Marzetti Co (MZTI) 2005 Q4 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 fiscal year 2005 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 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, simply press star then the number one on your key pad and questions will be taken in the order that 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. Please go ahead, sir.

Thank you. 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, Treasurer 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. Factor 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 filing with the SEC, including Lancaster Colony's report on form 10(K). Now, here is Jay Gerlach. Jay?

Good morning. And -- and again, thank you for joining us today. We are reasonably pleased with our overall results for the quarter of $0.60 per share versus $0.49 last year. We were particularly pleased to see operating income up about 11.5 percent and operating margins grow by 92 basis points in the quarter. Sales were up just over 2 percent to 276 million for the quarter. I'll review each segment shortly, but a couple of common issues will be high freight and energy costs which impact all our segments to varying degrees. Freight cost increases of course impact both inbound and outbound shipments. Energy costs impact not only our production processes but also many raw material and packaging costs.

A quick share repurchase update. We repurchased 210,380 shares during the quarter for $8,873,000 or $42.18 per share average and 1,348,418 shares for the full year for $56,720,000 or an average of $42.07 per share. Outstanding at year-end was 34,235,905 shares with approximately 3 million shares authorized for repurchase. We continue to find the availability of shares for repurchase very limited but we are interested in block opportunities from small to large.

Capital expenditures for the quarter were over $8 million with about 4 million going toward our new salad dressing plant and $22.7 million for fiscal year 2005 with over 6 million toward our new plant. Specialty food capital spending for the -- for the full year without our new plant added in exceeded our total non-food spending as we added or upgraded equipment to enhance efficiency, add capability and gain capacity. Beyond maintenance capital expenditures on the non-food side, primary projects were related to new business coming into our aluminum truck accessory product line. The highlight of the quarter from our specialty food segment was the successful restaging of our T. Marzetti brand refrigerated salad dressings. Rolling out just as the quarter began, this reformulated and repackaged line with seven new flavors grew each month of the quarter and continues to strow -- to show strong comparisons. Also supporting this segment sales growth of 5.3 percent, mostly real growth, as pricing was minimal was strong Sister Schubert's brand frozen bread sales in spite of the important Easter holiday following -- falling in our third quarter this year. Texas toast and our Marzetti fruit dip lines were also good growth contributors. While we did see ingredient cost savings in the quarter, earnings growth did not keep pace with our sales growth as high freight costs, placement and promotional costs for our new refrigerated dressings and somewhat less than expected plant performance in a couple of locations offset material cost savings.

Overall, for the -- for the full year, our sales mix between retail and foodservice channels did not change much. On the retail side, our branded mix versus private label stayed about the same as growth in our branded Marzetti refrigerated dips and dressings helped counter private label growth in other areas.

Turning to our glassware and candle segment, sales were close to flat in a non-seasonal quarter. Of significance was return to operating profit for the quarter versus a loss last year largely due to better glass production efficiencies. High energy costs particularly impact this segment in both utility and raw material costs. Year-over-year wax cost in -- cost per pound was up about 10 percent and are continuing to rise with the price of oil. For the year, total candle sales increased as we maintained our focus on the food, drug and mass merchant cha -- channel of distribution. Glassware sales were down as we concentrate on our core markets of candle containers and accessories and floral containers. Good progress was made improving plant performance in fiscal 2005 and it continues to be a priority in the future.

The fourth quarter for automotive segments saw total sales down about $2 million as our aluminum truck accessory sales increases were more than offset by floor mat sales declines. Operating income was close to flat for the quarter although comparisons to last year were weakened due to our plant closing charge of about $1 million last year. Floor mat sales declines were due to program mix, lower builds and previous loss of program -- programs to our now bankrupt competitor Collins & Aikman. Aluminum accessory sales were up due to new original equipment programs. Impacting the segment -- segments earnings continue to be pricing, raw material and energy costs and floor mat capacity utilization. For the full year, sales declined about $2.5 million or 1 percent and operating income was down almost $6 million for the segment. While our consolidated full-year sales grew about 3 percent, operating income was down about 5 percent. Net income, on the other hand, helped by the continued dumping and subsidy offset act funds received earlier in the year, higher interest rates and a lower effective tax rate was up over 16 percent and earnings per share helped by share repurchases was up over 19 percent. John Boylan will now give us some comments on the balance sheet as well as cash flows.

