Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Gary T. Steele – Chairman, President and Chief Executive Officer

Gregory S. Skinner – Vice President – Finance and Administration and Chief Financial Officer

Analysts

Tony Brenner – Roth Capital Partners

Chris Krueger – Northland Securities, Inc.

Morris Ajzenman – Griffin Securities

William Lauber – Sterling Capital Management

Warrick Jervis – Trailhead Asset Management, LLC

Landec Corporation (LNDC) F4Q 2011 Earnings Call July 27, 2011 11:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Landec Fourth Quarter and Fiscal Year 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this program is being recorded.

I would now like to introduce your host for today’s program, Mr. Gary Steele, Chairman and CEO of Landec Corporation. Please go ahead, sir.

Gary T. Steele

Good morning, and thank you for joining Landec’s year-end and fourth quarter fiscal year 2011 earnings call. I have with me today Greg Skinner, our Chief Financial Officer.

This call is being webcast by Thomson Reuters and can be accessed at Landec’s website at www.landec.com on the Investor Relations page. The webcast is available for 30 days through August 26, 2011. A replay of the teleconference will be available for one week until midnight Eastern Time, Wednesday, August 3, 2011, by dialing 888-266-2081 or 703-925-2533. The access code for the replay is 1540771.

During today’s call we may make forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially. These risks are outlined in our filings with the Securities and Exchange Commission, including the company’s Form 10-K for fiscal year 2010.

For our fiscal year 2011 which ended in May revenues grew 16% to $276.7 million and adjusted EPS grew to $0.33 per share prior to a one-time $4.8 million non-cash, non-tax deductible impairment charge for the write-off of Landec Ag's goodwill.

Landec generated $14.5 million in cash from the operations this past year, up 93% from our prior fiscal year. Cash balances remain strong at $36.3 million. Landec’s achievement and results in 2011 fiscal year are based on substantial progress in each of our businesses.

Our acquisition of Lifecore exceeded our expectations in the first year. In addition to the successful integration of our Lifecore Biomedical business with Landec, Lifecore demonstrated substantial growth in revenues from $20 million prior to the acquisition to $32.5 million, representing a 63% increase in sales for our fiscal year.

Lifecore EBITDA grew from $2.9 million prior to our acquisition to $9.9 million this past fiscal year, reflecting substantial leveraging of Lifecore’s capacity utilization as we increased unit volume sales to customers. We had expected $7 million to $8 million in EBITDA, but Lifecore was able to generate $9.9 million in EBITDA and achieve the sales growth as I mentioned of over 60%.

Revenues in our Apio fruit business increased by 3% or by $7.3 million in spite of quite difficult consumer economic conditions in the food sector and in spite of terrible weather in major produce growing regions. Extremely poor weather in California and Arizona adversely affected our ability to source produce for a value-added, specialty packaging food business, resulting in approximately $5 million in weather-related variances. In spite of those difficult conditions, we continue to serve our customers well during this time period.

In the fourth quarter, the industry fresh-cut category grew 3%, which was the first time the category has shown any growth in several years. Also in the fourth quarter, we resumed sales growth in Apio's value-added vegetable business and we grew revenues 9% in the quarter.

During fiscal year 2011, we also continue to work closely with Chiquita to expand the Chiquita-to-Go banana program and to launch the Fresh & Ready Avocado product line with both programs utilizing our BreatheWay proprietary packaging technology. Both programs continue to expand. The newer Avocados program is delivering fully ripened and ready to eat avocados to consumers and at the same time, the program is delivering two participating retailers, good revenue growth in the new category for Chiquita providing double-digit sales increases compared to conventional avocados.

In our third fiscal quarter, we announced $15 million equity investment in Windset Farms. Apio, our food subsidiary had an existing exclusive license agreement with Windset and views the equity investment as a continuation of our ongoing strategic partnership in the fresh produce market.

Apio gives Windset Farms, the most advanced hydroponic greenhouse producer in North America where the demand for hydroponically grown produce is rising rapidly. The hydroponic process just as in the side uses no soil and only a fraction of the water required in fuel production. Furthermore, the process results in higher yields per acre and it is not burdened with traditional weather-related or soil-borne risk.

In our existing license agreement, Windset Farms license from us the exclusive rights to Apio’s BreatheWay packaging technology for use with their hydroponic greenhouse grown cucumbers, tomatoes, and peppers.

