Marzetti Co (MZTI) 2004 Q1 法說會逐字稿

Good morning. My name is Marianne, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation first-quarter 2004 conference call. Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO, and 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. (OPERATOR INSTRUCTIONS). And now to begin your conference, here is Earl Brown, Lancaster Colony Investor Relations. Sir, you may begin.

Thank you. Good morning. Let me say thank you to all of 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 Boylan, 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 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 filing with the SEC, including Lancaster's report on Form 10-K. And now here is Jay Gerlach. Jay.

Good morning. Thank you for joining us to review our first quarter of fiscal 2004. I will make a few general comments and review each of our business segments, then John will review our balance sheet and cash flows, and finally, I will conclude with some brief comments on the future.

We continue to have a tough time growing our overall sales in a very competitive marketplace. We have maintained a focus on cost, which has helped us keep our overall pretax margin relatively flat at 12 percent. LIFO income, that John will comment on, helped us maintain those margins.

Capital expenditures for the quarter were 6.7 million, with our specialty foods segment receiving about one-half that spending for new equipment, facility upgrades and the conclusion of our Sister Schubert's capacity expansion project. Automotive spending was about one-third of the total, enhancing our capabilities and productivity in both floor mats and aluminum accessories. The remaining capital spending was in our glassware and candle segment, and best described as maintenance spending.

Share repurchases for the quarter were relatively insignificant at 26,916 shares for $1,055,000. Our method of buying on an opportunistic basis didn't yield much this quarter, but we continue to be interested in repurchases with about 756,000 shares still authorized, and a total of 35,759,000 shares outstanding today.

Turning to Specialty Foods, we were pleased to see sales growth of 5 percent, given no impact from acquisitions or any major new product line introductions. The demise of Fleming no doubt cost us some volume, but it is hard to measure what was picked up by their competition.

Retail growth was led by sales of produce department items, particularly apple dip, which is having a good season, and in the frozen case, Texas Garlic Toast. Food Service growth was generated by dressings and sauces sold into our national chain account customer base.

Noticeably higher ingredient costs was the primary factor influencing our lack of bottom-line growth. Soybean oil had the greatest impact, but many dairy related ingredients are up as well. We ballpark soybean oil impact in the quarter at 1.5 to $2 million. Recent new product introductions, either already on the shelf or being presented to our retail customers, include an organic veggie dip, the addition of bleu cheese to our organic dressing line, and a banana's Foster dessert all for the produce department.

In the frozen case, we've added the bagged Sister Schubert's rolls that can be used one at a time. And we are testing a new breakfast Texas Toast with an apple cinnamon flavor. We have been pleased with the trade reception to these items, but retail sell-through is too soon to measure.

Our Glassware and Candle segment continues to be our biggest challenge -- sales off 18 percent and operating earnings down 24 percent is a major disappointment. The seasonally strong month of September was noticeably below our expectations.

The Candle category that is not growing much, if at all, very aggressive competition and seasonal conservatism by the trade are all factors impacting our volume. We have not been pleased with the sell-through of our newly introduced line, and are making adjustments at this time. We've also revamped our marketing, product development and sales team to ensure we are getting and easing timely customer input, reducing our development time, and reducing costs. Efforts to reduce production costs are significant, with focus in raw materials, the whole supply change and plant floor productivity. While progress is being made on all these fronts, reduced sales levels and plant utilization are presently overshadowing the progress. Glassware sales have also been soft with the candle market weakening being a direct impact. Our glass production costs are battling reduced capacity utilization -- high natural gas costs and inefficiencies still coming from our plant consolidation earlier in the year. Much work needs to be done to see acceptable results in this segment.

Automotive sales were down about 7 percent, as our original equipment demand was impacted by new program gains, not fully offsetting program losses, mix and somewhat lower build rates. Aftermarket sales were up modestly in the quarter due to good aluminum storage box sales. Operating income was off a similar 6.5 percent, although it was held by the gain on sale of idle property of $442,000. Our cost reduction efforts are ongoing, but we were affected by lower plant utilization and some higher material costs in the floor mat part of the segment. We did bring on stream a couple of capital projects, one format related, the other aluminum accessories that should further help reduce costs, and give us some unique product capability going forward.

I would now like John to make a few comments and then I will wrap up.

