Lifecore Biomedical Inc (LFCR) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Landec third quarter fiscal year 2010 earnings release 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 follow at that time.

(Operator Instructions).

As a reminder, this program is being recorded.

I would now like to introduce your host for today's program, Mr.

Gary Steele, Chairman and CEO of Landec Corporation.

Please go ahead, sir.

Good morning and welcome to Landec's third quarter fiscal year 2010 earnings call.

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

This call is being broadcast 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 April 30, 2010.

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 144-1598.

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 2009.

As reported in yesterday's press release, for the third quarter of fiscal year 2010, revenues increased 8% to $58.1 million from $53.9 million during last year's third quarter, and net income increased 13% to $1.7 million or $0.07 per share compared to net income of $1.5 million or $0.06 per share in the third quarter of last year.

For the first nine months of the fiscal year 2010, revenues decreased 2% to $180 million compared to revenues of $183.7 million for the same period a year ago.

Net income for the first nine months decreased 7% to $5.5 million or $0.20 per diluted share compared to net income of $5.9 million or $0.22 per diluted share for the same period last year.

Overall, Landec generated $7.1 million in operating cash flow during the first nine months of fiscal year 2010 and ended the quarter with $69.6 million of cash and marketable securities and no debt, continuing to maintain our positive financial position.

Importantly, revenues from Apio's value-added fresh-cut vegetable business, which accounted for 82% of Landec's third quarter revenues, increased $3.5 million or 8% during this year's third quarter, compared to last year's third quarter.

Gross profit from Apio's value-added fresh cut vegetable business increased $763,000 or 17% from the year-ago quarter, and 1.1 million or 27% from the prior quarter.

Notably for the nine months, ended February 28, 2010, compared to the same period a year ago, Apio unit volume sales in the fresh cut vegetable category increased 21% while according to syndicated market data, the overall industry unit volume sales in the fresh cut vegetable category increased 7% during the nine months ended February 28, 2010 compared to the same period a year ago.

As a result, we believe that industry unit volume sales in the fresh cut vegetable category are starting to take a positive turn and will continue to grow during the next year, assuming the economy continues to improve and consumers continue to return to buying fresh, nutritious, and conveniently packaged produce products.

For all of fiscal year 2010, we expect revenues to be flat to slightly lower and we expect net income to be approximately the same as last year.

Our initial guidance for fiscal year 2010 was that both revenues and net income were projected to be flat to slightly higher in fiscal year 2010, compared to fiscal year 2009.

That initial guidance took into account the challenge of replacing approximately $9.5 million of non-recurring revenues and $2.5 million of non-recurring pretax income in fiscal year 2009.

Our revenue guidance for fiscal year 2010 is primarily due to significantly lower than planned Apio trading export revenues of $4.5 million in the first half of fiscal year 2010 caused by shortages from lower than expected yields in stone fruit produce.

Despite the non-recurring revenues in income in fiscal year 2009, the lower than expected export revenues in the first half of fiscal year 2010, the adverse weather in California and Florida in March 2010, and the lower interest income during the first nine months of fiscal year 2010, we believe we can achieve flat to slightly lower revenues in approximately the same net income compared to last year, for our fiscal year ending in May.

Let me turn to Greg Skinner for details of our results.

Thank you, Gary Good morning, everyone.

In yesterday's news release, Landec reported total revenues for the third quarter of fiscal year 2010 of $58.1 million versus revenues of $53.9 million for the same -- for the third quarter of last year.

The increase in total revenues during this year's third quarter compared to last year's third quarter was primarily due to a $3.5 million increase in revenues from Apio's value-added fresh cut vegetable business, primarily due to an increase in market share and from an $839,000 or 11% increase in revenues from Apio's trading business, due to exporting higher priced produce products during this year's third quarter compared to last year's third quarter.

For the third quarter of fiscal year 2010, the Company reported net income of $1.7 million or $0.07 per share, compared to net income of $1.5 million or $0.06 per share in the third quarter of last year.