As part of our strategic equity investment in Windset, we also received a 7.5% annual dividend on our investment and quarterly we will recognize 20.1% of the change in their fair market value. By example, from the closing date of February 15, 2011 through the end of fiscal year 2011, which was this past May, Landec recognized $328,000 in dividends and $662,000 in income from the increase in the fair market value of its investment in Windset.

Windset has purchased 222 acres of land in Santa Maria Valley and these properties are near Apio’s operations and we’re constructing 64 acres of indoor vegetable production for numerous varieties of hydroponically grown tomatoes. And this project has to be completed this fall.

In this synergistic relationship, Windset uses our packaging technology. We have access to their high quality produce product lines grown hydroponically. We earn a 7.5% dividend and we benefit from the change in the fair value of Windset, which we expect to further increase as they complete their Santa Maria greenhouse project early this fall.

Also in fiscal year 201, although, later than we anticipated, we have advanced our work with Monsanto to the beginning stages of biological trials, more on this later.

During fiscal year 2011, the use of Landec's Intelimer additive materials technology for personal care cosmetic products advanced and has now been formulated into over 50 products. And notably, during fiscal year 2011, we generated cash flow from operations of $14.5 million, up 93% from the prior year and we have maintained a strong balance sheet of over $36 million.

Let me now turn the call over to Greg, who will fill us in on the specifics of our financial results.

Gregory S. Skinner

Thank you, Gary, and good morning, everyone. In the yesterday’s news release, Landec reported for the fourth quarter of fiscal year 2011 revenues increased 17% to $68.1 million versus revenues of $58.2 million for the fourth quarter of last year.

The increase in total revenues during this year's fourth quarter compared to last year's fourth quarter was primarily due to, first, a $4.1 million increase in Lifecore revenues, which was acquired on April 30, 2010. Second, a $3.9 million or 9% increase in revenues from Apio’s value-added vegetable business. And third, a $1.7 million or 15% increase in Apio’s export revenues.

For the fourth quarter of fiscal year 2011, Landec’s net loss was $2.7 million or $0.10 per share compared to a loss of $1.5 million or $0.06 per share for the fourth quarter of last year. The increase in the net loss during the fourth quarter of fiscal year 2011, compared to the fourth quarter of last year was due to a $4.8 million impairment charge for the write-off of Landec Ag's goodwill and a $455,000 pre-tax loss at Lifecore due to the timing of shipments between the third and fourth quarters this past year.

These increases in the net loss were partially offset by the absence of the $3.7 million of non-reoccurring impairment and acquisition-related charges recorded during the fourth quarter of last year, and from a $363,000 increase in pre-tax income for Apio.

Excluding the impairment charge during the fourth quarter fiscal year 2011 and the non-reoccurring charges during the fourth quarter of fiscal year 2010, adjusted earnings per share for the fourth quarter of fiscal years 2011 and 2010 would have been $0.08 and $0.09 respectively.

Landec Ag's goodwill of $4.8 million have been generated in connection with the sale of Fielder's Choice Direct to Monsanto and had resulted from Landec's purchase of the remaining shares of Landec Ag's common stock still owned by (inaudible) not already owned by Landec. In the subsequent program with Monsanto while there has been good technical progress on the controlled release of actives from seeds-applied coating, it became apparent during the fourth quarter that conclusive biological test results are probably not achievable in the four months left in the agreement before Monsanto has to make its purchase option decision.

The uncertainty related to whether Monsanto will exercise its purchase option for the exclusive licensed field of technology, and the fact that Landec Ag is projected to be unprofitable for several years absent any ongoing relationship with Monsanto, these were the main factors contributing to the decrease in the estimated fair value of the Landec Ag business and thus full impairment of the related goodwill.

For fiscal year 2011, revenues increased 16% to $276.7 million versus revenues of $238.2 million for the same period a year ago. The increase in revenues during fiscal year 2011 compared to fiscal year 2010 was due to the $31 million increase in revenues from Lifecore and a $7.4 million increase in Apio revenue.

For fiscal year 2011, net income was basically flat with last year at $3.9 million or $0.15 per diluted share. There were several offsetting items, which resulted in net income being virtually unchanged from last year.

Items that decreased net income were, first, the $4.8 million goodwill impairment charge. Second, a net decrease in pre-tax income of $3 million at Apio primarily due to weather-related produce sourcing issues in Apio’s value-added vegetable business. And third, a $2.9 million increase in technology, licensing and corporate operating expenses due to several factors, including first, a full year of Landec Ag operating expenses compared to only half a year in fiscal year 2010, as operating expenses for the first half of fiscal year 2010 were reimbursed by Monsanto.

