Lifecore Biomedical Inc (LFCR) 2011 Q3 法說會逐字稿

Welcome to the Landec third 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.

Please go ahead, sir.

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

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

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

The Webcast is available for 30 days through April 29, 2011.

A replay of the teleconference will be available for one week until midnight Eastern Time Wednesday, April 6, 2011 by calling 888-266-2081 or 703-925-2533.

The access code for the replay is 151-7693.

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 2010.

As announced in our third quarter earnings release, we increased revenues 26% and net income 33% during the third quarter 2011.

Our Lifecore biomaterials subsidiary had a very good quarter with revenues of $12.2 million generating $6.8 million of gross profit, resulting in a gross margin of 56%.

Overall in the third quarter, Landec's consolidated gross margin increased to 17% from 14% in a year ago quarter.

Notably during the third quarter, Apio purchased $15 million in senior preferred shares in Windset Farms.

The investment represents a 20.1% equity ownership by Apio and Windset.

We view Windset as the most advanced greenhouse operator in North America using hydroponic growing practices.

The demand for greenhouse grown varieties is rising rapidly.

The hydroponic processes uses no soil and a fraction of the water required in fuel production while benefiting from higher yields per acre without traditional weather-related or soil-borne risk.

Windset has recently purchased 222-acres of land in Santa Maria Valley of California, just five miles from our Apio operations.

Windset is currently constructing 64-acres of greenhouses for numerous varieties of high value, hydroponically grown tomatoes, and this project will be completed late this summer.

The non-voting senior preferred shares will also yield an annual cash dividend of 7.5%.

In addition, over the period of its minority interest ownership in Windset, Apio will recognize quarterly 20.1% of the change in the fair market value of Windset.

Also under the terms of the agreement, Apio is represented on Windset's Board.

As you may recall, in July 2010, Apio and Windset entered an exclusive licensing agreement for Windset to use Landec's proprietary breathable packaging to extend the shelf life of certain Windset greenhouse grown vegetables.

We are excited about Windset's prospects and our ownership position as it is a good financial investment and we share numerous strategic common interests.

In our Apio food business, prolonged cold and wet weather continued to adversely impact produce sourcing.

For those of you living on the West Coast, you know that Northern California, Southern California, Arizona and Mexico, all the major growing areas for vegetables have experienced torrential downpours and flooding, as well as unusually cold weather since November of last year.

Fields are flooded, produce yields are way down, as is produce quality.

While we're not in the farming business, we need significant quantities of high quality vegetable products to supply our value-added retail and club store customers.

In the 12 years we have owned Apio, we have never experienced adverse weather of this magnitude, and the weather related produce sourcing issues have continued through March.

At this time, we are unable to estimate the full year adverse impact of our results from weather related produce sourcing issues.

However, we do know the impact will be higher than our previous full year estimate of $3.5 million.

Through the first nine months of our fiscal year, the negative impact on gross profit from weather related produce sourcing issues is $4.6 million.

We also know that the impact of net income is partially mitigated by the better than expected results from Lifecore -- from the Lifecore business and from the Apio export business.

However, as a result of not being able to predict the weather for April and May, nor the corresponding produce yields from fields that we expect our growers to harvest in the next two months, it would not be helpful to anyone at this time to declare new earnings per share guidance, other than to state we believe our earnings per share should show growth over last year's earnings per share of $0.29, but will probably fall short of the lower end of our recent earnings per share guidance for fiscal year 2011 of $0.34.

It should be noted that last year's earnings per share of $0.29 is after excluding the non-recurring charges that we experienced in fiscal year 2010.

Let me turn a discussion of financial results over to Greg.

Thank you, Gary and good morning, everyone.

In yesterday's news release, Landec reported for the third quarter of fiscal year 2011 revenues increased 26% to $73.5 million versus revenues of $58.1 million 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 the $12.2 million in Lifecore revenues and from a $3.7 million, or 43% increase in Apio's export revenues.

