Lancaster Colony Corp (LANC) 2012 Q1 法說會逐字稿

Good morning. My name is Martina I will be your conference operator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation first quarter fiscal 2012 results conference call. Conducting today's conference 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).

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

Good morning. Let me also say thank you for joining us today for the Lancaster Colony first quarter fiscal 2012 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 cost, 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 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?

Thanks, Earle. Good morning. We are pleased to report first quarter sales growth of about 3.5% with strong Food sales growth of 7.5%, offset by an anticipated soft Glassware and Candle quarter which was off over 15%. Earnings per share of $0.78 versus last year's $0.81 was primarily impacted by higher input costs not fully offset by price increases combined with lower candle sales.

Our Specialty Food segment saw our food service channel business outgrow retail channel growth as our customers generally saw improved sales and we benefited from new items as well. Retail channel growth was driven by our new Simply Dressed line of refrigerated dressings, New York Brand Texas Toast garlic breads, and Sister Schubert's frozen dinner rolls. We continue to see challenges in our veggie dip category, as well as more recently croutons.

Our latest IRI data for the 12-week period ended October 2nd shows the following for our key categories. Refrigerated salad dressings, category up just sort of 7%, Marzetti brands up over 23%. We maintain our number two market position (inaudible) share.

Produce dips, category off about 2%, and we were off just slightly under the category maintaining our strong number one position. Croutons category was up about 1.5%. We were off about 7% but maintain our number one position.

Garlic bread category was up about 2.5%. We were up about 8.5%, maintaining our number one position. Frozen dinner rolls, category up two and a fraction percent. We were up about 5%, again maintaining our number one category position.

We have seen noticeably more promotional activity in the Crouton category, particularly private label, in recent months. Our newest frozen items, New York Garlic Knots and Sister Schubert's Pretzel Rolls and Mini Baguettes, had good sell-in to a number of accounts in the quarter, but it's too early to judge retail sell-through at this time.

Food selling prices were up about $12 million in the quarter, while ingredient and packaging costs were up about $16 million. Soybean oil, flour, and dairy are the biggest contributors to the cost increases. Sales mix shifted to about 50/50 from last year's quarter, about 51.5% retail.

Operations performed well in the quarter, and we were particularly pleased with the good startup of our new Sister Schubert's line, which also let us reduce our seasonal inventory build and the associated holding costs.

Turning to Candles for a moment, sales declined as expected due to the exit of some very low-margin business and the related less seasonal sell-in. While there was some pricing in the quarter, it was offset by lower sales volume and higher wax costs of about $1 million.

Corporate expenses declined on lower costs associated with idle real estate held for sale. During the quarter, we invested approximately $4.3 million in capital projects, mostly Food-related with the Sister Schubert's capacity project and some automation projects being the primary uses. During the quarter, we repurchased 135,000 shares for about $7.9 million and have 27.245 million shares outstanding and 1.478 million shares authorized for repurchase.

I'll let John make a few comments around the balance sheet and other topics.

Thanks, Jay. Let's first review some of the more notable balance sheet line items as of September 30th. Consolidated accounts receivable totaled $85.118 million, which was approximately $21 million higher than at June 30th. As is typical, we saw our September receivable levels influenced by seasonally stronger sales experienced within the Glassware and Candle segment.

Additionally, we also saw comparatively higher levels of Food sales before the end of this year's first quarter. For perspective, though, relative to December 2010, our overall receivables grew only a couple million dollars. With respect to our inventories, the quarter-end balance of about $110 million was about $2 million less than the June 30th total.

However, with us seeing the absence of certain lower-margin Candle programs in the first half of fiscal 2012, the September 30th total declined by roughly $21 million on a year-over-year basis. Although not a sustainable decline over the remainder of the fiscal year, we were pleased with the near-term cash benefit derived from the production scheduling disciplines in place.

Turning a moment to our balance sheet capitalization, we have had limited change in our relative strength since June 30th as we remain debt free with cash and equivalents totaling over $128 million and shareholders' equity in excess of $522 million.

Turning to cash flows for a moment, cash flows provided by operating activities for the quarter totaled approximately $17.6 million, which compares to $9.3 million provided a year ago. This year's lower inventories contributed to this increase.

