Lancaster Colony Corp (LANC) 2013 Q4 法說會逐字稿

Good morning. My name is Deshanta and I will be your conference operator today. At this time I'd like to welcome everyone to the Lancaster Colony Corporation fiscal year 2013 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)

Thank you. I will now turn the call over to Mr. Earle Brown, Lancaster Colony Investor Relations. Please go ahead.

Thank you. Good morning and let me also say thank you for joining us today for Lancaster Colony's fourth quarter and fiscal year 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 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 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 again thank you for joining us. While pleased with our overall results for fiscal 2013, our fourth-quarter finish was not up to what we saw in the first three quarters. Overall sales for the quarter were off 2% from last year, with both segments being down. Operating income was off 7%, all from our Food segment, as Glassware and Candles earnings improved slightly. Our Specialty Foods segment sales were off 1% from last year, impacted by the benefit of some new program rollout costs last year that did not repeat in '13 and higher promotional and marketing support this year. Pricing had no impact on the quarter, and volume mix was off just fractionally.

We continue to see good performance from our Simply Dressed line of refrigerated salad dressing, which also benefited from the introduction of five new flavors of vinaigrettes. Offsetting that positive was our repackaged Marzetti veggie dip line that lagged last year's sales and continued softness in frozen garlic breads. Food-service demands from both our national chain account customers and distributors was up modestly for the quarter. We saw our sales mix move to 51% food service, versus 49% last year.

IRI data for the 12 week period ended July 14 shows the following from our key categories. Refrigerated salad dressings, the category was up 6.7%, our Marzetti brand was up 17.9%. Veggie dips, the category was down 7.4%, our Marzetti brand was down 9.5%. Croutons, the category was up just barely, 0.1%, our collective Marzetti, New York and Chatham Village brands were off 1.7%. Frozen garlic bread, the category was down 3.1%, our New York brand was up 1.1%. Frozen dinner rolls, the category was down 1.3%, our Sister Schubert's brand was down 2%. We are the leader in all of our key categories.

Segment operating income for the quarter was off about 7% as margins declined approximately 100 basis points from last year's quarter. The primary factors in the decline were lower sales, higher food service mix and higher consumer promotion and marketing costs. Material costs were favorable but only in the low six figures, our crouton capacity expansion was completed in the early part of the quarter and its start up probably had an unfavorable six-figure cost. Last year -- lastly, the prior year benefited from a $1 million recall related vendor recovery.

For the full year, the segments had a record top line and reached just over $1 billion in sales, a 2.5% increase from the prior year. Simply Dressed and our Sister Schubert's line were the primary contributors in the retail channels growth while the food service channel grew as well. Full-year mix edged up slightly to retail by 0.2%, at 51.7%. Full-year segment operating income was up over 9% and operating margins grew about 100 basis points to 16.3%, helped by about $8 million in pricing and over $5 million in lower material costs, mostly happening in the first three quarters of the year. We also benefited from lower slotting costs as we anniversaried some prior year new product introductions. Offsetting these benefits were increased consumer marketing costs, as we continued to invest in building our brands.

Our Glassware and Candles segment for the quarter saw a 6% sales decline and low six figure earnings. Candles sales were off, but wax costs were fairly neutral and sales mix showed some improvement. While not material in sales and contribution to the segment's overall results, we did divest various product lines that were largely directed to the lodging industry during the quarter, at a mid-six-figure loss. Candles and accessories sold to consumer markets are now the only product lines remaining in this segment. For the year, the segment showed an almost 7% sales increase and an almost $6 million operating income improvement, segment margin improved to 5.25% from 1.5% the prior year. Now, let me ask John to make a few comments.

Thank you, Jay and good morning. I will begin by making several remarks regarding our balance sheet, which I believe is generally reflective of fairly modest year-over-year fluctuations. First, we saw our accounts receivable total approximately $70 million, a 4% decline from the year ago level. The decrease reflects the lower sales for the quarter. We continue to see our overall [agings] remain solid.

With respect to our inventories, which totaled approximately $109 million at June 30, these declined just slightly from the prior year level. We were able to reduce candle inventories but saw a modest offsetting increase in food inventories. In property, plant and equipment, our net property balance increased over $5 million as our fiscal 2013 capital expenditures at $24.147 million exceeded depreciation. A notable component of this year's CapEx was our investment in additional crouton manufacturing capacity. Although we remain in the process of evaluating several projects, we expect fiscal 2014 capital expenditures could total $25 million or perhaps somewhat more. A significant project we foresee working on involves increasing the capacity and throughput of our dressing facility in Kentucky.

Turning to the other side of the balance sheet, shareholders' equity declined this past year to about $501 million at June 30, as affected by the $5 per share special dividend we paid last December. We continue to have no debt and ended the fiscal year with over $123 million in cash and equivalents. We therefore believe that we retain considerable flexibility in our capital structure to support foreseeable future growth initiatives.