Thanks, Jay. I'll briefly review several matters this morning regarding our June 30th balance sheet and fiscal 2005 cash flows. Let's first review some of the major year-end balance sheet components. Accounts receivable at June 30 totaled $100,351,000, a $6 million or 6 percent increase above the levels of a year ago. This growth was largely due to the strength of our June shipments. All in all, our accounts receivable agings remained in pretty good shape and are fairly comparable to year ago levels.

Turning to the largest component of our working capital, inventories, we saw a June 30th total of $164,365,000 that reflected a year-over-year increase exceeding $9 million or 6 percent. A planned build of candle inventories led to this increase. One category of inventory that again declined during the past year was the pressed glassware inventory that has been accounted for under the LIFO method. Most of this inventory was recorded at values substantially below its last production cost. As noted in this morning's release, LIFO income associated with this year's reduction totaled about $1.3 million compared to $4.2 million in the year prior. This inventory has been largely depleted at June 30th.

One other notable balance sheet change worth comment occurred over in other non-current liabilities and deferred income taxes which increased over $6 million. This increase primarily reflects adjustment to record additional minimum pension liability associated with our defined benefit pension plans. Fairly similar to what we experienced two years ago, the lower long-term interest rates prevalent at year-end necessitated this kind of entry in accordance with the pension accounting rules. And wrapping up my balance sheet remarks, couple of constants worth mentioning since last June 30th are the continued absence of financing debt and our substantial balances of cash and short-term investments totaling almost $185 million this year compared to over $178 million a year ago.

Turning to cash flows, cash flows from operating activities totaled $116, 677,000 in fiscal 2005, fairly level with the prior year total. In arriving at this year's cash provided from operations, the most prominent non-cash add-back remained depreciation and amortization which totaled $33,262,000. Other annual cash flow amounts of note include $22,683,000 for property expenditures, $6,721,000 for share repurchases and $34,055,000 for the payment of dividends. Given what I've shared this morning in our current expectations for fiscal 2006, 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. And I'll now turn the call back over to Jay for his concluding comments.

Thanks, John. We've begun fiscal 2006 expecting growth in sales and earnings for each of our segments and therefore overall. We expect food growth to be helped by continued growth of our refrigerated dressing line as well as product and promotional plans for other retail products. Ingredient costs should stay favorable for at least the first half of the year, although packaging and most energy impacted costs may trend up. Pricing opportunities will be limited. Our specialty food segment continued to be our largest in both sales and operating income as well as our fastest growing in fiscal 2005 and I would expect it to be our primary growth driver over the long term.

We do have the potential, however, for fiscal 2006 to be a significant growth year for automotive segment based on a major new aluminum accessory program now ramping up. Any opportunity from Collins & Aikman's bankrup -- Collins & Aikman's problems on floor mats is unpredictable at this time. Glassware and candles, while planning for growth, will be challenged to continue improving glassware production efficiencies and capacity utilization. Both candle and glass operations will be affected by high energy costs and the addi -- additional impact on the wax costs. We like our position for the fall season and hope the consumer is spending.

We continue to be very interested in good foot -- fitting food acquisitions and while we worked on several good opportunities in fiscal '05 and early fiscal '06, none were completed mostly due to value. While we have the financial resources to pay more, we do not want to reach beyond what our valuations would yield as an acceptable return. Capital expenditures this year could reach $70 million with our new salad dressing production facility being a major part of that. Share repurchases and dividends are our next priority uses of cash after acquisitions and capital investment. We are encouraged by our pretty good fourth quarter finish for fiscal 2005 and look -- look forward to opportunities for growth in 2006. Julianne, we're ready to take questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Jason Rogers with Great Lakes Review.

