Marzetti Co (MZTI) 2006 Q3 法說會逐字稿

Good morning. My name is Phyllis, and I will be your conference facilitator, today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation’s 3rd Fiscal Quarter 2006 Conference Call.

Conducting today’s call will be J Gerlach, Lancaster Colony Chairman and CEO – and John Boylan, Vice President, Treasurer and CFO.

All lines have been placed on mute, to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press *, then the number 1, on your telephone keypad. And questions will be taken in the order that they are received. If you would like to withdraw your question, press the # key. Thank you.

And now, to begin your conference, here is [Earl Brown] – Lancaster Colony Investor Relations.

Thank you, Phyllis.

Good morning. Let me also say thank you for joining us today for the Lancaster Colony 3rd 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 J 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.

Factors that might cause Lancaster’s results to differ materially from forward-looking statements include but are not limited to risks relating 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 filing with the SEC – including Lancaster Colony’s report on Form 10K.

Now, here is J Gerlach.

Good morning. And let me add my thanks, as well, for you joining us this morning.

Our 3rd Quarter Fiscal 2006 results were clearly disappointing – and below our expectations. While overall sales increased 2% and our automotive segment even had a strong 15% growth in sales for the quarter, our EPS declined to $0.35 versus $0.46 last year. All 3 segments contributed to the earnings decline. While this quarter is our seasonally weakest and we are facing a variety of cost pressures, we should have done better.

John will comment on our balance sheet after I review each segment. But first, a couple of updates. Share repurchases for the quarter totaled 712,835 shares – for about $29 million – including 96,000 shares repurchased in the 4th quarter. Year-to-date, repurchases total approximately 1.573 million – leaving about 32.765 million shares currently outstanding, and 1.454 million still authorized for repurchase. EPS gained approximately $0.01 in the quarter from repurchases.

Capital expenditures for the quarter totaled $15.5 million, with our new salad dressing facility being the biggest expenditure. Capital investment into specialty food projects was about 80% of our overall capital spending. Year-to-date capital investment is about $51 million.

Turning to our Specialty Foods segment. Our 3% sales growth was a little disappointing. Although again, this was a non-seasonal quarter. Our biggest challenge is in the food-service channel of distribution, where our customers' needs – whether impacted by their consumer demand, menu changes or other factors – was sluggish. Retail channel growth, on the other hand, was satisfactory, as the categories of refrigerated salad dressing and frozen breads stayed strong. We do feel the later Easter pushed – perhaps – 1-2 million of retail product sales into the 4th quarter.

We continue to be pleased with the success of our Marzetti refrigerated salad dressing line, kicked off one year ago. Market share data would show us a strong Number 2 in the category, at 21% share – with over 20% growth versus very slight category growth in the 52 weeks ended mid-February. That program has come with added consumer and trade-promotional costs – which we have consciously chosen to stick with, in spite of other cost pressures. Our increased promotional expenses on all dressings and sauce product in the quarter exceeded $1 million. We view this as true investment spending in one of our core categories and brands, and expect to continue this support into the future.

Moving onto our margin decline in this segment for the quarter. Factors in addition to the promotional spending I just mentioned would include issues of sales mix, freight, packaging costs, benefits, utilities and some manufacturing inefficiencies. Ingredient costs for the quarter were on balance-neutral. We estimate freight cost increases year-over-year in excess of $1.5 million during the quarter. Some pricing was implemented during the quarter, and its impact may have been around $1 million.

Our Glassware and Candles segment had the toughest quarter. Sales were down about $7 million or 13% -- primarily due to weaker-than-expected candle demand, as some of our customer sell-through was off. And in other cases, efforts to manage inventory down were underway. Glass product sales in the quarter were actually up just a bit.

The biggest factor impacting our segment operating income was the planned down time in our Sapulpa, Oklahoma glass-manufacturing facility. That plant was down from roughly mid-December to mid-March, and is now operating after a smooth restart. While we knew this would be costly to the income statement – exceeding $3 million in unabsorbed costs – we were able to reduce glass inventories by about $10 million, and avoid buying some of the highest-cost natural gas we've seen.

High wax costs continue to be a major challenge in this segment, with increases the first 9 months of this year in the range of 25-30% for our primary grades. While wax supply was on allocation – now lifted, by the way – we have had satisfactory quantity to meet our needs. Pricing relief has been minimal, as the market remains very competitive – both from domestic and offshore competition.

