Lifecore Biomedical Inc (LFCR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Landec first quarter fiscal year 2011 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 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.

Good morning, and welcome to Landec's first quarter of fiscal year 2011 earnings call.

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

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

The webcast will be available for 30 days, through October 29, 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 1483786.

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 10-K for fiscal year 2010.

As reported in yesterday's press release, for the first quarter of fiscal year 2011, revenues increased 7% to $65 million, up from $60.9 million during last year's first quarter, and net income increased to $2.3 million, compared to $2.2 million during the first quarter of last year.

Notably during our first quarter, Landec's hyaluronan-based materials subsidiary, Lifecore Biomedical, Inc, completed its first full quarter under Landec's ownership, and generated $6.4 million in revenues, with a gross margin of 47%, resulting in $3 million in gross profit.

That total gross profit for the first quarter of fiscal year 2011 increased $2.9 million to $11.8 million compared to the first quarter of fiscal year 2010.

While gross margins improved 3.6 percentage points to 18.2% compared to 14.6% during the first quarter of last year, and also increased by 2.1 percentage points compared to 16.1% in the prior quarter.

Overall during the first quarter of fiscal year 2011, Landec's financial position continued to improve and strengthen.

We generated $4.4 million in operating cash flow, paid down $615,000 of debt, and added $2.4 million to cash and marketable securities, which ended the quarter at $50.6 million.

In addition, we started repurchasing our common stock under our buyback plan of August 19, 2010, and through September 27, we have repurchased 215,684 shares at a total price of $1.2 million.

Based on the results of our first quarter, we are on track so far for achieving our net income goal of fiscal year 2011, and somewhat behind in our revenue goal.

As stated in our press release, some of the revenues are timing related, and some are due to a conscious decision to exit the domestic buy/sell low-margin business altogether.

In addition, we walked away from some low-margin value added vegetable business.

At this point in time, we are not changing our original guidance for the fiscal year of 2011, which was to increase revenues by 15% or more compared to the $238 million in revenues in fiscal year 2010, and to increase net income by 25% to 40% in fiscal year 2011 compared to fiscal year 2010, after excluding the $3.7 million in nonrecurring charges in fiscal year 2010.

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

Thank you, Gary, and good morning, everyone.

In yesterday's news release, Landec reported total revenues for the first quarter of fiscal year 2011 of $65 million versus revenues of $60.9 million for the first quarter of last year.

The increase in total revenues during this year's first quarter compared to last year's first quarter was due to the $6.4 million of revenues from Lifecore, partially offset by a $2.5 million decrease in revenues from Apio due primarily to delays in harvesting certain export products that we expect to ship in the second quarter.

And from Apio exiting some low-margin businesses including the break-even to low-margin domestic buy/sell business, which had generated $1.8 million in revenues during last year's first quarter.

For the first quarter of fiscal year 2011, the Company reported net income of $2.3 million, or $0.09 per share, compared to net income of $2.2 million, or $0.08 per share for the first quarter of last year.

This increase in net income during the first quarter of fiscal year 2011 compared to the first quarter of fiscal year 2010, was primarily due to the net income before taxes from Lifecore of $694,000, and a $236,000 increase in gross profit from Apio's technology business.

These increases in net income were partially offset by $212,000 of operating expenses incurred by Landec Ag due to amending the agreement with Monsanto at the end of the second quarter of fiscal year 2010.

In addition, net income was negatively impacted from, first, a $217,000 increase in research and development expenses for our technology licensing business, second, from a $181,000 decrease in interest income due to less cash to invest, and third from a $226,000 increase in interest expense due to the debt from the acquisition of Lifecore.

Turning to Landec's financial position, during the first quarter of fiscal year 2011, the Company generated $4.4 million of positive cash flow from operations, and paid down $615,000 of debt.

Overall, cash and marketable securities increased $2.4 million during the first quarter of fiscal year 2011 to $50.6 million.

Let me turn the call back to Gary.

Thanks, Greg.

Our goals and priorities for this year and next year are clear.

First, we believe Lifecore was an excellent purchase this last May, and there is momentum to grow Lifecore's revenues 40% year-over-year this year.

After one quarter, we like what we see, and Lifecore's management team has a solid three-year growth plan with excellent margin prospects.

