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Landec Corporation (NASDAQ:LNDC)

Q1 2010 Earnings Call

September 30, 2009 11:00 am ET

Executives

Gary Steele – CEO

Greg Skinner – CFO

Analysts

Tony Brenner - Roth Capital Partners

Peter Black – Winfield Capital

Chris Krueger - Northland Securities

Nick Genova - B. Riley & Co.

Greg Weaver – Invicta Capital

Nelson Obis – Winfield Capital

Will Lauber – Sterling Capital Management

Operator

Good day ladies and gentlemen, and welcome to Landec first quarter fiscal year 2010 earnings release conference call. (Operator instructions) I would now like to introduce your host for today’s conference, Mr. Gary Steele, Chairman and CEO of Landec Corporation. Mr. Steele, please begin.

Gary Steele

Good morning and welcome Landec’s first quarter fiscal year 2010 earnings call. I’ve got Greg Skinner with me today, our 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 October 30th, 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 1395388.

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 2009.

As reported in yesterday’s press release, for the first quarter of fiscal year 2010 revenues decreased to $60.9 million, from $71.8 million during last year’s first quarter and net income decreased to $2.2 million compared to $2.8 million during the first quarter last year.

We should point out that the first quarter of fiscal year 2010 included 13 weeks of operations whereas the first quarter of fiscal year 2009 included 14 weeks of operations. Notably during our first quarter, revenues from Apio’s value-added fresh-cut vegetable business increased $1.3 million or 3% after excluding the extra week in last year’s first quarter.

Overall revenues decreased during the first quarter of fiscal year 2010 compared to first quarter of 2009 because first, the extra week during the first quarter of fiscal year 2009 resulted in approximately $5 million in additional revenues last year.

And second, in addition to the decrease from the extra week last year, Apio’s trading business revenues decreased $6.7 million in this last quarter due to a tight supply of fruit. The decrease in net income during the first quarter of fiscal year 2010 compared to the first quarter of fiscal year 2009 was primarily the result of lower gross profit on lower revenues, which was partially offset by the tax impact of lower net income before taxes.

Overall Landec generated $4.3 million in operating cash flow during the first quarter of fiscal year 2010 and ended the quarter with $69.5 million in cash and marketable securities with no debt, continuing to strengthen our positive financial position.

Based on the results for our first quarter we are on track so far for achieving our revenue and net income goals for fiscal year 2010. Accordingly at this point in time we are not changing our original guidance for fiscal year 2010 which was that both revenues and net income are projected to be flat to slightly higher compared to fiscal year 2009 and that revenues and net income during the first half of fiscal year 2010 are projected to be lower then the first half of fiscal year 2009, but higher during the second half of fiscal year 2010 compared to the second half of fiscal year 2009.

Overall industry unit volume shipments for the fresh-cut vegetable category have continued to be negative and have stayed negative for 10 straight months through August, 2009. We have begun to see an improvement in industry category sales compared to the bottom reached late last calendar year but we are still seeing year over year negative declines.

The overall fresh-cut vegetable category declined 6% during the first quarter of our fiscal year 2010 compared to a decline in the category of 8% during the fourth quarter of fiscal year 2009. There is no doubt that the downturn in the US economy and the impact it is having on consumer confidence is adversely affecting purchases of fresh-cut vegetable products, but less so for Landec then the overall market.

For the first quarter fiscal year 2010, Landec continued to increase its market share. While the overall industry category unit volumes declined 6% for the first quarter, Landec unit volumes actually increased 35 for the same period.

We believe that the fresh-cut vegetable industry category will level off or return to positive growth later in our fiscal year 2010 especially if consumer confidence begins to rebound. Importantly we see this as a time to further strengthen our market position in the fresh-cut category by using our strong brand, our Breatheway packaging technology, our low cost position, and our strong balance sheet to further grow market share.

All in all, we are on track through the first three months of fiscal year 2010. Let me turn to Greg Skinner for details of our results.

Greg Skinner

Thank you Gary, and good morning everyone. As outlined in yesterday’s news release, Landec reported total revenues for the first quarter of fiscal year 2010 of $60.9 million versus revenues of $71.8 million for the first quarter of last year.

