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Operator
Good day, ladies and gentlemen, and welcome to the Landec first-quarter fiscal year 2012 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.
Gary Steele - Chairman, President and CEO
Good morning, and welcome to Landec's first-quarter fiscal year 2012 earnings call.
I have Greg Skinner, our Chief Financial Officer, with me.
This call is being webcast by Thomson CCBN, and can be accessed at Landec's website at www.Landec.com, on the Investor Relations page.
The webcast will be available for 30 days through November 4, 2011.
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 1551099.
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 2011.
As reported in yesterday's press release, for the first quarter of our fiscal year 2012, revenues increased 13% to $73.3 million, up from $65 million during last year's first quarter.
And net income was $1.8 million compared to $2.3 million during the first quarter last year.
Notably during the first quarter, Apio, our technology food business, increased revenues by 13%, driven by an 8% increase in revenues from Apio's value-added fresh-cut vegetable business and a 30% increase in our export revenues.
Overall during the first quarter of fiscal year 2012, Landec's financial position continued to improve and strengthen.
We generated $4.4 million in operating cash flow, paid down $1 million in debt and added $3.1 million to cash and marketable securities, which ended the quarter at $39.4 million in cash and marketable securities.
In addition, between September 22, 2011 and October 3, 2011, the company purchased on the open market under its stock buyback plan, 604,768 shares of common stock at a total cost of $3.3 million.
While net income was lower during the first quarter this year compared to the same quarter last year, we exceeded our internal plan for the quarter.
We are tracking well towards meeting or exceeding our financial guidance for fiscal year 2012, a 5% or better revenue growth and 30% to 40% net income growth after adding back the one-time impairment charge of $4.8 million to net income for fiscal year 2011.
Also in the recent quarter, Chiquita informed us of its decision to renew and extend the licensing and distribution agreement with our food subsidiary, Apio, for an additional five years, thus maintaining Chiquita's exclusive right to use our BreatheWay packaging technology for existing programs with bananas, avocados and mangoes, and adding selective shipping container applications to the agreement.
We are very pleased to continue working with Chiquita, one of the global market leaders in tropical fruit sourcing, distribution and marketing.
Chiquita has a sizable shipping container technology business that fits well with Landec's long-term interest in using modified atmospheric technology for preserving produce during global transport.
Our agreement with Chiquita includes guaranteed minimum purchases of BreatheWay membranes for all fields in which Chiquita has exclusive rights.
Let me turn to Greg Skinner for detail of our results.
Greg Skinner - CFO, VP-Finance
Thank you, Gary, and good morning, everyone.
In yesterday's news release, Landec reported total revenues for the first quarter of fiscal year 2012 of $73.3 million versus revenues of $65 million for the first quarter of last year.
The increase in total revenues through this year's first quarter compared to last year's first quarter was due to a $3.2 million increase in value -added fresh-cut vegetable revenues at Apio, primarily driven by the growth of the overall produce category and new product introductions, and a $4.9 million increase in Apio export revenues due to greater availability of fruit to export.
For the first quarter of fiscal year 2012, the company reported net income of $1.8 million or $0.07 per share compared to net income of $2.3 million or $0.09 per share for the first quarter of last year.
This decrease in net income during the first quarter of fiscal year 2012 compared to the first quarter of fiscal year 2011 was primarily due to, first, a $348,000 decrease in gross profit for Apio packaging because of lower BreatheWay packaging sales to Chiquita compared to the initial large order of BreatheWay packaging for avocados to build inventory that occurred during the first quarter of last year.
Second, a $280,000 decrease in gross profit for Lifecore from a product mix change resulting from the timing of shipments of aseptically filled products versus fermentation products, which reduce Lifecore's gross margin to 38% for the quarter, compared to Lifecore's expected gross margin of approximately 50% for all of fiscal year 2012.
And third, a $493,000 decrease in operating income due to higher operating expenses.
These decreases in operating income were partially offset by $281,000 in accrued dividend income from our preferred stock investment in Windset Farms and a $242,000 reduction in income tax expense due to lower pretax income.
Turning to Landec's financial position, during the first quarter of fiscal year 2012, the company generated $4.4 million of positive cash flow from operations.
Overall cash and marketable securities increased $3.1 million during the first quarter of fiscal year 2012 to $39.4 million.
