Marzetti Co (MZTI) 2006 Q4 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 fourth quarter and fiscal year 2006 conference call. Conducting today's call will be Jay 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. [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 fourth quarter and fiscal year 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 not to place undue reliance on such statements.

Factors that might cause Lancaster's results to differ materially from forward-looking statements include but are not limited to risks relating to the economy, competitive challenges, changes in raw materials cost, the success of new product introductions, the effect of any restructurings, and other factors as are discussed in time to time in more detail in the Company's filings with the SEC, including Lancaster colonies report on Form 10-K.

Please know that the cautionary statements contained in the Safe Harbor paragraph of today's news release also apply to this conference call. Thank you for your patience and now here is Jay Gerlach.

Good morning and let me add my thanks as well for you joining us today.

We are pleased to have reported our best quarter of the year from an operating income and operating margin standpoint. Sales for the quarter were up a solid 6.7% without the benefit of any acquisitions.

While each segment reported positive operating income for the quarter, it was our specialty food segment that provided all of our operating income growth. The same was true for the full fiscal year.

I will review each segment shortly but first wanted to update you on our primary cash uses for the quarter. Share repurchases totaled 615,739 shares in the quarter for about $24,361,000. Capital expenditures in the quarter totaled $11.4 million with about half going toward our new salad dressing production facility, scheduled to start up in early September.

Cash dividends paid on June 30th totaled $8,444,000. For the full year share repurchases totaled 2,092,442 shares for $84,343,000 including 435,000 shares repurchased in the first quarter of fiscal '07. We have actual outstanding shares of 31,810,000 shares and 2,498,000 shares still authorized for repurchase.

Capital investment for the year totaled about $62 million with over half going to our new dressing facility and over three-fourths to our specialty food segment. Total cash dividends for the year were $101.8 million, consisting of 34.4 million in our regular dividend and 67.4 million paid as a special dividend in December. Overall, $186.1 million returned to shareholders in the form of dividends and share repurchases and $62 million invested in new facilities and equipment.

We finished fiscal '06 with a strong debt-free balance sheet.

Let me begin my segment comments with our specialty food business which had a very strong finish to the year. Net sales for the quarter and full year were up about 5%. Operating margins, however, hit almost 19% allowing full year margin to get just over 16%. Helping our margin in the quarter were good volume, favorable sales mix, benefit of some price relief, better plant operations and minimal freight cost impact year-over-year, good control of promotional costs, and modestly favorable ingredient costs.

The later Easter holiday this year no doubt helped sales of some products a bit. But we also saw a continued strong performance in the produce department from our refrigerated salad dressings and veggie dip lines as well as croutons. Our Sister Schubert's brand frozen rolls also had good volume growth. Our Foodservice channel growth was not strong but better than we have seen in the recent past.

All in all a very successful effort for our entire specialty food team to deliver a strong finish to the year.

Our [auto] segment finished the year with a very strong sales quarter, up 24%, to become our number 2 segment based on volume. The primary driver in the quarter and throughout the year has been aluminum accessories, largely due to original equipment programs including one very large program that started early in the year. Floor mat sales did show a positive comparison in the fourth quarter, but still down for the year.

Unfortunately, we did not grow operating income in the quarter or year even with the sales growth due to high material costs, competitive price pressures, energy costs, start up costs at several new format programs and lack of capacity utilization at our Ohio floor mat plant.

Glass and candles continues to be a challenge with sales down 8% in the quarter and 7% for the year. But we did have a positive operating income for the quarter and year. Now our smallest segment in terms of revenue high raw material costs, particularly wax, high natural gas costs and overall capacity utilization are the big factors affecting profitability. Although the June quarter is not a strong seasonal period, tight inventory control by some of our major candle customers impacted our sales performance.

Let me ask John to make some comments on our balance sheet before I conclude with some thoughts on the new fiscal year.

Thanks, Jay.

