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Landec Corporation (NASDAQ:LNDC)

F3Q09 Earnings Call

April 8, 2009 11:00 am ET

Executives

Gary T. Steele - President and Chief Executive Officer

Gregory S. Skinner - Chief Financial Officer

Analysts

Nick Genova - B. Riley & Co.

Peter Black - Winfield Capital

Nelson Ovis - Winfield Capital

Walter Schenker - Titan Capital

William Lauber - Sterling Capital Management

Steven Denault - Northland Securities, Inc.

Operator

Welcome to the Landec Corporation third quarter fiscal year 2009 earnings release conference call. (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.

Gary T. Steele

Welcome to Landec’s first nine-month and third quarter of fiscal year of 2009 earnings call. I have Greg Skinner with me today, Landec’s Chief Financial Officer. This call is being webcast by Thomson CCBN and can be accessed at Landec’s website at www.landec.com on the Investor Relations page. The webcast will be available for 30 days through May 8, 2009. 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 1343032.

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 & Exchange Commission including the company’s Form 10-K for fiscal year 2008.

As reported in yesterday’s press release, for the first nine months of fiscal year 2009, Landec increased revenues by slightly over 1% to $183.7 million compared to the same period a year ago.

Net income for this nine-month period decreased to $5.9 million, or $0.22 per share, compared to net income of $10.2 million, or $0.38 per diluted share, last year. At the same time, during the first nine months of fiscal year 2009, we generated $6.3 million in cash flow from operations.

For our third quarter ended March 1, 2009, revenues were $53.9 million versus $59.6 million in the third quarter last year and our net income for the third quarter was $1.5 million, or $0.06 per diluted share, versus $4.0 million, or $0.15 per diluted share, for last year’s third quarter.

For both the first nine months and the third quarter of fiscal year 2009, Landec continued to generate net income and positive cash flow from operations. Notably, during our third fiscal quarter, we were able to hold and slightly improve our gross margin and operating margin relative to our second fiscal quarter.

It is notable because for the first time since we have been in the fresh-cut vegetable business, starting in the year 2000, overall industry unit volume shipments for the category have turned negative and have stayed negative for the five straight months through March 2009.

We began witnessing the decline in the overall fresh-cut vegetable category starting in our second fiscal quarter. This decline is a result of deterioration of the U.S. economy and the corresponding slump in consumer demand.

The fresh-cut vegetable industry category declined 8% during the first nine months of our fiscal year 2009 and declined 13% during our third fiscal quarter. There is no doubt that the downturn in the U.S. economy and the impact that it is having on consumers is adversely affecting purchases of fresh-cut vegetable products, but less so for Landec than the overall market.

For both the third quarter and the first nine months of fiscal year 2009 Landec continued to increase its market share. While the overall industry category unit volumes declined 13% and 8% for the three- and nine-month periods ended March 1, 2009, respectively, Landec unit volumes declined more moderately, by 5% and 1% for the same periods.

Although we project that softening consumer demand in the category will likely continue to affect us in the short term, we have recently seen a slowing in the rate of decline in the fresh-cut vegetable industry category and it appears that the declines in the upcoming couple of months will be less than what the industry experienced during the third fiscal quarter. We are hopeful that the fresh-cut vegetable category will return to positive growth during fiscal year 2010, which begins June 1, 2009.

Importantly, we see this as a time to further strengthen our market position in the fresh-cut vegetable category by using our strong trade brand, our BreatheWay packaging technology, our low-cost position, and our strong balance sheet to further grow market share.

Let me turn to Greg for details of our results.

Gregory S. Skinner

As outlined in yesterday’s news release, Landec reported total revenues for the first nine months of fiscal year 2009 of $183.7 million versus revenues of $181.2 million for the same period a year ago. The increase in total revenues during the first nine months of fiscal year 2009 was due to a $4.0 million increase in revenues from Apio’s commodity trading business, partially offset by a $1.3 million decrease in revenues from Apio’s fresh-cut vegetable business.

