Lancaster Colony Corp (LANC) 2010 Q2 法說會逐字稿

Good morning. My name is Robin and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation Second Quarter Fiscal 2010 conference call. Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO, and John Boylan, Vice President, Treasurer and CFO.

(Operator Instructions). Thank you and now to begin your conference, here is Earle Brown, Lancaster Colony Investor Relations.

Thank you. Good morning. Let me also say thank you for joining us today for the Lancaster Colony Second Quarter Fiscal 2010 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 restructurings 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 10-K.

Please note the precautionary 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. We're pleased to report our second quarter results with sales up 5.5% and earnings per share of $1.40. Both segments were meaningful contributors to these results, with strong seasonal and everyday candle sales providing all the sales growth as the weak foodservice channel kept our overall food revenue slightly below last year's quarter.

Operating income improvement was significant in both segments, as Specialty Foods' operating margin reached 23% and the Glass and Candle margin improved to 10%. Lower input costs, improved sales in candles and better sales mix in food and good operations in both segments were the primary contributing factors.

Specialty Foods segment results included more than $1 million of plant-closing-related costs as we consolidated one of our salad dressing production facilities into other operations. We estimate annual savings of more than $2 million from this consolidation.

Capital expenditures during the quarter were $2 million and we still estimate the full year at roughly $15 million. Some need for growth capacity will likely push this number higher in fiscal 2011.

There were no share repurchases in the quarter and the quarterly cash dividend was increased 5.3%.

Our Glassware and Candles segment, predominantly just candles today, saw a very strong holiday season. We benefited from more promotional seasonal business, but also saw strong demand from our everyday programs through the season. This better volume definitely helped our plant utilization. Additionally, our efforts to blend more alternate, non-paraffin waxes helped us keep wax costs in check, even as paraffin waxes rose a bit. We feel our strong service levels and high-quality product is giving us a true competitive advantage with major retail customers.

Our Special Foods segment again benefited from lower ingredient costs, estimated at greater than $13 million in the quarter. Pricing in the quarter was down about $5 million, all in our foodservice channel, as retail prices held steady.

Foodservice volumes were also down, yielding a total sales decline of approximately 8% in this channel. Retail channel sales, on the other hand, were up over 5% on volume growth. Sister Schubert's dinner rolls, New York brand ciabatta cheese rolls, Texas toast croutons and tortilla strips and Marzetti refrigerated dressings, veggie and apple dips and hummus were all contributors to growth in the quarter.

Let me ask John to make some comments relative to the balance sheet and cash flows.

Thank you, Jay. I'd like to begin this morning by commenting on some of the more noteworthy changes in our consolidated balance sheet.

First, our net accounts receivable, as of December 31st, totaled $85 million, which reflected a seasonal and volume-driven increase from the $61 million total at June 30th. Year-over-year the current year total was $10 million or 14% higher, as influenced by this year's stronger sales levels that we've seen in our candle products. We're comfortable with our accounts receivable agings, although we also remain vigilant in the oversight of our customer accounts and collections, especially given the existing economic challenges at retail.

Turning to inventories, which totaled over $82 million at December 31st, these declined over $20 million since this past June, primarily due to seasonal factors. Our inventories also declined by over $13 million since December 2008.

As we've been mentioning over the last couple of years, great emphasis has been placed on getting our candle inventories better aligned with demand. We believe we're now much closer to where we need to be.

Over in the liabilities, you'll note that we remain debt free as of December 31st. With shareholders' equity at December totaling over $458 million, we believe our balance sheet posture obviously provides us with considerable flexibility in meeting various possible cash needs.

Turning to other aspects of this year's cash flows for the six months, cash flows from operating activities totaled $69,181,000, which compares to $62,893,000 for the prior year. Higher net income drove this increase. Depreciation and amortization for the current six months totaled $10,882,000. As Jay alluded to, we had no share repurchases during the six months and our dividend payments totaled $16,487,000. CapEx for the most recent six months totaled $3,701,000.

