Lancaster Colony Corp (LANC) 2015 Q4 法說會逐字稿

Good morning. My name is Stephanie, and I will be your conference operator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation FY15 fourth-quarter conference call. Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO; and Doug Fell, Vice President, Treasurer, and CFO.

(Operator Instructions)

Now, to begin the conference call, here is Dale Ganobsik, Director of Investor Relations for Lancaster Colony Corporation.

Thank you, Stephanie. Good morning, everyone, and thank you for joining us today for Lancaster Colony's FY15 fourth-quarter conference call.

Let me begin by reminding everyone that our discussion this morning may include forward-looking statements which are subject to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, and the Company undertakes no obligation to update these statements based upon subsequent events. A detailed discussion of these risks and uncertainties is contained in the Company's filings with the SEC.

Also note that the audio replay of this call will be archived and available on our Company's website, LancasterColony.com, later this afternoon. With that said, I'll now turn the call over to Lancaster Colony's Chairman and CEO, Jay Gerlach. Jay?

Thanks, Dale. Good morning, and thank you for joining us.

We are pleased to report a strong fourth-quarter finish to FY15. Given the slow start to the first half of the year, we're encouraged by the better second half, allowing the full year to show growth in sales and operating income of about 6% and 1%, respectively.

Turning specifically to the fourth quarter, net sales increased over 7%, with strong food service channel growth exceeding 9%, and retail channel growth of over 4%. Our recent Flatout acquisition made the difference in the retail channel, where sales would have declined modestly, given the Easter shift. Overall, Flatout provided over half the sales growth in the quarter. Sales mix in the quarter saw retail near 50%, down about 1% from a year ago.

Food segment operating margin grew in the quarter 166 basis points, aided by growing sales, improved plant operations, lower ingredient costs, and good control of consumer and trade promotional spending. While we did see ingredient costs down in the mid six-figure area, egg costs shot up significantly in the quarter, with more impact to come as we move into FY16. Plant operations continued to show benefit from the capacity expansion completed in December for our dressing and sauce products. Consolidated net income and earnings per share from continuing operations grew 22% year over year in the quarter, against a somewhat weak comparison, given last year's service challenges.

The full year saw sales up 6%, with good volume growth, the addition of Flatout, and minimal pricing. While full-year operating margins were off modestly, we did show growth in operating income, net income, and earnings per share versus last year.

Regarding sell-through data for the quarter, based on IRI through July 12, we saw share growth in croutons, produce dips, and garlic breads, with some share declines in refrigerated dressing and frozen dinner rolls. The frozen dinner roll category is the only one not showing growth. We maintained our leadership position in all these categories.

Let me ask Doug to go ahead and make a few comments.

Thank you, Jay.

In general, many of the line items within our balance sheet as of June 30 were affected by the acquisition of Flatout Holdings on March 13. I will comment on some of the larger line items. Turning first to our accounts receivable, these increased modestly from the prior-year June level, with about $2.6 million of the increase relating to Flatout, and most of the remaining increase due to the stronger sales volumes. Consistent with past quarters, we continue to see our overall agings remain solid.

With respect to our inventories that totaled nearly $78 million at June 30, nearly all of the increase related to the inventories of Flatout. While generally immaterial, I do wish to point out the fourth quarter of FY15 reflected non-recurring charges of approximately $500,000 relating to the step-up in the fair market value of the acquired inventory of Flatout. With the inventory step-up charges now fully accounted for, we will not incur charges of this type going forward.

Consistent with our previous call commentary, in general, the net working capital needs of Flatout are proportionally similar to those of our existing business. The Flatout acquisition contributed $6.9 million in fixed assets, as adjusted to their fair market value. Adjusting for this transaction, the net balance of property, plant, and equipment remain comparable to the prior year June total, as our FY15 capital expenditures of nearly $18.3 million were offset by depreciation expense of $18.9 million. As mentioned in our past calls, the largest capital expenditure this fiscal year related to our dressing capacity expansion project at our Kentucky facility.

