Marzetti Co (MZTI) 2005 Q1 法說會逐字稿

Good morning my name is Tamara and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation first quarter fiscal year 2005 conference call. On 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. If you would like to ask a question during this time, please press star and the number one on your telephone keypad and questions will be taken in the orders that they are received. If you would like withdraw your question, press the pound key, thank you. And 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 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 form forward looking statements include, but are lot limited to risk 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 that are discussed from time to time and in more detail in the company’s filings of the SEC including Lancaster’s repot of form 10k. Now, here is Jay Gerlach. Jay.

Morning and thank you for joining us today, I will be making a few general comments and review our segment performance followed by John’s remarks on cash flow on our balance sheet. I will finish with comments on the future followed by our questions, we are encouraged by our first quarter sales result, our record at $281m, up 6% with all segments up, but challenged by a 9% decline in operating income.

Higher raw material costs with little price release in a common story line in all three segments. Share repurchases have continued following the additional two million share authorization in August with 300,000 shares repurchased in the quarter for $12.2m including an additional 97,500 repurchased during the second quarter today, our actual outstanding is 35,111,000 shares with 2.57 million shares still authorized for repurchase.

Capital expenditures for the quarter were 2.9 million dollars with our salad dressing capacity expansion project to get under way this fiscal year, we still project fiscal year 2005, total capital expenditure of $45 to 50 million.Exact timing of this project and other smaller projects could put this range on the high side.

Specialty foods sales growth for the quarter of four percent was helped noticeably by the Warren Prosen Foods (ph) acquisition. We also saw growth in both our retail and foods service channels. Our better retail categories in the quarter were veggie and food dips, croutons and frozen garlic bread, while dressings especially branded and private labeled curables were soft.

Ingredient costs, primarily soy bean oil and cream are still unfavorable versus last year. The impact has been over $1m in the quarter. We still think a favorable comparison could be noticeable in our second half of this year, barring any significant unfavorable change in market conditions.

Volume growth, mix, good plant operations, helped us grow operating income four percent and maintained the same 17% operation margin this year.

Our glassware and candle segment delivered a strong 13.6% sales increase for the quarter, this was our third consecutive quarter of candle sales growth, largely due to the candle growing again, better sell through of our existing customers and new programs and customers. We have maintained our focus on everyday candle for the food drug and mass channels. Operationally, candle making capacity utilization is up and glassware operating efficiencies have improved noticeably in the last eight weeks. Raw material and utility costs continue to move higher, especially for wax packaging and natural gas. Market conditions remain very competitive which severely limits our ability to get any price relief.

Automotive sales growth came from our aluminum accessories and heavy duty rubber product lines while floor mat sales declined due to the loss of certain programs. Pricing remains very competitive, while numerous raw materials are up significantly in cost, namely aluminum, steel and synthetic rubber. I will now let John comment on our balance sheet and cash flows.

Thanks Jay. My initial comments this morning relate to several of the more notable line items within our September 30th balance sheet. First our accounts receivable balances totaling $115,764,000 at September 30th, were approximately $21m higher than at June 30th as well as $10m greater than as of last September.

By and large, the comparative increases were certainly influenced by the record level of consolidated sales occurring within the most recent quarter. However an additional factor was the extended sales increase attributable to the glassware and candle segment.This segment’s sales tend to have much longer payment terms and therefore, they hire a mix of such sales will tend to increase consolidated receivables all else being equal.

With respect to our inventory, the September 30th total of over $154m was relatively consistent with that of this past June compared to last September, we achieved an eight percent of our $14m decrease, as prompted by our focus efforts over the past year to reduce various inventories within the glassware and candle segment.

On the other side of our balance sheet and liabilities, you will notice that our crude liabilities increase in excess of $13m since June 30th. This increase principally resulted form a larger accrual for federal income tax. Otherwise I believe that you will find the changes between June and September balance sheet announced have been relatively unremarkable.

Certainly one constant that is in the balance sheet strong and flexible overall financial conditions we remained debt free during the quarter and held over $168m in cash and equivalents in September 30th and exceeded $585m in shareholder’s equity.

Turning to cash flows for a moment, cash flows from operation activated from the quarter, totaled $13,801,000, this amount is fairly comparable to the $15,725,000 provided during last year’s first quarter.

One specific component of the quarter’s cash flows that you may find adventurous is the depreciation and amortization that totaled $8,499,000 which compares to $7,432,000 recorded a year ago.

As Jay referenced earlier, other cash flows to note for the quarter including capital expenditures at $2,866,000 in share repurchases of $12,227,000. And looking toward our upcoming second quarter results we wanted to remind you of several items that were included in light of out pre tax income during the second quarter over of a year ago.