Net income increased due to a $763,000 increase in gross profit and Apio's value-added fresh cut vegetable business, primarily due to gross profit on increased revenues and from improved operational performance.

This increase in net income was partially offset by first, a $207,000 increase in operating expenses at Landec Ag, as a result of the modified agreement with Monsanto; second, a $101,000 decrease in gross profit for Apio packaging, due to the contractually planned decrease in Chiquita minimums; third, a $140,000 decrease in gross profit in the technology licensing business, primarily due to the completion of the Air Products licensing payments during the third quarter of fiscal year 2009; and fourth, a $78,000 decrease in interest income due to lower yields on investments compared to the yields from investments in the same period last year.

For the first nine months of fiscal year 2010, Landec reported total revenues of $180 million versus revenues of $183.7 million for the same period a year ago.

The $3.7 million decrease in total revenues during the first nine months of fiscal year 2010 was primarily due to there being one extra week in the first quarter of fiscal year 2009, resulting in 40 weeks in the first nine months of last year, compared to 39 weeks in the first nine months of this year, and the extra week resulted in approximately $5 million of additional revenues in the first quarter last year.

In addition, the decrease in revenues during the first nine months of fiscal year 2010 was due to the $9.1 million decrease in Apio trading revenues.

This decrease was comprised of $1.9 million from the extra week last year, $2.7 million from our domestic buy-sell business, as a result of the Company's decision to exit virtually all of this business, and $4.5 million from primarily the shortage of export stone fruit during the first half of fiscal year 2010.

These decreases in revenue were partially offset by the $6.2 million increase in revenues from value-added fresh cut vegetable business.

However, if you exclude the $3.1 million for the extra week during the first nine months of fiscal year 2009, the increase in value-added fresh cut vegetable revenues for the first nine months of fiscal year 2010 would have been $9.3 million.

For the first nine months of fiscal year 2010, the Company reported net income of $5.5 million or $0.20 per diluted share, compared to $5.9 million or $0.22 per diluted share for the same period last year.

This decrease in net income during the first nine months of fiscal 2010, compared to the same period last year, was primarily due to, first, an approximate $600,000 decrease in gross profit, due to one less week in the first nine months of fiscal year 2010 compared to the first nine months of last year; second, a $406,000 decrease in gross profit for Apio packaging, due to the contractually planned decrease in Chiquita minimums, and a decrease in R&D funding, from Apio's R&D agreement with the US military, which was completed at the end of the second fiscal quarter of 2009; third, a $576,000 decrease in gross profit in the technology licensing business, primarily due to the completion of the Air Products licensing payments during the third quarter of fiscal year 2009, and fourth, a $336,000 decrease in interest income due to lower yields on investments.

These decreases were partially offset by an $840,000 reduction in our income tax expense, due primarily to lower pretax income.

Turning to Landec's financial position, during the first nine months of fiscal 2010, the Company generated $7.1 million of positive cash flow from operations.

Overall, cash and marketable securities increased $3.7 million during the first nine months of fiscal year 2010, to $69.6 million.

For the first nine months of fiscal year 2010, capital expenditures were $3.7 million and depreciation was $2.4 million.

Let me the turn the call back to Gary.

Thanks, Greg.

So where are we headed in the next 18 months?

Our focus is on strengthening and sharpening our programs with our existing corporate partners, defining and staffing projects to develop new applications for our Intelimer polymer materials technology, identifying new corporate partners in select areas, and identifying acquisitions or joint venture growth opportunities.

Let me just discuss these.

First, sharpening our focus with existing corporate partners.

You may recall that during our second fiscal quarter, we modified our agreement with Monsanto, allowing Monsanto to focus on specific seed treatment applications which are strategically important to Monsanto using our technology.

At the same time, the modification gives us the flexibility to pursue on our own or with other partners, applications of our Intellicoat polymer technology in seed coatings outside of the exclusive field license to Monsanto.

Monsanto will focus on specific target areas for seed treatments that use our technology to deliver chemicals on seeds in a way that improve the effectiveness of the active ingredient.

