Lancaster Colony Corp (LANC) 2009 Q3 法說會逐字稿

Good morning. My name is Kris and I will be your conference operator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation Third Fiscal Quarter 2009 Results Conference Call. Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO and John Boylan, Vice President, Treasurer, and CFO. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.

(Operator instructions)

And now to begin your conference, here is Earl Brown, Lancaster Colony, Investor Relations.

Good morning. Let me also say thank you for joining us today for the Lancaster Colony Third Quarter Fiscal Year 2009 Conference Call. Now, please bear with me while we take care of a few details. As with other presentations of this type, today's discussion by Jay Gerlach, Chairman and CEO, and John Boylan, Vice President, Treasurer and CFO, will contain forward looking statements of what may happen in the future, including statements relating to Lancaster Colony's sales prospects, growth rates, expected future levels of profitability as well as the extent of share repurchases and business acquisitions to be made by the Company.

These forward looking statements are based on numerous assumptions and are subject to uncertainties and risks. Accordingly investors are cautioned not to place undue reliance on such statements. Factors that might cause Lancaster's results to differ materially from forward looking statements include but are not limited to risks relating to the economy; competitive challenges; changes in raw materials costs; the success of new product introductions; the effect of any restructuring; and other factors as are discussed from time to time in more detail in the Company's filings with the SEC, including Lancaster Colony's report on form 10K. Please know that the cautionary statements contained in the safe harbor paragraph of today's news release also apply to this conference call. Now, here is Jay Gerlach. Jay?

Good morning and thank you for joining us. We're pleased to report a much improved third fiscal quarter with sales up nearly 7% and earnings per share of $0.76 versus 0.30 in last year's unusually weak quarter. For the second quarter in a row, we saw operating margins in the specialty foods segment return to more historical mid teen levels. During the quarter we did not repurchase any shares and have 27.976 million shares outstanding and 509,000 shares still authorized for repurchase.

Capital expenditures totaled 2.2 million in the quarter and 8.9 million year to date. We will likely see full year capital expenditures of less than $15 million. With the help of both good earnings and inventory control, we reduced our outstanding debt at quarter end to $15 million. Turning to our specialty foods segment, for the quarter we saw sales growth of 10% of which about 7% was pricing in an operating margin of 16.5%. Most of our product lines contributed to the sales growth with pricing being the primary factor to the retail channel as unit volume was near flat.

Our food service channel delivered sales growth as unit volume was up in this channel. Our sales of croutons from branded frozen retail breads and rolls outperformed that of our salad dressing and dip lines. Ingredient costs finally turned favorable year over year during the quarter by about $2 million. Freight costs also showed us modest savings.

Plant operating efficiency showed improvement as our entire operations team remains focused on enhancing productivity. Within the glass ring candle segment, candle sales declined for the quarter, although they were actually a bit better than we had initially expected. The segment sales were certainly impacted by the deterioration in economic conditions but we were encouraged by some new product placement, some beneficial planogram changes and seeing some customers with better than expected sell through.

Our margins remained under significant pressure as high wax costs and reduced capacity utilization impacted our cost of sales. Wax costs are off their peaks but not immediately helping the income statement. Let me ask John to have a -- make a few comments relative to our balance sheet and cash flows.

Thanks, Jay. Let's start out by discussing several key components of our consolidated balance sheet. Consolidated accounts receivable at March 31, 2009 totaled $72.355 million. This amount represented a 22% increase over last June's total and was about 14% above the level of last March. The relative strength and timing of the quarter sales led to this growth.

With respect to our inventories, here we have a different story. Our consolidated total of approximately $91 million at the end of this March decreased nearly $30 million, or 25% from the level of this past June. Further, on a year over year basis, our March inventories declined about $15 million or 14%. Seasonal factors influenced the June to March decline, but improved operating practices within our candle operations have also contributed to both these comparative declines, especially on a year over year basis.

With respect to borrowings, our long term debt of roughly $15 million has dropped $40 million since June 30th, in part reflecting the extent cash flow generated on our higher levels of profitability. We're obviously pretty well capitalized at the present time with our gross debt outstanding a relatively modest 4% or so of total capitalization. Except for the items I've already discussed, I believe the other changes in our balance sheet components are relatively unremarkable.

Turning to cash flows, I'd like to share a few items for your consideration. For the nine months ended March 31, 2009, Lancaster's consolidated cash flows provided by operating activities of continuing operations totaled approximately $92.8 million, which is well above the $63.5 million level of a year ago. This increase reflects some comparatively favorable changes in working capital components, especially from inventories as well as the impact of the higher level of consolidated debt income through March.