Lifecore's premium, high quality HA materials are a mainstay in opthalmology, and we want to continue to expand Lifecore's core business base in opthalmology.

Over the next year, Landec and Lifecore will jointly seek additional new business opportunities both inside and outside of opthalmology.

Second, we want to continue to grow our Apio food business, and our focus will be in areas where we can demonstrate superior product quality and customer service.

Apio has a strong operating team, and we have excellent facilities and proprietary packaging technology.

In the past year, we have seen increased pressures in pricing and margins, as both consumers and buyers seek relief from this deep and painful recession.

Our charge is to continue to innovate and enhance our operating efficiencies, but also to know when to walk away from low margin business.

The future growth in our Apio food business will come from continuing to increase market share, from new product launches, and from increasing sales of BreatheWay packaging to fruit partners, similar to what we are doing in bananas, avocados, mangos, and hopefully berries and [stone] fruit in the future.

Additionally, our East Coast value added vegetable processing site is now up and operational, allowing us to now access the next day delivery market previously unavailable to us.

It will take us several quarters to build some traction from this location.

A third goal is to continue to invest in R&D for our polymer chemistry.

R&D for fiscal year 2011 is expected to be $9 million, up from $4.4 million in fiscal year 2010, and of course that includes the addition, the recent addition of Lifecore.

We are increasing our R&D investments in order to support our core Lifecore Biomedical and Apio food business, as well as to advance our technology licensing business by underwriting new licensing and joint venture opportunities.

Our past investments in R&D are the basis now of our current progress in packaging, coatings, additives, and control release systems.

Our two acquisitions, Apio in year 2000 and Lifecore in May this year, are also a direct result of our R&D investments as vehicles for commercializing profitable applications of our polymer materials.

A fourth goal is to strongly support existing partnerships with Chiquita Monsanto and Air Products.

Some programs are proceeding well, and some are progressing more slowly.

But in all cases, Landec's technology works as advertised.

Last but not least, we plan to maintain a strong balance sheet in the future years.

We currently have over $200 million in total assets, and $50 million in cash.

Our goal is to generate substantial free cash flow by doubling cash flow from operations this fiscal year, and adding $10 million of our cash balances after paying $4 million in debt payments, and $6 million in capital expenditures.

In summary, we're expanding our investment into R&D to take advantage of potential growth opportunities that are projected to shift our revenue and margin mix, and to go to higher margin businesses accompanied by increasing cash flow.

We are now ready for your questions.

(Operator Instructions) Our first question comes from Tony Brenner from Roth Capital Partners.

Your question please.

Thank you.

Good morning, Tony.

Good morning.

Gary the value-added Apio revenues were down slightly.

I recall that last quarter you had indicated that this business was beginning to recover at whatever speed but never the less recovering and beginning to ramp up, and I'm wondering what the reason for the decline was, was that walking away from some marginal business or is there another explanation?

It's-- without going in to details, Tony and you can understand why I'm not going to mention names, there was a customer that we've had for a while, an important one, and a part of their business was going private label and they were asking suppliers, including us, to come in at what we felt was a breakeven business and it just isn't the type of business we want to have.

So we don't have that business anymore, it was-- it's one of their part of their business, we have other parts of their business, and that effects-- that will effect this quarter's results because we had the business last year we don't have it now.

Did that just happen this quarter?

No.

It happened--

The beginning of the third quarter of last year.

Yes, beginning of the third quarter.

Is --

And so there's two ways of looking at this, one is that a trend in the industry?

Don't know.

Is it more than that for Apio?

No.

It's-- we're starting to see a category that's got some life in it.

The category was flat this last quarter on a volume basis.

But we're starting to see some uptick in the trady side of the business.

The tray business was up although the trade business tends to be going to smaller size trays.

As consumers are coming back, they still have discretionary income issues.

But in general, we're still staying with our guidance, Tony but we do have the one customer situation where we just felt it wasn't good business for us.

Okay.

Let me ask you about your guidance.

You didn't exactly reiterate your guidance, the way you worded it was that you're not changing it at this time.

Yes.

How should we read that implication?

We finished 90 days.

We don't have any knowledge or reason to change it, so let's stick with it.

That's not a resounding --

I don't know what else to tell you.