The decrease in total revenues during this year’s first quarter compared to last year’s first quarter was partially due to the first quarter of fiscal year 2010 having 13 weeks of operations whereas the first quarter of fiscal year 2009 had 14 weeks of operations, which resulted in approximately $5 million of additional revenues last year and after excluding the extra week from last year’s first quarter, Apio’s commission-based trading business realized an additional decrease in revenues to $6.7 million due to our decision to exit virtually all of our domestic buy/sell business and due to a shortage of fruit to export.

For the first quarter of fiscal year 2010 the company reported net income of $2.2 million or $0.08 per share compared to net income of $2.8 million or $0.11 per share for the first quarter of last year. This decrease in net income during the first quarter of fiscal year 2010 compared to the first quarter of fiscal year 2009 was primarily due to first, an approximate $600,000 decrease in gross profit due to one less week in the first quarter of fiscal year 2010 compared to the first quarter of last year.

Second, an approximate $200,000 decrease in gross profit for Apio’s value-added vegetable business due primarily to higher produce costs. Third, a $187,000 decrease in gross profit for Apio packaging due to the contractual decrease in Chiquita minimums, and a decrease in R&D funding from Apio’s R&D agreement with the US Military which was completed at the end of calendar year 2008.

Fourth, a $257,000 decrease in gross profit in our technology licensing business primarily due to the completion of the air products licensing payments during the third quarter of fiscal year 2009, and fifth a $69,000 decrease in interest income due to lower yields on investments compared to the yields from investments in the same period last year.

These decreases were partially offset by $629,000 reduction in our income tax expense due primarily to lower pre-tax income. Turning to Landec’s financial position, during the first quarter of fiscal year 2010 the company generated $4.3 million of positive cash flow from operations. Overall cash and marketable securities increased $3.5 million during the first quarter of fiscal year 2010 to $69.5 million.

That concludes my presentation.

Gary Steele

Thanks Greg, as previously stated during the fiscal year 2010 compared to last year’s fiscal year, we will expense several known contractual reductions in overall gross profit totaling $1.8 million including the expected $600,000 reduction due to the end of license payments from our air products contract, plus the expected $1.2 million combined reduction in contractual minimum payments from Chiquita [inaudible] products.

In addition the extra week in fiscal year 2009 resulted in approximately $600,000 of additional gross profits last year which will not be recurring in fiscal year 2010. We are currently forecasting that these reductions in revenue and gross profit will be offset by increases in revenues and gross profit in our value-added vegetable business as a result of our increasing market share, which we did experience in the first fiscal quarter and by reductions in our SG&A expenses.

So where are we headed in the next 12 to 24 months? Our focus is on strengthening and sharpening our programs with our existing corporate partners, defining and staffing projects developing new applications for our Intelimer polymer materials technology, identifying new corporate partners in select areas, and identifying acquisition or joint venture growth opportunities.

Let’s take them one at a time. First, sharpening our focus with existing corporate partners. After nearly three years of collaborating with Monsanto in the seed coating arena, we have jointly identified specific target areas for seed treatments that use our polymer technology to deliver chemicals on seeds in ways that improve the effectiveness of the active ingredient.

These target areas are what Monsanto wants and what they want us to exclusively focus on, and we are staffing our team accordingly. In making this transition from a very broad field of seed applications to a more highly focused development program, we see specific applications where Monsanto and Landec can both benefit.

We are now in discussions with Monsanto to modify our existing agreement, whereby outside of these specific applications of Monsanto’s interest, we will be able to regain all fields previously licensed to Monsanto for seed coatings.

We will have the full rights either on our own or working with others to make and sell Intellocoat products for applications in seed coatings and other seed treatment areas outside of this better defined and more highly defined field with Monsanto.

In return Landec will fund the R&D work that supports the specific applications for Monsanto’s program going forward. We do not expect this modification to have any impact on our financial results for this fiscal year as license fees will continue as before.

We are working on this modification to our current agreement with Monsanto. Monsanto benefits from lower R&D annual expenses, and Landec benefits from the opportunity to derive revenues and income from the sale of Intellocoat products and the ability to partner with other seed companies on applications outside of our new exclusive deal with Monsanto.

We hope to have a new agreement, really its a modification to our existing agreement, in place within the next 60 days. We are pleased with this direction. Regarding Chiquita, the Chiquita to go program continues to expand in sales. You will see more coffee shops and convenience stores offering fresh Chiquita bananas for sale.