I'd like to now reference just a couple of income statement items. First, regarding our corporate expenses, we continue to incur holding costs within this line item related to several non-food manufacturing facilities idled over the last few years. These costs may make this line item fluctuate somewhat between quarters.

For example, in this year's second quarter we had a small impairment charge of less than $300,000. By contrast, in the prior year quarter we were able to realize a gain of approximately $400,000 on the disposition of a limited portion of our holdings. Over time, we would certainly hope to see our future holding costs mitigated by sales proceeds.

Finally, please note that in the current year second quarter we recorded a pretax distribution under the CDSOA program of approximately $900,000 or $0.02 per share after taxes. This compares to last year's remittance of about $8.7 million or $0.20 per share.

As we've indicated in the past, these distributions are recorded within our consolidated income statements as other income and, as such, are excluded from the operating income of the Glassware and Candles segment. While it's possible there may be some level of future distributions, such potential distributions are not subject to reasonable estimation at this time. At the very best, we do not expect to receive another payment before the last quarter of calendar 2010.

At this point, I'll turn our presentation back over to Jay so he can conclude our prepared remarks.

Looking ahead to the balance of our fiscal year, we see several headwinds. Our foodservice channel volume likely remains off, as there are few indications yet of industry sales picking up.

We also begin anniversarying the lower ingredient costs that have helped our favorable comparisons the last few quarters. We've actually been seeing some ingredients, particularly dairy products, start to move above year-ago levels.

Candles will be in the off season the next six months and wax costs are ticking up a bit. We are working to carry this season's strength on into next fall's season.

Food product innovation should contribute to growth in calendar 2010, but new items not yet introduced will not likely have much impact on our fiscal second half.

Increased penetration of our Marzetti hummus, Texas toast croutons, New York ciabatta cheese rolls and Sister Schubert mini pans and cloverleaf rolls should continue to help retail sales volume.

Our consumer marketing efforts continue to focus on building our key brands through creative messaging to the consumer, both in print, as well as electronic media and in-store promotion.

Acquisition growth is very much of interest and we are seeing more opportunities come to market. While nothing is imminent at this time, I would hope we'll see a good candidate or two in the coming months.

Robin, we're ready to take questions.

(Operator Instructions). Our first question comes from the line of Mitchell Pinheiro.

Hey, good morning.

Hello, Mitch.

Good morning.

Hey, so this was a remarkably strong quarter and I guess the one area that came a bit surprise is that pricing seems to be holding in your specialty food business, particularly given the ingredient cost decline. I'd love to hear your thoughts on whether there's any -- outside of, obviously, the foodservice segment, which has a sort of a cost-plus type of, toll-charge type of pricing structure -- what's the outlook for either price deflation or pricing in the dips, in the frozen bread, in the dressings category. How would you describe that, going forward?

Mitch, I think the list pricing is holding up well. What we might anticipate in the future is somewhat more promotional activity to react to some competitive things we see going on out in the marketplace.

I mean, how does-- when you use promotion, how does your volume lift react and maybe vis-a-vis competitors' same type of price promotion?

I mean, that's a tough question to answer, Mitch. It can vary quite a bit depending, obviously, on what product and brand you're talking about and the level of promotional activity and what the competition may be doing. But we would expect, at a minimum, when we're reacting to a competitive situation that we're maintaining share and certainly hoping we're growing it some.

Is the refrigerated dressings category-- how did that do in the quarter, the category?

In the quarter I think that category was-- it was up a little bit, Mitch, low-single-digit percentages.

And your share?

And we were-- our share was down just a little bit, from [RI] data.

Okay. How about the same for dips?

Dips the category was down low-single-digits and we were just barely down. I mean, we are primarily the category, as you know, there.

Right. And then finally, how about on the frozen bread side where Sister Schubert and New York Brand plays?

