Marzetti Co (MZTI) 2003 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Lancaster Colony corporation earnings conference today. Conducting today's call will with Mr. John Gerlach, 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 this time, simply press star, then the number one on your telephone key pad and questions will be take inn the order that they are received. If you would like to withdraw your question, press the pound key. Thank you. And now to begin the conference, I would like to introduce Mr. Earl Brown, Lancaster Colony Investor Relations. Mr. Brown, you may begin the conference.

Thanks, let me say thank you for join going us today and please bear with me while we take care of a couple of details. Today's discussion by Jay Gerlach, Chairman and CEO, will contain forward looking staples of what may happen in the future, including statements relating to sales prospects, growth rates, expected future levels of earnings per share, as well as the share repurchases and business act qui acquisitions to be made by the company. These are based on numerous assumptions and are subject to uncertainties and risks. Do not place undue reliance on such statements. Factors that might cause the results to differ materially include but are not limited to, risks relating to the economy, competitive challenges, changes in raw materials cost, the success of new product introductions, the effect of any restructurings and other factors that are discussed from time to time in the company's filings with the SEC, including Lancaster's report on 10K and 10Q. Now here is Jay Gerlach. Jay?

Good morning and thank you for joining us. I would have to describe your third quarter results as disappointing, sales down four%, including almost two% decline in specialty food sales is definitely not what we were planning, while a variety of factors some of which we have no control, the economy, the war in Iraq, and the weather contributed to these results, we are still not satisfied.

On the positive front, we continue to maintain a very strong balance sheet, that John will comment on a bit more in a few minutes. During the quarter, we spent $9.5 million on capital projects with the biggest being the on going expansion of our sister Shoe Burt's frozen dinner roll, capacity, due to be completed in July. In addition, new processes and technology are being introduced at several of our plants to enhance productive at this.

It looks like full year CAPEX will now be in the $30 million range. Our dressing capacity expansion project continues in the design and engineering stage with new major expenditures until fiscal 2004. Also, during the quarter, we repurchased 342,700 shares for $12.9m, and a total of 851,000 shares through nine months for $31.8 million. Approximately 880,000 shares are authorized for repurchase and many shares still outstanding.

Regarding acquisitions, I won't predict again if and when we might complete the deal we have discussed the past, but it remains alive. We are seeing just a little more activity in interest in potential sellers coming to the market.

Let me run through our segment performance for the quarter, beginning with our specialty food segments. Sales were off two%, although still have a favorable 5.5% comparison for the nine months. Our comments aren't really any different than what you're hearing elsewhere. A slow economy, and the war impacting consumer traffic and sell through and the harsh winter weather slowing demand for our overall food service channel.

Operating income was down 10% , impacted by volume, but higher costs, namely soy bean oil and honey, and energy costs. A less favorable sales mix, due to the later Easter was also a factor. I think our specialty food management team did a good job of controlling SG&A expenses in the quarter, in spite of a mid six figure provision for the pluming bankruptcy.

New product introductions have gone well for two dressings, as planned for our organic dressing line . And in the frozen bread line, peanut butter and jelly sticks are going through a product revision.

Our biggest challenge continues to be our glass ware and candle segment. Sales continue today have a very unfavorable comparison, not only due to many of the same reasons, but also because we are consolidating our glass capacity and redoing our emphasis on certain markets. The impact of rolling out a new candle line initially hurts sales as most costs are netted against sales, as well as retailers reducing their purchases of our current line in contemplation of installing a new line. So far we are pleased with the phase of this roll out. Unfortunately, data is not yet available for us to comment on the consumer's acceptance of our new line.

Operating income was impacted by our weak sales and related capacity utilization, start up costs of the glass line, which were relocated to our glass lines, which were relocated to our Oklahoma plant, much higher energy costs and some related raw at that energy costs increases. The candle remains price competitive, as well, we have seen a mid shift to business, which will be mitigated by our new line production. John will I am report on a couple other items in a few minutes.

The Automotive segment posted the only positive sales comparison for the quarter, due to good growth of our accessory product line sold the original equipment market. Original equipment format programs also showed growth. Unfortunately, the after market is showing declining sales at present, from both aluminum and floor mat lines. We remain committed to the after market with new product, customer and channel effort developments under way.

Sales growth and aggressive efforts on cost reductions let us increase operating income faster than sales, this impact was slightly held back by higher energy costs and some higher material costs. I would like John to make a few comments on the balance sheet for you right now.

Thanks, Jay. My comments this morning will be fairly brief, as we have experienced a few major changes in our balance sheet trends since our last call.

