Marzetti Co (MZTI) 2003 Q2 法說會逐字稿

Good morning, my name is Amanda and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation second quarter earnings release conference call. Conducting today's call will be Mr. John 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 speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time then please press star then the number one on your telephone keypad, and questions 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.

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

As with most presentations of this type, today's discussion by John 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 earnings 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 numerous assumptions and are subject to uncertainties and risks.

Accordingly, investors are cautioned not to place undue 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 the SEC, including Lancaster's reports on Form's 10-K and 10-Q.

Now, here is John Gerlach. John.

Good morning, thank you for joining us today.

We will follow our usual format this morning where I will make some general and operating segment comments and John Boylan will follow with some financial details.

With a number of significant items occurring in both this and last years second quarter, I will be basing my comments primarily on operating performance without their impact.

Given the challenges of the overall consumer marketplace and our own difficulties in our glassware and candle segment we are pleased to see earnings growth in spite of a 1% sales decline.

Before commenting on each segment let me update you with the following. In our annual meeting on November 19th, the Board of Directors declared a $0.02 quarterly increase in our dividend rate to $0.20 per quarter, marking our 40th consecutive year of case dividend increases.

During the second quarter we repurchased 343,300 shares for $12.1m, including the 136,000 shares repurchased so far in the third quarter, our actual outstanding today is 36 million,40 thousand,330 shares.

Capital expenditures for the quarter were 5,674,000 brining year-to-date capital expenditures to $12,146,000.

The $39m dollars of continued dumping and subsidy offset act funds announced in December have been received.

Turning to our specialty food segment, we are pleased to see operating margins bounce back in the second quarter after a bit of a slow start in the first. Year-to-date, our margin is close to last year's strong levels.

The second quarter was helped by good sales growth almost 10%, a strong mix of seasonal retail sales, stable ingredient costs, less promotional costs and better plant operations.

Retail sales growth for the quarter was helped by good seasonal demand for our Marzetti brand of veggie and fruit dip line. Nice growth in our upscale Girard's and Cardini's brands of dressing, New York Brand, Texas Toast and Breadsticks and a good season for Sister Schubert's brand, frozen dinner rolls.

Sales into the food service channel continued to grow as well with new items and promotional programs by our national account customers contributing to that growth.

New product introductions include good acceptance of our Too Light for Wine of produce department's salad dressings and initial shipments of our organics line also into the produce department.

Our most difficult segment continues to be glassware and candles where sales declined over 21% and earnings while reported up where impacted last year by the K-Mart account receivable write off with $14.3 million and this year by the LIFO income of about $2.7 million and $4.9 million of restructuring charges. Without these significant items earnings were down for the quarter. November 26 was our last day of glass production at our plant in Indiana with production now in the process of consolidating at our Oklahoma plant. Our relocation and start-up plan is on target and you will recall those expenses will impact us in the second half. Candle sales in the quarter were hurt by the general soft retail environment, but further affected by the lack of target volume and reduced K-Mart sales.

This reduced volume plus very competitive pricing continues to have an adverse affect on margins. We are working hard to implement our new updated product line introduction, with shipments beginning in February.

We have also updated our seasonal offering for the fall of 2003, and are pleased with our customer reaction so far. Cost reductions are a focus of candle operating management where we are targeting all areas of material, labor and overhead. We feel this segment will continue to be challenged by the costs of the glass production relocation, the new candle program rollout and generally soft sales throughout the balance of the fiscal year.

While this segment's performance is still almost unpredictable we feel we are on the right path with both our glass production consolidation and new candle program.

Our automotive segment continues to show improved sales and earnings in the second quarter. Although the many holidays definitely impact our original equipment demand. After market sales were relatively soft during the quarter.

Aggressive ongoing focus on cost reduction let us continue to move margin up a little. What we are actively working on new programs and products for the after-market and original equipment market, we are mindful that new vehicle sales are the near-term driver of our top line. Our focus on cost reduction will continue.

Let me ask John to update you now on our balance sheet, cash flow, and significant items in this quarter.

Thank you, Jack. My first few comments this morning will address some of the more noteworthy changes in our consolidated balance sheet as of this past December, specifically accounts receivable, inventory, and accrued liability.

I will also speak further to the second payment that we have received under the Continued Dumping and Offset Act and then rap up with some of cash flow numbers that may be worth noting.