Second, an increase in stock-based compensation expense. Third, an increase in R&D expenses due to the hiring of additional scientific staff. And fourth, an increase in accounting and tax service fees.

Items that increased net income were Lifecore’s net income of $7.3 million and the absence of $3.7 million of non-reoccurring charges, which negatively impacted net income in fiscal year 2010. Excluding the $4.8 million impairment charge during fiscal year 2011 and the $3.7 million of non-reoccurring charges in fiscal year 2010, adjusted net income per share for fiscal years 2011 and 2010 would have been $0.33 and $0.29 respectively.

For fiscal year 2011, capital expenditures were $6.7 million. Depreciation and amortization was $5.3 million. Gary?

Gary T. Steele

With Lifecore Biomedical now in place, Landec has focused on three core businesses. The first, we describe as our bioagricultural applications business, encompassing our food packaging and processing business and our seed-coatings partnership.

The second business for us is our biomedical applications business, encompassing the medical devices and materials that we make at Lifecore as well as our personal care additives and our drug delivery program.

The third area encompasses other licensing activities for applications such as specialty adhesives and functional coatings. Let me say a few words about important and existing partner programs.

We continue to support our licensing partner such as Chiquita with a roll out of its Fresh & Ready to eat Avocado program. Chiquita demonstrated with retail and food service customers that sales volume goes up and product rates goes down for avocados packaged with our BreatheWay technology.

We continue our exclusive program with Monsanto and Monsanto has just now begun important biological studies. Both parties are committed, are committing sizable levels of technical resources to the joint program especially given the December 1, 2011 contractual decision date ahead of us. As Greg mentioned, we just don't know how these biological results will turn out from what decision Monsanto will make.

Landec and Monsanto may decide before the current agreement terminates on December 1, 2011 to extend a purchase option date for Monsanto in order to have more biological test data. We’ll keep you posted.

We have stepped up our technology licensing activities, but at this time, we cannot disclose any details of our discussion. They are early stage, except that we are focused on selecting partners that can succeed in commercializing our technology even if upfront license fees are relatively small.

The current fiscal year, starting June 1 is off to a good start. In our bioagricultural applications businesses encompassing our food packaging and processing and seed-coating businesses, weather is very good so far for our Apio food business subsidiary. We hope that the recent fresh-cut industry category growth of 3% will continue or increase. We plan to introduce several new products and product lines at Apio in the coming quarters.

Windset is ahead of its construction schedule by several months. We expect Windset to launch new BreatheWay packaged products for cucumbers in the next quarter or two. And we plan to purchase high-value unique tomatoes from Windset’s new Santa Maria operation for our Apio vegetable trade business.

And Chiquita reports continued good results in its avocado program with retailers and foodservice operators as it continues to line up and strengthen its year round sourcing for avocados. And as stated earlier, Monsanto was committing sizable resources to our joint program.

In our biomedical applications field, which encompasses our medical devices and materials, personal care additives and drug delivery program, Lifecore has several products in review at the FDA. We plan to offer expanded opportunities and offerings from Lifecore. We expect further penetration into the personal care products market this year beyond the current 50 products we are currently in. And the collaborative technology evaluation in the drug delivery area is providing us with new insights as to where our technology might add value in drug delivery. In our licensing activities, we are moving forward on a number of early stage licensing discussions.

Regarding our guidance for fiscal year 2012, we plan to grow revenues in the range of 5%. And after adding back the $4.8 million impairment charge to net income for fiscal year 2011, we plan to grow net income by 30% to 40%.

As we look to further growth in fiscal year 2012 and beyond, our focus is very clear. Our goals are to grow Lifecore’s business by utilizing Lifecore strength in ophthalmology, its strong position in viscoelastic materials and sterile filling. Secondly, intend to grow Apio’s food business and maintain Apio’s margins. Third, maintain (inaudible). Fourth, find new investment opportunities for growth and margin enhancement.

Fifth, support Chiquita with its rollout plans for avocados and bananas and some other targets in the tropical fruit area. Six, support Monsanto with strong technical contributions, and seventh, find new applications for our BreatheWay packaging technology. We do see growth opportunities and we are expanding our investment in R&D to take advantage of these opportunities while continuing to shift the revenue mix to higher margin businesses as evidenced in the results for fiscal year 2011.

