Marzetti Co (MZTI) 2007 Q2 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 second quarter fiscal year 2007 conference call. Conducting today's call will be Jay Gerlach, Lancaster Colony's Chairman and CEO; and John Boylan, Vice President, Treasurer and CFO. (OPERATOR INSTRUCTIONS). Now to begin your conference here is Earl Brown, Lancaster Colony Investor Relations.

Thank you and good morning. Let me also say thank you for joining us today for the Lancaster Colony second 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 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 costs, the success of new product introductions, the effect of any restructurings, and other factors as are discussed from time to time in more detail in the Company's filings with the SEC, including Lancaster Colony's report on Form 10-K. 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's Jay Gerlach.

Good morning, and thank you for joining us today. I'll start this morning with comments on our second quarter. John will review our balance sheet and cash status. And I will then conclude with comments on our second half of fiscal 2007.

While the quarter saw a number of positive developments, we are disappointed to report sales growth of only 1%, and earnings per share of $0.56. A very weak automotive quarter and soft retail salad dressing and dip demand were key influences on our operating income. However, below operating income please also note that our continued Dumping and Subsidy Offset Act remittance this year was worth about $0.01 per share versus $0.22 in last year's quarter.

Share repurchases for the quarter were about 260,000 shares and totaled 711,000 year-to-date, with 2.2 million shares still authorized for repurchase, and 31.6 million shares outstanding today.

Capital expenditures for the quarter were approximately $13.2 million, with over 90% spent on food projects, primarily finishing up our new salad dressing facility and starting our new Sister Schubert's frozen bread facility. We remain very cautious on capital investment in our non-food businesses.

Turning to our Specialty Foods segment, 1.5% sales growth did not yield earnings growth. In fact, segment operating income was down about 2.5%, largely due to soft retail dressing and dip sales, somewhat higher ingredient costs, and still some costs to ramp up our new dressing facility.

The fresh produce health issues in September and October appear to have had a meaningful impact on fresh produce sales at retail, and we believe adversely affected dressing and dip sales as well.

Ingredient costs have started moving up with about a $1 million unfavorable impact in the quarter. We are very pleased with our new plant startup. And as the quarter progressed, we were able to significantly reduced internal overtime and outsourced production cost, with the benefits expected to increase as we move into the second half of fiscal 2007.

Our latest new product, hummus, began shipping late in the quarter, with one customer in stock before Christmas, and about 15 more that has shipped since then. Also our new line of vinaigrette dressings for the produce department has had good initial sell-in.

Foodservice channel demand was consistently strong through the quarter, as most of our customers showed favorable volume trends.

Turning to our most challenging segment, automotive, we had a sales decline of almost 8%, and reported a $5.3 million operating loss. Weak original equipment demand for aluminum truck accessories and rubber car floor mats, stubbornly high raw material costs, including aluminum touching record highs, and costs associated with our ongoing labor strike, were all factors.

Strike-related costs were somewhat above $2 million in the quarter. Aluminum costs were up above $1 million, with lower capacity utilization and certain operating inefficiencies also having an unfavorable impact.

We were pleased to see our Glassware and Candles segment deliver over 8% sales growth and almost a 15% operating income improvement. Sales were largely helped by strong candle demand, some carried over from the first quarter. Better consumer glass operations and utilization, plus lower natural gas costs, helped offset still hot wax costs in the quarter.

Let me now ask John to comment on our balance sheet and related matters.

I will begin this morning by addressing some of the more noteworthy changes in our consolidated balance sheet. First, as of this past December 31, our net Accounts Receivable totaled over $119 million, which was over $10 million greater than our June 30 balance, but a $2 million decline from the December 2005 total. The increase relative to June 30 was largely influenced by the seasonal timing of our Glassware and Candles sales. Compared to last December, the decrease reflected the weaker shipments we saw this December.

Turning to inventories, which totaled over $151 million at December 31, these declined about $11 million since this past June, and over $12 million since December 2005. The year-over-year increase is primarily due to the reductions we have experienced in both candle and glass inventories over the last year. Much of the reduction in glassware was achieved through the extended plant shutdown we took in last year's third quarter. And for the most part we have been able to maintain these reduced levels.

