Marzetti Co (MZTI) 2007 Q1 法說會逐字稿

Good morning. My name is Tamara and I will be your conference operator today. At this time, I'd like to welcome everyone to the Lancaster Colony Corporation first-quarter fiscal year 2007 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. And now to begin your conference, here is Earl Brown, Lancaster Colony Investor Relations.

Thank you. Good morning and thanks to all of you for joining us today for the Lancaster Colony first-quarter fiscal year 2007 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 Chief Executive Officer, and John Boylan, Vice President, Treasurer and Chief Financial Officer, 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 risk relating to the economy, competitive challenges, changes in raw materials cost, the success of new product introductions, the effect of any restructurings and other factors as are discussed from time to time in more detail in the Company's filings with the SEC, including Lancaster Colony's 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.

Now, here is Jay Gerlach. Jay?

Good morning and thank you for joining us to review our first quarter of 2007 results.

We were obviously disappointed in our earnings performance and minimal consolidate sales growth in the quarter. I will comment further on each segment; however, the limited sales growth and unfavorable sales mix in our Specialty Foods segment and high material costs and competitive markets in our nonfoods segments were the primary challenges.

Also contributing about $500,000 to the decline in our Specialty Food earnings was our new salad dressing plant that started up during Labor Day week. The completion of this plant also contributed to total capital expenditures in the quarter of $10.3 million with over 80% of this amount occurring in our Specialty Foods segment.

Share repurchases in the quarter totaled 450,414 shares for $17.5 million. Actual shares outstanding today are 31,852,000, with 2,483,000 shares authorized for repurchase.

For the first quarter, our Specialty Foods segment recorded about 1.5% growth in sales and a nearly 6.5% decline in operating income. Sales performance for the quarter was somewhat opposite of our fourth quarter in that our growth came solely from the foodservice channel, while retail channel sales were off slightly. New programs and increased customer traffic with our national chain restaurant customers seem to be driving that channel's better growth. Aggressive competition and somewhat slower consumer takeaways seem to be the negative factors in our retail channel. The softness in overall fresh produce sales following the spinach recall in September likely played some role.

Operating income for our Specialty Foods group was primarily impacted by the low total sales growth and the mix shift away from better margin retail lines. We also had added investment in consumer spending to support our relaunch pourable salad dressing effort.

Our new salad dressing production facility successfully started up in early September. While we are quite pleased with our progress to date, there will be some learning curve issues and limited plant utilization for several months. We estimate that the unfavorable first-quarter impact at about $0.5 million. Freight and ingredient costs were relatively flat year-over-year, pricing was modestly favorable versus last year.

While Automotive accessories sales grew 11% in the quarter, we slipped to an operating loss as high material costs continue to be a major challenge. Also contributing unfavorably were lower operating utilization in our Coshocton floor mat plant and some costs for a strike that began at that plant in late September.

Glass and Candle sales declined 10% largely due to later than expected seasonal candle orders and close management of inventories by many of our customers. This market remains very competitive. Glassware sales were also down. Less volume, competitive market conditions and stubbornly high material costs, especially for paraffin wax, all contributed to an operating loss for the quarter.

I will now ask John if he could make some comments on our balance sheet and related matters.

Thanks, Jay. Let's first review several of the more notable line items within our September 30 balance sheet.

Accounts receivable at September 30 totaled $123,252,000, which was approximately $14 million higher than at June 30, but only $2 million greater than as of last September. As typically occurs in the first quarter, our receivable levels are strongly influenced by seasonal sales experienced by the Glassware and Candle segment. We also had a record level of sales in the current year's quarter.

With respect to our inventories, the September 30 total of nearly $172 million compared to roughly $162 million at June and $175 million last September. Relative to the levels at June, we had some planned builds at Food and Automotive inventories. The year-over-year decline reflected the efforts made over the last year to reduce our Glassware and Candle inventories and we're now reasonably satisfied with that segment's levels.

Our property, plant and equipment increased only $3 million since June 30, although about $25 million since last September. The latter increase reflects the construction of our new salad dressing facility located in Kentucky, which as Jay mentioned, was effectively placed in service last month. In addition to the improved overhead absorption to be provided by this plant's fuller capacity utilization as the fiscal year progresses, other benefits we should enjoy are reduced outside co-packing costs, better system throughput, a reduction in workforce overtime and lower logistic costs.