For the first nine months of fiscal year 2009, the company reported net income of $5.9 million, or $0.22 per share, compared to $10.2 million, or $0.38 per share, for the same period last year. This did decrease the net income during the first nine months of fiscal year 2009 compared to the same period last year and was primarily due to:

First, a $3.3 million decrease in gross profit and Apio’s fresh-cut vegetable business primarily due to increased raw material costs for produce and packaging;

Second, an $883,000 decrease in interest income due to the company’s decision to invest only in FDIC insured certificates of deposit, U.S. government backed instruments, and triple-A rated municipal bonds, all of which have yields that are considerably lower than those the company realized from its investments in the same period last year; and

Third, a $189,000 increase in income tax expenses due to an increase in Landec’s effective tax rate to 41% for fiscal year 2009.

These decreases in the net income were partially offset by $287,000 increase in gross profit for Apio’s commodity trading business.

It should be noted that only $600,000, or 15%, of the $4.1 million book income tax expense is expected to be paid in cash because of the repurchase of subsidiary options in fiscal years 2007 and 2008.

For the third quarter of fiscal year 2009 Landec reported total revenues of $53.9 million versus revenues of $59.6 million for the same period a year ago. The decrease in total revenues during the third quarter of fiscal year 2009 was due to:

First, a $3.0 million decrease in revenues from Apio’s fresh-cut vegetable business due to the decline in the fresh-cut vegetable category during the quarter;

Second, a $1.3 million decrease in revenues from Apio’s packaging due to the timing of minimum payments from Chiquita; and

Third, a $1.3 million decrease in revenues from Apio’s commodity trading business due to the decrease in sales volumes and from lower average per unit sales prices as a result of a change in product mix.

For the third quarter of fiscal year 2009 the company reported net income of $1.5 million, or $0.06 per dilute share, compared to net income of $4.0 million, or $0.15 per diluted share, in the same period last year. This decrease in net income during the third quarter of fiscal year 2009 compared to the third quarter last year was primarily due to:

First, a $1.8 million decrease in gross profit and Apio’s fresh-cut vegetable business related to lower revenues and higher costs for produce and packaging;

Second, a $1.3 million decrease in gross profit from Apio packaging related to timing of revenues compared to the prior year; and

Third, a $307,000 decrease in interest income from lower-yielding instruments compared to the prior year.

These decreases in net income were partially offset by a $618,000 decrease in operating expenses primarily due to lower selling, general, and administrative expenses at Apio and a $405,000 decrease in income tax expenses due to lower pre-tax earnings.

Turning to the balance sheet, during the first nine months of fiscal year 2009 our cash and marketable security balances increased by $4.9 million to a record level of $63.9 million. The increase in cash and marketable securities was primarily due to generating $6.3 million in cash flow from operations and due to a $1.8 million tax benefit from the repurchase of subsidiary options.

These increases were partially offset by the purchase of $3.2 million of property, plant, and equipment for our fresh-cut vegetable business.

Gary T. Steele

Early in fiscal year 2009 we said that we planned to invest $7.0 million in capital expenditures in fiscal year 2009 for further automation and expansion of our value-added fresh-cut vegetable processing facility, up from $4.2 million invested in fiscal year 2008. As previously mentioned by Greg, we have spent $3.2 million during the first nine months of fiscal year 2009.

As a result of the current economic environment, we expect to invest a total of $4.0 million to $5.0 million for fiscal year 2009 instead of the original $7.0 million.

We have also said in the past that we plan to spend roughly $3.7 million in R&D, up from $3.3 million spent in 2008. We will continue our commitment to increasing our investment in R&D, as planned.

Looking forward, we be placing a greater emphasis on consolidating our already strong position in the fresh-cut produce arena, searching for acquisition targets both inside and more likely, outside, the food the arena and stepping up our out-licensing activities with new partners.