Turning to this year's cash flows, cash flows from operating activities totaled $131.682 million, which compares to $122.447 million for the prior year. This improvement reflects the improved net income that Jay mentioned. The most prominent non-cash add back in arriving at this year's cash provided from operations remained depreciation and amortization, which totaled $20.114 million, which was comparable to the prior year total. Also of note, total annual cash distributions of dividends during fiscal 2013 totaled $178.063 million, compared to $38.464 million a year ago. While this increase primarily reflects the year's special dividend distribution, it also encompasses the two increases of our regular quarterly dividend that were approved by our Board of Directors in fiscal 2013.

Finally, one other matter to comment on is the past year's effective tax rate. As noted in today's release, we did see a fourth-quarter benefit of approximately $700,000 relating to the release of reserves associated with uncertain tax positions. Our full year rate also benefited from the tax consequences associated with the year's large special dividend. Looking forward, we expect the fiscal 2014 rate to likely return to a more normal level, perhaps, between 33.5% and 34%. Thanks again for your participation with us this morning. I will now turn the call back over to Jay for his concluding comments.

Thanks, John. We began fiscal '14 with the good news in July that we've become the number-one refrigerated salad dressing on a full 52 week basis per IRI. We are also happy to have our new crouton capacity online enabling us to pursue new business and offer promotional support, again, after several months on the sidelines. Our repackaged veggie dips are also beginning to get more marketing support, as our transition to the new package is largely complete. The frozen garlic bread category remains soft with the exception of our New York garlic knots, which continue to grow. Further project innovation will be important to get this category moving again. We expect our Sister Schubert's brand to continue to grow, as we selectively enter new markets. We anticipate food service channel growth for the year, driven by modest industry growth and new program gains, offsetting any losses. Our new product development effort in this channel is busier than ever.

Candle sales will be dependent on seasonal sales, as usual, and right now, it looks likely to fall somewhat below year ago levels. As we move through the year, we anticipate seeing some modest food ingredient cost savings, primarily soybean oil, sweetener and eggs. These certainly can change as the year goes on. Wax costs are expected to be relatively flat for the year; we do not foresee any price increases of significance for the year at this time. We hope to see some operational improvements as we benefit from our recent crouton project as well as some additional automation and cost reduction enhancements. We'll continue to tick up our investment in building our brands.

While actively pursuing acquisition opportunities, we do not have anything to report today. We routinely discuss our capital structure and have 1.5 million shares available for repurchase. Finally, as you know, we have typically taken action on our dividend at our November meeting. Michelle, we are now ready to take questions.

(Operator Instructions)

Michael Halen with Sidoti.

Good morning. My question is in regards to the increased coupon redemption that you saw in the quarter. Were you more aggressive with the distribution of the coupons? Or, was it just strictly due to a higher rate of redemptions?

We were, on a year-over-year comparison, Mike, we were more aggressive, but largely it was due to a lack of activity a year ago than more stepped-up activity this year. On a full-year basis, I'd say it's relatively comparable, it was more timing of not as much a year ago back to more normal level this year.

Okay. Can you talk about what you saw in terms of promotional activity from some of your competitors?

I think, pretty much, similar to what we've been seeing. Nothing unusual from the standpoint of anything more or less active.

I guess the last one, in terms of veggie dips, can you fill me in on -- I guess -- what the difference was? I guess who picked up the difference between how much of Marzetti's was down and how much the category was down?

Yes. I think the beneficiaries were the primary competitors of ours, which would be Marie's and Lighthouse in that space. Again, we went through a packaging change in the March, April timeframe that as it related to actually showing up on store shelves, probably led a little bit further, even, into the quarter. As we went through that change, we were not doing as much promotional activity around veggie dips. As we've moved into this quarter, in particular, move on into the fall, we will definitely be stepping up that support, as we have that new package in the marketplace.

That's helpful. Thank you very much.

You're welcome.

Phil Terpolilli with Longbow Research.

Hi, guys. Christof Fisher calling in for Phil. Quick question to I guess the marketing and promotional costs and how we should think about that in fiscal year '14 and if there's any kind of sense of timing? I know there was a difference between '13 and '12, there.

From a timing standpoint, I think it will probably be more normal throughout the year, without some of the changes we saw this past year that were a bit impacted, again, by our crouton project and backing away from promotional support while we went through that capacity addition, as well as what we were just talking about around veggie dips. Overall, it will probably be up a little bit. But, I wouldn't say significantly. We do intend to continue to tick up a bit our support for our various brands.

Great. One last question. The new product portfolio that's planned for the coming year and how you might think of that it could affect your revenue potential. Any thoughts there?

Yes. It's a little hard to predict. Actually, our new product introductions of any note are going to be taking place as we get into calendar '14. So, their actual impact on the year, just from a timing standpoint, let alone how successful they are, will probably be relatively modest.