Regarding quick serve restaurant chains, such as McDonald’s, we believe and its our understanding that McDonald’s is currently focused on its hot drink and cold drink product launches and quite frankly, this is my personal opinion, we think with the recession the pressure on them to offer a more nutritious menu has subsided for the time being.

Chiquita is in discussion with other quick serve restaurant chains outside of McDonald’s. And the avocado program with Chiquita, we’re excited about the advancement of the program where Chiquita is now selling to both food service companies and retail grocery chains.

The second focus for the next 12 to 24 months is identifying new applications for our polymer technology. With the help of our new VP of Business Development, we have identified five to six promising development projects that uniquely draw on the potential properties of Landec’s Intelimer materials. We have stepped up R&D and business development spending by 20% to staff these programs and we will have more to say as we advance our efforts.

The third focus is identifying new corporate partners. We are making a significant investment in the area of drug delivery and the area of controlled release of actives and we are in early, and I repeat early, conversations with [big pharma] and medical device companies regarding testing and evaluating our materials for the delivery of small molecule drugs and for the coating of various device surfaces that might enter the human body.

Although early, it is clear to us that the biomaterials area is in need of help as traditional plastics and polymers have their limitations. We will need to be patient in this area, but our view is that while most of big corporate America is cutting and slashing budgets, big pharma and medical device companies need new product innovations more then ever.

The fourth focus is on acquisitions and joint ventures. We have recently identified some promising investment opportunities and we will be evaluating these closely and continuing our search. We have $70 million in cash and want to invest it wisely. We will talk more about this later in the year.

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

In the near-term as part of our advancing these goals we expect to first, see expansion of sales with L’Oreal and new initiatives with other major personal care companies which have already begun. Second, further expand our market share in the fresh-cut vegetable category. Third, start one or more research initiatives in new applications of our material science technology.

And fourth, move the M&A and investment activities from the broad search to a focus on one or more specific partner candidates. During fiscal 2010 we plan to expand our capital expenditure investments by 30% to 40% to approximately $6.1 million.

Major capital expenditures in fiscal year 2010 include the expansion of our value-added processing facility by 40,000 square feet in order to meet long-term projected increases in market share plus investments in equipment and productivity enhancement initiatives.

Over the next 24 months, we do plan to take advantage of broad application opportunities for our unique polymer technology. Looking at the long-term Landec has proprietary technology, a low cost structure, and a strong balance sheet to not only weather the current recession but to capitalize on new opportunities that are likely to emerge as undercapitalized companies look for partners and large corporations who are cutting their R&D budgets look for new products.

We see this as a time of opportunity. Our next 24 months goals are driven by our focus on achieving our long-term objectives for revenue growth and profitability and positive cash flow. We are now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tony Brenner - Roth Capital Partners

Tony Brenner - Roth Capital Partners

I have two questions, first of all as you recapture the rights to some of that seed technology to market it and do various things with it, particularly on the seed coating side, this required years of testing as I recall as customers tested very small plots then larger plots and so on during various crop cycles, are you going to have to start all over again with some of this or has none of it been discontinued, or what exactly will happen.

Gary Steele

Okay, as you know we’ve been working with Monsanto for several years. When we got together with them, they were in the midst of trying to develop a business strategy for setting up a new business called the Seed Treatments business. It took them about a year into our collaboration to get that formalized and started. Now they’ve been building it and they like it, and some of the work that we had done before that collaboration was put on hold, but we defined the collaboration to be the entire universe.

Any possibility for seed coatings and over the last several years through our work with Monsanto in laboratories and some field trials, they’ve begun to really focus on what they’re most interested in where they believe it’s the highest impact for them. And I’ve said very often, they’re not niche players. Its got to be really big for them or nothing at all.

So now we have found that focus with them and it turns out that in that area, we’ll have plenty of R&D and field trials ahead of us. Outside of that area, much of the work that we’ve done before on our own and some of which we did with Monsanto, outside of this new exclusive field, we can draw on that data.

And we can either pursue that on our own or work with partners. So once we get this modification worked out, hopefully in the next 60 days, we can draw on that information and go forward with others and that includes an existing business where we’re already making sales roughly about a million dollars a year; its called Pollinator Plus, and so we will derive not only the revenues but the very high gross margins from that business as well.

