Marzetti Co (MZTI) 2004 Q3 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Lancaster Colony Corporation third 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 number 1 on your telephone key pad, 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, here is Earl Brown, Lancaster Colony Investor Relations.

Good morning. Let me say thank you for joining us today and please bear with me while we take care of a few 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 undo 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 the 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.

Now, here is Jay Gerlach. Jay?

Good morning. Thank you for joining us today to review our third quarter of fiscal 2004.

We are pleased to report almost 4% sales growth in very competitive market conditions. Our specialty food segment's double digit sales increase generated all of our growth in the quarter.

Operating income was down about 12%. Specialty foods delivered the only earnings growth.

While not happy with our non-food segments performance, we are making money and generating cash in both automotive, and glassware and candles. Efforts to reduce both costs and capital utilized in both these segments are ongoing.

All of our segments are dealing with rising raw material costs and the continued presence higher energy costs. Lack of plant utilization was a factor in our non-food segments.

Here are just a few general comments before I review each segment.

Capital expenditures for the quarter were $3.4 million, as we particularly watch our non-food spending. Share repurchases for the quarter were 88,461 shares for $3.7 million. As in recent quarters, availability was not significant.

Due to our reduced capacity utilization in floormat production, we are idling a relatively small factory in Waycross, Georgia and relocating that production to our primary facility in Ohio. This will result in fourth quarter expenses which we estimate at about $1 to $1.5 million dollars, much of it noncash.

Turning to our food segment, we were pleased to see an 11% sales increase without much benefit of price increases. I think our sales and marketing team did a good job of executing their plan, but keep in mind the earlier Easter helped our comparisons a little. Sister Schubert's frozen dinner rolls and our New York brand Texas Toast both benefited from the earlier holiday.

Our Warren frozen foods acquisition added almost $5 million in sales for the quarter. Our food service dressing and sauce product lines and retail produce department and Texas Toast lines were all good growth contributors.

Carb watching is still very much a factor, and our offerings of 6 carb Texas Toast and 1 carb salad dressings are getting on the shelf with very early sell-through feedback being positive.

Volume and mix helped off set high ingredient costs so that we were able to show a modest operating income gain for the segment.

In addition to high soybean oil costs, our dairy based ingredients jumped up noticeably toward the end of the quarter. Sour cream and cheeses used in our dressing and dips looked to be at even higher levels in the June quarter. Soybean oil will also likely be more unfavorable in the fourth quarter than the third.

Automotive was our most difficult segment in the quarter, as lower capacity utilization and a less favorable sales mix helped push operating earnings down significantly more than the 7% sales decline. Weaker original equipment volume impacted both maps and aluminum accessories. Higher raw material costs are also impacting this segment, as synthetic rubber, steel, and aluminum have been moving up.

We were encouraged by the more modest sales decline in our glassware and candle segment of 3%. Candle product sales were up modestly during the quarter, hopefully a sign of their sales bottoming out. Glass product sales were obviously off.

We have had success at cost reduction initiatives for candle production, although rising wax costs are mitigating these savings. Glass costs are hurt by below standard plant performance and high natural gas costs.

Let me ask John to make a few comments regarding our balance sheet and cash flows.

Thank you, Jay.

My comment s on our balance sheet and cash flows this morning will be fairly brief, as we really had few major changes in trends to share since our last call.

Speaking first to our accounts receivable, Lancaster's consolidated accounts receivable at March 31, 2004, totaled $106,195,000. This amount represented an increase of approximately 20% over the June 30, 2003 balance of $88,583,000. The relative strength of our volume in March led to this increase.

If compared to the accounts receivable level as of March, 2003, the most recent March balances increased about 5%, which is fairly consistent with the quarter over quarter sales increase.

With respect to our inventories, the consolidated total of $148,852,000 at the end of this March was down over $10 million from the level of this past June and down over $4 million from March of a year ago. We continue to focus on reducing inventories in our glassware and candle segment.

On a related matter, as noted in this morning's release, we continue to reflect income associated with the liquidation of certain glassware inventories accounted for under the LIFO method of accounting and that are carried at substantially lower prior year's cost. The associated LIFO income recognized in the most recent quarter was approximately $800,000, compared to $2.4 million a year ago. Going forward, we anticipate these amounts will become smaller on a year-over-year basis as the related inventory is sold down.

