Welcome to the Landec Corporation third quarter fiscal year 2009 earnings release conference call. (Operator Instructions) As a reminder, this program is being recorded. I would now like to introduce your host for today’s program, Mr. Gary Steele, Chairman and CEO of Landec Corporation.

Welcome to Landec’s first nine-month and third quarter of fiscal year of 2009 earnings call. I have Greg Skinner with me today, Landec’s Chief Financial Officer. This call is being webcast by Thomson CCBN and can be accessed at Landec’s website at www.landec.com on the Investor Relations page. The webcast will be available for 30 days through May 8, 2009. A replay of the teleconference will be available for one week by calling 888-266-2081 or 703-925-2533. The access code for the replay is 1343032. During today’s call we may make forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially. These risks are outlined in our filings with the Securities & Exchange Commission including the company’s Form 10-K for fiscal year 2008. As reported in yesterday’s press release, for the first nine months of fiscal year 2009, Landec increased revenues by slightly over 1% to $183.7 million compared to the same period a year ago. Net income for this nine-month period decreased to $5.9 million, or $0.22 per share, compared to net income of $10.2 million, or $0.38 per diluted share, last year. At the same time, during the first nine months of fiscal year 2009, we generated $6.3 million in cash flow from operations. For our third quarter ended March 1, 2009, revenues were $53.9 million versus $59.6 million in the third quarter last year and our net income for the third quarter was $1.5 million, or $0.06 per diluted share, versus $4.0 million, or $0.15 per diluted share, for last year’s third quarter. For both the first nine months and the third quarter of fiscal year 2009, Landec continued to generate net income and positive cash flow from operations. Notably, during our third fiscal quarter, we were able to hold and slightly…

As outlined in yesterday’s news release, Landec reported total revenues for the first nine months of fiscal year 2009 of $183.7 million versus revenues of $181.2 million for the same period a year ago. The increase in total revenues during the first nine months of fiscal year 2009 was due to a $4.0 million increase in revenues from Apio’s commodity trading business, partially offset by a $1.3 million decrease in revenues from Apio’s fresh-cut vegetable business. For the first nine months of fiscal year 2009, the company reported net income of $5.9 million, or $0.22 per share, compared to $10.2 million, or $0.38 per share, for the same period last year. This did decrease the net income during the first nine months of fiscal year 2009 compared to the same period last year and was primarily due to: First, a $3.3 million decrease in gross profit and Apio’s fresh-cut vegetable business primarily due to increased raw material costs for produce and packaging; Second, an $883,000 decrease in interest income due to the company’s decision to invest only in FDIC insured certificates of deposit, U.S. government backed instruments, and triple-A rated municipal bonds, all of which have yields that are considerably lower than those the company realized from its investments in the same period last year; and Third, a $189,000 increase in income tax expenses due to an increase in Landec’s effective tax rate to 41% for fiscal year 2009. These decreases in the net income were partially offset by $287,000 increase in gross profit for Apio’s commodity trading business. It should be noted that only $600,000, or 15%, of the $4.1 million book income tax expense is expected to be paid in cash because of the repurchase of subsidiary options in fiscal years 2007 and 2008. For the third quarter…

Early in fiscal year 2009 we said that we planned to invest $7.0 million in capital expenditures in fiscal year 2009 for further automation and expansion of our value-added fresh-cut vegetable processing facility, up from $4.2 million invested in fiscal year 2008. As previously mentioned by Greg, we have spent $3.2 million during the first nine months of fiscal year 2009. As a result of the current economic environment, we expect to invest a total of $4.0 million to $5.0 million for fiscal year 2009 instead of the original $7.0 million. We have also said in the past that we plan to spend roughly $3.7 million in R&D, up from $3.3 million spent in 2008. We will continue our commitment to increasing our investment in R&D, as planned. Looking forward, we be placing a greater emphasis on consolidating our already strong position in the fresh-cut produce arena, searching for acquisition targets both inside and more likely, outside, the food the arena and stepping up our out-licensing activities with new partners. We believe that the U.S. faces a prolonged and deep recession that may last well into 2010. Landec has proprietary technology, a low-cost structure, a strong balance sheet, to not only weather the storm but to capitalize on new opportunities that are likely to emerge as under-capitalized companies look for partners and large corporations who are slashing their R&D budgets look for new products. We see this as a time of opportunity. We believe our future obligations to shareholders are first to focus on technology, innovation, and new product development. Accordingly, we will be stepping up R&D. Second, continue supporting our collaborative partners, such as Chiquita, Monsanto, and Air Products. Third, to ensure our sizeable cash balances are protected in investments that are safe and available as needed to selectively…

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

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

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

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

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

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

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

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

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

Your next question comes from Peter Black - Winfield Capital.