In making this transition from a broad, but not well-defined, field of seed applications to a highly focused development program, we see applications and opportunities where Monsanto and Landec can both benefit.

We now have the full rights either on our own or working with others, to make and sell Intellicoat products for applications and seed coatings and other seed treatment areas outside of Monsanto's exclusive field.

In return, Landec is self-funding the R&D work that supports the specific application for Monsanto's program.

We have recently delivered samples to Monsanto.

We should be advancing our work with them from the labs to the green houses to field trials over the next six to 12 months.

In addition we are planning to identify one additional strategic ag partner that can benefit from our proprietary Intellicoat polymer capabilities.

The process of identifying this strategic ag partner is underway.

Regarding Chiquita, the Chiquita To Go program continues to expand in sales.

You will see more coffee shops, mini-mart gas stations, convenient store sites, offering fresh Chiquita bananas for sale.

In quick serve restaurant areas, Chiquita's in discussions with potential quick serve restaurant customers for the sale of Chiquita bananas, delivered in our Breatheway packaging.

Perhaps the new regulations that require restaurant chains to clearly label calorie and nutritional information on menus might be a catalyst for quick serve restaurant chains to seek healthier menus that include bananas.

In the avocado program with Chiquita, we are excited about the advancement of the program where Chiquita is beginning to sell to both food service companies and retail grocery chains with plans to roll out the avocado program broadly starting this summer.

The second focus for the next 18 months is identifying new applications for our polymer technology.

We have identified over five promising development projects with unique potential applications, for the proprietary and versatile properties of Landec's Intelimer materials.

The third focus is identifying new corporate partners.

We have a sizable investment in the area of drug delivery and control release, and we are in early conversations with big Pharma and other medically related companies, regarding testing and evaluating our materials for the delivery of small molecule drugs.

Although early, it is clear that, clear to us that bio-materials is an area in need of help as traditional plastics and polymers have limitations.

We will need to be patient in this area but view that, while most big corporate America is cutting budgets, big Pharma and medical device companies do need new product innovations now more than ever.

We are also looking into potential applications in the area of value-added coatings using our Intelimer polymers; our goal is to have at least one new licensing partner in the next 18 months.

The fourth focus is on acquisitions and joint ventures.

We have recently identified a couple of promising investment opportunities and we will continue our search.

We have nearly $70 million in cash and we want to invest it wisely.

Our focus is in the materials area with emphasis on bio-materials that are potentially synergistic with our polymer chemistry.

Our track record for acquisition has been very good and we, if we decide to acquire a company, it will certainly be based on very thorough due diligence and very attractive returns on our investment.

We believe our future obligations to our shareholders are to focus on technology innovation and new product development and to continue supporting our collaborative partners and to ensure that our sizable cash balances are protected in investments that is are safe and available as needed in order to pursue and take advantage of profitable growth opportunities.

In the near term, as part of advancing these goals we expect to see an expansion of sales by Air Products, plus new initiatives with other major personal care companies which have already begun.

We expect to see a further expansion of our market share in the fresh cut vegetable category and that category appears to be making a positive turn.

We expect to move our work with Monsanto to green houses and trials in calendar year 2010, and we expect to start one or more research initiatives and new applications of our material science technology.

Lastly, we expect to move our M&A activities from the broad search to a focus on one or more specific partner candidates.

Our near term and 18 month goals are driven by our focus on achieving our long term objectives for revenue growth with profitability and positive cash flow.

We are now ready for your questions.

Certainly.

(Operator Instructions).

Our first question comes from Tony Brenner from Roth Capital Partners.

Your question, please?

Thank you.

Two questions.

First of all, with fresh cut vegetable sales turning up industry wide, Gary, is your mix changing as well?

Not really.

The tray sales are still weaker than in the past, and I don't know when that turn is going to come, Tony.

It is hard for us to say, but most of our growth is coming in the bag product area, so we haven't seen that change in mix yet.

Okay.

Second question, my impression is that you have been in some form of discussion with the big Pharma companies for quite some time.

You said negotiations are at an early stage.

Is it fair to conclude then that some companies have moved on, and others have become interested?

