Marzetti Co (MZTI) 2006 Q2 法說會逐字稿

Good morning. I will be your conference facilitator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation's second fiscal quarter 2006 conference call. Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO, and John Boylan, Vice President, Treasure and CFO. [OPERATOR INSTRUCTIONS] Thank you. Now to begin your conference, here is Earl Brown, Lancaster Colony Investor Relations.

Thank you. Good morning and let me also say thank you for joining us today for the Lancaster Colony second 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, Treasure and CFO will contain forward-looking statements of what may happen in the future. Including statements related 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 risk.

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 are but not limited to; the risk related 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 the 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 again thank you for joining us today. A somewhat strong finish in December to a seasonally strong quarter yielded a 5% growth in sales as food products and candles each had a good sales month. Our auto segment delivered the largest percentage increase in sales within the quarter of 10%. But more about that in each segment later. While pleased to see operating income up, the continuing challenge of high energy, freight and some raw material costs mitigate our operating earnings growth.

Pre-tax and net income was helped by $11.4 million pre-tax or $0.22 per share after tax of Continued Dumping and Subsidy Offset Act proceeds this year, which were received in our second quarter. The Act's benefit in fiscal 2005 was $0.47 per share and was also recorded in the second quarter. I will let John comment on our lower tax rate in a few minutes. I thought it might be worth pointing out, in the second quarter we returned almost $100 million to shareholders in the form of $76.2 million in a $2 per share special dividend and $0.26 in an increased regular dividend per share. Plus, almost $23 million via share repurchases during the quarter, including 150,194 shares repurchased so far in the third quarter. Year-to-date we have repurchased 914,000 shares for approximately $36.8 million, leaving us today with 33.38 million shares outstanding and 2.112 million shares authorized for repurchase as of today.

During the quarter, we also invested $18.3 million of capital into our business with the majority going to our new salad increasing production facility. Additional food related expenditures and additional capacity to support our growing aluminum tube step programs accounted for much of the balance of these second quarter investments. It is worth noting, that after the returns to shareholders and capital investments in our business that we still have no debt and at December 31 of '05 about $78 million of cash and short term investments.

Moving on to individual segment comments, let me start with the strong top line growth of 7% for our specialty food segment. There is no acquisition growth impacting this comparison and little if any price inflation during the quarter. Our retail channels were the faster growing during the quarter led by our produce category product lines of Marzetti branded dressings and veggie dips. Frozen bread, both New York brand garlic bread and Sister Schubert's dinner rolls continued with good growth.

Our food service channel provided only modest growth during the quarter as our customers faced challenging market conditions. We continue to be pleased with success of our T. Marzetti brand refrigerated salad dressings. Our recently repacked veggie dip line will be visible on store shelves in the near future. The rollout of our newly repackaged and reformulated grocery shelf, Marzetti salad dressing line, will be arriving this spring; as will our new upscale [Theresa's] Select recipes line of dressings.

On the cost side of the food business, freight and packaging as well as certain ingredient costs were up. The implementation of the new trans-fat labeling requirements was a significant project and came with some added costs in the quarter. We do have some modest price increases taking effect during the third quarter to help offset some of the higher costs we are incurring.

While we are disappointed with an almost 4% decline in glassware and candle sales for the quarter, a strong December in candle product sales led to an almost flat quarter for candle sales, while glassware product sales were down. While the overall candle category is showing little if any growth, our strong position in the food, drug and mass category and our ability to respond for large volume purchasers let us excel in the season ending month of December. The candle marketplace remains very competitive in spite of high energy and wax costs. We are pushing ahead with modest price increases for candles this quarter.

Glassware has been more challenging. While plant operating efficiencies were quite good in the quarter, high natural gas costs and weak demand led us to idle production for an extended period of time beginning in mid-December and likely not to start up until around the end of February. While a good cash move, the earnings impact will of course be unfavorable.

