Marzetti Co (MZTI) 2004 Q2 法說會逐字稿

Good morning. My name is Donna and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation second 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 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 keypad. Questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you. Now to begin your conference here is Earl Brown [ph] Lancaster Colony Investor Relations.

Good morning. Let me say thank you for joining us today. Please bear with me while we take care of a couple details. As with other presentations of this type, today's discussion by Jay Gerlach, Chairman and CEO and John Boylan, CFO will contain forward looking statements of what may happen in the future including statements relating to Lancaster Colony's sales prospects, growth rates, expected future levels of profitability 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 report on form 10K.

Now here is Jay Gerlach. Jay.

Good morning. Thank you for joining us to review our second quarter fiscal 2004 results. While there are several factors affecting our reported results for the second quarter and their comparison to last year, all covered in our earnings release, our results were not up to our expectations. Flat food sales for the quarter are certainly a concern while developments like the continued Southern California labor strike as well as bankruptcies and store closings such as Fleming and the Big Bear division of Pen Traffic [ph] are meaningful, we are definitely seeing a sluggish and more competitive retail environment. New product growth is crucial, but we don't have any contributing significant new growth at the present time.

I'll discuss this segment and our others in just a minute. First a few general comments on the quarter. On December 12, we were pleased to complete our first acquisition in over two years with the purchase of Warren Frozen Foods of Altoona, Iowa. With sales of about 18 million and an approximate purchase price of $21m this primarily industrial frozen noodle business should complement our existing retail frozen noodle business located nearby in Clive, Iowa. We are pleased to have the Warren family stay active in the business and in fact head up our overall frozen noodle operations. The second quarter impact from this addition was just less than $1m in sales and low six figures to the operating income line.

Capital expenditures for the quarter were 4.2 million with specialty food projects receiving the majority of these dollars. Share repurchases were just 66,000 shares for $2.6m as availability just wasn't there during the quarter. We were pleased to take advantage of our strong balance sheet, continued good cash flow, and the benefit of the lower tax rate to raise our quarterly dividend at the November annual meeting by 15% to 23 cents from 20 cents per share beginning with the December 31 payment. This marked our forty-first consecutive year of dividend increases. Income did benefit in the quarter from proceeds from the Continued Dumping and Subsidy Offset Act, a favorable LIFO inventory adjustment, and the recovery of a portion of a sizable bad-debt, all of which John will comment on further in just a few minutes.

Turning to our segment performance, I'll start with food where sales were basically flat, but operating income was off 9%. Sales mix in the quarter shifted slightly to food service. Our retail challenges include sluggish category growth in our key produce department category of veggie, apple, and fruit dips and very aggressive refrigerated salad dressing competition. New York brand Texas Toast for the quarter showed decent mid-single-digit growth while our frozen Sister Schubert's dinner rolls grew high single digits. We did have some negative impact on sales growth due to service problems around Thanksgiving following the startup impact of our Sister Schubert's capacity expansion, which is behind us now.

Lack of sales growth and a bit less favorable mix didn't help margins. The greatest impact came from ingredient costs, which were unfavorable to last year by a bit over $2m with almost $2m being increased soybean oil costs. It is a very challenging market to try to pass these increased costs along. This unfavorable cost comparison is likely to continue at similar levels through our second half. While disappointed with the 9% earnings decline, we were pleased to have a strong 19% operating margin in this segment.

Turning to our glassware and candle segment, please note that while our segment's operating income increased all of the items John will comment on affected this segment's results. We are still not showing satisfactory improvement in this segment for the quarter. However, we were pleased with sales and operating progress in the month of December. Obviously, time will tell if we will continue to see improvement. Our candle product line continues to battle a soft category, although final December demand was encouraging as is our January order pattern. Softer demand early in the quarter prompted us to cut back production hurting our capacity utilization. Glassware demand was near expectations, but plant performance was weak, which prompted a change in plant management in late November. While not immediately hitting the bottom line, we are seeing plant performance improve in January. High energy costs of course continue to especially hurt this operation.