Thank you, Jay. I would like to first comment this morning on several of the more significant line items within our September 30th balance sheet. First, our accounts receivable balances, totaling $105,562,000 at September 30th, were seasonally higher by about $17 million than at June 30th. However, the current-year total was roughly $4 million lower then the year ago total of $109,424,000. This fluctuation was influenced by the year-over-year decline in the first quarter sales.

With respect to our inventories, they totaled nearly $168 million at September 30th. We saw our candle inventories increase over the levels of both this past June and last September. This increase was principally due to lower than expected first quarter sales. As a result, we have implemented reduced production schedules for candles in the fiscal second quarter that we believe should allow for these inventories to be brought more in line with our future needs. As alluded to in this morning's earnings release, inventories for pressed glass were accounted for under the LIFO method of inventory continued to decline, with the resulting LIFO benefits during the quarter of approximately $1.6 million being included within the results of our Glassware and Candle segment.

Over in liabilities, you'll note that our accrued liabilities increased in excess of $11 million since June 30th. This increase resulted from a larger accrual for federal income taxes. I believe that you'll find our balance sheet accounts have otherwise remained relatively comparable to those as of June 30th.

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 over $145 million in cash and cash equivalents at September 30th.

Turning to cash flows for a moment, cash flows from operating activities for the quarter totaled $17,034,000. This compares to $24,234,000 provided during last year's comparable quarter. A fluctuation between periods resulted from relative changes in certain components of working capital. One specific component of the quarter's cash fool that you may find of interest is depreciation and amortization that totaled $7,432,000, which compares to $8,143,000 recorded a year ago. As Jay mentioned earlier, other cash flows of note for the quarter included capital expenditures of $6,677,000 and share repurchases of $1,056,000.

In concluding my remarks on our first quarter results, I thought I would also briefly comment on our fractionally higher effective tax rate evident for the quarter. This increase is due to the mix of segment results yielding a slightly higher effective rate of state and local taxes. All else being equal, we may continue to see this trend if (ph) our effective rate persists over the (technical difficulty) fiscal year.

With respect to reporting our upcoming second quarter results, we wanted to remind you of three items that were included in Lancaster's pretax income during the second quarter of a year ago. First and foremost, last year's second quarter reflected income recognition of the U.S. government's $39.2 million remittance of funding under the Continued Dumping and Subsidy Offset Act. This income translated to approximately 67 cents per share after taxes. For this year, we have submitted an application for another annual remittance under The Act. However, the inherent uncertainties associated with this program remain, and do not allow us to estimate, how much, if any, funding may be allocated to us by the customs service this year. And as we have previously disclosed, the longer-term viability of this program remains very uncertain. Also recognized as income in last year's second quarter was LIFO-related pretax income, totaling approximately $2.7 million or about 5 cents per share after taxes. Furthermore, we also recorded a pretax restructuring charge of approximately $4.9 million or about 8 cents per share after taxes related to the closure of our Dunkirk, Indiana glass manufacturing operations.

At this point, let me express my appreciation for your time this morning. I will now turn the call back to Jay.

Thanks, John. We're fortunate to be able to maintain our strong financial condition in spite of some challenges in current operations. We have several active acquisitions dialogs going today, all food related, but of course it's hard to predict their outcome. Our interest in share repurchase remains as opportunities develop, and we'll look closely at our dividend level at our November board meeting, being mindful of our strong balance sheet, our forty-year record of increasing the dividend, and the more favorable tax treatment of dividends. While sales in our second quarter are typically the biggest of the year, operationally, many of the challenges of the first quarter carry into the second. Factors affecting operating income will include ingredient costs in the food segment, energy costs, plant operating efficiencies and plant utilization. Opportunities for improving trends are better as we get into the third and fourth quarters of the current fiscal year.

With that, Marianne, we will take questions.

(OPERATOR INSTRUCTIONS). Our first question comes from Jason Rogers (ph), L.J.R. Great Lakes Review.

Hi. I was wondering if you could -- if you have any estimates for capital expenditures for fiscal 2004?

Jason, we, at this point in time -- and we had talked, I think, in our last call about thinking this year would be close to 40 or in that ballpark. We are probably running a little bit below that pacer at the present time, largely driven by the timing of expenditures and a salad dressing capacity expansion project, that is not moving at quite the pace we thought it would be when we talked a couple of months ago. So somewhat less than that, but definitely, I think north of 30 million.

