Marzetti Co (MZTI) 2004 Q4 法說會逐字稿

Good morning. My name is Tonya and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation's 2004 fiscal year conference call.

Conducting today's conference call will be Jay Gerlach, Lancaster Colony Chairman and CEO, and John Boylan, Vice President and CFO. All lines have been place 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 and questions will be taken in the order they are received. If would like to withdraw your question, press the pound key. Thank you.

Now, to begin your conference, 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 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 shares 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 10-K.

Now, here is Jay Gerlach. Jay?

Good morning. Thank you for joining us as we review our fourth quarter and fiscal year 2004 results. I'll make some overall comments and review each of our business segments. John will cover our balance sheet and I'll finish with some comments on the future.

Fourth quarter overall results was sales up 2% and operating income down 21% were not satisfactory. High food ingredient costs not covered in higher pricing, soft automotive sales and continued glass [inaudible-technical difficulties] production inefficiencies were significant unfavorable factors. On the plus side, candle sales increased for the second quarter in a row. During the year, food sales grew nicely in our food service channels, and several retail food categories as well. We also add added a couple of major new customer relationships for our new aluminum truck accessory product line.

In a very difficult year of inconsistent and mediocre demand with sharply higher raw material costs, and increased energy and employee benefit costs, I think our operating teams did a good job providing our customers with excellent service and product quality while continuously pursuing new business and cost productions. I'll go to our segment performance in just a minute.

Capital expenditures in the quarter were $4 million and for the year, 18.2 million. Our greatest spending went to our food segment, mostly for production and packaging equipment and facility improvements. Share repurchases for the quarter were 227,000 shares for $9.3 million and the total for the year was 408,377 shares or $16.7 million. Block repurchase opportunities are few, so we have instituted a modest daily repurchase program. Current shares authorized for repurchase are 320,000 with outstanding today at 35,337,000 shares.

Starting with our food segment, we were pleased to see over 4% sales growth in the quarter getting full year sales to over $639 million, up almost 5% versus fiscal '03. Our mid year Warren frozen food acquisition contributed almost one third of that growth. Food service sales, retail garlic breads, cream cheese dips and croutons were good performers in the quarter and year. We were, of course, disappointed to see the segment's operating income and margins decline for both the quarter and full year, while still a strong 17% operating margin. Material cost increases for the year were about $11 million and for the quarter, about $4 million. Soybean oil and dairy products were the primary culprits. Our new product successes for the year included 6-carb Texas toast, organic ranch veggie dip and organic blue cheese dressing, both acquired good shelf space, as did our new light dill veggie deep. Sister Schubert's bag Parker House Yeast Rolls have been well received as have our new Cardini brand croutons. Successful new products were also introduced to our private label and food service customers. The year ended with our retail mix at 51% versus food service at 49, which is down from 53% retail last year.

The encouraging news from our Glassware and Candle segment was the second quarter in a row of growing candle sales helped by new customers and programs, and better sell-through with certain customers. Glassware sales which remains focused on candle containers and accessories and floral containers, were somewhat stable year over year for the quarter. Total segment sales for the quarter were up 5.5% versus down 8% for the full year. All channels of this segment remain very price competitive, while wax and energy costs are at high and increasing levels. We continued our candle sales focus on the food drug and mass market channels, providing what we feel is the best product assortment, service levels, quality and pricing these customers demand. The segment's operating loss in the fourth quarter and decline in margins for the year were impact by volume, pricing, mix and ongoing glass production inefficiencies, aggravated by quarter end glass production downtime with a major furnace repair. When comparing quarters and years in this segment, please keep in mind the varying impact of LIFO income and prior year plant closing charges. All in all, unacceptable performance for this segment, we have a dedicated and hard working team in this segment, and we are all aware time is of the essence to improve performance.

Auto segment sales declined 5% for the quarter and 7.5% for the year. The loss of a major aluminum original equipment program early in the year had it's last quarter of unfavorable comparisons, and the loss of several original equipment floor mat programs impacted the fourth quarter as well. Partially offsetting those declines was growth from several aluminum original equipment programs and the aluminum after market. Our heavy duty truck, rubber product line also showed growth. Operating income in the segment was down 37% and 31% respectively for the quarter and fiscal year. High material costs, including aluminum, steel, synthetic rubber and plastic resins, plus lower volume and a less favorable mix were primary factors. Significant price competition, severely limits the opportunity to pass on cost increases. Keep in mind this segment's results include the $1 million plant closing charge for eliminating one of our floor mat production facilities.

John, would you give us the balance sheet update.