But I think the-- let me just say that we're-- we still believe we can hit the guidance and you know you followed us long enough to know that the big quarters for Apio are the holiday months and so the next two quarters include those months and that will tell us a lot.

But we're-- we feel good about our prospects.

Fair enough.

Thank you, Gary.

Yes, thank you.

Thank you.

Our next question come from the line of Daniel Rizzo from Sidoti & Company.

Your question please.

Hey, guys.

Good morning, Dan.

You indicated in your comments that you-- some of your deals are going well and some are going a little more slowly.

Could you elaborate on which ones are exceeding expectations, maybe which ones are just slightly again moving slightly slowly or maybe a little disappointing at this point?

Well let's start with the slowly, Air Products is slow.

They have made two attempts to purchase-- when we got together with Apio a couple years, I'm sorry, with Air Products a couple of years ago, it was their clear plan to build their performance materials business, which at that time was about $1 billion.

I think everybody thinks of Air Products when they think of this partnership, but they really do have a sizeable performance materials group and they wanted to expand it.

And at the top of their list was getting into the supply of personal care additives and ingredients to the cosmetic industry, high margins, good growth prospects.

And they were looking for a technology, [differentiating] technology platform that's Landec, but they also wanted to make an acquisition in the field so that they can have a big footprint in which to operate.

And that would include a worldwide sales force and formulators and those types of people.

They made several attempts to make these acquisitions, they have not been successful.

And as a result, they've had to do what I would call a home grow approach, which is the start to put together a team and it's just made things slow.

and I worry since Air Products is very consumed these days and the possible acquisition of Air Gas, a competitor, I do worry that they're distracted.

So for us it's somewhat frustrating, we'd like to see things moving more quickly.

We understand why to some degree it's not.

But it's still growing, but it's not the rapid growth.

We expected pretty rapid growth here at this point.

We at Landec continue to innovate and provide new product innovations and new products to the collaboration.

We are now in over ten products that are in L'Oreal products.

We now have two new customers.

So hopefully we can get going here, but the prospects of them making an acquisition in the field is probably slim in the near future.

So that's on that side.

The Monsanto collaboration is going, we've got a good technical, joint technical team.

The- our job is to deliver on the chemistry side of things to deliver these control release systems that are predictable and reproduceable, scalable.

And then this next spring Monsanto's job is to get it into field trials and to do the, what I call the biology.

So I'd say that one's good and on track so far but stay tuned.

Regarding Chiquita, they continue to expand the Chiquita-to-Go program.

That's been a good program for them, they're happy with that.

That's the program where we're now continuing to expand in Starbucks and 7-Eleven type of stores, mini mart gas stations.

So that one is proceeding well.

And from everything we can tell, they're gearing up now to roll out the avocado program nationwide.

They do have the year round sourcing, they have the ripening facilities now squared away, the product is now for the first time available nationwide and now it's a matter of them executing and for customers converting to the Chiquita branded product.

So that one looks like it's on track so far.

We're working with them on a couple of other programs, and as those progress we'll disclose those as well.

With the avocados, that's already rolled out, like that's-- they can be commercially sold or it is--?

Now it's for sale, yes.

Okay.

And just one other question, with Lifecore are you going to be breaking that out as a separate segment in your Qs and Ks, I don't know if you answered that already?

Yes, you'll see it, we're filing tomorrow.

You'll see it as a separate segment tomorrow.

Okay, all right.

Thanks, guys.

Thanks, Dan.

Thank you.

Our next question comes from the line of [Peter Black] from Winfield Capital.

Good morning, guys.

How are you doing?

Hi, Pater, okay.

Regarding Lifecore, from what you've seen so far their operations and the strength of their technology, do you have a sense yet of what end market you'll be targeting as you sort of-- as you look for synergy between their biomaterials and your polymer technology?

Is there any sort of track that you can point to that your R&D team is looking at as a potential end market?

Peter it would be so premature to start suggesting things because it would suggest that we know more than we might know at this point.

We have these joint technical teams.

The first reports of the Board is in December.

Let me just say that it's not rocket science to say that the first thing you want to do is they have a very deep broad strength in opthalmology, opthalmology is a real growth areas in the devices and pharmaceutical world.

So anything we can do to apply existing Lifecore products to new customers, that's low hanging fruit.