We believe that the U.S. faces a prolonged and deep recession that may last well into 2010. Landec has proprietary technology, a low-cost structure, a strong balance sheet, to not only weather the storm but to capitalize on new opportunities that are likely to emerge as under-capitalized companies look for partners and large corporations who are slashing their R&D budgets look for new products. We see this as a time of opportunity.

We believe our future obligations to shareholders are first to focus on technology, innovation, and new product development. Accordingly, we will be stepping up R&D. Second, continue supporting our collaborative partners, such as Chiquita, Monsanto, and Air Products. Third, to ensure our sizeable cash balances are protected in investments that are safe and available as needed to selectively pursue and take advantage of profitable growth opportunities.

In order to successfully advance our priorities, our plan over the next couple of years, through the fiscal year 2009 and 2010 include the following initiatives:

Complete one or more new licensing partnerships; expand the sales of our packaging technology with Chiquita and others;

Bring our collaboration seed coating program with Monsanto through field trials;

Start at least one new initiative in a promising area of materials science outside of the food technology business, which could involve an acquisition of, or minority investment in, one or more materials science-oriented companies; and

Continue to generate net income and positive cash flow, along with maintaining a strong balance sheet.

Over the next 24 months we are confident that we can continue to take advantage of broad applications of our unique polymer technology to grow and, very importantly, diversify our business and generate increased shareholder value. Part of our near-term plans are:

To hire a V.P. of business development and we believe we are close to doing that;

Expand the sales of our L'Oreal products and take new initiatives with other major personal-care companies, which is already beginning;

Seek progress in our Monsanto program, particularly in the area of controlled release of pesticides and fungicides, and in coatings that enhance plant vigor and corresponding improved yield;

Expand our market share in the fresh-cut vegetable category and negotiate lower input costs with key non-grower suppliers;

Start one or more research initiatives and new applications of our materials science technology; and

Move M&A activities from the broad search to a focus on one or two more specific partner candidates.

Our near-term and 24-month goals are driven by our focus on achieving our long-term objectives for revenue growth, with profitability and positive cash flow. We also believe that over the next five years our pre-tax margin mix will begin to change with increasing contribution to sales and pre-tax margin coming from our non-food technology licensing business, which generates higher percent margins and which is expected to grow faster than continuing growth in our value-added specialty packaging vegetable business.

If our partners execute in a timely way and if we continue to implement our plans well, we should see both gross margins and net margins increasing over a three- to five-year time frame.

We are now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nick Genova - B. Riley & Co.

Nick Genova - B. Riley & Co.

I wanted to ask on a comment that was in the press release that you expect operating margins to improve sequentially. Do you think that that’s going to be primarily driven by a higher gross margin or do you think it will be more on the cost side, like a reduction in SG&A sequentially?

Gregory S. Skinner

Well, I think it’s going to be a combination of the fact that we expect that some of our packaging costs will be lower in the fourth quarter than they were in the third quarter and secondly, we also expect operating expenses to be lower in the fourth quarter and the third quarter. So it’s a combination of the two.

Nick Genova - B. Riley & Co.

I saw that even in Q3 expenses were down. What’s driving that expense reduction? Can you give us a little more color on that?

Gregory S. Skinner

Well, it’s a combination of things. Last year we had, particularly in the fourth quarter, some fairly sizeable G&A expenses, but also in the area of Apio and this is volume driven, a lot of your sales and marketing is tied to your revenue and when your revenue is down, your sales and marketing is going to be down.

Nick Genova - B. Riley & Co.

And on the gross margin side, within Apio, I know that produce prices have been somewhat elevated, what’s the outlook on that? Is it kind of staying there and as you look into the season throughout 2009, what do you see there?

Gregory S. Skinner

They’re going to stay at the same levels that they’re at right now. Most of these contracts are calendar-year contracts and so that will affect us through the rest of 2009, which ends in May, and then through at least the first half of 2010. The higher produce costs as compared to 2008.