With respect to other assets, the large increase since June of last year reflects our preliminary estimates of the identifiable intangible assets and good will associated with the Flatout acquisition. Amortization expense relating to the intangible assets of Flatout totaled about $600,000 in the fourth quarter of FY15.

With respect to our balance sheet capitalization, we continue to have no debt, and over $580 million in total shareholders' equity. In light of the use of $92 million in cash in March to fund the Flatout acquisition, we ended the fiscal year with over $182 million in cash and equivalents as we continue to benefit from strong operating cash flows. Given our balance sheet posture, we continue to possess considerable flexibility to address our foreseeable cash requirements, including those supportive of our future organic growth initiatives, acquisition opportunities, continued dividends, and share repurchases.

Finally, our current-quarter and year-to-date effective tax rate of approximately 34% remain consistent with that of the prior periods, and in line with the guidance we previously provided for FY15.

Thanks again for your participation with us this morning, and I will now turn the call back over to Jay for our concluding comments. Jay?

Thanks, Doug.

We begin FY16 with good momentum off the second half of last year, an economy that seems to be moving ahead, the addition of Flatout, and focus throughout the organization on improving operational efficiency and cost controls. However, we are not without headwinds, which include much higher egg costs, select areas of tight production capacity, a challenging frozen dinner roll category, and plenty of competition. With much higher egg costs today, and an unclear future, we have implemented price increases going into effect this quarter, with further changes already planned. To date we have not had supply constraints impact our ability to service our business.

While our capacity addition last year for dressing and sauces has given us much needed relief, we do have certain specific capabilities where we are tight on capacity, which has us doing select outsourcing. We're also making some modest capital investments to enhance our capacity where needed.

We feel we have developed a comprehensive plan for this year to support our Sister Schubert frozen dinner-roll line, which includes expanded consumer and trade promotion activities, both traditional and digital. We see strong competition across our channels and categories, so successful product innovation will be an important competitive tool.

We feel we have a good and expanding pipeline of new products for the coming two to three years. Recent introductions off to a good start include our New York brand soft pull-apart rolls, and Simply Dressed avocado ranch dressing and sriracha ranch dressing and veggie dips. We are optimistic about our New York brand snack sticks and salad kickers just recently introduced. Upcoming product introductions will include Marzetti Vineyard dressings, which are wine-based salad dressings, and to flavor-cooked vegetables, Marzetti Veggie Drizzles.

Also of importance will be continued work to simplify our ingredients in existing products. This effort is ongoing in both channels of our business to address today's consumer preference for foods with a shorter and simpler list of ingredients. This can be a challenging and time-consuming work, as key factors like existing taste profiles and shelf lives need to be considered.

We have no major capital projects in our plans for this year, although we do have a variety of cost-reduction and capability and/or capacity projects planned. At this point, we would estimate the year's capital investment to be in the range of $15 million to $20 million. Acquisitions continue to be of interest, and our focus is for branded retail channel businesses with product that is broadly on trend. With our presence in the deli department, we would be interested in expanding there, but could find potential in any part of the store.

We continue to have about 1.4 million shares available for repurchase, although we repurchased less than 10,000 shares in FY15. Dividends are regularly discussed with our Directors, and we certainly want to keep our long track record of annual increases alive.

Stephanie, those conclude my comments. We're ready to take questions.

(Operator Instructions)

Our first question comes from Phil Terpolilli with Wedbush. Phil, your line is open.

Yes, can you hear me?

We can hear you now, Phil.

Good morning.

Good morning.

It seemed like there was a lot of puts and takes in the prepared remarks just around some of the margin impacts for next year. I think you mentioned avian flu, maybe some efficiencies from capacity expansion. If you sum everything together and maybe walk us through how you would get there, but do you think -- the price increase, as well -- do you think you can get operating margin actually growing here in FY16?