As of this past December 31st, our net accounts receivables totaled $137,584,000, which were approximately $28 million higher than our June 30th balance and nearly $24 million higher than that as of a year ago.

This comparison is skewed, however, by the December 31st inclusion of the $39 million receivable that was due under the Offset Act. The remittance itself was actually received in early January. Otherwise, the comparison of this past December's level would have been favorable to both this past June and December 2001 primarily due to our sales being comprised of a greater mix of faster paying customers, as influenced by the raising proportion of specialty food sales to the consolidated total.

Turning to inventories, which totaled over a $147 million at December 31st, we have seen overall stable consolidated levels, generally consistent with our recent sales trends. As indicated in this morning's press release, we did achieve the reduction of certain glassware inventories accounted for under LIFO and carried a substantially lower prior year's cost. That's had the effect of additional income recognition of approximately $2.7 million in the current year's second quarter. By the way the other significant item affecting the current year's glassware and candles' results', our restructuring related charge totaling about $4.9 million was predominantly non-cash in nature.

On the other side of our balance sheet and liabilities, you will note that accrued liabs totaled $75,768,000 at December 31st - an increase of over $29 million since June 30th.

Most of this increase simply resulted from larger accrual's for corporate income taxes - some of which is seasonal and some attributable to the affect of the Offset Act income.

For background, most of you are already aware that the Offset Act is indented to help eligible company harmed by dumped imports, receive a portion of the related anti-dumping duty, being collected by the US Custom Service.

As noted in our December press release regarding our current year allocation of Offset Act income, civil litigation has been initiated by another company against the Customs Service - essentially challenging the Custom Service's exclusion of the plaintiff from the funds allocable to eligible candle companies.

We are not currently aware of any significant new developments regarding this litigation nor can we speculate on or quantify what if any impact, this litigation may ultimately have on the amounts we have received.

We also want to emphasize as we have in the past that the offset act itself remains subject to some very well publicized legislative controversy. Accordingly, the amounts if any we may receive in the future are not subject to reasonable estimation. At the very best, we do not expect another payment before the last quarter of calendar 2003.

With regard to our cash flows, cash flows provided by operations during the six months ended December 31, a total of $87,225,000 compared to $75,929,000 last year.

The 15% year-over-year increase is due to the higher level of net income achieved during fiscal 2003.

Depreciation and amortization during the first six months of fiscal 2003 amounted to approximately $16,119,000. This amount is relatively consistent with the prior year's total after giving consideration to the cessation of goodwill and amortization that occurred upon our adoption of FAS 142 this past July 1.

As an aside, I point out that our slightly lower effective tax rates this year was also influenced by the absence of goodwill amortization, as a majority of this expense in past years was non-deductible.

As previously referenced our capital expenditures for the last six months totaled $12,143,000 and our share repurchases $18,893,000.

With the company's cash flows continuing strong, we do remain debt free and finished December with over $128m in cash and over $543m in shareholders equity on the balance sheet.

At this point, I'll turn our presentation back over to John so he can conclude our prepared remarks.

Thanks John, we begin the second half of our fiscal year sharing others concerned about the state of the economy and potential war with Iraq.

Our comments regarding the 2H of our FY as follows, especially food sales growth will get a bit more challenging as we anniversary some new good service programs from last year.

Soya bean oil cost increases were likely showing approximate $2-3m unfavorable impact mitigated by our efforts to get some price relief.

Our food acquisition project is in process with completion likely during this quarter. Our planned expansion for Sister Schubert's product line is underway. The Marzetti dressing expansion project is not underway yet. It makes sense to revise our FY capital spending estimates down to the range of $30-35m.

Glass and candle operations will continue to be in a transition period through the rest of the FY. And this will sell through data on earliness relations of our new candle line should be available in early 4Q.

Automotive performance should continue to show improvement. Share repurchases will continue with share still authorized of 1.087m. We are glad to have both a strong balance sheet and operating team in place as we work through this uncertain environment. Amanda, we are ready for questions.

At this time, I would like to remind everyone in order to ask a question please press star and then number 1 on your telephone keypad.

If you are using a speakerphone please pick up your handset before asking your question. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Noah Eckel:; Clovis Capital.

Hi guys, great quarter particularly in the food segment, it was a great performance.