Okay. And did you break down -- I might have missed this -- did you break down in food what percent was from retail and what percent from food services?

I didn't mention it now, but it really is still hanging at about the same 54 percent retail area.

Okay. Thank you, very much.

If there are no further questions, we will turn the call back to Mr. Gerlach for any concluding remarks.

Well, Marianne, we will wait just a minute and make sure there aren't any other questions before we do wrap up here.

Thank you, sir. Your next question comes from Don Taylor, Franklin Advisory Securities.

Good morning. I'm wondering if you could expand upon your revamping of the candle line. What kind of changes are you making relative to what our understanding was at the analysts' meeting?

Well, I think there's two primary things we're looking at -- one relative to the broad line -- I shouldn't say looking at -- working on -- for the broad line introduction of the spring. We, I think, feel there is a need to somewhat, I guess, I'd describe it as fine-tune it a little bit with elimination of perhaps a few -- what may have looked like, in implementation now, some duplication of SKUs as well as some changes in colors, and a little bit on the product labeling side. Another area that we feel we need to more significantly address in this product line, bid ford (ph) is what the trade these days calls opening price point items, which are as they would sound -- really kind of the low entry point of the marketplace. The new rollout we did really didn't address that as adequately as it appears it need be in the marketplace today. And as I think you've heard us talk in the past, a fair amount of the retail activity going on from a gross standpoint, is in the dollar stores. We need to have a more, I think, appropriate product offering for that channel than we do today. So those are really the two broad things we're actively working on today.

So you take your lowest price point item there and sell it for a lower price, or do you --?

No, you're trying to develop an item that is a little bit lower cost that helps address those lower price points. So it is yet a narrower offering at that level; and again trying to take costs out in the form of, probably mostly packaging, and a little bit in the material side where you can.

How quickly do you have something that you can offer?

Well, actually, we've got a little bit outright today. But we are trying to get that expanded literally over the next few weeks.

Okay. And the acquisitions you're looking at -- are they size-wise, in the ballpark of what we have seen in the past?

Yes, for the present time, they would be in that range. Yes, probably in the upper teens to maybe 30 million in revenue size.

Okay. Thanks.

Your next question comes from Scott Lisbon (ph), Bull Path (ph) Capital.

Good morning. I saw that the impact of higher soybean oil costs, which was about 1.5 million in the quarter -- just taking a look at what soybean oil has done since, probably the end of September, beginning of October, you know, it looks (indiscernible) up about 30 percent. I was wondering could you maybe quantify what the impact has been so far in the month of October? And do you have a sense of where that cost might end up for you guys for the full quarter?

I think, Scott, that what we're seeing at the present time is soybean oil will continue to be a fairly significant bother to us through the balance of the second quarter, and probably less so as we move toward the latter half of the fiscal year. Although at the moment at current market prices, we would see oil, year-over-year, as an increase. Clearly, there are a number of factors that will have to be determined at market between now and then to determine the full extent. But, I think the second quarter issues will still persist at somewhat comparable levels.

All right. I think on your last call, you had mentioned that sort of your outlook for fiscal '04 was that you might be able to improve operating EPS year-over-year. And I think one of those assumptions you made back then was that soybean oil costs would stay relatively flat. So, given what you are trying to do, you know, revamping the candle line, do you still think you would be able to improve earnings year-over-year, given the big jump in soybean oil?

I think we are, again, awful sensitive to forecast in earnings. But we obviously have to have an optimistic view and an expectation that that can be accomplished. But I wouldn't want to suggest to you that we are firmly forecasting that that is going to happen. But it certainly would be our expectation.

Okay. Thank you.

Your next question comes from Jason Rogers, L.J.R. Great Lakes Review.

Hi, just one other follow-up question. For automotive, could you break down what came from OEM versus aftermarket?

As far as what the mix was?

Yes, the sales mix.

Again, really hanging just about where we have been -- about 70 percent original equipment.

Okay. Great thanks.

At this time, sir, there are no further questions.

Okay. Well, thank you, Marianne, and thank you all for joining us today. We will look forward to talking again with our second quarter release late January. Thank you.

This concludes today's Lancaster Colony conference call. You may now disconnect.