Well, Phil, as you know we don't give specific guidance, but it certainly would be our goal to do that. Now probably the biggest wild card, at least near-term here, is egg costs and how that may play out. Overall, demand is always a key factor, and while we're optimistic on the outlook from a sales standpoint for 2016, you never know what can change during the year. But egg costs, as you know, are up dramatically. The outlook is very unknown at this point, but those prices are still at high levels today. We are -- have implemented some pricing, will be implementing some additional pricing. Both those are such moving targets at this point, it's hard to really put any even ball park estimate on their impact.

Right, okay. That's helpful. A couple others real quick. Refrigerated dressings, I think you mentioned that you may have lost a little bit of share in the quarter. I know there was some new product innovation coming out. Anything else competitively maybe going on there -- maybe Bolthouse getting a little more aggressive, or any of the other competitors in the space?

Well, I would say the category is, overall it's pretty competitive. It's got more players in it than it would have had just two or three years ago, including some relatively new entrants. Just the arrival of those can knick a little bit at shelf space and growth potential. Yes, we did lose a modest amount of share in the most recent period, maintained a leading position in the category. The Marzetti Vineyard dressings I mentioned, while they will have a relatively select roll-out, those are refrigerated dressings that will be merchandised in the produce department, as well. Hopefully we'll have some added innovation coming into that category, also.

Okay. On Flatout, any idea -- I think you did break it out, but any idea year over year, if we're looking at our model, what that business was maybe up? I understand you didn't own it last year, but I'm sure you have a sense of how it's doing? Maybe any color around the new products you've introduced there -- the gluten-free, the high protein. How those are going, as well?

Phil, not able to quantify specifically the year-over-year growth with Flatout, but we are seeing a little bit of an improvement in sales. The new product, I think particularly the new Protein Up product is getting good placement. It seems to be getting good initial sell-through with the consumer. Gluten-free is off to a slower start. Okay placement, but slower sell-through to the consumer.

They're both relatively recent in the market place at this time. They were both being introduced at the time of the acquisition and that transition, so don't know whether any of the -- those activities distracted a little bit from getting those fully introduced. But I think we're optimistic about both of them. At this point, I think the Protein Up looks like the stronger of the two.

Phil, if it helps at all, the annual run rate on the Flatout when we purchased them was about $46 million. That was in the first week back in March.

Right, okay. Last thing, you mentioned a little bit on M&A, but what have you seen year to date? Is the pipeline relatively consistent, a little bit slower, a little bit faster? It would be helpful, as well. Thanks.

I'd say it's relatively consistent. I think we're in a little quieter point right now at this time of the summer, which we typically see. But yes, I would say generally consistent.

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

Thank you.

Your next question comes from Jason Rodgers with Great Lakes.

Good morning, Jason.

Good morning. Do you have the total impact from ingredient costs and pricing for FY15?

Overall, the pricing for ingredients was about a mid-seven-digit figure.

Favorable.

Favorable, sorry about that.

All right, and the ingredient costs?

That was ingredients. I'm sorry.

Yes.

Pricing was up just modestly. I don't know that it barely cracked seven figures for the year.

I would agree.

Okay. You mentioned egg costs soaring, but also soybean oil, which is your largest food input cost, has come down pretty dramatically. I was wondering if you can give an outlook on your total food ingredient costs going forward, as well as freight?

Well, if you talk about ingredient costs ex-eggs, because that's been so volatile and changed so dramatically with this unknown outlook, take that out of the mix completely, our outlook for the full year would be a modest decline in ingredient costs, with soybean oil being a key factor there.

Okay. I was wondering if you can give an update on the operational improvements you've made in the dressing and sauce facility expansion, if those are coming in as expected?

They are, Jason finally, a little bit later than we anticipated, but we have, I think, consistently been seeing the benefit of those over the last -- really over the entire fourth quarter, and even as we move into the first. Probably we'll continue to see a little more incremental benefit over the next couple of months. At that point, we've probably reached our expectations.

The price increase that you're implementing, is that in both the food service and the retail channels? About what is the amount of the increase?

It is in both channels. The amount is -- varies widely depending on the level of egg content in a particular product. In the whole scheme of things, again, it's just an unknown as to where we're headed here. But pricing coming off of eggs across the entire business is a relatively modest, low single-digit percentage. But individual items would be moving significantly.