Gary?
Gary Steele - Chairman, President and CEO
Let's talk about our priorities for this year and next year.
The first priority is to grow to Lifecore revenues and earnings by adding new customers and expanding product sales to existing customers based on Lifecore's strength in ophthalmology and the production of viscoelastic materials, along with our new sterile filling capabilities.
Plus we are investigating new applications for hyaluronic acid in the form of new medical devices and/or as additional adjuvant therapies.
Lifecore is adding several new customers and introducing several new products to existing customers this year.
Lifecore has a track record of retaining customers as our bio materials are specified into customer FDA filings and their manufacturing processes.
We see Lifecore continuing to realize an overall gross margin of 50% or more and EBITDA margins of around 30%, though both may fluctuate quarter to quarter.
Second priority is to grow our Apio food business and maintain Apio's margins by demonstrating superior product quality and customer service while continuing to develop new innovative products and enhancing operating efficiencies.
We are developing several new specially package product platforms for launch beginning in the spring of 2012, which will significantly broaden our product line and help increase margins over time.
The future growth of our Apio food business will come from continuing to increase market share, introducing new products, and from increasing sales of BreatheWay packaging to fruit partners, similar to what we are doing in bananas, avocados, mangoes, and in greenhouse-grown cucumbers, peppers and tomatoes.
Third, we want to support Chiquita with its rollout plans for avocados and with the shipping container program which is currently in testing.
We estimate there are 7 million produce ship container trips each year globally and roughly 0.5 million of those trips are attempting to use expensive and logistically difficult-to-handle controlled atmosphere approaches, which involve installing bottles of oxygen and CO2 and the related manpower that is required to handle those bottles and to adjust the gas levels during transport.
Our BreatheWay membrane technology approach could greatly simplify and lower the cost of establishing a modified atmosphere within the container, and this would hopefully expand the market as well.
Fourth priority, advance our controlled release technology for agricultural applications and initiate discussions with top seed treatment, fertilizer and crop protection companies in order to assess the interest in our Intelimer and Intellicoat technology within the ag industry.
During fiscal year 2012, we are advancing our work in ag applications to determine the level of interest and potential new partners and to gauge the likelihood of entering into collaboration with one or more of these ag companies.
We are pleased that interest from leading ag companies so far appears to be high.
Fifth priority, continue to invest in polymer chemistry R&D.
Our R&D for fiscal year 2012 is expected to be a little over $9 million, as it was for fiscal year 2011.
The level of R&D spending in fiscal years 2011 and 2012 is primarily driven by support for our core Lifecore and Apio businesses, as well as the advancement of our technology licensing business for underwriting future new licensing opportunities.
Our current and past investments in R&D are the basis for our progress in packaging, coatings, additives and control release systems.
A sixth priority is finding new applications for our BreatheWay packaging technology, such as the work that we are doing now with Chiquita for transporting fruit globally in containers using the BreatheWay technology.
For seventh priority is finding new investment opportunities for growth and margin enhancement by identifying potential investment targets that have technology in commercial products that are synergistic with our polymer and biomaterials technologies.
An example of our search for new investments is our $15 million investment in Windset Farms this past February, which results in Landec owning 20% of Windset and receiving an annual dividend equal to 7.5% of our investment.
Windset Farms is a market leader in hydroponically-grown produce.
And the hydroponic process uses no soil and only 1% of normal water use.
It is sustainable for year-round growing operations and harvesting operations.
And it provides consistent quality, and for Windset, premium-price produce.
Windset's first commercial sales of tomatoes from their new California greenhouses will start next month, just seven months after starting the construction of 64 acres of greenhouses, along with a very large processing facility and water treatment plant.
Windset's California facility, only a few miles from Apio's facility -- we are finding a multitude of collaborative opportunities, ranging from packaging and sourcing to new potential varieties of produce.
Last but not least, we want and plan to maintain a strong balance sheet.
We currently have $200 million in total assets and nearly $40 million in cash.
We expects to continue to generate substantial free cash flow by increasing cash flow from operations this fiscal year.
In summary, we are expanding our R&D to take advantage of potential growth opportunities that are projected to shift our revenue mix to higher-margin businesses, accompanied by increasing free cash flow.
We are ready for your questions.
Operator
(Operator Instructions).
