Marzetti Co (MZTI) 2003 Q1 法說會逐字稿

Good morning, my name is Kristy and I will be your conference facilitator today. At this time I would like to welcome everyone to Lancaster Colony Corporation first quarter fiscal 2003 results conference call. Conducting today's call will be Mr. Jay Gerlach, Lancaster Colony Chairman and CEO and Mr. John Boylan, Vice President 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. If you would like to ask a question during that time simply press the star and the number 1 on our telephone keypad and question will be taken in the order they are received. If you would like to withdraw your question press the pound key. Thank you.

And now to begin your conference, I would like to introduce Mr. Earl Brown, Lancaster Colony Investor Relations. Mr. Brown, you may begin your conference.

Thank you, Kristy.

Good morning and let me also say thank you for joining us today. Please bear with me while we take care of a couple details.

As with most presentations of this type, today's discussion by Jay Gerlach, Chairman and CEO and John Boylan, CFO, will contain forward-looking statements of what may happen in the future. Including statements relating to Lancaster Colony sales prospects, growth rates, expected future levels of earning per share, as well as the extent of share repurchases and business acquisitions to be made by the company. These forward-looking statements are based on numberous assumptions and are subject to uncertainties and risks. Accordingly, investors are cautioned not to place undo 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 relating 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 SEC, including Lancaster's annual report on form 10-K.

Now, here is Jay Gerlach. Jay

Thank you for joining us this morning.

I'll comment first on our first quarter results, the relocation of our glass pressing operation, and individual segment performance. John will update you on our balance sheet and cash flow status and the financial impact of the relocation of our glass pressing operation. I'll conclude with a few comments on the second quarter.

While pleased with our overall 4% sales increase given a sluggish retail environment, we are disappointed we couldn't bring more to the bottom line where operating earnings were actually down 2 1/2%. Although with net income and EPS we're up 1 and 2% respectively.

In an effort to improve the performance of the consumer glass portion of our glassware and candle segment, we are in announcing the discontinuation of glass pressing operations at our plant in Dunkirk, Indiana and relocating that plant capability our plant in Sapulpa, Oklahoma. As we've experienced an on going trend down in demand for pressed glass due to both import competition and the trend to lower cost, blown glassware, we have not been able to utilize the capacity at the Indiana facility

We are disappointed to have to make this move for a variety of reasons, especially the loss of approximately 240 jobs and the Dunkirk facility. Warehousing, distribution and few other functions will continue at that sight. Customer service should not be affected. We do feel once this move and its related start-up period is worked through, we should have acceptable financial results for this part of the segment.

A few comments before I run through the segment. Share repurchases for the quarter were 165,000 shares for $6.8 million, including 50,000 shares repurchases so far in the second quarter, our actual shares outstanding is 36,499,686 and we have 1,551,109 still authorized to repurchase. Capital Expenditures for the quarter totaled $6.5 million with projects focused on improved efficiencies, capabilities and capacity where required.

I'd like to start my segment comments this morning by congratulating our automotive management on their top and bottom line improvement from last years first quarter. Our aluminum light truck accessory line continues to lead the way with strong sales growth lead by original equipment demand. Good operations have let us take the sales growth benefit to the bottom line. Floor mats, where our focus has been on the bottom line in getting cost out, contributed with nicely improved earnings. Our heavy duty truck products also contributed with modest sales and earnings growth.

Glassware and candles had a tough quarter with sales off 13% and earnings down 24% from last years low levels. Typical seasonal demand has not been as strong as expected for both candles and glass. Recent IRI data for candles, which covers our primary channels of distribution, food, drug, and mass, no longer including Wal-Mart, showed a decline in retail sales of 21% versus last year for the 13 weeks ending in late September. In addition soft demand, we continue to see a competitive market place with significant competition from imports. Our efforts to continue to reduce inventories has impacted plant utilization and required more frequent job changes both contributing to higher cost.

Glassware, as already discussed, is largely a lack of sales problem impacting capacity utilization and resulting in less absorption of fixed manufacturing costs. Our specialty food segment continued its strong top line performance, up almost 9%, all of which is internally generated as we've previously anniversaries our most recent acquisitions. Our retail growth was driven by frozen garlic bread and dinner rolls and the foodservice side by our dressing and sauce products. New products and customers versus last year and higher promotional activity as it relates to frozen garlic bread products was behind us above industry average in the sales growth.