Thanks, Jay. I'll briefly review several matters this morning involving our June 30th balance sheet and fiscal 2004 cash flows. However, I think you'll find these items to be fairly consistent with what you might anticipate from this morning's earnings release and our previous conference calls. Let's first review some of the major year end balance sheet components. Accounts receivable at June 30th totalled 94,623,000, a $6 million or 7% increase above the levels of a year ago. This growth was due largely to the strength of our June shipments. All in all, our account receivable agings remained in pretty good shape and are comparable to year ago levels.

Turning to the largest component of our working capital, inventories, we saw a June 30th total of $155,076,000 that reflected a year over year decrease exceeding $4 million or 3%. We have worked hard to reduce the inventories in our Glassware and Candle segment, and have seen that segment's inventories reduces about 18% since last June 30th. Inventories in the other two segments have increased, in part influenced by rising material costs. One category of inventory that again declined during the quarter was the pressed glass inventory that has been accounted for under the LIFO method. Most of this inventory was recorded at value substantially below it's most recent production cost. As noted in this morning's release, LIFO income associated with this year's fourth quarter reduction totalled about $900,000, compared to $1.9 million in last year's fourth quarter. For the full year, it's also noteworthy that this income totalled $4.2 million compared to $7 million for all of fiscal 2003. We currently have a LIFO reserve of about $1.5 million left on this inventory, which we would expect to see largely recognized over the next year.

The final balance sheet account to comment on is cash and equivalents, which increased over $35 million this past year to total $178,503,000 as of June 30th. This improved cash posture stemmed from a continuation of substantial cash flows. As cash flows from operating activities totalled $122,469,000 in fiscal 2004. Looking at our non-cash add backs and arriving at this year's cash provided from operations, depreciation and amortization totalled $31,267,000, which is fairly comparable to that of the prior year. Other annual cash flow amounts of note include $18,172,000 for property expenditures, $16,667,000 for share repurchases and $31,769,000 for the payment of dividends. Given what I've shared this morning and our current expectations for fiscal 2005, we believe that we remain financially well positioned to address our anticipated cash needs, whether it be for CapEx, share repurchases or business acquisitions. Thanks again for your participation with us this morning. I'll now turn the call back over to Jay for his concluding comments.

Thanks, John. We enter fiscal 2005 cautiously optimistic about our growth opportunities. The challenges of a very competitive marketplace remain, although there are some expectations of softening raw material costs as the year progresses. Our food segment has several new product concepts being introduced over the next 60 days or so, that should add growth opportunities in the retail channel for us. Food service continues to benefit from the consumer's desire for food away from home, new programs and product opportunities are good in this channel. As in all our segments, we see a consumer wanting more variety of taste and special interests, be they organics, low carb, natural, low fat, et cetera, which combine to give sales opportunity, but marketing and operational challenges. Ingredient costs are already showing a little sign of weakness and given what we know in some of our forward buys on ingredients, we expect greater savings as we get into our December quarter and beyond. We expect our dressing capacity expansion project to be under way soon, which could push total 2005 capital expenditures to the $50 million range.

Glassware and Candles appears headed for a better fall seasonal business, plus an expanded basic program with two major drug chains. We expect to see candle sales to grow for the year. In a continued dumping and subsidy offset act funds are an unknown for this fall with our second quarter likely being when we'll know more. Glassware sales and capacity utilization are heavily impacted by our candle-related needs, plus our continued focus on floral markets. While feeling a bit better right now about our recent operational performance, partially due to the idling of one particularly troublesome machine, we must have further productivity improvements. Rising wax costs and energy costs will be hurdles for the foreseeable future.

Finally for automotive in '05, with roughly two-thirds of our sales to the original equipment market, we will follow the sales trend for new vehicles coupled with the volatility from the impact of gaining and losing programs in this very price competitive marketplace. We continue to pursue both aluminum accessory and floor mat programs in the after market as well. While we may see some savings in metal costs, it appears synthetic rubber and plastic resins could stay high for some time. Our interest in good fitting acquisitions is a high priority, although at this time only one active candidate is in discussion. Share repurchases and dividend levels are reviewed quarterly, with no unusual plans at this time. We would expect to continue our modest daily repurchase activity. We're happy to take your questions at this time. Tonya, if you would like to proceed.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Rob Hill.

Good morning, guys.

Hi, Rob.

Hi, Rob.

In the press release you say in your Glassware and Candle section commentary, you talk about your ability to improve operational performance, will influence your assessment of the segment. Maybe you can just talk about that a little further and what, again, what sort of your strategy, kind of get us up to speed on what's taken place with all the changes that's gone on, especially in glass, and then what the strategy is going forward in terms of, you know, where you're going to participate both in glass and candles, that would be helpful. Thanks.