Okay. Great. Thanks so much.

You're welcome.

(Operator Instructions)

Greg Halter with Great Lakes Review.

Hello, guys. Relative to the hedges or at least buying forward for soybean oil and flour, can you speak to where you guys stand currently?

Yes. Greg, we are in a pretty similar position on soybean oil. Again, as you know, we go out a full 12 months, but kind of stair step the coverage level down, as those months go out. So, we are roughly 50%, 60% covered for the next six months and off after that. So, the practical implication of that, as you've watched soybean oil go down recently, is we don't have immediate benefit from that. At least not of significance, but we will certainly benefit from that as time goes on. Flour, we are pretty fully covered through the calendar year with relatively modest coverage in the second half of the fiscal year.

And, the impact on a penny change, any significant change there that you can speak to that's been the historic norm for the Company?

Greg, this is John. Historically, we used to talk about a penny change affecting the bottom line by roughly $1 million. It's now more down toward the high six figures, as many of our food service customers, over time, have moved to contractual arrangements where the cost is passed through on pricing so it doesn't really impact our contribution margins from those accounts.

That was primarily for soybean oil you were discussing?

That is correct. That is correct, Greg.

All right. And, any significant change in your employee count on a year-over-year basis? I think last year you were at about 3,100 and what do you see going forward on the hiring side?

It was -- we finished the year within just a few of that exact -- that exact number, Greg. Going forward, we will probably see a little bit of growth there, but don't expect it to be significant. We, of course, will get some seasonal fluctuations in both the Food and the Candle business, going through, particular the fall season.

All right. Relative to the capital spending plans for fiscal '14, you talked about $25 million, maybe more, with several projects. The one called out being the Kentucky dressing facility. Just wondered if you could elaborate a little more on what you are doing there? The last time I was there, it looked pretty efficient, but I'm no expert in the area. Maybe you can speak to that.

Well, it is efficient. So, this is largely a capacity driven expansion, although it should help efficiencies a bit. But, it is all machinery equipment within the existing walls of the plant. So, mainly processing equipment. More mixing capability and blending, et cetera.

Okay. So, no new construction on the exterior or adding on to what you have?

No, that's not planned at this point.

Okay. There's been a few deals in the M&A area recently. I just wanted to get your feeling. I know you are always out there looking and price is always a consideration and willingness of a buyer and a seller. In light of the Pinnacle and Wishbone deal, just wanted to get your thoughts on what you are seeing there or what you are looking at, currently.

Again, I would describe in general the deal flow as being relatively light. But, we do continue to look for what we would view as good fitting opportunities. So, again, we like the departments, categories that we are in today at the retail level and we are particularly looking for branded retail opportunities, again, like the produce department, we'd still be interested in frozen. But, open to around the store, as well. As you mentioned, the Wishbone opportunity, as you know, we have a little bit of presence in shelf stable salad dressings, but not a lot. So, wouldn't have considered that a high priority kind of opportunity for us.

I missed your comments about fiscal '14 on the food costs, what you specifically called out. Could you repeat that?

I think we mentioned we do anticipate a little bit of potential savings on material costs, as the year goes on. Again, kind of largely reflecting what you've -- what we touched on and you've seen in soybean oil as we work through our forward buys and see the benefit of the lower costs we are seeing today.

Okay. That's soybeans -- I think wheat is or flour is down, as well. What about some of the other areas like eggs and milk and sugar and so forth?

Eggs and sweeteners, we expect to see some savings, again, as the year goes on. Dairy, I think our current look would suggest maybe a slight uptick, probably not significant, but maybe a little bit of an increase.

All right. We have some companies that we cover that work with the food service area. It seems like things are going well in that regard, from perspective of purchasing equipment. It seems like you are seeing a similar uptick, as well, with, I think was 51% versus 49% last year. Just wondering if you could further elaborate on the health of that piece of your business?

Yes. I think we see that industry as performing a little bit better and seems to be optimistic about the future. It might be skewed a little bit to the QSR side of the chain account business, but generally I think there's pretty good optimism there today.

Okay. Last one. In your release, you talked about added volumes from several newer retail and food service programs. Any of those that you can specifically mention?

No, we can't mention them by particular customer name or anything, Greg. I think on the retail side, we do continue to see Simply Dressed, particularly, continuing to grow and Sister Schubert's, as well. More recently, as you know, we added the Simply Dressed vinaigrettes. That's a piece of that growth.

Okay. Thank you.

You're welcome.

(Operator Instructions)

At this time, there are no further questions. I will turn the call over to Mr. Gerlach for closing remarks.

Well, thank you for joining us this morning. Again, we will look forward to talking to you late October with our first-quarter results.

Thank you. Ladies and gentlemen, this concludes today's Lancaster Colony fiscal year 2013 results call. You may now disconnect.