We continued to remain debt-free during the quarter, held over $11 million in cash and equivalents at September 30 and exceeded $484 million in shareholder's equity. This is quite a change from where we were a year ago when we had also lacked any debt, but had over $155 million in cash and investments. This greatly reduced net cash position came about largely due to the level of cash returns we provided our shareholders, whether through share repurchases or dividends, including last December's special dividend of $2.00 per share. We have made some modest borrowings this month, but our balance sheet posture obviously still 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 provided by operating activities for the quarter totaled $6,031,000, which compares to cash utilized of less than $1 million in the year-ago quarter. Comparatively favorable changes in working capital components contributed to the increase. One specific component of the quarter's cash flows that you may find of interest is depreciation and amortization that totaled $7,553,000, which compares to $8,240,000 recorded a year ago. Other cash flows of note for the quarter included capital expenditures of $10,252,000 and share repurchases of $17,529,000.

In looking toward our upcoming second quarter results, we want to remind you that the prior year's comparable quarterly results reflected income recognition of the U.S. government's $11.4 million remittance to us under the Continued Dumping and Subsidy Offset Act. This income translated to approximately $0.21 per share after taxes. For this year, we have submitted an application for another annual remittance under the Act. We currently anticipate receiving notice of the government's intention sometime in November. However, there remains some inherent uncertainties associated with this program that do not allow us to estimate how much, if any, funding we may be allocated to us by the Customs and Border Protection Service this year. And, as we had previously disclosed, there also exists a number of potential legislative and unresolved legal issues that generally surround the future operations of this program.

Another smaller factor benefiting last year's second quarter and full-year result was a reduced effective tax rate due in part to the interaction of last year's second quarter special dividend with our employee stock ownership plan. Much like this year's first quarter, we anticipate the current year's full-year rate to stay in the neighborhood of 36.5% or so.

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

Thanks, John. Let me conclude with some comments on the balance of this year. Starting with our Specialty Foods segment, our most exciting developments include the introduction last week of Marzetti brand Hummus in three flavors -- Original, Roasted Garlic and Roasted Red Pepper -- to be merchandised in the produce department. Due to begin shipping by year end, this line met with strong reception from the trade. We're excited to offer a new on-trend product line to our consumer.

We also introduced last week a new line of vinaigrette dressings, also to be merchandised in the produce department under the Marzetti brand. Soon to be introduced to the retail market is our New York brand Texas Toast Croutons, taking advantage of this strong brand on a bread-related product outside the frozen case. As the year progresses, we would expect to see our dressing plant move from a negative to positive contributor.

Our Sister Schubert's product line growth looks good for the fall season and on into the future. We're starting a capacity expansion project for this product line that will help capital expenditures for the current fiscal year reach about $50 million. Refrigerated salad dressings and veggie dips and fruit dips will get strong sales support, as will our pourable Marzetti and Teresa's Select lines. As you will recall, one year ago, we were in the middle of rolling out our repackaged and reformulated Marzetti refrigerated dressing line. Our most recent IRI at 52-week data through mid-September shows our growth at 26% and market share at 22%, a strong number two. The Texas Toast Garlic Bread category has become very competitive and we intend to defend our strong position. Overall, ingredient and freight costs look to be flat for at least the second quarter.

On the nonfood side of our business, Glassware and Candle sales are starting off the quarter somewhat strong, at least partially due to seasonal volume that shifted from the first to second quarters. Automotive demand will be unfavorably impacted by OEM production cutbacks, including Ford's F Series pickup truck schedules. High raw material costs will likely stay near current levels for the Automotive group, and the impact of our ongoing strike will be a factor, although our Coshocton floor mat production is at adequate levels to meet demand.

Our strategic alternative work is making progress, although we have no new announcements today. Acquisitions in the food sector continue to be pursued with our focus on products and categories with growth potential. Share repurchases continue to be part of our use of cash, and of course our Board will consider the cash dividend when they meet in three weeks.

