Marzetti Co (MZTI) 2007 Q4 法說會逐字稿

Good morning. My name is Tracy, I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation fiscal year 2007 and fourth-quarter 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).

Now, to begin your conference, here is Earl Brown, Lancaster Colony Investor Relations.

Thank you, Tracy. Good morning. Let me also say thank you to all of you for joining us today for the Lancaster Colony fiscal year 2007 and fourth-quarter 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, it here is Jay Gerlach. Jay?

Good morning. Our fourth-quarter finish for fiscal 2007 was challenging and eventful. High raw material costs (technical difficulty) impact all of our business segments with the most significant being ingredients in Specialty Foods. In spite of these challenges, with continue to invest for the future via capital, promotional support, customer and product development.

On June 29, we divested our most difficult business of the recent past, automotive floormats, another step in our ongoing review of strategic alternatives. We also continued the closure process of our original industrial glass operations.

During the quarter, we acquired the Marshall Biscuit Company, an excellent fit with our Sister Schubert's frozen bread business.

In the quarter, we repurchased 560,501 shares for $23.968 million. Total repurchases during fiscal 2007 were 1,589,135 shares for $65.9 million. Including 387,000 shares repurchased so far in our first quarter of fiscal '08, we have 30,361,000 shares outstanding and 957,000 shares authorized for repurchase.

Including cash dividends of $33.7 million, we returned a total of $99.6 million to our shareholders through share repurchases and dividends. We invested an additional $55.8 million in capital projects for the year with over 90% invested in the Food segment.

Our new frozen bread facility to support our growing Sister Schubert's brand bread business was by far the major project for the year. The ramp-up of our new salad dressing facility was complete by fiscal year-end.

We ended fiscal 2007 with $42.5 million of debt on our balance sheet. This was up from 0 debt at the end of fiscal 2006.

Taking into account our divestiture and plant-closing activity during the year, we ended fiscal 2007 with total employment of 4,781 versus 5,605 at June 30, 2006.

Operating performance was quite challenging in the fourth quarter as our Specialty Foods segment felt the impact of much higher key material costs, over $5 million in the quarter, plus somewhat more promotional spending, especially in support of our frozen garlic breads, a less-favorable sales mix and some start-up costs relative to our new salad dressing facility. Specialty Foods sales were up 2.7% in the quarter with only about $1 million of help from this June's acquisition of Marshall Biscuit.

Segment operating income was down 28%. Operating margins were down noticeably from last year's strong fourth quarter but up somewhat from our third quarter. Our Glassware and Candles segment saw sales decline about 2%, yet operating income was up just over $1 million despite an additional plant closure-related expense of $1.1 million in the quarter.

Our Automotive segment, now without our divested and discontinued operations, reflects our Dee Zee aluminum truck accessory business. This business saw good sales growth of almost 7%. Operating income was in the black also off compared to last year. The full year showed a modest profit in a year challenged by record high aluminum costs and first-half weak demand.

Let me ask John to go ahead and make a few comments.

Thanks, Jay. I will briefly review several matters this morning regarding our June 30 balance sheet and fiscal 2007 cash flows. Let me start, however, by again reminding you that the automotive operations we sold in 2007 have been reflected as discontinued operations in our financial segments. Accordingly, as you are probably already aware, reclassification of a business to discontinued operations requires that we reclassify the corresponding results in all periods presented. Our financials do reflect these changes.

I also want to point out that we have released some historic quarterly financial statement and segment information for fiscal 2007 and 2006 that reflect the effect of the discontinued operations. You can find this data in this morning's filing of our Form 8-K, and we hope this helps you rebase your modeling for future periods.

Let's now begin our review of several major year-end balance sheet components. Please note that the 2006 balance sheet, current and non-current assets, and current liabilities associated with discontinued operations, have been grouped within separate line items. This presentation should allow for a cleaner comparison, if you will, of the balance sheet amounts relating to the continuing operations. On that basis, Accounts Receivable at June 30 totaled $92.6 million, which is up only 1% since a year ago. All in all, our Accounts Receivable agings remain in reasonably good shape and are fairly comparable to year-ago levels.

