Lancaster Colony Corp (LANC) 2016 Q4 法說會逐字稿

Good morning. My name is Sean, 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 fourth-quarter conference call.

Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO; Dave Ciesinski, President and COO; and Doug Fell, Vice President, Treasurer, and CFO. (Operator Instructions) Thank you. And now, to begin the conference call, here is Dale Ganobsik, Director of Investor Relations for Lancaster Colony Corporation.

Thank you, Sean. Good morning, everyone, and thank you for joining us today for Lancaster Colony's fiscal 2016 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 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 an audio replay of today's call will be available at our 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, and thank you for being with us today as we review our fourth-quarter and fiscal-year 2016 results. Doug and I will provide comments on the quarter, year, and outlook for fiscal 2017, with Dave joining us to respond to your questions.

Fourth-quarter net sales increased 2.4% to $284.5 million, and earnings per share reached $1.12 versus $0.93 last year. Sales growth was driven primarily by volume and pricing within our retail channel. Olive Garden brand shelf-stable salad dressings, croutons, and our frozen breads and pasta all contributed to our retail sales growth. We were pleased to see the growth in our frozen brands, with effective consumer promotion and somewhat easier comparisons to last year as the growth drivers.

Food service channel sales were flat for the quarter and were impacted by pricing coming back closer to normal after the impact of unusually high egg costs from earlier in the fiscal year. Our customer rationalization effort was also felt to a greater degree this quarter, and we saw less limited-time-offer promotional activity versus a very active quarter a year ago.

Retail sales mix for the quarter grew 140 basis points to 51.1%. Segment operating margin improved 230 basis points to 17.5%, largely due to improved sales mix, favorable ingredient costs, and lower freight costs, plus a bit of favorable pricing.

Our consumer and trade spend was up in the quarter, including some increased product placement costs to support the introduction of our New York Bakery Bake & Break garlic bread. While it's still early, we have been pleased with the initial acceptance of this new product.

For the full year, we are pleased to report a record in net sales of nearly $1.2 billion, net income of nearly $122 million, and earnings per share of $4.44. Net sales increased 7.8%, including the benefit of the Flatout acquisition, and 5.3% excluding it. Volume, the Flatout acquisition, and pricing were all contributors to sales growth.

Retail sales mix for the year grew to 52%, up 80 basis points from last year. Retail channel sales were helped by continued growth in our Olive Garden brand shelf-stable salad dressing, our Marzetti and Simply Dressed refrigerated dressings, and croutons. Food service channel business was largely driven by growth in our national chain account business. For the full year, segment operating margin improved about 140 basis points to 16.5%, with volume growth and pricing along with lower input and freight costs the key contributors.

Looking at retail sellthrough data from IRI for the 52 weeks ending July 10 of 2016, we maintained our leadership position at all six of our key categories. Our fastest-growing category, refrigerated dressings, saw our Marzetti and Simply Dressed brands show good sellthrough growth, although they have given up a little share as new entrants and more competitive activity have developed in that space. We picked up share in frozen garlic bread, croutons, and flatbreads, while losing 1 point of share in frozen dinner rolls.

With that, I'd like to ask Doug to make some comments on the balance sheet and related items.

Thank you, Jay. Overall, our balance sheet continues to remain strong, and not much has changed since our last earnings call. I will comment on some of the larger line items within our balance sheet that have changed since last year.

As conveyed in our previous earnings calls, the decline in our cash balances is primarily driven by the payment of our $5 per share special dividend on December 31. From a high-level perspective, the decline in our cash balance of approximately $64 million since last year can be summarized as follows: cash provided by operating activities of $143 million, offset by regular and special dividends of $190 million and property additions of $17 million.

In general, the increase in our accounts receivable balance reflects higher sales volume. Consistent with past quarters, we continue to see our overall agings remain solid. Our inventories remain in line with our expectations, and we continue to place emphasis on this important element of our working capital.

As mentioned above, the cash expenditures for property additions totaled $17 million in fiscal 2016, with the largest amount spent on new packaging equipment to accommodate growth and plant improvement projects to enhance productivity. At the present time, we anticipate capital expenditures to be in the range of $20 million to $22 million for fiscal 2017 and will include projects to increase capacity and productivity.

Depreciation expense totaled $20 million for fiscal 2016, and we expect a similar amount for fiscal 2017. With respect to our balance sheet capitalization, we continue to have no debt and nearly $514 million in total shareholders' equity. We ended the quarter with $118 million in cash and equivalents, and we have available borrowing capacity under our credit facility of nearly $150 million.