Somewhat as expected, we're seeing the impact of the significant aluminum truck accessory program we added early this fiscal year. Driving sales growth for the automotive segment past 10% in the quarter. Floor mat sales in the quarter were down as some programs were down from last year and others gone completely. Offsetting those were others, particularly for the Japanese trans plants that are showing growth. Our top four original equipment floor mat customers today include three major Japanese trans plants. The aftermarket remains sluggish for both aluminum accessories and floor mats.

Cost pressures in the segment included inefficient and duplicative costs related to ramping up our aluminum accessory program and high aluminum costs. Relative to floor mats, higher material costs and lack of overhead absorption impacted earnings. The segment's results did benefit from the sale of idle building, yielding an $800,000 gain in the quarter. Let me have John make some balance sheet and related comments.

Thank you, Jay and good morning. I will begin my comments by addressing some of the more noteworthy changes in our consolidated balance sheet. First, as of this past December 31, our net accounts receivables totaled over $121 million, which was approximately $21 million greater than our June 30 balance and also exceeded the December 2004 balance by over $12 million. The increase relative to June 30 was largely influenced by the seasonal timing of our glassware and candle sales. Compared to last December, the increase reflected the quarter's stronger sales volume, including that of December.

Turning to inventories, which totaled over $163 million at December 31, these remained similar to the level of this past June but increased nearly $21 million since December 2004. The year-over-year increase stems from several factors including; the higher sales volume in the specialty food and automotive segments, increases in raw material costs, and somewhat higher than desired inventories in the glassware and candle segment. The latter increase is being addressed through adjustments of production schedules, including the idling of our Oklahoma glass facility for the first couple months or so of our third fiscal quarter.

With regard to Lancaster's cash flows, cash flows provided by operations during the six months ended December 31, totaled $39,524,000, compared to $74,485,000 last year. The decrease was influenced by the lower level of net income and the fluctuations in accounts receivable and inventory that I discussed earlier. Depreciation and amortization during the first six months of fiscal 2006 amounted to approximately $16,540,000. This amount is relatively consistent with the prior year six month total of $16,865,000. Capital expenditures during the most recent six months totaled $35,075,000 and our share repurchases were $31,42,000.

Turning briefly to the income statement. One item I wanted to mention is our consolidated effective tax rate, which declined to 35.9% for the first six months of fiscal 2006, compared to 37.4% in the comparable year ago period. In addition to this year's rate benefiting from the new federal tax deduction for domestic manufacturing activities, and a somewhat lower state tax rate, fiscal 2006 will also benefit from the deductibility of the portion of the Company's special dividend that was paid in December to our employees stock ownership plan.

Finally this morning, I wanted to circle back on the current status of CDSOA from, which as Jay mentioned earlier, we recorded a current year distribution of over $11 million in this year's second quarter or $0.22 per share. This compares to last year's remittance of over $26 million or $0.47 per share. As many of you are probably aware, there has been recent Congressional legislative activity associated with the yet to be finalized Budget Reconciliation Bill that would end future CDSOA remittances on affected imported products that are entered into the U.S. after September 2007.

Regardless of the outcome, we believe 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 2006. At this point, I will turn our presentation back over to Jay so he can conclude our prepared remarks.

Just a few comments on our third and fourth quarters. In specialty foods, our retail product line initiatives should continue to be successful, although without the relative seasonal strength we see in the December quarter. Our food service channel sales should show more growth at some new programs are initiated. We should benefit from some price relief. The soybean oil cost comparisons getting to about flat with last year. Overall ingredient costs comparisons may turn modestly unfavorable. Energy costs may move closer to levels of last year.

We'll be excited to see our or Marzetti brand and Teresa's Select brand grocery shelf dressings perform once the salad season gets going late in our third quarter. Our acquisition focus remains solely on the food segment, although no deals are imminent at this time. Glassware and candles will be in the off-season. Although, new and updated planograms will be set with several of our key customers. Much wax formulation and other initiatives are underway to mitigate still rising material costs and we are expecting to see lower energy costs as compared to the first half of the fiscal year. Approximately two months of glass production down time will be a drag on earnings.