Morning.

Good morning.

I wanted to ask a little bit more about the automotive segment. You talked about the major programs there. Do you -- do you have any kind of guidance for what sales and margins could look like?

Jason, no, we -- we don't, as -- as I think you know, give specific guidance either overall or by segment.

Okay. And as far as the tax rate, what's your expectation for the tax rate going forward?

Jason, I -- I believe there are -- there are two influences to -- to look at into fiscal 2006. We'll see a -- a lower effective state tax rate within Ohio due to the recent legislative changes, but perhaps more prominently in fiscal 2006 we'll begin to obtain a -- an additional deduction under federal tax law for domestic manufacturing activities. So with that said, I think we would anticipate seeing the effective tax rate for the year somewhere in the neighborhood of 36.5 percent, give or take.

Okay. And congratulations on the good results.

Thank you.

Thank you.

Your next question comes from the line of Chitra Sundaram with Cardinal Capital.

Yes, thanks. In looking at the model and the -- the last quarter's operating margins on the food business and then for the year, I think it comes to about 16.6 percent and that's a little bit less than the 17 percent we had a year ago, and I think it was about 15 percent for Q3. Is that primarily a result of the promotional activity with the new products and the foodservice component from the Warren acquisitions? So, is that how sort of we should trend it out or is it likely to come back up to 17, 17.5 or more in the coming year or two?

Well, we would like to think we could expand that margin a little bit. A lot of that influence will be influenced by ingredient costs and what happens there as -- as we move forward. You know, the decline in margins has over the last couple of years been impacted by maybe several factors in -- in -- including the -- the promotional and introductory cost that -- that you just touched on. Those are somewhat more recent as we've relaunched this refrigerated salad dressing line. But other things that would impact that have been some -- some plant performance issues over the -- over the past year, and then again over the past year and maybe more particularly more recently freight costs have also be -- become a -- a somewhat significant factor.

So the freight costs, I think, am I right in the press release it said about approximately 2 million or something being the impact. Or did I read it wrong?

No, the -- the $2 million --

No, I'm sorry, that was the commodity price.

relates, yes, food commodity costs.

So, I mean, if we had to sort of isolate promotional costs -- freight costs, I mean, it going to -- probably going to be hard to comment on, but the promotion costs, how should one think of that as a percentage of sales? Is it sort of -- it's an additional 50 basis points that comes into cost of sales from the promotions that are going on? Or --

Promotional costs by and large are treated as a deduction from gross sales so it's essentially an adjustment to net sales. It's -- it's fair to say that promotional costs rose modestly higher than the overall sales rate. Perhaps as great of impact is the growth that we've seen in freight costs within that segment, and that largely between increased promotional costs and freight costs, that offset much, if not all, the benefits that we re -- received from lower commodity costs in the quarter.

And then you layer on that the mix change or that's no longer a factor?

That -- that can be a factor, although it will vary from -- from time to time, quarter to quarter, not just between retail and foodservice but even within those two pieces. So overall, year-over-year, the -- the foodservice retail mix was -- was relatively constant, but we -- we probably suggest there was an overall little bit less favorable mix as it relates to -- to just looking at the broader product line and -- and where sales growth is versus what -- what specific product line margins might look like.

And would you mind just giving some guidance on what the retail was at foodservices and the branded versus private label within retail?

Was -- was the question mix of -- of retail versus foodservice --

Yes, yes.

I think we're -- we're still just a little over half retail like 51 and a fraction percent retail. I don't have a -- a branded versus private label mix I could share with you right now.

Okay. And in terms of thinking of CapEx, you mentioned it could go up to about 70 million in the coming year. Of that, how much should we sort of think about in terms of the new plant and what are the other initiatives and the aluminum, I guess, the aluminum accessory?