Second quarter automotive sales were off about 11% with the biggest sales decline coming from the original equipment market for our aluminum accessories. A major decline in a prior year original equipment program has not been totally offset by new programs starting up this current year. In addition original equipment floor mat demand is off again as new programs are not completely offsetting declines in or loss of prior-year programs. The operating income decline is primarily due to the volume declines summarizing material costs and some shift to a less favorable product mix.

At this point I'll let John make a few comments on the balance sheet.

Thanks Jay. My first few comments this morning will address some of the more noteworthy changes in our consolidated balance sheet. I'll then wrap up my comments with some cash flow considerations that may be worth noting.

First, as of this past December 31 our net accounts receivables totaled $106,288,000, which was approximately $18m greater than our June 30 balance. This increase was largely influenced by the seasonal timing of our glassware and candle sales. Compared to accounts receivable of a year ago, the current year's balance is about $31m lower. However, this comparison is skewed by the prior December 31 inclusion of the $39m receivable that was then due from the federal government under the Continued Dumping and Subsidy Offset Act. This year's remittance was received in December with last year's receipt occurring in early January. In another development related to our accounts receivable we recorded income during this year's second quarter of approximately $1.2m representing the recovery of a previously written-off customer balance. Further recovery on this account is expected in the third quarter to total approximately $800,000.

Turning to inventories, which totaled over $150m at December 31, we have achieved a $9m decrease since last June. As implied by this morning's press release, we continue to see further reduction of certain glassware inventories accounted for under LIFO and carried as substantially lower prior year's cost. This reduction had the effect of additional LIFO income recognition of approximately $1m in the current year's second quarter compared to $2.7m recognized in the prior year's quarter. On the other side of our balance sheet in liabilities you will note that accrued [libes] totaled $50,175,000 at December 31, an increase of about $7m since June 30. Most of this increase simply resulted from larger accruals for corporate income taxes as influenced by seasonal and other timing factors. As I alluded to earlier, we did receive our CDSOA distribution in December. This totaled slightly less than $2m or three cents per share. As we've disclosed in the past, the Offset Act itself remains subject of some fairly well-publicized political 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 to receive another payment before the last quarter of calendar 2004. With respect to some of the previously disclosed litigation involving past distributions to candle industry recipients, there has been no further resolution to this matter that we can report upon today.

With regard to our cash flows, cash flows were provided by operations during the six months ended December 31 [and] totaled $59,398,000 compared to $87,225,000 last year. The decrease is due to relative changes in working capital components particularly accounts receivables and accrued taxes. Depreciation and amortization during the first six months of fiscal 2004 amounted to approximately $15,322,000. This amount is relatively consistent with the prior year's total of $16,119,000. Capital expenditures during the last six months totaled $10,840,000 and our share repurchases $3,698,000. The net cash outlay for our December acquisition of Warren Foods, although eventually to be subject to some final post closing adjustments, totaled approximately $20,568,000. On a related matter the Warren acquisition also caused the increase in balance sheet goodwill of approximately $9m. This amount may change modestly as we finalize our purchase price allocation as well as the post closing adjustments. With the company's cash flow continuing strong, we do remain debt-free and finished December with over $150m in cash and over $576m of shareholders' equity on the balance sheet.

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

Thank you John. Looking forward to the second half we see a very competitive marketplace for all of our products. Operating results will be impacted by rising material and ingredient costs that presently are very difficult to pass on in higher prices. Capacity utilization will still be a challenge for our non-food segments. We will continue our attention to new product development. Some of our new products recently or soon-to-be- introduce include, in specialty foods taking advantage of the popularity of consumers watching their carb intake, a six-net-carb New York brand Texas Toast to be introduced in February to very interested trade customers and a Marzetti brand one-carb line of pour-able salad dressings. Also, our organic blue cheese refrigerated salad dressing and ranch veggie dip will be reaching the market plus a light dill veggie dip at the same time. We are excited to have our new bananas foster sauce targeted to the produce department now starting to ship.

For candles and glassware, our candle attention has focused on updates to our new line introduced last year, efforts to develop additional trendy more upscale product, and development of more opening price point items. Working closely with suppliers on raw material cost-savings and our own lean manufacturing efforts encourage us that further cost reductions are possible. Our glassware development efforts are focused on candle and floral accessories at this time.