In addition to pricing -- and I don't think I mentioned earlier, we are looking at opportunities to do any kind of reformulating, both in just reducing the content of eggs, perhaps using some egg substitutes, all dependent on customer and consumer preferences and ultimate taste impact.

To this point you've had no disruption in egg supply, correct?

That's correct, in a total basis. We've had some suppliers that have had some issues, but we've had others that have been able to cover that for us. We've not had any problems servicing our business.

Finally, I wonder if you could provide an update on Presto pasta.

Presto pasta, we are withdrawing from the market. It did not reach the expectations that we anticipated. You might still see a little bit of it on the store shelf today, but we are not moving forward with that.

Thank you.

You're welcome.

(Operator Instructions)

Your next question comes from Jeffrey Thomison with Hilliard Lyons.

Good morning. Congrats on an excellent quarter.

Thank you.

I had two topics I wanted to ask you about and you touched on both, but I thought I would just put them back on the table for further discussion. One is the food service operations. I wondered if we could drill down a bit and look at what all's going on there to spur things? I wonder if there are macro factors, industry factors, or Company-specific factors at play that are leading to a bit of a boost there in helping that business?

The second question, Doug, a little bit more on the CapEx outlook. I believe I heard you give a number of $18 million CapEx last year, and then for the current year I believe you said $15 million to $20 million. Essentially flat CapEx, whereas I thought the CapEx may have been lower, coming your dressings plant expansion project last year. I just wanted to clarify where the CapEx stood?

Well, Jeff, it's Jay. Maybe on the first question on food service, I think the drivers are all of the above. From a macro standpoint, I think an improving economy just seems to be helping the restaurant business pretty much across the board. A lot of our national chain accounts are seeing improvements in their business.

We do also then have customer-specific situations where they are seeing maybe above-average growth, driven by whatever, whether it's product innovation or their marketing and promotional activities. We have that benefit. Then tied in with that are limited time offers, which it can vary customer to customer and time period to time period how much activity there is there. But we've seen a pretty solid stream of that activity going on, as well. All those things have been helping the food service channel of our business. I'll let Doug comment on the CapEx.

Okay.

On the CapEx, Jeff, the range that Jay gave in his commentary is that of a range. There is going to be an influence of several factors there. I appreciate your thought in terms of perhaps CapEx being lower this year. But as we look out into FY16, we do see some specific pockets of CapEx that are going to be necessary to balance supply and demand, if you will. Those have a little bit of a price tag to them. It's still being developed, if you will, ultimately how much of that CapEx we will expend in the current year. I would take Jay's commentary as general guidance for right now.

But then when you have that range, you are -- the comparison would be the $18.3 million from last year?

That is correct.

Okay. Then back on the food service, just to make sure I'm clear, the pricing benefit that could happen -- or when you were talking about pricing benefits, were you talking about FY16 outlook, or did you also have pricing benefit in the just-completed FY15 year?

No, there wasn't any pricing from the food service standpoint in 2015. In fact, there might have been even a little deflation going on in 2015 coming off the lower soybean oil costs. The pricing inflation, it will be both on the retail and food service side, is going to be again, egg-cost-driven at this point, since that is starting to a degree this quarter. Again, the outlook is just hard to predict as to how far that may have to go.

Okay. When you're talking about your customer base on food service, do you have many customers that are seeing net growth on the restaurant side of things, net growth in the number of units they operate?

We do have some that are, yes.

Okay. I didn't know if unit volume would be another driver.

Yes, that would certainly be a factor, absolutely.

Okay. That's all for now. I may circle back with you later today.

Okay, great. Thank you, Jeff.

Thank you, Jeff.

If there are no further questions, we will turn the call back over to Mr. Gerlach for concluding remarks.

Again, thank you for joining us today. We'll look forward to talking to you in late October with our first-quarter results.

Thank you. This concludes today's conference. You may now disconnect.