Marzetti Co (MZTI) 2003 Q4 法說會逐字稿

Good morning. My name is Chastity and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation 2003 fiscal year and fourth quarter conference call. Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO, and John Boyland, Vice President and CFO. (OPERATOR INSTRUCTIONS) And now to begin, here is Earl Brown, Lancaster Colony Investor Relations.

Thank you and good morning. Let me also say thank you for joining us today and please bear with me while we take care of a few details.

As with most presentations of this type, today's discussion by Jay Gerlach, Chairman and CEO, and John Boyland, Vice President and CFO, will contain forward-looking statements of what may happen in the future, including statements relating to Lancaster Colony's 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 cost, 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 10-K and 10-Q.

Now, here is Jay Gerlach. Jay?

Good morning and thank you as well for joining us today. In spite of a year with over $112 million in net income, 21.5 percent return on equity with no debt on the balance sheet and $143 million of cash, I'm disappointed in our operating performance for fiscal '03 and particularly, the fourth quarter.

Many factors impacting our business are not unique to us, such as sluggish retail sales, the Iraq war, the weather, high-energy coast and higher material costs. Aggressive competition in all our businesses and markets impacted both sales and margins. Our execution has not always been at planned levels as well. The end result was a fourth quarter where only the food business grew the top and bottom lines and a year that saw sales and earnings improve for food and auto, but real disappointment in glassware and candles. I will comment further on each segment in just a minute.

For the year, our capital expenditures were about $30 million with specialty foods recording the most dollars at over 14 million, primarily due to the Sister Schubert's expansion, which is coming online as we speak. We also spent somewhat more in auto, $8 million than recent years as cost reduction, capacity needs and new capabilities were addressed in both floor mat and aluminum accessory production facilities. Glass and candles at about $8 million was down largely due to the consolidation of production into one consumer glass plant.

Share repurchases for the year totaled 948,000 for a $35.5 million, leaving 35,770,000 shares outstanding at year-end and 783,000 shares still authorized for repurchase. Only 10,000 shares have been repurchased so far in fiscal 2004.

In fiscal '03, we paid a total of $28.2 million in dividends at 78 cents per share after increasing the dividend for the 40th consecutive year last November. Our payout ratio for '03 was 25 percent and the current yield is 2 percent.

No acquisitions were completed in fiscal '03, although we identified and evaluated a number of food prospects.

Moving on to our segment review, given the challenging environment for our food segment, we're reasonably satisfied with our fourth quarter and full year results. Sales and earnings up 4 percent each were helped by a favorable product mix and good control of promotional costs, offset by high ingredient costs, primarily soybean oil. The year, up 5 percent in sales and 2 percent in earnings, felt the impact of a weak third quarter after a good first half. The top line did not benefit from any acquisition or price inflation. Our retail food service mix moved about 1 percent toward retail in the year, almost 54 percent retail.

Some of our key categories continued to give us growth. Produce department sales were led by cream cheese fruit dip and private label dips, Texas toast, both New York Brand and private label, continued to grow and our national chain restaurant dressing and sauce business also grew. Some of our challenging categories were pourable grocery shelf salad dressings and our Marzetti brand food service business.

Private label is a growing part of our food business, comprising a little over 10 percent of our total retail sales.

Soybean oil had a substantial impact on cost, up over $3 million in the second half.

We were pleased to have our Sister Schubert's expansion almost complete by fiscal year-end. It is now finished and going through its start-up phase. Total cost of the project is about $10 million and it should almost double our capacity. Other projects in the segment were primarily packaging equipment and information technology.

Moving to our auto segment for the year, sales up 4 percent and operating income up 12 percent reflects good full year growth in aluminum accessories and floor mat volume down due to weak after market sales. A full year earnings benefited from ongoing cost reduction efforts and the growth in aluminum accessories sales. For the quarter, segment sales actually declined almost 7 percent due to the softer floor mat sales, both original equipment and after market, and flat aluminum accessories sales.

Earnings were down 31 percent versus the fourth quarter last year due to the sales decline, higher raw material costs and floor mat production and the negative effect of competition on our pricing.

Several capital projects were completed late in the year, focused primarily on cost reduction of both aluminum accessories and floor mats. A couple of these projects also gives us some unique product capabilities for both the original equipment and after market. For the year, our mix of original equipment sales was almost 70 percent versus 30 percent to the after market.

Last one, candle sales had a very disappointing fourth quarter to finish a difficult year. Sales for the year were down 20 percent due to soft glass and candle demand, while operating income is in fact, up 17 percent. It is important to remember last year included $14.3 million in provision for Kmart's bankruptcy.