Within the current fiscal year, depreciation and amortization for the first nine months totaled $16.362 million and share holder dividends were $23.85 million. In concluding my remarks, just a brief comment on our corporate expenses and the consolidated tax provision for the quarter.

As I mentioned on last quarter's call, we are incurring some costs associated with certain disposed non-food operations in our corporate expenses. These costs include amounts associated with idle real estate being held for sale, as well as costs associated with serving of our defined benefit pension plans. We anticipate that these costs will continue for the foreseeable future at varying levels, although hopefully diminish over time.

With respect to our consolidated tax provision, somewhat similar to a year ago, our effective tax rate for the quarter of 34.7% was a tad lower than normal, reflecting factors associated with our state and local provisions. We anticipate a fourth quarter rate closer to that of the effective year to date rate. I appreciate your attention this morning and I'll now turn the call back to Jay for our concluding remarks.

Thank you, John. Looking to our fourth quarter, we have developed some confidence in seeing better year over year food operating margins but are cautious as to sales and unit volume growth. So far in April, our branded retail demand looks okay, while the food service channel demand is a bit off what we've seen in recent months. Our list pricing has not changed, but we may see promotional spending perhaps increasing over time if necessary to address competitive activity.

Our key new products of New York Brand Dip'n Sticks and Ciabatta Cheese Rolls continue to perform well, as do our New York Brand Texas Toast Croutons. Marzetti humus is starting to gain traction with several new customers. Current new product introductions include new flavors of hummus and our New York Texas Toast Tortilla Strips just being shown to the trade.

While the fourth quarter will have comparability less favorable pricing impact than the third quarter, ingredient costs should be more favorable. We expect that off season candle demand may pick up a bit from our earlier expectations, but operating margins are not likely to see significant improvement from lower wax costs and the benefits of any higher volumes until fiscal 2010.

For now, we have put share repurchase on hold and are careful with capital expending as we build a strong balance sheet for these uncertain times and opportunities that may come our way. Thank you for your interest and let me thank all members of our organization who strive every day to make these improved results possible. Kris, we're ready to take questions.

(Operator instructions)

Your first question comes from Mitchell Pinheiro with Janney Montgomery.

Hey, good morning.

Good morning, Mitch.

Hi, Mitch.

Hey, that was heck of a quarter. The -- so first thing I want to try to quantify, and I may have missed it in your prepared remarks, Jay, was in the commodity cost impact. Did you define that?

Yes, I think I said it was about 2 million favorable.

2 million favorable. So that's -- so that's declining. Is that in terms of year over year comparison, is that declining? I mean, that was the first time -- was that the first time it turned positive?

Yes, in several quarters.

Okay.

I don't know exactly how many, but yes.

Okay. All right. And so then, but now -- and then in your fourth quarter comments you talked -- you sort of said that pricing is less favorable, materials will be more favorable, is that -- is that?

Yes, that is what we see.

Okay.

Because we are anniversarying price increases, but it does look like ingredient costs should come down further.

Okay.

Year over year.

Got you. When you look at the food service piece of the business, is pricing holding in food service?

Well, Mitch, as we've talked in the past, that pricing is generally fluctuates pretty closely to input costs. So there's not -- has not been dramatic negative impact yet, but we'll start to see more of that, I think, as we go through the fourth quarter and into next year.

Is the like a quarter lag or two quarter lag or how much -- is there a way I could think about that?

I don't think it's quite that -- quite that quantifiable. So I couldn't give you a specific time frame, Mitch.

Okay, when -- a touch surprised that the -- the premium products will be like Marzetti, the categories are holding up. What type of -- can you define or can you talk about the category growth in refrigerated dressings?

Actually the category growth there is not really holding up too well, Mitch. I think if we look at just a most recent ten week or 12 week area, we'd see refrigerated dressings up slightly. But veggie, fruit, apple dips, that whole are is showing negative comparisons.

So, okay. So the refrigerator dressing is up slightly. Even despite we had -- we had the decline, we've seen decline in bagged -- bagged lettuce, bagged salads. Is that -- has that had an impact on your business?

(inaudible - multiple speakers) part of what's having an impact is consumers do seem to be buying less fresh produce right now and obviously you don't have the produce you don't necessarily need the dips or the dressings to the same degree.

Right.

But there is also the opportunity, particularly on the dressing side, for the consumer to, if they want to trade down, they can certainly look to the grocery shelf instead of the produce department for -- and refrigerated dressings.