Our Automotive segment delivered really mixed results. Strong sales growth of almost 15% -- yet just below breakeven operating income. Almost all the sales growth came from aluminum accessories to the equipment market, while floor mat sales were down just slightly. Our aluminum operating performance was much better for the quarter. And even with 17-year high aluminum costs, we were able to meaningfully improve the bottom-line contribution.

Floor mats were a completely different story, where higher material costs of synthetic rubber, resins, carpet and other chemicals – as well as product-mix change significantly impacted earnings performance. A 550,000 equipment impairments change and new program startup costs also impacted this segment.

Let me ask John to go ahead and make some comments now on the balance sheet.

Thanks, J. Speaking first to our accounts receivable – Lancaster’s consoled accounts receivable at March 31st 2006 totaled $107.023 million. This amount represented an increase of approximately 7% over the June 30th 2005 balance of $100.351 million. 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 2005, the most-recent March balance actually declined about 1%.

With respect to our inventories, the consolidated total of $156.373 million at the end of this March decreased about $8 million or 5% from the level of this past June. This decline was driven by an overall reduction in glassware and candle inventories, including the benefit of the Sapulpa plant idling. Compared to a year ago, inventories rose by roughly $9 million, largely reflecting volume-driven increases in our food and automotive inventories, as partially offset by the decline achieved in glassware inventories.

Moving down the balance sheet to our net property balance at March 31st – I'd point out that this total has increased by nearly $30 million since last June, largely as a result of the continued investment in our new dressing and sauce manufacturing facility in Kentucky. So far, this construction project has stayed largely on-budget. We anticipate startup to occur in the 1st quarter of fiscal 2007.

While it's quite possible we’ll see some initial startup costs associated with the Kentucky facility’s early production volumes, we do look forward to being able to share a showcase facility with our customers, along with the opportunity to reduce future operating costs by eliminating the level of excess overtime and freight that we now incur within our existing production and logistics processes. With further project expenditures to be made in the 4th quarter, as J mentioned, we see our consolidated full-year capital expenditures approaching $65 million or so.

I believe the other changes in our balance sheet components are relatively unremarkable. We do remain debt-free, with over $52 million in aggregate cash, cash equivalents and short-term investments. We also finished the quarter with nearly $500 million in shareholders equity.

In concluding my remarks, I'd like to share a few cash flow items for your consideration. For the 9 months ended March 31st 2006, Lancaster’s consolidated cash flows provided by operating activities totaled approximately $66 million – compared to $90 million for the preceding year’s 9-month period. Much of this decline reflects this year’s lower level of net income – including the effect of the $14.8 million year-over-year reduction in our 2nd-quarter CDSOA remittance from the US Customs Service.

Within the current fiscal year, depreciation and amortization for the first 9 months totaled $24.445 million. Property additions totaled $50.588 million. Shareholder dividends were $93.316 million. And share-repurchases were $59.982 million.

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

Thanks, John.

Looking ahead, first let me comment on our disclosure this morning of our evaluation of strategic alternatives among our non-food businesses. While we do not intend to comment further unless we do have material developments triggering disclosures regarding these efforts, I would emphasize this process is ongoing. It did not start in just the last few weeks. The time-table in any specific actions are not known at this time, and we do have outside financial advisors assisting us in this effort. We view this effort as supporting our long-term focus on growth opportunities in the food segment of our business. We are very interested in food acquisition opportunities, and while we are in dialogue with several prospects, nothing is imminent at this time.

Our operating management is focused on the performance of each of our businesses. Many of our recent challenges – especially freight, material and utility cost pressures are continuing into the foreseeable future. We need to find more sales volumes, some selling price-relief, and operational cost savings, to deliver better earnings performance.

Some of our initiatives include – Continued strong support of our Marzetti refrigerated salad dressing line. The repackaging and introduction of 3 new veggie dips – Asian Ginger, Horseradish, and Roasted Red Pepper & Parmesan flavors. The recent repackaging and updated flavors or our Marzetti pourable salad dressing line also includes significant promotional backing. The introduction of our new specialty dressing line of Theresa’s recipes. A new whole-wheat version of Sister Schubert’s Dinner Rolls, arriving in stores in July. Aggressive efforts to develop lower-cost alternative-wax compounds for candles. Even more focus on energy usage in all our facilities. Ongoing efforts to pass pricing along, where possible.