This growth was partially offset by a slight decrease in revenues for Apio's value-added fresh cut vegetable business as a result of weather related produce sourcing issues.

For the third quarter of fiscal year 2011, Landec's net income increased 33% to $2.3 million, or $0.09 per share compared to $1.7 million, or $0.07 per share for the third quarter of last year.

The increase in net income during the third quarter of fiscal year 2011 compared to the third quarter last year was due to the $4.2 million of net income before taxes from Lifecore.

This increase was partially offset by a $2.4 million decrease in Apio net income before taxes primarily due to produce sourcing issues and Apio's value-added business and from a $917,000 increase in operating costs at corporate primarily due to the increase in stock based compensation expenses and higher accounting and tax service fees.

For the first nine months of fiscal year 2011, revenues increased 16% to $208.6 million versus revenues of $180 million for the same period a year ago.

The increase in revenues during the first nine months of fiscal year 2011 compared to the first nine months of fiscal year 2010 was due to $27 million of revenues from Lifecore and a $7.1 million increase in Apio's export business.

This increase -- these increases were partially offset by a $3.3 million decrease in revenues in Apio's value-added business and a $2.1 million decrease in Apio's domestic buy/sell business, which it completely exited during fiscal year 2011.

For the first nine months of fiscal year 2011, net income increased 22% to $6.7 million, or $0.25 per share compared to net income of $5.5 million, $0.20 per share for the same period last year.

The increase in net income during the first nine months of fiscal year 2011 compared to the same period last year was due to the $7.7 million of net income before taxes from Lifecore.

This increase was partially offset by first, a $3.4 million decrease in Apio net income before taxes.

Second, from a $2.6 million increase in operating costs at corporate and Landec Ag and third, from a $662,000 increase in income taxes.

Turning to Landec's financial position, during the first nine months of fiscal year 2011, the Company generated $12.4 million of positive cash flow from operations, a 76% increase over the same period last year and ended the quarter with $38.4 million in cash and marketable securities.

For the first nine months of fiscal year 2011, capital expenditures were $4.9 million and depreciation was $3.9 million.

Gary?

Thanks, Greg.

Let's discuss the substantial progress we have achieved in the third quarter and our outlook for the Company overall.

As mentioned earlier, we completed our equity investment in Windset, and we are optimistic that we will realize an attractive return on this investment over time.

Lifecore and management team continue to perform well and exceed their plan.

Lifecore's polymer based materials are directed towards ophthalmic, orthopaedic and veterinary medical applications which tend to result in higher margin sales.

There have been substantial productivity yield gains made in the HA manufacturing process at our Lifecore facilities in Chaska, Minnesota.

We are expanding our customer base at Lifecore and we have identified new investment opportunities in the HA biomaterials arena.

We are optimistic that over time we will develop strategic and financial synergies by joining Landec's capabilities together with those of Lifecore.

We should point out as disclosed in yesterday's release that during the third quarter of fiscal year 2011, the quarter we're reporting on, certain Lifecore orders planned for the fourth quarter of this year were filled and shipped at customers' requests during the third quarter, resulting in the exceptionally strong third quarter for Lifecore in revenue and sales mix.

Because some orders planned for the fourth quarter were shipped during the third quarter, we are currently projecting for the fourth quarter that Lifecore revenues will be approximately $5.5 million and that Lifecore will generate a net loss of approximately $600,000 as a result of product volume and sales mix.

Overall, Lifecore is having an excellent year, exceeding both its revenue and net income plan, and we are pleased with this acquisition.

In the licensing area, Chiquita is finding success with the continued rollout of its fresh and ready Avocado's using Landec's BreatheWay packaging which are providing substantial reductions and retailer shrink and double digit sales increases for the retail programs in the program.

As word spreads and as retailers begin to see the economic benefits, this program is expected to gain momentum.

In our work with Monsanto, the program has moved to biological experiments and trials using our Intellicoat seed coatings as a control released delivery system for seed protection.

