Marzetti Co (MZTI) 2005 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Lancaster Colony Corporation second quarter fiscal 2005 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 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, simply press the star and the 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. Now to begin your conference is Earl Brown, Investor Relations.

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 Boyland, 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 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 cost, 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 and thank you for joining us today.

After my general comments and a segment review, John will discuss our cash flows and balance sheet. I'll conclude with comments on the future and then we will take questions.

While reported net income and earnings per share looks for the second quarter looks good, our operating performance without the benefit of Continued Dumping and Subsidy Offset Act funds was below our expectations. The best news was still good sales growth in our Specialty Food segment, up about 8 percent.

Before reviewing each segment, let me update you on share repurchases, which were 261, 689 shares in the quarter, for $11.1 million, including 105,156 shares repurchased so far in the third quarter. We have repurchased 666,845 shares year-to-date, and have 1,708,000 shares still available for repurchase and 34,885,900 shares outstanding.

Capital expenditures for the quarter were about 6.7 million including some initial costs for our Marzetti capital expansion project. Full-year capital expenditures could reach $35 million. We are also pleased to raise our quarterly dividend rate 8.7 percent to $0.25 for the dividend paid December 30, 2004.

Segment performance was led by Specialty Foods with sales up 8 percent. A little over 1/3 of that contributed by the December 2003 acquisition of Warren Frozen Foods. Sales growth was also helped by national account food-service business, a good veggie dip season, good New York brand Texas Toast sales, and strong Sister Schubert's frozen roll sales.

While ingredient costs were not much of a factor, less favorable sales mix in production inefficiencies in both of our frozen bread operations continued to the -- contributed to the weaker margins and relatively flat dollar earnings. Also contributing was somewhat higher promotional costs. We are moving quickly to address the manufacturing cost challenges.

Moving on to our Glassware and Candle segment, we experienced weaker glassware sales and after three quarters -- three growth quarters, our candle product line sales also declined in the December quarter, leading to the segment's overall decline of about 7 percent. Strong interest in our opening price point candle merchandise, hurt both sales and earnings as this is typically our lowest-price product. We continue to operate in a competitive market place, while material costs trend up and energy costs stay high. Positively, actual glass plant operations are showing improvement.

The good news in our Auto segment is that it still showed an operating profit and we landed some new aluminum accessory business. Sales were unfavorably impacted by the loss of more than one original equipment format program, while aluminum accessory sales grew. Material costs are a major challenge particularly aluminum, steel, and synthetic rubber. Pricing is very difficult, especially in the original equipment market.

John will now comment on cash flows in our balance sheet.

Thank you, Jay.

My first few remarks this morning will address some of the noteworthy changes in our consolidated balance sheet, and then I'll conclude with comments on our cash flows that may be of interest.

First, as of this past December 31 are our net account receivables totaled $109 million which is approximately $14 million greater than our June 30 balance. This increase was largely influenced by the seasonal timing of our glassware and candle sales. Compared to the accounts receivables of a year ago, the current-year's balance is only about $3 million greater.

Turning to inventories, which totaled roughly $143 million at December 31st, a $12 million decline has occurred since last June with a $8 million or 5 percent reduction achieved from the year-ago total. The latter decline was accomplished through planned reductions in glassware and candle inventories.

With respect to our glassware inventories, over the last two years, we have been disclosing the amount of LIFO-related income being derived from the reduction of certain pressed glassware lines carried at substantially lower prior year's costs. Those inventories have now become much smaller, and at least for the second quarter, the LIFO-related effect of their further reduction was essentially immaterial to our results.

On the other side of our balance sheet in liabilities, you will note that accrued liabilities totaled nearly $62 million at December 31st, an increase of over $16 million since June 30th. Most of this increase simply resulted from larger accruals from corporate income taxes as influenced by various factors, most notably, the size for the CDSOA distribution received in December. As Jay alluded to earlier, this year's CDSOA distribution totaled over $26 million, $0.47 per share, compared to last year's remittance of $2 million, or $0.03 per share.