We expect to continue our share-repurchases, and as our new salad dressing plant is largely completed by June 30th, expect full-year capital expenditures again to total approximately $65 million.

Phyllis, we're now ready to take questions.

At this time, I would like to remind everyone – in order to ask a question, please press *, then the number 1, on your telephone keypad. We’ll pause for just a moment to compile the q-and-a roster.

Your first question comes from the line of David Liebowitz, with Burnham.

Very briefly, the non-food portions of the Company. What are they being carried on the books for, right now?

I don’t think that we separately disclose net asset value, per se, of the non-food segments, David. I think you can, in reference to the 10K, see what the total assets are by-segment. We don’t intent to update those numbers until June 30th.

Second question. In terms of the acquisitions that you are seeking in the food business… You did say there is a dialogue ongoing at the moment. Can you give us some idea of the size of the companies you're looking at, at the present time?

David, the current conversations would include a range of… From a revenue standpoint, of probably the upper teens to roughly 60 million.

And are these in arenas that you are already involved in? Or would these be step-outs into new businesses?

They're somewhat different product. But they do fit in with some of our existing – what we would consider – I think – our "core" categories.

Excellent. Thank you very much.

Sure.

Your next question comes from the line of George Askew with George Askew, with Stifel Nicolaus.

A couple of questions, here. Can you characterize in a little more detail, the food service sluggishness you're seeing? Are there lost customers, there? Or is it a temporary impact of delayed new products or things of this nature?

George, no – there are no lost customers in that reference. I don’t know that there's much true delayed new-product impact. It just seems to be – in general – a more-sluggish demand – which we would then interpret as sell-through on our chain-account customers that are perhaps dealing with less store traffic and whatever all impacts that for them. Whether – again – it’s higher energy costs, as we're seeing now – or competitive issues, and their given a competitive base.

The candles business. Can you break out for us of the 13%... I think I've got that right… 13% decline in revenue, there. The Candles and Glassware. How much was the decline in candles versus glassware? You said glass was actually up.

Yes. Actually, it was just a little bit. So that was all a candle-related decline.

How much of that would you attribute…? It sounds like there was some destocking going on. How much can you attribute to destocking?

We can' really put a specific number on that. I'd just kind of throw out it would be several million dollars. It was not an insignificant amount.

Was that an industry-wide destocking? Or was it select retailers at work?

I think it was more select retailers. I wouldn't say we saw that across-the-board with everybody we do business with.

You said it was… I think you said… customer… weakness in customer demand. Did you see weakness in the sell-through of candle products? Or was it simply within the consumers? Or was it simply your retail customers pulling back on demand because of this destocking?

Again, it’s probably hard to pin that down, for sure. But yes – I think there was certainly some retail sell-through factor in there. Again, the IRI-related data that we would show an overall category that is probably off 2 or 3%. And we're probably not in that analysis performing much different than the category. But the data is limited, given the number of mass-merchants and other retailers we do business with that just don’t participate in supplying IRI-related data.

On the… bear with me, here… floor mat business. Are you seeing any relief or improvement in that business tied to weakness in your primary competitors, there? The [inaudible] bankruptcies specifically?

George, I don’t think we can say we've seen hardly anything at all there favorable, at this point.

Has your estimated cap-ex grown [7-ish]?

No. We're not there, yet. Clearly, we won’t be building another salad dressing factory. But as far as other detail, no – we have not developed that fully, at this point.

Then last question. Can you characterize the current M&A market in your business segments? Kind of big-picture? I mean with rates having increased, is there any less enthusiasm, for example, from private-equity buyers in your arenas? Or is there plenty of private capital out there that they're not going to slow down? How would you kind of characterize?

You know George, our best barometer of that would probably be in a recent participation in a true auction environment. We have not been involved in any of those since the first of the year. So other than seeing some of the same kind of data everybody else would see about transactions and multiples out there, we really don’t have a better insight on that, at this point.

Your next question comes from the line of Greg Halter with Great Lakes Review.

Question for you regarding the food-ingredient costs. I see that soybean oil – I believe the futures have been moving up. I wonder if you have any sort of hedges in place for oil, as well as may be some of the other food-ingredient items?

