Q4 2004 Lifecore Biomedical, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Thank you for calling Lifecore Biomedical's fourth quarter and year end 2004 conference call. All participants will be able to listen only until the Q&A session. At the request of Lifecore Biomedical, this conference is being recorded. If anyone has any objections, you may disconnect at this time. We'll now turn the meeting over to Mr. Dennis Allingham, President and Chief Executive Officer. Sir, you may now begin.

DENNIS ALLINGHAM, PRESIDENT & CEO, LIFECORE BIOMEDICAL, INC.: Thank you, Jason. Good afternoon, everyone. I am Dennis Allingham, President and CEO of Lifecore Biomedical. And I would like to welcome you to our fourth-quarter and year-end conference call. Present with me today is Dave Noel, our Vice President of Finance and Chief Financial Officer. During the call today, we'd like to review the financial results for the fourth quarter and the year ended June 30th, 2004, comment on some business activities that occurred during the quarter, highlight our future guidance for fiscal year 2005, and then close with questions and answers.

Before we begin, I will read our Safe Harbor statement. Certain statements in this release regarding Lifecore's anticipated future sales and financial results are forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. Numerous risks and uncertainties may affect whether such results are actually achieved. These include the likelihood and timing of the return of the Company's adhesion prevention product to the market; the timing of orders from customers; continued market acceptance of the Company's products; timing of regulatory approvals; the success of new product development efforts; and other factors. These risks and uncertainties are more fully described in the Company's annual report on Form 10-K, including exhibit 99.1 for the fiscal year ending June 30th, 2003 and other more recent filings. Actual results may differ materially from anticipated results.

As I closed the conference call for the third quarter, I indicated that we would grow the business and make money. Well, we did just that. We are very proud of the fourth quarter results. Our sales for the quarter were at a record level and profits exceeded the previously-issued quarterly guidance. Most importantly, these results marked the return to profitability for both the quarter and the year, even in spite of the restructuring charges that we incurred. To provide more insight to our financial results, Dave Noel will highlight our performance. Dave?

DAVID NOEL, VP FINANCE & CFO, LIFECORE BIOMEDICAL, INC.: Thank you, Dennis. As Dennis noted, we are very pleased with the results for the fourth quarter and the fiscal year. Sales for the quarter totaled a record $13 million, up 14 percent compared to the 11.4 million reported for the fourth quarter of last year. For the fiscal year, sales were a record $47 million, an 11 percent increase from the 42.4 million reported in fiscal 2003.

Foreign exchange favorably impacted sales by 124,000 for the fourth quarter and 979,000 for the fiscal year, principally from the strengthened euro. The Company reported consolidated fourth-quarter net income of $1,002,000 or $0.08 per share compared with a net loss of $568,000 or $0.04 per share during the same period of a year ago.

The fiscal year consolidated net income was $707,000 or $0.05 a share compared to net loss of $335,000 or $0.03 a share for fiscal year 2003. Included in the fourth quarter and fiscal year 2004 results are onetime restructuring charges of $196,000, or $0.01 a share, and $1,136,000, or $0.09 a share, respectively. These restructuring charges relate to a workforce reduction of approximately 10 percent. Excluding these restructuring charges, Lifecore would have reported pro forma net income of $1,198,000, or $0.09, for the fourth quarter, and pro forma net income of $1,843,000, or $0.14 per share, for fiscal year 2004.

It is important to note here that these pro forma disclosures are not in accordance with generally accepted accounting principles, or GAAP. Our reconciliation related to the pro forma disclosures can be found in the schedule titled, "pro forma net income and loss information," which is part of the earnings release distributed earlier today. The release can be found in the investor information section of the Lifecore web site under news releases.

Looking at the results in more detail, the gross margin rate in the fourth quarter improved from 48 percent last year to 59 percent in the current year. And for the fiscal year, gross margins improved from 52 percent last year to 56 percent for the current year. This gross margin increase is due to the following factors: Increased margin in the Oral Restorative Division, due to operating leverage afforded by our higher sales volumes; increased Hyaluronan Division margins, due to product sales mix. And offsetting these two factors were increased unused manufacturing capacity charges associated with the withdrawal of our adhesion prevention product from the market.

Operating expenses, excluding onetime restructuring charge, were 6.3 million for the fourth quarter compared to 5.9 million for the same quarter a year ago. And for the fiscal year, operating expenses were 24.7 million, again, excluding the onetime restructuring charge, compared to $22 million for fiscal 2003. This increase in operating expense is primarily …