Lancaster Colony Corp (LANC) 2013 Q3 法說會逐字稿

Good morning. My name is Susan and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation's Third Quarter Fiscal 2013 Conference Call. Conducting today's call will be Jay Gerlach, Lancaster Colony's 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's Investor Relations.

Good morning. Let me also say thank you for joining us today for the Lancaster Colony Third Quarter Fiscal 2013 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 factor 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 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 being with us. Our third quarter results -- total sales growth of 3%, driven by 4% food segment growth and a slight decline in candle and glass sales.

Earnings per share reached $0.80 versus $0.67 last year, an increase of 19%, with both segments improving earnings from last year's third quarter.

While no shares were repurchased during the quarter, we did invest approximately $9 million in capital projects, with the major investment being to expand our crouton capacity, which was completed late in March.

Our specialty foods segment had a strong quarter, particularly considering it is our seasonally weakest quarter and the overall environment continues to reflect an unpredictable consumer. Segment sales of $247 million were a third quarter record. The sales growth rate of 4% was largely volume-driven, as pricing contributed less than 0.5%.

With Easter timing being similar to last year, we feel the holiday had no material impact on the quarter.

Our newer product lines of Simply Dressed refrigerated salad dressings and New York Garlic Knots continued to be good contributors. We also saw good growth from our overall New York Garlic Bread line and a good Easter season for Sister Schubert's Dinner Rolls.

Veggie Dip sales were impacted by our packaging restage, which created a gap in demand as we switched over to the new container at retail. Croutons were affected as well since we had backed off our promotional activity in advance of some down time around our expansion project.

Looking at 12-week IRI data through March 24, you'd see the following for our key categories and brands. Refrigerated salad dressing -- the category was up 4%, Marzetti's up 5.9%. We were tied dead even with Marie's for the category leadership position.

Crouton category was down 1.4%; our brands were down 5%. We maintained our No. 1 position.

Veggie dip saw the category down 4%, the Marzetti brands down 3.5%; again, maintained our No. 1 position.

The frozen garlic bread category -- down 2.5%; our New York brand, down 4.5%. We maintained our No. 1 position.

Dinner rolls -- the category was up 3.3%; our Sister Schubert brand up 3.7%. Maintained our No. 1 position.

Operating margins in the segment reached 13.6%, up from 12.5% last year. In addition to sales volume growth, earnings were also helped by lower coupon redemption costs and a more favorable sales mix as retail channel sales outperformed food service channel sales, which were relatively flat.

Material costs were favorable by almost $2 million. We did have some modest six-figure startup-related costs to our new crouton capacity project and a bit higher freight costs in the quarter.

Over all, a strong third quarter for the food segment.

While the glassware and candles segment had a modest sales decline, earnings improved a bit and we saw an operating margin of almost 5%, up from 2.9% last year. A stronger sales mix and somewhat lower product placement costs were the primary contributors to the earnings gain.

Let me turn to John now for some comments.

Thank you, Jay, and good morning. First, and briefly, reviewing several notable aspects of our balance sheet, accounts receivable at March 31, 2013, totaled $91,705,000. Somewhat similar to last year, the March level was significantly above that of the prior June total, mostly reflecting the relative strength of sales toward the end of this year's March quarter compared to the quarter ending last June.

Stronger year-over-year March sales led to receivables increasing about $5 million over the year-ago March total.

Turning to inventories, the consolidated March 31, 2013, total of about $92 million declined about $18 million, or 17%, from last June, primarily due to the timing of seasonal builds of candle inventories.

We were also pleased that a 9% reduction in consolidated inventories was attained since last March, reflecting improvement in both operating segments.

Our overall balance sheet posture remains strong, with just over $100 million of cash and equivalents on hand, and we continue to have no debt outstanding.

While our cash balances are off from the June 30th total that exceeded $191 million, do keep in mind that we distributed a $5 per share special dividend this past December. Regardless, our financial condition remains well positioned to support our future growth opportunities.

With respect to cash flows, Lancaster's consolidated cash flows provided by operating activities for the nine months ended March 31, 2013, totaled approximately $95 million, compared to about $85 million a year ago. This increase is largely attributable to the improved net income.

Depreciation and amortization for the first nine months of the current fiscal year totaled $15,124,000, and we have returned cash to shareholders totaling $167,134,000 in dividends, inclusive of the special dividend that exceeded $136 million.

One final matter to touch on is our effective income tax rate for the quarter, which totaled approximately 32.3% of our pretax income as compared to 34.9% in last year's third quarter. We do expect a lower full-year effective tax rate, and influencing this reduction, as noted last quarter, is the impact of the special dividend interacting with our now-frozen employee stock ownership plan.