Given our balance sheet posture and overall liquidity, we continue to possess considerable flexibility to address our foreseeable cash requirements including those supportive of future organic growth initiatives, acquisition opportunities, continued dividends, and opportunistic share repurchases.

Finally, our overall effective tax rate of approximately 34% for the fourth quarter and fiscal 2016 is consistent with our expectations and previous guidance. We would expect a similar effective rate fiscal 2017.

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 enter fiscal 2017 optimistic about our business, but with two major sales growth challenges, both in our food service channel. Our customer rationalization process will impact sales negatively, and price deflation will have a smaller but still meaningful impact.

The reduced sales growth should not, however, unfavorably affect profitability, as the rationalization plan should improve efficiencies in our dressing and sauce operations, and deflationary pricing is a passthrough of reduced ingredient costs.

On the plus side for sales, we look for continued strength in Marzetti and Simply Dressed refrigerated salad dressings, in our brands of croutons, and improving Flatout and New York Bakery frozen garlic bread sales volumes. Olive Garden dressing should also show further growth.

New products, such as our New York Bakery Bake & Break garlic bread, Marzetti Vineyard Dressings, and just-introduced Sister Schubert's Shareable Bread are also expected to contribute to retail channel growth. We also feel our core national chain restaurant business should continue to grow, absent the business we rationalized. We expect increased consumer and trade spending to support new products and general growth and distribution initiatives.

Our supply chain will continue to be an area of focus and opportunity, with both customer service and cost reductions a priority. Improving our operating efficiencies is an everyday goal across our business.

We expect lower ingredient costs, driven by much lower egg costs versus the unusual spike experienced last year. Other ingredients are expected to be generally favorable the first half of our fiscal year and then trending to flat in the second half. Freight costs are anticipated to remain at lower levels, although we likely will be lapping those as the year progresses.

We continue to be interested in acquisition growth and are focused on branded retail product lines that are on-trend with the consumer and likely merchandised in the perimeter of the store. With our longtime presence in the produce department and our more recent move into deli with the Flatout acquisition, we particularly like those areas of the store.

We appreciate your interest and thank you for joining us this morning. Sean, we're happy to take questions at this time.

(Operator Instructions) Frank Camma, Sidoti.

Can you talk a little bit about -- sort of just -- you led on there a little bit with the competitive landscape in, I think it was, two categories where maybe the share slipped little bit. Can. Can you just talk a little bit more about that? Was it driven by new products or product innovation, or was it totally new brands coming into the market?

You know, in the refrigerated dressing space, it's a combination of some new players that have been getting a little bit of shelf space and, in general, a little bit more competitive promotional activity. The frozen dinner rolls -- in that case, no new entrants. I think just a little bit of, again, competitive activity. Not a significant shift there, when you think about the fact that we have got about a 50% share in the category.

Okay. Obviously, you had a lot of success with some of the new flavors in the salad dressing. Do you feel that your competitors may be mimicking that activity? I was just wondering if you can comment there.

Well, I think we're seeing a variety of things, both flavors as well as specific ingredients the competitors are using that may be a little different than what we are using and others are using. So things like yogurt and Greek yogurt are definitely finding a presence in the refrigerated dressing space today.

Okay. And just a little more commentary on the deflation on the retail side. Is it fair to say that you might feel more pressure in certain categories than others? For example, like frozen versus the refrigerator dressings? Or is that not an accurate statement?

You know, Frank, we're really not seeing true deflation on the retail side. We might see, again, a little bit more promotional activity --

Oh, okay.

-- that you could categorize as that. But the real deflation we're talking about is over on the food service channel.

Oh, okay. Okay. I misunderstood that. Okay. And the last thing -- I know you can't talk anything about specific acquisitions or anything, but can you -- is there any way for you to talk about, sort of just from your experience over the last couple of years, has the flow of deals changed at all? Credit markets are a little more uneasy than where they were perhaps a couple years ago. I was wondering if that changed anything, or if more sellers have come out because of pricing. I was just wondering if you could comment on that.

Frank, I don't think we've really seen a noticeable change in overall deal flow at this point.

Okay, fair enough. Thanks, guys.

Eric Gottlieb, D.A. Davidson.