Automotive development is mostly original equipment related, although one exciting new market we are entering is accessories for the sport compact market such as cat-back exhausts, intakes, and carbon-fiber wings.

The second half will obviously benefit from the Warren Frozen Food addition. We continue to be interested in additional food acquisitions, although nothing is close at this time. Our strong balance sheet gives us the ability to do more and potentially bigger deals if the fit and future look good. We ballpark capital expenditures for the year in the neighborhood of $25m due to first half expenditures totaling 10.8 million and a bit-later start to our salad dressing capacity expansion project. While we expect a challenging comparison to last year's second half, we are working hard to show favorable results.

Donna, with that we're ready to take questions.

At this time if you would like to ask a question, please press star then the number one on your telephone keypad. At this time, we have no questions sir.

We'll wait a minute to see if anybody wants to sign up.

Your first question comes from Greg Halter from Great Lakes Review.

Relative to the bad-debt recovery, is that a cost-of-goods item or SG&A? Which segment does it relate to?

That credit is recorded in SG&A. It relates to the glassware and candle segment.

OK. On the food side obviously as you mentioned, the sales are somewhat disappointing there. What kind of impact could you put on the strike in California and other areas? Alternatively, what kind of impact from the Atkins diet and less bread and carbs being eaten these days?

We can't quantify the second point on the Atkins side, although we would certainly believe that there is an impact there. Obviously we're partly trying to deal with that with some product development efforts. The labor issue is primarily Southern California, but a little bit of an impact back to the other markets affected. I think St. Louis and a little bit in West Virginia probably totaled just short of $1m in sales for the quarter - we estimate.

OK. Thank you.

The next question comes from Rob Hess [ph] from Fiduciary Management.

It's actually Pat and Rob. We're both here. Rob is closer to the story than I am. Looking back, I know you have struggled with the candle and glass segment for a couple of years. The automotive segment you've turned the margins around. Now the revenues have turned down again. On the food side, you have a whole series of issues there but basically we are struggling on the top line there. Margins are pretty solid. If you look back at this company and you look at the operating profit, including acquisitions, you did better operating profit in '97 than you are doing today. It has basically been floating around 144 to 155 and now down into the 130s on an annual operating profit basis. We're seven years into basically running in place even with acquisitions. I guess my question is, the problems that we talk about-or you talk about on these quarterly conference calls - whatever those interim issues are, we're not making any progress on a yearly basis with this company. The company is not growing. It's shrinking. We're wondering just from a big picture standpoint, what are you guys going to do about that? Because there is value in these individual operations that aren't being realized by this management team.

I don't know that I can argue a whole lot with your opening general comments. Our continued strategy and focus has been to get the best possible results we can out of each of these operating segments and try to benefit from, over time, the broader mix both to give us different growth opportunities. Frankly, it does have some benefit of hopefully mitigating the downside when different issues turn against us as we certainly have seen, for example, in that period of time with the candle business, which in '97 was performing-the glass and candle segment - at significantly higher levels obviously than we see today. Yet the overall impact has clearly been mitigated by the improvement in the food business. We're still sticking with that strategy. As we sit today we are trying to do a variety of things with a lot of attention in each of these segments on both growth as well as cost reduction to hopefully enhance performance of both top and bottom line.

I guess----

I guess to wrap that up, we have a pretty high level of patience and certainly do take a long-term view from this office. I wouldn't want to, on the other hand, say that, gee, things will never be different and never change. We certainly are very aware of the concerns you articulated earlier and know the importance of breaking out of that stagnant trend.

We appreciate the effort as well. We're all on the same side of the desires here. I guess there comes a point-what is your definition of long-term? We you come up on seven or eight years of more-or-less running in place, I think that qualifies as long-term not being able to get the job done. It may be time for an overhaul and maybe realize some value in these enterprises that aren't making progress. Instead of just hanging on to these companies that really are not going anywhere, give them up to somebody that can do something with them and move ahead. That certainly is where we are on the stock.

I appreciate your input. They are things we are thinking about and are concerned about everyday. We hear what you are saying.

OK.

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

We appreciate you joining us this morning and look forward to talking to you after our third quarter earnings release. Hopefully we'll have a little bit better news at that point in time. Thank you again.

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