started with the sale of single-purchased bananas that now has expanded for the use of banana smoothies.

Regarding the retail grocery store program with Chiquita for bananas, although there have been delays in starting the second phase of retail grocery trials for bananas delivered in Landec packaging, the program is now back on track and retail trials are scheduled to begin this fall.

Consistent with other goals we stated for fiscal year 2008, we added two strategic partnerships this last year.

First, we entered into a worldwide exclusive licensing arrangement with Chiquita for the packaging of avocados, which represents one of the fastest-growing produce categories in North America.

For avocados, our focus with Chiquita is to use our BreatheWay packaging to deliver ready-to-eat avocados for food service and retail grocery stores.

Chiquita is now selling avocados to food service customers in the Eastern United States while, in parallel, they are developing a consumer retail package for avocados.

We and they are enthusiastic about the market size and potential for ready-to-eat avocados.

Our second new strategic partnership is with Monsanto's Seminis Seeds Genetics business.

Seminis is the world's leading and largest vegetable seed company.

The partnership with Seminis is Landec's first end licensing technology agreement.

Collectively, Landec and Seminis have identified specific vegetables where Seminis can breed unique traits beneficial to the consumer and breed them into select produce seeds and deliver the resulting proprietary vegetables to the marketplace with enhanced levels of nutrition.

For example, high anti-oxidant and vitamin levels as well as unique colors, taste, and/or texture.

Monsanto has developed a proprietary and non-GMO technology for rapidly identifying gene markers that identify unique and interesting traits in produce for breeding these traits into the seeds.

Landec has exclusive commercial rights to sell these novel produce products in the North American market in certain fields.

We intend to start grower trials this fall for our first product enhanced with a unique consumer trait.

Our goals for the year also include finding new applications and markets for our BreatheWay technology, and we have.

Apio has new programs underway for products configured for the deli, food service, international, and special military applications.

All in all, we had a good year.

We accomplished our goals, allowing us to achieve record revenues and a 30% increase in net income from continuing operations while maintaining a strong balance sheet.

Now let me turn it over to Greg Skinner for discussion of the financial results.

Thank you, Gary, and good morning, everyone.

As outlined in yesterday's news release, Landec reported total revenues for fiscal year 2008 of $238.5 million versus revenues of $210.5 million for the same period a year ago.

The increase in total revenues during the fiscal year 2008 was due to, first, a $13.1 million increase in revenues from Apio's value-added vegetable produce business; second, a $10.7 million increase in revenues from Apio's commissioned trading business; and, third, a $3.2 million increase in non-food license fee revenues primarily due to revenues from the Intellicoat license agreement with Monsanto.

Net income for fiscal year 2008 increased 30% to $13.5 million, or $0.50 per diluted share compared to net income of $10.4 million for fiscal year 2007, after excluding $18.8 million of non-recurring operating income in fiscal year 2007.

The non-recurring operating income in fiscal year 2007 was primarily due to the gain on the sale of Fielder's Choice Direct to Monsanto net of operating losses at Landec Ag through the close date.

The 30% increase in net income was achieved despite incurring $1.5 million of non-recurring general and administrative expenses during the fourth quarter of fiscal year 2008.

The increase in our continuing net income during fiscal year 2008 compared to the same period last year after excluding the $18.8 million of non-recurring operating income in fiscal year 2007 was primarily due to, first, a $1.2 million increase in gross profits and Apio's value-added vegetable business primarily due to increased revenues; second, a $1.6 million increase in Apio's packaging gross profit as a result of an increase in minimums paid by Chiquita; third, a $3.2 million increase in non-food licensing gross profit primarily due to the Intellicoat licensing agreement with Monsanto; and, fourth, a $503,000 increase in interest income as a result of investing and the cash received from the sale of Fielder's Choice Direct.

These increases in net income were partially offset by $2.5 million increase in operating expenses compared to last year, which was primarily incurred during our fourth fiscal quarter and from an $898,000 increase in our book income tax expense during fiscal year 2008 compared to the same period last year.

It should be noted that only $400,000 of the $3.4 million book income tax expense for fiscal year 2008 is expected to be paid in cash because the repurchase of Apio's options resulted in tax deductions of $19.7 million, which reduced Landec's cash tax liability.

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

The fourth quarter fiscal year 2008, Landec reported total revenues of $57.3 million versus revenues of $51.2 million for the same period a year ago.