Turning to the largest component of our working capital inventory, we saw a June 30 total of $149.7 million that also reflected a year-over-year increase of about $1 million or 1%. Our non-food inventories actually declined, as we expected, with food inventories have having increased above year-ago levels.

Another balance sheet change worth comment is net property, which increased about $30 million or 17%. This growth is reflective of the investments we've made in fiscal 2007 on construction of our two new manufacturing facilities in Kentucky. In our dressing and sauce facility, we accomplished most all the planned major customer transitions by June 30. Going forward, we would like to think that this plant's 2008 operating efficiencies will reflect lessons learned from the 2007 start-up period. Construction of the nearby roll facility is also now nearing completion with the final production line expected to be brought up within the next couple of months. We are excited about the opportunities each of these facilities provide and continue to look for ways to further leverage their capabilities.

Another change worth mentioning in our balance sheet is the extent of increased non-current other assets, which is attributable to the intangible assets associated with the acquisition of Marshall Biscuit. Declines in non-current other liabilities were influenced by lower deferred taxes and our year-end adoption of FAS 158, the new accounting statement applicable to post-retirement benefits.

Finally, in wrapping up my balance sheet remarks, I would point out that we remain financially strong with debt, net of cash, less than $35 million and shareholders equity of $444 million. For perspective, just two years ago, we had no debt but we held cash and investments totaling approximately $185 million. This nearly $220 million swing in our net cash position was influenced by our cash returns to shareholders during this two-year period aggregating approximately $286 million in regular cash dividends, share repurchases, and the December 2005 special dividend.

Turning to this year's cash flows, cash flows from operating activities of continue operations totaled $89.133 million in fiscal 2007, which compares to $98.996 million for the prior year. A lower level of net income, including the effects of the reduced CDSOA remittances, contributed to this decline, although we also experienced some favorable relative changes in our working capital components. In arriving at this year's cash provided from operations, the most prominent non-cash add-back remained depreciation and amortization, which totaled $28.766 million. Of this amount, as has historically been the case, over half still related to our non-food operations.

As Jay admitted to, some annual cash flow amount of note included $55.823 million for property expenditures, $[65.858] million for share repurchases, and $33.696 million for the payment of dividends. As has been the case for a number of years now, our share repurchase activities served to more than just offset option exercises, as we have reduced shares outstanding in fiscal 2007 by roughly 5%, year-over-year, at June 30.

Given what I have shared this morning and our current expectations for fiscal 2008, we believe that we continue to be financially well positioned to address our anticipated cash needs, whether it be for CapEx, share repurchases, dividends or business acquisitions. As our existing bank revolving credit agreement will expire in the back half of the fiscal year, we do look to renegotiate the somewhat larger facility in the not too distant future.

Thanks again for your participation with us this morning. I will now turn the call back over to Jay for his concluding comments.

Thank you, John. As we begin fiscal 2008, some of our past challenges remain. In particular, we expect ongoing high raw material costs. Yet, we're optimistic for the year for several reasons.

Numerous retail food product price increases are going into effect this quarter, which we expect to offset some of the high ingredient costs. Recent product introductions of Marzetti hummus and Texas Toast croutons are being joined by New York brand pizzeria dipping sticks on store shelves by our second quarter. We are excited about further new product introductions as the year progresses.

We will see further ramp-up of three new national chain restaurant customers as the year progresses. Our new Sister Schubert's facility will be starting up and helping support this growing product category. Our Marshall's acquisition will help us bring to market some new frozen bread items as the year progresses.

We're optimistic our non-food segments will show further improvement. Our strategic alternative work continues with perhaps further developments to announce in the near future. Through closing our industrial glass operation and the June floormat business divestiture, we are exiting the only pieces of our non-food segments that were experiencing negative cash flows.

We continue to work on acquisitions of good fitting food businesses with a couple of active conversations going on at this time. We may see more opportunities and perhaps some softness in valuations as a result of current market conditions, but that remains to be seen.

Share repurchases will likely continue, but we will be mindful of the changing credit markets and volatility in the equity markets as well. With no major capital projects planned for 2008 except the conclusion of our new Sister Schubert's plant, we expect capital expenditures will be in the range of $30 million.