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

Thanks, John. Turning to the final quarter of the fiscal year, we anticipate our toughest comparison to last year, which was a very good quarter. Our toughest headwinds are growing sales volume as we anniversaried some new product rollout last year, and lack of favorable input cost comparisons.

We also plan to up our promotional spend, including back to promoting croutons, now that our new capacity is in place.

We also anticipate providing more support for our New York Garlic Bread products.

We hope to see some benefit from our repackaged Marzetti Veggie Dips and our new Simply Dressed vinaigrettes, which just started shipping in March.

Our food service channel volume is challenging to predict in this economy and we have limited new programs to offset any weak macro demand.

On the cost side, we expect higher egg, dairy, and flour costs in the quarter, which could even take our overall input costs up slightly. Soybean oil costs should be off a bit as they have been the last couple of quarters, which may trigger a little price deflation in our food service channel. We do not anticipate implementing any meaningful price increases in the fourth quarter.

Our search for good-fitting food acquisitions continues, and while actual deal flow is slow, we continue to develop ideas and relationships that we hope will lead to opportunities down the road.

Capital expenditures for the year will likely total around $25 million.

We begin the final quarter of the year knowing we have a tough comparison, but focused on delivering the best possible finish to the year.

Susan, we're ready to take questions.

(Operator Instructions) Alton Stump, Longbow Research.

Yes, thank you. Good morning, Jay.

Good morning, Alton.

Actually, you probably don't want to talk about full-year '14 just yet too much, but on the input of cost -- you mentioned that costs might be up slightly in the June quarter. Any early read on how things look, particularly for the first half of full-year '14 on the cost front?

Alton, at least where we make forward buys we do have a little greater visibility there. But in general, I'd say we expect overall input costs to more than likely be relatively flat going through the first half of the year. That would (multiple speakers) ups and downs, but generally flat.

Got you; okay. And then, just on the product mix front, is there any meaningful benefit there, in your view, in the coming quarters?

I'm sorry -- did you say the product mix?

Right. I mean, if you're not going to take any more extra-list pricing, which makes sense, with the costs being stable, is there any mix benefit potential, in your view?

That's a little hard to predict. We did see a little bit greater retail mix in this current quarter, as we've seen the last couple of quarters of this fiscal year as well. I would like to hope we would continue to move that mix a little bit more to the retail side. So if we're successful with that, yes, we might make a little progress there.

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

Thank you.

Greg Halter.

Yes, good morning.

Hi, Greg.

Good morning, Greg.

Relative to the startup costs that you delineated, I think in the six-figure area, are those over with now going forward in the current quarter?

Yes, we generally think that's behind us at this point, Greg.

All right. And on the candle side, just wondered if you can comment on what's going on relative to wax costs?

Wax costs appear to be relatively stable, and that's kind of what we anticipate, looking forward at this point.

And I think you briefly touched on this on the last question, but can you comment on where you maybe bought out or covered on the flour side, and soybean oil?

On soybean oil, we have our typical -- we're out as far as a year. But most of our coverage is in the next six months, and we're pretty well covered for that six-months period of time. On flour, we're only bought out through September at this point. But we'll probably look to be adding coverage there in the not-too-distant future.

It looks like both of those areas are down, at least based on the futures prices, so seemingly it would be a good time to lock in, although you're the expert, not me.

Well, I don't know that we're experts, but yes, you're generally correct there. As you recall, our soybean oil buying process is one where we don't really try to time the market, but continue to add coverage month-in and month-out. Flour, we do do a little bit more opportunistically, so there is some opportunity to take advantage a little more aggressively on the timing side there.

All right. And if you could touch on the competitive environment. You obviously noted that you're No. 1 in the five categories that you mentioned, but is anyone dropping by the wayside, that you can tell, or coming on strong in any of those areas?

Greg, I don't think we've seen anybody moving materially in either direction in those various categories. Definitely nobody going away. So no, I couldn't single somebody out as being unusually aggressive, either.

All right. And I certainly can't blame you for not purchasing shares at the price that your stock's been at recently, which is obviously doing very well. And you've raised the dividend, I think, for 50 consecutive years. What are the chances, with the cash that's building -- obviously, we presume you will increase the dividend again, but that there may be another special cash dividend for 2013?

Greg, I really don't want to speculate on that, although as you know, we've not done that very often. So I doubt we would go there as quickly again this year. But we talk about various potential opportunities at every Board meeting, so that's an active discussion quarterly.

And I would presume that your $100 million or so in cash is yielding 0.1%, 0.2%, something like that?

Greg, this is John. You're essentially correct; it is very low-yielding.

All right, thank you.

You're welcome.

You're welcome.

And there are no further questions at this time. I would now like to turn the call back over to Mr. Gerlach for any concluding remarks.

Well, thank you for joining us this morning, and we'll look forward to talking to you when we report our year-end results in late August.

Thank you for participating in today's conference. You may now disconnect.