Marzetti Co (MZTI) 2007 Q3 法說會逐字稿

Good morning. My name is Tanya and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation Third Quarter Fiscal Year 2007 conference call. Conducting today's call is 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 Corporation Investor Relations.

Thank you, Tanya. Good morning, and let me also thank you all of you for joining us today for the Lancaster Colony Corporation Third 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 is Jay Gerlach. Jay?

Good morning, and thank you for joining us today. Looking at our third quarter fiscal 2007 results, excluding our divestiture and plant closing impact, results were mostly positive. Overall sales were up 4%, and food sales were up 6% with minimal pricing help. Higher raw material costs are a growing head wind with third quarter unfavorable year-over-year impact exceeding $4 million in total. Before I comment on each segment, during this quarter, we repurchased 318,000 shares for $13.54 million.

Year to date share repurchases totaled 1.044 million shares for $42.6 million, leaving 31,284,000 shares actually outstanding today and 1.89 million shares authorized for repurchase. Capital investment during this quarter totaled approximately $16 million, with over 90% spent on the specialty food business, and the majority of that going to our new Sister Schubert's frozen roll production facility. We expect completion and initial start up of this facility in midsummer.

Turning to our Specialty Foods segment, we saw strong sales up 6% with retail channel sales finally growing again. Helping retail sales growth were somewhat more aggressive marketing and promotional efforts, less negative impact for soft lettuce and other fresh produce sales, and the earlier Easter this year.

We are frustrated not to show segment operating income growth largely due to higher ingredient costs, well in excess of $2 million in the quarter, and not much offset by pricing. Some ongoing startup costs of our new salad dressing facility and higher marketing and promotional expenses were also a factor. Some of the higher marketing costs went to support the roll-out of our new New York Texas Toast brand Croutons and our interest into the hummus category. The jury is still out on these but we remain very optimistic. Our food service channel continues to show growth with a couple of meaningful new customer relationships developing.

The Glassware and Candles segment had a much improved quarter, although with a somewhat easy comparison given downtime last year at our consumer glass facility in Oklahoma. However, this quarter did show almost 4% sales growth in a nonseasonal quarter mostly candle driven. Good operations at both the candle and glass facilities helped, as did modest price relief. High wax costs remain a challenge.

Automotive showed a 1% sales decline, reflecting somewhat soft aluminum truck accessories demand, although off its first half lows partially offset by somewhat stronger floor mat sales. As mostly an original equipment supplier we are subject to the build level and mix of new vehicle production. Material costs continued to be unfavorably high, particularly for aluminum and carpet, with virtually no selling price relief at this time. This continues to be a very difficult sector for us. Let me ask John now to make a few comments.

Thanks, Jay. I thought I would start out by discussing several financial statement consequences of two significant third quarter actions we took in our nonfood segments. First, the third quarter and all related historic results of the one automotive divestiture we concluded are now treated as discontinued operations for financial statement purposes. You will see evidence of this treatment reflected at several places within the basic financial statements, including our cash flow statement to be included in our forthcoming third quarter Form 10-Q. Within our income statement released this morning, the activities of the soda operation have been extracted from those of the continuing operations. Instead, the results of the divested activities are simply presented on an after-tax basis as income from discontinued operations. Additionally, the gain on sale of the related net assets sold totaling approximately $0.02 per share has also been given a separate line item within the current year's income statement. As previously disclosed, however, these operations were relatively small, having approximately $26 million in net sales during fiscal 2006.

Turning to the second action we took last quarter, announcing the upcoming closure of our industrial glass operation, the consolidated operating income of our continuing operations reflects approximately $2.4 million of associated pre-tax restructuring charges and asset write-downs in the quarter. We expect that we will continue to incur various related closure costs through at least the end of the calendar year. We estimate that these future costs could range from $3 to $5 million, largely depending on how we resolve the disposition of the associated facilities. This glass operation was also small, with less than $10 million in net sales in fiscal 2006, and had a recent history of modest operating losses. In conjunction with our review of various strategic alternatives, we had come to the conclusion that there was little near-term prospect for a successful turn-around or sale.

Let's shift now to a discussion of several key components of our consolidated balance sheet. Lancaster's consolidated accounts receivables at March 31, 2007, totaled $109.326 million. This amount represented an increase of approximately 5% over the June, 2006, balance, resulting from the relative strength of candle sales occurring before period end. Higher food sales were largely responsible for a 6% year-over-year increase in receivables. With respect to our inventories, the consolidated total of $151.482 million at the end of this March decreased about $6 million, or 4%, from the level of this past June. This decline was driven by a seasonal reduction in candle inventories. Compared to a year ago, total inventories remain relatively flat.

Moving down the balance sheet to our net property balance at March 31, I point out that this total has increased by over $16 million since last June, as influenced by our continued investment in the frozen roll manufacturing facility under construction in Kentucky. So far, this project has stayed generally within budget and as Jay noted, we anticipate start-up to occur in the first quarter of fiscal 2008. We look forward to this facility allowing us to meet additional demand, achieve better overall efficiencies, and open the door to additional product development opportunities. With further project expenditures to be made in the fourth quarter, we anticipate our consolidated full-year capital expenditures still perhaps approaching $60 million or so. Except for the items I have already discussed, I believe the other changes in our balance sheet components are relatively unremarkable. We do remain debt-free, although our cash and investments are now less than $10 million, and we could well see some modest borrowing activities in the fourth quarter. In concluding my remarks I would like to share a few cash flow items for your consideration.