For the industry, the business of applying crop protection chemicals to seed is growing rapidly and now represents $1.5 billion in annual sales as more companies in the ag field work to apply fungicides and insecticides directly to the surface of seeds.

Our approach for using our functional polymers to release small molecule crop protection active materials is unique, and it's proprietary.

Our five year licensing agreement with Monsanto ends in December of this year, and we are collectively focusing our efforts with Monsanto over the next three quarters to determine how to proceed beyond that date.

Regarding our air products collaboration, recall that Landec receives 40% of gross profits from product sales to the personal care cosmetic industry for ingredients that include our Intelimer polymer materials.

Our focus for the past year has been on expanding our penetration of ingredients in lotion and cream product lines, and Landec's additives are now found in nearly 50 products under numerous well-known brands.

An upcoming major milestone for our joint efforts in cosmetics is the launch of a new cosmetic product line based on Landec's Intelimer polymers at the in-cosmetics show in Milan, Italy in April.

Over the past year, we have investigated new areas for licensing our technology, and we recently entered into an exclusive technical evaluation agreement in the area of drug delivery.

During the evaluation period of program, we will learn where, if at all, our materials add value into delivery of therapeutic drugs to humans.

We're cautious about this area since pharmaceutical companies seem to be becoming much more hesitant about new investments that require potentially new clinical studies and FDA review.

As many of you know, the FDA process is becoming much more difficult, costly and time consuming.

Bottom line, we are making substantial progress in our core businesses and with our licensing partners.

Looking forward, we are focused on two strategic directions for building Landec's future and shareholder value.

One within the food business and the second for polymer opportunities outside of the food arena.

Within the food business, we are working to diversify and broaden the applications of our packaging technology and build on our leading market share position and value-added fresh cut vegetables.

We are building on our success at Apio using our technology, our market leadership position and our existing channels of distribution in the pre-cut produce market to pursue higher margin product lines and new BreatheWay packaging opportunities.

Example of the broadening and diversification efforts include the work with Chiquita with bananas and avocados and other tropical fruit targets, the licensing and equity agreements with Windset for greenhouse grown vegetables and ongoing R & D efforts for using our proprietary BreatheWay packaging and other shelf-sensitive vegetables and fruit.

This diversification can lessen the impact of exposure to adverse weather as we're experiencing this year on certain product lines and provide new growth at higher margins for added product lines.

For polymer material opportunities outside of the food arena, we are focused on finding and acquiring a business with existing product and market applications that can be significantly enhanced or differentiated by using our polymer materials technology.

Our experience has shown that we have successfully combined our material science capabilities with three existing companies that we acquired, Apio in food, Fielder's Choice Direct in seeds and recently, Lifecore in the biomaterials arena.

We find that we can create value faster when we combine our material science capabilities with an existing company that already has market presence and established customer relationships and where that company can benefit from our polymer technology.

Landec applies its material science capabilities to enhance and differentiate the Company's products and the acquired company provides the marketing and sales capability and the existing customer base.

Our track record is pretty good for doing this.

Accordingly, our new M & A search continues to focus on opportunities where we can accelerate growth for our products and technologies in higher margin areas.

We have an investment banking firm that is engaged in helping us find targets, and this firm is working closely with our VPs of Business Development at Landec Molly Hemmeter and our VP of Business Development, Rick Curtis at Lifecore.

We will keep you apprised of our progress regarding growth opportunities for both our food and polymer technology business.

In summary, our three core businesses, the Apio food packaging business, the Lifecore biomedical materials business and the licensing business continue to advance.

In addition, we're making good progress in these two new strategic directions to broaden our food business and to acquire another high margin growth business for our polymer technology.

Our efforts and focus are aligned with our stated goal to increase revenues and profits by continuing to shift revenue mix to higher margin businesses while growing each core business.

Thank you for your time, and we would love to have your questions.