The impact from lower capacity utilization and competitive pricing pressures continued. Our new candle program roll out has gone well, but unfortunately, is not having much favorable impact on sell-through at this time. The entire candle category at food drug and mass according to IRI was off 4 percent for the quarter and 9 percent for the 52 weeks ended June 29.

Looking at the fourth quarter, we saw very soft demand for both candles and glass. Candles were particularly impacted by the decline in a couple of major private label programs and the roll out of our new program and its related costs.

Satisfactory efficiency levels of equipment relocated in our glass plant consolidation has not yet been achieved. Earnings were obviously impacted by lower capacity utilization, higher energy costs and inefficient plant operations.

Keep in mind this segment has a number of things impacting its year and quarter and last year, including LIFO income, plant consolidation charges and the Kmart bankruptcy. This morning's release has the details of these items.

John is now going to comment on our balance sheet and cash flow.

Thanks Jay. As one might expect after a year with a record bottom line, Lancaster Colony experienced great cash flows in fiscal 2003 and again, finished with a debt free balance sheet, providing us altogether with substantial financial strength and flexibility.

Let's first review some of the major year-end balance sheet components. Accounts receivable at June 30 totaled $88,583,000, a nearly $21 million or 19 percent decline from the levels of a year ago. The two factors most influencing this drop were the decline in fourth quarter sales and the fourth quarter sales mix containing a higher proportion of food sales.

As we discussed in the past, these customers tend to have shorter payment terms than do our nonfood customers. All in all, our accounts receivable agings have stayed in pretty good shape as well.

Turning to the largest component of working capital, inventories, we saw a June 30 total of $159,412,000 that reflected a year-over-year increase exceeding $11 million or 8 percent. This increase came after a $36 million decrease had been achieved in fiscal 2002.

For fiscal 2003, each of our business segments experienced increased inventories with the largest coming in our specialty foods segment. Inventory levels in this segment a year ago were at less than desirable levels to the point where we were seeing customer service issues. This summer, we've been very pleased with our service metrics.

One category of inventory that again declined during the quarter was the pressed glassware inventory that has been accounted for under the LIFO method. Most of this inventory has been recorded at value substantial below current production costs. As noted in this morning's release, LIFO income associated with this year's fourth quarter reduction totaled about $1.9 million compared to $2.9 million in last year's fourth quarter.

For the full year it is also noteworthy that this income totaled $7 million compared to $3.3 million for all of fiscal 2002. We currently have a LIFO reserve remaining on this inventory in excess of $5 million, which we would expect to see mostly recognized over the next year or two. We intend to continue our prominent disclosure of this income as we have in the past.

With most other elements of non-cash working capital remaining fairly consistent between years, a third balance sheet line item I want to point out is other noncurrent liabilities which increased about $12 million to $27,811,000. Similar to that of many other companies, this increase largely related to the recording of an additional liability for our defined benefit pension obligations. The amount still provided was substantially increased by the near historic low interest rates, specifically present at June 30.

Finally, the last balance sheet account to comment on is cash which increased over $59 million this past year to total $142,847,000 at June 30. This increase was obviously influenced by the year's record bottom-line, as well as by a net decrease in non-cash working capital of over $6 million. This improved cash posture stemmed from a continuation of substantial cash flows as cash flows from operating activities totaled $155,985,000 in fiscal 2003, about $4 million less than the prior year's total.

Looking at our non-cash addbacks and arriving at this year's cash provided from operations, depreciation and amortization totaled $31,669,000, which is $3.6 million less than in fiscal 2002. Most of the decline in D&A was due to the cessation of goodwill amortization, which was effective July 1, 2002.

For reference, the expense related to our amortization of goodwill during fiscal 2002 totaled about $2.7 million, most of which was non-deductible for income tax purposes.

On a related note, the lack of this nondeductible goodwill against fiscal 2003 results contributed to the slight lowering of our annual effective tax rate.

Other annual cash flow amounts of note included $29,941,000 for property expenditures, $35,552,000 for share repurchases, and $28,152,000 for the payment of dividends.

With respect to the past year's capital expenditures, over $7 million of the total relates to the expansion of our Sister Schubert's operations.

Given what I have shared this morning and our current expectations for fiscal 2004, we believe that we remain financially well positioned to address our foreseeable cash they, whether it be for CAPEX, share repurchases or business acquisitions.

I will now turn the call back over to Hay for his concluding comments.