Well, as we look at the garlic bread category, we see one that was basically flat for the category and ourselves in the last quarter and on the frozen roll business where Sister Schubert's is, we actually see a category that's down a bit, largely I think because of Pepperidge Farms-- not Pepperidge, Pillsbury's exit from that category. And we had significant growth there, strong double-digit growth.

Okay. So in the candle business, are the sales trends that you saw in the quarter, I mean, are they-- is there anything sustainable there? Or was there-- you said both holiday and your everyday business was strong but 42% is an off-the-chart kind of growth rate. How could you, like, describe where it's going in the second half of this year?

And maybe I should point out, when I reference the everyday business, it's still impacted by the seasonal component. It's just seasonal sales uptick of products off the everyday program. It wasn't just selling the items we had in on the store shelf that were purely seasonal items.

Got you.

I think it's-- it is very much a seasonal business. It's one where I think our channel, overall, probably benefited from a consumer tradedown. So that affect might continue to a degree, but, again, continuing into the second half, we very much get into the off season. I think the good news is, from all reports we've had so far, the sell-through at retail, again, in our channel, was pretty strong. So we don't think there's going to be a big hold-over of inventory from the season, carry-over of inventory.

So you expect some sales growth in the back half in candles?

I'd say some is fair, but not near as strong as what we saw in the second quarter.

Sure. And then in terms of the margins, it's interesting that you were able to offset some of the paraffin pressure with alternative candle material, but a double-digit margin was a nice, certainly, the first profitability we've seen-- well, you had some profit last quarter but certainly more meaningful here. Is a 10% margin and those trends with alternative sort of input costs, is that something that, maybe, we could see?

I'd say, Mitch, that's probably unlikely. I mean, that volume certainly helped get those margins to the level we saw. So that's going to be hard to see, going into the second half of the fiscal year.

I think you said last quarter or I have notes where you thought a normal margin in candles would be in that mid-to-high single-digit. Is that still something that you think is fair?

Yes, that's right. And I think when we talk about that, we're talking about for the whole year, too.

Right.

So it does have the benefit of that typically stronger second quarter.

Okay. Last question -- maybe for John, or both of you. You have a building cash position here. And I know you have acquisition targets or certainly that's your, maybe, number one use of cash. But is-- as far as either a) share repurchase, special dividend or more aggressive dividend increases, are any of these also being considered, given your unlevered balance sheet?

Well, Mitch, I think we have to think about all those, but you're right, our priority is looking for acquisition opportunities. We do still have about a half million shares authorized. We have not been buying recently, as you know. We'll continue to consider that, I think, as we look at our cash position and evaluate how close we may be to any acquisition opportunities.

Okay. Thank you very much.

Thank you.

(Operator Instructions). Our next question comes from the line of Greg Halter.

Good morning, guys.

Hi, Greg.

Good morning, Greg.

Hi. I'm wondering on your foodservice-- sorry, on the Specialty Foods business if you could break that out in terms of percentage of sales between foodservice and retail?

Yes, our mix for the quarter got up to about 57% retail, which was about a 3 percentage point improvement from that quarter a year ago.

And then looking at the food input side, in terms of your hedging strategy, if you could give us an update there on where you stand, it would be helpful.

Greg, our approach is similar to what we've talked about in the past as it relates to soybean oil. We go out with a declining amount of forward coverage out as far as 12 months, but the majority of that coverage would be in the next six months and probably about half of our overall needs in the next six months would be covered.

Flour we do a little bit more opportunistically and there I think our coverage is pretty solid now through the end of the year, end of the fiscal year, some coverage beyond that into the first quarter.

Okay and the soybean oil looks like it's relatively stable, within a range, certainly different than it has been in the past. A couple years where it spiked.

Yes, it's ticked down a little bit recently, which has been encouraging. We saw it hovering in that 40 or a little higher range and now we're back in that 36-37 area, it appears.

Still you're number one with wheat or flour the second largest?

I'm sorry.

In terms of usage, soybean oil is still the number one food ingredient?

Yes, that's right.

With wheat or flour the second?

Correct.