Our first question comes from the line of Tony Brenner from Roth Capital Partners.

Your question, please?

Thank you.

Good morning.

Good morning.

I'd like to pursue the Monsanto issue, if I could.

It seems like Monsanto will not have had an opportunity to conduct field tests using your technology.

Are you discussing with Monsanto the possibility of extending the trial period or option period beyond December?

Good and fair question, Tony.

We're meeting with them next week.

They have been telling us that they can still work with the December 1 date, and that has been a consistent message from them.

I would not be stunned, nor would you if, as we get closer to that date, that they ask that question, so we would certainly consider it.

But at this point, they feel that what's critically important for them is these, what's called glass jar trials, which are large scale, they're in laboratories and in greenhouses, they're not in the open field.

And they can do tests such as introducing aphids and things like that and see if the kill rates are the types of protection that you would want to have in our control release system.

They also think that they will get in some limited field trials before December 1.

So, so far they're telling us, and we've asked, they're telling us that they can work with the December 1 date, but I, like you, would not be stunned or surprised if they did ask for more time as we got closer.

We would really like to get clarity by December 1.

That's our strong preference.

Are you talking with other potential partners in the event that Monsanto chooses not to exercise its option?

We're talking to other potential partners and other agricultural application areas because we have an exclusive partner with Monsanto, but those other companies also have interest in the same field as Monsanto.

It's just that we're not at liberty to talk about any of the work that we're doing in the control release field with Monsanto because that's confidential and proprietary.

But yes, we are talking to other companies so that in the event that for whatever reasons, Monsanto chooses not to go ahead, it's not a conversation that's starting from scratch.

I see, and last question.

Let's say Monsanto chooses in December to exercise its option, pays you $10 million.

How significant -- and you continue to supply the technology to Monsanto.

How significant a stream of revenues would that produce, and how long will it take you to scale up to be able to do that?

I think that realistically, after December 1, there's still a year to two years of development.

You'd have to scale up the coating process, Tony, from a small scale to a large scale.

I'm sure they would want to do more extensive field trials, et cetera, et cetera.

So, I think there's more work to be done there.

We would certainly be asking for them to fund our work beyond December 1 if that's the path we're going , and we would use that time to enter into and negotiate a definitive polymer supply agreement so that we're very clear on the margins and the income that we would be making from this commercial relationship.

I have a feeling that we would also intensely be working with them on further targets that most likely would include soybean, corn, cotton and canola.

So anyway, I think you would use that one to two years to really get all that nailed down and then go

So, beyond that initial $10 million payment you're getting $5.4 million annually, there's a license fee, so it's reasonable to think that initially that goes down?

No, the license fee ends December 1.

I understand, but now you're getting that.

So in the interim one to two years, that stream of revenues however, until you are able to scale this up significantly, is likely to decline, is that fair?

Absolutely.

It will be somewhere between zero and just getting R & D fully burdened reimbursements for any effort that we have.

So, that gap between December 1 and commercialization is you no longer have the license fees, but you do have -- we would hope to have and expect to have R & D reimbursement.

Okay, thank you.

Thank you.

Thank you.

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

Your question, please?

Good morning.

Good morning.

Looking at the Lifecore business, I think you stated that you've identified some new customers as well as you've identified some new opportunities.

I was wondering if you could expand on that a bit and give us an indication onto your visibility into 2012 and whether you look at that as a growth business that year?

We look at 2012 as a growth year for us with Lifecore.

Some of the investments that Lifecore's made in terms of building new relationships will start to come to fruition in 2012.

I'd rather not comment on the specific customers or the programs, but Chris, what I will tell you is that, and this is not going to come as a surprise to you, but when we bought Lifecore we said let's, pardon the expression, let's look for the low hanging fruit, let's look for the new customers in the ophthalmology space that can use and benefit Lifecore's viscoelastic materials and sterile filling capabilities.

So you do that first, and then let's look for some new opportunities, and that's where the combination of Landec and Lifecore skills can come together.