While our aluminum accessory products should show solid growth and have most of our cost inefficiencies behind us, floor mat margins will remain a significant challenge. Energy costs may abate some but we see no meaningful decline in raw material costs at this time. Indeed, aluminum prices are currently near 17-year highs. For the year, we see capital expenditures reaching approximately $70 million, with over half going to our new salad dressing facility. This project should be almost complete by fiscal year end with start up beginning in August. Share repurchases will continue. And we remain interested in any significant block repurchase opportunities. We're ready to take questions.

[OPERATOR INSTRUCTIONS] Your first question is from George Askew of Stifel Nicolaus.

George Askew with Stifel Nicolaus. Jay, just a couple of quick questions. First, congratulations.

Thank you.

The auto program, can you give us -- well, auto is up 10% roughly but it sounds like floor mats are down. Can you give us a sense of the order of magnitude of the aluminum business there?

George, we really haven't disclosed it down to that level. But obviously it is a significantly higher percentage growth than the rate for the segment overall. And we have one particular program, which I don't think we've identified by name in the past but is having the greatest impact. Although, we are seeing additional new business of similar type product helping us from other customers as well.

There have been some clearly on the automotive side plant closures, GM, Ford, certainly the most notable on the domestic side clearly. What -- is there fall out from those plant closures that will impact your business on either aluminum or floor mat products?

At this point we don't see any either current or any strong hints of impact on the aluminum side. Floor mats, yes, I would say we've already seen some impact from that and maybe potential for some additional impact. It is of course, hard it put your finger on exactly because those plans are still somewhat developing. But it obviously just depends on the particular vehicles involved and the timing of those changes.

You said the top -- three of the top four floor mat customers are actually trans plants, Japanese I should think.

Exactly. And obviously, they're not being impacted by any of this plant closure activity.

Right.

Except favorably, perhaps but not unfavorably.

Right. Okay. Just shifting to food for a moment, I think you said it was little to no pricing in the quarterly performance in food, although you are looking for price. Did I get that right?

Yes, we are. In fact, we have certain product lines that have pricing going into effect literally almost as we speak. February 1 is the target date for several of our product lines to implement pricing. So, we will see some modest benefit from that this quarter and the balance of the fiscal year.

And the product -- new products that have been launched, are they kind of ahead of what you would expect, what you had expected or in line or what is kind of the sentiment there?

I think -- what's really out there that we can measure of new products so far is again our refrigerated salad dressing line, which has about eight or nine months or at least the end of fiscal year had eight months under its belt. And I think it actually was rubbing somewhat of ahead of what our projections were. Our veggie dip, which is more of a repackaging than a total relaunch, is really brand new. In fact, that product isn't going to be on the shelves in most cases for consumers to be seeing until probably the next 30 to 45 days. So at that point, we'll probably start to get a hint of any impact that packaging may have on the retail sell through.

And then Teresa's comes even a little later, it sounds like.

Yes, that's right. That's probably getting on self again more like a March time frame. With usually the salad season itself getting going late March and into our fourth quarter.

Bear with me. One more question. On the candle side it sounds like you're gaining share. Is that fair?

Well, if we were just to look at IRI data, which is of some value of course but it doesn't include some key retailers, namely Wal-Mart, so if you take that out of mix, yes, we've gained modest share. I think they're showing a category that is relatively flat to slightly down and we're just slightly up. So we might have picked up, if we look at 52 week kind of data through earlier mid-December, we might have picked up 1 to 2 share points through that channel. But again, it doesn't include Wal-Mart, it also doesn't include dollar stores, both of which are important to the overall candle business and our candle business.

Are those -- Wal-Mart and dollar stores I would think have a favorable growth trajectory for you guys.