We have a growth plan for this year and years to come and we are now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Tony Brenner from Roth Capital Partners. Your question, please.

Gary T. Steele

Good morning, Tony.

Tony Brenner – Roth Capital Partners

Good morning. I have three questions I guess. First of all, how will Windset’s fair market value be determined each quarter?

Gary T. Steele

Well, there is actually formula within the agreement, which as long as that formula continues to approximate fair market value, that’s a formula we’re going to use. It’s only on an annual basis, Tony, we’re going to have to get appraisal done and it’s based on a discounted cash flow model.

Tony Brenner – Roth Capital Partners

Okay. Secondly, regarding the earnings guidance, it’s in the release, it implies an unusual quarterly pattern with a very low first quarter and an especially strong fourth quarter, what’s the reason today?

Gary T. Steele

Well, it’s a combination of things. One, is the Lifecore shipment pattern and we’re making our best guesstimates on what we think the customer order patterns are going to be in. We do have quite a bit of insight to this because they ask their customers for six-month type of forecast. So usually they come pretty close.

And then secondly, it’s our best estimate on the change in the fair market value of Windset, which is the biggest swinger here and that’s because when the Santa Maria project (inaudible) products that will be sold from that projects, obviously, that becomes commercialized, you’re going to see a significant increase in fair value, which should be in our fourth quarter.

Tony Brenner – Roth Capital Partners

Last question, I didn’t go back and check, but I'm pretty sure that this is the first release and in least a decade in which the word banana doesn’t appear. Does that mean that bananas are at least for the time being out of the picture in terms of being a potential growth driver?

Gary T. Steele

It was mentioned, I mentioned at least one time, Tony, so no…

Tony Brenner – Roth Capital Partners

In your remarks, but it’s not in the release.

Gary T. Steele

Only in the release. Okay, thank you. No it doesn’t imply that at all. They are expanding their Chiquita-To-Go program. I'm going to give you a personal point of view here and that is that recent events in the posting of calorie counts and more visibility to consumers in terms of what they’re consuming and whether it’s good or bad for them.

There is leading people like McDonald’s who recently announced that’s it’s going to put sliced apples and Happy Meals. I think there is more pressure on those types of operations to start to support the sale of healthy products. So no, we’re expanding the Chiquita-To-Go program not only in the U.S., but there seems to be new energy in Europe. There were some changes at Chiquita that led to some management changes in Europe and they seem to be putting some energy behind it. So, if it wasn’t mentioned, it’s our oversight, it’s not because anything is, have less enthusiasm or less interest.

Tony Brenner – Roth Capital Partners

Is anything called there were something like, so a fair amount of time again roughly 7,000 affiliates in which Chiquita-To-Go has appeared, does that number changed, are there any meaningful accounts have been added?

Gary T. Steele

The last time we gave a number and it’s been several years because the emphasis at Chiquita became more on volume than it was on the number of sites. But last time we gave numbers it was in the 20,000 to 25,000 sites and I would only get to that number, it has to be higher because they’ve been expanding.

Tony Brenner – Roth Capital Partners

Okay. Thank you.

Gary T. Steele

20,000 to 25,000 sites and they are in two-thirds of Starbucks and I think there is gosh, I think there is, trying to remember the number of Starbucks in North America, but I think it’s around 11,000.

Tony Brenner – Roth Capital Partners

Thank you.

Gary T. Steele

Thank you, Tony.

Operator

Thank you. Our next question comes from the line of Chris Krueger from Northland Capital. Your question, please.

Gary T. Steele

Good morning, Chris.

Chris Krueger – Northland Securities, Inc

Good morning, following up on the last question, I just want to be clear on your quarter-to-quarter guidance for the fourth quarter, which is going to be, expected to be higher than second and third, that is mostly or largely based on the Windset project, starting to sell product, is that clear.

Gary T. Steele

Mostly, yes.

Chris Krueger – Northland Securities, Inc

On the avocados rollout, do you have an idea of what percentage of retailers or grocery retailers are selling those products now and where that was at quarter ago?

Gary T. Steele

Gosh, I don’t but it’s small, they have little bit like pattern in Europe, they’ve got to roll it out consistent with their ability to do year round sourcing. You can’t launch avocados just for a few months and then withdraw; you have to have your own sourcing. And so they’ve been lining up, they’re sourcing from North America, Central America, and South America. But the last time we mentioned any specific site data, Chris, you may recall, I think it was a quarter or two ago, they were in 1,500 sites, 1,500 sites and that is expanding. But I couldn’t tell you, so it’s relatively small in terms of market share. But what they are finding is that when they’re in that site, the velocity goes up in double-digit plays and the shrink was down appreciably. So, I think they are just trying to track this rollout, so that they don’t get ahead of their supply lines.