Tony Brenner, ROTH Capital Partners.
Tony Brenner - Analyst
Thank you.
First of all, I wonder if you could break out the Apio packaging revenues within that Apio value-added category?
Greg Skinner - CFO, VP-Finance
They were relatively small this quarter -- I think slightly over $0.5 million.
Gary Steele - Chairman, President and CEO
Last year?
Greg Skinner - CFO, VP-Finance
Last year they were about double that.
Gary Steele - Chairman, President and CEO
For the quarter?
Greg Skinner - CFO, VP-Finance
For the quarter.
It was the initial launch of avocados.
Tony Brenner - Analyst
Okay.
Gary Steele - Chairman, President and CEO
You were talking about for the quarter, right, Tony?
Tony Brenner - Analyst
Yes.
And on the new Chiquita license agreement, you mentioned there are minimum payments.
Is that minimum payment in excess of the previous agreement?
Greg Skinner - CFO, VP-Finance
No.
Gary Steele - Chairman, President and CEO
No.
Tony Brenner - Analyst
I'm sorry, no?
Greg Skinner - CFO, VP-Finance
No.
Gary Steele - Chairman, President and CEO
No.
Tony Brenner - Analyst
Okay.
And is it cost in for five years or does it increase or decline?
Greg Skinner - CFO, VP-Finance
It's constant.
It's an extension of what we currently have.
They had an option to extend our current agreement five years unilateral to exercise that option, or they've told us they're going to exercise (multiple speakers)
Tony Brenner - Analyst
Okay.
And are sales currently in excess of that schedule or lagging?
Greg Skinner - CFO, VP-Finance
Well, kind of -- I think it depends a lot on the new addition of the container concept, on whether it will exceed the minimums in the banana area.
I mean as you know historically, or at least since it's kicked off, they've exceeded the minimums in avocados almost from day one.
Tony Brenner - Analyst
Okay.
And second, SG&A as a percent of sales and sequentially has declined despite what is cited in the release as higher sales commissions for Apio, as well as various bonus accruals.
I'm wondering what the reason for that is and might that be true for the full year?
Greg Skinner - CFO, VP-Finance
It might be true for the full year, but the majority of that expense is G&A, which has no correlation to revenues.
So even if revenues go down and your G&A is going to have really no correlation.
The correlation to revenues is really commissions and brokerage.
Tony Brenner - Analyst
Okay.
So it was 8.2% in the quarter, which is the lowest it has been in a while as a percent of sales.
And you are suggesting that $6 million figure or 8.2% of revenues is unreasonable projection?
Greg Skinner - CFO, VP-Finance
It's not unreasonable; it's just that, as you know, there's really no correlation between G&A and revenues.
And we had a very good --
Tony Brenner - Analyst
Right.
Greg Skinner - CFO, VP-Finance
-- revenue quarter and our G&A is pretty much on tracking to plan.
Tony Brenner - Analyst
Okay.
And also the tax rate was a little lower than expected.
36% is a good number for the year?
Greg Skinner - CFO, VP-Finance
You've got to factor in the non-controlling interest.
That is also -- that is factored in before you calculate your taxes.
Tony Brenner - Analyst
Yes, I understand.
But 36% --
Greg Skinner - CFO, VP-Finance
38% is what we booked it.
Tony Brenner - Analyst
Okay.
Okay, thank you.
Operator
Daniel Rizzo, Sidoti & Company.
Daniel Rizzo - Analyst
What's -- the new agreement with Chiquita in terms of the shipping container using your technology for that -- are you going to be trialing that for a while?
I mean is there a number of years before it gets commercialized, or how does that work?
Gary Steele - Chairman, President and CEO
I think it's probably trialing for another 3 to 4 quarters.
I don't think it's years.
We've actually been working with them for a while.
And basically we are using our membrane technology.
And there is various -- there's two different configurations that we're testing.
So as we speak, they're doing shipping trials from South America up to -- and Central America -- up to the States.
The focus initially will be bananas, obviously; that is their sweet spot.
We will also discuss with them the possibility of transport of other types of produce, but right now, their main interest and our interest is the movement of bananas.
So I think it's quarters, not years.
Daniel Rizzo - Analyst
There's another company I follow that's indicated they have an agreement with another banana producer to seal a container.