I will briefly review several matters this morning regarding our June 30th balance sheet and fiscal 2006 cash flow. Let's first review some of the major year-end balance sheet components.

Accounts receivable at June 30th totaled $108,987,000 - a $8.6 million or 9% increase above the levels of a year ago. This growth was largely due to the strength of our June and fourth quarter shipments. All in all our account receivables agings remained in recently good shape and are very fairly comparable to year ago levels.

Turning to the largest component of our working capital inventory, we saw a June 30 total of $161,949,000 that reflected a year-over-year decline exceeding $2 million or 1%. Food inventories were relatively even with that of the year ago with higher inventories of automotive products being more than offset by reduced inventories of glassware and candles.

Our balance sheet change also worth comment is net property which increased about $33 million or 21%. This growth largely reflects the additional $36 million we spent this past year on construction of our new dressing and sauce facility in Kentucky. We are excited to see this facility being brought up to begin trial operations over the next few weeks. The full phase-in of customer volumes has spanned much of fiscal 2007.

I'd also note our expectation that we should see a decline below $30 million in CapEx during 2007, absent a commitment on our part to expand our Sister Schubert's manufacturing capabilities. Over the next few weeks we will finalize our dues on this project for which we could see additional expenditures in excess of $20 million during fiscal 2007.

A larger balance sheet change also worth mentioning occurred over in other noncurrent liabilities and deferred income taxes, which decreased almost $9 million. This decline primarily reflects an adjustment to reduce the additional minimum pension liability associated with our defined benefit pension plan. Essentially opposite to what happened a year ago to hire long-term interest rates prevalent at year-end necessitated this kind of entry in accordance with the pension accounting rules.

Finally in wrapping up my balance sheet remarks I point out that while we remain financially strong with no debt, our largest year-to-year balance sheet change is reflected in the decline of cash, cash equivalents and short-term investments. In the aggregate these balances have declined by over $142 million during the last year due to fiscal 2006's historical high levels of dividends and share repurchases as well as the record level of CapEx.

Turning to cash flows, cash flows from operating activities totaled $97,015,000 in fiscal 2006 which compares to $116,677,000 for the prior year. A lower level of net income particularly as affected by the reduced CDSOA remittances contributed to this decline as did relative changes in our working capital components.

In arriving at this year's cash provided from operations, the most prominent non-cash addback remained depreciation and amortization which totaled $32,341,000. Of this amount, as has historically been the case, over half actually relates to our nonfood operations. As Jay alluded to, some other annual cash flow amounts of note include $61,965,000 for property expenditures; $84,343,000 for share repurchases; and $101,760,000 for the payment of dividends.

By the wait with respect to share repurchases, I point out that these did not just offset the effect of stock option exercises but actually achieved a marked year-over-year reduction in shares outstanding. We have about 5.8% fewer shares at this June 30th.

Given what I've shared this morning and our current expectations for fiscal 2007 we believe that we continue to be 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 will now turn the call back over to Jay for his concluding comments.

Thanks, John.

Let me first comment on our strategic alternative work where we have no further details beyond the comments in our earnings release other than it is being actively worked on. And I think there could be some developments yet this fall.

Overall, we have a positive outlook for fiscal 2007. As always there are many variables, including demand, energy cost, raw material and ingredient costs. In specialty foods we have new product initiatives including new flavors, line extensions and at least one new category of product we intend to enter during the year.

Our recently restaged Marzetti brand refrigerated dressings, prepackaged veggie and fruit dip and just restaged grocery shelf Marzetti salad dressing and the new Teresa's Select brand of salad dressings all should be growth contributors. Sister Schubert's brand, wheat rolls and New York brand presliced garlic bread will be new additions.

We generally expect a bit more growth than last year for the Foodservice channel as well. We anticipate pricing to be modestly favorable, packaging and ingredient costs are likely to be up year-over-year while we anticipate freight costs not showing as large of an increase as last year.

We will manage SG&A expenses carefully. However competitive conditions could unfavorably impact selling costs.

