Lancaster Colony Corp (LANC) 2016 Q1 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 fiscal year 2016 first-quarter conference call. Conducting today's call will be Jay Gerlach, Lancaster Colony's Chairman and CEO; Doug Fell, 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. A

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

Thank you, Susan. Good morning, everyone, and thank you for joining us today for Lancaster Colony's fiscal 2016 first-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 provisions 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 at 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, and good morning. Fiscal year 2016 is off to a very good start following a strong finish to 2015. Our first-quarter saw sales increase just over 13% and operating income, net income, and earnings-per-share increased 21% from last year's first quarter. Earnings-per-share reached $1.01, up from $0.83 last year.

Food segment operating margins reached 15.3%, up from 14.4% a year ago. Last year's first-quarter was challenged by inefficient plant operations due to capacity constraints, higher new product introductory costs and higher freight costs. This year's quarter benefited from the capacity addition brought onstream in January, limited product introductory costs, lower consumer spend, and slightly reduced freight costs.

Partially offsetting these positives was the significant increase in egg costs. Lower soybean oil and dairy costs helped to offset some of the egg cost increase.

While our acquisition of Flatout contributed about one-third of our total net sales increase, our remaining business grew over 8%, with both our retail and food service channels showing good growth. Marzetti refrigerated dressings, Olive Garden dressings, and New York brand croutons were all good contributors to our retail channel growth. Food service growth was helped by sellthrough with existing customers, including some incremental limited-time-offer promotions.

While we implemented pricing actions in both channels during the quarter, primarily to offset the steep increase in egg costs, the actual realization was constrained, as our pricing actions typically lag the trends in cost inputs. We expect greater benefit from this pricing in the second quarter. With the benefit of Flatout, our retail mix in the quarter improved to 50.5%, up 110 basis points from last year's first quarter.

Looking at IRI sellthrough data for the 12 weeks ending October 4, we held or grew share in four of our six key categories. Our most challenging category continues to be frozen dinner rolls, where both the category and our Sister Schubert brands showed declines. As we enter the very important holiday season for this brand, we feel we have a very comprehensive and attractive promotional plan. Hopefully, the consumer will respond favorably. We maintain our leadership positions in all six of these categories.

Let me now ask Doug to make a few comments.

Thank you, Jay. The comparative September and June 30 balance sheets reflect our acquisition of Flatout holdings on March 13. I refer you to my commentary from our last earnings call regarding the core working capital components of Flatout. Consistent with our expectations, little has changed since June 30 relative to its working capital.

I will now comment on some of the larger line items within our balance sheet that have changed since June 30. Turning first to our Accounts Receivable, these increased nearly $12 million from the June level. In general, the increase reflects the stronger sales volumes experienced in the month of September versus June.

Consistent with past quarters, we continue to see our overall agings remain solid. With respect to our inventories that totaled $90 million at September 30, the $12 million increase since June 30 primarily reflects the seasonal build of retail inventories for our second fiscal quarter. Typically, our second quarter is our largest quarter for retail sales.

As mentioned in our past calls, in the first half of fiscal 2015, we were executing our dressing capacity expansion project at our Kentucky facility. We do not have a similar project of this size in process at September 30. Consequently, our capital expenditures of approximately $3.4 million for Q1 were offset by depreciation expense of a similar amount.

The increase in Accounts Payable since June 30 generally reflects the influence of higher sales volumes and the related seasonal increases in inventory mentioned earlier. The primary increase in accrued liabilities since our past year-end reflects a higher accrual for federal income taxes, along with other increases in accruals related to our higher sales volumes such as freight.

With respect to our balance sheet capitalization, we continue to have no debt and nearly $597 million in total shareholders equity. Likewise, we ended the quarter with nearly $200 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 potential share repurchases.

Finally, our current quarter effective tax rate of approximately 34% remained consistent with that of prior periods and in line with our expectations.

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 began our second quarter with a positive view of organic sales growth in addition to the benefit of Flatout. This quarter is the strongest seasonally for a number of our retail products, including Sister Schubert dinner rolls and our Marzetti produce dips. We also hope to benefit from recent new product introductions, including our Marzetti Vineyard dressings and veggie drizzles now starting to get on store shelves.

We expect food service channel sales to continue to rise, generally aided by strong growth with certain chain customers. We do not see any short-term relief from higher egg costs. The impact on our material costs could be meaningful, but with more pricing in effect to help offset the impact. Our plans call for higher promotional spending than last year, both consumer and trade.

Operating costs should continue to be helped by the added capacity and overall efforts to improve plant floor efficiency. We will, however, continue to be pushed on capacity in certain areas for the immediate future.

We continue our acquisition search, focused on branded retail products that would generally be viewed as on-trend and a good strategic fit. No shares were repurchased in the quarter, and we spent about $3.4 million on capital projects. As typical, at our upcoming November Board meeting, we will review our cash dividend for a potential increase.