Thanks John. Looking to fiscal 2004, we feel we can do better. However, it will be a very challenging year. Natural gas costs are off their peak but look to be staying at high levels. Soybean oil is also off its recent peak, but comparisons will be tough, at least through the first half, and dairy costs are edging up. Competition will be aggressive everywhere we do business and opportunities to look for growth will be limited in what to us still looks like a slow economy.

However, we do see positive things in the works or opportunities for further improvement including the new Sister Schubert's capacity to support sales growth efforts in that product line, new product line extensions on both dressings and dips, as well as frozen bread, new salad dressing capacity project moving forward for an early 2005 start up providing capacity and more efficient production, our new candle program at retail for the first full fall season, a full year with glass production under focus at one plant, most plant closing issues getting behind us, new aluminum accessory capabilities that should create new business opportunities and some signs of life back in the after market, both aluminum accessories and floor mats.

That highlights a few. I can assure you that we have tremendous every effort every day in pursuing new sales opportunities and cost reduction initiatives in all our segment. We would like to grow our food segment via acquisitions this year and continue to evaluate good fitting opportunities. Capital expenditures for the year may reach $40 million as we move forward with our salad dressing capacity expansion. We will continue to evaluate share repurchases and the cash dividend in light of earnings, cash flow, cash position industry trends and other needs.

With that Chastity, we are ready to take questions.

Chastity, are you there?

(OPERATOR INSTRUCTIONS) Your first question comes from Greg Halter.

Good morning guys.

Hello Greg.

Two numbers I missed quickly. Jay, I think you mentioned the share count at year-end as well as the return on equity figure for the year?

Return on equity was 21.5 percent. Shares out at the end of the year was 35,770,000.

Okay. And looking at the candle program, how long has that been out there now at retail?

Shipping in late February, it's probably been on store shelves starting sometime in March.

Okay. That's 4 or 5 months so far. Your initial reaction there and what you're seeing and expect going forward?

At this point unfortunately, I have to say it's pretty inconclusive as we seem to have been rolling it out at the same time that the category is really seeing some significant softness. There have been a few opportunities for comparison that might give us encouragement that we're on the right track but it just isn't conclusive at this point.

We are remaining quite positive as we get into the fall season, again assuming some strength in the category that we are on the right track with the program. We have tweaked it a little bit and are doing some updating for a few areas of weakness we've seen in a few months we've been out, but nothing significant.

Okay great. And Elliot has a question for you.

Good morning.

Elliot.

Let me ask you, with the blackout recently, was there any one time candle surge of business?

Not that's come back to us directly via orders or for that matter, any anecdotal feedback yet at this point. We would think there would be something, but nothing identified yet.

And on a more strategic basis, given the continued deterioration in the glassware and candle business and the renewed deterioration in the automotive side, under what circumstances might you entertain a bid to divest those operations?

You know, Elliot, we have not identified circumstances where we would do that and at the present time, aren't trying to develop those criteria. We certainly are concerned about the performance of both those segments, although I -- I think the automotive business, as we look at the whole year and I think that is a reasonable way to look at it, we're reasonably satisfied. We are still on a longer time term improving path there. The glassware and candle business has obviously, some very big challenges still ahead of it and our concern would be at higher there -- you know, how quickly we can see some noticeable improvement.

Thank you.

You're welcome.

Your next question comes from Robert Kirkpatrick.

Good morning. Could you talk a little bit more about the softness in the candle category? Can you quantify that for us at all?

You know, only in the sense if we looked at that segment sales decline over the year Rob, it's roughly two-thirds of that is in the candle part of the business. And a noticeably weak fourth-quarter where again, I think a weak category, coupled with the impact of our rollout, which in hindsight, we may have been off a little bit more than we should have at one point in time. In the sense that I think as we worked into this, the actual implementation of the rollout, we saw those customers getting the new product line start to cut back noticeably on their purchases in anticipation of that. Plus frankly, the introductory costs of getting the new line on the store shelves was enough to offset a reasonable amount of the actual sales dollars we were getting on those initial orders filled. So it wasn't like there was a new pipeline benefit from rolling that out at all. In fact, I think it was more of the opposite.

Okay. And can you quantify for us the amount of the expansion of the Sister Schubert's capacity that you are bringing online and then do the same with the salad dressing expansion that you are planning for 2004 fiscal year?

We've kind of ballparked that Sister Schubert's capacity, prior to the expansion was in the 20 to $25 million in sales range depending on mix of products that was running through there and we've in essence doubled that.

Okay.