The -- the -- the -- the plant addition is probably a little more than half of that

Oh, okay.

number. Other projects are -- are still going to be mostly skewed to the -- to food kind of projects which will be, again, equipment upgrades both from a -- an efficiency productivity standpoint in some cases capacity additions for certain product lines. The aluminum side ha -- has been a combination of -- of -- well, I shouldn't say combination, it is mostly equipment to -- to meet the -- the growth coming from this new program.

And sorry take up so much time. Just -- just the very final question. The interest income, is there -- do you have a number as to how much of that other income was interest income?

It is predominantly interest income. So stated differently the -- the increase in other income is almost solely attributable to the increase in interest income largely driven by higher interest rates prevalent during the fourth quarter this year compared to a year ago.

Yes. Thank you so much.

Sure.

Again, in order to ask a question, press star one on your telephone key pad. Your next question comes from the line of George Askew with Legg Mason.

Yes. Good morning, everyone.

Good morning, George.

Congrats on a nice quarter. Kind of turning back to the auto business for a moment. A couple of questions. You know, if you look at the last six quarters or so, clearly that business on a segment operating margin has been -- has been challenged kind of in the 0.5 to 3, maybe 4 percent type segment margins. Looking back further, however, you were regularly doing sort of 6.5 to almost 8 percent segment operating margins. With kind of a new aluminum contract coming hopefully maybe some benefits from challenges in your floor mat competitive set, can we get back to sort of the 6.5 to 8 percent range in this business?

Well, George, I -- I wouldn't want -- wa -- wouldn't want to forecast that, but I also wouldn't want to rule that out. I think the biggest issues are going to be [inaudible] costs and capacity utilization, which today is -- is -- is -- the the concern on the floor mat side of the business, not -- not on the aluminum end.

Are you able to get -- to pass through some of the higher costs contractually as -- as -- as raw material costs go up? I mean, are -- are you hedged in any way with your contracts there?

It's -- it's very, very difficult to do, George. When-- when -- when you get to some renewals, new business, there may be some opportunities, but on existing programs, that -- that usually doesn't occur.

The -- and -- and you indicated you expect growth? I just want to make sure I understood. You really are hope -- looking for growth on a sales and earnings basis from each of the three segments?

That's right.

Okay. The -- you -- you suggested that glass was down as you focused on the kind of your core floral markets and -- and other core markets there. Is -- a re we seeing an SKU reduction going there? Is that part of the -- the program?

Yes, there is some, George. Really, what we've -- what we've done in focusing on -- on those categories I mentioned of candle containers and accessories and -- and floral containers is -- is reduce some SKUs and -- and as part of that volume that has come out of other markets that we just didn't feel made -- made sense for us.

And -- and is that -- can that have a meaningful impact, limiting your SKUs, will that -- can that improve operating margins there meaningfully or is it really just a question of -- of trying to focus?

I don't know that we can say meaningfully solely on that, although certainly SKU reductions do have the -- the -- the tendency to -- to -- to give the operating guys, production guys, a -- a chance to improve plant performance just because there's fewer job changes potentially less short-run kind of items. So there is definitely some side benefit to that. The negative obviously is -- is back to the capacity utilization issue.

And then turning to floor mats real quickly, the -- with the -- the bankruptcy -- chapter 11 filing at -- at Collins & Aikman, are you -- are you seeing new business there are -- or on the other hand are you seeing Collins & Aikman act more aggressively in the market now that they, theoretically, have different cash flow requirements than they did a few months ago? Are you -- are seeing a change in their behavior or in the landscape?

Yes, I think, well, first of all what we're seeing is -- is potential for new business. I think, we can't suggest that we've got a bunch of new contracts in house, but -- but it has certainly has created a real new dynamic in -- in that piece of our business that we're just going to -- to have to wait and see how that ultimately plays out. Actually, I think it probably has had the opposite effect as -- as it relates to what Collins & Aikman is currently doing. I think they were probably following that -- that cash generation strategy pretty aggressively prior to their -- their bankruptcy filing and one of the reasons I think that we lost a decent chunk of business to them. But I'm not aware that they're doing that today. In fact, what you'd read in the -- in the -- the assorted news reports and -- and some of their filings even are that -- that they have or are trying to -- to institute some significant price increases. So it's -- it's very much a moving target but we think it has the potential to be an opportunity for us, not a sure thing but -- but certainly one that we're trying to stay very much abreast of and -- and in touch with any opportunities we may have in that market.