Chris Krueger – Northland Securities, Inc

Okay. One last question on Lifecore, you indicated you have several products in review with the FDA right now. I was wondering if you just kind of give us a little bit more insight into the types of products, or kind of offshoots of what you currently are selling, or did they bring it to new markets or just a little bit more detail on that?

Gary T. Steele

They are in the ophthalmology field, they’re viscoelastic materials, which is what Lifecore does and makes. So it’s they are in that same strong area that Lifecore focuses on. So view those as more in the product extension arena rather in that totally new platform.

Chris Krueger – Northland Securities, Inc

Okay. So is fair to say that current customers, if these gain approval, you could bring it deeper into current customers as well.

Gary T. Steele

Yes, that’s, well, yes that’s exactly the right way to think about it, exactly.

Chris Krueger – Northland Securities, Inc

All right, that’s all I’ve got. Thank you.

Gary T. Steele

Thanks, Chris.

Operator

Thank you. Your next question comes from the line of Morris Ajzenman from Griffin Securities. Your question, please.

Gary T. Steele

Good morning, Morris.

Morris Ajzenman – Griffin Securities

Good morning. Hey, so this year fiscal ’12, you have been talking about corporate licensing deals for a while and you can’t be that specific, if something happens, but should we expect something happened over the next 12 months this current fiscal year. I guess it takes time, but are we getting closer to something being announced potentially?

Gary T. Steele

Did you settle for an answer, this says, I don’t know? Is that an appropriate answer to your question because it’s hard to judge these things. We were close to win last year, I’ve spent a lot of time on it and at the end of the day, it just didn’t make sense, so has to go forward, it just, we could not agree on terms that we felt were fair for our shareholders, so we walked. So those are types of things didn’t happen in licensing discussions. But I’d say that there is a handful, five fingers on a hand of licensing discussions going on right now. And we like them because there is good fit for our technology, but I just can’t tell you, Morris whether one or more of these are going to hit, but I would think that if you had 5.5, wherein you could really come to terms, at least one of them would come to fruition. So that’s the best answer I can give you. I’d hate to mislead you and tell you, absolutely, who knows?

Morris Ajzenman – Griffin Securities

Fair enough. One last question, when you do that, you gave us some of the projected revenue and earnings growth this fiscal year, you lump together and it’s a big number, increase in Apio pre-tax and Windset, $0.29 and $0.31, would you care to kind of break those two apart to give us some idea of what, so we can kind of understand what you see happening this year with those two products?

Gary T. Steele

Morris, can we take it offline? I don’t have that immediately available.

Morris Ajzenman – Griffin Securities

Thank you.

Gary T. Steele

Thanks, Morris.

Operator

Thank you. Our next question comes from the line of Bill Lauber from Sterling Capital. Your question, please?

Gary T. Steele

Good morning, Bill.

William Lauber – Sterling Capital Management

Hi. Got a few questions here, I’ll get some of the easy ones first. When is that dividend, when do those hit, is it the same quarter, or is it every quarter?

Gary T. Steele

Well, we’re looking monthly. It’s every quarter, it’s paid annually in May. So our first payment will be (inaudible).

William Lauber – Sterling Capital Management

Which you book at month?

Gary T. Steele

But we book it monthly.

William Lauber – Sterling Capital Management

Okay.

Gary T. Steele

So it’s 1.125 million per year, we book whatever that is divided by four per quarter 280,000.

William Lauber – Sterling Capital Management

And that cash actually hits in May?

Gary T. Steele

And then we get paid in May. Yeah.

William Lauber – Sterling Capital Management

Okay. Now I guess, created on your cash flow assumptions in the release, coming up with the free cash flow somewhere approximately $9 million to $10 million, and then assuming, I guess, you don’t push up the Monsanto deal more than a year, you’d have about $4 million there, so your cash balances increased somewhere in lines of $13 million to $15 million, am I correct in that?

Gary T. Steele

That’s probably in the ballpark because the four, remember it’s not part of operating. So the guidance was operating cash flow. The $4 million we considered investing. So in a different section your cash flow and anything dealing with the increase in Windset, which is projected to be a fairly sizeable amount this next year. That is deferred and just becomes part of your investment, and you don’t get that cash until a put or call at the end of year six.

