Lancaster Colony Corp (LANC) 2016 Q2 法說會逐字稿

Good morning. My name is Karen and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation's fiscal year 2016 second-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).

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

Thank you Karen. Good morning, everyone, and thank you for joining us today for Lancaster Colony's fiscal 2016 second-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 will now turn the call over to Lancaster Colony's Chairman and CEO, Jay Gerlach. Jay?

Good morning and thank you for being with us today. We are pleased to report growth in both sales and earnings for our second quarter of fiscal 2016. Our seasonally strongest quarter saw sales growth of 7% and earnings-per-share of $1.25, up 4.2% from last year's quarter.

Core sales, excluding the Flatout acquisition, were up 4.2%, which is a bit disappointing given our increase in trade and consumer support on our retail channel product lines. Core retail channel sales benefited from some increased pricing in response to higher egg costs, nice growth in our Marzetti refrigerated salad dressings, New York BRAND croutons, and Olive Garden dressings, offset by declines in our frozen product lines, which were impacted by sizable level of frozen inventory reduction activity by one of our large retail customers in December. Most disappointing was our Sister Schubert frozen roll line where we added some television advertising to our promotional efforts.

Our food service channel continued to provide strong growth primarily from our chain restaurant account business. Including Flatout, we saw our retail mix essentially unchanged at about 55% of total net sales.

IRI data for the 12 weeks ending December 27 shows us continuing to lead all of our key categories. We gain share in all but one category, frozen dinner rolls, and saw sell-through growth in all but two, frozen dinner rolls and refrigerated dips, which were nearly flat.

Operationally, we performed reasonably well but not as efficient as we saw in the first quarter. Very high dressing plant utilization, which created some challenges, was paired with a bit lighter utilization in our frozen bread plants. These factors, coupled with an unfavorable change in our core sales mix, contributed to a small decline in gross margin.

Freight costs were down year-over-year largely due to lower seasonal costs, which helped mitigate the gross margin decline. Ingredient costs were up for the quarter driven by much higher egg costs partially offset by favorable soybean oil costs. Operating expenses grew with the addition of Flatout and increased spending on consumer marketing.

Let me now turn to Doug Fell for a few comments, then I will wrap up with some thoughts on our second half and take questions.

Thank you Jay. As a reminder, the comparative December and June balance sheets reflect our acquisition of Flatout Holdings on March 13. I refer you to my commentary for our Q4 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 cash balances, the significant decline of approximately $95 million since June 30 primarily reflects the payment of our $5 special dividend on December 31. As Jay will mention in his remarks, this will total around $137 million.

Other notable items impacting the change in our cash position for the first half of fiscal 2016 include cash generated by operations of approximately $74 million reduced by regular cash dividend payments of $26 million and property additions of $7 million.

Our Accounts Receivable balance decreased nearly $2 million from the June level. In general, the decrease reflects continued strong collection efforts, as we slightly reduced our days outstanding. Consistent with past quarters, we continue to see our overall agings remain solid.

With respect to our inventories that totaled approximately $80 million at December 31, the slight increase since June 30 primarily reflects the influence of higher sales volumes coupled with the slight overhang in frozen retail inventories related to the decline in December orders from a large retail customer. In general, the increase in Accounts Payable since June 30 reflects the influence of higher sales volumes and the related increases in inventory. The reduction in share orders equity reflects the impact of the $5 per-share special dividend payment on December 31.

With respect to our balance sheet capitalization, we continue to have no debt and nearly $482 million in total shareholders' equity. Likewise, in light of the special dividend, we ended the quarter with over $87 million in cash and equivalents as we continued to benefit from strong operating cash flows.

Given our balance sheet posture and overall liquidity, 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, the slight decline in our current-quarter effective tax rate to approximately 33.5% reflects the tax benefit related to the special dividends paid to shares held in our frozen ESOP. We anticipate our effective tax rate to resume a more historical rate of around 34% for the second half.