Yes.

That's a good way of describing it.

Okay.

Is this area one in which licenses might be very narrow in form for a particular drug allowing you to issue multiple licenses for this technology?

That's a terrific question, and our preference would be to have numerous licenses, along therapeutic classes or types of materials that we would be providing rather than one broad license.

But we are at a state where I am not really sure how to answer that question, Tony.

It is still early stage, Pharma is, if you have been watching big Pharma, you know they're skittish they have drastically cut back R&D budgets, business development people have been coming and going, so it is in flux.

Our preference would be to do what we have done with other partners in the past, that is to have well-defined fields, be exclusive in those fields, but not do it so broadly that you can't work with others, so that's our preference.

Okay.

Thank you.

Thank you.

Thank you.

Our next question comes from Peter Black from Winfield Capital.

Your question, please?

Morning, guys.

Morning, Peter.

To follow up on what Tony was just talking about regarding a potential pharmaceutical partner.

There are a lot of drugs obviously out on the market that tout or highlight controlled release properties.

Is there anything in your, I guess, own clinical data right now that suggests that your polymer technology increases bio-availability or has a new value that would differentiate it between what's already out there in terms of controlled release?

Excellent question.

And there's some standard work horses in the industry.

One is called PLGA, it's a standard work horse, it's polymer based that's used in lots of drugs, and it has some severe limitations.

The good news is that everybody knows it's safe, it's been tried and used for years and years.

The problem with these delivery systems, Peter, is that they tend to have what's called a bolus or a burst effect and that most of the active is released immediately when given intravenously or swallowed et cetera.

Our animal data, so far, and our in vitro data suggests we don't have that burst effect allowing more active material to be available for dispensing over longer periods of time when that's useful to the patient.

So number one, we think we have a release profile, at least in the early results that looks advantageous.

Secondly, we also think we can work with some hard to deliver molecules that tend to be insoluble, they are hard to process, and we think that we have an advantage there as well.

The third area that looks promising to us, and remember it is still early stuff, Peter, is that we can load higher amounts of drug in our delivery vehicles than most people or all people.

And so we are looking at those attributes.

On the other hand, compared to these other systems that have been out there for quite a while, you've got to be asking the question, "what's the safety and toxicology profile, how much work have you done in vitro, and in vivo?" We have no intentions of going into human trials ourselves, so we will need partners.

Early on, we see some advantages that are attractive, so we want exploit those.

Okay.

Then, just turning to the improvement in really the entire fresh cut vegetable market.

Do you think that and the fact that Chiquita is willing to roll out the avocado program this summer might suggest that they are themselves becoming more optimistic on consumer spending for higher value, higher priced items and that there's the potential for them to revisit the banana program at retail some time in the future?

Excellent question and I don't have an answer for you.

We are meeting with them in a couple of weeks.

That will be our very -- that will be one of our most important discussions.

I don't know.

Okay.

And I don't know how optimistic they are.

I think we have to be a little cautious here about declaring victory on the consumer coming back.

There's still a lot of unemployment, but indicators are positive and we will discuss that with them in a couple weeks.

So I will have more information next quarter.

Great.

Thanks.

Thank, Peter.

Thank you.

Our next question comes from Morris Ajzenman from Griffin Securities.

Your question, please?

Good morning, Morris.

Good morning.

Two quick questions.

One, you talk about the nine months industry and company unit volume gains.

Do you have that for the most recent quarter?

The most recent quarter.

For the third quarter.

You talk about for nine months, the industry being up what's the number here?

You talk about industry being up 7%, you being up 21% for the nine months.

I have that, but you know off the top of my head, I don't remember.

Can we get back to you on that?

No problem.

The second one, a quick one, assuming your earnings come in flat for the year, your cash flow of $7.1 million positive for nine months, what would that be for the full year, would it be approaching $10 million or so?

Approximately, yes.

Okay.

Thank you.

Thank you.

Our next question comes from Will Lauber from Sterling Capital Management.

Your question, please?

Morning, Will.

Morning.

Will is here.