The increase in total revenues during the fourth quarter of fiscal year 2008 was due to, first, a $1.4 million increase in revenues from Apio's value-added vegetable business; second, a $3.8 million increase in revenues from Apio's commissioned trading business; and, third, a $796,000 increase in Apio's packaging revenues due to the increase in minimums paid by Chiquita, plus revenues from Apio's research and development agreements with the US military, which started at the beginning of fiscal year 2008.

For the fourth quarter of fiscal year 2008, the Company reported net income of $3.4 million, or $0.13 per diluted share compared to net income of $4.4 million, or $0.16 per diluted share for the same period last year.

Included in that income for the fourth quarter of fiscal year 2008 was $1.5 million of non-recurring general and administrative costs primarily related to accounting fees, tax consulting fees, and legal fees.

This increase in net income during the fourth quarter of fiscal year 2008 compared to the same period last year was primarily due to a $1.6 million increase in operating expenses and a $780,000 decrease in value-added gross profits due primarily to the fourth quarter of fiscal year 2007 being an unusually good quarter for gross margins.

These decreases were partially offset by $771,000 increase in gross profits and Apio packaging due to an increase in revenues and by a $901,000 decrease in income tax expenses.

Turning to the balance sheet, during fiscal year 2008, our cash balance, including marketable securities, decreased by $3.5 million to $59 million.

The decrease was due to the repurchase of all of the outstanding common stock and options of Apio not owned by Landec for $20.8 million and capital expenditures of $4.2 million.

These decreases in cash were mostly offset by $17.5 million of cash generated from operations.

That concludes my formal presentation.

Gary?

Thanks, Greg.

Looking ahead, we are focused on five priorities for building shareholder value over the next several years.

First, to continue to grow revenues, pretax profits, and cash flow; second, extend the commercialization of our BreatheWay packaging programs in bananas, avocados, and new applications; third, strongly support our technology licensing partners' launches of new products; and, fourth, seek acquisition targets that use our technology and are synergistic.

Last, but not least, expand our R&D activities to develop new business opportunities.

We expect fiscal year 2009 to be full of challenges driven by raw material cost increases, which require us to pass on some of these costs to our customers.

We are in the process of doing this.

We are well aware that customers are tightening their belts, so we need to offer products of good value, which are high in nutrition and flavor.

For fiscal year 2009, our financial goals are to continue to grow revenues 10%, and grow pretax earnings 15% to 20%.

Related to and as a consequence of our success in building a profitable business, is an increasing tax expense liability.

Landec is transitioning to a full tax rate business model.

As a result, net income in fiscal year 2009 is projected to decrease 5% to 10% because our effective tax rate and book income tax expense is projected to double from 20% in fiscal year 2008 to 40% in fiscal year 2009.

The incremental book income tax expense is expected to be approximately $4.4 million to $4.8 million, or $0.16 to $0.18 per share in fiscal year 2009.

However, more importantly, because of substantial net operating losses and tax credits for cash tax purposes, we are only estimating that we will be paying only 10% of our book income tax expense in cash for fiscal year 2009 resulting in the preservation of cash in a favorable impact on our cash balances.

Although all of our goals could be adversely affected by a further downturn in the economy and corresponding consumer demand, as well as further increases in raw materials and fuel costs, operationally, we expect progress in each of our businesses including, first, the further rollout of Chiquita products for bananas and avocados, which use our BreatheWay packaging technology; second, advances in research with Monsanto for seed coatings; third, initiation of human clinical trials for Aesthetic Sciences' dermal fillers; and, fourth, increase sales by Air Products in both the personal care and catalyst arenas; and, lastly, advances in new applications for our Intelimer polymers from current and future R&D activities.

We are now ready for your questions and, again, thank you for participating in this conference call this morning.

Thank you, sir.

(Operator Instructions) Tony Brenner, Roth Capital Partners.

I have a couple of questions.

First is why there is -- appear to be a much slower growth in value-added Apio packaging sales in the fourth quarter compared with a first nine months of the year.

I think it was up 3.5%, but it appears that you are holding out the likelihood or at least the possibility of a return to a 10% growth rate in fiscal '09.

I'm wondering what the explanation for that is.

Tony, we don't have enough quarters under our belt, but it looks as though the overall category is slowing due to the economy and consumers tightening in their belts, but we're especially seeing that in the vegetable trade business, which is a more discretionary purchase for consumers.

Trays are nice things to have.

You can have people over, families, et cetera, et cetera.