Anything we can do to modify the existing Ha materials either through changes in molecular weight or cross linking or modifications of the chemistry itself and apply that to existing customers in opthalmology, that would be lower hanging fruit.

Beyond that our search will take us fairly broadly into other applications for HA.

HA is a very versatile molecule.

It's natural to the body.

It does-- the body-- the immune system views it as friend not foe but it does tend to degradate in the body after about six months.

So can you extend the life of HA by doing certain things to it so that it can be used in dermal fillers, can you put HA into a format so that it can be applied as a mesh for wound care, those types of things, can it be used in incontinence, et cetera, et cetera.

Those are the types of things we'll be looking at but it's just way too early to declare where we're going.

But you can certainly count on us looking hard at low hanging fruit first.

Okay.

And in the past you've talked about in one of your goals along with revenue and profit growth and-- is to establish additional licensing agreements.

Are you still confident that something else will something else will happen before the end of the fiscal year?

Or-- because I noticed that's not part of the sort of going forward guidance here.

A little somewhat modification in our thinking, not that we're not interested in licensing but I think the -- I think this environment is not conducive for the mega licensing deals of the past.

The Monsanto $17 million licensing deals, you just-- you're not-- other than maybe a narrow sector of biotechnology, you're just not seeing those deals consummated and for obvious reasons.

People-- corporate America has been laying off R&D staffs and cutting back and retrenching.

So our thought process is we are still interested in licensing because it's a leveraging of our investment in R&D.

We can't be all things for all people but perhaps there are times when people can take our technology and commercialize it.

So the way we think about it is we'll probably do more narrow, more narrow focused licensing agreements not the big broad brushed exclusive agreements.

And we did one recently with Windset where they're using our packaging technology for hydroponically greenhouse grown vegetables.

And they're the industry leader in that field.

So those types of more narrowly defined licensing agreements probably makes sense going forward.

And when we can find ways of helping fund our R&D by working with partners we'll do that as well.

So we're definitely working on it, Peter.

It's hard to predict when and how many of these, but on average we'd like one a year, so if not more.

So we're working on it.

We'll keep you apprized.

It's hard to predict when these things come to fruition.

But it's still of strategic interest to us.

Understood.

Okay, thanks.

Thank you.

Thank you.

Our next question come from the line of Chris Krueger from Northland Capital.

Good morning, Chris.

Hi, good morning, guys.

Following up on the value-added segment, can you refresh our memory on when you rolled out the super value and did that make for a tough comparison this quarter or is that yet to come or should we not look at it that way?

No I-- from my recollection, it started up first quarter a year ago.

So it's apples-to-apples.

Yes, it is.

So we were fortunate to be able to start last year with super value and it did take them a little time to roll it out to all their chains which now include Shaws and Acme and Jewel and Albertsons, so it's apples-and-apples.

Okay.

And in the past you've provided some market data, whether it's market growth rate or your market share within the market.

Do you have anything we can look at there?

Yes, we're-- if you take it all together and look at Nielsen data and those types of things, and there are some retailers that are not included in Nielsen, but in general we're about 30% market share in the fresh cut vegetable category.

Okay.

And then how-- what's the growth rate been for the entire market last three months or year-to-date or whatever you might have?

Last three months it's been flat overall.

It's been flat.

And in the prior two years, the category was down about 10% a year.

And then prior to that it was growing about 10% every year.

So pre-recession 10% growth annually, recession 10% negative growth, and then now it's flat.

And as I said in trays we're starting to see some positive numbers on the tray side, that's starting to slowly snap back.

Okay.

I don't think you've mentioned the new East Coast facility is that up and running and --

Yes.

I did mention it Chris briefly, it's a walk before you run small facility in the Southeast.

We're up and running.

We're-- our plan there is to do two things.

One is to access the next day delivery market.

And what that means is there's some buyers on the East Coast that perhaps they haven't figured out their plans or they were surprised by demand or whatever and they need something tomorrow.

Well we can't-- from California, we can't get it there that quickly.

So this allows us to have a small processing facility to address that need.

And also we're going to be looking at some categories of produce that or tend to be more popular on the East Coast, believe it or not, and so we're looking at that as well .

As I mentioned earlier, give us a couple of quarters to get that up and running.