While specialty food earnings were very good, we were disappointed to come up short of last years first quarter results. Sales mixed with Bitmore Foodservice, higher promotional spending on frozen garlic bread products, and somewhat hight production expenses were all factors in lower margins. Ingredient costs were slightly favorable in the quarter.

Let me ask John to update you on the balance sheet cash flow and glassware related restructuring charge.

Thank you, Jay.

My initial comments this morning relate to a couple of the more significant line items with our September 30th balance sheet. First, our accounts receivable balances totaling $109,424,000 at September 30th at a level even with that at June 30th and down almost $20 million from the year ago total. A latter fluctuation is consistent with the decline in quarterly sales that occurred in the glassware and candle segment where customer payment terms are somewhat longer on average than our other two segments.

With respect to inventories that totalled over $162 million at September 30th, they too were down about $20 million since September 2001 as prompted by the lower sales levels of candles and glassware. The $14 million increase occuring in this total since June 30th was affected by seasonal inventory sales of candles and certain food products. All in all, as is evident from a review of the company's balance sheet, our financial condition has remained extraordinarily strong and flexible as we continue to be debt-free for the quarter and held $90 million in cash and investments at September 30th.

Turning to cash flows for a moment, cash flows from operating activities for the quarter total $24,234,000. This compares to $29,508,000 provided during the last years comparable quarter. The fluctuation between periods resulted from relative changes of certain components of working capital. One specific component of the quarters cash flows that you may find of interest is depreciation and amotitization that totalled $8,143,000 which compares to $8,743,000 recorded a year ago. However, last years total included about $660,000 related to the amortization of goodwill. Such amortization is not recorded in the current year due to the company's adoption of FAS 142 that became effective for us this past July 1. As an aside, I'd point out that our slightly lower effective tax rate this quarter is also attributable to the absence goodwill amortization as the majority of this expense in past years was non-deductible.

As Jay mentioned earlier, other cash flows of note for the quarter included capital expenditures of $6,469,000 and share repurchases of $6,811,000.

In concluding the remarks, I thought I would elaborate on the plant consolidation restructuring charge against the second quarter results. We currently estimate this charge would be $4 million pre-tax or approximately eight cents a share after tax. The majority of this charge will be non-cash in nature related principally to the write down of the remaining net book value of buildings and equipment no longer to be used. Outside the initial charge, we expect that some additional costs such as for equipment and personnel relocation will also be incurred to enable our Sapulpa facility to begin manufacturing pressed glassware, depending on a number of factors, these costs might total $1 million or so.

Of much less certainty at this time, is the extend to which our Sapulpa operations may incur a manufacturing start-up costs for pressed ware over the back half of this fiscal year. While every effort is being made to minimize the transitional issues, we do not expect to see the full benefit of this consolidation until next summer, while difficult to quantify, we anticipate the ultimate benefits of this consolidation at forecasted sales volumes should be substantial. We expect to have more definitive guidance of the impact of this project by the time of next quarters earnings conference call.

I appreciate our attention and I will turn back to Jay.

Thanks, John.

Looking to the second quarter, we share the concern for the economy and particularly holiday retail sales. Glassware and candles is the most seasonal segment and so far we're seeing orders and shipments behind last years numbers. As most are retailers are managing inventories closely and the dock strike turn slowdown goes on, there is a chance of last-minute demand if the consumer is buying.

On a more positive note, we are quite pleased with the reception updated everyday candle program that will begin rolling into stores in early 2003. This new assortment includes new product, packaging, fragrances and colors directed at the mass market channel and offering basic and upscale positioning.

Similar seasonal sales comments can be made about glassware and capacity utilization remains at new levels. Raw material and utility costs are not having much impact versus last year. Don't forget last years second quarter included a $14.3 million charge in this segment for K mart's chapter 11 filing. This segment will likely remain quite challenging through the fiscal year. Automotive demand is holding up well, but we don't see the holiday plant downtime in any changes to those plans until the end of the quarter. New program and product development continue for our original equipment customers for both floor mats and aluminum accessories. While overall after market demand is soft, but see some bright spots in aluminum accessory items. We also see some increases in raw material cost, particularly chemicals and synthetic rubber and plastic rezons.