The bag business is still very robust and growing, so what we're expecting this year is that we're expecting that some of that slowing down in the vegetable business will continue, but we're expecting -- in the category we're expecting to slow down, but we're expecting to take share as well.

So that's why we feel that we can grow our business by 10%.

And you'll take share how?

The way we've done it in the past, which is using our BreatheWay technology and demonstrating superior quality and superior taste.

A second question has to do with Apio packaging.

In your comments, you alluded to some of the non-Chiquita business that's going on there.

I wonder if you could elaborate a little on that?

The military and other customers and what portion of that category they comprise.

I missed the last -- what portion of what?

Of that category they comprise.

Okay.

We're expanding trials with the military -- more shifts, more trials, more tests in terms of allowing military personnel to have fresh-cut produce -- fresh produce, not only cut but fresh and whole in far-removed remote places, and so that's continuing and that's going very well.

A growth area for us is the deli.

We've been able to get a foothold in several customers' deli departments.

That business is expanding.

That is a distinctly different purchasing process than from the produce side of stores and chains.

Third is we've been doing trials of shipments of product out of South America to Europe in terms of being able to ship produce products long distances by surface fleet as opposed to airborne, which is prohibitively expensive.

Those trials have gone exceptionally well, exceptionally well.

Is that bananas or other --?

No, these are vegetables.

These are vegetable products for now.

If we were doing -- if it were bananas, it would be with Chiquita.

And so we're very excited about the international prospects because if given the cost of aviation fuel and flying produce by air freight, it's really a dramatic difference if you can do it by surface fleet.

So military, international, deli, I'm forgetting -- oh, food service.

We have put a more concerted, focused effort in food service, and our approach to food service is -- and, by the way, I'm very glad we're not a big player in food service right now.

I don't need to tell this audience that food service is hurting quite a bit from the downturn in the economy.

Nevertheless, our approach is food services go directly to the operator.

So we'll go right to the restaurant chain ourselves as opposed to going through a middleman.

And that makes it an attractive proposition for us.

So these are all new initiatives.

I would say of all those initiatives, the deli, the international, and the military are at or very close to commercialization, and food service is still a work in progress.

Okay.

My last question -- as always, there seem to be a lot of things going on with Chiquita.

However, Chiquita is -- I think in it's fifth year as a collaborator with Landec.

It's still not meeting contractual minimum revenues nor is, according to your guidance, is it expected to in fiscal 2009.

Air Products is in its third year as a licensee.

It's, as far as I know, not developed a single new product for commercial distribution, and I'm wondering whether investors should be discounting these two businesses as drivers of earnings growth, at least for the near future?

Let's comment on both of them separately because I think you may have something a little bit wrong there on your products.

But in terms of Chiquita, it has been a while.

Recall that in the January '08 conference call I mentioned that there had been a huge reorganization, massive layoffs of many senior people.

I was worried that would affect parts of our programs, and it did.

It delayed the retail program, which is really, in my mind -- the two drivers for minimums -- for exceeding minimums, Tony, are the quick serve restaurant business, which, as you know, we've now reported this morning, involves the world's largest quick serve restaurant chain, McDonald's, so I think that's starting to take foothold, and those tests are expanding in the US as we speak.

So that's a major driver to start to move past minimums, but the other is the retail stores, and that's the one that was delayed with the Chiquita reorganization, and that's cost us a couple of quarters.

So the proof will be in these trials that start this fall and, to be conservative, we're assuming that we will not be exceeding minimums in the fiscal year that we just started, but it could happen if certain things come together in a way that we would all hope and wish.

But we want to be conservative in what we report.

So that's Chiquita -- and they are building momentum.

This technology is something that they've invested heavily in.

On the Air Products side, there are new products that have been developed, and we had renegotiation here with Air Products recently that brought a couple of fields back to us, but it also gave some flexibility for Air Products to really go forward in a much broader, faster way.

We've got many new products in development that are ready to be tested.

We've got a great partner in L'Oreal, which is a good first test site for us in terms of testing some of these new products not only for skin care but also for hair care.

So I think that, with Air Products, since they were new to the personal care market, it took them acclimated and up to speed.

We needed to do a slight modification to our agreement, which we have done, and now we're off to the races.

So I'm much more bullish about Air Products than I was about a year ago.

Peter Black, Winfield Capital.

A quick question -- in the back of the press release where you go through some detailed questions and answers, you talk about Landec's growth opportunities, and in one of them you refer to the -- what it looks like a new program with Monsanto for a seed treatment business.