With the exception of our cash balances having increased $17 million since June 30th, I believe the other changes in our balance sheet components are relatively unremarkable. We remain debt free, with nearly $160 million in cash, and we finished the quarter with over $583 million in shareholder's equity. This balance sheet strength certainly leaves us in an excellent position with respect to considering future business acquisitions and pursuing additional share repurchases.

In concluding my remarks, I might also make mention of a couple other cash flow items for your consideration.

For the nine months ended March 31, 2004, Lancaster's consolidated cash flows provided by operating activity totaled add $81,703,000, compared to $123,006,000 for the preceding year's nine month period. Within the current fiscal year's amount, depreciation and amortization totaled $23,183,000 million. Property additions have totaled $14,192,000, with share repurchases having totaled $7,381,000.

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

Thank you, John.

As we begin the final quarter of our year, we are encouraged by our top line presence in the specialty food segment but yet concerned with the ingredient cost situation. While higher pricing may be possible in the future, I don't think it will help much in the fourth quarter.

Our biggest challenges in the non-food segments continue to be a very competitive marketplace and lack of capacity utilization. We are pushing hard every day for sales and further cost reductions.

Our floormat plant consolidation will not have much fourth quarter impact.

Acquisition wise, our focus remains on food opportunities. Our salad dressing capacity expansion project will likely get underway late this fourth quarter.

We have very focused sales efforts today in all our product categories, with the greatest near term success and opportunity being in the produce and frozen bread department for the supermarket, custom formulated dressings and sauces for the food service channel, and everyday candles for the mass, supermarket and drugstore channels.

We are striving for the best possible finish to a challenging year.

Stephanie, we are ready to take questions.

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

Your first question comes from David Liebowitz.

Good morning.

Hello David.

When we look out to the new fiscal year, which is it going to be the toughest quarter with comparisons as they are shaping up right now?

David, jeez, that's a tough call, I'd probably just because of the seasonality to it, have to, you know, say our second quarter, I think. There is also the potential, I suppose, if these ingredient costs stay at high levels and keep going up, that that comparison could be more unfavorable that quarter than later quarters.

Second of all, have you increased the amount of couponing you are doing right now as you introduce your new products?

I don't think significantly if much at all, really.

And lastly, as a percentage of total revenue, what would you expect new product sales to represent this year and any guess for next year?

Well, David, I don't have that number in front of us, and it can be pretty hard to track. So I would rather not take a stab at that. Frankly, probably a little less so than prior years without a real blockbuster category in the food business, new category growth going on.

And just one last question if I may, are we close with any potential acquisitions or anything that you might be able to close in the fourth quarter?

Yeah, I wouldn't say close, anything in the fourth quarter would be you know, pretty unlikely at this point. But there are an active conversation or two going on right now and there's probably a remote chance something could happen then, but I'd say that'spretty doubtful.

Okay, thank you. I will get back with you and let others ask questions.

Thanks.

Your next question comes from the line of Greg Halter.

Hello, guys.

Hi Greg.

In the last period, you talked about the labor strikes in California and several other places impacting results. Can you give us an update on what happened there in the quarter?

You know, the strikes, I think the ending day was February 29th. The business has come back online, obviously. We have not seen what we would describe as any windfall of huge restocking orders or anything like that, but the volume is coming back on the West Coast and did not create any unfavorable comparisons for us in the quarter.

Okay.

And you mentioned the early Easter helped, can you quantify that at all.

No, I can't really on that, Greg, I think until we get -- and I am not sure we can quantify exactly at any time, but until we get through this month and then look back at March and April. We may have a better feel of that.

Okay.

And I believe on the last call as well, you mentioned something about a possibility of a bad debt recovery. Did anything occur there in the quarter?

Gregg, this is John.

Yes, we did get a bad debt recovery, it amounted to roughly $700,000. It's reported in the glassware and candle segment. Unfortunately, we also had a higher level of bad debts in that segment of the quarter, and that, combined with additional Sarbanes-Oxely compliance costs, largely wiped out the benefit of that recovery.

Okay, but that's in your numbers?

That is in the numbers, correct.

And basically offset one with the other.

Roughly, that is correct.

And do you have the figure for goodwill and other intangibles at the end of the quarter?

That is $84,047,000.

Okay.

And my last question deals with cash flow year-to-date, you're at $81, $82 million versus $123, which is a fairly significant drop. Can you elaborate on what the components behind that drop are?

That's a good question. I should have clarified that a little bit more.