Nick Genova - B. Riley & Co.

One thing that has been impacting California and actually has for several years and then looks like it will be even more severe this year is just general drought conditions. Does that impact your business at all?

Gary T. Steele

Obviously it can but fortunately most of where the areas we get our produce from is ground water and so far ground water has not been impacted from what you’ve seen about the fed cutting off the San Joaquin Valley, so on and so forth.

So up to now it has not impacted us.

Operator

Your next question comes from Peter Black - Winfield Capital.

Peter Black - Winfield Capital

In terms of Chiquita’s minimum payments to you, could a successful roll out of the Chiquita-To-Go program at Starbuck’s and McDonald’s potential get you over the volume hurdle there or do you really need to see a full roll out on the grocery store format, to start seeing a revenue increase from Chiquita?

Gary T. Steele

A successful roll out in Europe and the U.S. of Chiquita-To-Go, which as you know is on track, combined with a major quick-serve restaurant customer, whether it’s McDonald’s or someone else, that would get us over the hurdle. But Chiquita-To-Go alone probably would not, so you need both. And you would not need retail if you were landing a fairly major quick quick-serve restaurant chain.

Peter Black - Winfield Capital

And so do you have any kind of data from McDonald’s that suggests that the roll out is going well there so far?

Gary T. Steele

We know very little. They are real hush-hush. All we know is that our technology is working as advertised, which as you know, is needed to get to very remote sites. Now I’m going into my own thinking here, I worry that recession and their focus on really low-cost, low-price items on their menu could be affecting us. I just don’t know. But we don’t really know much about what’s going on there, and probably won’t for some time. I wish I could tell you more.

Peter Black - Winfield Capital

And moving over to Air Products, do you have a sense of when that collaboration with Air Products would start to become meaningful, from a revenue and profit contribution standpoint?

Gary T. Steele

First of all, there’s two components of the Air Products relationship. One is in the personal care area, where we add ingredients to some of their skin and skin-care, lotion-care products. I think we are up to about eight or nine products right now. And going well.

And even with this recession, people are buying these very expensive personal-care products. And right now all of our products are with L'Oreal, under various brands.

On the other side is the catalyst business with Air Products and that is affected by the downturn in the economy because much of the applications are in construction, such as pipe retrofitting, etc. So that one is not growing at this point.

To answer your question, I think what we really need is to land one or two new customers outside of L'Oreal to really have this thing hit that inflection point that we’re all waiting for and we are in trials, we are in testing, it goes through a coding process where it has to be accepted and improved and you have to do the toxicology and those types of things.

So for that end point to take place, I think we have another year of that process to qualify these new customers before it takes off.

Peter Black - Winfield Capital

And is their products agreement, are they exclusively working with L'Oreal so that you’re signing up with new personal-care customers would be completely separate from that agreement or is this through Air Products?

Gary T. Steele

Our relationship for everything in personal care is through Air Products. They provide the marketing and sales expertise on their own nickel and you may recall, we share in gross profits in a very attractive way when products are sold.

Operator

Your next question comes from Nelson Ovis - Winfield Capital.

Nelson Ovis - Winfield Capital

The first question is very simple. Do you basically have a paper-packaging contract that expires, is that what’s behind the optimism in terms of those prices going down?

Gary T. Steele

It’s just that what the world has gone through, and you’ve seen it in your other companies, over the summer when oil prices were going crazy, everybody viewed it as an opportunity, including our suppliers to raise prices and everybody had to go with it and so those prices went up. And that includes for us films, plastics that go into our trays and corrugated cardboard. And that’s about 20% of our cost sales and so that kind of went through the roof. We fought our battles as best we could.

Our view is the world has changed and it took some time for the world to come back and sit down with these folks, including us, and so we have re-negotiated prices. So that’s what’s going on.