I'm wondering how that differs or is like an add-on to the original agreement with Monsanto where I thought that your earnings stream from that was kind of capped, and there was really no back end.

Is this in addition to that?

Peter, this is all part of the five-year worldwide co-exclusive license agreement that was consummated on December 1, 2004.

So it's all in that agreement.

But when we entered that agreement, it wasn't clear to us what Monsanto's primary interests were.

That's why we gave them five years to figure it out.

And it became obvious to us several months ago what their interests are, and it took them some time to develop their own internal business plan.

What they've come up with is that they want to be a major player in what's called the seed treatment business.

The seed treatment business is a concept where instead of putting an insecticide or a fungicide directly on the ground or on the plant through spraying or plowing it in, they're going to put it right on the surface of the seed.

So it goes right on the surface of the seed, the seed is put in the ground, the treatment, the chemical treatment, will be there to protect the seed, the seedling, and the early germination phase of the plant, and they realize that our technology is a great carrier or delivery system for that seed treatment.

So imagine that it's mixed into our coating.

It's applied to the seed.

We hold it next to the seed, we keep it there, we protect the seed, and when a weed germinates, or an insect hatches, that's a function of soil temperature.

So we'll either dispense that treatment, over time, or we'll dispense it in response to a certain soil temperature that's achieved, to have its maximum effectiveness.

So think of this as a technology that we bring to Monsanto that helps them deliver and modulate the release of an active ingredient at the right time.

So it took us about a year to figure out what they were primarily interested in.

We now know.

Okay, and we know what the revenue and cash flow contribution of this is?

Yes, that was -- as you know, that was pre-negotiated in terms of license fees and reimbursement for R&D, et cetera, et cetera.

So this is all in the original agreement of (inaudible).

And then after five years they have a right to purchase the technology?

On or before the end of the fifth anniversary, they have not only a right but an obligation to make one of two choices -- to terminate the agreement, in which case we get all of our rights back, or buy us out of the co-exclusive that cost them "x" million dollars more, and then we would enter into a long-term polymer supply agreement.

Landec is the exclusive supplier of the polymer materials.

Let me just say that the targets that Monsanto is look at are not niche products.

They are broad looks at corn, soybean, cotton, you know, large, large row crop markets in North America and worldwide, and they have the wherewithal to really commercialize our technology using their seed business platforms.

Okay.

And has the buyout price been determined yet?

(inaudible).

You may recall that the fixed license fees are $17 million over five years.

But 13 and then a $4 million termination fee, so the guaranteed amount is 17, then there's another 4 on top of that.

So it could be a maximum of $21 million, if they buy us out.

And then, as Gary just said, we'd enter into a long-term supply agreement.

And they've been funding our R&D to the tune of $1.3 million a year.

If we need to expand our coating facility, they'll pay for that.

And then you've got the polymer supply agreement.

Another thing that I thought was impressive, if you look at the year-over-year gross margins for the full year, you can see that as your technology licensing business is -- as it grows, and you supply more of these -- more of the polymers, your potential to increase your consolidated gross margins, you can see what it could look like.

And I guess when you talk about Monsanto supplying the -- just supplying the polymers, I would imagine that's a very high-margin business at the end of the agreement, right?

Yes, the answer is yes.

And I mentioned in a previous call that what we're looking to do is grow each of our businesses, the food business and the licensing business, but we see the mix of pretax margin changing rather substantially over the next five years, where more and more of it's coming from the non-food licensing business.

Okay.

One last question -- you mentioned briefly in the press release that you were looking at some acquisitions.

Is there anything -- are you close to consummating something or are these kind of small niche acquisitions?

Can you just comment at all on where you spend?

It's kind of tough for me to go into any detail here, Peter.

Just to say that we are active in the M&A phase.

We have identified one or more targets that are of great interest to us.

They're not small niche-y kinds of things.

They are things that would add a lot in terms of helping us build our technology platform.

They would -- by the way, it's in the food arena -- it would allow us to broaden the use of our BreatheWay packaging technology, it would allow us to have a broader platform for using the Seminis seed genetics technology.

So it's very much with technology in mind, and the problem with M&A is it's very binary.

These things happen or don't happen, they take time.

So I should stop right there and just say that we're still pursuing with great interest and vigor.

Jonathan Lichter, Sidoti & Company.

Can you detail a little bit more about those deli and food service applications -- how it works?

Okay.