Speaking first to our accounts receivable, a level of Lancaster consolidated accounts receivable at March 31, 2003, totaled $101.521m. This amount represented a decrease of approximately 7% from last June's balance of $109 million, and a 12% decline from a year ago level that exceeded $115 million. The relative weakness of this past quarter sales contributed to these declines. As we have also mentioned on our prior calls, our receivable levels have benefited from the rising mix of food sales within the consolidated total. This benefit occurs as a result of our food sales typically have shorter payment terms and to our nonfood sales.

With respect to our inventories, our consolidated total of $153.136m at the end of this March was up 3% above June levels and about 1% below that of last March 31st. We had modest year over year increases in the specialty foods and automotive segments, however, inventories of glass sales and candles decline, under the [lifo] method of accounting. As such inventories were carried at substantially lower costs, related income was recognized as is disclosed in today's earnings announcement. Also related was an impairment charge taken during the third charge, related to a write off of our consumer glass modes. This action resulted from a decision to narrow our overall product line and more clearly focus on select product categories that we believe provide us better opportunity for long term growth and profitability.

In a period of economic uncertainty, our balance sheet retains its overall position of strength. Cash equivalents on hand totaled an excess of $131 million on March 31st. The current lack of debt, the cash position, the $542 million in shareholders equity and our continuing strong cash flows clearly leave us in an excellent position with respect to considering future business acquisitions, and pursuing additional share repurchases.

Before concluding my remarks, let me share several cash flow amounts. For the nine months ended March 31, 2003, Lancaster's consolidated cash flows provided by operating activities totaled $123m compared to $113.119m for the preceding years nine month period.

Within the current fiscal year's amount, appreciation and amortization totaled $24.056m. This amount is relatively consistent with the prior year's total after giving consideration to the cassation of goodwill amortization that occurred upon our adoption of FAS142 this past July 31st.

As we previously mentioned in earlier comments this year, the slightly lower effective tax rate we are seeing for fiscal 2003 has also been influenced by the absent of goodwill amortization as a majority of this expense in past years was nondeductible. One notable use of cash during the past quarter was for income taxes. Due to the size of our second quarter income, taxes paid in the third quarter totaled $31.957m this year, as compared to $19.978m in the third quarter of a year ago.

I appreciate your attention this morning. I will now turn the call back to Jay.

Thanks, John. As we move into the fourth quarter we see a variety of challenges and opportunities. On the challenging side, we don't expect any significant improvement yet in the economy. Our candle and glass initiatives will still be in progress. Energy and some ingredient and raw material costs will stay at higher levels than the prior year, although likely below their third quarter peak levels. Competition will continue to be aggressive.

On the plus side, the weather and war challenges of the third quarter should not have a significant impact on into the fourth. And maybe most encouraging, April food sales trends, including the Easter weekend are looking positive. Our fourth quarter is a little seasonal strength from our automotive and glass segments, however our salad dressing business is in season and Sister Schubert's rolls is a popular product for Easter and Mother's day.

By working hard for the strongest result in the fourth quarter, we are working to position fiscal 2004 for the best position line. Our new candle line, our glass production consolidation, our expanded sister Schubert's capability should help us improve our performance in fiscal 2004. With that, we are ready to begin with questions.

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

Your first question comes from the line of David Hurst (ph) of Burnham Securities.

Hello, David?

Just one moment.

The comments you mentioned briefly about fiscal 2004, sister Schubert's et cetera, have you give us a broader picture of how you see 2004 involving and which quarters of '04 will have the toughest comparisons are '03?

David, I can't really give anything, you know, concrete on a quarter by quarter basis. I think we will have the same typical seasonal strengths in the December quarter related to the glass and candle business and some aspects of the food product lines. As we go through the year perhaps, we will have a chance or maybe at least flat and perhaps even favorable ingredient energy costs related comparison, but that is certainly dependent on how those costs trend going forward. Overall, I think we're still not excited ability about the general strength of the retail marketplace, although there are some signs that things -- activity is starting to pick up a little bit. But nothing that we would think is wildly so.

We are anxious to have that added sister Schubert's capability as we get into 2004, we do think the glass consolidation period as we begin fiscal '04 should be behind us and that should give us an opportunity for favorable comparisons as we go through the year, although we also need volume there. It isn't just a production issue, and like wise the new candle program rollout is certainty starting to get on the shelf, but the sell through story remains to unfold. So while we are excited and confident about that, we don't know for sure what is going to happen there.

And the second question is on the automotive side of things, how much further can we come in the way of margin expansion before we hit a ceiling based on the revenue level?