And then relative to dairy, is that specifically milk or which areas?

Well, it would be across the things we're buying, which include cream. Particularly we use a fair amount in the veggie dip product line. Cheeses in dressings and we use butter, certainly, in the baking business, to a degree.

And on the new product side, I see some of the competitors focusing more or specifically focusing on health-conscious-type products and just wondered if you have anything specifically that you're utilizing or marketing in that effort?

Yes. Greg, right this moment, I don't know that I'd say we have anything we're marketing directly at that. We're working on some ideas on the innovation side that would encompass that. But there certainly is a more general effort, I think, across the industry, which we'd certainly participate in, in looking at how we can enhance any of our current products from a nutritional standpoint.

And, as you've probably read, sodium is one of the hotter topics recently on that front and definitely on our list, both in the retail side of our business and the foodservice side to look for opportunities to reduce sodium content.

And specifically, anything that you see coming out over the next six months that you can mention?

Nothing we're ready to talk about, but we do think we have a couple of pretty good ideas that we'll be getting to market probably closer to midway through the calendar year.

And would those be done on a specific geographic test basis or how do you normally roll those types of products out?

We would typically do a little bit of testing, but we would also, depending on where the-- what the product is and where that brand has strength would dictate from a geographic standpoint just how broadly we'd roll it out, initially.

And then if you had to give some sort of flavor for where you think your penetration is -- and I know you have plenty of product on the food side -- but how your geographic penetration stands or what your opportunities are to continue to expand the products geographically?

Well, we do have opportunities. They're predominantly, from a pure geographic standpoint, going to be more to the western half of the country or western third of the country, even. And we do have some initiatives going on there to expand some of our current product into those markets.

But certainly penetration in existing markets is another initiative where we want to try to obviously fill in any voids of retailers that aren't carrying our product, as well as trying to encourage, obviously, consumer sell-through on that product.

And one final one for John, what would you expect your tax rate to be for the full year?

The tax rate for the back half of the year, all else being equal, Greg, should be in the neighborhood of 35%. So for the full year, it'd be a little less than 35%.

Great, thank you.

You're welcome.

Our next question comes from the line of Sarah Lester.

Good morning.

Good morning, Sarah.

Hi, Sarah.

I wanted to ask a follow-up question about promotional activity. You mentioned more promotional activity in the future on the retail side. Are you currently seeing higher promotional activity right now among competitors?

Yes, we're starting to see some that we, I think, feel there's going to be a need to be a little more aggressive in the future, reacting to.

Okay and then, I'm sorry, you said $13 million from lower raw materials costs. That was just on the foodservice-- I mean, I'm sorry, on the Specialty Foods side?

Yes, that's right.

How much in total, including candles?

Candles probably adds almost another $3 million.

Okay. And then I just wanted to get sort of more detail on your outlook for foodservice. You talked about tough comps coming up. I guess, can you expand on that and what you're expecting, maybe by channel?

Well, on the-- the tougher comps, I think, come primarily on the cost side, on the input cost side of things. We're going to start anniversarying the lower ingredient costs we've been seeing.

Actually, the-- as we get a little bit further into the fiscal year and certainly impacting us for fiscal '11 on the foodservice channel business, the comps actually probably get a little bit easier as, again, we anniversary the downward move, both in demand, as well as pricing starts to get anniversaried there.

On the retail side, I think in general we continue to be confident that we can see growth in that channel of our business, hopefully similar to what we've seen in the recent past in that mid-single-digit area.

And then are you seeing any differences sort of, I guess, casual dining versus quick serve?

They're both soft. I think the quick serve is probably still faring a little bit better than the casual side, at least from an overall standpoint, what we see.

Okay. That's all I've got. Thank you.

Thank you.

(Operator Instructions). If there are no further questions, we will turn the call back to Mr. Gerlach.

Well, thank you for joining us this morning. We appreciate your time and look forward to talking to you with our third quarter results.

This does conclude today's conference call. You may now disconnect.