An example is that in Costco, which is a major customer of ours, they have a deli department.

It operates independently and separately from its produce department, and, as you know, they have a lot of rotisserie chickens and things like that, and we're supplying them with -- think of it as a vegetable kit.

And so they're making these wraps where we supply them with all the materials to make the wraps except for the meat, where they just add the meat, and they sell these veggie chicken wraps or veggie wraps, whatever, and they are big sellers, they're a hot product, and that would be an example of our entre into the deli department.

Another example would be that some of our trade business is going into deli departments.

These are the same trays, essentially -- there are some mix changes -- that we sell over on the retail produce side that are now going into the deli side.

And on the food service side?

Food service -- I mentioned that we are starting a program where we're looking at going directly to the end operator.

This is a little bit novel and different.

Usually, you would go through a middleman such as US Food Service or Cisco, but that tends to squeeze the margin life out of you.

And when we've tried to do that in the past, we just didn't feel that it met our margin requirements.

So we're building a capability within our company of going directly to -- and I'd rather not mention names, but just imagine large restaurant chains that are well-known to all of us where we can provide them with portion sizes, we can provide them with very high-quality set of vegetable products that are served to their customers in their restaurants.

So it's just starting.

I'd love to report progress and success on that in future earnings calls but, at this point, it's pretty early on, Jonathan.

Okay.

And then just going back to the Apio value-added business, the margin was down there.

Were there any specific sourcing problems this quarter or was it just related to higher packaging costs?

Yes, it was cost-driven.

(inaudible).

Yes, we referred to it in our report.

I don't need to tell you because I think everybody is seeing this.

The cost issues are substantial.

We've got -- anything that relates to energy, whether it be films or trays or corrugated cardboard, farmer produce, which we are obviously buying in large quantities.

There are costs going up, and we're in the process of passing on a portion of these costs in terms of price increases to our customers.

So there's some of that that was going on in the fourth quarter.

And recall, and I think we also made this statement in the press release, that last year's fourth quarter was an unusually good quarter -- no sourcing issues, cost increases hadn't started being realized yet, and if you look at the margins from a year ago, they were very high.

That's the fourth quarter of 2007.

Moving to the McDonald's agreement -- has Chiquita given you any indication as to how long McDonald's will be testing?

No.

They've been looking at this for -- as you can imagine, they don't rush into anything, and they're not interested, from what I could tell, in just doing things on a regional basis.

If they're going to do something, it's going to be nationally, if not internationally, so I think they're being very methodical about it, but it's constantly expanding in a number of sights and different geographic locations.

We know they're testing in several states in the North, some in the South and some in the West.

But I don't have a framework.

In the call the other day that Chiquita had, they didn't mention any timing.

So I don't know specifically the speed at which this will roll out.

Okay.

What was CapEx for the quarter?

Oh, for the question.

I know for the year it was 4.2.

You know, in all honesty --?

That's fine -- for the year.

We're generally a $3 million to $4 million type of a year.

I will tell you, as a heads-up in terms of the question that I'm asked occasionally, how we're going to use our cash, with our growth plans, we're looking to expand not only our processing facilities but certainly our cooling facilities in our staging areas.

So that will be a priority for us in the fiscal year we're in right now.

How much would you expect CapEx to be this year?

$6 million to $7 million.

Sal Kamalodine, B.

Riley.

A couple of accounting questions as well -- D&A for the quarter and if you could also address the sequential increase in intangibles?

The intangible increase as a result of a reclass, we had recorded a portion of the buyback to retained earnings in the process of going through the year-end audit and work with E&Y who have determined that amount, which was $4.8 million, should have been in goodwill has no implications on our P&L.

So we did a reclass out of retained earnings into goodwill at year-end.

And the G&A question -- ?

D&A -- depreciation.

Depreciation for the year?

For, yes, the year will do.

Going forward, or what was it?

For Q4 -- or was it for fiscal '08, if you have that.

Fiscal '08, it was $3.2 million, I believe.

Okay, thanks.

Okay, so with respect to the value-added business, I'm wondering if you felt the full brunt of higher oil prices on your packaging costs in Q4, and if you could also talk about whether higher oil prices have spilled over into your produce sourcing costs yet?

That one is easy -- yes, you betcha.

Did we get the full brunt in the fourth quarter?

I don't think so.

I think it was building a head of steam, and we've been feeling it through our first quarter as well.

Things are settling down a little bit now, Sal, but the worry is do these things keep happening.