Now, in the area of produce, where we buy raw materials from farmers, that has not gone down. That did go up and it stayed up because it’s more driven by land values and land costs in these growing areas than anything else. And land has been going up out here for these types of prime regions where you can only grow vegetables, and it’s very rare that you can find other places to do that.

So we see an optimism because we’ve been able to recently re-negotiate some prices on these inputs.

Nelson Ovis - Winfield Capital

So when they gave you higher prices they forced you to sign a longer contract is basically what took place here.

Gary T. Steele

Yes. But now, you know, the world has changed and so we sat down.

Nelson Ovis - Winfield Capital

More interesting question, for me, anyway, I think I’ve expressed on these calls a certain cautionary tone in regard to acquisitions. I read with interest in the press release a reference to this fact that you had spent a fair amount of time looking at an acquisition and had walked away from it. I guess the question is what did we learn from that experience, the outcome of which, without knowing anything, I feel very positive about because it shows discipline. And maybe you could share with us what, in terms of that whole experience, you’ve learned.

Gary T. Steele

A lot of time spent, by the way. Frankly, probably a distraction for many of us. But what we learned is that our discipline approach to having a check list that’s fairly tedious and robust, that has to do with strategic reasons for making acquisitions, operational reasons for making acquisitions, and financial reasons, you have to have checks by each of those little boxes and when you don’t have those checks you walk away.

Nelson Ovis - Winfield Capital

So it worked and double-down next time, okay? Is there currently a deal flow that is occupying some of your time or are you more focused on internal operations?

Gary T. Steele

A very fair question. Much more time, thankfully so, on operations and how do we grow the business internally. On the other hand, I would say that we have begun to step up activities and we have hired a third party to help us in a broad sweep of looking outside of food at materials science companies that may reside on their own or they may be embedded in larger companies, where we think that their materials science technology is synergistic and complimentary to what we’re doing. It’s right at the beginning, it’s a broad sweep. I would like to tell you we know exactly what we’re looking for, but we don’t. But we will. And so that’s where we’re turning our attention. And while we will keep our eyes open in the food business for opportunities, our focus is more focused on materials science opportunities outside of the food.

Nelson Ovis - Winfield Capital

It sounds like you have somebody else making the first cut, so that’s very positive.

Gary T. Steele

Right.

Operator

Your next question comes from Walter Schenker - Titan Capital.

Walter Schenker - Titan Capital

I would have thought that the trading operation, since it is a methodology to reduce risks in the package side, would, in periods when the package side is down, actually be up some as opposed to down. Am I missing something?

Gregory S. Skinner

The trading business is very seasonal. The primary products that we export to Asia are stone fruits, grapes, apples, and broccoli. Those are probably the top ones. And the stone fruit is probably number one and that season goes from June to about October and then it falls off and then you don’t have any stone fruit again until June.

So if you look at historically our break down of our revenues, about 75% of the revenues in our trading business occur during the first six months of the year. 25% occur in the second half because it’s a supply-driven business. If the supply is there we can export it, if it’s not, we can’t. So that’s why the second half of the year export and the trading business is lower than the first half.

Walter Schenker - Titan Capital

But it is, to some extent when your packaged, fresh packaged is down, the extra product you contract for is sold through the trading operation, correct?

Gregory S. Skinner

Yes, we can use that as an outlet but that’s not as material as the seasonality.

Operator

Your next question comes from William Lauber - Sterling Capital Management.

William Lauber - Sterling Capital Management

You mentioned a couple of times on the call and the press release that you are growing market share in the fresh-cut vegetable category. How are you doing that?

Gary T. Steele

I know we’re biased, but we have a couple of advantages that we’re capitalizing on. First of all, we’re a very good operator and we deliver probably the highest quality in the industry and we’re proud of that and we want to continue to do that.

Secondly, we do have technology that can get product in good shape from the West Coast to the East Coast. And third, we have been able to manage better, I think, than others during critical shortage periods. You know, when is very scarce, there’s either been heavy rains or freezes or whatever.