So its not a start-over. We can draw very heavily on data that we’ve already developed over the years.

Tony Brenner - Roth Capital Partners

And that $1 million pretty much is equal to the increased R&D liability that you’ll assume.

Greg Skinner

In gross margin, for at least this year, it’s a wash.

Tony Brenner - Roth Capital Partners

Okay, and my second question has to do with the military contract that expired. It sounded like a promising area for expansion. Is it dead completely or what happened.

Gary Steele

No, its still continuing and we’re doing shipping trials to Guam. So we just, its continuing but without that funding. We don’t need their funding anymore to be honest with you. What we need is for the, we were working with a group called [NADEC] which is the R&D side of the military, we now need to gather more shipping trial data such that procurement people will start to embrace this and plus we’ve got to figure out some logistics challenges such as navy ships for example not publishing when they’re going to set out on a cruise because that’s confidential information.

Well then how in the heck do you know when to get the produce to the dock, so, there’s some practical issues we’re working through but more importantly, we’re continuing in some important shipping trials and Guam is our focus right now.

Tony Brenner - Roth Capital Partners

It sounds like its still at a fairly early stage and [now] close to turning into a major contract for you.

Gary Steele

I think so. Its, I don’t know how many people on this phone have ever dealt with procurement in the military but there’s some art and some science here and we’re figuring out the art.

Operator

Your next question comes from the line of Peter Black – Winfield Capital

Peter Black – Winfield Capital

Just to follow Tony’s, his first question on Monsanto, I’m wondering if you could into a little more detail on the financial ramifications of this change because you spoke about it, you seemed to be pretty positive, but when I read it and think of what the potential had been of potentially coating a large amount of their seeds to a much more narrow focus, and obviously that’s not likely that they’d buy the technology now, you’re going to have the cost back on your books. Aren’t we now facing a situation where next year, the change in this relationship is going to be a negative on your P&L where it wouldn’t have been.

Gary Steele

Let me answer the second part of your question first, any negative impact next fiscal year would be minimal. So financially we view this as kind of a neutral. When you enter into a broad license that includes the universe, its just now, I’ve never seen, I’ve been in many licenses, I’ve never seen it where a partner is going to pursue everything.

You’re not going to pursue everything. And what we’ve been looking for from Monsanto is specificity as to where they believe in their organization and with their worldwide marketing sales capabilities, where can we have the most impact. And we’ve identified that.

By the way, it’s a technically challenging area. If it were easy, somebody would have already done it. It involves the control of insecticides and insects and fungus and those types of pests, in the area of agriculture by putting the chemical on the seed and delivering it at a certain time and over a certain rate.

So certainly challenging. Some of these other things that we were looking at on our own in the past in the Monsanto eyes, are not as huge as this opportunity. So what was going on, if you’ve been reading about Monsanto, they had a 8% worldwide layoff a couple of weeks ago. Everybody is on a spending freeze. You can’t travel in Monsanto without some high level person signing off.

So as you know they’re under attack by the Chinese and their Round Up chemical business, so they were, we started to hear about these things happening and gosh-dog it, if their cutting people in their organization, certainly they’re looking for ways of reducing some of their short-term R&D expenses.

So its kind of a convergence of, wow, they’d like some relief on the R&D funding side and we saw a number of applications that we were interested in that they weren’t going to pursue, but is the opportunity with Monsanto diminished? I don’t think so. I think the technical challenges are still there but it allows us to take things that they weren’t going to be focusing on and see if we can do something with them, with others or on our own.

So and by the way, the license fees are the same. The buyout provision will be the same. So I just see this as a good evolution of our relationship where now we have more specificity and if we can pull it off technically, it’s a very sizable opportunity and no diminishment to what we were thinking a year ago.

Peter Black – Winfield Capital

And how long do you think the field trials for these new applications will last before you have some kind of answer on whether or not—

Gary Steele

We have two years left in our five-year agreement. I see us running the full two years before we’ll know. It’s challenging stuff and that’s why its such a high value area for them.

Peter Black – Winfield Capital

And then when you talked about the unit volumes and also the revenues within your Apio value-added vegetable business being up 3% year over year excluding the extra week, is that really on an apples to apples basis or is the increase in your volumes due to bringing on that new large customer you have in this quarter.