As we've disclosed in the past, the Offset Act itself remains subject to some fairly well-publicized political controversy. Accordingly, the amounts, if any, we may receive in the future, remain not subject to reasonable estimation. At the very best, we do not expect to receive another payment before the last quarter of calendar 2005.

With regard to our cash flows, cash flows provided by operations during the six months ended December 31st, totaled $74.772 million compared to $56.129 million last year. The increase is primarily due to the extent of the higher level of net income during the most recent six months.

Depreciation and amortization during the first six months of fiscal 2005 amounted to approximately $16.865 million. This amount is relatively consistent with the prior year six month total of $15.322 million

Capital expenditures during the most recent six months were $9.583 million and our share repurchases were $23.304 million The strength of these cash flows for the past six months has resulted in a continuation of a very solid balance sheet. At December 31st, cash and equivalents exceeded $204 million. Shareholders' equity exceeded $605 million, and we do remain debt free. At this point I'll turn the presentation back over to Jay so he can conclude our prepared remarks

Thanks, John. Looking to the third quarter.

Positive opportunities should include favorable food ingredient cost, select pricing relief, and frozen bread operations. Higher bread and nonfood costs, high energy costs and some capacity utilization issues remain. And we are working diligently to offset these challenges through cost reductions where ever possible.

Our most exciting news this quarter will be the roll out of our repackaged, reformulated Marzetti brand refrigerated salad dressings. Not actually in stores till late this quarter, we are looking forward to this new program launch.

We have also been pleased with our new veggie dip items, Bacon Tomato and Buffalo Ranch, which are getting on many store shelves Our new yogurt fruit dip is also getting a good reception. Also getting good exception -- acceptance -- is our new line of Marzetti brand of salad accents, just reaching store shelves, in Asian Sesame, Bacon Almond Crunch, and Fruit Nut Lover favorites.

As the Texas Toast category leader we are just now bringing our latest version, Jalapeno Cheese to market.

We continue to see good acceptance of our Sister Schubert's brand frozen-dinner rolls in a 10-piece resealable bag. Other new items being introduced this month and next, include Blue Cheese Slaw Dressing -- Blue Cheese Slaw Dressing and our Sister Schubert's microwavable sweet rolls.

We also have some new upscale candle products going on store shelves this quarter, and we are getting positive feedback on our seasonal line for next fall, being shown now.

Aluminum truck accessories should continue to show sales growth as existing and recently-added programs continue to grow. On the acquisition front, it sounds like this year could bring interesting candidates to market. We remain very interested in good fitting food acquisitions, and certainly have the resources for the right opportunity. We also expect share repurchase activity to continue. At this point we're happy to take questions. April, if you would like to go ahead?

Thank you. At this time, I would like to remind everyone in order to ask a question, please press star and then the number 1 on your telephone key pad. Please hold. Your first question comes from the line of Nick Compris [ph] with Alpine Investment management.

Hi guys.

[voices at once] Good morning.

The food business, you talked about it being more competitive today than it was ten years ago and yet, I look at your numbers over the last five or six years and they have been excellent, 9 percent operating income growth since 1998. My question is, given a more competitive environment, do you think you can continue with these numbers?

That obviously is a tough question and partly given the fact that we don't specifically forecast future numbers. I think if we can continue to develop good, exciting new product hopefully even at the extreme of developing some new categories, as we have done in the past with our veggie dip line and Texas Toast as well as you know, the every day aspects of high quality, good service, good operations, you know we would expect that we could continue to be a very solid player going forward.

There are certainly changes in the industry going on daily on a macro scale, but you know, it can always have an unexpected impact and the competitive side of the business can always change somewhat as well. But we do think we have got a good product assortment. Good assortment of brands. Good management, so, yeah, I think we are pretty positive about the future.