But those are probably two or three years down the road.

And we're also identifying thought leaders primarily in North America that are in universities and clinical settings that are experts in the HA, or hyaluronic acid arena, and we're starting to make those relationships so that the three to four and five year timeframe is covered as well.

So, there's a stage plan to keep Lifecore growing, and they've exhibited this year.

You may recall, Chris, that when we bought them in May, we sent out a press release and said we thought that they would grow revenues from $20 million to $28 million.

Well, they are certainly going to beat that.

And we thought they were going to grow EBITDA from $2.9 million to $7 million to $8 million, and they are certainly going to beat that this year.

So, they're exhibiting the ability to execute on their plan and to surpass our expectations, so we hope that will continue.

Okay.

Shifting gears on the Apio export business, can you kind of walk us through exactly how that works?

Because the growth rates there have really been volatile, a negative 30% plus 40% this quarter, and I'm just trying to understand that business a little bit better.

It's complex.

On a quarter to quarter basis, you can get a little whiplash here, so I wouldn't get too worried about that.

But generally, often when there's tight supplies as we've been experiencing here in the West Coast, I mean, extremely tight supplies, they benefit from higher prices, and so they get some price benefits.

Greg, do you want to add to this at all?

No, it's a supply business Chris, and as we've said in the past, typically, three quarters of their revenues and profits occur in the first six months of the year, and then it drops off and the second half because there's no fruit to export and that's their primary product.

Broccoli tends to be tight in the second half, and they just happened to have, as Gary just said, a good quarter, mainly as a result of tight supplies which resulted in higher prices.

Okay, and obviously you're able to get your hands on enough supply to meet that demand.

Yes, but as you know, everything is extremely tight in our business these days, and the industry has really been suffering accordingly, but they're having a good year.

We -- to not get whiplash, we watch them closely on an annual basis because we know they have some quarterly and seasonal -- seasonality.

Okay.

On the core Apio fresh cut vegetable business, I know its been really tough on the supply side of things, but how has consumer demand been, or is it hard to evaluate due to shortages even at the store shelves, or how should we look at that?

Yes, there's so much noise, Chris, I'm really a little worried about giving you numbers because the noise is so much affected by tightness of supply.

But in general, the category in '09 and '10 was down 10% in terms of unit volume, the industry category.

And as you recall, we were holding flat and taking share.

Basically what I could tell you is that this -- it's basically somewhere between flat and a couple of percentage points down this year, so it's not the 10% down, but I couldn't tell you how much of that is supply issues and consumer demand issues or whatever.

It's really -- there's too much noise to really read a lot in that, so I'd be hesitant to say anything more.

Okay, last question.

On the avocado fresh and ready rollout, do you have an ACV or distribution percentage for the end of the quarter and where it was three months ago?

No, I don't.

The last quarter we mentioned that they were in 1,500 stores, that they were getting double digit velocity improvements in each of those stores, that the shrink was going down, and we have not received an update for this quarter.

But everything we hear from them in terms of qualitatively, not quantitatively, is that it's proceeding really well, and their rollout seems to be going from the East Coast West.

So, they're not out on the West Coast yet, but they seem to have their sourcing aligned although in California, there's sourcing issues for avocados as well because everybody has been hit by this weather, and they seem to have their four ripening centers up and running.

So, I would suspect by next quarter we'll have a pretty definitive and quantitative update for you, but it looks like it's going well.

Okay, thank you.

That's all I've got.

Thanks, Chris.

(Operator Instructions) Our next question comes from the line of Warwick Jarvis from Trailhead

Good morning.

Good morning.

I wonder if you could give us some additional information about the gross margins in tomatoes compared to the Apio business?

Fair question.

The -- substantially higher is the short answer, and Windset has a very enviable position in that it tends to have a price premium in the marketplace.