And basically what they're trying to do is pump in ethane oxide and cut down the supply chain.
Is this something along those lines?
I mean is it the same type of thing?
Gary Steele - Chairman, President and CEO
No; it's -- we are -- so, ethylene is the gas that ripens fruit and vegetables.
What we do is we control the levels of oxygen and CO2 and we can slow down the respiration rate of the produce, thus extending its shelf life.
We can work with these ethylene oxide approaches or not.
They can be additive or they can be separate.
We don't care; it's not directly competitive.
Daniel Rizzo - Analyst
Okay.
Gary Steele - Chairman, President and CEO
And let me just mention, Chiquita has a separate business called TransFresh, which is in the container technology business.
So it's a real business; it's been around for some time.
And that's the group we are working with.
Daniel Rizzo - Analyst
Okay.
And then finally, with the acquisitions, you guys said you're actively looking.
Is there a particular area that looks exciting to you?
Or a particular -- I mean is it more in produce or is it just something completely different?
Could you just elaborate?
Gary Steele - Chairman, President and CEO
Well our primary focus has been in the biomedical materials arena.
Daniel Rizzo - Analyst
Right.
Gary Steele - Chairman, President and CEO
If we could replicate and find another Lifecore, we would like to do that.
That may not be possible because our criteria is for immediate accretion.
We're not interested in companies that are one or two years away from earnings, that kind of thing.
But we really think the biomaterial space is the place for us to invest going forward.
We would not rule out -- if something selectively comes around in the food sector where we can really see some operating and/or sales synergies, we wouldn't rule that out at all, just as we did with the Windset investment; that's in the produce space.
And it met all the needs that we were looking for in terms of having an investment that was immediately accretive, year-round growing.
We think hydroponic growing is the wave of the future, and we want to be part of that technology.
But most of our focus so far has been in the biomedicals and biomaterials area, which is outside of food, so far.
Daniel Rizzo - Analyst
All right.
Thank you, guys.
Operator
Peter Black, Wynnefield Capital.
Peter Black - Analyst
A quick question -- on the -- basically the last page of the press release, where you break out the lines of business -- if you look at the Apio value-added gross margins, the decline from 15.7% to about -- a little under 14% this quarter; was the majority of that due to the gross profit hit you mentioned from the lower inventory build of BreatheWay packaging for avocados?
Or did you see any kind of price erosion as well on the tray side?
Gary Steele - Chairman, President and CEO
It was all the packaging, Peter.
Peter Black - Analyst
All packaging.
Greg Skinner - CFO, VP-Finance
(multiple speakers) extremely high margin business.
Gary Steele - Chairman, President and CEO
Yes.
And they were loading up for their initial launch last year in avocados, Peter, so it's all about that.
Peter Black - Analyst
Okay, okay.
Good to know.
All right, thanks.
Operator
Morris Ajzenman, Griffin Securities.
Morris Ajzenman - Analyst
The earlier questions -- Chiquita going forward a five-year extension renewal, same minimum payments; what about all the other terms outside of the shipping which you probably are negotiating.
Are those all the same terms?
Gary Steele - Chairman, President and CEO
Yes, they are.
We have a agreed-upon transfer price in terms of our packaging products.
As you know, they are good margin.
So, it's pretty much they had the right to extend, and they exercised that right -- and are the same terms.
And also, we had been working with them in the shipping container area and we felt they were the horse to attach -- to ride.
So that's really the main difference.
Morris Ajzenman - Analyst
You mentioned operating cash flow, $4.4 million.
I presume -- is that after CapEx or not?
Gary Steele - Chairman, President and CEO
No, no -- (multiple speakers) counting operating cash flow.
And then CapEx for the quarter (multiple speakers)
Greg Skinner - CFO, VP-Finance
I want to say it's -- hold on.
I can to look it up real fast (multiple speakers)
Gary Steele - Chairman, President and CEO
We'll have it for you.
Greg Skinner - CFO, VP-Finance
(multiple speakers) $1.6 million -- $1.6 million.
Gary Steele - Chairman, President and CEO
$1.6 million, yes.
Morris Ajzenman - Analyst
$1.6 million.
And should we annualize that for the full year, CapEx (multiple speakers)
Gary Steele - Chairman, President and CEO
No.
The CapEx plan for the year is $6 million in total.