Yes, it is kind of a little bit of a little bit of a mixed bag overall. The dollar channels I think have struggled a little bit. Dollar store channels through -- or at least since energy costs shot up so much. Wal-Mart on the other hand I think continues to perform pretty well as you read about them.

Great. Thanks very much.

Sure. You're welcome.

Your next question is from Diane McKeever of Barrington Capital.

You mentioned your tax rate and I just wanted to get a sense as to the rate that you mentioned, 35.9%. Is that a good number to use as ongoing tax rate or will it be going back up?

Diane, this is John. I think for the fiscal year internally we're thinking 36% give take.

And then with respect to your CapEx plans, after this year's spend, do you expect them to return to more normalized numbers? Will they be more normal numbers?

Yes. We would. Normalized may be somewhat higher than what we saw in the few fiscal years prior to the current year. This year being impacted mostly by this new salad dressing facility. But I would say going forward we're probably going to continue to make some greater investments in the food segment of our business than what we were doing several years prior to now. As again, growth and new packaging alternatives and requirements develop. So, we don't have an '07 CapEx forecast but I would guess it is closer to 30 million plus or minus a little than it would have been 20 million.

With respect to the intone veer increased spoke a little a little bit about, could you give me an idea as to how long you think it will take to work through that increase?

Well, I think the increases we've seen in the specialty foods and automotive segments, to a large extent have been volume driven or influenced by increased raw material costs. So I -- so, to the extent that you do have increased sales volumes, it is not unusual to see a corresponding increase in the working capital needs. And in those two segments that's pretty much what we've seen. In the glassware and candle segment, certainly the idling of the Oklahoma facility will influence our inventories, at least glassware in the third and fourth quarters. And we're hoping to see lower candle production, as well year-over-year in the third quarter, that should also further decrease the year-over-year level of higher candle inventories. So, I would say by June 30 we should see our glassware and candle inventories much more in line with the year ago levels than what we did at December 31.

And just finally, to clarify with respect to the CDSOA payments, did you say you would not expect another payment during calendar '06?

No, we would not expect to see a payment until the last quarter of calendar 2006. And the amount really is not determinable at this point in time.

Okay. Thank you very much.

You're welcome.

Thank you.

Your next question comes from David Leibowitz of Burnham.

A few things. I have a question. You mentioned in the text that there was an $800,000 gain -- pre-tax gain on the sale of vital real estate. Is that applied to the automotive group's operating earnings of 699,000, which would imply you lost 100,000 in automotive?

That's correct, David. It was an automotive segment building and it does run through the operating income for that segment.

So basically, it is a nontax gain but it is just to minimize the loss that automotive is still running at? Do we expect automotive to be in the black for the second half on an operating basis?

Well David, as you know we don't forecast specifics. We'll be highly disappointed if we're not. I think while we've talked about our specific floor mat challenges as well as some ingredient -- or raw material costs pressures. Our aluminum segment should continue to show strong growth through the balance of the fiscal year. And again hopefully, we now have most if not all of our start up inefficiencies and we also had some duplicative costs that we carried through the end of the second quarter. Particularly in the form of building lease costs that were incurred, doubled up, as we were transitioning from one building that to another; that has already gone away. That hopefully, we'll see somewhat stronger performance out of that aluminum -- end that of segment.

And floor mats still remains a problem area?

Still remains a challenge. We do have some new programs coming on during the second half. But I think it really does remain to be seen exactly when those start and the volume they'll bring. And then again still the issue of energy and material costs that are bothering that part of the segment also.

And sometime back you had hired a consultant to hope you work a turnaround program in automotive. Have you implemented it this point all of those recommendations?

David, we did have somebody do some work along that line for us sometime ago now. And I wouldn't say that the recommendations were all conclusive. However yes, we have implemented things. One of the things major things we did now I guess a 1.5 year ago was exit our Waycross, Georgia facility and consolidate production at that point in time. So yes, I think we've implemented most of the time things that were feasible to do.