With that, Tamara, we're ready to take questions.

(Operator Instructions). Jim Barrett, CL King & Associates.

Let's see -- could you talk at all about the assets that are for sale? And, can you give us any indication as to what level of interest there has been in those assets?

Jim, we've not talked about specific assets, other than to comment that they are among our nonfood segments. At this time, that's really all we have disclosed.

Okay. And then you did reference your Candle business and the cost of wax. Any thoughts, given the fact that petroleum is down, and I know there is not a direct correlation there, but to what degree should -- what's your level of optimism in terms of how that market looks if we look out longer-term if, for arguments sake, petroleum were to stay at current levels?

Well, you'd like to think over time that we would see some trend down due to that, although we haven't experienced that at this point. So, while we pursue that aggressively, we also pursue opportunities for alternate formulations and alternate non-paraffin-based wax opportunities. So, we have a lot of effort going on in that area.

And I take it, one alternative would be soy?

Yes, it would.

And how much -- is that a lower-cost ingredient versus wax?

It's lower cost today versus paraffin, yes.

That's what I meant, I'm sorry. Is that something to get enthused about? I mean, is it materially below paraffin?

You'd probably say materially, but it does have to go through different kind of blending processes and it has different levels of use application to different production processes. So I wouldn't want to suggest it's an immediate windfall.

Okay, thanks, Jay.

George Askew, Stifel Nicolaus.

Hi, George Askew at Stifel Nicolaus. Hi, John and Jay. It sounds like you're seeing the candle shipments in October that were delayed from September (inaudible)?

Yes, that does seem to be there. Our confidence is pretty good here early in the quarter. Now where the visibility gets a little less clear as we get toward the end of the quarter as it relates to just the strength of candle volume.

The consumer takeaway weakness in the produce aisle -- has that abated following the spinach problems?

I don't know that we have got real good data yet at this point, so it's more anecdotal comment that the negative impact is lessening but maybe has not gone clear away.

Are you going to see some startup expenses from the new plant in the second quarter and in the second half, or can you quantify that at all?

I don't know that we can quantify it too much, George, but we will definitely see it in the second quarter, I think as we get into the second half, hopefully starting to trend down some.

(multiple speakers).

Or trend toward positive, maybe I should say.

Okay. If it was 500,000 in the September quarter, could it be half that in December, or -- just to pick a number? Or, would it be 500,000 again?

I think the impact of the second quarter could be somewhat greater. In ballpark terms, we have anticipated roughly $1 million, give or take for the second quarter adverse impact, and that's before any net benefit we might get from some of the benefits I mentioned in my comments.

And then, lastly, CapEx for '07 -- I think you gave us a number there. For the quarter, it was $10.3 million, and for the year, did you give us a full-year number?

Yes, we're ballparking around $50 million.

Okay. And how much of that will go down to Sister Schubert's?

We're probably looking in the 25 or a little more range.

Outstanding. I will catch up with you later as well.

(Operator Instructions). David Liebowitz, Burnham.

Briefly, the operating losses in the nonfood groups -- are they expected to continue through the end of the second quarter?

We would sure like to think not, but we have most of those same challenges before us today.

Okay. And how much of the challenge is top-line driven, meaning we're not getting adequate growth in sales, rather than the cost side of the equation?

I don't think we could try to split that up for you, but certainly, they're both a factor. But the material cost issues and the capacity utilization I would think are the more significant, although obviously, sales impacts capacity utilization.

And, in terms of the hoped-for acquisitions, are you seeing anything more reasonably priced? You had indicated on a prior conference call that one of the biggest handicaps you're facing right now is not being willing to pay what appeared to be aggressively-priced entities.

David, there's no real indication yet that we see that there's any material decline in valuations. So our challenge is to find things that are such a good fit and opportunity for us that we can be competitive.

And last question if I may. In the Food group, are you couponing and discounting more versus a year ago?

I think right at the moment, we're about the same. Sometimes, the timing can move around by a month or two from product line to product line, but generally, pretty similar.

Okay, thank you very much.

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

Well, thank you for joining us this morning. We're hoping we can deliver better news as we close our December quarter and we'll look forward to talking to you then. Thank you.

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