This is Bill talking, good morning.

Hi, Bill.

First of all, I would like to commend you folks for your practice of releasing those questions and answers with your quarterly releases.

We find them very, very helpful.

Thank you.

But today I was just wondering if you can maybe expand on that idea, and looking back over the last few quarters, could you share with us a few things from an operational standpoint that you folks could have done differently?

Looking back, obviously with twenty-twenty hindsight and realizing that certain things are beyond your control such the economy, and the focus of your partners and what they do?

Well, first thing I would say is we should have hired our head of business development, several years ago, as opposed to a few quarters ago, Will.

And I will take -- I will fall on my sword on that one.

There's only so much that Greg and I could do and David Taft could do, so in retrospect, I think it would have been wise for us to bring in that senior roll earlier.

Secondly, I think it would be, it would have been good for us to have our modification in the Monsanto agreement somewhat earlier, if we could have done that, to give us the flexibility to work with others.

There were quite a few -- since you are in St.

Louis, you know very well that there were a lot of changes going on in Monsanto, and we weren't quite sure who we were working with there for a while because there were so many changes.

But it would have been nice to have that modification to that agreement a few quarters earlier.

I would have liked that as well.

In terms of other changes, I think it would have been great to have some of this identification of internal projects.

I've mentioned that we have identified five projects or more that we want to fund internally.

I would love to have had that a year ago, so there are a number of things that we would done differently in retrospect.

On the other hand, we have a full plate here; we are very engaged.

There are a number of things as you know that are works in progress that we want to report on in the next few quarters from a business development point of view.

So I hope I am addressing your question.

That's fair enough.

On the seed side of the business, with your modification with Monsanto, you indicated in your opening remarks that you folks were pursuing at least one other arrangement with an ag company.

Can you share with us how far along you are?

Early.

It is early, but let me give you a couple of choices that we face, and one is outside of the Monsanto inclusive deal, we could work with a number of companies in what I call project areas.

So we could work with company A in project area one, we can work with company B in project area two, et cetera, et cetera.

Or, we could find one broader strategic partner who can really provide the marketing and the customer eyes and ears, have access to farmers and to seed companies that we don't currently have; and our strong preference would be to pick one broader partner, that's a strategic partner where we become the functional polymer developer, and supplier which is what we do well.

Our strong preference would be to fund one strategic partner outside of the Monsanto agreement rather than what I call the one off situation, so that is the direction of our focus right now.

Okay.

Thank you.

Thank you.

Thank you.

Our next question comes from Chris Krueger from Northland Securities.

Your question, please?

Good morning, Chris.

Good morning.

Can you talk a little bit about new products that you have introduced and your core fresh cut veggie category and what stage they're at and how it is going?

Yes.

We are looking at -- we have got a cup line that is for on-the-go people; it is about 12 different products.

What I like about it is, not only is it a retail product, but it could be a convenience store product, which would help us put our foot in the door for a market that we don't currently serve directly ourselves.

We have launched a number of products that are doing well for us in club stores.

I am going to mention one and I'm going to laugh because I don't like the product myself, personally, but you would be surprised how well our Brussels sprouts are selling and our squash products, our new slaw products, are doing very well in club stores and beginning to take hold in retail chains as well.

We are also looking at some new potential channels that we have on tap before and one that would be of great interest to us that we are exploring in its early stage is school districts.

I think your, you may be following very carefully the plight this country has in terms of diabetes and obesity and things like that.

We are starting to see school districts really taking their food, their child food program seriously in terms of having much more control and command over what's served to kids.

So we are starting to make some inroads in that arena as well.

Those are examples of new things we are doing.

We also had some very positive trials here recently with some shipment to Asian markets and European markets, and we did a control study where these were in what I call case liner packages where we were shipping products by surface ship, to Asia and Europe, and there was a control where it is open air shipment, and there was a control where the shipper actually pumped in oxygen CO2 using gas bottles and those types of things which is called control release, control atmosphere, excuse me, and then our packaging and we just blew away the controls.