I'm wondering, the pushback that you're seeing from customers -- are there any particular categories where they are basically pushing back on pricing for [inflationary] costs?

I again, Eric, on the retail channel, I don't think we're seeing any particular pushback from customers. And frankly, on the food service side it's not pushback from customers; it is our pricing into that channel, which is more cost-driven. And so it is -- traditionally, as ingredient costs -- key ingredient costs, anyhow, have moved up and down at different points in time, we have passed those changes on with either increased or decreased pricing.

So this past fiscal year we had inflationary pricing driven by this sharp spike in egg costs we started seeing in the spring of 2015. And then those prices, egg prices, have been coming down so far this calendar year, back to pretty much historical levels. And our pricing is now reflecting those lower costs.

Now during -- when egg prices were high, we heard that with your competitors were reformulating or adding egg substitutes. Were you doing that at all? Have you changed formulations?

Yes, we did a little bit of that where we could. I wouldn't tell you it was significant, but we did make some minor adjustments if it was feasible without changing either the quality or the taste the product.

Okay. And then can you detail your hedging strategy again -- oil? I know eggs you can't, but how far forward are you bought on certain ingredients?

You know, Eric -- this is Doug. For the oil, we are through that forward buying strategy I think we've conveyed to you in the past. We ladder that out over a 12-plus-month period. And so for the first half of the fiscal 2017, we are largely covered. And we have some level of coverage into the first half -- or the second half of 2017, and just a little bit beyond.

We do the same sort of routine with flour. And we have pretty much all of our coverage in for the first half of 2017 and some coverage, again, in the back half of fiscal 2017.

Got it. And this is for Dave. So last quarter it was day eight --.

Right. (laughter)

I guess now it's around day 115, I think, something around --.

You have got somebody else that's counting. (laughter)

For anybody counting. (laughter)

So I'm wondering, have your views -- what's your views on Company direction and strategy: what job number one is; what keeps you up at night? Basically a State of the Union address, if you will, on what you're seeing at Lancaster?

You're going to get a very brief one. But, you know, what I would tell you, after having spent a good quarter now unpacking the business and getting to know the people and customers, a solid track record of success underpinned by very, very strong brands; great innovation; a strong presence and growing and relevant categories, particularly in the perimeter of the store, if you looked at where we are positioned versus a lot of the bigger traditionals, the large-cap and mega-cap players.

I like where we play in the store. And we've been able to deliver that by good, solid indication. You know, the food service business is also very, very well positioned with great brands, great innovation. And we partner with some of the best customers that are in the industry.

You know, food service is a big industry, with some that are growing, and some that aren't. And I like the fact that we seem to have been able to leverage our capabilities to partner with the ones that are the most consumer relevant and have demonstrated the most consistent growth.

So I'm sitting here at day 115 even more excited I was at day eight. As we look forward, the areas that we want to focus on are probably as follows: you know, figure out how we can accelerate our ability to drive base growth through innovation. So this isn't a new skill set, but it's going to take an existing skill set and just build more muscle against it.

The other is, as we look at our supply chain operations, figure out how we can make smart choices to drive consistent and modest margin accretion into our business, so we make a little bit more out of every dollar that we sell.

And then finally number three, as Jay pointed out, we have a strong presence in the produce section of the store, which is arguably some of the most exciting real estate in retail today. And with the Flatout acquisition we have a presence in that exciting and highly fragmented branded specialty bakery and deli section.

And as we go forward, it's figuring out those niche bolt-on acquisitions that complement our existing capabilities, and we use those to just accelerate our growth going forward. So short question, a medium answer for you. But that gives you a taste of maybe where we're focusing going forward.

Got it. Thank you for the color. With that, I'll pass it on.

Phil Terpolilli, Wedbush Securities.

Hey, guys. Thanks for taking my call. This is actually Dominic Ruccella on for Phil. Just kind of starting off, I wanted to revisit Eric's question.

It sounded like you mentioned that the costs are being passed along. So does that mean that the pricing step-up we saw in 4Q and what we saw come through a little bit last quarter is going to be -- is not going to be continued into the first half of 2017? Am I thinking about that the right way?

Yes, you are. As it relates to the retail channel of our business, which is where a lot of that pricing was last year and where the deflation is happening as we moved into this year, there was a little bit of retail pricing that was driven by increased ingredient cost, primarily eggs. Traditionally those prices are not adjusted as ingredient costs change, if they change downward.