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 our second half with an optimistic outlook for organic sales growth from largely the same areas we've been experiencing -- refrigerated dressing, croutons, Olive Garden dressing in the retail channel, and continued momentum in the chain restaurant piece of our food service channel, although growth there may be tempered by our recent initiative to selectively rationalize some of our food service business.

New retail products will help a bit as we further roll out Marzetti Vineyard dressings and Veggie Drizzles. We also have some new introductions for the third and fourth quarter that may provide some modest benefit yet this year.

Frozen, particularly Sister Schubert rolls, will likely continue to be a challenge. We anticipate ingredient costs trending down as soybean oil stays favorable, flour becomes so, and egg costs trend down from their recent highs, assuming no further aid in influenza outbreaks. Freight costs are expected to stay somewhat favorable through the second half.

Trading consumer marketing spend is likely to head up some as we support new product introductions and continue investment in our brands. We continue to look for acquisition opportunities in the branded retail space and have several things to evaluate with the new year.

Capital investment for the second quarter was about $4 million and our full-year outlook looks to be in the range of $15 million to $20 million.

We were pleased to return $137 million to shareholders with our special dividend December as well as increase the regular cash dividend for the 53rd consecutive year by 8.7% to $0.50 per quarter. In total for calendar year 2015, we returned $188 million to shareholders in the form of dividends. We did not repurchase any shares during the quarter.

Karen, at this point, we are ready to take questions.

(Operator Instructions). Phil Terpolilli, Wedbush.

Thanks for taking the questions. I guess maybe to start on the food service side, you mentioned in your prepared remarks around some rationalization in that business. Do you have any sense of maybe the kind of the timing and the magnitude of what you are potentially talking about?

And then, the rationale behind it, is it potentially just growing so fast, you don't necessarily have the capacity or is the business you are trying to rationalize maybe lower margin? So we could start with that.

No, it probably goes as much too capacity and complexity, Phil, as anything. And timing-wise, we've seen just a little bit of it take effect at the present time, and that probably continues to roll out over the calendar year. I don't have a real good estimate for you as to what the impact may be, but probably in the single-digit percentages of that channel of our business, but trying to take some complexity out of the business that ideally will also help us on the capacity side of things.

That's very helpful. And then a quick question on the inventory side. I think you mentioned a reduction in some of your customers on the inventory side. Can you quantify that at all in terms of impact it was in the quarter for the top line?

Not down to the dollar, Phil, but we are probably talking mid-single-digit million dollar impact.

Okay. And then just a couple more for me. Shifting to the new product side, I know we've talked for a quarter or two now about these Marzetti sub line launches, the Vineyard and the Drizzles. Any update as to how that's going, sort of the consumer acceptance? Any signs maybe it's cannibalizing versus incremental growth for the dressing business?

It's still a little early to form much of an opinion on that, Phil. I think we've been generally positive about its rollout with still a fair bit more to come yet this spring, but not good enough data to give you anything at this point as to whether we are actually seeing any cannibalization yet.

Got it. And that distribution, I guess where you at now versus where you are hoping to get to by call it the spring, summer time frame?

I, again, can't give you specific numbers but I think we've definitely got more to go versus where we have been so far.

Okay. That's helpful. And then just one last one for me. On the Flatout portion of the business, any sense of how that performed in the quarter? I heard the blanket remarks, but any more detail there? And then I know Walmart with their Clean Floor policy I'd imagine has been impacting Flatout, but any signs that they may be readjusting this policy or how are you guys adapting to what's going on there?

Well, first, you're right, it is impacting the Flatout business and probably the most significant headwind we've got in that business right now. I wouldn't say we are seeing any signs of that changing, but we are working on initiatives to try to find alternative ways to still get attractive displays in front of consumers. So, work to be done there, but in the near term, that has been a headwind and is going to be at least for a little bit here.

Okay, great. And I'll pass it along. Thanks.

Frank Camma, Sidoti.

Just to piggyback on that Flatout question for a second, it looks like sequentially if I back into the numbers, Flatout fell pretty a lot sequentially. Do I have that right, A? And B, there's really not much seasonality in that business, right, as compared to your Sister Schubert's business?