The start up of our new dressing plant will be a drag. And its impact will be dependent on how fast and efficiently we are able to bring up.

In automotive, we have anniversaried the major new aluminum accessory program in the past year, but are positive about the impact of other new programs.

Floor mats are less predictable. Overall demand in the segment could be volatile depending on total vehicle sales and mix. Costs will remain a challenge - both raw materials, aluminum, plastic, resins, carpet other chemicals plus still high energy costs. There should be some price relief but still likely short of our needs.

Glass and candle demand will be guided largely by what we experience in this fall seasonal buy in and sell through. We have a couple of new candle product lines, Essential Elements and Willow Lane that we expect to be pluses. Our level of sales success obviously impacts the issue of capacity utilization.

Raw material and energy costs are likely to stay at high levels. Pricing is attempting to be implemented in candles and certain glassware items. Our success in the very competitive market remains to be seen.

Our acquisition growth efforts remain focused on food opportunities. And, while we routinely are looking at one or two, valuations remain a challenge.

Future share repurchases will be evaluated when we are back in the market next week.

Before going to questions, I would just like to remind you we can't comment any further in any further detail on our strategic alternative process at this time. But we are looking forward to reporting developments when appropriate.

Phyllis, we are now ready to take questions.

(OPERATOR INSTRUCTIONS) George Askew with Stifel Nicolaus.

Good morning, Jay and John. Congratulations. Very nice results out of specialty foods, and scratching one of my questions off the list right now.

Could you give us a little bit more detail on the mix shift within specialty foods? I mean it sounds like clearly retail is doing well. Sounds like some of your higher margin products are doing well and Foodservice is a little softer. Each of which should probably help margins. Is that what we're seeing here?

You have kind of answered it as you asked it. Yes. It was a little bit of a shift to more retail business and within the retail piece, some of the better margin product lines had a good quarter. The Easter comment does primarily relate to Sister Schubert's so that was definitely a help early in the quarter.

And, overall, I think we saw continued strong demand out of the whole refrigerated dressings and dip category as we went into the dressing season.

Can you just aggregate for us the volume versus price contribution of the 4.8% growth there?

I will let John correct me, but I think pricing might have been very low seven figure impact. Maybe a little over $1 million dollars.

So really only about a 0.5% probably. I'm sorry the growth -- okay. A million of the growth?

Yes.

Between 1 and 2 million.

Okay. You're rolling out new products. Can you characterize for us their contribution during the quarter. Were they -- did they contribute to profitability or were they dilutive?

I would say, I guess our view would be I think that they did contribute to profitability. Yes.

That's excellent. And then, the new plant. You mentioned that it's going to be a drag on earnings in '07. Can you characterize that one-, two-, three-quarter type event? And was it a drag here in the fourth quarter as you're getting it ready to get in a position for opening?

I think it had pretty small impact in the quarter, maybe low six figures. Again the timing as we go out over the year is a little bit unpredictable as to the exact timing of ramping things up but -- I think, probably think it's going to be skewed to the first three quarters. I would hope by the fourth quarter we're getting pretty well up to speed. But still certainly remains to be seen.

One last questions. You mentioned the new category of food entering in '07. Can you give us a hint what were you (MULTIPLE SPEAKERS) --?

Not in detail but it is a new category into the produce department that we think there's opportunity. I wouldn't suggest it is a huge huge potential business but we think it is a nice addition to what we have in there today.

And adjacent it sounds like the things you're doing now.

Yes. I think we will be able to identify that when we are talking about the first quarter. But we are not bringing that until the trade until probably that time or shortly thereafter.

That's fair. Again, congratulations, I will yield the floor. Thanks.

[Stan Westhopf] with [Paradyne] Capital Management.

Good morning. I have a couple of questions. You mentioned that you are looking to do some construction with the Sister Schubert facility. Is that included in your CapEx for the 30 million roughly for '07?

No. That it is not in that number. I think the way John -- I will let him comment as he framed it.