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

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

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

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

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

First of all, there’s two components of the Air Products relationship. One is in the personal care area, where we add ingredients to some of their skin and skin-care, lotion-care products. I think we are up to about eight or nine products right now. And going well. And even with this recession, people are buying these very expensive personal-care products. And right now all of our products are with L'Oreal, under various brands. On the other side is the catalyst business with Air Products and that is affected by the downturn in the economy because much of the applications are in construction, such as pipe retrofitting, etc. So that one is not growing at this point. To answer your question, I think what we really need is to land one or two new customers outside of L'Oreal to really have this thing hit that inflection point that we’re all waiting for and we are in trials, we are in testing, it goes through a coding process where it has to be accepted and improved and you have to do the toxicology and those types of things. So for that end point to take place, I think we have another year of that process to qualify these new customers before it takes off.

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

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

Your next question comes from Nelson Ovis - Winfield Capital.

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

It’s just that what the world has gone through, and you’ve seen it in your other companies, over the summer when oil prices were going crazy, everybody viewed it as an opportunity, including our suppliers to raise prices and everybody had to go with it and so those prices went up. And that includes for us films, plastics that go into our trays and corrugated cardboard. And that’s about 20% of our cost sales and so that kind of went through the roof. We fought our battles as best we could. Our view is the world has changed and it took some time for the world to come back and sit down with these folks, including us, and so we have re-negotiated prices. So that’s what’s going on. Now, in the area of produce, where we buy raw materials from farmers, that has not gone down. That did go up and it stayed up because it’s more driven by land values and land costs in these growing areas than anything else. And land has been going up out here for these types of prime regions where you can only grow vegetables, and it’s very rare that you can find other places to do that. So we see an optimism because we’ve been able to recently re-negotiate some prices on these inputs.

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

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

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

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

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

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

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

Right.

Your next question comes from Walter Schenker - Titan Capital.

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

The trading business is very seasonal. The primary products that we export to Asia are stone fruits, grapes, apples, and broccoli. Those are probably the top ones. And the stone fruit is probably number one and that season goes from June to about October and then it falls off and then you don’t have any stone fruit again until June. So if you look at historically our break down of our revenues, about 75% of the revenues in our trading business occur during the first six months of the year. 25% occur in the second half because it’s a supply-driven business. If the supply is there we can export it, if it’s not, we can’t. So that’s why the second half of the year export and the trading business is lower than the first half.

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

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

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

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

I know we’re biased, but we have a couple of advantages that we’re capitalizing on. First of all, we’re a very good operator and we deliver probably the highest quality in the industry and we’re proud of that and we want to continue to do that. Secondly, we do have technology that can get product in good shape from the West Coast to the East Coast. And third, we have been able to manage better, I think, than others during critical shortage periods. You know, when is very scarce, there’s either been heavy rains or freezes or whatever. We’ve been able to manage our inventory flow and our availability probably better than anybody in the industry and that’s known to our customer base. That doesn’t mean to say that there aren’t some tough competitors out there; there are and there are some real loyalties in the industry that are hard to break but that’s what we’ve been doing. Basically it’s technology, quality, and delivery performance that has been working for us and we hope to maintain that.

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

If you don’t mind, I would rather not go into a lot details on that, but let’s just say that there’s very important things for us that have to do with non-competes and definitions of non-competes, that you’re going to buy somebody you don’t want them coming back and nipping you in the butt. And there were issues about valuation and price and that kind of thing. So generally, you’re right, but I would rather not to go into more detail if you don’t mind. But it was enough, frankly, for both parties to realize that, you know, it was close but no cigar.

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

That is one excellent question and they’re living with not much cash. I don’t think I need to tell this group the difficulty in the venture capital world of getting venture capital investors to invest more money. That’s a real difficulty. So their focus is on corporate deals and the worry I have is that corporate deals take time. And so we’re concerned about it. We’re only a passive investor. We’re not a venture capital investor, we’re not the answer for their short-term cash problems. But we’ve got our fingers crossed that they will find some corporate strategic partnering financing here that will let them go forward. But there is a risk that they won’t and so we wanted to highlight that for folks, to know that that possibility exists.

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

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

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

In the spring you plant seed and you have trials and this is obviously a very important spring for us. We have two programs with Monsanto. One has to do with what we call LoCo weights, low weight coatings that go onto the seed and the hypothesis is is that we provide a protective coating that improves the vigor of the seedling and therefore the plant, and therefore leads to yield improvements. You can only look so far in laboratory tests and greenhouse tests; you’ve got to go into the field. So that’s important for us to see this spring. And then next fall we, the second program, which is our controlled release program, which has an active ingredient in the coating, which could be a fungicide or insecticide, which you hope to hold there against the seed, to protect the seed, in the soil and then dispense it at the right temperature when the pests, the fungus or the insect, emerges and that’s based on soil temperature, by the way. So those two programs are slated for field trials this year and then as you get into those you hope to then go to South America and get another bite of the apple in the Southern Hemisphere so that you get enough field data to know what you have. So we’re starting this spring and we’ll keep you posted.

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

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

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

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

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

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

$1.5 million.

That’s down from what for fiscal 2009?

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

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

When do they need to make that decision?

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

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

Can you accept a don’t know answer.

Sure.

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

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

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

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

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

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

Who else sells trays outside of the club channel?

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

Do you have distribution outside of club with trays?

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

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

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

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

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

We hope.

There are no further questions in the queue.

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

This concludes today’s conference call.