With regard to Lancaster's cash flows, cash flows provided by operations during the most recent 6 months ended December 31 totaled $41,817,000 compared to $39,524,000 last year. This increase was influenced by favorable relative changes in working capital components, and partially offset by the lower level of net income.

Depreciation and amortization during the first 6 months of fiscal 2007 amounted to approximately $15.4 million. This amount is relatively consistent with the prior year 6 months total of $16.5 million. Capital expenditures during the most recent 6 months totaled $23,485,000. And are share repurchases were $28,350,000.

Our capital expenditures for the first 6 months of fiscal 2007 included approximately $17 million related to the two significant expansion projects we have had within our Specialty Foods group. As Jay mentioned, our new specialty dressing facility started operations in the first quarter. And we expect to see further production volumes for key customers added to its output in the third quarter.

The second food project relates to our frozen rolls project launch -- productline, and entails construction of our production facility adjacent to the new salad dressing plant. We have expanded this project's original near-term scope and finalized construction cost. And we now anticipate that total project costs will approximate $45 million, over $30 million of which will be spent during fiscal 2007. Operational startup of this facility is anticipated to occur this summer. On a consolidated basis, we currently anticipate total capital expenditures for fiscal 2007 to perhaps exceed $60 million.

Turning briefly to our income statement, one item I wanted to mention is our consolidated effective tax rate, which increased to 36.9% for the second quarter of fiscal 2007 compared to 35.3% in the comparable year ago period. The prior year rate benefited from the deductibility of that portion of the Company's special dividend that was paid in December 2005 to our employee's stock ownership plan, as well as a higher level of nontaxable interest income.

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 received of approximately $700,000 in this year's second quarter compared to over $11 million last year. As we have said in the past, the amount, if any, we may receive in the future under this program are not subject to reasonable estimation. At the very best we do not expect to receive another payment before the last quarter of calendar 2007.

At this point I will turn the presentation back over to Jay so he can conclude our prepared remarks.

As we move into the second half of our year, some key things I would encourage you to keep in mind. Our new salad dressing plant should become a more positive contributor. Our consumer glass operations, our plan to operate throughout the quarter versus being down the entire quarter of last year. Natural gas and other energy cost are anticipated to be lower than last year. Food ingredient costs are expected to be up further with the rise in corn and soybean oil costs. Other raw material costs are not anticipated to come down. Strike-related costs will continue, but we expect at a lower level.

While retail sales within our Specialty Foods segment are expected to improve in the second half of fiscal 2007, we remain focused on the ongoing consumer and competitive challenges in this channel. We feel we have plans that should deliver retail sales growth in the second half.

I can't add much on our strategic alternative process that wasn't in the press release, other than to emphasize we remain committed to this effort.

On the acquisition front, the new year has started with a number of good prospects that we're actively working on. All these prospects are food businesses that fit in either the frozen case or produce department. They range in revenue size from about $10 million to $15 million to about $75 million. It is not possible to predict a timetable or likely outcome at this time.

With that we're ready to begin taking questions.

(OPERATOR INSTRUCTIONS). George Askew, Stifel Nicolaus.

A couple of questions here. The $2 million spent out-of-pocket related to the strike was a big number in my mind. Certainly more than I would have guessed. Can you articulate where that money has gone? Are you essentially paying for two workforces here? Do you have pricey lawyers? What --?

There is some legal expense in there, but the primary expenses are related to security costs and outsourcing certain production and processing early -- earlier in the work stoppage process. There certainly was also some lack of productivity as we ramped up a replacement workforce that has been in place since mid to late October, and managed to maintain our service levels at acceptable levels.

The lack of efficiency would not be in that number. I'm taking the $2 million out-of-pocket as cash costs.

That's right, yes.

So it was even higher. Will that be roughly half that number in the third quarter, do you think?

I don't know that we would be real comfortable predicting that at this point, but we would expect it to be down somewhat noticeably from what we saw in the third -- or the second quarter.

Let's see, the startup costs -- actually on that front, it looks like you had some new floor mat business in the quarter as well. I guess I'm kind of surprised that occurred with all the turmoil there. Was that a program that had been anticipated, or are your customers fairly comfortable with your service levels, as you mentioned, or new business? What is the --?

Those are awarded well in advance, so they were starting up during the quarter. It wasn't like there was business awarded during the quarter that we started up in the quarter itself.