Candle and glassware on the other hand, it is amazing to look at '98, kind of a high watermark year and how good specialty foods have done and that business, of course, has changed dramatically and automotive has always been a smaller part of your business. My question is, with those businesses, can they be resuscitated, for a lack of a better term, and what would be some realistic operating-margin objectives for the those businesses?

Well, we are certainly working hard trying to improve them from where we sit today. I think you know, the encouraging side of things, though not as relevant in the segment, compared to the numbers in the quarter. due to maybe some unusual items going on last year. But the -- I think the growth we are seeing at least on a year-to-date basis, while not showing product line growth in candles in the quarter itself, for the six months, it is up. We would look back over the calendar year. It is up some as well.

You know, we continue to, I think, make progress in that product line and in the opportunities out there. We are focusing the glass business very much on service and our candle-related needs of containers and accessories as well as continuing to focus on the floral category where we have a very strong presence and then operationally making some progress -- continued progress on the glass operations side.

So, yeah, I think we can improve again from where we are but not forecasting margins other than to say the margins we saw in the late '90s are probably not achievable again. That was perhaps a pretty unique time in the candle industry that we were able to be a significant beneficiary of.

The automotive side of things is perhaps a little bit more problematic with the challenges of the customer base being the biggest factor. Longer-term material costs, usually fluctuate up and down. They are at high levels today. We would anticipate that at some point there would be some relief from that, although we aren't seeing signs of that yet. But even longer term, the challenges will be with the continued cost pressures on the entire vendor base for the original equipment market. So, our ability to execute and continue to get cost out and still meet all the customer requirements in that market place will be a big hurdle. And you know, we got to do a better job there than we are doing today.

So, the -- you know, I mean, I don't think -- I certainly wouldn't expect a return at a late '90s margins on glassware and candles, but does that business have a potential for double-digit margin, or would that be overly optimistic?

Again, without trying to cross the line of forecast in here, I would like to think that's not overly optimistic. But on the other hand, I don't know that it is going to go way into double digits.

Thanks very much, guys. Good luck.

Thank you

Your next question comes from Rob Health [ph] with the D.C. Area Management.

Good morning. Jay and John.

Hi Rob.

Good morning, Rob.

Maybe you could get a little bit more specific on -- let's see, what were the products that sort of give you the less favorable sales mix in the specialty foods area, and maybe a little bit more detail in what happened to the frozen broad in terms of the inefficiencies, and how much that cost you?

Yeah, there is maybe a little overlap on the frozen bread side. The two mix issues is, one, is food service versus retail where we continue to see the overall mix of the business inch over to the food service side which is a lower-margin part of the business and then within the retail side of the business, some of the individual product line mix was skewed a little bit to the lower margin. Somewhat a little bit lower margin product categories. I rather not name the specific lines that are above or below.

But in most cases that was within this frozen-bread assortment of both the Sister Schubert's dinner rolls and the Texas Toast. The operational issues were related to a couple of different things. One was in the Texas Toast production facility where we had some down time relative to some replacement of some equipment that ended up taking a little bit longer than -- than planned.

And then on the frozen dinner roll business, the Sister Schubert side, some pretty good growth in that business. Some equipment that has been installed a year ago, and not quite ramping up to the levels of operation we were trying to drive it at peak part of the season in November and December. So those are both issues that hopefully we are adequately dealing with and will get behind us pretty quickly.

Can you quantify -- you know, general whereabouts, whether it was $1 million. $500,000, $300,000, in terms of cost.

You know, you are probably getting into at least the low-seven figures.

Okay. That's helpful, thanks.

Sure.

And let me just -- Let me take a bigger-picture look at the specialty foods item. It varies and, obviously, you have variable factors such as, obviously, these type of things, as well as -- as well as t he ingredient costs that have you know, been very cyclical or very inflationary lately. What do you think the general margin -- are we -- is there -- is this a 17ish, mid-17ish- type margin business, or, you know, in the past you have done even at think 18 or 19 percent? You think -- you feel like there is no real change or you feel you are confident you can kind of get back there once these things sort of base that you've talked about?