Morris Ajzenman - Analyst
$6 million, okay.
And so let's look at the -- let's talk the operating cash flow of $4.4 million.
If you look at the midpoint of your guidance, do the quick calculation -- is that $4.4 million, is that going to be more than 4 times the amount, I presume -- is the free cash flow going to be in excess of -- if I annualize that, that would be $16 million, what $17.6 million?
I presume we're going to be well north of that, based on your midpoint of guidance?
Greg Skinner - CFO, VP-Finance
Yes, well, remember this was our low quarter.
Morris Ajzenman - Analyst
I understand.
Greg Skinner - CFO, VP-Finance
This was the quarter where we -- our net income was going to be half what it is for the second and third and that the fourth quarter should be 50% higher.
Now there is a caveat in here that a chunk of that income is associated with our Windset investment, which is non-cash.
So we've got to take that into account.
The biggest swinger in the number is not necessarily net income as we've reiterated our guidance, but rather working capital, which can swing fairly substantially quickly.
But right now we're tracking to our guidance.
Morris Ajzenman - Analyst
Okay.
And had the CapEx -- what about the D&A for the quarter and what do you think it will be for year?
Greg Skinner - CFO, VP-Finance
It's about $1.4 million for the quarter and you can pretty much times that by 4.
Morris Ajzenman - Analyst
Okay.
And I think that's it.
All right, thank you.
Operator
William Lauber, Sterling Capital Management.
Will Lauber - Analyst
Hi.
I had a question on those containers with Chiquita.
I'm just trying to understand; where does Chiquita benefit out of this?
And do a lot of bananas go bad before they even get to the stores or --?
Gary Steele - Chairman, President and CEO
There are a number of issues going on here.
First of all, we -- the answer is yes, there are.
They lose about 9% I believe in terms of weight and perishability.
But it also allows them to go longer distances.
And that's one of the key things that they are looking for, is that they can ship out of -- by example, Costa Rica, and get to Antwerp and get to the Far East, and et cetera, et cetera.
So it's just a number of reasons.
And then the -- and plus, this controlled atmosphere approach where you're moving these big bottles around and having to adjust the valves and all that is pretty costly.
And it's just logistically a nightmare.
So it's just a number of reasons.
So it's perishability, it's shipping distances, and it's also cost, that play into their interest.
Will Lauber - Analyst
Can you give an update on the synergies between Landec and Lifecore?
Are you guys working on any kind of products that -- where you're going to be using the Landec technology for Lifecore products?
Gary Steele - Chairman, President and CEO
First of all, let me just tell you that we're still looking at it.
And it is not crystal clear exactly where that's going to turn out.
But it's more I -- remember I referenced the fact that we're looking at some interesting approaches using hyaluronic acid as either a drug or as an adjuvant in combination with drugs.
And it's there where HA -- hyaluronic acid, the Lifecore materials and our delivery system, where we can help release something over time, probably has the most synergistic interest.
We are talking to several leading institutions, nonprofit institutions, academic institutions, that are leaders in the field of HA and drug delivery.
And we will most likely enter into licensing and/or collaborative agreements with them in the next several quarters, but this synergistic approach is going to take some time, Will.
It's not going to happen right away.
Will Lauber - Analyst
Okay.
And my last question -- you guys are still spending a lot on R&D, and it's not being reflected in the stock price.
And can tell you, from some of our other companies, you are not alone in that matter.
But I think at some point the stock market will reflect that.
But can you talk about how you look at the research and development and the return on investment?
Or do you from the top give scientists kind of areas to look in?
Do they have freedom to look at things that they are interested in and just how you approach that?
Gary Steele - Chairman, President and CEO
Yes.
It's generally about 80% to 90% of our R&D is very much directed.
It's against specific milestones and objectives.
It's clear that we are directing them to areas that have to do -- for example Lifecore, a lot of the R&D is process improvements and it has to do with meeting development needs of partners, et cetera, et cetera.
So it's very directed.
But about 10% to 20% is follow your nose, investigate areas that are of curiosity and interest to you because that is the life blood of future products.
And so you have to have both.
But the vast majority is very directed.
And here in Menlo Park, it's directed right now.
We -- for example, one of the programs is -- in the aftermath of our transition with Monsanto, we were getting very close to actual biological studies but we didn't get quite there.