It was, it was a very significant demonstration of how our technology can allow produce to be shipped and stay fresh for long periods of time by surface shipping.

Okay.

How has the sourcing environment been for vegetables in recent months and what's the outlook there?

Really, March was really, really tough.

The California has been just -- we are building arks out here and floating away.

And I don't need to tell you about Florida.

That got -- tomatoes just got hammered with freezes, and Mexico wasn't doing much better, so March was a real tough sourcing month.

I suspect that April will be tough as well.

And for us, we were -- it is, we were looking at March, April, May as maybe real upside opportunities for given the rebound in the category and given the market shares that we are taking, we were feeling pretty optimistic about our fourth quarter, and we are constrained by sourcing.

It is not catastrophic.

The sky is not falling, but it has been a limitation for us to really keep that headwind that we have and keep going.

Obviously, that would be -- these conditions would be factored into your updated guidance, correct?

Yes.

Okay.

Last thing --

I have to tell you, we are -- our updated guidance is assuming that some of this really nasty weather is going to subside here pretty soon.

It usually does in California, by mid-April, but we are certainly counting on that.

Okay.

Last, as far as the potential supply agreement with Monsanto, what would be a rough time line on that?

I know you -- can you go over that again?

Yes.

It was a five year arrangement.

We have -- I think the agreement comes to a decision point in December of 2011.

And I would expect them, who knows, but I would expect them to take the full time of testing and then when the parties sit down and they decide, do we go forward, if we go forward, they would buy us out of this -- basically think of it as an option, they would buy us out and we enter into a negotiated supply agreement, or they choose to pass, and I would expect that not to happen until a little bit before December 2011.

All right.

That's all I have got.

Thanks.

Thank you.

Thank you.

(Operator Instructions).

Our next question comes from Walter Shenker from Titan Capital.

Thanks, just since you brought it up, in the press release, as opposed to on the call, you made reference to a number of potentially negative factors going forward in the fresh vegetable business relating to raw material costs, which I don't believe was just one month, associated with farming in California, margin pressure due to ability to pass along increased cost, increased promotional expenses; can you give us any general sense as to magnitudes of those different issues, not specifically or maybe in the aggregate?

As far as the impact it will have on our margins?

Is that the question?

Yes.

You can see over the course of a few years, our margins have compressed and it has been a result of the factors we mentioned in our press release, and there are concerns, as Gary just mentioned, that those particular pressures could continue going forward, so we need to continue our operating performance, and efficiencies in order to try to offset some of those, but it is a challenge to offset it.

You have competitive pressures out there.

You have costs going up.

You have a margin squeeze and the way you offset that is by new product introduction, and by operational performance.

Walter, let me just add to -- this is Gary.

Let me add a couple of thoughts.

Over the last year or two, and we're getting more specific to answer your question.

What's been driving cost increases out here is land cost increases for available land that is dedicated to growing high value vegetable products, which is what we are interested in.

The last couple of years there was a clearly marked shift in land going into strawberries.

There were new varieties developed; strawberries was the new wave.

A lot of farms were diverting to planting strawberries and in typical farming fashion there was a, they went overboard, and they planted too many strawberries and now you are starting to see some reasonableness coming back in terms of land being appropriately applied to vegetables as well as strawberries.

So I think they're, I think there's some countervailing forces here that might be beneficial to us.

The proof will be in the pudding here in the next six months when we start to negotiate our new farm contracts, but strawberries was really driving some of these price increases, number one.

Number two, Tony Brenner mentioned earlier in the call, he asked about the mix in trays and bags.

I think as the economy -- if and as the economy snaps back we can start to see a more positive change in mix, whereby our trade products start to rebound, and that really helps our gross margins as well.

So, there are some, some countervailing forces here that we will work with, plus we are just finishing Phase I of our buildout, and we're always looking to get more efficient in our plant; we've got good operating people at Apio that really do a good job of that, so we fight all the time to offset some of these forces that tend to reduce margins.

So we have some good opportunities here.

Okay.

And just one other question, going back to Monsanto and the ag market.

Over the years you have worked Monsanto, you have advanced the intellectual property a fair amount.