The $30 million would exclude any new construction on the Sister Schubert's manufacturing capabilities. What I wanted to convey was that we believe that manufacturing - the new manufacturing capabilities would exceed $20 million in additional expenditures over and above the 30.

Can you comment on -- you've had great growth in the automotive segment mainly we like the aluminum product. Do you see that leveling off in the next year or so or do you see some good strong growth in that category?

I think the rate of growth definitely is not as high as what we had experienced this past year but would like to think there's still some decent growth going on there now again. Subject to demand, obviously, from the build standpoint that could meaningfully fluctuate, obviously, as that is pretty dependent on new vehicle sales.

One last question. We know the floor mats have been declining in the past year or two or so. Can you mention, your comment on how much that is part of your automotive segment of sales, that is?

Today, it's probably in the 1/3 area. Is that pretty close ballpark, John?

Little over a third.

Thanks. Excellent quarter.

Jason Rogers with Great Lakes Review.

It's actually Greg Halter. Congratulations on fine results there.

I know you mentioned in the auto segment, the aluminum program is about anniversarying but it just seems like in the quarter with such a positive impact, is there something that I'm missing there or can that continue going forward into fiscal '07 at this type of pace?

Again I don't think that type of pace can keep up. Because we do anniversary this big program but we have been picking up some additional ones throughout the year. So we would expect at this point that we obviously continued growth there. Although, again, as I just commented you have got to keep a pretty good eye on new vehicle sales and particularly light truck sales, as a lot of this is like truck accessory kind of product.

And in the quarter -- I guess I should rephrase. Are these programs usually quarterly or semiannual or annual type programs?

You're still talking about the aluminum program?

Yes.

They would, more typically, be annual kind of programs. I mean they can change on short notice but it's not like we would anticipate starting up a new program and only having it for a quarter or two.

It seems like the growth in the quarter just seems outsized. But I guess you had a 10% and a 15% in the previous two quarters.

Looking at wax costs, you mentioned that they are up. Just wondered if you could provide some detail for you how much they are up on the year-over-year basis and what the outlook is for wax cost going forward?

Maybe to put it more in a dollars sense, it's probably year-over-year had about a mid seven-figure impact.

In the quarter?

No; for the year. The cost themselves of actual wax has stayed at high levels. We have not seen it come off at this point but what we and I imagine everybody in the industry is working hard on is ways is if we can find them to reformulate and try to drive the actual overall wax cost down some. When I say wax in the sense of using not only the typical paraffin wax but potentially vegetable waxes, and whatever kind of appropriate blends, perhaps, that can be developed to mitigate the rising costs.

You are not in the allocation at this point?

No. We don't have any problems getting material.

And one area where you've received benefits over the last couple of years is the CDSOA; and it's our understanding is, this may be the last year for that. I just wondered if you could comment on your current take on the situation?

I think, Greg, the language we have in our SEC filings particularly in this last 10-Q is still pertinent basically. The current legislation provides for distribution of antidumping duties on products entered into the U.S. through September of 2007.

To be frank, there is a lot of legislative and legal controversy still surrounding this program. So as always, we view the future of this program and our receipt as very problematic.

And any change in the suit of trying to get some of those dollars back from the recipients?

Greg, you are referring to --?

On the CDSOA, I thought there were some lawsuits of, again, I'm just paraphrasing that these dollars have been allocated maybe in a way that some of the companies that receive them may have to potentially return some of those funds.

There has been a decision within the last month that was adverse to a remittance made to the crawfish industry. That particular litigation as I understand it is to be further via appeal and so there is nothing directly yet on (indiscernible) is, as to the resolution of that case or any related remedies.

All right; thank you very much.

(OPERATOR INSTRUCTIONS) Diane McKeever with Barrington Capital.

Now that the new plant is nearing completion, I'm wondering if you could talk again about the benefits that you expect to see from this plant? And I know that you said there would be some startup costs. But I'm wondering if you could give some clarity as to when we could begin to see those benefits and the numbers?