Specialty food demand should be good this quarter. Holiday sales will be important especially in the Marzetti dips and Sister Schubert's dinner roll business. Some new product and line extensions getting placement include our two [INAUDIBLE] line of reduced fat Marzetti produced salad dressings. Select test markets for the new New York brand peanut butter and jelly filed breadsticks, New York Texas Toast Heels are in test and our Reames brand skillet meals are also in test. We are also excited to introduce in December a line of USDA certified organic dressings under the Marzetti label also merchandised in the produce department. We feel our plants are running more efficiently and should see benefit from reduced dairy product cost. Increased soy bean oil cost will not be a factor in the second quarter, but could be in the second half.

Acquisition efforts remain focused on food prospects. We do have one deal that has a good possibility of closing in the next 60 or so days.

Capital expenditures are likely in the $40 million area with specialty foods getting the biggest share. We expect to continue repurchasing shares.

While concerned about the overall outlook for the economy and facing a variety of our own challenges, we feel we can show over all sales in earnings growth for fiscal '03.

Kristy, with that, we are ready to take questions.

At this time I would like to remind everyone in order to ask a question, please press star 1 on your telephone keypad. If you are using a speaker phone, please pick up your handset before asking a question. We will pause for just a moment to compile the Q-and-A roster.

Your first question is from Robert Killpatrick.

Can you talk about the results in the specialty foods business and why the margins were down almost three percentage points year-over-year and try to attribute that decline in margins especially on higher sales to a variety of the factors that you have initially touched on?

It would probably be fair to remind you that we had high margins a year ago. We were in the quarter spending on a comparative basis more trade money on Texas Toast. We were just at that point coming off a year agos numbers, just coming off a period of still holding back on trade spending as we felt we needed to be sure we can service the business. We stepped up the trade spending up, some there, we've dealt with operating inefficiencies to a degree as volume ramped up over some of the peak summer months with overtime and related cost that is kind of come with running a little bit beyond capacity. Shorter runs and more job changes.

Mix is certainly an issue. Particularly in this quarter on the dressing and sauce side where we saw the greater growth coming out of the foodservice side of the business. That's a lower margin portion of that segment.

We also saw particularly as we get into September, somewhat slower apple dip season. On the retail side of the business is one of the better margin items and it was a little softer than what we saw last year. I think those are kind of the comments that come to mind. John, I don't know if you can and any to that?

No, I think that pretty well summarizes it.

Jay, would you assume that it is roughly say the shortfall would be a quarter each of those is real equal rates or are some of them the majority of it and some others the minority?

That really is hard to quantify. I would put the mix issue somewhat less efficient as probably the bigger factors and the other two being somewhat smaller.

Can you give us how was your foodservice retail mix this quarter versus the year ago quarter?

How much did that shift?

I don't have that specific number right in front of me, Rob. Again, it was mostly in that dressing side of the business. I can check on that and let you know.

Secondly, the operating inefficiencies because you're pumping more volume through the plants in the food business side. Is that mostly on the dressings and sauces side or frozen bread?

Mostly dressing and sauce areas. I think you remember we talked about our need to expand capacity and that part of the business is a project that's not completed yet. Just on the verge of getting started.

Is it your -- you will continue to run the inefficiencies through the balance of the year as you build the new plant extensions?

As we deal with seasonal peaks, we likely will have some of those problems. We do get into that certainly in the summer months. We come off season a little bit now. As we get back into the springtime, we will see seasonal peaks again.

Okay. And the -- did you hold trade spending back on Texas Toast again in the balance of last year?

We're pretty much on an apples-to-apples comparison now.

Great. I'll get back in line and ask some more questions later.

Thanks.

Your next question comes from Jim Barrett at CL King.

Jay, if you didn't mention it, when we look at the candle business, given how important Wal-Mart is, any general senses as to how the category is performing if you were to include Wal-Mart?

That's pretty hart for us to do. While we have access to retail sell-though numbers, we do have those in confidence and I don't think we can comment on those specifically.

Has the deterioration in the category been recent?

Is it more of a September phenomenon?

I think it perhaps gets to be a little more significant in September, but particularly just because you are getting into the seasonal periods.

Correct. I assume it extended into October?

Yes. It's fair to say that. Maybe it's showing more life recently. I can't give you anything like hard IRI data to confirm it.