One specific component of the quarter's cash flows that you may find of interest is depreciation and amortization that totaled approximately $5 million, which is similar in amount to a year ago. Other items of note for the quarter, including shareholder distributions, comprised of share repurchases of $7.890 million and regular dividends of $9.008 million.

Last November's increase of the stated quarterly dividend rate to $0.33 cents per share marked the 48th consecutive year of regular increases in our regular cash dividend. It would be customary for our Board to consider another such increase at the upcoming meeting in November.

I appreciate your attention this morning. I'll now turn the call back to Jay.

Thanks, John. Looking ahead to what is typically our strongest seasonal quarter, this year will be a bit different. Candle sales will be down significantly as the biggest impact from our decision to exit some low-margin business is realized. Lower sales and production levels will also hurt operating income in this segment.

Second quarter Food sales will be helped by our new frozen bread items. Simply Dressed refrigerated dressings should continue to grow, and we have also just expanded this line with several light offerings encompassing yogurt as an ingredient. We have also reformulated and repackaged our hummus, now under the Otria brand.

Sales of our more seasonably impacted food products, like Sister Schubert's frozen rolls, Marzetti and Otria veggie dips, will likely vary with the confidence level of the consumer. We continue to be pleased with the Western market expansion of Simply Dressed and New York Brand Texas Toast. Food service channel business looks to be holding up, but will also depend on consumer spending through the holidays.

Input costs will continue to be a challenge. Even with a few commodities off their absolute peaks, we are still behind in pricing. We have recently announced a round of branded retail pricing effective January 2nd that should average about 3% on many categories.

Our preferred use of capital is for acquisition growth, and while there is some activity, we don't see much that fits our criteria of branded retail in a category-leading position and growing. As John mentioned, our upcoming November Board meeting will have a thorough our dividend.

While we enter the second quarter with no lack of distribution on Candles, almost the opposite is true in Food where we feel we have a strong placement of our key brands and look forward to seeing the pace of consumer takeaway.

Martina, we're ready to take questions.

(Operator Instructions). And you have a question from the line of Alton Stump from Longbow Research.

Yes, good morning. This is actually Phil Terpolilli calling in for Alton. Just wanted to start with the top line. Some nice growth in the quarter. Thanks for the detail earlier, in especially Foods. I think you mentioned private label pressure in croutons?Can you guys give us more color around croutons?

Well, just the fact that there's more private label activity, and seems to be encompassing a fair amount of promotional pricing. A lot of price competition in the category, certainly in the last three to four months. And at the present time it seems to be continuing.

Okay. That's helpful. And I think you mentioned quite a bit on new products. Any idea what the contribution was to the top line in total, a number?

No, Phil, I can't give you an exact number. The frozen product, the newest product in the quarter, was relatively modest, maybe just seven figures barely.

Okay. Great. On the info cost side, it looks like costs accelerated again this quarter. Do you think this is the peak here or should we expect a similar increase going into Q2?

It's hard to predict that at this point. We just stay tuned to what develops. As you know, we do have some forward coverage on soybean oil and flour.

Right.

We do have some stability looking out over the next several months relative to that, but stability at higher levels, certainly.

Okay. Great. And then just the last question. I know you mentioned the 3% price increase. Could you give us more detail on which categories that is and your outlook for that?

Well, it's most of them. We're particularly not doing anything right now with croutons given the situation we see there.

Sure. Okay, great. I appreciate it. Thanks, guys.

And you have a question from the line of Chuck Cerankosky from Northcoast Research.

Good morning, everyone.

Good morning, chuck.

If we look at the Food segment, I'm trying to get clarity here. Revenues were up 7%. Then in the texted release, you talked about contribution, I guess, from new products of 4% and 5% from pricing. Are those percentage points of the sales increase, and does that imply negative volume?

I guess, first of all, Chuck, the -- in the news release, that 4% relates to the retail channel business, not new products. So from a volume standpoint, I think what we saw in retail channel was relatively flat, volume primarily pricing driving that growth, maybe a little bit of mix change within that as well given the impact of Simply Dressed growth during the period. Food service channel growth was stronger, and that was both some pricing and unit volume growth.

