Lancaster Colony Corp (LANC) 2011 Q3 法說會逐字稿

Good morning My name Cherylynn and I will be your conference operator. At this time I would like to welcome you to the welcome you to the Lancaster Colony Corporation, third quarter fiscal 2011 earnings 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 & Answer period.

(Operator Instructions).

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

Good morning. Let me also say thank you for joining us today for the Lancaster Colony third quarter fiscal 2011 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 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 in such statements.

Factors that might cause Lancaster's results to differ materially from forward-looking statements include but are not limited to, risks related 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 that cautionary statements contained in the Safe Harbor paragraph of today's news release also apply to this conference call.

Now here is Jay Gerlach .

Good morning thank you for joining us today. Our third-quarter results reflected sales up 1%, and earnings per share up $0.71 versus $0.86 last year.

The third quarter is not a seasonally a strong quarter, and our results were further impacted by Easter-related sales moving to the fourth quarter and by rising input costs in both segments of our business.

Before reviewing our segments I would point out that we invested $12.6 million in capital projects during the quarter. Virtually all food related, with the biggest project being our Sister Schubert's, expansion.

We anticipate full-year expenditures to reach approximately $40 million. Share repurchases in the quarter totaled 244,000 shares for $13.8 million. We currently have 1.678 million shares authorized for repurchase. And actual shares outstanding of 27.437 million shares.

Turning to our segments, let me first comment on candles, where sales in the quarter were up 4% with limited contribution from pricing. Wax costs in the quarters were up about $1.3 million. Improved efficiencies and cost reduction efforts allowed us to eek out a small operating profit in the quarter.

Our food segment saw only 0.5% sales increase with about 2% coming from pricing, so unit volume was off. More impactful was meaningful change in our sales mix, as retail channel sales declined about [9%] and the food service channel grew about 12%, resulting in our retail mix following to about 49% from 54.5% last year.

While the retail channel declined heavily due to the Easter shift, and we generally appeared to hold market share in most of our key categories, sales to this channel were softer than we hoped throughout the quarter.

Two notable exceptions were croutons, which experienced continued good growth, and the ongoing rollout of our new Marzetti's Simply Dressed refrigerated salad dressings. We are very pleased with the trade acceptance and retail sell-through of this line.

In the 12 week IRI period ending March 20, it has propelled our growth in the category to 15% versus less than 4% for total category growth, which led to an increase of 2.5 share points.

For croutons our, IRI -measured growth was 11.9% versus 4.7% for the category and we retained the number one category position.

The dip category was about flat as was Marzetti, even with the continued growth of our Otria line. Our New York brand of garlic bread grew over 4% versus less than 2% for the category. Sister Schubert's brand grew at 3.3% versus 3.6% for the category, but do remember this is just a few days before the big Easter impact last year.

Our food pricing in the quarter was about 2% of net sales and lagged input cost increases of about 3% of sales. Freight costs were up about $1 million, further in addition to the negative impact of the mix shift, we also ran some of our plants at lower levels, impacting overhead absorption.

I'd now like to John to make a few comments.

Thanks Jay and good morning. I'll begin today by several key components of our consolidated balance sheet.

Accounts Receivable holds $77.928 million as of March 31, 2011. Compared to last June's total, this amount increased by 15% and is primarily reflected in the relative strength of March's sales compared to that of last June's.

Somewhat similarly, year-over-year weakness in Easter-related sales led to a 3% decline in accounts receivable, compared to March 2010 level. Turning to inventory we (inaudible) total of approximately $104 million at the end of this quarter.

(inaudible) -- reflected a somewhat seasonable decrease of about $17 million or 14% from the level of this past June. On a year-over-year basis our March inventories increased about $7 million or 7% due to higher material costs and the pre-Easter bill. Our net property balances have increased about $15 million, largely due to the impact of the expansion of our frozen roll capacity in Kentucky.

So far, the construction process remains in line to accommodate a start up beginning late in the current fourth quarter. Based on our operational experience with the original adjoining facility, we do not anticipate major complications in bringing up production.