But that's now up and running, we're making product

Okay.

Is there a way to quantify on the West Coast what percent of sales are for so called next day delivery since we have kind of an idea of what the potential could be?

Wow.

I know you don't have that in front of you, but just--

(Inaudible) that is, but I couldn't give it to you now, so could we try to follow up and give you our best guess on that?

Sure.

All right, next on the Windset agreement I believe on the last call you indicated you felt the cucumbers would launch in November and then further launches six months or so later.

Is that the same time frame still?

Meeting with them tomorrow.

And sorry, but I'll have an update on that.

I don't know of any reason why that staging is any differently, Chris.

That-- I think that's the plan and we're meeting with them tomorrow to reconfirm that that is their plan.

But that's the best we know right now.

Okay.

The last question I related to Lifecore, should we expect kind of gradual sequential growth throughout the next three quarters to sort of get to that $27 million, $28 million, is that a good way to model it?

Yes, it's pretty accurate if you recall we had mentioned at the time that we acquired them.

And one of the things that really excited us is they just had landed a couple of new big customers.

And in one case the customer has to go through FDA, which we hopefully will get approved by the end of this calendar year, which means the second half of the year is really when we'll realize the revenues from that customer.

So you should see some growth in the second quarter and then bigger growth in the third and fourth quarters.

Okay.

And last on that gross margin, obviously was much higher for Lifecore.

Did you still deal with the purchase price accounting issue this quarter, or should we expect gross margins to also go up as year rolls out, I guess is what I'm getting at?

Yes, once we use it all up, which I'm guessing right now, it should be gone by the end of the third quarter.

And Chris we just, for everybody's benefit, I think you're talking about how under purchase price accounting you have to value finished goods inventory when you purchase a company, is that-- that's what you're referring to, correct?

Yes.

Yes, okay.

So yes that is reflected in this quarter and you're saying that accounting in a sense, the influence of that goes away after the third quarter?

Yes and we're half done right now.

The original amount was about $520,000, we're down to about $270,000 at the end of the quarter.

So we've got $270,000 to go over the next two quarters.

All right, that's all I got.

Thank you.

Thanks, Chris.

Thank you.

Our next question comes from the line of Lawrence Goldstein from Santa Monica.

Your question please.

I'd like to ask several different questions, if I may.

Is licensing primarily or totally the Monsanto?

No our licensing business is-- has-- actually there's four licensing partnerships.

Monsanto is one in the field of control relief systems of seed coatings that are applied directly to the seed which carries an active ingredient, and that's a $17 million licensing deal over five years, $17 million in total.

We have a licensing arrangement with Air Products in the field of our materials when used in personal care products, skin lotions, creams, skin colorants, hair sprays, those types of things.

And that's an arrangement where Air Products gets 60% of the gross profit when sales are made and we get 40%.

We have a licensing agreement with a Japanese company called Nitta, Nitta Corporation, in field of adhesives.

And that is a licensing arrangement where we collect a royalty.

And then we have a licensing arrangement with Windset.

And that's the agreement we just talked about where they are using our packaging technology for greenhouse grown, glass house grown hydroponically grown vegetables.

So we have a number of licensing partnerships and we will add to those.

Would you comment then on why the trend has been down annually and again in this quarter?

In the licensing?

Yes.

Well one of the trends-- or the reason it was down at least, and I think this may go back to last year, we used to have a licensing with Air Products that ended.

So that's a piece of it.

Yes, their-- they had a -- Lawrence, they had in the agreement with Air Products the first three years they were giving us license fees and funding R&D, and that was just to get us started.

And the contract was to say at the end of three years then that will stop and then we'll just focus on sales of products together.

And so you're seeing that change year-over-year.

And I guess I'm a little confused in the fact that looking at our licensing line it's actually up.

So what-- maybe you can point to it.

Well it's down year-over-year in this quarter.

And it was down May of this year versus 2009 and versus 2008.

Well the one piece, if you're going and looking back, is the Air Products that ended.

As far as--

And again in the quarter you just commented reporting.

It's Air Products.

It's the-- it's their -- it's the contractual agreement that R&D funding would come to an end after three years and their license fees would come to an end.

So that's the difference.

We're still launching products with them and the partnership is still alive and well.