William Lauber – Sterling Capital Management

So I guess, implement the (inaudible). The next question I guess, you guys could pretty much I guess use your cash proceeds over the next year to eliminate the debt, I'm just thinking of your thought there. Would you guys stand on your debt again and then I assume you’re still mainly in short-term treasuries and communities, which are probably not yielding enough, too much at all.

Gary T. Steele

That’s right.

William Lauber – Sterling Capital Management

You got that right.

Gary T. Steele

The debt is 4.2%, it’s fixed, so we fix it with a swap. The issue right now is because LIBOR hasn’t moved. An anticipation when you enter into a slot, you’re hedging against, the fact that the LIBOR could go through the roof and instead of paying a current variable of 2.5, it certainly jumps to six. Well, when you’re in that type of position (inaudible) we would have a sizable loss on breaking that swap. So it would not make sense until LIBOR goes up and we could at least get of it at no cost or no expense, put it that way.

William Lauber – Sterling Capital Management

Okay, and I think in some of your private calls, you’d mention that you had opened East Coast Warehouse (inaudible), when you expect certainly some business from that?

Gary T. Steele

We already business, it’s in the southeast, it’s up and running. It’s modest at this point, but it gives us a spot on the East Coast, access some customers who needed some next day deliveries especially for the trade business that we’re in. So it’s fulfilling that purpose, but we’d like to expand it further.

William Lauber – Sterling Capital Management

And then, I know either you have got the chance Wall Street Journal today, but I guess in the session there was a story in there about fallow and mentioned, for us to express and did they adjust the plastic and they use it for the bag a lot on the right amount of oxygen to reach leap priority, I want to know if this is an opportunity for (inaudible) I think continues to head the list for the military and trials or something like that?

Gary T. Steele

We did, where we add value and let us if you needed 40 or 50 days a shell life which very few people need. But let us, you may recall well in our past calls, (inaudible) family barely respires its requirements for maintaining an atmosphere or really minimal. Our technology is frankly [overfilled] and we’ve avoided the whole leaf lettuce for a retailer because they don’t need 40 or 50 days of shelf life obviously. And so I suspect what Fresh Express is using is something called micro perforated. It’s got little tiny holes in the film and it allows some of the CO2 to get out. But generally speaking the leaf lettuce family is generally amusing a generalization here it’s just not really a good target for us.

William Lauber – Sterling Capital Management

Okay. And then my last question, you have mentioned about the licensing deals and you mentioned the cut backs that company has made in their R&D budgets. If you can just comment, I think it’s wrong here. I kind of thought that at least in the long-term there might be a plus for you guys and that you could operate as kind of an outsourced R&D for other companies. I mean is that thinking wrong?

Gary T. Steele

Exactly, our thinking and why we’ve hired a couple of business development people in the last year, because we believe that during the great recession and the severe cut backs in R&D people would then improve their income statements, but long-term they’re going to be short on new products. And so we anticipated that people would start to come out of their shelves and start to inquire about new technologies et cetera, and that’s what we’re seeing and that’s why I mentioned that we are starting to see a handful of potential licensing discussions get started here. It’s probably we’ve stepped it up ourselves. But how those turn out, when they turn out is hard to say, but well I think that’s exactly correct. I think that people are starting to say, hey, we got to figure out how to get new products and maybe we go outside.

William Lauber – Sterling Capital Management

You go into these new potential partners with a product that’s pretty far along or like how involved do they have to be in the testing?

Gary T. Steele

Of the handful of discussions we have, one is pretty far long and another one is absolutely barebones gosh can even do, but it’s look on paper good, but you haven’t done the first experiment and then the rest we’re in between. So we’ve got the full spectrum.

William Lauber – Sterling Capital Management

Okay. Thank you very much.

Gary T. Steele

Thanks.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of [John Walthouse from Walt House & Company]. Your question please.

Gary T. Steele

Good morning, John.

Unidentified Analyst

Guys, good morning. I had a question about, okay, assuming that Monsanto exercise the termination thing, what is the expense savings and I guess probably two different scenarios, one, if you see significant interest in other, by other Ag people for that seed technology and the others if you don’t?

