Marzetti Co (MZTI) 2005 Q3 法說會逐字稿

Good morning, my name is Julianne, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation Third Quarter Fiscal Year 2005 Conference Call. Conducting today's call will be John Gerlach, Lancaster Colony's Chairman and CEO, and John Boylan, Vice President and CFO. [OPERATOR INSTRUCTIONS] And now to begin your conference here is Earl Brown, Lancaster Colony, Investor Relations. Please go ahead Mr. Brown.

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, 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 extend 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, thank you for joining us today to review our third quarter results. After my comments on the quarter, John will review our balance sheet and cash flows. I will conclude with some thoughts on the future, and we will take your questions.

We are pleased to report almost 3% overall sales growth with each segment contributing to our consolidated increase. Our specialty food segment was up about 4.5%. While operating income was up in 2 of our 3 segments, overall operating income was off 3%, as effected by asset impairment charges. Net income, helped by a slightly lower tax rate and increased interest income was just ahead of last year. Reported EPS, which benefited from our ongoing share re-purchases was $0.46 versus $0.45 last year. We repurchased 576,349 shares during the quarter for $24,544,000. Fiscal year to date, our repurchases have totaled 1,243,000 shares for $52.3 million. We have approximately 1.1 million shares still authorized for repurchase and 34,319,167 shares outstanding today.

Capital spending for the quarter was only $4.7 million, as we carefully controlled our non-food related spending and our new salad dressing production facility project is just getting started. For all of fiscal '05, we believe capital spending may reach $30 million. One of our bigger investments for the quarter was the purchase of equipment for packaging our redesigned refrigerated salad dressing line. This renewed line which features 7 new flavors, a new bottle design and new graphics started to ship in the third week of March. Trade acceptance has been very strong with additional skews added at 95 exciting customers, and so far 15 new customers have already been added. Actual sales volume impact in the quarter was limited, although there were some start up costs that adversely impacted results. Also, a positive in the quarter was sales growth from frozen breads, as we benefit from less concerned about carbohydrates today versus last year, geographic expansion and an earlier Easter this year that positively impacted our Sister Schubert's brand frozen yeast rolls.

Overall ingredient cost savings were mitigated by higher wage and benefit cost, freight cost, warehousing cost, the latter primarily due to the start up cost of the new frozen foods distribution center. A somewhat less favorable sales mix was also a factor. Glassware and candle sales were up just slightly due to growth in our candle sales largely offset by weaker glassware sales. Candle sales growth came primarily from exciting customers due to additional items and stronger sell through. We remained focused on the food, drug, and mass merchant channels of distribution. During the quarter, we completed the roll out of our everyday program into the second of the three major drug store chains. Glass sales to our core market for candle containers and accessories and floral containers were okay. Sales of tableware and drinkware were soft. Operating efficiencies of both our candle and glassware facilities improved the raw material and energy cost increases significantly offset those efficiencies. Capacity utilization, especially in our glass plants remains a challenge. In the Automotive segment, aluminum truck accessories sales were up nicely in the quarter but mostly offset by weaker floor mat volumes. The net was a modest increase in overall segment sales.

Truck accessory growth was driven by good demand for existing and new program/plant customers and the benefit of a sizeable promotion with one of our domestic truck accessory programs. Aftermarket sales were up. Floor mat sales weakness was primarily due to very competitive market conditions in the original equipment market, leading to loss of domestic programs mitigated by growth with most of our transplant customers. The after-market was off modestly in the quarter. High material cost for aluminum, steel, synthetic rubber, and plastic resins were a major negative factor. Some price increases were implemented during the quarter mostly on aluminum products, but its beneficial impact was relatively modest in the quarter especially compared to the effect of higher material cost. A lack of capacity utilization negatively impacted floor mats. Let me ask John to comment on our balance sheet and cash flows.

Speaking first to our accounts receivable, Lancaster's consolidated accounts receivable of March 31, 2005 totaled a $107,713,000. This amount represented an increase of approximately 14% over the June 30, 2004 balance of $94,623,000. The relative strength of our sales volume in March compared to that of last June led to this increase. If compared to our accounts receivable level as of March 2004, the most recent March balance increased to less than 2%, which is fairly consistent with the quarter-over-quarter sales increase. With respect to our inventory, the consolidated total of $147,166,000 at the end of this march was down about $8 million or 5% from the level of this past June and within 1% of the level of March a year ago. With respect to our net property balance at March 31, I'd point out that this total has declined by roughly $9 million since last June, largely as a result of our depreciation exceeding the level of capital expenditures during the first 9 months of fiscal 2005. However, also contributing to this decline was a non-cash impairment charge, we took in the third quarter, with respect to certain production equipments utilized in our non-food operations.