With respect to our capitalization we continue to have no doubt, and as of March 31, our shareholders equity exceeded $497 million. We believe that having cash and equivalents on hand of over $107 million preserves our flexibility to meet our foreseeable cash needs and consider meaningful business acquisition opportunities as they may arise.

Turning to cash flows, I would like to share a few items for your consideration. [Like its first] consolidated cash flows provided by operating activities for the nine months ended March 31, 2011, totaled approximately $98 million compared to $86.9 million a year ago.

Favorable relative fluctuations in working capital components have helped to more than offset the impact of the decline in net income.

Within the current fiscal year, depreciation and amortization for the first nine months totaled $14.469 million, and we have returned cash to shareholders totaling $26.640 million in dividends, and $39.564 million in share repurchases.

I appreciate your attention this morning and I will now turn the call back to Jay for our concluding remarks.

Thanks John. As we begin the fourth quarter, we are realizing the benefit of the Easter-related volume that we missed in the third quarter. Also benefiting this quarter will be food related pricing in effect for the full quarter.

Challenges for the quarter include increased energy costs inflation, particularly as it impacts freight costs, and some further raw material costs inflation not fully reflected in our recent pricing actions.

We remain concerned about the strength of the consumer once we move past the Easter holidays. While we do not anticipate the size of mix-shift we saw last quarter, we do see some continued momentum in our food service channel.

We expect our Marzetti Simply Dressed line to show continued growth, including new western markets. Marzetti, Otria dips, and beginning in fiscal '12 a reformulated, repackaged Marzetti hummus line will help hopefully help the soft refrigerated dip category.

Our next round of product innovation is focused on frozen breads, one example of which is our new New York brand garlic knots. We feel this is one of our best tasting products and are anxious to see how the consumer reacts. This project -- this product should start to be on store shelves in May. Other new items won't be introduced until late in the summer.

While the fourth quarter is seasonally slow for candles, we have had success getting modest pricing that should help mitigate the extent of higher wax costs. We have been willing to rationalize some [point] marginal business, allowing us to limit our seasonal inventory build this quarter.

Acquisitions remained a priority for us, and while we continue to explore several ideas nothing is presently actionable, and overall the deal flow seems very quiet. We are looking forward to the start up phase of our new Sister Schubert's capacity at the end of this quarter and the benefits it should bring for the fall season.

We are now ready to take questions.

(Operator Instructions)

Your first question comes from Alex Bisson.

Good morning.

Hello Alex.

I have a couple of questions for you around pricing. I guess first off, how have your competitors reacted? Have they also raised prices?

I think generally that has been the case, Alex. Everybody seems to be pretty rational in that -- I am talking specifically in food.

Okay. I guess more broadly, how would you frame the competitive environment? Have you seen continued couponing as you had over the last 6 months or have things kind of become a little more sane?

I would say it's -- it's staying similar. Relatively competitive in most categories, probably a little more so in the frozen bread side of things.

Okay, how much do you think Easter hurt the third quarter?

We ballpark that at about $7 million or so. Plus or minus a little bit, which is a little more than what we thought going into the quarter, frankly.

We hadn't really seen a quarter that had such a clear-cut off between the third and fourth in real recent memory. So perhaps a little bit more than we anticipated when we were starting the quarter.

Okay. Then kind of final pricing-related question. How are consumers reacting to the higher prices? Do you have any sense of how much -- how much that is impacting demand?

You know we really don't at this point because a lot of our retail pricing didn't get to the trade until late February and early March. So the prices at retail are just getting up now, so we really don't have any -- any good data or even much anecdotal commentary. But that clearly is a concern.

Go out and walk the retail stores and a lot out of our items are going to be up probably at retail anywhere from $0.10, to $0.40, or $0.50 per item. In some cases cross in price points. Where you start to see things like veggie dips, perhaps in some markets, refrigerated dressing.

You get about $4 per unit. That concerns us a little bit. But we are watching that closely.

All right, and I guess final question for you with regards to candles. Obviously some good volume in the quarter. But it looks like costs are going higher.

You did mention modest price release, but you think you think you can get enough pricing to offset the full amount of increases in raw materials?