As a matter of fact, I'll go on to tell you that one of the long list of reasons why we wanted to make this investment was that the 64-acres of greenhouses that are going up right now are already pre-sold.

It's already sold out.

But Windset is really sensitive about talking about their gross margins, but let me just tell you that it is appreciably higher than Apio's gross margins at this point and tomatoes -- of all their products line, tomatoes is one of their highest.

So, forgive me for not being more specific, but I want to protect their confidentiality, but their margins are quite attractive.

Thank you.

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

Good morning, Will.

Good morning.

How does the situation with Monsanto play into your acquisition plans?

It looks like if they would buy you out that you could basically, probably by that time eliminate the long term debt, so how would that play out with your acquisition plans, whether they bought that out or not and how you would finance going forward?

And I guess what rate is that debt at now, and have you looked into what you could get if you put it to more debt?

Yes.

The debt we took, as you know, was related to the Lifecore acquisition.

We felt that even though frankly we could have bought the company with cash, that we had very favorable terms from Wells Fargo, 4.2%, five year fixed term loan, and we had a lot of hard assets at Lifecore that was attractive to Wells, and that's why we got such a good deal.

Just so you know, if Monsanto decides to go forward -- and by the way, I'm there next week Will, I'm hoping that when we look at all of the data together, we'll all arrive at the same conclusion in the same way.

That's what you would hope for.

I wouldn't expect there to be one party saying oh, it's great and the other party saying it's lousy.

So anyway, there are changing players at Monsanto, and that's one of our concerns is to make sure that we know who the decision makers are and all that.

The science is going well.

You just have to let the biology tell us how well it's working in practice.

But anyway, if they decide to go forward, they write a check for $10 million and if they terminate, they write a check for $4 million.

We're not -- our thinking is in terms of searches for new acquisitions et cetera.

We're not affected -- we're not even thinking about whether it's $10 million or $4 million.

It really isn't materially affecting our thinking in our approach.

Our challenge here is finding good targets.

So, on the Monsanto side, certainly $10 million is better than $4 million, but it's not affecting our thinking.

While I'm talking about the M & A search, I'll just tell you that it's a challenge out there to find a company that frankly is like Lifecore.

We would like to have another Lifecore, and most of the targets tend to be "one year away from profitability", which is not appealing to us, and -- or they're too early stage or they are tired and kind of been around the block too many times.

So, that's why you get professional help and that's why you have to be persistent and patient, and these searches typically take about a year.

But I don't know if I've answered your question, Will, did I?

About Monsanto?

I guess a little bit of that, but to say everything goes well on December 1, Monsanto exercises that, you get $10 million, are you going to put that into short-term treasuries, or would you pay down the long term debt?

And I guess I don't know if this is a question for Greg or not, but have you --

Yes, I'm turning to Greg as you ask.

What kind of rate you could get now, has that changed materially from that 4.2% that you got, I guess it was about a year ago or so?

Well, let me -- I'll answer your last question first.

The rates have stayed pretty steady.

I think we could get something very similar, at least in the near term.

Obviously, the Fed is talking about increasing rates, or at least the experts out there think the rates are going to go up, and obviously the banks will follow course.

But as of today, the rates are almost identical to where they were a year ago.

As far as what we do with the $10 million, at this point, to fix the term of our loan for Lifecore, we entered an interest rate swap and at this point in time, the swap is actually an unrealized loss.

So, if we were to pay it off early we would be recognizing a loss from paying down that debt, so given that, and unless that changes between now and December, we would probably put it into munis or marketable securities.

Let me also mention, Will, that we haven't we're just beginning our budgeting and planning process for next year, but I can't -- we haven't even gotten too far in that, but I can tell you that one of the goals for next year is to generate significant free cash flow, and one of the ways we're going to do that is we will not need as much CapEx next year.

We've expanded our Apio facilities, we've improved it, we've made productivity gains.

So, I really see us not requiring as much CapEx next year and therefore, I think that with growth and increased profitability and lower CapEx, we'll also be generating a fair amount of free cash flow next year.