First of all, yes, you are right. Q1 to Q2, the business is off. Seasonality is a little bit of a factor as we've come to find out. That product isn't as popular during the holiday season (multiple speakers)

Oh, okay.

-- balance of the year. But the issue that Phil just brought up is certainly a factor. And then we had a little bit of some inventory reductions going on with one or two of the distributors that are involved in that business also.

Okay. How is the -- I know you had some -- initially you had some issues with I believe the protein -- I might have this reversed -- but the protein version was doing well, but maybe the gluten was not doing well. Just wondered if you could give us an update on that?

It really was the opposite.

Opposite? Okay, all right.

Protein has been doing pretty well and the gluten-free is still slow-moving, getting a little bit better but still relatively slow.

Okay. Is there -- this might be a silly question, but is there an opportunity to -- I wouldn't think you would want to do this but, to me, it seems like there's not a lot of healthy choices in the frozen. Would you be able to take a brand like Flatout and bring it into frozen somehow where people would have the convenience to bring that home and store it and make something healthier for you at home versus like a Sister Schubert's, which is obviously not a super healthy type of product?

I wouldn't rule that out, Frank. It's not something that we are currently considering. We do know consumers actually do buy it. Some of them take it home and freeze it, so --

Oh, okay.

So some of that does go on, but we don't have a current plan to try to merchandise that in frozen.

Okay. And the last question for me is just on the institutional side. Obviously, it looks like you did pretty well there. I was wondering if you could talk about the volume impact versus the price increases that you got there.

Frank, pricing and volume in the food service channel probably had about an equal contribution to growth.

Okay. And I think you called out specifically the restaurants who are overall doing fairly well. Is that correct?

Yes, I think generally we've seen the chain guys see their business improving.

Great, thank you.

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

So, I heard this issue with a large retailer as recently as last night with another one of my companies, and it looks like they are creating a lot of noise and so I just want to understand it a little bit better as far as what the conversation is like today, and if you are worried at all about these efforts bleeding into maybe other products that you might produce. And the reason I ask that is it's kind of been explained to me that this is more of a national brand focus in addition to trying to clean up the store area. And so I question if it can bleed over into other brands that you produce besides just maybe what you have on open floor displays and things like that. In this particular retail, I think it was a few years ago they tried to tier brands and then that kind of died off and now we are in this moment where they are reducing inventories and working on the clean store initiative. And so just the conversation, is it that this might just be a near-term effect? What does that conversation sound like? And then just more broadly, are you concerned about this effort affecting other products that you produce?

You know, Brett, I certainly don't have all of the answers to that exactly. But our situation is, on the inventory side of it, is particularly focused in the frozen space. And I think there is just an initiative to try to be as clean on seasonal inventory at the end of the season as possible and maybe just a little more aggressive effort on that a little earlier in the end of the calendar year than we've historically seen.

The other issue, the merchandising related one or the Clean Floor policy is one that we anticipate is going to continue to go on going forward. And that more particularly affects our Flatout flatbread business. So as I mentioned earlier, we are trying to work to find alternative merchandising opportunities that meet the requirements that they have at this time and likely going forward that hopefully will have -- will mitigate any impact on our business.

That's good color. So, can I read that as maybe other parts of the store might be more appropriate in this type of environment?

Could potentially be, yes.

Okay. And then it sounds like you're more hopeful, just in reading your body language, it sounds like you are more hopeful that the inventory issue can subside in coming months. I don't want to put words in your mouth, but would that be a fair statement?

Yes, I think, with that hopeful qualifier, yes.

Okay. Independent of any change in a particular customer's strategy, it sounds to me like you are disappointed in the response of Sister Schubert's relative to the brand support that you put in place. Can you describe maybe what you and your team learned from that and ideas on how to attack this going forward?

Well, I think we haven't fully digested the potential earnings from that at this point, Brett, in evaluating some of the information as it relates to those efforts. But we are concerned that we don't feel that our investment really moved the needle to the degree it should have, and we will be considering what kind of alternative approaches may make more sense in the future.