You continue to have full access to the full breadth of your science as long as it does not go into the same applications that Monsanto and you have identified.

Yes.

So let me make sure.

There's a well defined field with Monsanto which we have not publicly disclosed, and they would have upon the exercise of their option, they would have exclusive rights to benefit from that intellectual property which involves patents and know-how and we would be providing to them any improvements and modifications over the life of our agreement.

Outside of that field -- first of all, we own all of the patents, we don't turn patents over to folks.

Outside of that field, we have the full freedom to work with anybody we want to, including working on our own.

Okay.

Since you haven't disclosed it, it obviously creates some basis for discussion, but if I was XYZ major ag company so that this is your master agreement, I -- assuming my application is different from that of Monsanto, I pretty much would have a very broad capability of utilizing your technology?

Yes.

Back to our looking for a broad strategic partner it would be, there is a broad field of applications that we can license to a new partner.

Okay.

Thank you.

Thank you, sir.

Thank you.

Our next question comes from Rick Fetterman with Fetterman Investments.

Your question, please?

Morning, Rick.

Good morning.

This is Rick Fetterman.

Can you expand a bit on the Air Products collaboration?

It is -- it is kind of seems like it has been in this stage that's currently described it seems like before rock 'n roll; I know it hasn't been that long.

I like to say before flushed toilets, but you are right.

It has been a long haul, and the state, just to remind you, they have exclusive rights in the personal care field.

They are our eyes and ears and arms to market and sell products globally to the personal care industry, and the value that we add is our materials have unique properties in terms of what's called viscosity modification, we can change the flow of various types of ingredients that are in gels and lotions and creams and things like that.

We also have the ability to from a deposition point of view to keep the actives that a L'Oreal and Estee Lauder may be interested in.

We can keep it on the skin longer because we can do some things with our materials to make them hydrophobic which is oil-loving versus hydophilic, water loving, and we also have some unique properties in terms of sensory feel and texture and those types of things, the way it works is Air Products is the exclusive marketer and seller of these products -- by the way we just won some prestigious award and the name of that award escapes me and I apologize -- but -- for innovation in this field.

The way it works is they fund all of the marketing and sales on their own nickel, and then when we sale products to a personal care company such as L'Oreal, they get 60% of the gross profit, we get 40%, it has been a -- we have been increasing sales gradually, each year and Air Products has been gearing up its capabilities for marketing and selling products.

They didn't have that capability before; they are a new player in the industry and so it has been taking some patience on everybody's side, and we are hopeful that as we develop new products, which we have been really -- that's our focus is developing the new products that they will sale, that this will begin to expand, especially beyond the ten or 12 products we currently are in with L'Oreal, we need new customers as well expansion of L'Oreal purchases.

So, I agree with you, Rick it has been a little bit in a slow state for a while, and all I can tell you is that our role is to develop new products, and that's what we are doing.

Is -- along the same line, you said the sales to Air Products have been growing, albeit slowly, but still growing, is that for use by their -- them or their clients in R&D.

No, no --

Those are actually product on --.

Those are actually in --- I think they are in 12 L'Oreal products.

These are in creams and lotions and things like that where we are a component in those end products, so this is actual end product sales, not R&D sales.

Would you expect that in fiscal '11, that there would be sufficient revenue to break that out in this particular area?

Break it out as a separate line item you mean?

Yes, or just release what that number was?

Yes, either as a line item or just in two Air Products we have done X number of dollars worth of business.

Would you settle for an "I don't know" answer?

It's the one I am going to get, so I guess so.

Let me think about that one a little bit.

I don't know.

I don't think we have done that in the past.

But maybe we will, so I would like to think about that one, if you don't mind.

Good enough.

Thank you.

Thank you, sir.

Thank you.

There are no further questions in the queue at this time.

I would like to turn the program back to Mr.

Steel for further remarks.

We very much appreciate your being on the call today and thank you for joining us.

We look forward to continuing to update you on our progress and plans.

Thanks again.

Thank you, ladies and gentlemen, for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Good day.