Got you. And how about the dispersion of the five percentage points for price increases? Did that -- was that equally applied to both food service and retail?

Chuck, that was. There's a little stronger pricing component on the food service side than retail, but both had pretty significant contributions for pricing.

On the acquisition side, is it a hesitancy by sellers, given the economic environment, or is it just a very poor level of deal flow that you're exposed to?Thank you.

You know, we don't know for sure, but we would -- we would think just your point of hesitancy relative to sellers in this environment is definitely a factor.

All right. Thank you.

Thank you.

(Operator Instructions). You have a question from the line of Mitch Pinheiro, a private investor.

Good morning, Mitch.

So I'm a private investor today. Just on Candles for a second. I guess your margins are negative, but you're exiting low-margin businesses. You'd think that the mix would be better. I think you said, Jay, something about having some -- the lower volume probably hurts productivity. Is that what's driving margins down as you exit the lower margin business?

Yeah, that's a factor. And again, we also still saw some wax cost increases going on. Both were factors in the quarter. Yes, the lack of volume and the lack of capacity utilization are issues there.

So by exiting -- I mean, it's got to be -- to exit the business, obviously your decision is that you'll see improved profitability, but if you're going to be stuck with excess capacity and that kind of pressure on your margin, will it ever turn? What would make all of a sudden the exit and the extra capacity go away?

Well, hopefully we'll find opportunities to bring in a little bit better margin business, but there hasn't been a timely one- for -one offset there, particularly as we roll through the peak seasonal period, we see even greater impact from those decisions.

Okay. So, I mean, I know that Candles have always -- I don't want to say nonstrategic, but it's not your Food business. At what point do you finally say, listen, it's not really contributing and just divest it or sell it? When does that happen?

Well, they're in the timeline, Mitch. We do continue to evaluate that, and our focus today is still on trying to improve the performance of the business.

I hear you. I mean, it's not a big piece. It's not a big piece of your company, but at the same time does it have any -- is there management distraction here, where it's just worth getting -- parting with it sooner rather than later or is it -- because you really haven't been able to turn this thing around.

You know, Mitch, we don't think there's management distraction there. The Food and the Candle business are two distinctly different teams and they're focused on their respective priorities. We don't really feel that's an issue while we try to improve the performance.

Okay. And then as we look at the second quarter into the second half. Food service, I guess I'm under the impression that you're still lagging behind your input costs in food service. Is that correct?

Well, probably a little bit, but not as much as we've probably lagged on the retail channel side.

Okay. And is there any pricing -- what would the pricing for the second quarter be? What do you think your average pricing will be combined in specialty?

As far as an increase?

Yes.

You know, Mitch, that's not something we're really in a position to forecast at this point, but there will be favorable pricing impact in the quarter.

Okay. I mean, something similar in magnitude to this first quarter?

You know, that might be a ballpark, yes.

Okay. Is there -- did you incur sliding expense in the quarter?

Yes, there was sliding relative to the new items. It was probably mid to upper six figures.

Is that going to continue or have you kind of reached your new distribution gains and it will either level out or diminish?

It will continue, but can't give you an exact level, but yes, it will continue some. I don't think it will go up much from that kind of level in the quarter.

Okay. I mean, how much of your Specialty growth was distribution gain?

I don't know that I can give you that off the top of my head, Mitch. We'll see if we can circle back to you with some thoughts on that.

Okay. And then, I guess finally, in terms of acquisitions, you haven't had any in a little bit. The outlook seems more of the same, nothing out there that's really tickling your fancy at this point. I guess the best use of your cash is share repurchase right now, and just hanging back waiting for something to fit? Is that the strategy?

Yes. I think so. At the same time, we're not rushing into massive share repurchases, but have certainly been doing that.

You have ample dry powder. Cash plus your balance sheet, (inaudible) potential leverage, it's there. I'm just surprised that there's not more attractive candidates out there for you.

Well, we are as well frankly, but we continue to look and hopefully we'll find the right opportunity.

I guess the last related to that would be -- I mean, you're in dressings. You're in frozen. Would you consider -- is it likely that the next acquisition is outside those two core businesses, or do you think they'll fit inside both?