Is part of that consideration maybe working on to expand distribution west, or is that lower on the totem pole for you?

That would be a little lower on the totem pole. I certainly want to continue to expand distribution where possible, but we want to be sure we are taking advantage of potential sell-through to existing consumers and new consumers in our core markets, which are generally in the eastern half the US.

Okay. Just two more for me. I appreciate it. On the rationalizing parts of your food service business effort, I wanted to tack on to a question that was asked earlier and just see -- I assume you make these decisions for the benefit of the bottom line. And can you maybe frame up how I can think about what that might do for your operating margin? Is it something that can add 10, 20, 30 basis points of operating margin just from rationalizing some of these products away?

I don't know that it's going to be quite that easily evident, Brett, but over time, hopefully it does let us improve the margin a little bit. And it would be in the likely relatively modest basis point area that -- you mentioned 10 or 20 basis points. More likely to be there versus 100 basis points.

Okay. And so I take it that the rationale for the move more near-term is simply to help ease any operating constraints and things around that nature?

Yes, that's true.

Okay. And my last question is just I'm just trying to understand. Eggs have come way down. Now egg products haven't come down as much when you look at the liquid and the dried market, but they are still off pretty nicely. And can you just frame up the benefit, maybe qualitatively, during the quarter from that? It sounds like you got back to even with where your pricing was, so it still should have been a margin help, in my opinion, net. And then can you kind of frame up what your expectation would be if AI doesn't come in and give us round two here? Can that benefit fall-in nicely in coming quarters? So that's my first question. And related to that, does the decline in the dairy complex help you guys at all going forward?

Brett, I will make a couple of comments and see what Doug would like to add here. But I think, as it relates to the second quarter, we didn't quite get whole on pricing versus egg costs. We should start -- assuming these egg costs trend down further, that should be beneficial as we move through the third and fourth quarters. As you know, our pricing, as it relates to passing on ingredient costs, particularly in the chain restaurant business, has a lag effect. So we've lagged on the way up and paid some margin penalty there. The lag on the way down should give us a little bit of margin benefit.

So those are the comments I would have relative to eggs. And yes, the dairy side of things looks like it may play out a little bit favorable in the second half. Always subject to change. There's a little more volatility there at times than we see elsewhere.

So Doug, would you add anything to that?

No, Jay, you covered it all. Thank you.

Thanks for taking my questions guys.

Jason Rodgers, Great Lakes Reserve.

If you didn't, would you mention what the overall impact on -- as far as pricing was in the quarter?

Right around 2%.

Okay. And you talked in the release about looking in the second half for higher costs in supporting of new products, product placement and marketing and so forth. Is there any way to quantify that or at least the magnitude that we should expect?

You know, it's a little tough to gauge exactly because of the timing of some of these events, but it will be appreciable as we work our way through the second half. I'm not real close to all of the fine details, but from what we're seeing and hearing, there will be some modest impact as we work our way through. There are some new planned introductions in there, so certainly the support of those products will help drive that figure as well.

Okay. And I wonder if you could just talk a little bit more about the frozen dinner roll category, what you think might be behind the share loss and what can be done about it, if it's new products, pricing, or whatever.

Well, Jason, at this point, it could be all of the above. We're certainly working on some innovation ideas. We're certainly considering whether there should be some different views on pricing.

One of the challenges we feel we continue to have in the dinner roll category is the competition over in the -- on the fresh bread side of things that obviously has a myriad of choices for the consumer. And while we have a very clean label kind of product in the frozen case, I think we get labeled as a frozen product and a perception that maybe it doesn't have as clean a label as it does. So we need to figure out how to get that message across to more and more consumers. So, clearly, more work to be done for us in that space.

Okay. Thank you very much.

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

Well, thank you again for joining us. We'll look forward to sharing our third-quarter results with you as we get to late April. Have a great day.

This concludes today's conference call. All participants may now disconnect.