Right. But so then -- but the fact that refrigerator dressings are up slightly is -- I mean it's not an anomaly, but, I mean, it seems to be bucking the trend of -- it's not people aren't trading down there, and there's less fresh produce. What do you think drives that category? Just more eating at home, is that it plain and simple, or -- ?

I mean, yes, I think that may be the one thing that is helping the category. Yes.

Okay. When you look at the frozen -- the New York brand products, how are they performing in the marketplace?

Well, there in the whole frozen bread category we see a category that is showing some modest growth and there we're generally outgrowing the category, again I think helped by some of the new product that we've been talking about for the last couple of quarters.

Right. In the frozen bread side, can you talk about, when I go into the stores and I look, private label -- let's say the core product, the frozen garlic toast seems to be about half the price of the branded, either yours or your competitors. Is that -- are you seeing any move in private label in that segment or is that -- are people really more brand loyal?

No, I think private label is getting a little bit of share there, but I don't think there's typically that big a spread between branded private label. You may see that in certain stores perhaps, but I think more broadly it's not that big a discrepancy.

Okay, okay. When -- did the early Easter -- you talked about it in the -- you said the later Easter this year, I kind of thought Easter was earlier this year versus last year.

No, it was about three weeks later. So that probably did push a little bit of volume actually from this third quarter into the fourth quarter?

I'm sorry, that's what I meant, but I -- so you do not benefit -- you actually got hurt.

On a comparative basis, yes. That was a little bit unfavorable, and that's particularly in our sister Schubert --

Schubert, right.

-- product line that has a fair amount of holiday kick to it and maybe to a lesser degree, but perhaps a little bit of that in the -- excuse me, veggie dip and dressing area, refrigerated dressing.

Okay, got it. Also, last question, on your candle business, so -- the wax costs, what's the underlying driver of like sort of the -- wax is down but still up. What's the underlying driver of that stubbornness?

Stubbornness of the --

On the cost side? I mean, it just doesn't seem to have -- I mean, you would expect on a year over year based on petroleum costs, it would be down, not significantly but it doesn't seem like you're seeing the benefit there.

Well the other factor I think is there is a limited number of suppliers of wax and they're certainly doing their best to hang on I'm sure to the margins that they have today.

So --

It has been slow coming down, you're right.

Yes. Okay. And in terms of pricing, any -- how much pricing were you able to get in candles on a year over year basis?

Well, I think -- Mitch, this is John, I think the pricing within the candle side is a little harder to quantify than in the food, just because of the SKU turnover that we see in candles. But broadly speaking, I'd say in the high single digits on many of the continuing items. And also just go back to your earlier question regarding the lag and seeing a drop in wax costs, I'd note that from an accounting standpoint, within our financials, there is some lag in getting recognition of lower wax costs to the bottom line just because of the slower turnover of the candle inventory. So you will see some of that lower wax cost begin to come through as we move late into the fourth quarter and into early fiscal 2010.

Okay, all right. Well, thank you.

Thanks, Mitch.

Your next question comes from Jason Rogers with Great Lakes Review.

Hello.

Good morning.

Looking at your pricing, I know you mentioned in the fourth quarter it's not going to be as great of a benefit it was in the third. I was wondering if you had maybe a range where you think pricing might end up in the quarter (inaudible - microphone inaccessible).

Yes, Jason, we can't give you a range on that. We just recognized that again we're anniversarying price increases on our retail product lien and we'll probably see a little bit of deflationary pricing on the food service side of the business.

Given that you're now seeing positive raw material costs and just in general raw material costs have come down pretty dramatically from what they were a year ago, are you seeing pricing pressure both from your supermarket customers on the retail side and also just looking at competition in general, given what's happened with the economy, if you're seeing more aggressive attempts from your competitors.

As it relates to the trade, Jason, I think there's routine discussions around pricing, as there always are, so I wouldn't describe it as dramatically different than what we usually deal with every day. I'm sorry, the other part of your question was?

Competition, are you seeing increases in your --

We're seeing a couple of -- relative to a couple of our product lines some stepped up competitive activity, but not anything we'd describe as dramatic or significant at this point.

Okay, thank you.

Sure, you're welcome.

(Operator instructions)

Your next question comes from David Leibowitz with Horizon Investment.

Good morning.

Hello, David.

Morning, David.

A few quickies. First are you gaining or losing share of market in your key product lines?

I think we're holding flat to gaining share in key product lines. I don't think we have any that actually are going the other way on us.

Excellent. Second, on the balance sheet, the interest income in other and interest expense, there were significant moves, one year over year. How do we explain that?

Well, as you might recognize, interest rates are much lower than a year ago, plus our borrowings outstanding are down substantially as well.