You know, I wouldn't say it's likely they're outside that, but we're open to going outside those broad categories if it meets that criteria, as we've talked about of, branded retail category leading and growing. So while we like the categories we're in and would be happy to expand our presence in those, we're certainly open to looking at other parts of the store.

All right. Thank you very much.

Thank you.

And you have a question from the line of A.J. Strasser from Cooper Creek Partners.

Hey, guys. Thanks for taking my question.

Good morning.

Good morning to you. Just a few questions, actually. The first is on the Candle side. How long do you continue to expect to continue exiting low-margin business? How long should that persist for?

At this point I think we've exited the business we intend to. The impact certainly carries forward meaningfully into the second quarter because of the seasonal component in that business. We'll be through the balance of the fiscal year anniversarying some of those decisions.

To the extent that the volumes are one of the big reasons that you're operating at negative margins, should that continue throughout the rest of the year, just given the lost business?

Well, it's a little hard to predict. Again, we're not forecasting earnings performance. We do get into our best seasonal quarter here in December, then volume trails off as we move out of the season in the third and fourth quarters. So we'll have to stay tuned on that.

Okay. And could you just give us a little color? The growth rate in Q1 was pretty strong on the Specialty Foods line. How should we think about that? You made a point of calling it out, that that growth rate should persist going into Q2. Is there any -- would you temper that, or is there anything that we should be thinking about that would mitigate that growth rate going into Q2?

Well, I think the biggest unknown continues to be just what the consumer sell-through is going to be like. As we think about our retail business, we think we've got very strong placement of product at retail relative to history, yet just the unknown of is the consumer really going to be there like we might expect. The same issue really goes over to the food service channel. It's performed pretty well for us since -- since the spring or so, and has continued to hold up. But that's always at risk to change in this volatile environment we're in.

Right. And how much of that growth rate that we saw in Q1 was a result of new product introduction? And when do we start to lap that?

Well, as far as lapping it, we'd like to think we have a continued stream of new things coming out that will keep up new product growth. I don't have a specific number for you relative to the quarter, but Simply Dressed was probably the primary factor during the quarter for growth. As we move forward this fiscal year, we're hoping our newest frozen items will start to be bigger contributors, in addition to what we think is continued growth in the Simply Dressed line, also.

So Simply Dressed was a big piece of that growth rate in Q1. When did you introduce Simply Dressed last fiscal year?

Just about the beginning of the first quarter a year ago.

Okay. And would you say it made up the bulk of that growth rate? I'm just trying to understand. I mean, it's impressive.

No. There was -- we saw good growth in our frozen retail items as well, both our New York Brand garlic breads and our Sister Schubert's dinner rolls were also factors.

Lastly, on the margin side, if I look back at you guys over the last couple of years, you've been able to have a nice bump up, Q1 to Q2, on the Food side, on the margins on the Food side. Roughly 300 basis points. What typically has enabled that, and is there any reason we shouldn't see that again this year?

That's heavily driven by mix impact in the December quarter where we see our retail business impact by across the board, but then a couple categories maybe get a little bit more seasonal help, and those particularly would be our Sister Schubert's dinner rolls and our veggie dip line.

Thank you very much for taking my question.

You're welcome.

You have a follow-up question from the line of Chuck Cerankosky from Northcoast Research.

Thanks, guys. In looking at some of these price increases and the threat of private label, Jay, how are you balancing that with promotional activity such as in-store displays and couponing, especially recognizing that response to coupons is very high right now? And what I'm looking at is what are you thinking about in terms of blunting the impact of higher prices to the consumer?

Well, Chuck, I guess when it comes to the trade promotion standpoint we would -- we'd like to keep our trade spending generally flat on a percentage basis year-over-year where we can, although we're mindful that we may have to react to competitive situations, so we may not be able to exactly do that as it relates to our reach to the consumer within store and coupons. Again, we're trying to manage ourselves relatively flat to prior periods, but as you've commented, there is some uptick in redemption out there, particularly on couponing. I don't think we've seen it as dramatic as some of the things we've read, but it is out there. So those are potential factors.

All right. Thank you.

You're welcome.

At this time there are no further questions. Mr. Gerlach, do you have any closing remarks?

Thank you for joining us today. We'll look forward to talking about our second quarter in late January.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.