We begin fiscal 2008 positive yet mindful of the very competitive markets we operate in and the challenges that creates. Our investments for the future, be it for capital, new products, acquisitions, marketing or people, are a key to creating long-term value. I am confident all of our people are up to the challenges we face in fiscal 2008.

Tracy, we're ready for questions.

(OPERATOR INSTRUCTIONS). Oliver Wood, Stifel Nicolaus.

Good morning. In the release, you mentioned your divestitures of noncore essentially playing out through the balance of the year. Could you just give us a sense of what you'd expect the business to look like at the end of the process?

Well, we definitely expect it to be more of a -- as I think we've referenced in the past -- a consumer packaged goods business. How exactly that's made up remains to be seen, as that is an ongoing process at this point.

Then the potential acquisitions you mentioned, can you give us a sense of size of those? Are they more kind of at the bolt-on level or larger?

Well, yes, they would range to a bolt-on level to somewhat larger, certainly larger than any ones we've done recently. I think we get into the $70 million to $100 million range in one of them we're working on.

I guess for John, when you talked about increasing the debt capacity, could you give us a sense? Is that for, you know, in order just to look it acquisitions down the road? It was kind of interesting, given the recent pairing down of the business.

Well, I think, Oliver, it's also sort of reflective of the fact that we went from a balance sheet a couple of years ago that was coming close to a couple of hundred million dollars of cash and no debt, and we ended the last fiscal year with somewhat greater than $40 million of debt outstanding. That's increased a little bit since then. So I think increasing the amount of the available credit is prudent, given where the business is at today and given the potential for various expenditures in the future, including four business acquisitions.

Any expectation for CDSOA going forward?

That is a subject that is extremely difficult to predict. The program, as it currently stands, remains in effect and is applicable to all entries made into the U.S. through the end of next month. Disbursements from those entries could play out for several years in the future, but there is still a significant amount of judicial and legislative uncertainty in the program. So, the amounts are very unpredictable as we look out into the future. There's not much transparency to that program.

Turning to raw material costs, which I know is one of the major pressures this quarter, what kind of visibility do you have going forward, whether it's soybean oil, dairy, paraffin?

Well, right now, unfortunately, Oliver, it looks like perhaps even further increases in the nearer-term future that, barring maybe what you've seen a little bit in the commodity markets this week, it looks like it will probably hold up. Now, whether that changes anytime soon we're not certainly counting on that today, but the increases continue to be pretty dramatic, whether it's in the dairy complex; soybean oil certainly is a big deal for us. But it even gets into many other ingredients. Eggs would be another example of something that's up pretty dramatically year-over-year. So I think the potential is there are for further need for pricing as we go into the future here.

A final question and I will pass it on -- regarding Marshall Biscuit Company, I know it is still early but I just wanted to get a sense of is initial performance meeting internal expectations?

Oh, yes, I think currently it is. You know, we referenced them maybe bringing us some capability on the new product side. We have not obviously brought anything to market yet as we speak, but certainly overall operating (technical difficulty) yes, we are very happy with it.

Greg Halter, Great Lakes Review.

Good morning, guys. A couple of housekeeping items quickly -- John, I know you mentioned about the goodwill and so forth that's included in one of the accounts, I think other assets. Do you have the goodwill and other intangible figure?

The cash paid for that acquisition, Greg, was $23 million, subject to a small earnout above that. Most of that was allocated to various intangibles, including goodwill.

I know you had indicated that the depreciation and amortization was about $28.7 million I believe for fiscal '07.

Yes.

Given the new facility and now that that will be depreciated, I guess I'm wondering what kind of schedule that is on and what kind of configure you're looking at for '09 and maybe '08 and maybe into '09 as well.

I think, as we look into '08, and we will be bringing the frozen roll facility online for depreciation purposes here very shortly, we are really looking at depreciation of an amortization still hanging in, in the high 20s.

Okay. Of the $30 million that you expect in capital expenditures for fiscal '08, would it still be fair to say that 90% or so of that will be spent in the Food segment?

I think that's fair at this point, Greg.

Okay. You mentioned, in the food area, about I believe three new restaurant customers that will be ramping up in the year or maybe you're already doing business with them now.

Yes, we are doing business with them now and further ramp-up as we work through this year, yes.