I semi caught your comment about the dock strike. I would have thought, is there any hope that the dock strike will delay the arrival of imported?

I think we are seeing an indication that was and I am not seeing anyone credit that for what seemed to be last-minute cause for things. I do think that's a factor out there. The clean up from the strike and as we all hear these report that is maybe things aren't really operating up to full potential out there even today. Thank you, good luck.

Your next question is from Elliott Schlang of LJR Great Lakes Review.

In the portfolio of your cash and equivalents, is there anything other than tax exempts in there or other vehicles?

Elliott, this is John. All the investments are as they have been. They are in short-term, i.e. less than 90-day investments comprised of tax exempts or taxable money market funds. It's all high grade, highly rated securities.

If I remember correctly at the New York meeting, you talked about two acquisitions which you were hopeful of without being specific obviously. Is the acquisition that you are now talking about one of those two and are the others still on the docket or have they fallen through?

This is one of those two. The other one is put on at least a lengthy hold here. At the seller's request.

Will there be a sale of real estate related to the glass plan?

Nothing significant planned at this point.

Any new automotive product that is can give a further boost to the top line in that market?

A number of things in the works. I think the ones that are visible on the after market side are primarily on the aluminum end with updated storage and tool boxes where we are seeing still continued growth potential and interest from the retail side of the business. The original equipment side on the aluminum and floor mat side has new product and programs under development and being quoted, it's really not possible to comment right now of specifics there that we see happening in the immediate future.

If the automotive production looks lower next year which it seems to be at the moment, do you feel that you can still increase your sales in that operation?

That's going to depend on how much it's down and what the mix is of what might be off. Our aluminum product is dependent on light trucks and sport utilities. If they would be unusually impacted, that would be of concern. The floor mat side is car and light trucks. It would depend on what vehicles are selling and which aren't.

Looking at the glassware side, my last question, are you looking at out sourcing abroad any further?

Isn't this sort of a losing battle to try to keep up in competition with those imports?

Elliott, we have supplemented a little bit without source product, but most of what we are doing is domestically produced. As you remember, we have a pretty tight relationship with our candle business not only making containers that were filled with wax, but having a broadline and we think a strong presence in the market on candle accessories in general. To a lesser degree the floral market is another area that we have a strong presence in. We feel that we can be competitive in those market places. It is important that we have viable plant utilization which we really think we can get out of the move we are making over the next couple of months. Over all, that should give us at least acceptable, if not better than that results out of that part of the business.

Thank you.

You're welcome.

Your next question is from Stephen O'Brien from Wellington Management.

The mix shift that took place in the specialty foods, was that really another way of saying the retail demand was soft?

No, I wouldn't say it was soft, but we are definitely seeing faster, better growth opportunity on the foodservice side of things. That's pretty much a broad trend in that industry as well. You do have the potential for wider and fluctuations on a shorter term basis on the foodservice side. Those programs and individual item and promotional periods were product in the foodservice arena can spike volume versus different periods pretty noticeably where the retail businesses is generally more steady. You can do promotional things in the retail side, but usually don't see that dramatic of a shift as you might see on the foodservice side.

I guess looking back over a few years, your specialty food business had been growing at low double-digits and it's now around 9%. Was the low double-digits a function of acquisitions thaw don't have now?

That definitely was a factor. Acquisitions and the ramp-up of some new product, depending on the specific period, but particularly the most recent one would be the Texas Toast product line that was ramping-up rapidly. I think new product coupled with the benefit of acquisitions has been the Sister Schubert's business as well as the Mama Bella Garlic Bread business, that helped that. We are looking at the moment at internal growth in that 9% or so in the quarter. I think in that upper single digit range is probably a reasonable growth target absent acquisitions and pricing.

Do you expect the Texas Toast and the bread lines are the fastest-growing part of the product mix as opposed to say the salad dressings and the dips, et cetera?

It probably if you looked at an over all basis, the two big groups, you may be a little bit, but there pockets of it like the Sister Schubert's product line is growing at strong rates on a smaller basis.

Do the bread lines have lower margins than salad dressings?

Not in a general sense, no.

It's not that type of product mix?

No. That's right.

Thank you.

You're welcome.

Your next question is from Greg Halter of LJR Great Lakes Review.