These charges totaled approximately $1.6 million before taxes or $0.03 per share after-tax with about $900,000 attributable to glassware operations and the balance to rubber floor mat manufacturing. Looking forward, as was implied by Jay's comments, we do see the pace of our CapEx increasing over the remainder of the calendar year particularly as our construction efforts become more intensive on our new facility for manufacturing dressings and sauces. As we previously disclosed, this food segment project is not expected to come on line until late summer of 2006. Except for the items I have already discussed, from our balance sheet components are relatively unremarkable. We remain debt free with approximately $182 million in aggregate cash, cash equivalents, and short-term investments. We also finished the quarter with over $589 million in shareholders equity. This balance sheet strength certainly leaves us an excellent position to considered future opportunities for business acquisitions and for pursuing additional share repurchases.

In concluding my remarks, I would like to share a couple of other cash flow items for your consideration. For the 9 months ended March 31, 2005, Lancaster's consolidated cash flows provided by operating activity totaled approximately $91 million compared to $78 million for the preceding year's 9-month period. Within the current fiscal year, depreciation and amortization for the first 9 months totaled $25,93,000, property additions totaled $14,238,000 and share repurchases were $47,848,000. I appreciate your attention this morning. I will now turn the call back to Jay.

Thanks John. As we move to the fourth quarter of fiscal '05, we see several issues we've talked about this morning continuing, including more favorable food ingredient costs, unfavorable non-food raw material cost, high energy cost, and a very competitive market limiting the opportunity for price increases. One upcoming event is this weekend's national drop of a front page FSI ad for our recently repackaged line of refrigerated salad dressings. Also just shipping are the 2 new Sister Schubert's brand microwaveable frozen sweet rolls. We look for both these lines to add incremental growth over the next few quarters. On the other hand, the earlier Easter this year may have pulled some sales, particularly frozen bread end of the March quarter.

Our Auto segment will see the start up of a significant original equipment program and aluminum accessories. Also in aluminum accessories we see some modest price relief being helpful. A variety of dynamics in the floor mat category has the potential to create opportunity for us although not likely to have much fourth quarter impact. Material cost for aluminum, steel, SPR, and plastic resins will remain high.

The fourth quarter for glass and candles will likely be seasonally soft with our emphasis on continued selling and planning for the fall season. We also have several projects underway that focus on operational improvements. We have several interesting food acquisitions under evaluation at this time, all could be good fits with our existing businesses and might be somewhat larger than our recent acquisitions. However, with no guarantees that any of these potential acquisitions will be completed, share repurchases will likely continue. Julianne, with that we are ready to take questions.

[OPERATOR INSTRUCTIONS] George Askew, Legg Mason Wood Walker

A couple of questions on the freshly foods side of the business. In the past, you quantified the dollar impact of some of the commodity cost movement, net effect. You didn't in the last quarter but you did the prior 5, I guess. Can you give us some sense of how impactable the lower or how favorable the lower commodity costs were in that segment?

In ballpark terms, George, the impact on the quarter was perhaps a million dollars favorable. We certainly had benefit from lower oil prices, though we also had some offsets from some other materials, including cream.

Okay. In kind of looking at some of the other impacts, food based, food segments, can you give us a sense of the -- I think I have underestimated, frankly, the seasonal movements between your product lines. But can you kind of refresh us on how to look at the seasonality of the business? Bread, frozen bread versus dressings and then also the product mix within bread. Can you explain sort of what was going on there that affected your margins?

George and unfortunately we heard you breaking up a little bit, but I thought the question was largely around seasonality in the quarter. And well, we typically do see in the third quarter because there aren't any real major retail events in that period of time. It is skewed a little bit more to the food service mix than we see in the other quarters. Within the categories I think, and particularly in the bread category where we might see some -- a little bit of an unfavorable mix is due to some of the growth in sales of a little bit higher cost versions of Texas Toast and even to a little bit of degree some of the other newer items in the Sister Schubert's line, which are just a little bit lower margin than the base business.

Yes that is what I was trying to get at. Was there pricing competition during the quarter or was it really -- were there just lower -- higher cost items out there as opposed to lower revenues?

I don't think there were any lower pricing issues, George.

Okay.

And then lastly, on the food side, the startup expenses around the frozen food, do you see. Can you quantify that? I assume those are somewhat one time in nature, although they obviously have to be posted in P&L.

Yes. We think they are one-time in nature, but probably in the mid-6 figure range.

Okay. All right. Great. I'll stop there and maybe come back at the end.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] David Leibowitz, Burnham Securities, Inc.

I guess we have the same difficulties with house ware and glassware that has been with us for some time now. Are there any rays of hope that you can point to that says that we are going to get the topline moving there?