Gary T. Steele

Right. Understand your question. Let’s say they terminate, we get a $4 million check. We go our separate ways, we have been currently spending a little over $1 million a year of our own money supporting that program. So here is a $1 million there is that potentially we could say. On the other hand, we are in early, very early discussions with other potential Ag partners involving applications outside, currently outside the Monsanto field because obviously we are working exclusively with them. But those contacts would be the same contacts, the same potential partners that might be interested in what we are doing with Monsanto. So I don’t want you to think that we are just sitting on our hands here, waiting for a phone call, so we are not, but the answer to your question, we are currently spending about $1.1 million somewhere between $1 million and $1.5 million in R&D in support of this program, it’s a big program for us, we are very interested in its success. So we have these other conversations going on. So there is some parallel processing going on.

Unidentified Analyst

Right. So presumably, if you are getting somebody who has strong degree of interest, you will maintain some of that spending, but not necessarily all of that.

Gary T. Steele

Right. That’s a fair way to...

Unidentified Analyst

Or would you try to match it, make it so its earnings neutral rather than (inaudible)?

Gary T. Steele

We try to match it because that’s how we started out with Monsanto and they were paying for all the R&D that support, it was a little bit of a quick truck flow to recall maybe from about a year, year and half ago where they were having some major layoffs and they were having problems supporting outside R&D funding, while they were relying on their own people. So we came to a quit (inaudible) where we took back some rights that we had given to them in this option agreement took those back and return for supporting our own R&D. So it was a good decision at time, we are still happy with that, but in general, we like to have R&D fully supported and that’s what we would seek.

Unidentified Analyst

Okay. Okay, good. Thanks.

Gary T. Steele

Thanks, John.

Operator

Thank you. Our next question comes from the line of Warrick Jervis from Trailhead. Your question, please.

Gary T. Steele

Good morning.

Warrick Jervis – Trailhead Asset Management, LLC

The personal care side do you have a number as far as what your revenues were from that and is it safe to assume that comes in on the research development and royalty revenue line?

Gregory S. Skinner

Yes, its, yes, that’s exactly what we said. It is the majority of those (inaudible).

Warrick Jervis – Trailhead Asset Management, LLC

Okay. So you are in 50 products right now, I mean what's the outlook for that over the next year or so?

Gary T. Steele

It is pretty good. A year ago, I think we were in less than 20. So member our partners Air Products, they are the exclusive marketing supplier worldwide. They've been challenged in that, when they got in this business. They didn’t have the sales force and the marketing force. They didn’t have the formulators, and they were intending to acquire those capabilities through an acquisition and they have not been able to do that. They tried, but they haven't been able to do it.

So in the last year or so, they've been hiring some of their own people and entering into distributor agreements and putting small group of formulators into their labs. So for us it's been frustratingly slow, but hopefully we have some momentum now and more importantly we have creditability because no one knew who in the hang Landec was in the personal care field until recent years. So we would expect that this is going to expand. Is it going to be a huge part of Landec in the next year or two, no; it’s going to be, but it's very lucrative. It's a high margin business for us.

Warrick Jervis – Trailhead Asset Management, LLC

So you're in 50 products now, how many formulations or how many Air Products are in those 50 products, I mean each one…?

Gary T. Steele

Roughly, I think I understand your question. There are roughly three products, okay. And then in this world you’ve given these codes and numbers and I won’t agree with those, but there are roughly three products that go into those 50 formulations. So our largest customer by example is L'Oreal, another one would be a company called (inaudible), those types of companies. And so we're primarily drying up a three product lines, and then recently in Milan there was a launch of a new fourth product line that is just now being introduced at Air Products is very, very enthusiastic about as are we.

Warrick Jervis – Trailhead Asset Management, LLC

Okay, great. And then there is a quite a buzz on line about these clear I think there are Clearly Fresh Bag from IPO?

Gary T. Steele

Right.

Warrick Jervis – Trailhead Asset Management, LLC

Can you talk a little bit about that?

Gary T. Steele

Well, I'd love to. We’re trying to sort it our self. There is a lot of logging going on about how great they are. We’ve only launched this product initially about, let me tell about everybody what Clearly Fresh Bag are. Up until recently, the only way you could back us to the Landec packaging technology was buying a product that have the produce already in it and it was fully sealed and it had our BreatheWay patch on it and it had our brand Eat Smart on and on and on. And the more we thought about it, we said well sometimes you may want to not buy it that maybe you just want to buy the bag. And so we started this initiative in the last year and we decided that we would scope the market initially just by putting it on the Internet and using our website et cetera, et cetera. And we were getting a lot of interest in this technology and it works and helps people extend the shelf life and you can put the produce of your choice in the bag.