I'm not sure how close we can get right at the moment but the benefits coming from that facility, I don't think, start to outweigh the startup costs until probably at the earliest - near the end of this fiscal year. Again, dependent on our ability to ramp it up from a timeliness and efficiency standpoint.

I think the benefits we anticipate to see are, overall, are a more efficient production operation than we have in most of our other facilities today from the standpoint of plant flow and layout, as well as particular operating equipment and the speeds and efficiencies that it should run at. I don't know if that goes enough to your question or if John would add anything to that.

The other thing I would note, Diane, is it's probably allowed us to extend the life of our existing distribution facility here in Columbus. And by doing so, we've invoided a fairly significant CapEx here.

Thank you very much.

Boyd Boston with [Garrison] Asset Management.

Good morning. On the Foodservice business what gives you the optimism for the new fiscal year? You seem to be quite encouraged about increased growth there.

And you particularly are talking about the Foodservice channel versus retail?

Yes.

If I came across as quite optimistic that might be a little strong. We do think we ought to see some better growth this year than we saw this past and this past was a relatively soft growth year. It was up year-over-year; but I think what we hope we will see is a customer base that is not impacted to the degree they were this past year, from a customer count and sell-through standpoint.

Certainly don't know that for sure; but we also have programs that we've been working on that have been developed. We expect to be developed over the not too distant term that should have a contribution as well in fiscal '07.

In regard to Sister Schubert when you first audit could you refresh my memory? You made a capacity addition I think you had it planned, I don't know added 20% capacity. You did something. And how much is potential 20 million. How much more capacity would that be?

I think our last capacity addition was maybe in the 30, 40% kind of growth. This has the potential to be -- it would likely be significantly more than that. Maybe 50% plus capacity addition.

When you talk about the bread category when you mentioned the New York brand is the Montebello brand performing at a similar fashion to the New York brand? Or is there a major difference?

It's probably pretty similar. Actually it's a smaller brand from a dollar standpoint so the percentages sometimes can be -- actually can be greater. But I think we continue to be pretty pleased with what is happening with the Montebello brand.

Finally for the whole year, energy costs. Could you give any dollar figure as to what that was versus the prior year or how much of an increase?

I don't think we had it tallied in that manner. But I would point out that fuel costs which are certainly energy-related have significantly impacted the results of the specialty foods segment. In particular our overall natural gas expenditures were up year-over-year and that is in a year in which our largest glass facility was largely shuttered for three months.

So that the impact has been fairly significant and really pervasive across each of the three segments.

Thank you.

Rob Halp with Fiduciary Management.

Good morning. Just wanted to kick off by saying congratulations on a good quarter and I applaud the efforts on the capital returned to shareholders throughout the year and thought that was impressive to see and good to hear you talk about that, as well as exploring options that seems like you guys are -- seems like we are making some really good milestones here as we head into '07.

Thank you.

Just I thought that just to kind of go over a previous question. I thought that the new plant should really help with some distribution costs that, maybe, you talked about this a little bit, John, that you guys aren't going to be as inefficient in terms of distributing costs because of the size and the ability that this new plant gives you. And that could be an early cost savings right away.

Is that true or am I wrong on that?

I think as we bring that facility up and increase the volume being shipped out of there we will see a savings in distribution costs. If for no other reason, right now to meet our customer needs, we are doing a lot of interplant shipments. And we are hoping that a lot of that unnecessary expense will disappear.

And other things I think, I thought if I go through my notes were you guys are running flat out in terms of, over time you're even incurring overtime costs that were seemingly unneeded and ongoing. And those would eventually be relieved with the new facility.

That is correct.

Maybe we can talk quickly just not being too scattered here; but on the Foodservice business do you do any business on the quick service side? Is it all entirely casual dining in that area?

We really do cover the gamut even up to the white tablecloth side to it to some degree. Yes. Casual and quick service would be, we'd be significantly -- significant players in both of those categories.