Okay second unrelated, your packaging arrangement with Chiquita is one of the three major banana producers and sellers Fresh Del Monte and Dole being the other two.

Would you comment on the differences in how they ship to the US and why the other two you're not working with or what the story is?

Okay that's a very fair and good question.

The Chiquita, first of all just let me explain that we're in an exclusive arrangement with Chiquita in the field of bananas and avocados.

As long as they achieve certain minimum purchases, or minimum obligations, under our exclusive agreement we can only work with them.

We're in a period of time where that is looked at and reviewed every year, we sit down and talk about and we decide do we want to keep in that exclusive agreement or not.

If we were not in the exclusive agreement then Landec would be free to talk to others, such as two companies you mentioned.

At the time that we got together with Chiquita, which was several years ago, their-- let me just if I could summarize it basically our sense was is that there were some parts of the banana industry that actually feared our technology.

They were afraid that it would be commercialized and that it would lead to a reduction in waste of bananas.

If you think about it, if one-third of all bananas or 30% of bananas are thrown away and you have packaging technology that extends the shelf life, you could see that some players in the industry might actually not welcome our technology.

Chiquita very innovative, thinking ahead, actually saw that our technology, A could get bananas into locations that were before impossible to get to because the distribution channels were lengthy and too remote and our technology now allows them to get into 7-Elevens and Starbucks and places like that, and Chiquita wanted to do that.

And secondly they also realized that a technology that could preserve a banana in a very good color state, all yellow, green tips, no browning, would actually increase purchases of bananas and expand the market.

So Chiquita really had those insights, they had a CEO that wanted to grow the business, was looking for innovation and that was appealing to us and that's why we joined forces with Chiquita.

How do they ship to the US?

Do they ship in boxes or bulk in a container?

They all ship it the same way.

It's all--

Who all ships the same way?

The three, the three banana companies.

No I believe they do not.

In cardboard boxes, 40 pounds they come up green.

They come into ports of entry, they go to ripening rooms in where they're gassed with ethylene gas for five days.

And so that part of the logistics is pretty consistent among the big three players.

Okay, I think you're missing something, Dole doesn't ship to ripening center at dock side, they are gassed with I don't know [FTO], or what it is, and ripened in a short time and so the warehousing and the transportation is eliminated and the need for inventory is reduced vastly and they ship directly to the markets.

Where are you saying they do the ripening?

Dockside, each container is gassed with a special mechanism, it's produced by [Ballcam] by the way.

We've worked with Dole for other over a year and a half, so we are familiar with Dole.

Right well-- so they have eliminated the need for a warehouse where the ripening process is done.

You see?

Excuse me?

I said okay.

Okay.

I'm just wondering the supermarkets, as I understand it, which is why your product is attractive, want yellow bananas they don't want green.

And your bananas last what, seven, ten days, once they reach the market?

So I'm wondering why you, maybe its a mistake, did a exclusive deal with Chiquita when the other two guys are pretty darn big and locked yourself out of that.

Okay.

Well, I would rather not comment on a good partner that we have.

But we would like to find the opportunity to get in to the retail grocery stores and just view that as the continuing discussion with Chiquita.

And if we're not in an exclusive relationship, we can talk the others, but right now we're in a exclusive relationship.

Does that end-- does that contract, that exclusivity end at some point in time?

It's renewable annually.

It's renewable annually and they have the right to renew it, so they can keep renewing it.

What was that?

Oh I see, they have the right.

And does it apply--

As long as they purchase certain minimum amounts of our packaging.

Right.

Does it apply only to specific fruits, or vegetables or whatever?

It applies only to bananas and avocados and mangos, and those are each separate deals.

We can work with others in other types of fruits, which we are.

Thank you.

Our next question comes from the line of William Lauber from Sterling Capital Management.

Your question please.

Yes, on the R&D numbers I noticed the HA there is pretty hefty part of the overall R&D numbers, is that a pretty good run rate?

Yes, it is.

Yes, it is.

That'll be steady.

Okay, so when you are talking taking R&D up from the $4.4 million to the $9 million, it's probably 80 or so percent of that increase is due to the Lifecore acquisition.

Will, that would be very accurate, yes.

okay.