Really not in a position to give any details on the salad dressing one yet at this point.

Okay but in -- but --

It would not be near as dramatic.

It wouldn't be a doubling, okay.

The dressing business is much much bigger and we're operating four plants today, so this is one additional piece of capacity in that mix.

So it's a whole new plant as opposed to a new manufacturing line?

That's the plan, yes.

Okay. Could you then talk a little bit about maybe some of the food acquisitions that you looked at during the year that didn't work out and whether you are starting to get discouraged that you are going to be able to buy things at the valuations that you feel are appropriate?

Well, I don't know that we are discouraged but valuations, at least in a couple of cases that we really took down to the wire, did seem to vary, depending on the buyer's view of things and we didn't quite seem to get to what others could come up with, but I don't think terribly discouraged either. I think it's always a challenge of judging initially the fit and the growth opportunities and then being disciplined and realistic in how we value those opportunities and we've not been anxious to maybe value where others may be willing to go, at least at the present time based on what our view of the opportunity is.

Okay, grade. Thank you so much.

You're welcome.

Your next question comes from Robert Dialio.

Hi Jay.

Good morning Bob.

Um -- as I listened to your comments and you indicated that you hope to do better next year. I'm wondering from what base are you looking at? If I look at your reported earnings and try to make some adjustments for the year for the dumping, nonrecurring and the restructuring and the LIFO, I'm coming up with a round two and a quarter kind of an operating earnings. Is that fair in your view as a base?

I'm going to let John comment there only because I'm not sure what I am allowed to say.

I think we are limited Bob from addressing what might be viewed as core operating earnings. Clearly, you've identified some larger items that may or may not reoccur. With respect to the LIFO income, there may be some element of that going forward for. But I hear what you are saying but I would prefer not to comment as to your specific estimate, because it is a pro forma estimate.

Um - let me ask you slightly differently then. You reported 311 for fiscal '03. The numbers that you've identified obviously, there could be some -- from what you said earlier, there is likely to be some LIFO gain coming up, but if I just take the 67 cents in dumping, 8 cents in restructuring and back out the LIFO gain just to be conservative, I do mathematically come to 224. Is there anything else in the numbers that was unusual in the year in your view in terms of either a depressant or an addition? I do know whether the cost of running these two plants -- even if you can't quantify it, I'm just curious directionally, if you think there was something unusual beyond that in the numbers?

I think the restructuring activity was certainly intended to help the efficiencies of the glassware business and we did operate within the year with a glassware facility in Dunkirk, Indiana, the manufactured portion of which has since been closed. So we're hoping to see some efficiencies on the glassware side that were not present in fiscal 2003. We still have some progress to make in that arena as Jay alluded to, but that's certainly one aspect where we would hope to see reasonable improvement.

And could that be material? Is that going to move the needle at all or is this sort of minor, the margin? There are a lot of variables here, obviously, utilization facilities, all kinds of stuff, I realize.

We would like to think it would do more than a little bit at the margin, but depending on your definition of materiality, I'm not sure, but it should do a little bit more than just move the needle if we can get our consolidated plant operating at the efficiency levels we need to see for the full year.

If I try to go through a similar exercise in your cash flow statement, which you don't have listed and you don't give us the detail on your release, but you did give us a lot of the components in your conversation. I think you said you had close to 156 million in cash flow from operations in that you are -- depreciation was actually, sounded like a little bit better than your CAPEX for the year unless I missed that. What was your CAPEX for the year just ended?

Go-ahead John.

The CAPEX was 29,941,000 (ph) and D&A was 31,669,000 (ph).

Okay so before -- the way I calculate free cash flow, before share repurchase and before the dividend, kind of looks like cash flow from operations was essentially free (ph). DD&A more or less offset CAPEX, so you generated, all it 156 million in free cash flow, the way I define it. Included in that 155 million however, is this dumping onetime. Maybe it's going to recur, maybe it isn't but there's a decent size onetime dumping payment in that number. Correct?

That's correct.

And that's like 25 million or so after taxes it looks like?

In that range, maybe just a tad less.

Is there anything else, if I'm trying to normalize your cash flow that I should be taking out of there? I guess the restructuring charge may or may not be -- I do not know how much of that cash for instance?

It was primarily non-cash.

So would that be the major adjustment to cash flow if I am trying to normalize?

Again, I hesitate to go down the path of normalization but certainly that is the largest single individual item affecting comparisons probably going back as well as going forward.