Gary Steele

If you don’t mind the pun, its on a broccoli to broccoli, it does include the fact that we’ve increased market share such as taking the super value chain which includes Acme and Shaw’s and Albertsons and [Jewel], etc., so certainly we’re including in that group the new market share that’s just now kicking in.

Peter Black – Winfield Capital

But taking that out, your business is still doing better then the overall category.

Gary Steele

Yes, the industry is down 6% this last quarter, we’re up 3% and there’s also a mix issue here as you may know, our bag business is doing just fine. Its more in the tray business which is more discretionary as people are not, they’re not having the families and friends over for gathering, that kind of stuff.

Do we think that’s going to change anytime soon, I don’t know. I think this Christmas season, this holiday season is going to be very revealing. And obviously we’ll disclose to people how that looks but we needed some resurgence in consumer confidence and if you saw consumer confidence index four days ago, its still pretty darn low in the US.

Operator

Your next question comes from the line of Chris Krueger - Northland Securities

Chris Krueger - Northland Securities

On the new expansion, what’s the timing on that, when do you expect that to be operating.

Gary Steele

Boy you’re asking the same question I’m asking our people because in an ideal world, you’d love to have that all done for the holiday season and I will tell you they’re really, they’re working their fool heads off down at Apio, but the whole idea is to have most of it done by November.

Chris Krueger - Northland Securities

Okay, so its right away then. What do you think the impact just from that expansion, is there any sales that you’re currently missing because of your [inaudible] capacity, or is there any impact you expect on growth or margins.

Greg Skinner

The initial focus of the build-out is going to allow us to bring our raw product storage in-house. Currently we’re using third party coolers to store a lot of our product or at least a percentage of it, especially during the busy holiday season. This is going to allow us to bring that all in-house. That’s going to save cost from an aspect of not having to pay the third party cooler.

Not having to freight it to their cooler and back over to our cooler. You can imagine that adds cost. So there is going to be a cost savings, at least initially for that alone. And then its going to allow us the space for capacity and expansion.

Gary Steele

Longer-term though, and I don’t mean really long-term, the whole idea here is to just be a much more efficient operator. We know we have cost pressures in terms of land values that are farmer partners have. We know that the cost of our produce, raw materials, that the pressure has been up. So we need to offset that with efficiencies in a very streamlined SG&A, so that’s what we’re investing in.

Chris Krueger - Northland Securities

I know you gained some super value business that you just talked about, has there been any other meaningful new customer wins, or any losses for that matter.

Gary Steele

We gained, I’m not going to get into specifics here because of competitive reasons, but we gained another one recently and we lost one recently. First time I can remember us losing a customer in a while and it was, so its kind of a wash. One of our customers, it was just all about price and we’re not all about price.

So there’s a little bit of a wash that took place recently. But in general we’re up on market share as reported in our numbers.

Chris Krueger - Northland Securities

And last, what was your CapEx and your depreciation for the quarter.

Greg Skinner

CapEx was about $1.3 million, and depreciation was around a million, how about $800,000.

Operator

Your next question comes from the line of Nick Genova - B. Riley & Co.

Nick Genova - B. Riley & Co.

A couple of questions, first within the Chiquita business, I don’t know how specific you want to get but I’m trying to get a sense for, it seems like they’re doing a lot of good things there that they’re rolling out overseas in some areas. The Chiquita to go program in general, you’re seeing it in more convenience stores, etc., can you give us a sense for when you might expect that to begin to exceed the minimums and then how it ramps from is it like a hockey stick perspective or would it more of a kind of slow steady increase and how that plays out into fiscal year in 2011 and beyond.

Gary Steele

Excellent question, if it’s the Chiquita to go program alone with the rollout of more coffee chains and stores and things like that. I don’t know if you’re, I was just in a Starbuck’s this morning and boy, those bananas sure looked good. If its just the continuing rollout and build up of Chiquita to go, view that as a steady as you go kind of a build up including some expansion in Europe.

If we get a hit in one of the quick serve restaurant chains, then that’s more of a hockey stick and we got kind of jazzed about McDonald’s and all that in that we really did well in the test and all that. But it’s a function of how they’re prioritizing their development programs and it looks like the coffee rollout and some other drink items are of highest importance to them and it doesn’t look like improving their nutrition line up is as high as importance as it was a year ago.