I was a little confused given the great performance on the guidance, it seems that there was a downtick in the guidance. I think that the statement last quarter was -- we think we have some year-over-year growth and in your quarterly statement, but today it was, we might achieve earnings that we did last year. So it is a two part question regarding that, one, what is the earnings level last year you achieved -- there are somewhat -- what are you sort of guiding to this year, is it 249 or 242 because I know there are some one time gains in the number last year, and then second are you implying that the quarterly comparisons for the next two quarters will be down $0.4 to $0.5 in each of those quarters from what you put up in the year ago period? Thank you.

No, we are referencing the 249 that was recorded -- actually that is the gap earnings per share for fiscal 2002. I think as we do look forward, we are concerned about the softness of the second half of the year and therefore you can see the cautionary tone in which we express guidance for the back half.

Great, thanks.

At this time, there are no further questions.

Well, may as well be patient here for a minute and see if anybody else wants to jump in.

You do have a follow-up question from Noah.

Great thanks, I was going to let other people get some questions in but I guess I'll go with few more.

The food performance is phenomenal this quarter. I was wondering, last quarter you missed the number a little bit, a part of it was some one-time items and the overtime cost if we figured that was going to go away.

The other was the promotions and I was wondering, if one of you could comment on the promotional activity in this quarter and also I wanted to inquire was there this, affect where -- you have promotions in one quarter, did that help you in the volumes this quarter and is it more -- we are trying to figure out the operating trends of the businesses. Should we sort of smooth out the two quarters performance, is that more an accurate portrayal of the look at the trends in the food business right now, ex your raw material costs? Thanks.

No, I think on the promotional question we certainly can have a little variance quarter-over-quarter and I think referring to in the first quarter was some lack of promotional spending the prior year driven by some capacity issues which really weren't there as we got into a comparative situation in the second quarter which got a little more -- apples-to-apples kind of comparison year-over-year.

Again the timing quarter-to-quarter can vary year-over-year, quarter-to-quarter can vary a little bit but I don't think there is a material change year-over-year to really suggest that the only accurate comparison is to try to smooth two quarters or more.

Okay, great, and then are there any -- I know there has been help in the raw material side -- soya bean -- you had some nice hedges in place that seems like -- I think you have the raw materials or things like that that are hurting you right now or is it over helping you so like [Inaudible] , rubber, wheat, aluminum, can you sort of run through some of those for us and let us know how those are impacting your business at all?

Well glass has obviously gone up pretty noticeably, the impact frankly because we are down though to one less glass plant is less meaningful in dollars than what we have seen in the -- would have seen otherwise, but it is a bit of an increase, I don't think a dramatic burden at this point.

Aluminum seems to be relatively stable, we are seeing cost increases in some chemicals and synthetic rubber overall on the floor mat side of the business. Not sure if I'm missing any other material, John does anything come to mind to you?

No and I think I would just add that for the second quarter as indicated in the release by and large commodity costs across the company were relatively neutral in effect year-over-year, it as we -- we start to peer into the back half of the year that we can see a trend of increased costs year-over-year.

Great, great quarter again. Thanks a lot.

Thank you.

The next question comes from Robert Dialio; Neuberger Berman.

Hi guys.

Hello.

In the context of what I guess you are going for a sort of a flattish year, it sounds like the sooner you get squeezed some what in the back half on these raw materials. What kind of free cash flow do you think you are looking at with this new revised,-- I think your capital budget has been,-- I think you said down $30m, $35m. It sounds like that's been pushed out. Is it a question of timing as opposed to anything else I guess? Can you talk a little bit about the free cash flow after working capital, but before dividends and share re-purchase and what you can do with working capital that kind of stuff?

Bob. First of all we will let you guys make your own earnings estimates. I guess the guidance we have given this morning is a little bit broad we hope so. So you need to plug in that number. I do think CAPEX in that 30 may be as much as 35 is realistic out there. The dividend rate is John any working capital thoughts or comments.

I think by and large Bob; year-over-year we aren't expecting much change in net working capital. Clearly the balance sheet at December 31 is some what skewed as I mentioned by the inclusion of the offset act funds and receivables which is some what offset by the increase in accrued liabilities because of the related tax impact, so that will tend to wash it self out by June 30.

And the,--you mentioned a depreciation figure earlier. Depreciation and amortization relative to that CAPEX. Is that what you think you are looking at?

Probably. I think in $32m, $33m area.

Okay. So it sort of sounds like if we strip out this receivable movement, just kind of what I would view as more or less non-recurring reimbursement you got, your net income is going to come pretty close to your free cash flow. That fair?