We have reviewed all the science and all the experiments that we were doing with Monsanto and we feel that they are worth continuing.
And the reason they're worth continuing is the need is still out there.
And what we're finding is that when we go to these crop protection companies and fertilizer and micronutrient companies, they really want to meet.
They really want to talk.
So we will know in several quarters whether that work that we started is really worthy of continuing and whether or not there's partnering opportunities.
So that's one example of a directed R&D program.
Will Lauber - Analyst
I guess a couple of follow-up questions on that -- as far as your business development priorities, could you go through those?
Or what is the top couple priorities right now for the business development side?
Gary Steele - Chairman, President and CEO
Yes, yes; the top business development is to -- at Lifecore and at Apio is -- the very top -- is to build on our core businesses.
So up at Lifecore, our top priority is finding one or two or three new customers for our existing products, existing products -- because remember some of these have to go through lengthy development and FDA reviews.
But if they are already approved, that helps our costs.
So Lifecore, it's very clear; business development is build the core business and expand customer base and product base.
At Apio, the business development focus is -- number one is these new product platforms that we will begin launching in the spring and we're doing a lot of consumer and produce manager, purchasing manager market testing.
We are laying out the product portfolio, the number of SKUs we want to launch, the price points, et cetera, et cetera.
So both our core businesses, Lifecore and Apio, the number one priority is expansion of our existing core business.
Number two priority in business development is to find another Lifecore, or opportunistically, if there is something that just really makes sense from a bolt-on to Apio, we would consider that as well.
So that's the number two priority.
Number three priority is -- in business development is -- where do we go next with Windset Farms?
We've got the first phase essentially built and they're growing it out, and they are going to start to sell products here in the next month or two.
Where do we go next with them?
And we think the whole hydroponic area is a real good opportunity for us with a market leader to expand.
The fourth priority is to -- in business development -- is to figure out life after Monsanto and is there value there that we've created?
Is there a partner that we want to work with?
And can we get to field trial so we can really validate that the control release technology does allow for an active to be released over time, and to sustain the protection of the plant?
So that's number four.
Number five is any new licensing deals.
The environment I've said in the last couple quarters is really pretty sour on the historical way we've tried to do licensing deals, which is big upfront license fees, et cetera, et cetera.
So we have to change the model.
So those are the five priorities, and that is the order in which we are doing it.
Operator
Rick Fetterman, Fetterman Investments.
Rick Fetterman - Analyst
Good morning.
I noticed there was no comment on -- regarding Air Products in this discussion.
Is there anything new there that you would -- with either them or [L'Oreal] that you would care to comment on?
Gary Steele - Chairman, President and CEO
Well they just -- we continue to add products.
The big announcement in Milan for a perm called Deposilk, which they believe is the most attractive product line that we've launched with them.
When you announce those things -- an announcement was in April I believe -- you go through about a year of testing.
You send out samples, you work with people and their formulations.
They have to take it and formulate it into their creams and lotions and hair sprays and things like that.
So you've got about a one-year lag, where you are just supporting testing.
And so that's why you will probably not hear much on that for a few quarters.
It's in that phase.
Rick Fetterman - Analyst
Do you have any feel as to whether some time in fiscal 2013 there is going to start to be some meaningful revenue from that in terms of the profit-sharing from that joint venture or that licensing agreement?
Gary Steele - Chairman, President and CEO
The honest answer is I don't have a good feeling for that.
And the reason is I don't know how well this Deposilk will take off.
Since it's new and it's different, the attributes seem to be very positively received and Air Products is pretty high on it.
But I'm frankly not able to tell you.
I just don't know what kind of profile that will have in terms of build up.
I would be misleading you to tell you if I thought I knew.
I just don't know.
Rick Fetterman - Analyst
All right.
Thank you.
Operator
Will Lauber, Sterling Capital Management.
Will Lauber - Analyst
If you guys can give an update on the Clearly Fresh bags?
One thing I've kind of noticed, have been reading about, is a lot of innovation and new product introductions are going on at the private-label stage.
And I wonder if you guys have thought about going to some of the big grocery store chains and helping them out in that area?
Gary Steele - Chairman, President and CEO
The issue -- I understand.
And private-label is -- you're right; it is for real and it is here.