I mean, they’re selling a heck of a lot of quarter pounders right now in this recession. So we would need, we’d need a catalyst like that and it doesn’t have to be McDonald’s. It can be any one of the major chains for this to really look like a hockey stick. Otherwise its just a steady build up and I would think that some time next year we would be able to exceed our minimums.

Nick Genova - B. Riley & Co.

So its not in test anywhere else then, so if it was to go into another quick service restaurant it would have to first be tested similar to the McDonald’s program and then potentially it would go beyond that.

Gary Steele

I believe there is one other chain and I’m not 100% sure on this, but I believe chain where tests have begun.

Nick Genova - B. Riley & Co.

And then moving on to a different aspect, on the gross margins, the last couple of quarters you seem to have done a pretty good job counteracting the challenges with the California land costs and produce costs in general, have you been able to successfully pass on some price increases and what’s your gross margin outlook. I know that I think that the margins also get impacted by the mix shift out of tray business so can you just give us a sense on what you feel the gross margin is going to go directionally.

Greg Skinner

You can imagine in this economy that trying to pass on price increases, especially when your competitors out there competing against you on only price is next to impossible. So I can tell you we try where we can, but the success rate in this economy is not going to be high.

As far as margins overall, we suspect the margins will be lower in fiscal year 2010 then they were in 2009. Dramatically lower, no. It is driven by the increase in the cost of produce which we’re as I just mentioned, not able to pass on, and then the mix. And the mix does have a fairly substantial change in your margins as you shift to more bags and less trays as a percentage of what you did the year before.

Your margins are going to change somewhat but it doesn’t necessarily mean that it hurts your gross profit. Its more of a, as long as your gross profit is going up, your margins are slightly lower. You’re obviously increasing your bottom line and that is what we’re focused on.

Nick Genova - B. Riley & Co.

Just to clarify one of your comments regarding margins being lower in 2010 compared to 2009, you had some pretty rough quarters last year where you got down to the 10% range, you don’t anticipate going back down to that level within the Apio value-added segment.

Greg Skinner

No, we don’t see that right now.

Operator

Your next question comes from the line of Greg Weaver – Invicta Capital

Greg Weaver – Invicta Capital

On your trading business you had really good margins there in this last quarter, what drove that.

Greg Skinner

Well the, what we exported basically broccoli and fruit, and so as your mix changes to more broccoli or vegetables, your margins tend to be higher and this was a tough fruit specifically stone fruit, season. That’s one of the major drivers for why revenues were down so much, so as a result of the mix change, that’s why margins are up.

Greg Weaver – Invicta Capital

Okay and just on the guidance for flat EPS, what tax rate is assumed in that.

Greg Skinner

Right now our tax rate we’re assuming is 37% for the year, slightly less then last year.

Greg Weaver – Invicta Capital

Okay so pre-tax income will be reasonably close to flat, year over year.

Greg Skinner

Reasonably close, yes.

Operator

Your next question comes from the line of Nelson Obis – Winfield Capital

Nelson Obis – Winfield Capital

I don’t want to dwell on something that’s a bit of a disappointment but frankly I know you’re frustrated sometimes when you deal with partners and your shareholder base in regard to the whole polymer technology also has a hard time assessing what the upside is and handicapping what might catch on. I just wanted to go back and do a little Monday morning quarterback in regard to the Intellocoat product, the dream if I remember right, was the idea that the Intellocoat would be, that all the seeds would be coated and then basically it would serve as a time release that would allow uniform planting of the seeds and then the seeds would actually germinate or be available to germinate, only when the soil moisture and soil temperature reached an optimum level. When I heard that, that sounded like a serious step forward in the whole seed area. So, I’m curious what your Monday morning thoughts are about why this hasn’t translated into something bigger with Monsanto, were there some issues about putting the Intellocoat on in a uniform manner that would have given them the optimism to go forward because it really was a very, very positive dream out there which I still, well I don’t know what to think about, but maybe we should return to that for a second and help us out.

Gary Steele

I may be missing some of your thoughts here so bear with me here, this is, Monsanto has had several years to figure out what they want to do in the seed treatment business. That’s why they got together with us. And what they want is to transform the way chemicals are applied to plants and they want to do it by putting more and more of the active ingredients on the seed and their whole stick is to be involved with our tech, use our technology for controlling insect pressure and may be down the road, weed pressure.