Good morning. Wondered if you can comment on the tax rates down to 38.1 with the Fas 142 implemented. Is that 38.1% a reasonable area to expect for the rest of the year?

Internally we are looking at 38% plus or minus, yes. Short answer.

Okay. Can you comment on your increase or lack there of in insurance costs and what you see going forward?

Insurance in the sense of property casualty insurance?

Property casualty, DNO and anything related to insurance.

It's certainly going up. I don't know that we felt anything out of the ordinary compared to what's going on in the market place. We are probably benefiting on the DNO side which is not a big cost to us. Being in the middle of a multi-year contract there and the property and casualty definitely is going up. The healthcare side of it is double digit inflation. Mid-teens or better at the moment. We are always working hard on trying to find ways to control those costs.

Okay. Can you comment on the government dumping situation. I think it was about this time or maybe in November that you heard something last year.

Greg, as you are probably aware, the program still exists. We did submit the application for receipt of such funds the beginning of September, however we don't expect to get notice of what if any funds we might receive until the end of November. So it is still very problematic as to the amount. We are pretty much at the mercy of the U.S. Customs Department to go through their calculation process and inform us the end of next month.

Okay. Finally, I know there is some contingent payments for some of the acquisitions, I think Sister Schubert's. Are those amounts reaching whatever the rates are going to be anywhere significant and you can ballpark what kind of number that could be or a range?

Those -- the one acquisition that we have now with is the Sister Schubert's acquisition. The earn out could on an annual basis run pretty much up to the level you saw recorded around $3 million and I believe there two years left on that earn out.

Okay. Thank you.

Certainly.

Your next question is from Greg Easton of Safeco Asset Management.

Good morning. A few questions. Can you talk about the relative size of the acquisition you are currently actively working with in the food area, given that you said earlier that high single digit earnings growth in foods is probably a reasonable goal without acquisition.

It's probably best said that it's a typical size for what we have done in the recent past. It's in that ballpark.

I get the point. Next question, could you talk about the plant you are closing?

Could you describe what percentage capacity you are utilizing it at?

First of all we would emphasize we are not truly closing the whole facility because we are going to continue to do warehouse and distribution out of that site as well as other functions. There will be activity there. As it relates to melding and pressing glass, capacity utilization in recent months has been at extremely low levels on a long-term historical basis relative to the last two or three years. We probably have been operating somewhere in the 35-40% range of what we would have been.

Okay. In Oklahoma, are you currently pressing glass there already?

Not much of it. This is a new endeavor for them and there will be learning curve start-up costs to go along with that.

If you are not already doing there, why would your utilization of equipment and people in Oklahoma be better than what it was or any more efficient than what it was in Indiana?

We have idle glass capacity out there. Not the same equipment to make glass, but we have tonnage available in the furnaces that are in Oklahoma that we can benefit from making press said glass on as well.

That's where you get the synergy and therefore the higher utilization benefit.

That's right.

Given that you transition from one production point to another, should we expect that you have built inventory and pressed glass or you are going in order to tide you over for the transition period?

We think we are in good shape from an inventory standpoint as we look at several multi-month transition processes both from an inventory standpoint and we will be doing this over the slower demand months. We are really coming to the end of the seasonal period for glassware. We are in good shape to maintain customer service levels.

So there really won't be a -- you don't expect a glitch or expect any blip in the inventory necessarily that would show up, say, in then quarters, say, in preparation?

No. I don't expect a blip in the inventory. I'd be naive to say we don't expect glitches because there certainly will be some, but from an inventory standpoint, no, no unusual blips there.

If I can ask on a third point. In the auto parts business, can you give us kind of a break out between the OEM and after market sales? Can you talk about that?

As it relates to --.

Sales and OEM channel versus after market channel for the auto parts.

We don't break it out specifically, but no doubt the growth is coming almost exclusively on an original equipment side. There has been growth on the aluminum after market side, but it's virtually all original equipment.

That was to any particular OEM producer versus others?

I think it's spread around reasonably well.

Okay. I will let someone else go. Thanks.

At this time there no further questions. Do you have any closing remarks?

Thank you. Thank you all for joining us this morning and we look forward to talking with you around the first of February with second quarter results and hopefully a little more detail to help you understand what we are doing here in the glass business. Thank you.

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