Marzetti Co (MZTI) 2006 Q1 法說會逐字稿

Good morning. My name is to Phyllis, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation first fiscal quarter 2006 conference call. Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO, and John Boylan, Vice President and CFO. (OPERATOR INSTRUCTIONS). 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 for the Lancaster Colony first-quarter fiscal 2006 conference call. Now 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 to not place undue reliance on such statements. Factors that may 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 Colony's report on Form 10-K.

Now here is Jay Gerlach. Jay?

Good morning and thank you for joining us today. Our first quarter of fiscal 2006 was not as strong a start to the year as we expected. While net sales were up about 2%, they were held back by soft candle and floormat sales, a lackluster Food Service channel and end of quarter transportation availability issues. I will comment further as I review each segment.

Operating earnings were down 5.5% as higher freight costs, higher non-food material costs and new program start-up costs adversely affected results. Net earnings were helped by a lower tax rate and share repurchases aided EPS, which was $0.53 versus $0.52 last year.

We are not at all pleased with the start to our year. Before going to individual segment comments, let me point out capital expenditures in the first quarter reached $16.7 million with the primary projects being our new salad dressing production facility and capital expenditures for our major aluminum original equipment program that required additional capacity.

The aluminum investment is primarily completed, while our salad dressing facility is looking at a midsummer 2006 completion. Share repurchases in the quarter totaled 188,000 shares for a 8.3 million or $44.29 per share average. Year-to-date repurchases are 343,232 shares for 14.8 million or $43 per share average. Actual shares outstanding today are 33,951,000 shares. We continue to be interested in block repurchase opportunities.

Moving to our segments, our Specialty Foods segment sales growth of almost 6% was not bad given the sluggish demand from our Food Service channel and the impact from a lack of refrigerated trucks at quarter end. The positive contributors included our restaged T. Marzetti refrigerated salad dressing line, showing strong year-over-year growth. We are recording the recent Nielsen data. We are a solid number two in the category.

We also saw strong frozen bread demand for both our New York and Sister Schubert's brands. While ingredient costs were favorable as expected, other costs including energy and packaging were increasing. Transportation costs increased in the area of 1 to $2 million for the quarter, the biggest single unfavorable factor. Include a bit of less favorable mix in the promotional and slotting cost of our refrigerated salad dressing relaunch, and the overall result was a 5.6% decline in operating income.

Glassware and Candle sales were off 5% in the quarter, mostly due to lower candle sales impacted significantly by weak dollar store channel demand. Overall glass sales were up slightly. Glass plant operating efficiencies helped operating income, although rising natural gas costs were a negative in the quarter.

Candle sales saw wax and energy cost increases more challenging as the quarter progressed, while selling prices stayed very competitive. Our automotive segment recorded a 2% sales decline with aluminum accessory growth not offsetting format declines. While our new original equipment aluminum tube step program had strong volume, shipments were a bit short of expectations. Aftermarket sales decreased for both aluminum, accessories and floormats. Segment operating income was hurt by lower sales, aluminum original equipment program start-up challenges and higher material costs.

Let me ask John to make a few comments on our balance sheet and cash flows.

Thanks, Jay. Let's first review several of the more notable line items within our September 30th balance sheet. Accounts Receivable at September 30 totaled $121,086,000, which was approximately $21 million higher than at June 30, as well as $5 million greater as of last September. By and large, these comparative increases were certainly influenced by the record level of consolidated sales occurring within the most recent quarter.

However, an additional factor in the comparison to the June 30 balance was the extent of the first-quarter seasonal sales attributable to our Glassware and Candles segment.

With respect to our inventories, the September 30 total of over $175 million compared to roughly $164 million at June and $154 million last September. Relative to June, we had some planned builds of food and automotive inventories. The year-over-year increase also reflected higher candle inventories resulting from a planned inventory build, occurring earlier this year as compounded by somewhat less than expected sales. We are making adjustments in our candle production schedules to better balance our inventory by December 31.

In our current liabilities, you will note that accrued liabilities increased in excess of $14 million. Similar to last year, this increase principally resulted from a larger accrual for federal income taxes. We continued to remain debt free during the quarter and held over $155 million in cash, cash equivalents and short-term investments at September 30 and exceeded $591 million in shareholder's equity. This balance sheet posture obviously provides us with considerable flexibility in meeting various possible cash needs, be they for dividends, share repurchases or business acquisitions.

Turning to cash flows for a moment, cash flows used in operating activities for the quarter totaled $768,000 compared to cash provided of $13,719,000 in the prior year. The fluctuation between the quarters was primarily due to the relative quarterly change in our inventory levels.

One specific of the quarter's cash flows that may be of interest is depreciation and amortization that totaled $8,240,000, which compares to nearly $8.5 million recorded a year ago. As Jay referenced earlier, other cash flows and notes for the quarter included CapEx of $16,734,000 and share repurchases of $8,327,000.