Okay. And if I move candles completely out of the picture, I move the government giving you money, much greater amount this year versus last year, we have fewer shares outstanding. What is the operating number look like on the pretax line versus a year ago?

That I don't have at hand, David, and I can get back to you on that and give you --

If you'd be so kind. Thank you. Two others, nothing was said about acquisitions on the call, usually you have at least a throw away line, we're trying but they think their company's worth more than we do. Is there anything to report at all?

You know, David, no there isn't. We continue to look for opportunities, but it's been a very, very quiet deal market. So nothing really to report there. We're obviously interested there, longer terms, think that's an opportunity that a strong balance may help us execute on, if the opportunity develops. But it's very quiet right now.

Okay, and Jay, you said the capital expenditures for the fiscal year will be roughly $15 million. What was it last year?

I think last year in total was a little over 16, is my recollection. And we might actually be less than 15 even.

Okay, but its basically $1 million to $2 million differential year over year.

Yes, in that range.

Do you still have properties left to be sold?

We sure do.

And what are they on the balance sheet for right now?

The net carrying value of those properties, David, is in the neighborhood of $2.5 million.

And what were they originally on the books for?

I couldn't tell you what the original cost of those properties would be as many of those have been with the Company many years. Those are largely idle manufacturing facilities held from an accounting standpoint as available for sale.

And at $2.5 million, then, you would not be able to book very much of a profit?

Well, we will see. It will depend upon how we're able to dispose of those properties, obviously the industrial real estate market at the present time is relatively slow, although we have been able to dispose of a couple of properties within the current fiscal year. We have a handful more to work our way through.

And do we have very much in the way of new product to be introduced during the fiscal fourth quarter?

David, right now the two things that I quickly mentioned, the new hummus flavors as well as the New York tortilla strips are the primary things on the food retail side, they're getting introduced and have any impact in the fourth quarter. On the food service side there's always new things being developed, I really couldn't give you a sense of exactly what that may look like in the fourth quarter, but there will be new things going on there.

And given the price wars amongst the fast food restaurant chains, have you seen any pick up in your business as a consequence?

I don't know that there's anything we can attribute to specific price wars or competitive activity, but I think our food service business through the third quarter anyhow has -- has frankly performed pretty well, I think we've had the good fortune of some new products and programs that have come our way over the last 12 months, sort of have ramped up and we're fortunate to have some good customers there that maybe are seeing better results than the broader industry. So I wouldn't necessarily attribute it to just more competitive activity.

And last question, if I may, the trend with raw material costs coming down, if we were to annualize where we stand currently for the fiscal year upcoming, how much of a dollar savings would that amount to?

David, I'm not quite sure that the time period that you're looking for, I guess --

I would say fiscal 2010, that commences on July 1 for the full year. If raw material costs were to remain where they are now and not even come down further, how much of an annual savings would that amount to?

I don't think at this time we can comment on that. We don't have a good number on hand frankly for the full fiscal year. Clearly, as you look back for the first three quarters of the current fiscal year, we have nearly $30 million of adverse cost comparison. We should be able to, at current cost levels, recover a good chunk of that over the next 12 months, would be my guess.

That's a great start and I say thank you very much.

Thank you.

Your net question comes from Sarah Lester with Sidoti and Company.

Good morning.

Good morning, Sara.

Just one quick question on food service, I guess could you break that out a little bit more and talk about quick serve versus casual dining?

Well, again I think we're -- our food service business is skewed a little bit more to the quick serve end of the business. But actually, I think as we look at what we've seen current demand wise from some even of our causal food service customers, volume is soft but not as much as you might think, given all the bad news you hear out there.

And then I guess one other related question, I think you'd said 3% of growth was from volume in specialty foods and volume was flat in retail. Was that correct?

Yes, our total -- of our 10% growth, 7% of that was pricing and about 3% was volume and some mixed benefit.

Okay. So that implies that unit volume and food service is roughly 6%, pretty good. Is that about right?

Yes, I think that's in the ballpark, yes.

Okay, is that more attributed to sort of special items or special products or is it just -- you're just seeing continued strong growth there.

Well, I think it is again helped by new products and programs and almost by definition most things we do in the food service channel are special because they're all, almost all custom formulated for our customers.

Okay, okay. Thank you.

You're welcome.

There are no further questions at this time, I will turn the call back over to Mr. Gerlach for any concluding remarks.

Well, thank you for joining us this morning. We're looking forward to talking to you about our fourth quarter and full fiscal year 2009 results in August. Thank you.

This concludes today's conference call. You may now disconnect.