We would like to think there is a little room to go yet. I wouldn't want to predict a specific number. As you know, it stays a very challenging environment. A lot of cost pressure from virtually all of our key customers and our efforts to a large degree get focused on getting costs out to meet those demands and hopefully let us maintain an inch up margin a little bit. It isn't going to go up dramatically from where we are today, but we do think there is up side opportunity.

Thank very much. I will let the others asks questions now.

Your next question comes from Robert Dialio of Neuberger Berman.

Good morning. On specialty food, can you quantify in some way the negative impact in the quarter from particularly soy bean price changes and whether or not your hedges have rolled off completely? I'm trying to gauge, A, the magnitude of that, and B, if we assume soybean oil stays where it is, we have hit the max point or paying there?

We are probably, Bob, in the quarter looking at ingredient costs. I throw honey in with the soybean oil because it was a meaningful contributor. We are up north of a couple million dollars year after year. As it relates to our forward buys, we frankly don't have a lot bought out into the future at the present time, especially on into fiscal '04. Just a little bit. We are anxiously watching that market as we start the growing season. Hopefully we might see some trend down in pricing. It has come off a little bit its peak levels of the recent past, but I would like to think will is a little more there, but certainly don't have any better crystal ball than others. John, anything you would add to that?

No. I think that pretty well summarizes it

When you look at soybean and honey, there be a couple million pretax year of year? Is that correct?

That's correct.

If prices were to stay where they are now for these ingredients, when might your comparisons be neutral?

if you know what I'm asking.

I would think we would have to be out into this quarter next year. Third quarter next year. Is that fair, John?

We can see looking forward if market conditions remain unchanged as we will see higher year after year costs through the calendar costs

A year over year penalty of the magnitude of what we just saw or a lessening one?

I think that is tough to quantify. It will listen as we move into the first and second quarters of our fiscal 2004.

And if you look at the specialty food segment as it is situated today and try and strip out some of these nonrecurring, whether it was weather, whatever, in the quarter, what is your sense as to what a normalized kind of top line growth rate might look like there?

I don't -- that isn't a specific exercise we have done on the quarter. Bob, but I would think we're still in that mid single digit area. It is something we think is reasonable with the current mix of business as we see it today.

Okay. And in terms of the -- I heard you mention some of these new products. Is there anything in the pipeline that looks particularly promising that could move the needle at all?

You know, I don't think we are seeing any blockbuster kind of product at the present time. But incrementally things like the organics and the two lifefuls certainly do help. They are relatively modest product line extensions.

Okay. And to the question of free cash flow, your year to date CAPEX is running what roughly, just so I can compare it to the cash flow and the figures you gave out earlier?

The property additions for the nine months were $21.673m.

Last year that would have been what?

$14.3 million.

What is your best guess for the year for CAPEX?

Approaching $30 million.

There is some unusual stuff in there in terms of the furnace rebuilds and what not. What would you expect that number to be next fiscal year at this point? Is that going to be higher or lower?

Bob, it is most likely higher based on the assumption we will be moving forward with this salad dressing plan expansion, as I mentioned in the design and engineering right now. We're still anticipating that that will be moving forward. So I would anticipate at least at these levels and most likely higher.

And all in the cost of the salad dressing, $5m, what are we looking at?

It is a significant project. We are looking in the 25, $30 million area.

Spent over how long? Next year?

It is going to be fiscal '04 and some probably in fiscal '05

The operating cash flow of $123m, how much of that came from working capital? If you pulled the amounts out of receivables. Just in round numbers. Do you have a sense of that?

For the year to date, there is not much generated from working capital. I do not have the quarterly year over year impact. I can get back to you on that.

Okay.

It is a simple nine less six, but year to date, not much impact.

Okay. And two final questions. One, in your capacity utilization in the candle and glass ware area. What is that looking like now a days? When you might have a sense as to how the candle line is looking successful or not?

On the second part first, the candle sales, we are probably still looking at another three months or so. We are probably talking about it again in our next conference call with the fourth quarter results. Capacity utilization is not where we need it in the glass business right now, even after the consolidation. We are probably in the 70% area, plus or minus a little. Candles are a bit of a moving target because of the seasonal at this aspect of it. This is in the 75% area in the ballpark. But as we move now on through the summer, moving up with the seasonal aspect of that business.

You mentioned -- last question -- a couple nonrecurring items in the quarter. It sounds like to take the mid-single six dig it of 500,000 hit for bankruptcy, but you mentioned some write-offs, glass molds as they were because of some of the shifts. If you tried to normalize this quarter for all the puts and takes, extraordinary [life foe] or these nonrecurring hits, is there a material adjustment you would make for the numbers?