You know, that is a real concern. I'd have to say it's doubtful. Just for two reasons. One the ongoing competitive nature of that category. But almost more importantly, we continue to see wax costs go up even a further announced increase in wax costs just yesterday.

So as you watch -- watch the oil markets escalate, it does seem to flow through relatively timely to the wax market.

Got you. Thank you very much.

You're welcome.

Your next question comes from Mitchell Pinheiro.

Good morning, Mitch.

Good morning. So Easter is about a $7 million impact. Is that, $0.02 per share, perhaps? I mean can you look at it that way or -- ?

I couldn't really quantify it for you that way, Mitch.

I guess it certainly has maybe even a bigger impact only because it's your higher margin channel. So there was probably negative mix. I don't know if you said that or not, but negative mix in this quarter?

Yes they're definitely -- there definitely was, so yes that does have a meaningful impact.

But you should see a positive mix in the fourth quarter, is that correct? All things being equal?

Well, as it relates to Easter, again our concern is like everybody else's, just what the consumer takeaways really going to be like in the environment we are with a lot of inflation coming at them across the packaged food space.

As you called out I think in your comments, you know, your IRI and the dressings -- refrigerated dressing was I think up 16% or so, 15% in the last 12 week. And driving that was perhaps Simply Dressed.

I was curious, it looks like a terrific product, but I have not seen it in my market yet. What type of ACV does it have, is there slotting expenses associated with this and how do you think Simply Dressed affects the fourth quarter?

Mitch, I think ACVs are probably in the 60% range right now. I think it is definitely going to be a positive for the fourth quarter. We are also encouraged by getting established in some new markets, particularly out in the western part of the country. So it's definitely a help for us.

There are some cost related issues on it that we won't get fully addressed until probably late in the fourth quarter. To really get the full margin potential out of it. And there has been modest slotting related to Simply Dressed.

What type of cost issues are you referring to? Is it a -- ?

It's on the production side. We haven't been able to fully automate the production at this point. Due to some new equipment we had to get in, but we wanted to get in the product to market as soon as we could. So we have been paying a bit of a penalty on the operating cost side.

It looks terrific. I can't wait to see it in some markets near me.

So, as far as -- as far as the commodity cost impact, you took -- you are taking pricing here you will get a lot of that in the fourth quarter. That, can you kind of help us frame with that sort of covered and where you remain somewhat exposed maybe perhaps for future price increases?

Yes, I think we are -- a little concern is that there are some ingredients that continue to move up since we established the new pricing. Probably relates to the -- not so much the high-level ones of soybean oil and flour.

Throughout the ingredient list, things like sugar and other smaller ingredients, as well as the freight cost impact. Which again as we see diesel continue to move up would expect that to be a further burden.

Are you getting pricing in food service?

Yes, we are.

And what type of pricing would we expect in the overall blended rate for the fourth quarter?

I would think we are probably in the -- in the 4% range maybe, you know, plus or minus slightly but ballpark around 4%

Okay that's helpful. What is driving the food service momentum? It looks particularly strong here.

It's really been in our chain account volume where I think we have -- in the third quarter saw a general uptick that appears across our customer base. And their demand which I assume reflects some improved store traffic there.

Seeing we had some instances of new products with existing customers and in a couple cases some promotional product going on during the quarter all contributed to the strength there.

So is that something where you could see the momentum carry through at least a quarter or so of?

I think, the momentum does seem to be somewhat stronger there, so yes I would we are a little bit more upbeat about that channel than what we had seen in the prior quarters.

Okay. Then just last question. As it relates to acquisitions. You talking about your pipeline being sort of being you know, not very exciting. What do you -- I mean -- where do you anticipate or when would you anticipate a more full pipeline?

Or, it seems like activity is picking up a touch, but you're not quite seeing it, is it your space, your sector, your interested areas, or waiting for certain properties? I mean what is it about the acquisitions that keeps it a little sleepy at this time?

It is probably all of that, Mitch. But it seems a little bit surprising that we are in an environment of a fair amount of capacity. Not only on our part, but in the whole food business to do deals, but there don't seem to be a lot of people that are really excited about selling anything right now.