Again, Rob, it is hard to try to pin it down to even a narrow range. I think in the past I've used a relatively broad range over a longer term, of -- you know, in the 15 to 20 percent area--

Ok.

-- but, you know, obviously material costs play a big factor. Certainly growth, and then, you know occasionally, fortunately we don't have it too often, some of the production efficiency issues, that might pop up.

Did the ingredient costs -- were they favorably comparable over last year? How did that look second quarter over second quarter last year?

They were actually slightly favorable.

Slightly favorable and I take it the forecast in the next six month at least where we are at right now and in the big important ones, they are going to be favorable?

Should be more favorable as we go forward in the next two quarters.

Ok. That's all I have, thanks a lot, guys.

Sure. You're welcome.

Your next question comes from George Askew with Legg Mason.

Good morning Jay, John.

[voices at once] Hi George.

Let's see a couple of my questions have been asked already. But on the -- you know, on the nonfood material costs, you know, packaging, freight energy, are there techniques that you can use use to manage those costs? going forward? Hedging, or forward buys or things? Any opportunity for relief through those type of tactics?

I will let George chime in if I am overlooking something anything we do in forward buying the nonfood area would be in energy cost, natural gas, we will do a little bit of that. But the other cost synthetic rubber and aluminum steel we have been talking about, now, I know their only opportunity would be if you want to buy a quantity and bring it in-house, and inventory it. We are not inclined to do much of that.

The low-carb trend. During the quarter, did you see -- you know -- any lift for example in some of your carb-heavy bread categories that you could attribute to the low carbs going away? And how do the comparisons look over the next couple of quarters versus any impact you may have had a year ago?

George, we would have to at least attribute it to the lower level of concern about carbs. but I can't quantify it. But we did see good performance out of both of our primary-branded bread product lines. So, we we had have to take at least part of that is due to less carb concern.

Am I right that it looks like, organically, it looks like food grew 5 percent when you back out the $5 million revenue impact from the acquisition?

I think that's fair, yeah.

Then lastly, you mentioned the mix of bread had moved a little bit toward the food service, you know, channel. Is there a strategic goal of doing that, or was it just -- was there -- was there a customer win? Was it something unusual in the quarter that resulted in the food service mix?

Actually, George, I was making that comment in reference to the entire segment--

Oh, okay.

So no, I don't think really we saw that specifically on the bread side.

Oh, okay. I see.

I would add, George, that as part of that mix, the acquisition we did last December is food service in orientation. Just by its addition it will contribute to the overall mix tipping more toward food service.

Okay. Well, good, those are my questions. Thank you.

You're welcome.

Your next question comes from Gregg Halter with LJR Great Lakes.

Hi guys. Good morning.

Good morning, Greg. Hi Greg.

I think on the last call, you had mentioned that capital spending might be 45 to 50 million for the year. I think John, you had mentioned you are looking at 35 for this year. Some of that being pushed out or -- can you provide some background regarding that?

Gregg just a little more clarity to the actual timing of some of the expenditures relative to the Marzetti expansion project is probably the primary factor there. We might also be running a little by the timing wise behind where we thought we might be, as well. Not significantly as it relates to the project and the need to bring it on stream to service business, but just as it relates to the actual timing. But, other than that, John, I don't know if there is anything you would add there. I think our Cap Ex in the non-food areas continue to continues to be under you know, pretty tight scrutiny and we are watching very carefully what we are doing there.

Is that Marzetti facility -- is it located in or around Columbus, correct?

No, actually it is in southern Kentucky.

What's the hopes out of that facility? Is it greater capacity or better efficiencies or how do you see the new facility?

It is capacity for growth and just the fact that it will be new, it should be more efficient. Geographically, it is in a spot to help us serve a little more cost effectively, that part of the country.

Thank you.

Sure.

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

Thank you for joining us this morning. We appreciate your attention, and we look forward to talking to you when we report third quarter here in another three months, or so. Thank you.

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