Bob, I'm not sure how we could get comfortable that between all of our legal and accounting advice on GAAP and all of that other stuff. But I think we have tried to lay out all of the pieces as we see them and let you and your colleagues add and subtract as you might wish to assemble what picture is important to you.

You didn't mention a number on the write-offs on the molds. Is that material?

The press release indicates it is somewhat greater than a million dollars.

That was in the release? I'm sorry. I missed it. Okay. Thank you.

Thanks, Bob.

Your next question comes from Greg Halter of LJR Great Lakes.

Good morning. Have you purchased any shares so far in the fourth quarter?

Share repurchases in April were just a couple thousand, Greg.

Okay. And John, did you say that the updating now is 35.9?

That's right.

That's correct.

And John, I wondered if you would repeat the cash flow from operations numbers for both this year and last.

Sure. The current year net cash provided by operating activities is $123.006 million. Where for the prior year, it is $113.119m.

Okay. Regarding the Phleming (ph) provision, is that a complete provision for the receivables you had there?

That is correct.

You are not expecting any of that back?

Well, we would like to think in the typical situation such as this we might see a small amount of that back, but we have reserved for the full amount of our exposure given the circumstances as we understand them presently.

Okay. And I believe you have contracts coming up in the floor mat business with New York frozen foods. Are those set now? Are you still negotiating?

Actually we are still negotiating with both of those. Should hopefully have resolution here in May to maybe on into June with one of them.

Okay. That's all I have. Thank you.

Your next question comes from Robert Kirkpatrick of Cardinal (ph) Capital.

I'm sorry if you mentioned this already. But I didn't catch the number of shares and the amount you spent during the third quarter.

Third quarter was 342,700 shares for $12.9 million.

Okay. And then, Jay, could you comment upon the acquisition outlook in a little bit more detail?

Only in the -- we have literally just in the fast last few weeks started to see a few opportunities start to come across. Again, as you recall, our focus is primarily in the whole food segment. That's what we are seeing is a couple, three food things to take up a look at. It had been really few and far between so all of a sudden we have seen two, three here in a couple week period of time.

I can't really tell you that we have identified any of those as real opportunities that fit for us yet. We are encouraged to think maybe the seller community is starting to think that they can come out and try to market some things. That obviously isn't all we're doing, sitting here waiting for stuff to flow in here. We continue to be identifying prospects and making calls, that kind of stuff, but no real substantive developments on that side of the M&A world either.

Okay. And with the development that you're doing both in terms of the salad dressing plant and Sister Schubert's expansion, your CAPEX being somewhere around $30 million for the coming year, excuse me, for this current year, for next year, you would probably -- given you're going to have a fair amount of spending on a expensive salad dressing plant you would end up in the $40 to $45 million range?

Again, we haven't finalized a number budget for next year, but we probably could be getting up toward the $40m area. Again, that project will move on over into some of it into fiscal 2005 as well.

It might be approaching $40m in 2004 and down to $35m down in 2005, and then down further in '06?

Obviously a variety of assumptions. Yeah. You may not be far-off there.

That's great. Finally, your press release and discussion talked a little bit about the increased competitive conditions in the retail side of the food business. I was wondering if you could expand further on those?

Just that I think it is a very competitive environment. With things -- with retail sales being sluggish in the quarter it probably stepped up a little bit more than what we have seen in the recent past prior to that. I would say in general, you know, a pretty competitive environment in virtually all of the retail product categories we are competing in.

So it wasn't anything specific to the bread business, it wasn't anything specific to the dressings line with people having, you know, particularly aggressive promotions?

No. I would say again it is aggressive in both those, as well as others.

Great. Thank you so much. I appreciate it.

Your welcome.

At this time I would like to remind everyone, in order to ask a question, press star one on your telephone key pad.

Sounds like maybe we have finished with the questions?

You have a follow-up question from Robert Dialio of Neuberger Berman.

Just a point of clarification, the $123 million or so of operating cash flow year to date, I assume that includes this, whatever you call it, this CDSOA gain, which looks like $24 million after taxes? Is that about right?

It does include that gain. After tax basis. Correct.

Okay. Thanks.

Thank you.

At this time there are no further questions. Are there any closing remarks?

Just that we appreciate you joining us this morning. We will look forward to talking to you late in August as we report our fiscal year in fourth quarter. Thank you again.

This concludes today's Lancaster Colony corporation earnings release conference call. You may now disconnect.--- 0