Super. Well, thank you.

Sure, you're welcome.

Your next question comes from the line of David Leibowitz with Burnham.

Good morning.

Hi, David.

I had to pop off for a moment so if I ask a question already covered, I do apologize. First, when do we hear from the government if you're going to get any dumping duty money this year?

Typically, I think that's been November to December. So it'd be -- it's sometime in the -- in our second quarter.

And is the government still collecting or is this monies that were already collected that they disburse over a period of years?

The duty is still in place so they're -- they're definitely still collecting.

Okay, good. Second question, how much glassware are you producing that is not utilized with the candle operation?

You know, David, this would just be kind of a -- a ballpark on that, but it's probably, maybe -- maybe three-quarters or a little bit more.

Is either floral or ball ware or what have you?

Or -- and -- and I'd draw a distinction, I guess, between candle containers and candle accessories a little bit.

And sticking with candles for one moment, is there anything changing in the channels of distribution where you might be overlapping with some of your competitors who heretofore have not sold into your channels or you're selling into their channels?

David, nothing's coming to mind there of any substance that we've seen going on, no.

Okay. Turning to automotive, you had indicated a year or so back that the floor mat business had evolved into simply low-cost provider is who the big three or big five were going to and similarly with the after-market. Is that still the case?

To a large degree. Of course I think you could -- you could make that -- you could make that case probably on a lot of things today even beyond the automotive business. But in general, that's -- that's reasonably true in automotive. Now having said that, certainly service and quality still have importance and again, I think maybe the -- the situation we've -- we've seen developing with Collins & Aikman and the comments they made would lead to you believe that, yeah, price and -- and -- and low cost is important but if you reach too far on that low price, you can obviously create even greater problems.

And is it appropriate for me to ask or for to you answer whether or not you might have looked into doing something with Collins & Aikman because of their tax loss carry forward?

No. We really haven't looked into that, frankly, for any reason other than -- than --- than the -- the general competitive factor.

Okay. And on the food side of the equation, you normally give us at the year-end some idea of the types of deals you might be looking at and the size of the revenues of the companies you might be looking at. Is there anything you can report to us today on that score?

From an acquisition standpoint, David, right now, really only one and -- and probably in a size range typical to what we've done in the past that's -- that's very active going on right now. Maybe a couple other things that we're looking into in a -- in a little more preliminary basis.

And in terms of new product introductions this fiscal year versus the most recent fiscal year just ended, are we going to have more new products or fewer new products? Have you looked at it in that fashion?

I think it's probably going to be maybe a little bit more and -- and at the present time with probably generally characterize them as -- as at least close to if not specifically more line extensions than a -- than a whole brand new concept or -- or category.

And with last year's introductions, you had quite a few in the low carb, low fat, healthful, as it were. Is that -- were those successful product launches?

Umm --

Specifically the so-called healthier ones.

I -- I think if you discount the kind of what -- what's what's developed in this whole carb area which is -- is not near as important as it used to be, and -- and beyond that, probably we've -- we've been reasonably satisfied. And even there, I think particularly of our -- our six carb Texas toast has -- has done reasonably well and continues to.

Okay. And what percentage of your food sales last year came from new product introductions overall?

I -- I don't have a percentage like that for you, David.

Okay. Thank you very much and keep up the great work.

Thank you.

Thanks, David.

Again, if would you like to ask a question, press star then the number one on your telephone key pad. If there are no further questions, we will turn the call back to Mr. Gerlach for any closing remarks.

Again, thank you for joining us this morning. We'll look forward to talking to you with our first quarter earnings release. Thank you.

This concludes today's Lancaster Colony Corporation fiscal year 2005 conference call. You may now disconnect.