Well, Rob, first of all, I guess what you can assume from the comment there, and in my comments is, you know, our patience is getting on a very short string at this point in time. We, we've got really-- and perhaps not unusually, two primary areas we're focusing on. Obviously to grow the top line, which is more than likely to come more from the candle side of the business where we do see I think a category that is overall performing maybe a little bit better, certainly not as weak as it had been, some positive things happening on our end, relative to some optimism as we go into the fall season as it looks so far to us. And I think just in general a little bit better sell-through.

I mentioned a couple of expanded programs with a couple major drug chains that will be having some impact for a good part of the fiscal year, and then frankly, if we can keep the candle business showing some positive sales trends, it does offer the opportunity to pull the glass business along with it from the standpoint of usage of containers and to a degree, accessories, which we would hope would help the plant utilization, capacity utilization, and most critical to is that we have some long-term consistent production performance, we did a repair to one of two furnaces in our facility late in the year, couple weeks in June and couple weeks in July downtime that is behind us. We've made some other adjustments on the plant floor and have been seeing some better performance in the plant and the critical aspect now is just to do that day-in, day-out, week-in and week-out. Those are the kind of things I think we can, and have to do ourselves.

The external factors are going to be harder to deal with, the rising wax costs and those are already trending up, but as you see oil at $48 a barrel, I don't know that any of us know what quite to expect in wax costs going forward, if that holds up for a while and likewise, how that spills over into other energy costs, particularly natural gas, which has also been at high levels. But with oil leading the way like that, it won't be surprising to see natural gas move to yet further, higher, further high prices.

Let me just sort of ask, assuming that, let's say the candle business, it seems like you're starting to put a reasonable, let's call it some numbers that appear to be indication of stabilization in the area for you guys, and getting some new programs, what about pulling-- you talk about pulling through some of the glass that is related to the candles, whether it's containers or accessories. How much of the capacity that you have, though, on glass is really directly influenced by that, and how much is sort of other things that, you know, really aren't directly related to the health of the candles business that, you know, you maybe compete with a whole host of guys that don't really, you know, that don't have any relationship to the candle business? Is that a fair question or do you understand the question?

Well, kind of, yeah. I can't really give you, you know, a specific percentage or number of the, the glass capacity utilization that is solely candle based. It is meaningful. If we package it with our floral container business, which we also view as a pretty decent market, I think we do at least get to the point we can say a majority of our volume is going to those marketplaces.

Yeah, I guess I'm just trying to understand there, is there a business here that, you know, sounds like it's been kind of, you know, reworked and shrunk to some degree that a reasonable business that is just kind of related to this niche of the glassware, and maybe that business that's pulled through, or I'm sorry, the candle business has pulled through and, you know, without-- can you make a decent margin with that type of, you know, volume that would be related to that niche, I guess?

You know, we, we, we can't tell you that for sure.

Okay.

Again, what we've got to do is get the plant performance, I think, on the productivity side is just critical to, to working in that direction certainly.

And then can you talk about the, maybe for those that don't watch some of the commodity prices, especially on the food ingredient side, what we're looking at in soybean and dairy and sort of the outlook, a little bit more color on what you guys know and your expertise there? What we have seen prices, and maybe what the markets look like.

Well, soybean oil has definitely come off its peak. It's still at higher levels historically, but off the peak that we would have seen just six or eight weeks ago even, or six to ten weeks ago. We still have, as we of look at our current position, expect unfavorable ingredient cost comparisons definitely in the first quarter. Second quarter maybe still a little bit, and as we get into the second half, barring any surprising changes, we might start to see some savings in ingredient costs versus a year ago. That's, particularly the soybean oil. Dairy-related costs are not as readily forecasted or valued by the commodity market, so we depend on just really input we're getting from our suppliers as to what they expect costs to be like in the future. And we do see some likelihood that those will start to come down off of some peak levels as well, but, again, more than likely into the second half versus this first half.

If I just go through your numbers that you provided, it looks like that ingredient costs, at least on just the food side, raw materials impacted your overall earnings number by like 20 cents for the year versus your fiscal '03 results. Is that, is that kind of correct, just back of the envelope? $11 million or something?

-- I don't know that he's ever had it in EPS basis, but--

I think it's fair to take that $11 million, Rob, that's disclosed in the release and apply a reasonable set of assumptions on the tax rate and the like.

Okay, and then, I mean just trying to get a feel for what potentially could be somewhat of a swing looking out into the future at some point, I guess, in terms of what it could do on the upside as well. So no real question. I just wanted your commentary on that dollar, or per share amount. All right. Thanks, guys.