And my final question is on the Windset, the 7.5% annual cash dividend, when does that hit, and would that be just 7.5% of the, I guess the -- was it $15 million?

Yes, it's 7.5% of the $15 million.

It's an annual cash dividend.

It's due within 90 days of the anniversary date, so it must be paid prior to May 15 each year.

I'm sorry, what was that date again?

May 15, 90 days after the anniversary date of entering into the agreement.

Okay, that's it for now, thanks.

Thank you, Will.

Thank you.

Our next question comes from the line of Rick Fetterman from Fetterman Investments.

Your question, please?

Hi, Rick.

Good morning.

I just -- all my questions were answered except for one.

The increase in operating costs at corporate you'd mentioned were due to stock based compensation, R & D and then increase in accounting and tax service fees.

Are those particular increases permanent, and can you quantify them?

No they're not -- yes I can and no, they're not permanent.

We--It had been quite a few years since we had issued any stock options to senior management and it was time to do that.

But probably the bigger numbers were, what we found, Rick, is that when you have an acquisition, that year you're going to be spending more on tax issues and accounting issues.

They are complex.

You want to get the accounting right, you want to make sure that you've got the proper inventory valuations, et cetera, et cetera.

So, in a year in which we do an acquisition, you're going to see that number jump up.

In a year that we don't do an acquisition, you're not going to see that jump, so it really is a function of activity.

So, it's not a steady state.

It just depends on transactions, really.

Okay.

Could you care to quantify what the increase in the accounting portion was?

Greg?

Yes, year-over-year it's about 40%.

40% of the total from the year before.

We expect that to decrease next year, and we do not expect -- obviously, R & D is a function of heads, so we don't expect it to increase at the rate that it increased this year, but it's going to stay relatively flat, and stock based compensation should also not increase.

It will stay relatively flat.

So, when you look at it year-over-year, two of them will stay flat in FY '12 and accounting and tax fees should go down.

I want to just make sure that -- I heard what Greg said, but if we're doing another acquisition, it could affect that.

Also, Rick, we did this investment in Windset Farms which is a Canadian based company, and there were-- we had to be very diligent about tax issues there and so that explains the -- much of the tax increase.

So, it really is transaction related, and it's not any permanent increase.

Thank you very much.

That's all I've got.

Thank you.

Thank you.

(Operator Instructions) Our next question comes from the line of Morris Ajzenman from Griffin Securities.

Your question, please?

Good morning, Morris.

Hey, when we got Lifecore acquisition back, I think was May of last year, you'd stated that they had revenues in calendar 2009 of $20 million and you were guiding us to $26 million to $28 million and you guided to EBITDA of approximately $7 million to $8 million.

As this year comes to a close in the guidance you gave us in the fourth quarter, that revenue is going to be $32 million to $33 million and on a net income basis, you're going to earn $7 million.

I'm not sure how that exactly lines up with the EBITDA guidance you gave us, but it looks like a little better.

Can you give us any guidance?

Clearly, top line came along better and you were saying that's a rocky year.

Any guidance for next year, what sort of growth you will see there?

And basically, the net margins this year will work out to about 21% to 22%.

Any help you can kind of give us looking out to next year, how you see Lifecore moving on?

Boy, Morris, I would be doing you and everybody else a disservice.

We certainly would expect continued growth, but we haven't even begun to do the planning and budgeting process, and I think I would just be doing you a horrible disservice to go beyond that.

So no, I'd rather not give any guidance at this point, but I would like to do that in the next earnings call.

I just think it's premature.

We've got to sit down with the team.

They're just starting their budgeting and planning process, but I don't see them going backwards.

I certainly see them going forwards.

Thank you.

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.

We want to thank everybody for being with us today on this earnings call and really appreciate your being a part of this discussion.

Many thanks.

We look forward to keeping you updated.

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

This does conclude the program.

You may now disconnect.

Good day.