Now, are those regional companies or national, or is this a nice [wind] for --?

We think they are nice wins. Yes, they are all national chains.

What was your split between the retail and the nationals, if you will, for the year?

It's pretty close to 50-50, just a tad maybe in the 51%, 52% retail, so it did trend a little bit more food service for the year.

All right. I know we've had the conversation in the past about the paraffin wax costs and so forth and that you have been looking at alternatives. Has there been anything put into place in that regard at this point?

Well, I think, as we look at least in the fourth quarter, I think we feel we've made some good moves overall, formulation-wise, that kept some of the higher costs in check on just the wax piece. But unfortunately, as we entered this fiscal year, we are faced with some recent additional price increases on paraffin wax. So, the challenge stays before us to find ways to offset that, whether it's further reformulation, pricing, any other moves that might mitigate that.

You talked about some price increases there. Any kind of range that you can provide us on what they're going up on a year-over-year basis?

You're talking about particularly the candles side of things?

Correct, and the paraffin.

You know, those have been at different points in time. They would probably be in the low single-digit area.

That is what you are expecting into fiscal '08, the current year?

You know, right at the moment, we don't have further specific plans for pricing, but certainly it will be wax-dependent as well as, frankly, competitive market conditions.

I'd note, Greg, that in addition to price increases within that business, we have had the benefit of bringing to market some new product with better-than-historical margins, so it's good to have increased prices, but new product development is also important obviously there as well as throughout the business.

Yes, that's definitely the best opportunity to try to enhance margins.

Okay. Relative to paraffin wax costs, you indicated that you expect some further increase in '08. I mean, is that a single-digit price, or 20%, or how would you frame that?

Probably single I think is what we know today.

Okay. Backing up on the food again, you indicated some new restaurant customers. On the other side, any customer lost in the quarter or the year?

You know, Greg, nothing of significance coming to mind -- certainly the volume we do with any given customers move up and down some, but I'm not recalling anybody of any significance we actually lost during the year.

Okay. The New York brand, the dipping sticks, will that be a national rollout?

Yes, that is the intention, yes.

David Liebowitz, Burnham.

You mentioned an acquisition that might be in the range of $70 million to $100 million of revenue.

Yes.

How would you pay for a transaction of that size?

Well, discussions so far would suggest that's going to be a cash transaction, so back to the financing John was talking about, that's the kind of thing that would be used for.

Would this deal, as you envision it, be accretive in its first full year of ownership, or would be further out before it becomes accretive?

Well, you know, I would caution you that it's still in some conversation stage, so a lot of the specifics aren't that close. It's always speculative as to whether you get it closed, a deal done or not anyhow. I would like to think it would be at least modestly accretive.

Are there other transactions that you might be closer to reaching a point of signing a piece of paper on?

Again, it's hard to gauge one versus the other, so I don't know that I could give you much there. Maybe is my best answer perhaps.

Okay, so basically, we're looking at two potential acquisitions at this time?

Yes. Actually, we probably have two or three in some form of discussion right now.

In terms of disposing of the balance of the non-food businesses you currently have, are you in discussions right now or has Goldman Sachs brought anybody to the table? Or is it at a point now that you're trying to get out there again and flog the world?

There are some discussions going on, but there's also some more development work to be done there, too.

Okay. Lastly, barring an acquisition in the $70 million to $100 million range, how much of the line would you expect to take down this year?

You know, David, I don't know that I would really want to speak to the specific around it because that plays into the forecast on other aspects of cash uses. Clearly, as we had $40 million-plus outstanding at June 30 on $100 million line, I think we would like to have somewhat more flexibility to perhaps increase the debt on that basis.

To the extent that a large acquisition would come about, we would perhaps look for other types of financing to support that kind of transaction. You play that in against the process of our strategic alternative work, I'm not sure that speaking to a specific utilization right now would be appropriate.

Okay. I must concede, I did not pay as much protection, John, as you were speaking for other reasons going on here in the office. Did you say what your CapEx would be this year?

We believe it will be in the neighborhood of $30 million, David.

Okay, and that is separate and distinct from any buyback activities, share-repurchase program activities?

Oh, yes, that's totally different, yes.

Okay, thank you very much.