Relative to CapEx, we still believe full-year expenditures could total as much as $70 million, of which about half could relate to the Specialty Foods segments new dressing and sauce facility.

In looking toward our upcoming second-quarter results, we wanted to remind you that the prior year's comparable quarterly results reflected income recognition of the U.S. government's $26.2 million remittance to us under the Continued Dumping and Subsidy Offset Act. This income translated to approximately $0.47 per share after-tax.

For this year, we have submitted an application for another annual remittance under the act; however, there remains some inherent uncertainties associated with this program that do not allow us to estimate how much, if any, funding may be provided to us this year. And as we have previously disclosed, the longer-term viability of this program remains even more uncertain.

I appreciate your attention this morning. I will now turn the call back to Jay.

Thank you, John. As we look to the balance of the year, our biggest challenge will likely be the impact of high energy costs, starting with how the consumer response to high heating costs and on to how high and for how long these costs will impact our materials like resin-based packaging in food, wax costs and synthetic rubber. Natural gas for our various production processes and heating will be a much greater cost over this winter. Higher freight costs will likely persist, but availability issues should decrease by calendar year-end.

We have a couple of initiatives in our retail food product lines we are excited to kick off in the next four to six weeks, one of which is repackaging our market leading vegetable dip line. We also expect our frozen bread performance to stay strong and our refrigerated salad dressing sales to keep growing. We are concerned about the growth rate in our Food Service channel as consumers continue to deal with high energy costs.

You may see some new floormat -- we may see some new floormat opportunities as the year goes on, and our aluminum tube step program should continue to grow. Glassware and Candle demand will be driven by the success of the holiday season.

We have and will continue to pursue selling price increases where raw materials and transportation cost increases warrant it. It is difficult to suggest the benefit at this point as the amount and timing vary across our product lines and our markets remain very competitive. We expect to continue to repurchase our shares and will thoroughly review our cash dividend at our board meeting next month. Acquisitions remained our preferred use of capital, and we continue to seek good fitting food acquisitions.

With that, we're ready to take questions.

(OPERATOR INSTRUCTIONS). Chitra Sundaram, Cardinal.

I did not expect to be the first, but just a couple of questions. The lack of refrigerated trucks I think -- not lack, but I think you mentioned about some delay in availability of trucks. Could you comment on how that kind of could have arisen given that you probably have contracts in place, and how you expect that to ease, and then I have a couple of more.

Well, the refrigerated transportation issue was heavily driven by the storm impact and impacting the month and particularly affected us a little bit right at quarter end. And as you have probably read, a lot of that equipment was diverted and being used in those particularly impacted areas.

Refrigerated capacity is always a little bit of a challenge and can have some seasonal issues to it. But this clearly aggravated that, and where we thought we had commitments for specific equipment at the time it was needed, it just was not there. We do expect that to alleviate as we get through the rest of the calendar year, but likely it will still be at least a little bit of an everyday problem for us until then.

Now I guess there was a bit of a report out there on Blise Inc. (ph) and how it is going to spin off its Home Expressions division, which includes its candle businesses. Is that something you all have tracked, and do you have any comment on it, or what it, you know, what kind of ideas it may give rise to for you, in your candle business?

I don't know that I can comment at all on what they are doing, other than it will be interesting for us to watch certainly and at the present time has not changed how we are thinking about our candle business.

Right. Just a couple of -- the share buyback I just -- how many shares you said you bought back in the quarter?

In the quarter, it was 188,000 shares and 343,000 year-to-date.

Yes. And in the cash and marketable securities, is possible to break out what the marketable securities out of 155 million was?

We are looking for that right now.

The short-term investments approximate $57 million at September 30.

Okay, great. And lastly, did I get it right that the cash flow from operations was a negative 768,000 because of the inventory buildup?

It was a cash flow used in operating activity. That is correct.

George Askew, Legg Mason.

Jay and John, it looks like broadly speaking operating income was affected by -- you identified sort of two different categories. One is obviously the higher non-food input costs, and the other is startup costs or promotional costs. Startup in the case of the aluminum tube step program and promotional cost in the case of food. And you did break out kindly the impacts from higher transportation expenses. But for the shortfall in the quarter, how much of it was within one of those categories, startup and promotional costs, versus the input? I mean is it 50-50? Is it mostly higher input cost? Am I asking that question properly?

Yes, it is a good question. We don't have a specific calculation on that right in front of us, George. I will look to John to see if he might want to take a stab at it.