We wanted to make sure it was working first and that's why we did this limited launch. And now we are going to do a trial fairly sizeable trial at an unnamed major retailer and they will be displaying these. Think of this is on a kiosk, they can hang from a rack and it probably wouldn't be too far from the banana display, and we wanted to see how well it sell some [Purina] for example. How well does it do in a retail setting.

And one of the things we’re learning is that the retailers ask a fairly straightforward question and that is should this be in the centre aisle, meaning should be over in the – where you can get garbage bags and lack bags and things like that or should it be over in the produce aisle, we would prefer to be over in the produce aisle. So that's the kind of thing that we're determining.

The next thing we're determining is how can we use the state-of-the-art knowledge and capabilities that are now evolving in social media and various types of Internet marketing that can really get this thing broadly out here. So it may sound like baby steps and frankly I guess it is, but we’re really pleased with the initial reaction even though it is a small number of folks, it's very positive.

Warrick Jervis – Trailhead Asset Management, LLC

Okay, good. Well, we ordered, they seem to work, so

Gary Steele

Good, thank you.

Warrick Jervis – Trailhead Asset Management, LLC

That's all I have. Thank you.

Gary Steele

Thank you.

Operator

Thank you. Our next question comes from the line of (inaudible). You question please.

Unidentified Analyst

Just in regard to the write-down that took place as a result of your accounting analyses of the ongoing relationship with Monsanto. Is there any kind of accounting nuance that required you to take the write down now as opposed to perhaps the next quarter if they were termination?

Greg Skinner

It’s Greg. You have to go through an annual, goodwill impairment and as part of that you have to give your outside appraiser projections. And you have to put some probabilities around those projections. And one of the biggest revenue items from the Landec Ag's, I think would be the $6 million option payment from Monsanto that is due is they elect to write the check on December 1st. We have to put some probabilities around it, we’re looking at the information we had at the time. We’re just starting biological tests. And at this point it was difficult to say, again they’re going to write a check, in fact we have put a probability around it.

Right now, given the data that we have, it’s more likely than not, they’re not going to write that check on December 1st. We end up extending in the agreement, but that’s yet to be discussed. But when you go through that analysis then your probability weighted and you look at this kind of cash flows and you come up with a fair value of Landec Ag's compared to the book value. The analysis shows that the goodwill will leave there.

Unidentified Analyst

Okay. So it’s an annual calculation.

Gary T. Steele

So the answer to your question is, as you know, annually you’re going through the – in much more detail those types of questions and we had hoped frankly to have more biological data at this point, we don’t have it, just starting. And we also felt that in general, if you have a choice try to be conservative in accounting and this is the most conservative way you can be and we felt that it was approved.

Unidentified Analyst

Is it a lack of data or lack of positive data?

Gary T. Steele

Lack of data? I know you, you know this, you can do all the chemistry in the world, but until you put in on seeds and the plants grow when you’re doing biological trails, you know how well it’s going to work, does it, you can check enough in the root system, does it gets to the right parts of the plant, is it effective in killing the bugs that you want to kill, on and on and on. So it’s just a lack of data, it’s not a lack of enthusiasm. They are putting a lot of people on this program as our way. It’s testimony to the interest (inaudible) in getting to the data.

Unidentified Analyst

So, I mean essentially, was there a delay in terms of these tests or…

Gary T. Steele

Yeah.

Unidentified Analyst

Okay.

Gary T. Steele

Yeah, it was.

Unidentified Analyst

Just okay, just caused by dealing with a large company et cetera, whatever.

Gary T. Steele

I don’t want to put all the burden on them, they are just things that in science come up and we have to work more on those things and get somethings tweaked and modified and we did and now we can start getting some data.

Unidentified Analyst

Got you. I mean there is a growing season figure-in in terms of getting that data?

Gary T. Steel

No. We get a lot of data in laboratories and Greenhouses.

Unidentified Analyst

Got it. Okay. Thanks.

Gary T. Steel

Yes. Thank you.

Operator

Thank you. There are no further questions in the queue at this time. I would like to turn the program back to management for any further remark.

Gary T. Steele

Well, again, thank you very much for taking the time to hear our earnings report and to be with us today. So we look forward to keeping you updated. Many thanks.

Operator

Thank you, ladies and gentlemen for your participation in today conference. This does conclude the program, you may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Landec CEO Discusses F4Q 2011 Results - Earnings Call Transcript
This Transcript
All Transcripts