Just so you know, over in our Apio business, we do some private-label with our specialty package products, such as with Trader Joe's and Albertson's, and there is one more who I'm forgetting right now -- Kroger.
But in the Clearly Fresh, it's now on the Internet.
We're getting the standard, typical kind of responses, which is like 3% or 4% of people who inquire, purchase something.
And that was just to get it out there.
And we have started some trials down in Texas.
And there's nothing -- I don't have anything to report to you about those trials yet.
But hopefully we'll have something to tell you next quarter.
But the key is, how do you get this thing so there's 1 million hits on the Internet, and how do you get a couple retailers just saying, hey, this is good stuff and we're going to -- and by the way, one of the questions is should this go in the center aisle of the grocery store along with regular packaging or should it be over on the produce side?
Our position is it should be in the produce side, and that's one of the things we are testing.
So, we are in that mode.
And, Will, I hope you buy some over the Internet and try them.
I think you will find that it works really well.
And we're getting a lot of good feedback from people who are starting to use it.
Will Lauber - Analyst
Yes; we had them in the office and we put some bananas in the bag and then some outside and it definitely works.
I'm just thinking on the grocery store side, if -- right on the top of the banana display they would put three bananas in the bag and then three next and just -- so when people look at that they're going to see the big difference.
and I think that could be a way to sell it.
Gary Steele - Chairman, President and CEO
We are going to hire you as our merchandising guy.
That's a really good idea.
And that's the kind of thing we're looking at doing in Texas.
Will Lauber - Analyst
All right.
Thanks.
Operator
(Operator Instructions).
Craig Pieringer, Wells Capital Management.
Craig Pieringer - Analyst
Can you briefly update us on drug delivery away from HA?
In prior calls, there's been some discussion of drug delivery and specifically the encapsulation of a protein for controlled release.
And some firm was taking a look at that.
And I understand that firm either encountered financial difficulties or for some other reason is not proceeding forward.
Can you update us there?
Gary Steele - Chairman, President and CEO
Yes, thanks, Craig.
In our work with the -- that collaborative company who is selling its business, basically, we learned that -- they learned and we learned together that probably the best, most exciting application for our control release drug delivery technology is for the delivery of proteins and peptides.
The short reason for that -- there is a long reason, but the short reason is that we can put high loadings of the drug in our materials.
And when you combine a polymer system, which is typically done when you want to deliver a drug, either by pill or intravenous or whatever, that has to be processed at high temperatures to get the polymer in the right form.
And that degrades the protein and peptide.
That deactivates it.
And our materials can be processed at low temperatures.
So between the high loadings, the control release and the fact that it's not denaturing or deactivating the proteins and peptides, that appeared to be a real exciting area for us, but that partner was having its own issues.
So what we're doing is we've picked one or two protein and peptide models and we're doing the internal work ourselves to build a database to say, hey, that all works; it makes sense, so that we can go to the big pharma and have some real true data.
And so to us right now it's a data building mode, Craig.
We have a group of some advisers who are advising us on the right dosage forms and the right approach.
There's some centers of excellence of people that have come out of the Genentechs and the Amgens of the world.
And there is also centers of excellence at MITI and other places that we are associating with.
So that is the mode we are in.
So it's data building so that we really have a strong case to go to big pharma.
Craig Pieringer - Analyst
Did that firm return to you any of the research they had done?
Gary Steele - Chairman, President and CEO
No, that's the problem, is that we can't use that data.
That's why we are doing this.
Craig Pieringer - Analyst
So it's kind of back to square one but still long-term (multiple speakers)
Gary Steele - Chairman, President and CEO
Not square one in that we benefited from the collaboration in that we know where to focus, we know the experiments to do.
It's just that under the agreement, that data is theirs, and we have to build our own.
Not quite back to square -- no, not square one, but certainly, we would -- we have to generate this data ourselves.
Craig Pieringer - Analyst
Okay.
Great.
Thanks for answering that.
Operator
Thank you.
I'm not showing any further questions in the queue at this time.
Gary Steele - Chairman, President and CEO
Let me just summarize by saying in a nutshell, we are on plan for our first quarter.
And we are looking forward to keeping you posted on our progress in the second quarter.
So thanks for joining us today.
Operator
Thank you, ladies and gentlemen, for your participation in today's conference.
This does conclude the program.
You may now disconnect.
Good day.