Susan, we are ready to take questions.

(Operator Instructions) Brett Hundley, BB&T Capital Markets.

Thanks for the time. I have a few questions. Doug, do you have the volume performance during the quarter?

The volume performance is roughly around 8%.

Okay. Okay. And honestly, your volume performance and thus your sales growth is clearly very strong, especially relative to your peers. And the market environment is such that I think that customer exposure becomes increasingly important. And I'm wondering if you can talk to -- not specifically, of course -- but I'm wondering if you can talk to that -- the customer exposure that you might have, both on the retail or the food service side, and how you believe that that's benefiting you in this environment?

Well, you know, Brett, I think on the retail channel of the business, I wouldn't point to any dramatic changes there. Obviously, the addition of Flatout gets us into the deli department is and presence with that particular brand and product line. As it relates to the rest of our retail channel products, I think it's incremental improvement but nothing dramatically different overall.

On the food service channel, as we've referenced in the past, we are selling 19 of the top 25 restaurant chains. There haven't been any additions in the current quarter to that. We may have added a smaller chain or two over the past quarter or two, but nothing significant as far as new major customers there.

Having said that, I think we continue to find opportunities to sell existing customers additional product. And then, the benefit of these limited-time-offers that are at times hard to predict and don't always line up from a comparative basis on a year-over-year standpoint in a similar fashion, can drive that business a little bit more so than the general trends in the restaurant trade.

Okay. And Jay, we've heard reports over this past quarter of a large mass merch customer pushing for some pretty heavy discounts from vendors. And I'm just curious if Lancaster was negatively impacted materially in the quarter? Or if you largely saw business as usual?

Generally business as usual, Brett.

Okay. And then, I wanted to ask you, Jay, about the plan that you talked about on your frozen rolls. You've talked a little bit now for the -- I guess the pressure in that category. And I would just be curious to learn more about the plan that you have in place as you are into Q2 now.

Well, as we typically do, going into the holiday seasons, we try to put a total plan together, both from a trade standpoint -- so ideally getting the best merchandising positions on the retailers' shelf as well as consumer support around that. And I think this year on the consumer side, we've tried to be as all-encompassing as ever with the use of kind of the traditional FSI kind of couponing support to an expanded use of digital, both from a couponing as well as an advertising standpoint.

And for the first time this season in Sister Schubert's core markets, we're going to do some television, which is new for us, generally as well as specifically for this brand. So, overall, we think we've got a very strong both consumer and trade program in place that we hope will make a difference from a consumer sellthrough standpoint.

That's helpful. And then just two more for me. This might be tough to answer, but you guys have, of course, talked about marketing and promo costs uptick going forward here. And I'm just wondering if you can couch that a bit further for us?

Your operating margin performance was a bit stronger than expected during the quarter. And there is always a lot of puts and takes to think about as we model your consolidated operating margin. And so I'm trying to think about an increase in marketing and promo costs relative to last year, but also relative to other pluses and minuses that may be affecting your margin profile going forward.

And so, as you can, as we think about Q2, can you maybe just lead us through some of the puts and takes that might affect margin? Of course, again, you talked about marketing and promo. You also should have better pricing in place on the egg coverage side. So, just wanted you to talk qualitatively about that.

Well, Brett, probably still the biggest issue is going to be the egg cost headwind. Overall, we might anticipate the whole ingredient deck to be up maybe in the mid-7-figure area, with the plus being especially on the egg side and some of the benefit being over on -- still on soybean oil and dairy costs.

Promotional expenses probably in the low-7-figure area of an increase year-over-year, plus or minus a little bit there. Freight costs in general, I think we'd expect to be generally flat.

So, what am I not thinking about, Doug or Dale, here?

Plant operations.

Yes, plant operations. We do expect to continue to show some improvement year-over-year. Again, the capacity addition didn't start to come onstream until the first of this current calendar year. So still we are challenged working through the December quarter of last year there.

Okay. And at least related to the egg cost headwind, I understand that that remains a big issue from a standalone cost basis. But from a impact to margin standpoint, you should have more price coverage in place during Q2. Thus, I would expect the margin hit to be better in Q2 relative to Q1.

We would anticipate that, right.

Okay. And then the last question from me -- I appreciate it, either Jay or Doug -- is, I wanted to just talk about your balance sheet for a minute. You continue to hold a fantastic balance sheet, roughly $200 million in cash. And I wanted to explore potential for a special dividend and understand how you think about that.

Clearly, as you evaluate M&A, depending on what you see out there and what kind of return you see, what is your openness to a special dividend? And when do you think that you would look at something like that? Thank you.