David, Yes I think there is certainly hope if not some expectation, but obviously no guarantees either. I think our challenge is again a little bit more to the glassware side where we have narrowed the scope of our market place largely to this candle container accessory and floral markets with modest volume in the more traditional retail channels, although we've not discontinued pursuing that business at all. Offset by what we think is still opportunity to grow, the candle business yet remaining again, focused on that food, drug, and mass channel, and we think that focus continues to make sense for us where we think there is good opportunity in the marketplace as well as our abilities to support that market and I think that is indicative in this pickup of the second major drug chain with a good everyday program on candles. So, yes I think there is overall, there is hope and expectation that we can improve that.

What about the Sears, Kmart merger. Does that in anyway impact you?

We can't judge that yet and we are probably as anxious and interested as anybody to see how all that comes together and plays out. It could be an opportunity and there is always downside risk too.

And what about the automotive side, do we have any way of figuring out whether or not floor mats should be part of the business going forward?

David, we continue to evaluate that pretty carefully. I think what we're encouraged by today in that product category is a lot of change and upheaval that seems to be going on in the original equipment market that we think and hope that we'll actually see some opportunity come out of that in the future, rather than any further downside impact.

And on the food side, you mentioned a few potential opportunities in acquisition. Is there anything you could tell us in terms of the size of these companies and how far along the conversations may have progressed?

Not with any specifics, David, other than the things that are in that evaluation process right now are a little bit larger than what we have done in the recent past.

Good. And the very last question, if I may? It has to do with the current food operation. Are you concerned you might have too many SKUs out there right now?

No. We do not have that concern.

Excellent. Thank you very much.

Rob Hall, Fiduciary Management

Couple of questions -- again I may have missed -- what should we look for in the freestanding insert as a new design in the dressing area? Which brand?

It's our Marzetti brand refrigerated salad dressings. It's again new package. A number of new flavors. It's a national FSI ad, so you should see that in any market in the country.

And that's going to be on the outside. That's going to be the wrapper?

It is going to be on it's on the front cover of one that's dropped in this weekend.

Okay. And second, can you review again the thoughts on the CapEx for the expansion on the dressing side?

The overall investment, I think is as you saw us release in maybe a couple of quarters or so ago, it is about 44 million. We are ramping up now, there's been modest expenditures through the third quarter mostly on the side prep side. So as we get into this fourth quarter, the ramp up and spending gets going and the project is anticipated to be completed summer of '06.

And what is going to be coming out of that line? Just again review, sort of what it will look like at the end of '06, in terms of products?

It's a salad dressing and sauce production facility. So it will have both mixing and packaging equipment.

What does that do for your capacity on those areas at the end of expansion?

Rob, I don't know that we've specifically disclosed that. It is certainly an increase in capacity. Probably not a huge increase, but definitely an increase.

The notion though is efficiency more than additions? It sounds like that.

It's a combination. Yes.

Okay. Go ahead, Thanks.

You are welcome.

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

Thank you again for joining us this morning and we will look forward to talking to you about the fourth quarter and year-end in August. Thank you.

Mr. Gerlach. I do apologize. We have a follow-up question from George Askew with Legg Mason.

Okay. Sure.

Apologies Jay. Thank you. Two quick things. On automotive, what are the synergies between the aluminum accessories side and the floor mat side? Are there clear synergies where it is important to keep floor mats around for distribution purposes with -- for the aluminum accessories business?

Not necessarily. No. The synergies would be somewhat common, original equipment customer base, but the benefit we get there is pretty subjective. It's not a situation where we would, for example ship product together or anything like that.

And then on the repackaging of the T. Marzetti and the National FSI drop and what not, as we think about this quarter, obviously the new product launch is terrific, are we going to have – obviously we are going to have higher business I suppose, as well as hopefully higher revenues and shipments. Are you expecting a margin benefit from this program this quarter or is it more of a fiscal '06 thing there?

I wouldn't suggest a big margin benefit this quarter because while it may ramp up volumes some, National FSI Drop for example is a little more expensive than what we might normally do. So, some of that will be offset. So I wouldn't expect a big favorable impact.

And are there you mentioned the customer wins. New customers and additional SKUs of existing customers. What inning are we in as far as that incremental distribution goes. In other words, are you half way through, sort of, what you hope to get or is every customer being contacted and we pretty much know what the distribution gains are?

You know George I will try ball park that at two thirds to three fourths through. And again, that's contacts and listings and commitments. It is certainly not relative to any actual volume we have seen yet.

Okay. Great. That's exciting. Excellent. Thank you very much.

Thank you, George and again thank you all for joining us and Julianne unless you have any other questions?

There are no further questions.

Okay. Thank you again.

This concludes today's Lancaster Colony Corporation Third Quarter Fiscal Year 2005 conference call. You may now disconnect.