So that’s their focus. They told us that a year ago. That’s where we’ve been increasingly putting our time and attention and that’s where they think the biggest impact is in the marketplace. So as they were asking for something on our side, which is some relief on R&D funding to deal with their downsizing and all of that, we wanted to take some fields such as what you mentioned, early plant [form], dust off, treatments of soybeans so that they can, with coatings, so that they can carry over from year to year.

Those are areas that Monsanto is not focused on so let’s get those back and we can see if we can work with others. So Monsanto’s interest in using our coating technology for the release of active ingredients is now more focused then ever and it’s the big area for them. The big area for Monsanto means access if it works, to one third of the worldwide market share.

So for us its, my view is, I’m glad they’re focused. Tell us, we’ve been asking, what do you want, where do you think the biggest potential is and they’ve told us. So now we get to focus on that and I didn’t want stuff to just kind of sit around outside those areas doing nothing while we were focusing on Monsanto.

Let’s get it back, let’s do something with it. So my view is this is the natural evolution of a five-year license agreement.

Nelson Obis – Winfield Capital

So what am I missing here. If you have a product that allows uniform planting and in an efficient manner and then when the soil moisture and soil temperature reaches a certain level, that serves as a trigger to allow the germination process to begin. That should be a revolutionary product unless its already out there. Am I missing something, it sounds like what you’re saying is that’s not something you’re going to let go of but am I missing something in terms of what the opportunity is or what the challenge is or whether other people have this.

Gary Steele

Are you talking about the program where you can plant the plant, you can plant seeds earlier then normal?

Nelson Obis – Winfield Capital

Yes, Intellocoat, with the Intellocoat—

Gary Steele

Yes, that was our early focus. That’s not the primary focus of Monsanto.

Nelson Obis – Winfield Capital

No I understand that, but I mean, forget about Monsanto for a second. They’ve made their choice. The question is, from your perspective trying to find a viable product, shouldn’t that be a revolutionary product despite what Monsanto has decided or not decided. Am I missing something about what the potential promise of that particular Intellocoat product might be.

Gary Steele

No, you’re not. We’re very excited about it. So let’s go see if we can work with someone else on that. We’re not going to do that one on our own. That would require substantial partnering efforts to help us on that. And so now we have the ability to work with others in that area and others. There are actually other areas emerging that we haven’t talked about especially as the value of soybean is going up and up and up every year.

Soybean was kind of viewed as a low value seed in the past and now we think that it has become very expensive and people are very concerned about how to use soybean most effectively and we get to coat soybean now.

So no, you’re not missing anything. I think the promise is still there.

Nelson Obis – Winfield Capital

And is that your Pollinator Plus product specifically.

Gary Steele

No, Pollinator Plus is different then what I’m talking about. Pollinator Plus is involved in the production of what’s called seed corn where you get to, there’s, believe it or not there’s male corn and female corn and this has to do with the timing of the male corn and the female corn pollinating at the ideal state, at the ideal time, and we can do that beautifully and we’re working with a number of customers right now that use that in their production scheme.

Now we get to expand that on our own. We get the revenues and the margin from that. But that’s different from what I was talking about.

Operator

Your next question comes from the line of Will Lauber – Sterling Capital Management

Will Lauber – Sterling Capital Management

Just kind of following up, maybe I’ll ask that a different way and maybe we can, because I’m quite confused here too. If Monsanto was coming to you for R&D relief of whatever it is, $1 million a year, kind of a drop in the bucket for them, you kind of have to wonder what, it certainly seems like the early planting seed would be quite a, it might not be a huge opportunity for them, but it would certainly be something that would be significant at certainly more then the $1 million in the R&D relief that they were seeking. I guess I’m just kind of missing, did they not like the test or—

Gary Steele

Their interest in early planning, they indicated to us a year ago that that was not the mainstay of their new seed treatment business. So we’ve known for over a year that that was a low priority for them because there were other things that were emerging as much higher priorities for them. So they want to focus on the higher priorities, which have to do with a timely release of these active ingredients that I’ve referred to.

And we saw that this opportunity, if they’re not going to prioritize early plant corn or other things like that, let’s do it with others. Let’s do it with others and its not the million dollars for Monsanto, it’s a drop in the bucket for them, but I think they found it really difficult for them to be laying off 8% of their workforce worldwide and just dramatically slashing other budgets and still continuing to fund us at the same rate.