You know, Brett, that's something we do talk about from time to time. We do feel it's certainly a potential opportunity for a return to shareholders. It's obviously relatively easy to implement, so you can do it in a relatively short period of time.

Our priority still remains on investing in acquisition growth potential. And we do continue to actively look at a lot of opportunities in the market. Not seeing a lot that we would consider to be great fits, as we speak today, but there are opportunities out there and we continue to explore those.

So, it's something we do consider and will consider. We don't want to just accumulate cash on the balance sheet indefinitely. So, as you know, we've done a couple special dividends over the last seven or eight years, when we've gotten into a situation -- not a lot different than where we've been today. So it is something that we do talk about from time to time.

Thanks so much for taking my questions.

You're welcome.

Thanks, Brett.

Frank Camma, Sidoti.

Nice quarter. So, you had a number of new products here that you called out in the press release. I was just wondering if you could talk about any one of these that -- I mean, obviously you go in with the position that these are all going to do well, but have any done -- have exceeded your expectations at this point? Or is it too early to say? I was wondering if you could just give some color on that.

The newest ones are the Marzetti vineyard dressings and veggie drizzles. And it is too early there to tell, other than the trade reaction has been very positive to both those. But just now getting on the shelf, so really don't have a strong feel for how that's going to play out with the consumer yet.

Okay. And could you talk about -- you mentioned Flatout, and I was just -- we've talked about this in the past about how you can, over time, utilize that to gain more access into the deli section. Is there -- has there been any specifics that you can mention that either happened in the quarter that you will soon do with other products?

Frank, at this point, no. Nothing real specific to talk about there, but we obviously are getting some experience now in working in the deli with the Flatout brand, and with the team that we brought over from Flatout that's been very helpful in helping us learn and understand that category in the supermarket. So, we do anticipate we can take advantage of that, hopefully, with some product innovation, and perhaps some of our existing products, but perhaps more importantly, acquisition ideas.

Okay, good. And remind me, is this Flatout capacity that you purchased, does that have enough capacity going forward for your growth? Or do you need to add expenditures to build that out?

It has a fair amount of growth capacity available to it today, yes.

Okay. And the final question is just on the food service side, obviously seeing good growth there too. Was the strength -- you have good exposure, obviously, but just wondering if the strength was kind of across the board? Or were there specific -- you don't name your customers, but was there specific customers that kind of pulled that up?

You know, it's kind of a combination of three things, Frank. One is just the general industry, I think, is stronger and is seeing growth. And then there certainly are some chains that are outperforming, and we are fortunate to be aligned with two or three of those that are doing better than average. And then the third would be again these limited-time-offers where we had some strong events like that going on during the quarter.

Okay. Got you. Thanks, guys.

You're welcome.

Thank you.

Phil Terpolilli, Wedbush Securities.

This is Dominic jumping on the line for Phil. Thanks a lot for the time this morning. Seems that the question I had set up or most of the questions I set up were already asked, but I was wondering if maybe you could provide a little bit more color on the expectations for the increased marketing and promotional spend that you guys expect?

I know you guys said it was going to be kind of geared towards Sister Schubert's in the second quarter. Is that something you guys expect to remain elevated throughout the end of the year? Or do you guys expect to kind of reallocate that towards some of the other new products as well? Or if you could provide any more color on that, that would be great.

Well, yes, we do have the uptick that's particularly targeted at Sister Schubert's in the second quarter, which is their seasonal peak period. But we do anticipate more consumer spend year-over-year throughout the balance of the fiscal year. And that is across different products, different brands over that period of time.

Okay, so it should be sustained up there. Okay.

Yes.

And actually that takes care of all my questions. Thanks a lot for the time today, guys.

You're welcome. Thank you.

Sure.

David Stratton, Great Lakes Review.

Thanks for taking the call. I just have one question about the avian influenza. And that is, as they suspect that the migratory birds took it north, and there could be a repeat of migratory birds bringing it then south for the winter. Do you or your suppliers have any plans in place to ensure that there isn't a disruption or in some way to mitigate any increases that might come from a recurrence of the outbreak?

The -- you know, you raise a great point, and we all remain a little anxious as to what might happen as the birds do migrate south. We are in constant contact with all of our egg suppliers. And while I don't think any of them can guarantee our supply, they have been working on certainly increased biometric security around all of their egg-producing facilities, and there's been quite a bit of press on that, as you are well aware of.

So I think we are in a good position with our suppliers. And we have -- we use several suppliers, so we are not dependent upon any one. And we just remain guarded for the next several weeks and months as we work our way through this period.

All right. Well, thank you very much.

Sure.

At this time, there are no further questions. I would now like to turn the call back over to Mr. Gerlach for any closing remarks.

Well, thank you again for joining us this morning. We'll look forward to talking to you late in January with our second-quarter results.

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