And turning to glassware and candles, how much CapEx are you going to have there over the next six months and all of next year? Have you budgeted that yet?

Not for next year we haven't. For the balance of this year we're probably low seven figures.

And do we have any special program that is we will be instituting over and above that which will add to the cost?

In that segment?

Correct.

No. One thing we are doing is some furnace repair work while we've got this plant down this month and next. But it is -- by standards of that business I wouldn't call it dramatic.

And turning over to specialty food for a moment, how much did you have to increase your promotion and ad budgets and couponing to introduce the new lines this year? Or reintroduce the new lines?

David, I couldn't give you an exact number right now. But it is fair to say, we definitely have stepped up our consumer and trade support both as we've launched that restage refrigerated dressing line. And we'll be doing more of the same with our pourable dressings as we get into the second half of the year. So, we are being more aggressive in the market place definitely.

And you say second half of the year, you're talking this calendar year, so in the first half of next fiscal year for pourable?

I was really talking second half of the fiscal year.

Okay. Good. So that when we look forward to fiscal '07, we will not have a comparable amount of upfront spend?

Well, it depends of course on whether we've got any other new product or category strategies we might want to employee. And and I wouldn't suggest that we would dramatically back off that kind of spending next year. There is some investment spending in the sense of slotting allowances, particularly, that wouldn't repeat themselves. But other kinds of consumer support is likely to be at levels similar to this year.

And in other words, the overall spend on the specialty foods will be percentage wise comparable '07 to '06?

At this point, David, I wouldn't want to suggest it's going to be down much. I would say comparable to slightly less. But again, if there are opportunities, we wouldn't back away from them if it took some additional spending.

Lastly, in terms of acquisitions that you are looking at, are you looking to go a little further afield in specialty foods or are looking just to fill in within the categories you're already participating in?

Well, that's the first priority is the categories we are participating in. We would look at -- and farther afield being maybe somewhat different categories. I wouldn't suggest totally different parts of the business. For example I don't see us going out and getting into the distribution side of the business. But if it is a category that we think has the right fit, the right growth opportunities, sure, we would take a serious look at it.

Okay. Thank you very much.

You're welcome.

The next question comes from Greg Halter of Great Lakes review.

Good morning. Just wanted to make sure that I have this correct on your receivables, that there is or isn't any amount from the CDSOA in the figure?

There is not any receivable related to CDSOA, Greg.

And what was the tax right you that applied on that amount from the CDSOA?

It would effectively be the overall effective rate, nothing unique relative to its taxability. There is a little variation on the state tax side but nothing substantially different from the overall rate.

Okay. And last quarter you had commented and discussed the refrigerated truck situation after the hurricanes with transportation costs being up and so forth. Can you comment on how that's, if it has resolved itself at this point?

There are two aspects to that that we talked about last quarter. One being cost and frankly that is still up with maybe some signs that some of the premiums that were getting tacked on at the end may be abating a little bit. The aspect of availability and impacting maybe even the timeliness of service or as it related to the first quarter even right at quarter end, some shipments being delayed because of lack of availability. We have not had that problem to any material sense this quarter.

And can you comment on what your wax or paraffin costs are running on a year-over-year basis and maybe in percentage terms?

I don't know if John might suggest a percentage here, Greg, or not.

I don't know that I quantify the percentage. In part it is difficult that match the percentage with that which is actually going through the income statement on a FIFO basis. But I think it is fair to say, that we're seeing some pretty good double digit percentage increases in year-over-year wax costs paid. All else being equal. We at the current time, have access to all the supply that we need. But the per unit costs have substantially increased and really show no signs of diminishing in the foreseeable future.

In fact, we got notice of further increases on the horizon just last week.

Are you still on allocation? I think you made that comment last quarter that you were on allocation but you were able to get enough.

That's right. Allocations do still exist from certain of our vendors. But overall, we've had adequate supply.

Okay. The Collins & Aikman bankruptcy we would have hoped would have helped the floor mat side. Any comments and if anything is happening there?