We’ve been able to manage our inventory flow and our availability probably better than anybody in the industry and that’s known to our customer base.

That doesn’t mean to say that there aren’t some tough competitors out there; there are and there are some real loyalties in the industry that are hard to break but that’s what we’ve been doing. Basically it’s technology, quality, and delivery performance that has been working for us and we hope to maintain that.

William Lauber - Sterling Capital Management

Back to the acquisition that didn’t work out, you didn’t quite mention it, but would it be safe to assume that it fell apart over price terms?

Gary T. Steele

If you don’t mind, I would rather not go into a lot details on that, but let’s just say that there’s very important things for us that have to do with non-competes and definitions of non-competes, that you’re going to buy somebody you don’t want them coming back and nipping you in the butt. And there were issues about valuation and price and that kind of thing.

So generally, you’re right, but I would rather not to go into more detail if you don’t mind. But it was enough, frankly, for both parties to realize that, you know, it was close but no cigar.

William Lauber - Sterling Capital Management

And with Aesthetic Sciences do you have any idea of how long they can hold out, without any additional financing?

Gary T. Steele

That is one excellent question and they’re living with not much cash. I don’t think I need to tell this group the difficulty in the venture capital world of getting venture capital investors to invest more money. That’s a real difficulty. So their focus is on corporate deals and the worry I have is that corporate deals take time.

And so we’re concerned about it. We’re only a passive investor. We’re not a venture capital investor, we’re not the answer for their short-term cash problems. But we’ve got our fingers crossed that they will find some corporate strategic partnering financing here that will let them go forward.

But there is a risk that they won’t and so we wanted to highlight that for folks, to know that that possibility exists.

William Lauber - Sterling Capital Management

I guess my final question was would there be any way that you would put more money into it, but that sounds like that is a negative.

Gary T. Steele

No. I don’t think so. Let’s put it this way. If the venture guys wanted to put more money in and they were asking us to come in with them, we would certainly consider that. But just to be the venture guy alone, that’s not our cup of tea.

William Lauber - Sterling Capital Management

And then if you would give a update on both of the Monsanto trials.

Gary T. Steele

In the spring you plant seed and you have trials and this is obviously a very important spring for us. We have two programs with Monsanto. One has to do with what we call LoCo weights, low weight coatings that go onto the seed and the hypothesis is is that we provide a protective coating that improves the vigor of the seedling and therefore the plant, and therefore leads to yield improvements.

You can only look so far in laboratory tests and greenhouse tests; you’ve got to go into the field. So that’s important for us to see this spring.

And then next fall we, the second program, which is our controlled release program, which has an active ingredient in the coating, which could be a fungicide or insecticide, which you hope to hold there against the seed, to protect the seed, in the soil and then dispense it at the right temperature when the pests, the fungus or the insect, emerges and that’s based on soil temperature, by the way.

So those two programs are slated for field trials this year and then as you get into those you hope to then go to South America and get another bite of the apple in the Southern Hemisphere so that you get enough field data to know what you have. So we’re starting this spring and we’ll keep you posted.

William Lauber - Sterling Capital Management

So it sounds like, I guess, Monsanto probably doesn’t have any real incentive to do anything before that five years is up anyway, but it sounds like it’s probably going to be about that time when they will have a good idea of what the technology is doing, is that correct?

Gary T. Steele

I think that’s right. You know, they are funding us to the tune of $1.3 million or $1.4 million a year in R&D spending. I don’t think that’s material enough for them to want them to trigger a purchase of the rights that we have in our agreement. So I think you’re right. I think it’s probably a couple more years. But the ball is in their court. They could chose to do it earlier. I wouldn’t expect that.

William Lauber - Sterling Capital Management

A while back we had asked you in all these different partnerships what was kind of like the, I think using baseball terms, the double, the triple, the homerun. Would it be safe to say that Monsanto is probably the home run right now? A couple of years out? Or the possibility of?