So they came to us and we’re working out this type of mutually beneficial agreement.

Will Lauber – Sterling Capital Management

I guess just following up on that, like the last caller, I see that it could certainly be a kind of big potential and I can’t imagine that if it’s a positive for Monsanto that they would just give this up and let you go to the competitors unless they saw something that, am I missing something there.

Gary Steele

No, I think its all down to prioritization. They know what they want to focus on with us. That’s where they’ve got their mind set on it. It’s a big area for them and for us if it materializes. And in the other areas, they weren’t going to get at it either for quite a while or never. So our view is let’s extract some value from this.

Will Lauber – Sterling Capital Management

And then you have been taking market share here over the last year, I believe in the past you had mentioned your market share in the tray, I don’t know if it was around close to 40%, 50% of the market. Where does that stand now and then do you have any approximation of, on the bag side of the market.

Gary Steele

The market share in the tray area is about the same. Its been fairly steady and the bag area has been increasing especially with the super value chain and that market share is around 30%.

Will Lauber – Sterling Capital Management

Okay so the tray is still, was it, I’m sure I have it somewhere in our files, about 45% or something like that.

Gary Steele

Yes.

Will Lauber – Sterling Capital Management

And then my last question, you had mentioned your new VP of Development and you have come up with kind of five areas, can you draw those out and I guess for the lay people out here, point out some of the potential uses in those categories.

Gary Steele

Right, they’re in three or four areas, primarily without going into too much specificity, and I’d prefer not if you don’t mind, but one is in the area of controlled release which involves the delivery of some type of a molecule either through time or temperature, and that molecule can be a drug, it can be a catalyst, it can be a insecticide or a pesticide.

It could be a flavor, it could be a fragrance, and so that whole area is definitely high priority for us. And by the way the, we think that the drug delivery approach is very synergistic with what we’re focusing on with Monsanto. There’s a lot of synergy in that.

The second area is in the membrane area and that is if we make membranes for food packaging that allows the food to last longer by controlling transport of certain types of gases, why don’t we look at applying that membrane technology to non-food uses. So that’s a second area.

The third area is in the area of unique coatings and what we call viscosity modifies, where by just changing temperature a little bit, the viscosity or the flow properties of our materials can change rather dramatically around that temperature switch.

So we’ve identified a couple of anchor, what we would call anchor development programs around each and they all have potential partnering aspects to them. So that’s what we’re doing in these application areas that are outside of food.

We also have a couple of significant new programs that we’re evaluating in the food area which would involve proprietary technology and/or existing use of our channels of distribution. We’re well set to put other products through our channels in the food areas as well.

So those are high priority programs for us both in and outside of the food arena.

Will Lauber – Sterling Capital Management

And any kind of timeline, I know with the new person coming in and getting up to speed, and going out and knocking on doors, do you have any kind of goals as to next fiscal year signing deals or what—

Gary Steele

We would, in the food program area, I think that could move faster for us because we’re already geared up and set to develop products and launch products in that area, so I could see several of those programs generating revenues in our next fiscal year.

In these non-food new materials areas, which include by the way bio materials, that’s development, that’s a development effort and I think it would be unrealistic to say that next fiscal year you would have any materiality in revenues. Unless something really unexpected happens, I would say that’s a little bit longer-term.

Will Lauber – Sterling Capital Management

And any kind of a bonus compensation for the new employee based on number of deals or size of deals.

Gary Steele

No, that’s not how we, we look at net income growth and free cash flow as our measures for how we compensate folks. If we had longer time, I could—

Will Lauber – Sterling Capital Management

I agree with that—

Gary Steele

There’s some real problems—

Will Lauber – Sterling Capital Management

[inaudible] you and Greg, for someone who’s job is to go out and get new business, I understand how that eventually will flow through but—

Gary Steele

We are, let’s just say that our VP of Business Development is highly motivated and the compensation, in my opinion is right. I don’t like tying it to doing deals. Its fraught with a lot of floss, but she is highly motivated.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Gary Steele

Thank you everybody for being on our call today and we look forward to keeping you all apprised of our plans and progress. Many thanks.

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Source: Landec Corporation F1Q10 (Qtr End 08/30/09) Earnings Call Transcript
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