I think as you look at at the promotional costs associated with the dressing rollout, George, that was in the neighborhood of $1 million. The startup costs are -- that is really not a number that we have precisely done. We know that there is a mid six-figure kind of set of costs that could be somewhat considered one-time. Then there were some additional costs associated with startup inefficiencies, but I would not want to quantify that extent of inefficiencies until we had that program up and running for longer than what we have.

And then on the input costs, you said 1 to 2 million, right?

That is correct.

Can you quantify, for example, in the Glassware and Candle business the impact of higher paraffin, for example, or natural gas?

I think as we look at paraffin, I don't know that I would quantify it in dollar terms. It is clearly up more than -- it is a double-digit increase percentagewise year-over-year. Natural gas is a smaller impact to this particular quarter. It will probably become greater as we move through the year given current market conditions. Obviously --

Smaller being maybe mid to upper six figure kind of impact this quarter. Is that fair?

That is correct.

Does that mean -- I guess I distinguish the two buckets quite simply because startup and promotional I kind of view as theoretically our investments in the future, whereas the higher input costs are just, you know, market forces at work.

On the dollar stores, what is going on there? Are you losing market share in the dollar stores in candles that you referenced, or are they cutting back shelf space there, or what is happening?

George, at this point in time, I don't think we have lost any market share to speak of, but as you may have read elsewhere, that whole channel of distribution seems to be very challenged right at the moment, and maybe as some speculate that follow the industry, there is impacted by the high-energy cost impact on their consumers and lack of spendable income, store traffic.

And then lastly on the floormat front, I forget exactly which month Collins & Aikman went Chapter 11, but have you -- what have you seen from those guys? I know that you talked about potential opportunities in the floor mat category before, and yet this quarter seems to be as weak as ever. Are you seeing any pricing activity out of Collins that is either favorable or unfavorable? And how are -- how is new business being evaluated there, particularly OEM business on the floor mat side? Are your customers looking forward to the next model year for rebids, or is there potential activity, new activity there in the next quarter or two?

George, this maybe should not be surprising. In spite of a lot of conversation that was generated by the filing of Collins & Aikman and potential opportunities that might be out there, those kind of things don't -- or in this case at least have not played out as timely as we might have thought they could. And there certainly are a lot of different issues as you get into the detail of a Chapter 11 filing as it relates to any resourcing of business and stuff.

So we continue to think there is long-term opportunity there. It just may be somewhat longer than we may have hoped.

As it relates to pricing kind of issues, it has not directly impacted our business in the sense that, we can run out and raise prices now that there are other problems in the industry. You may have looked or if you have not, you could look at Collins & Aikman's filings and see what disclosure they have made relative to changes in their terms with their customers, but those changes don't really directly impact us.

Okay. Great. I will yield the floor.

Terry Warzeka (ph), Rocker Management.

I guess, Jay, you had mentioned that your wax prices were up double-digit, and I'm wondering if you could give us a little bit more color on what is going on there? You know like how many suppliers do you have there, and I have kind of heard anecdotally that there is at least one vendor of paraffin who is putting some of its customers on allocation. And I'm wondering if you are seeing any of that, and you know, well, anything you can -- any additional flavor you can provide there would be helpful. Thank you.

Actually, yes. We are with again one vendor, a significant player in the industry, I think we're all on the same allocation. So that is in effect. We probably have in total seven to 10 different suppliers, at least kind of broad paraffin wax kind of suppliers. There could be a few others in specialty areas.

But the impact as it relates to availability and impacting our operations at this point is not significant. We are scrambling to be sure we have got enough wax available from other sources looking at alternative formula or blending opportunities. So right as we speak, it is not hindering operations. It has the potential to do that if that allocation were to stay in place an extensive period of time. Other vendors go on allocation or that allocation level will go down. But right now it is not impacting our operations from the standpoint of we cannot make the product we need to make.

Have the wax suppliers signaled any price increases in, say, over the next couple of months, or any direction they have given you?

You know, I'm not aware of a specific signal pricing that has not already been implemented. But it is probably not unreasonable to assume that there is right at the moment still some upside risk there.

David Burnham (ph), Burnham Company.

Well, it is half right anyway. Good morning. Briefly a few questions if I may. First, the cost issue of oil, natural gas, etc., is that your main drag on profitability -- not profitability but profit margins at this juncture?

You know, David, if you I think would consider that that is the primary driver in pushing freight costs and even especially throwing in what impact it is having maybe on in consumer demand, yes, I think it would have to be the biggest factor.

And second question, the cost of the repackaging and reintroduction on the veggie dips, is that a significant dollar amount that came out of the first quarter, and will there be further (multiple speakers)?

What we were talking about in the first quarter, David, is relative to our whole restaging and expense to do that for the refrigerated salad dressing line. I did mention veggie dips, which actually are a more modest just repackaging effort.