You certainly see an occasional one happen, but not that many. You see a few more, I think, on the international side. But our focus is domestic.

I guess one last just relating acquisitions, sorry to hog the Q & A, but --.

So as it relates to the segments, I mean, would you consider, or are you considering a third leg to the specialty side. You know you have frozen bread you have your refrigerator dressings/dips. Are you interested in a third leg, or do you just want to continue to focus on your two current core competencies?

I think we would be somewhat open-minded if it met our criteria of -- of a branded item in a category-leading position. It doesn't necessarily have to be frozen or produce department related.

Okay. All right, thank you very much.

Thank you.

The next question comes from Michael Avery.

Good morning, guys.

Hi, Mike.

Hi. Just one left, really. Everything else has been answered. I guess for you, John, on the share buyback front, do you expect to continue be as aggressive, I guess, to the tune of that $15 million quarterly run rate?

You know I think we've been opportunistic on that front, Mike, and we remain open to considering share repurchases at that rate going forward. Can't see it stepping above that, but we'll certainly reflect upon that as our window opens here in the next few days.

Okay. That's all I have, guys. Thanks.

Thank you.

Your next question comes from Jason Rogers.

Hello.

Good morning.

Did you mention the impact from commodity cost on the quarter? There was some interference earlier I don't know if that --

I think we referred to about 3% of sales.

Okay. And what about the hedges that you have currently in flour and soybean, if you could just provide some detail there.

Soybean oil, we are pretty well covered out through about the end of the calendar year. Flour is positioned just about the same.

Okay. And you gave the estimate for CapEx for this year, I was wondering if you have any earlier thoughts on next year's CapEx?

No. Other than all likelihood it will be meaningfully less than this year. But no. Don't have a specific range to give you right now.

Okay thanks a lot.

You're welcome.

Your next question comes from Seth Cohen.

Hi. Just a few quick questions. Number one, if you look at the IRI data it looks like most of the pricing you guys took directionally was done in, I guess, the last four weeks of the quarter or so.

Yes. That would be about right. Yes.

I guess over the same time period you saw, it looks like volumes sort of had been positively inclined until that happened. Is there any reason that we should think of other than general elasticity or something like that? And given that on last quarter's call you had talked about how commodities would be offset sort of starting in this quarter, the next quarter and the following. You know, is the last week of this quarter more indicative of what the future of this current quarter should look like?

Again I don't know exactly what IRI data you have got. But we anticipated, I think, as we got into this second half of the year that there would be a cost price lag going on that felt we would have to deal with going through this half of the year.

I think we'd hoped that the March quarter would be more the significant than one of that of the two. But we do continue to see a little bit of ongoing material cost inflation as well as rate cost inflation that is probably not fully recognized in the recent pricing we have taken. So that lag may stay with us for a little while.

One follow-up question was just -- do you think about sort of the 4% pricing you've got for the quarter, what you think the reasonable assumption for the volume would be? Against that 4%?

Well in the quarter again, the quarter was hard to measure because again you have got the Easter impact.

I'm just saying, you said for next quarter you'd be around 4%?

On the volume side?

No, you said anticipated roughly 4% pricing.

Next quarter. That's right, yes.

So what do you think -- what's your anticipation for volume in the quarter? Based on what -- you have been doing this quite some time.

Again, I can't give you that. We are going to benefit from Easter in this quarter, so that's going to help the volume at the beginning. But once we get past Easter we are again concerned about what the consumer -- the consumer state is, not only with our own information but the inflation they are seeing across the supermarkets. It's just hard to get -- get very comfortable with that at this point.

Okay and one last question. The Q1 through Q3, year-over-year it looks like food margins are down and look like 310 and 360 basis points?

Yes.

Is that safe to assume, or how should we think about that in Q4? Is any reason to think that should not continue to happen?

Well, again, we don't give earnings guidance or margin guidance. So I will let you guys work on that.

Okay. Thank you very much.

You're welcome.

At this time there are no further questions, Mr Gerlach, are there any concluding remarks?

Thank you again for joining us. We look forward to joining talking with you later this summer with our fourth quarter and full-year results.

This concludes today's conference call me you may now disconnect.