As it relates to our benefit, nothing seems to have happened materially yet. As you may follow that bankruptcy, it just seems to grind on. And most of the time existing business seems to stay in place for the present time. And the ultimate play out of that still does remain to be seen. And there is reason to be optimistic that there could be opportunity coming our way over the next six months or so. But as time goes on, we're less and less confident as to when anything significant might happen there.

And finally, the Marzetti plant, if you could provide an update on if that is moving along within your expectations, above or beyond and where the costs presently are relative to your thoughts?

Costs seem to be tracking pretty much right on. If there is a little variance on the upside it is probably only in six figures. Timingwise, likewise, seems to be right on target. We're not sure, right yet, when we'll actually start doing some more preliminary kind of manning and then test start up. I mentioned August. There certainly will be some expense prior to August as it relates to bringing people on board and that kind of stuff. But as far as actually doing some trial startups, that's more likely July/August.

And looking at the work force there, is that something that you you're already hiring for or you're going to be transferring folks down or how is that process going to play out?

At this point, the work force on the floor is not being hired yet or even recruited yet at this point in time. I think those plans are well put together but not manning there. We're starting to man some of the more senior management positions like plant manager and maintenance manager, that kind of stuff. But so far just two or three people actually on board and on the payroll in Kentucky for us right now.

What city is that in Kentucky?

It is down in Hart County, Kentucky. And it if you don't laugh at the name of the city, it is Horse Cave.

Okay. Thank you very much.

Sure.

Your next question comes from Boyd Poston of Galleton.

Good morning. On the automotive aluminum accessories business, the dollar amount on that business, will that work its way higher from what it was in the second quarter? Would it be higher third quarter, fourth quarter? I am trying to see how this peaks out or do we still have growth?

There should still be some -- in the one big program effect in that, there should be some growth there. Now clearly, that's dependent on vehicle sales really, light truck sales in this case. Although, this product line seems to be skewed more truly to light truck versus or -- I shouldn't say seems to be. Is skewed to true light trucks, pickup trucks versus SUV's. And so far the build and sales volumes of those vehicles seem to be holding up pretty well. And again, we do have some other programs for similar kind of product, both domestic and again transplant customers, that are also I think still in a growth mode. So as we sit right today, I think there is definitely still some volume upside in that part of our business.

Possibly even in the next fiscal year?

As -- probably looking out it fiscal '07, it is a little harder to have clarity there. But given some of these programs we're starting up as the year went on -- as the fiscal year went on, all other things being equal there should be a little bit of upside potential there, too.

On the raw material, the aluminum praising, how far behind the curve are you as the aluminum increases and you're able to capture recapture price? How far behind in curve are you with that and how fast can you ever catch up?

Well, they're up enough that catching up alone is potentially an elusive goal at least any time real quickly. But we're probably a good six months plus behind in the sense of seeing aluminum increases and passing some of that along.

On your new pourable salad dressing products you're going to introduce in spring, the price points they'll be introduced at, how would they compare with what you're going to replace?

They're going to be -- the Marzetti branded product is going to be, I think, going to be comparable to what we're replacing. And it is geared to be competitive with the other national brand product that's on the grocery show. The Teresa's Select, which is intended to be positioned a little bit higher than the Marzetti branded product, is really something now for us. And again we'll be, we think, positioned competitively. But we don't really have existing businesses there to compare it to.

And finally depreciation, your guess for '06 and if you have a guess for '07 total year?

Boyd, I don't know that we've taken a look at fiscal '07. But I believe as we look within fiscal '06 if you were to think of D&A of being in the neighborhood of 32, 33, 34 million, that should be a reasonable good guess at this point.

Thank you.

Thank you.

[Operator Instructions] If there are no further questions we will turn the call back to Mr. Gerlach for any concluding remarks.

Thank you all for joining us this morning. We appreciate your interest. We will look forward to talking to you with our third quarter results. Thanks again.

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