Gary T. Steele

Yes, I would say it’s got that distinct possibility. If the field trials go well, if the value is shown, if Monsanto is true to form and chooses not to do mixed launches but really broad-based sweeping launches of putting coatings on all their seed. In that scenario, this would be substantial.

Operator

Your next question comes from Steven Denault - Northland Securities, Inc.

Steven Denault - Northland Securities, Inc.

Can you remind us what the Chiquita minimums are in fiscal 2010?

Gregory S. Skinner

$1.5 million.

Steven Denault - Northland Securities, Inc.

That’s down from what for fiscal 2009?

Gregory S. Skinner

In 2009 it’s $2.2 million because we had one special project going on.

Gary T. Steele

And they can chose, annually, to opt out of that by moving to a non-exclusive, if they want to.

Steven Denault - Northland Securities, Inc.

When do they need to make that decision?

Gregory S. Skinner

Late in the calendar year, before December 1. Next November.

Steven Denault - Northland Securities, Inc.

Do you have any sense of when you would expect, or Chiquita would expect, McDonald’s to make decisions, in terms of the trials?

Gary T. Steele

Can you accept a don’t know answer.

Steven Denault - Northland Securities, Inc.

Sure.

Gary T. Steele

I don’t really know and I don’t know that Chiquita knows.

Steven Denault - Northland Securities, Inc.

The other thing I’m trying to reconcile is that in your third quarter that ended late February, your units, fresh-cut units, were down 1%. The sales were down 6% but we were also in an environment where sourcing was an inflationary sourcing environment year-over-year. Can you help me reconcile that.

Gregory S. Skinner

The volume being down versus the [sales] being down?

Steven Denault - Northland Securities, Inc.

Yes, sales were down greater than volume which suggests sort of ASP deterioration.

Gregory S. Skinner

When we talk volume we’re talking about total volume. So you’re talking our bags, our trays, everything. The main reduction in our volumes, but not only in the second quarter, but the third quarter, was in the area of trays. Well, trays have a much higher sales price than bags. So it’s a mix change.

Gary T. Steele

And you can imagine what’s going on with trays. People are just not hosting parties, families are not getting together like they used to and so that has had a greater impact on the bag business.

Steven Denault - Northland Securities, Inc.

Who else sells trays outside of the club channel?

Gary T. Steele

Outside the club channel is a company called Mann Packing, a private company in Salinas, and a company called Taylor, again, another private company in Salinas.

Steven Denault - Northland Securities, Inc.

Do you have distribution outside of club with trays?

Gary T. Steele

Oh, yes, we’re very prominent in retail stores with our trays.

Operator

Your next question is a follow-up from Nelson Ovis - Winfield Capital.

Nelson Ovis - Winfield Capital

I don’t want to be argumentative but I have seen some data that indicates actually that families are getting together in the home more than they used to. You look at the performance of companies like Green Mountain that makes the ability to make coffee in the house. I really think it might have less to do with people getting together and more to do with what they spend when they get together.

Gary T. Steele

That’s a fair point. I made a statement that was broad-sweeping. We know that people are going for frozen stuff. We know they are reaching in their pantry for canned goods that have been there a while. So that’s a good point.

Follow-up Nelson Ovis - Winfield Capital

I think that’s more accurate of about what’s going on. If we get some more income in there, or if the whole wellness theme continues to resonate, I think we’ll get back to people eating good stuff rather than cheap, bad stuff.

Gregory S. Skinner

We hope.

Operator

There are no further questions in the queue.

Gary T. Steele

We thank everybody for being with us on this call. We appreciate it and look forward to talking to you to give you updates on our progress.

Operator

This concludes today’s conference call.

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Source: Landec Corporation F3Q09 (Qtr End 03/01/09) Earnings Call Transcript
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