But farmers were notified that their fertilizer costs more than doubling, et cetera.

Their fuel costs are going up substantially.

So there's no question that's a factor.

We are in the process of passing on some of these cost increases in terms of price increases and, frankly, I expect them to stick.

But that's the process we're in right now.

I think the fourth quarter got a fair amount of them, Sal, but I think there's -- the first quarter there was some continuation of this, but my sense is it's settling down here, at least for now, knock on wood.

Greg, anything you want to add to that?

No, I would say that's an accurate statement.

Okay, thanks, that's helpful.

And, Greg, can you share with us your analysis of what the impact would be on the value-added EBITDA run rate?

What would be the impact on EBITDA for every dollar increase in oil prices?

Surely, you've done some kind of an analysis where you try to translate higher oil prices into what it means for your earnings.

Can you just share with us how sensitive your earnings are to higher oil prices?

Well, there is certainly some sensitivity there.

Have I sat down and done analysis for every dollar oil goes up -- this is what it means to us?

I can honestly say I have not.

It impacts several aspects of our cost.

You not only have packaging, but you have freight, you have fertilizer to grow the produce.

So each of those has a different element of what impact petroleum prices have on those items.

Now that petroleum is coming back down, as Gary just mentioned, we're hopeful that we've seen the impact and, going forward, it's going to stabilize, and it will have a slight impact on our gross margins for this year, but it's certainly not going to be dramatic.

Let me see if I can give it another shot.

This is a butter knife not a steak knife, but I think our impact is going to be moderate -- it's not low, it's not severe.

The cost increases that we've seen at the beginning of this year as we were planning and budgeting, fell more into what I'd call -- and take this as a rough estimate -- the 3% increase category in terms of cost of goods as opposed to for many other industries, it was 10%, 15%, 20%.

So we're more in the 3% category but, on the other hand, 3% is a lot for us, and we're looking to recover much of that -- not all of it -- but much of that through corresponding price increases.

Yes.

And so far your retailers have been receptive to this pass through?

Yes.

Okay.

Moving on to the tech licensing revenue -- can you break down the $1.7 million by program or customer?

Almost all of that -- the easiest way to do it is there's two pieces to it -- there's Chiquita, then there's the military.

The military was an 18-month project for $500,000, and it's spread evenly over the 18 months.

So you can quickly back into what the Chiquita piece was based on that.

Okay.

And how does that -- how does the Chiquita piece trend throughout fiscal '09?

Well, we've now switched with the new agreement from a year or so ago to quarterly minimums.

So you're not going to see this big spike that you've seen in the past in the third quarter where -- you know, under the take or pay contract we have.

They would write us a big check, you'd see a big increase in revenues and gross profit.

That's going to be spread quarterly now.

So you're going to see that $2.2 million that we mentioned, minimum-wise, being spread evenly over the four quarters.

Okay.

And then, finally, with respect to Starbuck's -- are the bananas -- all of the banana supply to Starbuck's today packaged with the BreatheWay technology and is Chiquita Starbuck's exclusive supplier of bananas?

Yes and no.

Anything that we supply to Starbucks is packaged in the BreatheWay technology -- very difficult logistics, a lot of fragmented sites, et cetera.

Dole is also supplying some sites, and it will be an interesting test case, because to the best of my knowledge, Dole is not using any technology, and so to Starbuck's way of trying to have a second source in case it needs it.

So anything we supply with Chiquita's technology, and Dole is not using technology.

There are very difficult handling and logistics issues and timing issues.

So it will be really interesting to see how well that works.

Bill Gibson, Nollenberger Capital.

One question on Air Products or a couple -- in reworking the agreement, are you still getting the same percentage of gross profits?

We are.

There were four fields -- let me see, there were four fields, and we're getting the same gross profit in three of the four.

We made an accommodation in one sub-segment of one of the fields.

One of the sub-segments of the catalyst field -- we reduce the gross profit because it looked as though, with our 40% take on the gross profit, it really made the program commercially unviable for Air Products.

So we gave them a little bit of relief on that, but that's been a very small source of revenues and a small accommodation on our part but one in which we think that can help Air Products, which is a worldwide leader in catalyst -- really get it going.

Because we were a little frustrated that they just weren't commercializing that quickly enough, and we came to the conclusion that if we gave some relief on the gross profit percentage of this one sub-category of catalyst, that would help them really get it going.

No changes in the major segments such as personal care.

No.

But in terms of Air Products, they're new to personal care.

