Q3 2005 Lifecore Biomedical, Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Thank you for calling Lifecore Biomedical's third quarter 2005 earnings release conference. All participants will be able to listen only until the question-and-answer session. At the request of Lifecore Biomedical this call is being recorded. If you have any objections, you may disconnect at this time. We'll now turn the meeting over to Mr. Dennis Allingham, President and Chief Executive Officer. Please go ahead, sir.

DENNIS ALLINGHAM, PRESIDENT, CEO, LIFECORE BIOMEDICAL, INC.: Thank you, Sarah. Good afternoon, everyone and welcome to Lifecore's fiscal year 2005 third quarter conference call. Present with me today is Dave Noel, our Vice-President of Finance and Chief Financial Officer, and as been customary, during the call today we will review the financial results for the third quarter and the nine month periods ended March 31, 2005, highlight our guidance for the balance of this fiscal year and close with questions and answers.

Before we begin, our Safe Harbor Statement, that certain statements made today 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. And these factors include the timing of when we receive orders from customers, the continued market acceptance of our products, the timing of regulatory approvals, the success of our new product development efforts and the likelihood and timing of the return of the Company's adhesion prevention product to the market, and other factors.

These risks and uncertainties are more fully described in our annual report on form 10-K and I call your attention to exhibit 99.1, for the fiscal year ending June 30, 2004 updated with other more recent filings. It's important to note that actual results may differ materially from anticipated results. As I stated in the copy of the press release we continue to be pleased with our performance this fiscal year. Our sales for the third quarter were at record levels. Profitability is at an all-time high in the Company's 40-year history, and Dave Noel will now highlight our performance and provide some additional insight to these results. Dave.

DAVID NOEL, VP, CFO, LIFECORE BIOMEDICAL, INC.: Thank you, Dennis. Well, earlier today Lifecore reported record consolidated revenue of $14.1 million for our third-quarter ended March 31, 2005. This is an increase of 13% from the $12.5 million recorded for the third quarter of a year ago. For the nine month period the Company reported revenue of $40.4 million, an increase of 19% from the $34 million reported for the same period of a year ago. Foreign exchange favorably impacted revenue by $102,000 for the third quarter and $406,000 for the nine month period, principally from the strength of the Euro.

The Company reported consolidated third quarter net income of $2,108,000 or $0.16 per share or $0.15 per diluted share compared with a net loss of $49,000 or $0.00 a share during the same period of a year ago. The nine month period consolidated net income was $5,767,000 or $0.45 per share or $0.43 per diluted share compared to a net loss of $295,000 or $0.02 a share for the same period of a year ago. Included in the third quarter and ninth month 2004 results is a one-time restructuring charge of $940,000 or $0.07 a share.

Gross margins have improved seven points year-over-year from 55% last year to 61% for the current year for the third quarter and first nine months. This increase in gross margin is mainly due to the following factors: increased Hyaluronan division margins due to a favorable product mix, decreased unused manufacturing capacity charges due to higher production levels resulting from increased sales and increased margins in the Oral Restorative Division due to operating leverage afforded by the higher sales volume.

Third quarter operating expenses were $6.6 million or 46% of sales, compared to $6.1 million excluding the one-time restructuring charge or 49% of sales in the same quarter a year ago. For the first nine months of the fiscal year, operating expenses were $18.6 million or 46% of sales compared to $18.3 million excluding the one-time restructuring charge or 54% of sales last year. Overall, we're very encouraged by the fact that we're able to grow revenues $6.4 million or 19%, while limiting our operating expense growth to only $300,000 on a comparable year-to-date basis.

Other income and expense items include currency transaction gains associated with intercompany transactions with our European subsidiaries. These gains are due to the relative strength of the Euro over the dollar. Also bonds refinancing expenses of $290,000 were recorded in the first quarter related to our refinancing of the Company's industrial revenue bonds. We had a one-time pretax gain of $250,000 which was received in the second quarter in conjunction with the Company's securing the marketing rights to it's anti-adhesion product and interest expenses decreased due to the refinancing of the Company's industrial revenue bonds in the first quarter which reduced our overall interest rate over six percentage points.

And interest income is increased due to our increased cash position and higher interest rates. Lifecore currently has a net operating loss carry forward of approximately $29 million which can be used to offset future taxable income. The Company has recorded a income tax provision of $129,000 for the third quarter and $359,000 for the nine month period this year related to federal, alternate minimum tax, state taxes, and foreign income taxes owed. We are continuing to strength our balance sheet. Our cash position increased $3.2 million during the quarter and has increased $6.2 million since the beginning of the fiscal year ending at $14.8 million as of March 31, 2005. Additionally, our working capital is increased $8.1 million during the first nine months of the fiscal year and is now approximately $30 million.

Next I'll give an overview of the performance of each division starting with the Hyaluronan division. The Hyaluronan division sales for the third quarter was a record $5 million, a increase of 12% from the $4.5 million reported for the same quarter a year ago. Sales for the first nine months of the fiscal year increased 22% to $14.2 million compared to sales of $11.6 million for the same period of a year ago. These increase -- these sales increases reflect increase of pathalmic (sp) and orthopedic customer sales. The division reported operating income of $1,020,000 or 20% of sales for the third quarter compared to an operating loss of $233,000 for the same period a year ago.

Operating income of $3,192,000 or 23% of sales was reported for the nine month period compared with an operating loss of $869,000 for the same period last year. Included in the third quarter and fiscal year 2004 results are one-time restructuring charges of $523,000. The significant increase in operating income for the quarter and for the first nine months is due to a sizable 22% increase in revenue, reduced unused manufacturing capacity charges tied to an increase production levels, and decrease regulatory expenses associated with the withdrawal of the Company's anti-adhesion product from …