The startup cost in the new dressings plant, you suggested I guess on the last conference call it might be higher here in the second quarter than it had been in the first. Do you have a number you can give us there?

I think that it was somewhat higher in the second quarter. If you used $1 million that might be a decent estimate. The actual cost -- the gross cost would be higher than that in terms of unabsorbed overhead. But we did start enjoying some of the savings from less copack product, reduced over time and the like throughout the rest of Marzetti's supply chain.

On a net basis, something less than $1 million?

We have not measured it specifically. I guess, based on the information I have I might say in the neighborhood of $1 million, give or take.

On the food side, the dressings, the drag in dressings in the quarter is kind of lingering effects from the spinach recall, not related to you guys obviously. Can you give us a sense of the sequential monthly behavior of that category? Were things improving towards the end? Do you see it returning to normalcy this quarter, or are we just at a flat line lower level?

I don't know that we -- we maybe saw a very slight trend of improvement through the quarter. At this point it looks like there's potential for it to improve noticeably in the second half. Although the other shoe that is now dropped on this produce category is some of this crop damage out on the West Coast because of the cold weather. And just what its impact may end up being to the price to the consumer availability, and then obviously spillover effect for the product we're selling, is a little bit of an unknown at this point.

Then a last question on the frozen bread business. Are you hanging on to share there, and just having to spend a little more behind your brands? What are the dynamics going on there?

We have probably given up a little bit of share there. But as we move into the second half, as I kind of alluded to, we do think we have good plans in place on both the frozen bread, particularly frozen garlic bread category, and over in the produce, dressing and dip side to help us drive that business a little further.

[Ezra Solomon], [JL Advisors].

I'm not sure -- I joined the call a little bit late, and I may have missed it. I'm not sure how much detail you went into in terms of the paraffin wax costs in the candles and glassware business. I was wondering if you could just give us some color as to what percent of COGS that represents in the production of candles? And where those costs are on a year-over-year basis, and where you expect them to go going forward?

We didn't touch on specifics. But I think roughly we would see paraffin wax costs -- and I'm going to look to John for some concurrence here -- probably up 8 to 10% over the same time a year ago. But we don't get into the specifics as to percentage of cost and stuff. It definitely had an unfavorable impact still in the quarter of a meaningful amount.

Have those costs abated since the end of the quarter at all, or just continued at that relatively high rate here?

At this point, no, we have not seen those costs decline.

Is there any reason to believe that they will going forward?

If you want to put your optimist hat and look at the price of a barrel of oil. As a buyer of wax we certainly think it should come down. But we are not seeing that at this point.

[Stan Westoff], [Powdergem Capital].

I have got a couple of questions. In the food segment margins have been kind of lagging there for the last few quarters, I guess except for the fourth quarter '06. Are we going to see some improvement along those lines anytime soon or we are going to see that continue to be in the range it is now?

We don't forecast earnings, and specifically -- then obviously not segment margins. I think what we would like to think we can help happen is with some efforts we've got underway shift the mix a little bit more to the retail side that historically has been a little bit better margin business than over on the Foodservice end.

We also think we will benefit in the second half, as John was touching on, ramping up our new salad dressing plant further through the second half, and the benefits that we expect to get out of that.

Having said that, then going the other way is going to be the challenge of ingredient costs that are likely to be up in a variety of areas. Soybean oil we're certainly seeing up, but at higher levels. All the things that corn impacts have started up, and are likely to go up further -- at least that is the way it looks at this point -- throughout the second half. There'll definitely be some ingredient cost inflation in the second half greater than what we have seen in the recent past.

Is there any mid to long-term goal you would like to see the operating margins get in that segment?

We would like to think in the mid to upper teen area is a range we could stay in long term. But obviously there are these variety of factors that do impact that. But generally that is an area that we think is reasonable.

This is more of a maintenance thing, because I've only been covering you guys for a little while here. When did the paraffin waxes really start to climb? It has been going up for a little while. I was just curious when it really started coming into effect?

We're probably looking at almost 24 months now, at least 18. They really spiked, like a lot of energy costs, at Katrina time.

Then one last question. Can you comment on what kind of progress is being made with the strike at the floor mat facility in Ohio there? Is there (multiple speakers)?

I think all we could tell you this morning is that we are negotiating, and have been back at that for two weeks or little bit more now after about five or six weeks of no meetings. So there are meetings taking place.