Isn't catalyst potentially the biggest area?

Even with the reduction, couldn't that mean more to you?

No.

You mean with reduction could it be more to us?

Gosh, what's the bigger area?

Well, I don't know the sub-segment, so I can't -- catalyst is big for them.

It is big for them, and they are a major player there.

I don't know the answer to your question.

All I know is that their enthusiasm, excitement, and attention is much more oriented to personal care, because it's such a high margin, fast-growing business that I think this is strategically very important for them, and that's where they spend most of their time.

We were trying to give them a little incentive here to spend more of their time on catalyst, and, you're right, it may do the trick.

And then, Greg, when you do the breakdown by sector at the end of your releases, where will that show up?

Air Products?

Yes.

It's in the tech licensing.

It's in tech -- okay, so that's part of tech licensing.

Yes.

And then just lastly, Chiquita second phase tests -- do you have any indication how broad they're going to be and will there be any on the West Coast?

I don't.

I know that they would -- my guess is they're going to start on the East Coast and then expand pretty quickly after that, but I've only heard of tests on the East Coast, so far, initially.

So think of those as kind of beta tests, and if that goes well, I'm sure they'd be out in the West Coast in a heartbeat.

(Operator Instructions) Will Lauber, Sterling Capital.

I guess the first question is for Greg.

I guess a couple of different moving parts here, and I guess this question probably won't be relevant if you do acquisitions throughout the year, but do you have any idea of what the cash balance would be at the end of the next fiscal year?

Well, cash grows -- as Gary said earlier, we're going to increase our capital expenditure.

Historically, we've replaced our capital with the DA component.

But you could pretty much look at our projected net income and assume the cash balance will go up by that amount minus about $3 million.

Okay.

So the working capital would be --?

The working capital is typically neutral.

Okay.

I mean, you do see some swings but, by and large, it's flat year-over-year.

So without M&A it would be pretty sizable.

Okay.

And another question or maybe I could get a comment from you guys -- last week I was on a call with one of McDonald's major vendors, and they were talking about the beverage program, and said that the coffee wasn't going up to expectations but the smoothies were doing extraordinarily well.

Have you guys gotten any indications or how many boxes of bananas that they're going through a day in those stores?

Well, now that you've put that in the public domain, we've heard that it's going extraordinarily well.

But I don't have the boxes per day.

Whatever happened to strawberries?

I know about a year ago, there was some talk about strawberries and other berries using your technology, and I haven't heard anything about that lately.

Technical challenge for us -- one of the benefits that we bring to produce is we're putting it into a sealed, enclosed package, and then all the permeability and breathing goes through our patch.

So the good news for bananas and vegetables and things like that is that it keeps in the moisture, and it's great.

You're tasting a banana that's actually got some moisture in it so you can tell the difference.

When you get to certain berries, they tend to grow with mold on their surface, and when you put them in a sealed package, we may exacerbate the problem of mold because we have a buildup of moisture -- so that requires us to come up with different films that have what's called "high vapor moisture transfer rate" to get some of that moisture out.

So that's what we're working on, and it's a technical challenge for us.

So it's certainly a target and great need of better shelf life, but capturing moisture in this case, which is a positive for most of our applications, has been a technical challenge for us.

On the acquisitions, I think you've said in the past that if you do any acquisitions, they'll be accretive in the first year.

Is that correct?

That's absolutely correct, yes, that's our intent, that's our goal.

We have three criteria -- it has to be a platform for using our technology; second is we want synergy and channels of distribution; and, third, we want it to be accretive.

Okay.

And you don't have any acquisitions factored into your guidance?

No.

Our guidance is assuming, a, that we still do good work with our technology and we implement well.

We're assuming that the economy is continuing to be sluggish if not in recession.

We're assuming that the cost increases that we've talked about do materialize, and that we're able to capture some of those but not all of those in terms of price increases, and we're assuming no M&A.

As far as any acquisitions, I'm assuming that you would pay with cash and/or debt rather than your stock with the level it is right now?

Let's just say that we would use -- we're certainly going to use cash.

We have a lot of borrowing capacity.

So those would be our first choices.

It would just get down to the details of any specific transaction, but I understand the drift of your question.

Cash and debt would be our first picks.

Okay.

And the last question -- are all the extra accounting expenses behind you now?

Yes, I would say they are.

We've recorded them in the fourth quarter.

That was one of the major reasons for the increase in G&A during the quarter, and we're about ready to wrap up our audit.