For the nine months ended March 31, 2007, Lancaster's consolidated cash flows provided by operating activities of continuing operations totaled approximately $66 million, which is essentially even with the year-ago level. Comparatively favorable changes in working capital components largely offset the impact of the lower level of consolidated net income through March, including the effect of the $10.7 million year-over-year pre-tax reduction in our second quarter CDSOA remittance from the U.S. Customs Service. Within the current fiscal year, depreciation and amortization for the first nine months totaled $23.131 million, property additions totaled $39.121 million, shareholder dividends were $25.321 million and share repurchases were $41.89 million. I appreciate your attention this morning. And I will now turn the call back to Jay.

Thanks, John. Operationally, the fourth quarter looks to be challenging. Sales should be up modestly but raw material costs look to be high with food ingredient costs even more unfavorable than this quarter. We may see some limited pricing help in our Food segment during the quarter, but the bulk of our pricing is due to be implemented on or about July 1. Potential positives of unknown benefit at this time is the level of success of our new hummus and New York brand Texas Toast Croutons. We are as well up against a very strong year-ago quarter. We do have new product activity in our glass and candle lines as well but its impact will be limited in the fourth quarter and is expected to be more meaningful in the fall season. New designs and newer -- new and higher content fragrances are meeting with good customer acceptance and will be more visible at retail as our customers' Planogram changes are implemented.

During the fourth quarter we do expect further progress on our strategic alternative efforts, with much of our near-term focus on our Automotive segment. Food acquisitions are a significant priority for us, and we are encouraged by a couple of opportunities we are actively working on today with sales ranging from $10 to $30 million. Either or both of these would be good fits and growth opportunities for us. At this point, Tanya, we're ready to take questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of George Askew with Stifel Nicolaus & Company.

Yes, hey, John, hey, Jay.

Good morning, George.

Well, let's see. A couple of questions here. And of course, I have not written them down. But on candles, can you -- the 4% top line growth is great. Can you kind of segment how much of that was price, how much was volume?

I don't believe we can separately divide the increase between price and volume. There have been several approaches being used to get effective price increases, whether it is the introduction of new products, considering redesigning the nature of the product, as well as straight price increases. It has not been across the board. But we have on balance been able to get some traction finally on pricing in that product line.

George, I think we did see some benefit of what was a pretty decent sell-through, in the holiday season, and obviously then follow on restocking getting into this quarter, plus some additional new products into some existing customers, both of which were helpful.

So there is definitely -- I mean you're definitely seeing some volume growth there.

Yes, we are.

Plus the price and mix, it sounds like, as well. Okay. So if I look at the profitability there, I mean the $2.4 million in charges, and write-offs and what not for the industrial glass business, all is within the Candles and Glassware -- Glassware and Candles segment, correct?

That is correct.

So if I add that back, and just try to look at the segment profitability, my math, I mean you guys, you know, adding that back, you had an operating margin of 6.8% in the third quarter here, and in the second quarter, the December quarter, it was 5.6. I mean it seems like you've had two pretty good quarters on an operating basis in that business.

Yes, George, I think we've been encouraged by what we're seeing there. Again, a little bit of pricing, but also pretty good operations in both the glass and candle parts of that business, and maybe a little bit of uptick, although I don't think it is significant at this point, but we are trying to move the mix up a little bit, into a little bit higher value product.

Do you think a mid single digit operating margin, segment operating margin is doable, excluding the charges and write-offs and things which obviously there are more coming, it sounds like, but excluding that, do you feel like you're in a -- that kind of profit level, profit margin level?

Well, I would like to think so, with all of the caveats that might go with that and particularly material and energy costs and capacity utilization, always, a meaningful factor, and certainly have some variability to it.

And then on foods, third quarter is traditionally, kind of the weakest margin quarter, it looks like, if I go back and look at prior years. Is a -- but you indicated that, you've got more cost pressures coming. I mean can you give us any kind of -- are we seeing, operating margins a couple hundred basis points below year-ago levels, as we sort of look at the next several quarters, or can you give us any other metrics? You mentioned a dollar, what is it here, $2 million higher commodity costs this quarter. I mean is that --

We're north of that this quarter and we expect it to be a bigger number next quarter. As you know, George, we don't forecast margins and those kind of things, but the fourth quarter would historically be a better seasonal quarter for us, helping margin typically, but as I kind of touched on, we also know we're up against a pretty strong comparison to last year's fourth quarter that showed I think in the neighborhood of a 19% operating margin, so certainly at the high side of what we saw last year and what we've seen since then.

Okay. That's fair. And then the final question, do you have a bead on CapEx for 2008 yet? I mean I think you said the $60 million for '07, we will see that go down, I assume.

Somewhat significantly. I don't know if John's got a range here, he would have any comfort with it, at this kind of early stage.

I don't -- we've not done our capital forecasting for fiscal 2008. The one set of significant expenditures that we might see early that year would be the final payments on the frozen roll facility in Kentucky. But other than that, George, we would probably expect to see expenditure levels in the Food segment trend much closer toward historical norms than where they've been here the last couple of years as we do not have any other large brick and mortar projects being planned at the present time.

Excellent. Okay, good. I will cede the floor. Thank you.

Thanks, George.

(OPERATOR INSTRUCTIONS) We will pause for your next question. (OPERATOR INSTRUCTIONS) 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 today. If questions come to mind, certainly don't hesitate to give either John or I a call. We do look forward to talking to you as we report our fourth quarter in August. So thanks for being with us this morning.

Thank you. This concludes today's Lancaster Colony Corporation Third Quarter Fiscal Year 2007 conference call. You may now disconnect.