Obviously, what we have for the nine months is a fairly significant decline in net income and that's the primary driver. If you recall a year ago, we had the large receipt of the CDSOA funds, and that makes up the majority. The year-to-date cash flows isn't too far different from taking net income plus D&A for the nine months.

If you took the CDSOA out last year, what would the number have been, approximately?

I don't have that handy. Obviously, you also have to take out CDSOA -- to do a comparison, you have to take the CDSOA of this year out.

Right, which was a lot smaller, though, correct?

That is correct.

Okay. Alright, I think that I have the data to be able to do that as well.

If you have any questions, don't hesitate to give me a call.

Alright, thanks.

Your next question comes from George Askew.

Hi Jay, hi John.

Good morning.

I hope you can hear me all right.

Sure.

Three quick questions.

You mentioned your low carb new product introductions. Can you give us a -- you know, characterize what the low carb diet trends are doing to the core business? Have you seen, you know, can you quantify what kind of impact you have seen there.

George, we can't quantify it but I do think we are definitely seeing it and probably see it particularly in the frozen bread category and maybe a little more actually over on our Sister Schubert's brands dinner roll product versus the New York brand Texas Toast.

Do you feel like your -- I mean, are your competitors, you know, how are they responding as well as yourselves? I mean, do you see any degree of desperate pricing, or, you know, promotional activity? Or anything of that nature going on as the categories are being impacted?

Nothing that I think we would describe as that. And in the Texas Toast category, I think we have at least been the first to market with a lower carb Texas Toast product. And in fact, I am not aware of any of our competition of having a similar product on the market.

Obviously there is a whole lot of lower carb product across the entire food spectrum going on today and there is definitely a consumer base out there that is very interested in that still.

Right. Good.

On the higher commodity costs, including energy, what can you do from a hedging forward buying type, you know, strategy to protect yourself there.

Well, George, we do do forward buying in both natural gas and certain food ingredients, particularly soybean oil. What I think we, as more and more of the industry is faced with today, is we have now seen these costs go higher and last longer so forward contracts that were entered into a while ago are starting to drop away, so we continue to see a little bit, if not noticeably greater impact from the cost. More so on the food ingredients than the natural gas. It's now been at higher levels for an even longer period of time?

Right.

And then lastly, on the M&A market, looking at the economy, how rates, you know, appear to be back up a little bit just recently. How would you characterize the M&A market for food properties? Is it warmer, you know, more active than it was, say a year ago, is it less active? You know, any characterization there?

I do think it is somewhat more active. I also think, you know, value expectations have probably inched up a little bit. Maybe driven as much by the private equity interest in the whole sector as anything.

Okay. Well good, thank you very much.

Thank you.

I would again like to remind everyone, in order to ask a question please press star, then number 1 on your telephone key pad.

Your next question comes from David Liebowitz.

A couple of totally unrelated issues.

First, the K-Mart re-upping their contract with Martha Stewart, does that have a positive impact on your housewares and glasswares?

In the sense that it doesn't create a negative environment, probably yes. Just exactly what that means for how they'll move forward obviously remains to be seen in the categories we're involved in, which -- primarily candles and a little bit of glass. But I think we'd take that certainly as a positive development.

And second of all, last year there was a large recovery on the dumping issue of glassware, and I was wondering whether or not there's going to be any government moneys coming to you based on that this year.

That was actually candles.

I meant candles, I apologize.

David, and the large amount was in fiscal '03, a smaller amount -- much smaller amount in fiscal '04, although still sizeable dollars.

As we look to any further distributions, it is just still an unknown, there are a variety of variables, both as it relates to the legislation itself that's created this opportunity, and certain legal challenges going on out there relative to it today. So we just -- we don't know whether there will be another one and if there is another one, know how much that may be.

And continuing with the two areas of weakness, automotive and glassware/candles, are there any substantive issues that might change over the next 12 month that would give you cause to believe that in '05 these two areas could perform in better than in '04, both top and bottom line?

David, we certainly would like to think so. And it probably needs to be, for the most part, volume driven, which there is always the potential in -- frankly, in any of our segments but maybe more so in this one, that the new programs can't have a significant impact because they can be quite sizeable. And I can't tell you we have got confidence that that could happen for us, and there is also, obviously, the reverse that could happen as well and that you could lose any one or more of those. But we are very aggressively, you know, pursuing new business opportunities in both the original equipment and the after market of both floormats and aluminum accessories.

Thank you very much.

Thanks.

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

Thank you for joining us this morning. We'll look forward to talking to you mid to late August as we report the full fiscal year. Thank you.

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