Okay. So even if casual were to continue to be tough and if they were trading down you'd kind of benefit in that regard. But still if we have a tough consumer environment out there and they decide to stay home and eat you don't get that side of the business too much.

That's true; yes.

Lastly I guess the expansion in bread, little bit new here. But if you were to undergo this expansion on the -- in the bread area what do you think you need to do, then, from a Foodservice specialty food standpoint in terms of you've got sort of the sauce and dressing side expanded and the bread side.

Are you pretty much done with new growth expansion and growth CapEx for a while? I know it's tough to say especially if you're going into some new lines that may be growing a little bit faster but what are your thoughts longer-term over the next three years on that regard?

It is tough to say. I would think over the next three years, it would be likely that we wouldn't have another single big expenditure beyond what we are talking about right now for the bread business.

On the other hand, not only the hope for routine growth we would like to think we would see. I do think we see within the Food business continued demand for more and particularly special and unique kind of packaging capability that probably just adds a little more capital need for that business than we might have seen, say, five years ago.

Well, you don't -- does it seem like a new facility? More equipment side? Or -- just trying to get at maybe the big CapEx dollars are going to be close to ending on the specialty food side, when we get back to more nice growth but not huge expenditure mode.

I would think that's largely where we are. I guess I would though, frankly hopefully would have a demand for big expenditure if we have the growth to support it. But we wouldn't see that right now beyond this bread need.

Okay. Thanks.

[Jason Rogers] with Great Lakes Review.

It's Greg again. I have a couple of follow-ups. I saw in July that soybean oil - at least the future prices - had spiked up and they've come back since. This brings up a point.

Wondering whether or not you have any forwards at this point or doing anything on the hedging side?

We are out forward some, not to a real big degree right at the moment. We've been trying to understand the market and how the fundamentals should be impacted. And it does appear like we've had a couple of good crop years. There's a fair amount of product out there. This crop seems to have not had any huge problems. At least that I've heard about.

Yet the price still seems to stay high and there's a lot of speculation of course around this bio-diesel stuff and how much that's lurking in there and encouraging the speculators to hang with soybeans and soybean oil longer than they would have in the past.

Remains to be seen, but that we've enjoyed seeing it come off a little bit in the last week or so. But would hope our wrap up here with another favorable crop report would bring about a little more softness. But certainly no guarantees.

Certainly beats the 35 back in '04.

Yes; definitely.

Can you remind us - soybean oil and I think cream is your second largest raw ingredient cost? What kind of variabilities the gross margins of the Company have related to $0.01 or $0.10 change or wherever you framed it in the past.

I think what we've said in the past is that a $0.01 change in soybean oil would be roughly equivalent to a $1 million change in gross margin all else equal.

Okay. On the [Suppula] plant are there any plans for that to be idled in fiscal '07?

No plans at this point but we are monitoring closely the utilization of that facility. So I can't tell you we've got any plans for any extended shutdowns at this point in time.

When would the next rebuild be required there?

I think the nearest one is out almost three years. Two-and-a-half to three years from right now.

Good. And finally on the glass and candle side, on a year-over-year basis, can you give us some sense on what those two items or categories were up and/or down on a year-over-year basis?

You're talking about candles versus glassware on the revenue side?

Correct.

We were actually down on both of them with candles probably being the majority of the decline.

And is (MULTIPLE SPEAKERS). Sorry. On the food side is the retail in food service still about 50-50?

It's close but we are probably in the 51 to 52% retail.

Thank you.

At this time there no further questions. We will turn the call back to Mr. Gerlach, for any concluding remarks.

Thank you Phyllis. And we do appreciate everybody joining us this morning. If there are any follow-up questions, please don't hesitate either to give John or I a call. We will look forward to talking to late October with our first quarter results. Thank you.

This concludes today's Lancaster Colony Corporation first quarter and fiscal year 2006 conference call. You may now disconnect.