Again I would sort of be reluctant to speak further to the for capital level of net income Bob.

Okay. Yeah. I am not asking you to forecast but I am just, -- that's okay. I mean obviously if your working capital isn't going up, then your cash flow, -- and your CAPEX is close to depreciation that's not a lot left from an operating basis other than net income but okay.

But certainly [Inaudible] .

Can you give us a little help on the Candle and Glass business? How dependent, -- this is sort of the wild card in the equation if we are going south here, pretty hard and can you give us any visibility on where the trough might be, how dependent it is. Frankly on these new products introductions or if these don't take off. What's the worst case for this business?

Any way you can sort of quantify what we might be looking at there.

Bob I don't know that we could truly quantify a worst case. I would like to think we were certainly at the low end of a trough and if it is not the lowest hopefully pretty darn close to it.

The new program is quiet important to us as it relates I think that opportunities to not only maintain the business but more importantly get it growing again and we are really pretty pleased with the initial acceptance at the trade level of what we have been showing and what appears to be the commitments to roll that plan out into stores. We just unfortunately don't have any stores setup with it yet, that will start to happen in February.

So, we just have this unknown of what the consumer acceptance is going to be like. We are also, though I think, pretty pleased with what we have heard from some initial feedback as well as on our seasonal product offerings for next fall but also we're revised and updated so we are.

I think very cautiously optimistic about our own efforts in developments as it relates to the broader category; we would have to remain concerned that there does not seem to be a lot of growth if any going on across the board. We have at least seen some comment but no real data to support it but there maybe a little bit of shift starting to go on back to the food, drug and mass merchant channel from some other specialty channels of candle distribution but that's more anecdotal comments that we have picked up or it is a fact that it is strictly anecdotal comments, we haven't seen any reports or studies to quantify that truly is happening.

Okay and on the auto side, it clearly looks like you have turned that business around. What's the vulnerability to that business relative to the build rate, is it particularly sensitive to the auto build rate, I mean, how sustainable do you think these are?

Yeah unfortunately, I think it is quite sensitive because our mix of original equipment business has got to be pretty significant -- we are probably in the mid-sixties any how overall original equipment versus after markets, so yeah -- overall build is more important for us than would also be mix what [Inaudible] built and what's not because we do have -- on the aluminum side a real strong presence in the light truck arena and then over in the format side of the business, it is a little broader mix of both light truck and a lot of cars as well.

Okay and could you just give us a quick update on acquisition activity in the food area, is there much going on here.

There is not a lot a quantity out there. We do have this one deal we are working on that has taken a little bit longer than we thought but still very much on track, we are not seeing a big quantity things out there and even fewer things that we are think are good enough to fit that we want to take it very far. So pretty slow, frankly, right now.

Okay, and lastly in terms of your dividend policy to the extent that we do get significant changes in the tax law, would you -- I mean you guys have done an excellent job of deploying your capital over the years. I have to compliment you there. But would you change your philosophy at all or the tax laws will change?

You know, we haven't formally addressed that but I would expect that to be a very meaningful factor in evaluating further increases if there is a real material change in that law.

Okay thanks.

Thank you.

The next question comes from Greg Halter:; LJR Review.

Good morning Jay and John.

God morning Greg.

First, John the acquisition, you mentioned in the food area, would you care to indicate the range or size of revenues?

I think, I would just tell you it's kind of typical of what we have done in the recent past.

Okay, that's fair. And on the salad dressing project, with that being slowed down or pushed back, any particular reason for that and, I guess the reason for the question is, I thought that had been one of the capacity constraint issue in the first quarter?

You know, it is that, although we have put into place some plans that we think help us address that for the, - kind of the near-term or intermediate-term as we work on expansion project, but we had some different options develop kind of at the eleventh hour that we want to step back and re-evaluate and that's why we are in the process of rapping up right now.

Okay, but it still will go forward at some point?

Yes.

Okay, in relation to Marzetti, I think there is a contract up there in March maybe?

Early March, you are right.

Any indication on, what you see happening with that?

No, not at this point in time, we are not aware of any significant issues or problems and but haven't started any formal negotiations yet.

Okay, I believe that's all I have and good results thanks.

Thanks Greg.

Thanks Greg.

At this time there are no further questions.

Thank you Amanda. Well we do appreciate everybody joining us this morning and we look forward to talking to you with our third quarter results toward the end of April. Thank you.

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