And the second part I guess going along with some of the earlier questions, it's parsing your language it's kind of like the parsing the federal reserves language, but in last quarter's wording you had add several new licensing partnerships and now it's seems like it's focusing more on the R&D side and just a couple of months time that seems to be a pretty kind of major change, was there something just over the last two months where--?

No we did one with Windset.

So check to that.

We will probably do another but it will probably involve an evaluation and joint testing period before we enter the license agreement.

So I just don't know if that's going to fall into this calendar year or next calendar year.

And the others are in the works.

And you just -- who knows.

They-- it's hard to predict when licensing agreements come together.

So one under our belt, one clearly in the works moving towards this evaluation period and then others in the pipeline.

Okay.

All right.

And then the last is just a comment on the avocados, one of the major chains here is selling them now and although I don't eat them I notice on the counter when I came home one night that I saw the Chiquita label on it and you can definitely tell the difference in the ripeness as opposed to-- and by the way Gary it's not your MBA friend who's selling it so.

Okay.

All right.

Good.

Okay.

Well glad you saw it.

Okay, thanks.

Thanks, Will.

Thank you.

Our next question comes from the line of [Warwick Jarvis] from [Trailhead Asset Management].

Your question please.

Good morning, Gary and Greg.

I got a question--

Good morning.

About can you give us updates on licensing for drug delivery applications with pharmaceuticals?

It's in the works.

We hope to have-- first of all we're definitely going to have to have a partner in that field.

We're not doing that on our own.

We're not going into Phase 1, Phase 2 and Phase 3 clinical trials on our own.

So we-- I'd say it's on the top of our list licensing focus and we need a partner and we want a partner and all I can say is we're in advanced discussions.

Okay.

Second question, in Lifecore you've got a lot of excess capacity there, is there any thought of going into some other products like the animal products area?

We're-- like veterinary applications for HA, you mean?

Yes.

Yes, we are.

I would still put this back in the sky hook department at this point because this is part of the joints team evaluation.

But Lifecore is already a supplier of veterinary products to the, what I'd call, the high end racehorse market the horse market.

Well what about companion animals, I mean how many dogs have we all seen that limp around with various types of ailments, orthopedic ailments.

So we're-- that's on the list.

It seems like it would be a potential candidate for the types of things that HA molecules do do to provide relief in joints.

So veterinary medicine would be an interesting category for us and it's on our target list.

Okay, thanks.

Thank you.

Thank you.

Our next question comes from the line of Morris Ajzenman from Griffin Securities.

Your question please.

Good morning, Morris.

Hi, guys.

You partially answered this question a couple of questions ago.

We're talking about the revenue guidance you've given, the minimum of 15% growth issue versus last and then you speak about Lifecore Biomedical this $6.5 million of this quarter continue to ramp up for the remainder of the year, quarter-to-quarter.

And I was kind of looking for some sort of broader guidance, I know you don't give detailed numbers, but revenues usually sort of high in the second or third quarter, is that going to change in this year going forward as Lifecore biomedical ramps up?

Just give us some sort of idea of how revenue [supplies dates] they ramp up to you from that perspective.

Well recall one of the key seasonal drivers is the export business and --

Were you-- I'm sorry were you talking about only Lifecore or were you talking about Landec consolidated?

Landec consolidated, how will the numbers play out?

I'm sorry, okay.

So within the export business, three quarters of the revenues are recognized in the first half of the year with 25% in the second half.

So you're going to have somewhat of an offset to the fact that Lifecore is going to be building through the year.

When you look at it, historically our second quarter has typically been our biggest revenue quarter, followed by the Q4, and third quarter is somewhere in between and with the first quarter typically being the lowest.

And I think that trend will continue this year from what we're seeing right now.

Fair enough.

Thank you.

Thank you, Morris.

Thank you.

Our next question is a follow-up question from Lawrence Goldstein.

Yes, Lawrence.

When you make these acquisitions and in your various business, do you have in mind the achievement of a particular return on capital on equity and well-- and if so, in success mode, what kind of percentages are you hoping to achieve?

Let me mention to you that certainly we have return criteria in mind when we're thinking about our own plans and goals and when we present them to our Board.

But in terms of our compensation plans, they tend to be steered towards revenue growth, controllable income growth, we use the word controlled income growth because that's pretax and things that are not in control of Management, and free cash flow.