[Diane Lekeever], Barrington Capital Group.

I heard you earlier give a number on current employees. I was hoping that you could give further information with respect to, by business segment, the current standing for employee headcount.

You know, Diane, we don't have that in front of us. I mean, what I gave you was a total count of course, so that's really all I've got right at the moment.

Could you repeat what that total count was again?

It was 4781 at June 30.

What was the prior number?

5605.

So is that entire difference attributable to the most recent divestiture or sale of the floormat business?

Well, it's heavily a part of that, but also going on in there of course is our new salad dressing facility in Kentucky that's got additional employees. There's always some be it business or seasonal condition changes in each of our businesses, but it would heavily be impacted by the divested operations, yes.

So that was about 800, roughly, employees for that segment?

Again, I'm not looking at the exact numbers here, but we would probably get pretty close to that, yes.

Okay, that's all. Thank you very much.

Jim Barrett, CL King & Associates.

Jay, could you talk about your acquisition activities? To what extent over recent years have you competed with strategic acquirers versus LBO shops? Is that the case in this $70 million to $100 million acquisition you're contemplating?

You know, I think, if we look back over the last two or three years in the deals we were very actively in a process on, you know, they were probably at least 50-50 if not a little bit more than that, ending up with financial-type buyers in the end. Clearly, that has been a challenge to compete against.

You know, in the conversation we're having today, I read don't have a feel for what the other alternatives a seller may be looking at. In general, the things that we are most actively involved in today are entrepreneurially family-owned businesses. They're not divestitures of other major food companies or anything like that.

Is there a reason why you would not consider brands that are being divested by the large food companies, or is it just coincidental that they are not out there?

I mean, that's just a point in time here. We've certainly seen some of that in the past. Based on what you read out there today, I would guess that could be likely here in the future, too. We would be interested in those things, certainly.

Then the assets or the businesses that you are contemplating some kind of strategic alternative for, are they -- are the folks interested in those businesses -- do they tend to be financial-type buyers or strategic acquirers?

There's some mix going on there, too. Of course, there's some financial-type buyers who might have a presence in a related space, so you can almost define them as a little bit of both. So yes, I would have to say it's both at this point.

Then last but not least, in terms of doing deals in the food space, do you currently have a bias toward foodservice versus packaged goods?

Well, our bias would be toward branded product going to the retail channel, but certainly there could be some fit opportunities on the foodservice side that would make sense to us.

Okay, well, thanks. I appreciate it.

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

Hello again. I'm wondering if you could frame the start-up costs for the new facility down in Kentucky for fiscal '07 in terms of the negative impact it had on the operating results.

You know, Greg, I think we would just kind of suggest in the low 7-figure area is I think is good a comment as we could give you today.

I just want to make sure I heard correctly. On the raw material costs, on a year-over-year basis, they were up $5 million?

We've said $5 million, I think, plus in the Specialty Foods segment.

That's just in the quarter?

That's in the quarter, yes.

I think I missed the share count figure that you provided currently after the repurchases. Was it 30,361,000?

That's right; yes.

That 387,000 that you've repurchased so far, can you provide what cost that was done that?

We're going to look here and see if we've got that.

Just about $41, Greg.

$41, okay. Regarding the Marshall Biscuit acquisition, is the management remaining?

Yes, the management has remained and frankly, I think it's an important (technical difficulty) an important asset that we did require. We think we've got some very good talent there.

How are their facilities? I mean, will they need some capital expenditures to get them into shape, or are they pretty good already?

We think they are pretty good shape today, yes.

Will the new Sister Schubert's facility or any of your other facilities be making any of their products?

You know, that's a little hard to define at this point -- not specifically contemplated, but there certainly could be some of that, yes.

But not in the near-term?

I don't think so, no.

Your indication that they had sales of around $1 million for the one month would seem to indicate about $12 million on an annual basis. Is that about right?

We would probably ballpark it in that area, yes.

Okay, thank you very much.

At this time, there are no further questions. Mr. Gerlach, are there any closing remarks?

We just thank everybody for joining us this morning. We will look forward to talking to you about our fourth quarter in another 60 or so days. Thank you.

Thank you for participating in today's conference call. You may now disconnect.