David Leibowitz, Burnham Corp.

A few questions, if I may, totally unrelated. First the announcement or the statement in the report that you are now focusing more on the disposition of automotive rather than housewares and candle. Is there any special reason for that?

I think it is just as we have worked through the process today that is where we have ended up prioritywise. But I really don't have any other specifics for you.

An accounting question, if I may. The paragraph in question ends, that should our review result in the divestiture, closure, or other form of restructuring, we could incur significant charges. I thought we had to mark-to-market what we thought each of our businesses were worth when we put our 10-Qs together, or am I missing something there?

The impairment rules are somewhat complicated. I would be glad to chat with you a little bit bit more off-line. But we certainly respect the rules as they are. We do go through periodic impairment analysis. And relative to the knowledge that we have at the present time, and the rules as they are constructed, there is not a need to record an impairment charge as of the end of the second quarter.

Then I will get back to you after the call, if I may John, on that.

That's fine.

Lastly, the decline in -- the cash position right now, is this going to be a seasonal high point, or do you think we're going to be able to add to that by the end of the year?

We would typically be cash flow positive operationally for the balance of the fiscal year. There are obviously a lot of non-operation -- non-operating cash applications that can occur, both CapEx, dividends, and the extent of our share repurchases, if any, that may or may not leave us cash positive at June 30. So we certainly don't have as a corporate goal to remain without debt. And if as a result of looking at various alternatives, including share repurchases, we incurred some level of debt, that would not deter us.

The last thing. You circled back to the share repurchase. Jay, if I remember, said there were 2 million shares still left on the authorization.

Yes, a little over 2 million. Yes.

Given the quantity that has already been purchased is there a reason why management hasn't gone back to the Board already seeking further authorization?

Historically we have probably gotten down closer to 1 million or less still authorized before we get an additional authorization. So at this level we feel we've got adequate authorization. But as you know, over a lot of years now we have consistently had that authorization available, and I don't see any reason why we wouldn't continue to going forward. But don't feel that we need to run back and raise it up above the 2 million or 2.2 million we're sitting at today.

(OPERATOR INSTRUCTIONS). Greg Halter, Great Lakes Review.

The last time I was down in Horse Cave, the Sister Schubert's plant was just -- some of the walls were just going up. I am just wondering if you are going to give us an update on how that is looking now, given the weather and everything else that has been good and bad I guess?

I think it is staying right on schedule. It does have a roof on it. The walls are up, I think, in a structural sense, but not with sides on them right at the moment. Again, very much on schedule.

Related to when the production could start there, I don't know if you gave a timeframe for that?

We just mentioned summer. And it is probably midsummer, so roughly although there will be some initial pretty slow learning curve ramping up there, so it would be throughout the summer, probably starting roughly midsummer.

Relative to who you would be serving, is that existing accounts that are being -- the products are being produced elsewhere now, or would this be totally new incremental volume that you expect?

It is really helping us meet the demand growth that is ongoing. And today, a little bit like where we had been in our dressing business, we are running our existing plant at very, very high levels that creates added cost and inefficiencies. While it does give us more cases, it is still not the ideal way to operate. So that is primarily what we will be offsetting. But we do see continued good growth potential for that productline.

And geographically, any change in the distribution?

Not dramatically so -- right at the moment, but that is part of the growth that we would expect to continue to be available to us.

I wondered if you could comment, specifically in the food area, of any new products that you may have in the works that we could be looking for?

I don't know that we've got anything right this minute that we would feel comfortable disclosing. I think -- I can't remember if we mentioned this on the last call, but starting to get introduced right now is a line of our New York Texas toast brand croutons that we think will be a good addition to the category. Anticipating it will be sold on the grocery shelf, but we think an upscale product to what is currently available today. That is probably the only one I would single out right at the moment.

You made some comments about your M&A type possibilities being in the food area. What these be strictly either foodservice or not, or a combination?

The ones we're looking at right today are primarily retail productline businesses with, in some cases, some amount of foodservice business, but primarily retail.

That is helpful. Thank you.

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

Thank you again for joining us this morning. And we will look forward to talking to you hopefully with some more positive news as we close our third quarter probably right at the end of April, first of May. Thank you.

This concludes today Lancaster Colony Corporation's second quarter fiscal year 2007 conference call. You may now disconnect.