First we recognize income in last year’s second quarter, totaling approximately $1.2m pre tax, or two cents per share after taxes, relating to a bad debt recovery. We also recorded pre tax income, totaling approximately $1m for about two cents per share after taxes, related to the liquidation of LIFO (ph) inventories.

Finally last year’s second quarter reflected income recognition of the US government’s $2m re-vetted to us under the continued dumping and subsidy off that act. This income translated to approximately 3 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 remains and do not allow us to estimate how much, if any funding may be allocated to us by the customs and border protections service this year. And as we have previously disclosed, the longer term liability of this program remains very uncertain. I appreciate your attention this morning, I will now turn the call back over the Jay.

Thank you John. Entering our second quarter, we are cautiously optimistic about our seasonal demand. Veggie Fruit and Apple dips plus Sister Schubert's dinner rolls and candles should all benefit from the holiday season.

Actual orders and reorders of course will tell the story. We are in a much better position to support our Sister Schubert’s demand versus last year when our plant expansion was finished behind schedule. Candle sales could have another growth quarter if sell through at retail holds up.

New food items have been very well received by the trade and will likely generates some sales in the second quarter, those include Buffalo Ranch and Bacon- Tomato, Veggie dips, Vanilla Flavored Yogurt Fruit dip and Bistro Blue Cheese and South West Caesar salad dressings.

Material costs will still be a factor, although food ingredient cost comparisons should begin to improve, packaging aluminum steel are likely to be just as high or higher. Good consistent plant performance will also be very important.

We expect stock repurchases to continue at a similar pace in the future, repurchases of 397,500 shares in our first four months compares to 408,377 shares in all of fiscal 2004. Keeping in mind our 41 year record of increased cash dividends, our future dividend rate will be thoroughly discussed at out annual meeting in about two weeks.

I am happy to see across the board sales growth. We remain concerned with the low level of profitability in our non-food segments, cost reduction efforts are on-going as are identifying opportunities to implement price increases to mitigate the impact of our raw material cost increases.

Good fitting food acquisitions remain of interest to us and while the number of opportunities to consider is good, no serious talks are presently under way. We are now happy to take your questions. Tamara if you want to go ahead with that.

Tamara we are ready to do questions.

(Operator instructions). Your first question comes from David Sleivowhich with Guardian.

Congratulations on a strong quarter.

Thank you David

Turn to the non-food part of it fist and just ask how far away form acceptable margins are we in first automotive and then in the house (inaudible) group?

Well, David I cant really give you a specific number but we would certainly think longer term at that glass and candle segment should have penciled it in the double digit area.

The automotive segment an little more of a challenge probably somewhere in the mid-uppers single digits is more realistic there and in first conference call you had said that the clock is ticking as to the a determination on what automotive and perhaps staying in that field or otherwise. Is there anything you want to report on that?

No we don’t have any kind of deadline set or anything but we are very close in monitoring our progress and the issues we are dealing with in those segments.

Okay and turning to food, in the last conference call you indicated you were looking at perceptual acquisition, is there anything to repeat on that score at the moment.

Not that actually has been pushed on the back burner form the seller side, at present the relationship is still there but the dialogue is inactive at the present time.

Okay and lastly as we look through the next three quarters where is going to be the toughest comparison year over year?

You know David I am not sure we can say that with certainty of course but primarily going to I think our expectations on food and ingredient costs starting to mitigate in the second half, we would probably still have to say the second quarter as we might see it right today as the toughest.

Thank you very much.

Sure

Our next question comes from George Hasky with Lake Megan (ph)

Hi Jay, Hi John. Really on the food side, the dressings, you referenced to dressing as soft, you referred to (inaudible) I believe, is this something going on in the food service or customer movements?

No George that was specifically referring to our retail dressings and both are branded and private label retail dressings and they just had a soft quarter.

Is there competitive activity going on there that we should know about?

I don’t know that it is significantly different that what it has been in the past, the effectiveness of some of our plans may not have been where it was expected and we are visiting that right now.

But that does not change you situation for building a plan

No it does not. No

Alright. Great. Thank you.

You are welcome

If there are no further questions we will turn the call back over to Mr. Gerlach for closing remarks.

Just to make sure Tamara, if anybody else does have any questions.

You can press start one on your telephone key pad to ask a question.

If not, we do appreciate you joining us today, always happy to talk to you if you have any calls between calls if you do have any questions so we will look forward to talking to you as we record our second quarter late January. Thank you for joining us today.

(Operator Instructions)