Thank you.

Sure.

Your next question comes from the line of David Lebowitz.

Good morning.

Hi, David.

Hi, David.

A few questions. In the first quarter last year, did you receive any money from the government on the dumping action?

David, no, we did not.

And secondly, in reading through the press release and your outlook statement, is one to believe that your revenue as we sit here today with the first quarter not quite over, looking flat to down in earnings likewise, or am I misreading the statement?

We're not forecasting specifically sales or earnings, David, for the quarter or the year obviously. So I, I got to leave you guys your own devices there.

Okay. Then let me come at it slightly differently. Which is going to be the toughest quarters year over year to match?

The first quarter is probably the easy answer. I think the second might follow it, but, again, as you look out to the second half, there is still a lot of variables that could change. But first quarter would definitely be the most difficult one, for the reasons we just talked about on the ingredient cost side.

Understood. That's what I was trying to make certain of. Let me say thank you very much.

You're welcome.

Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question is from the line of Greg Spiegel.

hey, good morning, guys. I apologize if you had to answer this already. Hi, good morning guys. I apologize if you answered this already, I had to hop on and off the call. Could you just spend a second and talk about the demand environment, particularly in the candle business, and what you're seeing on pricing.

Yeah, we did touch on that just a little bit and, you know, I think we're moderately encouraged by what we have seen, as I commented on a couple of quarters in a row now, of top line growth and what looks like to be a better fall season as we can evaluate it so far. Pricing remains very, very competitive, so I can't suggest there is any expected price relief on the horizon, although again, with the rise we're seeing in raw material costs, there certainly is justification for it, but I'm not sure if the competition will let that happen.

And is the competition that you're finding primarily from imported product or is it domestic players that--

You know, it's a mix. For a lot of the basic programs that we're dealing with, I would say it's maybe a little bit more domestic actually than import. But the import, importers are a factor and they are certainly a factor in pricing.

Thank you.

You're welcome.

At this time, your next question comes from the line of Jason Rogers.

Hi, Elliott Schlang. Good morning.

Hi, Elliott.

Hi.

Let me ask a few questions, if I may. You referred in the release to several new food products. Could you be specific as to what is being introduced there?

You know, Elliott, actually with a major trade show coming up here in October, that is a key launch point for those, we really can't go to them. They are-- the ones I'm speaking to in this next 60 days or so are heavily geared toward the produce department of the supermarket, but for competitive reasons, we're just not ready to say exactly what they are.

And in the same release, you mention the new customer specific non-food programs. I assume those are the two drug chain programs that you alluded to, or are there other factors in there?

Well, yeah, that primarily as well as, we do have at least a couple of growing new aluminum original equipment relationships going on.

And you refer to, in the glass area, the possible need for further action. Would that include possible divesture?

You know, we have no specific plans, but we certainly are, you know, evaluating our progress very closely with a very open mind.

And in the conversation before, you mentioned the possibility-- the fact that you were losing some programs in the mat area. Are you losing market share? Would you feel, of that market, and are you gaining programs in any sector of that market?

You know, that's-- I think it is fair to say we are losing a little bit of share there right now. It's-- on the floor mat side, as you may recall, we've, we've been a tier two vendor on a lot of that product, and that market is going through a pretty rapid change right now with those kind of relationships, and in some cases it's costing us some programs. In other cases, we may move from a tier one vendor, or a tier two vendor, I'm sorry, to a tier one. And in others where we may stay tier two, but go from one tier one to a different tier one. So it's, it's an environment right now, in the floor mat product line, that is changing almost daily.

In view of the low carb diets, first of all, are you seeing any ebbing in that emphasis and secondly, are you doing any further development as far as taking, moving more toward lower carb products?

You know, Elliott, I think everybody seems to have an opinion as to whether low carb is still climbing or dead. We would probably take the middle ground and suggest it's, it's a factor, but maybe trending down a little bit. We're watching, I think very closely what we're doing with further new product, although we've been pleased with the success we've had with our 6-carb Texas toast. I think going forward, what we're likely to be doing, as I imagine maybe a lot in the industry will be doing, is concentrating more on the overall nutrition aspects of ingredients, rather than just focused heavily on carbs, but the carbs will certainly be a factor going forward. But, but we might suggest or think it's trending down at least a little bit at this point in time.

Thank you.

You're welcome.

At this time, there are no questions.

Thank you, Tonya. And thank you, everybody, for joining us today. We'll look forward to talking to you as we report our first quarter in late October. Thank you.

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