So those tend to be the focus of our compensation plans.

But in terms of returns, we're certainly looking for returns on investment north of 20% et cetera, et cetera.

In terms of return on equity we have not used that as a standard in our compensation plans, it's probably something that we should move towards, and I would acknowledge that that's probably a shortfall on our part at this point.

Well return on capital and return on equity have been virtually identical for sometime now.

Yes.

The contrast is I guess you have to go back to 2007 when you were in the high 20s and even hit 35% one quarter.

Where as now --

Yes, well that's probably-- that was definitely the year we sold Monsanto, so I'm guessing that was a year of the big Monsanto gain.

We sold our seed business to Monsanto.

Yes, need to be a little -- we had some-- well we sold a business for 50 times EBITDA.

So I think--

Yes, but within each quarter was up there in the high 20s, it wasn't just the year.

I think you're message is well taken and understood.

I'm just trying to understand why it is or how come a Company which deals in science and if I can use the word high tech, one would typically find-- and patented and proprietary technology if you will, you typically find much more substantial gross margins to begin with.

And so I'm confused as to why we don't see that here not even in the success years when you had the high returns.

We-- our food business is a different business model, it's a good net margin business, it generates cash flow, it doesn't require much CapEx.

We are moving, as we've said, into areas where there are higher margins.

Lifecore is an example of a high margin business.

The work that we do with our licensing partner such as what we do with Chiquita are very high margin businesses.

So the margin mix is important for us to change over time, and so that is our goal, that's what we're working on and we've taken steps in the last two years to do that.

Well Corporate wise what would you say in success mode you would hope to achieve some day in gross margin percentage?

Well we want to move it to 50% gross margins, but we've got quite a bit of work to do here because of nature-- we take title to the produce in our food business and it's just a different business model.

But certainly we want to move from 20% towards the 50% category.

Lifecore is already there, our packaging business is well north of there.

And as we look to future investments we'll be looking for those types of margins.

So you're saying the 14% to 16%, the 18% gross margins of the last three quarters for example, you think you can virtually triple in success mode?

We would have to transform our business quite a bit from being totally reliant on our food business to having other businesses.

So--

Well is that in the business plan, obviously you would have to do it, but is that the business plan?

No, that's not the business plan, that's our goal.

That's the direction we want to go in, Lawrence.

So--

I don't understand direction you want to go in versus goal.

There are other people I'm sure that want to ask questions here, Lawrence, so why don't we take this offline.

You don't want to answer that question?

I'm not --

Thank you.

(Operator Instructions) And our next question is a follow-up question from [Jarvis Warwick].

Yes, thank you.

Just curious on the stock buyback, is that-- have you put in place sort of an automatic program or is this something at your discretion with blackout windows and so forth?

It's automatic.

Okay.

If the price is at a certain level, they can buy under, I can't remember the rule right now, but you are limited as to how much you can buy in the open market each day based on volume, you can do one block a week, it's all outlined in SEC rules.

And that's--

Right, but this was something-- so you are not subject to the blackout, it's on sort of auto pilot?

Yes.

Within your-- okay, great.

Thanks, great quarter.

Thank you.

Thank you.

Our next question comes from the line of [Steven Rafanovitz] from [Venus Partners].

Your question please..

Good morning.

I just have a balance sheet question.

I noticed that other comprehensive loss on the balance sheet increased above 85%.

Without the benefit of looking at your 10-Q, I'm assuming it's related to the swap that you established on your long-term debt.

Is that--

Exactly.

And is that a trend that's going to continue on a quarterly basis, or given the current yield curve flattening or is that something that's just a hiccup from putting on the swap recently?

I can't answer that until I get a couple of more quarters under my belt as to whether it's going to continue to increase or it's just going to flatten out until LIBOR starts going up.

We're going to have a loss until LIBOR gets in the twos.

Yes I know.

Of course if we just continue to pay it off by the time we get five years out, the swap will have no value.

Okay, I was just curious.

Okay, thank you.

Okay, thank you.

Thank you.

I'm not showing any further questions in the queue at this time.

I'd like to turn the program back to you for any further remarks.

I just want to thank everyone for being with us today and we look forward to updating you on our progress and plans.

Thank you.

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

This does conclude the program, you may now disconnect.

Good day.