Greg, at this point, as you know – oil is the primary thing we would have the ability to either hedge, or… as I think you recall… we really deal with that by making forward buys, relative to our expected future needs.

So as we start to look at the recent moves over the last week or so, we're really in our case looking at the beginning of fiscal '07. Particularly, the first half. Our forward buys, at this point, give us relatively modest coverage, probably, in the 20%-or-so area, right today.

This recent run-up is not terribly well-explained or understood, I think, as to why that may be going on. I don’t have any particular thoughts on where it might go from where it does sit, right today.

I think our current analysis might suggest that at current levels, we'd probably be looking at not a whole lot of soybean oil impact on that first half. But if it were to move up more, obviously that would be a little bit different story.

Other ingredients – I think as we sit at this time – probably would… And again, these are more subject to very near-term fluctuations, of course. But right now, we'd probably see those totaling up to relatively neutral, still.

You made a comment about this 713,000 or so shares bought in the 1st quarter. But I missed the dollar amount you spent.

I think it was right around 29 million.

You discussed the destocking issue a little earlier. But the one that’s getting the press these days is Wal-Mart. I was wondering if you could comment on what you're seeing with your business – either in the food and/or any of the other businesses, relative to Wal-Mart.

Well, Greg, we do try to avoid specific customer comments. I'd say that we wouldn't be immune from what you're reading about them.

That sums it up. Thank you.

Yes.

Again, if you would like to ask a question, please press *, then the number 1 on your telephone keypad.

Your next question comes from the line of Rob [Halp] with Fiduciary Management.

First of all, I'd like to say I appreciate at least the openness of the commentary regarding the hiring of the financial advisors, regarding potentially making some corporate decision on the non-food business. I know those decisions aren’t easy. But as long-time shareholders, we appreciate that.

Second of all, I just wanted to see. Just kind of what your thoughts are on margin degradation in the specialty food business. If you kind of think about your experience over time in these businesses, I guess what would you think… maybe as a percentage of the degradation… would be things you think are sort of temporary? And what percentage would you think would be maybe those that… maybe just the nature of the business and how it’s changed? Whether it’s needing to be promotional? Maybe competitive issues with the customers, et cetera? Is there a way you can handicap that for us?

Rob, I'm not sure I could handicap that. The kind of things we certainly would like to think are not… Or maybe I should better say historically might have not thought are necessarily long-term would include things like spikes in energy costs that have really flowed through significantly in the area of freight costs. But also, in operating costs for operating plants.

But I certainly wouldn't suggest that I'm convinced that that is a short-term phenomenon, and we’ll at some point – 1, 6, 12 months from now start trending down. I, in fact, think we have to start considering those more long-term – perhaps – levels of cost. And find ways to offset those. Reduce usage. Offset with both cost decreases and some pricing. The pricing has probably been one of the more-challenging arenas for us – even in the food business. We're just going to have to – I think – figure out how to get more relief. I think the industry overall is.

There's a lot of – I think – pent-up inflation on costs throughout the industry that just aren’t getting passed on yet to the customer. And we're going to have to get some relief on that, ultimately.

The other thing – certainly again – is we've looked historically and tried to work toward the future that we've got to have some success in, is new-product development. Obviously, excitement over new items that can spur the top line growth beyond normal, and not necessarily be as price-sensitive as an item or a category that’s been on the market for 5 or 10 years. So we're working a lot in that arena. But clearly, it’s a lot easier to talk abut than to click on just the right thing.

And what do you think your new facility does in terms of helping to alleviate some of these things. I mean you mentioned freight. Is there any other? Is there some utility benefit, as well? Energy costs?

Well, yes. Overall, it should be a more-efficient plant operations, as it relates to utilities. It’s definitely going to help us from just an everyday operations standpoint, from the sense of reducing overtime, reducing congestion – inefficiencies that are in the dressing and sauce side of the business today, as we operate at very high-capacity utilization levels.

Hopefully, it does give us good potential to add some growth to the business, with a plant that shows very well – adds some capabilities – and certainly gives us added capacity to be sure we're pursuing growth.

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

Again, thank you for joining us, today. We’ll look forward to talking to you in late August with our 4th-quarter results. And again – while I mentioned a lot of these same challenges we've dealt with… not all of them, certainly, but a number of them carry forward into the 4th quarter. We're going to be clearly working hard to deliver the best results we can. So, thank you.

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