As you know, we are already a strong category leader in veggie dips, but we did feel it was appropriate to update that packaging, and in fact, that will be introduced to the trade at a trade show starting a week from Sunday. So it is not near as big a commitment as what we have had in the refrigerated dressing side of things. Nonetheless, we're excited to have some meaningful new look to have in the marketplace.

Okay. And what about couponing, is that becoming a bigger part of the promotional budget this year versus a year ago?

You know, overall probably a little bit given what again we are investing in the refrigerated dressings.

And the last question, all of the turmoil in the Southeast between Florida and New Orleans, Mississippi because of the various natural disasters, have you been able to quantify how much business you are losing as a result of all this?

You know, David, we really cannot. Dave, the first storm is over. In the Gulf of Mexico side, we did not think we are having a very significant impact on actual demand from our customers. This more recent one in South Florida we just could not quantify it at this point. I don't think it will be that significant, but there obviously are still areas that don't have power, and what quantity of stores are open or not open down in that market, we don't have a specific handle on, or again its impact on our business at this point.

Chitra Sundaram, Cardinal Capital.

I just wanted to go back to the food business. The food business grew 6%, and the press release talks about Food Service increased, and then obviously the bulk perhaps came from Specialty Foods. It seemed to me that that implied something like an 8% growth out of the Specialty Foods and then maybe a percent or two out of Food Service. Would that be fair?

Yes, that is -- that is pretty fair.

So when we think about the issues that arose in the refrigerated truck business, can we assume at least Specialty Foods would have done even better?

Well, a little bit. Now even better that was probably a mid to upper six-figure right at quarter-end impact.

Okay. So in the look at the upcoming quarter, I know you don't give any kind of guidance, but you would expect the trends of Q1 to sort of continue into Q2? And I'm talking about the revenue line or some slowing?

Again, we don't give guidance. I'm just trying to think of --

So thus far, what you have seen in the second quarter?

Well, any -- what I'm trying to think of is any particular initiatives on our part or concerns of any sort on the downside, and nothing is strongly coming to mind. We do get into a stronger seasonal quarter for a lot of our vegetable and fruit dip products. So on the one hand, that is a plus, but at the same time comparatively, we need to have a good seasonal quarter out of those product lines.

I don't have any reason to think we have got any problems there. But I guess without again trying to give any guidance, I'm not thinking of anything unusual that would be dramatically different on the up or downside.

Is it possible for us to just quickly review sort of how the first quarter's food business performed relative to your plans? When you look at the Specialty Foods and the Food Service, when you're going into the first quarter expecting Food Service to be impacted by -- I mean I am assuming it is consumer spending at the restaurant chains, right, that has impacted the Food Service business? Say, was that in line with what your plans were?

No, that was not. We would have expected the Food Service channel to be stronger than it was in the quarter.

And the Specialty Foods business, did that --?

On the retail side, it was pretty close to expectations. It could have actually been slightly ahead.

And the Food Service, the main force there or the main driver there is sort of consumer spend at the restaurant chain, is that the issue?

Well, from our standpoint, it appears to be. That is what we hear about broadly in the industry, and the trade is a major factor.

I see. And when you think about the upcoming holiday season looking at past years, has it typically improved? Do people tend to eat out more or cater out? Is that kind of -- are those sort of drivers there work to the benefit of Food Services in the holiday season, or is it even weaker because of during holidays?

No, I think seasonally there is some benefit on the Food Service side as well typically.

George Askew, Legg Mason.

Yes, just two quick follow-ups. I just want to clarify on the freight -- the availability of trucks issues. Was that a revenue issue for you guys or a cost issue? In other words --?

That was revenue.

Okay. So you literally just were not able to ship all that you wanted to?

Yes, and obviously the reason it is a topic here is it literally was in the last couple of days of September.

Right, okay. I apologize if you have already answered this, but has that eased up adequately today?

I don't know that I would say adequately. It has maybe eased up a little bit, but it is still an everyday factor, and our transportation guys think maybe it will be off and on but of a diminishing factor as we work through December.

Okay. And then just more broadly on the topic of acquisitions, I know there was activity in the summer. Can you give us a sense of what the market looks like right now?

It is definitely not from our standpoint as active as it was in the summer. Now the reason it was more active for us then, there were not only things to look at, we had particular interest in several. So as far as just the overall activity, yes, there is probably still a similar amount of opportunity out there. But as far as specific fits that we have got a real excitement about, it is definitely at a lull from what we saw back in the summer.

And the -- are you seeing any kind of enhanced competition from competitors that may now be owned by new owners or any change in their business practices?

No, we have not seen of that at the present time.

At this time, there are no further questions. Mr. Gerlach, are there any closing remarks?

Thank you, Phyllis. No. We appreciate you joining us today. We will look forward to talking to you in late January about our second quarter. Thank you.

This concludes today's conference. You may now disconnect.