I think, Jay, if I may add, what I would just clarify for you folks is that on the food service side, they're contractual. So they have escalators when the commodities go up and de-escalators when the commodities go down that impact the revenue line. And what you're seeing is the impact isolated within the food service part of the business, where those de-escalators are taking effect. And then on a going basis they roll forward. But it isn't impacting the retail part of the business there when you take a price increase. Unless there's something extraordinary, that price increase sticks going forward.

Got you. Very helpful, thank you. I guess, just sticking on the revenue side, food service was flat. Could you break out how much of this you were seeing from rationalization versus the limited-time-offer reductions?

Not in any real specifics, Dominic. But the bigger part is, I think, rationalization side; and to a lesser degree, but still noticeable, on the less promotional activity. Pricing would be in between.

Got you. Okay, that helps. And then just last one I have is: as we think about total operating margins, and obviously you've seen some good expansion, do you guys expect that that can continue into fiscal 2017 and throughout? Or is there some point in the future where we'll start to see that operating margin level off?

Well, that's certainly a goal of ours, as either Dave and I have commented on some of the different components between supply chain; improved operating efficiencies; the mix change, perhaps, as we see the retail channel of the business growing a little bit faster than the food service channel. Those kind of things should all contribute, we hope, to margin opportunity.

Great. Understood. Thank you for the color, and I'll pass it along, thank you.

You're welcome.

Thank you.

(Operator Instructions) Elliott Schlang, Great Lakes Review.

Good morning, Jay and Doug, and congratulations on another good quarter.

A few questions, if I may. I'd be interested in what, if any, plans you have for further geographic expansion or emphasis in any particular area?

Elliott, on the one hand, we continue to pursue some opportunities in geographic areas where we don't have big presence, particularly moving West, including California. So there's effort going on there. I wouldn't say it's a real unusual effort, but it is there, and we're pursuing that.

At the same time, though, we are also being sure we are active in pushing to grow our presence in our core markets, which vary between our different brands. But we're very focused on those as well.

And any new thoughts on Canada or Mexico?

Canada has been a good market for us for a number of years. We continue to look for further opportunity there, both with expanded distribution of existing products and moving additional products into the market.

Mexico is a much smaller market for us and not getting real high priority at this point. But we are doing some business there, and we'll look for opportunities there.

And on the cash that you alluded to, I assume that's invested in places similar to what you've done historically. You're not taking any -- or you might comment on where that cash is invested, in what types of vehicles.

Yes, it is being invested consistent with past practices. And it's largely in commercial paper, US government securities -- very, very secure type investments.

And given the limited acquisitions that you have had the last few years, are you considering broadening your acquisition criteria at all, or pretty much sticking with tried-and-true formula?

Elliott, no, I don't think we are looking to broaden it. If anything, we're bringing a little bit more focus in what we're looking for, as we touched on some of the core areas of the store we are interested in and particularly the perimeter of the store. So if anything, you'd probably see a little bit more focus rather than a broader look from us.

And any new or lost accounts that we should be aware of and that you are free to talk about? Especially any comment on the Wal-Mart relationship with the challenges that Wal-Mart has had recently?

No, Elliott, no changes, with the exception of -- back on what we've done from a rationalization standpoint in our food service channel. Other than that, no noticeable additions or deletions. Our business continues to perform well with Wal-Mart, and we're glad to see their performance improving.

And I assume from the number of shares outstanding that you did not purchase in the quarter, or any comment about your program for the future in the corporate repurchase side?

That's correct, Elliott. We didn't repurchase any. As you know, we keep shares authorized but do that on an opportunistic basis, and just haven't had that as our top priority at this point. But always have an open mind to that and keep an eye on any developments that might suggest activity there. But nothing in the fourth quarter and virtually no shares for the fiscal year.

And as far as the labor contracts, anything coming up of any significance in the next several months?

Actually, we are in the midst of negotiations in our frozen garlic bread operation up outside of Cleveland as we speak.

And that's due when?

We are actually past due. So we've continued to operate; the workforce continued to work as negotiations proceed.

Good luck on that, and congratulations again on the good quarter. Thank you.

You're welcome, thank you.

And there are no further questions at this time. I will turn the conference back to Mr. Gerlach for any concluding remarks.

Well, thank you all for joining us today. We'll look forward to talking to you later in April -- or later in October with our first-quarter results.

And this concludes today's conference. You may now disconnect.