We'll be filing our 10-K this week.

So as far as we're concerned, these accounting issues are behind us.

Let's just make sure we're all clear on that.

We expect, in the filing of our 10-K, that we are going to be receiving lots of scrutiny from the SEC.

We're prepared to respond to those.

We've gotten all kinds of expert opinions telling us that our accounting is reasonable and appropriate.

But I think we're going to run through the gauntlet, and we're optimistic about that.

But also let me mention that in going back to E&Y, we had originally gone to another accounting firm to save some money, and going back to E&Y, I can assure you that that money that we had hoped to save, we're not going to save.

So when we returned to E&Y, especially given the fact that there is a lot of effort here to get this 10-K done in time, our accounting costs will be high for this year, but in terms of -- but we think it's done.

We're done, we have our accounting firm that we're happy with.

We will go through the SEC review and move on.

But the E&Y expenses are in the guidance that you gave?

Yes.

Yes.

Sal Kamalodine, B.

Riley.

One question regarding the pipeline and the technology licensing businesses -- what do you see there?

How full is your pipeline and should we expect any deals in the near term?

A good question.

As we've told our team, our highest priority this year in the technology licensing arena -- our first priority, by far, is to make sure that the current arrangements that we are working in are successful.

So let's make sure that the Air Products program really starts to get traction and expands with new products; that the Monsanto R&D, and it is R&D, which is now focused on their targets of building a seed treatment business gets done well; that the Aesthetic Sciences program, which is about to go into human clinical studies -- if they need support from us, we want to provide it; in terms of Nitta, our adhesive collaborator in Asia, any support they need, we want to provide it.

In addition, we want to make sure that the research -- and I emphasize research -- that we're doing in terms of the delivery of small and large molecules, either for drugs or for industrial and household cleaners or for coatings, et cetera, et cetera, that we do that research well.

As we said last year at this time, we said we expect two new deals.

We're not saying that this year.

We're saying that may happen, but our focus is on supporting our existing collaborators.

Tony Brenner, Roth Capital.

These various tax items that benefited your tax expense in fiscal '08 -- R&D credits, export credits, 1048 and so on -- are these only one-year items that will have no carryover benefit?

No, some will have carryover benefit, but there is no doubt that we got the bolus -- the benefit in '08 because we did a catch-up.

When we started looking at these credits, as you know, we had huge NOLs for years and years and years.

Tax was kind of an afterthought because we weren't paying any and suddenly we became a taxpayer.

We started asking the right questions as to -- are these credits that we have calculated over the years -- are they accurate?

Have we picked up everything that we're entitled to?

And in the process of going through that, we discovered, no, I think we left some stuff on the table here, and we went out and did three fairly involved projects in the area of R&D.

ETI, which is extraterrestrial income, which we referred to as "export," and then our stock option deductions, and as a result of that, we had a rather sizable pickup in our credits and our NOLs that impacted our '08 and drove our original estimated effective tax rate from 28% down to 20%.

On a go-forward basis, you're going to continue to get R&D, assuming that the government ever comes out and approves it again.

Right now the federal government has not approved the R&D credit for '08.

We have not factored that into our guidance because until it's approved, you're not going to get it.

The ETI deduction went away in 2006, so that's not something that's available to us anymore, and then, of course, whatever happens in the area of stock options we'll also take into effect.

So we will get some credit, going forward.

As Gary mentioned -- well, I think it was in the press release and what we said in the conference call today -- even though we'll be having sizable book tax expenses next year, we only plan to pay 10% of it because of the carryover for cash tax reasons, for NOLs and credits.

Now, that's probably a one-year through '09 and starting in 2010, we'll be paying full taxes along with recognizing full book expense.

So among your conservative assumptions in your guidance, is no R&D tax credit for fiscal '09?

Yes, none.

Since this was a look back for 15 years in '08, you've got a big benefit.

Going forward, it's not -- it will be somewhat of a benefit, but you could take our R&D expense and assume that maybe somewhere between 5% and 10% will end up being a credit for taxes.

So it's not a huge number.

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

Well, I'd just like to summarize by saying as we end fiscal year 2008, we did exceed our own revenue projections.

We hit our earnings projections.

We feel that we have some momentum now with our licensing partners to really see that come forward through commercialization, and we're looking forward to keeping you apprised of our progress and plans throughout this year.

So thanks for joining our call, and we appreciate it very much.

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

This concludes the program.

You may now disconnect.

Good day.