Just so I understand Jay, what you're trying to say about the outlook, you made it clear you're fighting a number of headwinds on a number of fronts, which I can understand. But you did say that you expected -- I am looking for the exact words you used, you expected to improve upon, I think or something to that effect, your results next year. I'm wondering from what base level you are referencing?

In a broad sense, and again, not putting down specific numbers either pro forma last year or forecasted numbers going forward, I am looking at the business in general without considering any CDO funds as a comparative or nor expect any this coming year as a comparative.

Okay. And when you made the comments about -- it sounds like if that's true, then your free cash flow might be north of 100 million, 110 something like that. That's going -- Forget I even said that because that's going to imply you have to give me a net income figure so.

When you say -- I just have one or two more questions, but when you cited the soybean pressure as being a headwind for the first half of this year, are you assuming that soybean oil stays where it is, falls, rises?

We are -- in that comment, we are assuming it stays generally where it is right now.

Okay.

And there is maybe some opportunity for that to be a little bit less unfavorable as we don't have huge commitments beyond the first quarter of our fiscal year. Now having said that, that means there's also risk on the upside but we would like to think that conditions are not really there to support upward movement. But you know, we've been wrong before, of course.

Okay. And historically, you've commented on what you think kind of the long-term organic revenue growth rate might be for foods. I didn't hear you give that kind of projection this time. Do you still feel it's in line with your prior comments in terms of --

I think we're where we would generally be thinking today is in that kind of low mid single digit area, baring the benefit of some real exciting new product. The whole category seems to be growing in general in that area and right at the moment, we don't have anything that's helping us drive growth any -- materially any stronger than the overall categories.

Is there anything in the pipeline that you think -- you mentioned a bunch of line extensions etc., but for instance, is the salad capacity expansion perhaps or the Sister Schubert's or what have you, is there enough -- anything in the pipeline to sort of get you excited there or is it just --

Maybe it gets us excited but not to the point of revising that thought to double digits or something like that.

Okay, okay. Thanks.

You're welcome.

(OPERATOR INSTRUCTIONS) Greg Halter.

Hello again, guys.

Hey Greg.

Just wondering if you decided on a location, I guess strategically possibly for the salad expansion, salad dressing expansion?

No, not final final yet that we would be prepared to comment on that.

Okay. And relative to the CDSOA payments, can you give us an update on anything you're hearing, whether or not those will continue or be discontinued at this point?

You want to comment John:

Greg, I think there has been really no change since the disclosures we made with our third quarter Q in terms of some of the uncertainties associated with that program. We do intend to be submitting an application for additional disbursement sometime next month, but it is very, very uncertain as to how much if any, we might be entitled to when the disbursements would typically get made this coming December.

Okay. And do you have any union contracts that either you just negotiated with or are coming up in the next 12 months or so?

Actually, we've got a couple that are in process right at the moment that are the last ones we have this fiscal year. It's been a pretty busy year. We've settled four so far this year and two more to go and feel positive those will get resolved without any unfavorable impact from any kind of work stoppage or anything like that.

Okay. In the glass business, are there any glass furnace rebuilds that you expect any time soon?

There could be one out later in the fiscal year. That is still being evaluated right at the moment.

Any spend on that -- is that included in the CAPEX figure or no?

Yes, it would be in there, yes.

So it gets expensed over time then?

Oh, yes.

You mentioned competition and price and if you can be specific, is there any one particular player or players in any of the three groups that is doing more than they had in the past or any new players that have come on the scene?

As it relates to players, no, I don't think there are any new ones that are, at least of significance that are active in the marketplace. In our various segments, it comes in different fashions and with kind of a different style. The one you of course read about all the time is the automotive industry because they are pretty public with their different programs and they are being as aggressive as you would read about. But the other segments are likewise, I think seeing a lot of concern from the trade relative to pricing and certainly, looking for any kind of competitive opportunity to leverage a better deal for them.

Okay. And one last one. Other than the candle business which is I think been beset with competition from a lot of the foreign players in China and so forth, are you seeing any of that -- probably not in food, but anything like that in the auto business where you are --

We see it to a modest degree in the automotive business. It's more on the aftermarket than the original equipment side but it's a factor out there and it certainly has been for a long time and continues to be in the glass business.

Okay great. Thanks for those comments.

You're welcome.

Your next question comes from Robert Dialio. His question has been withdrawn. If there are no further questions, we will now turn the call back over to Mr. Gerlach for any concluding remarks.

Again, thank you for joining us this morning. We do appreciate your interest and look forward to talking to you with our first quarter results. Thank you.

(OPERATOR INSTRUCTIONS)