Marzetti Co (MZTI) 2008 Q1 法說會逐字稿

Good morning. My name is Chateena, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation first-quarter fiscal year 2008 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.

Good morning. Let me also say thank you for joining us today for the Lancaster Colony first-quarter fiscal year 2008 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 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 risk. 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 note 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.

Good morning and thank you for joining us. We're pleased to get fiscal 2008 off to a pretty good start with almost 9% sales growth and 12% operating income growth. Strong sales, modest pricing relief and some benefit from the closure of our industrial glass operations helped us offset the challenge of still high raw material costs. From a capital allocation standpoint during the quarter we repurchased 572,708 shares for $23,245,000 and year-to-date since July first, have repurchased 857,950 shares for $34,395,388, which leaves 29,890,440 shares outstanding and 2,486,787 shares available for repurchase.

Capital expenditures for the quarter totaled $8,573,000 with over 90% invested in our food operations, driven mostly by our new Sister Schubert's frozen bread production facility. Dividends paid during the quarter totaled $8,165,000. During the quarter we began the startup of our new Sister Schubert's plant, and today we're very pleased with its progress. While not yet where we expect productivity to be, we are well on our way and glad to have the capacity to support this growing productline. We plan to expand our geographic markets and introduce new products over the coming months with this added capacity.

Strong topline performance for most of our food productlines in both our retail and food service channels produced over 7% sales growth. Price increases and the Marshall's acquisition provided over half the growth, while the balance came from good Sister Schubert's demand, produce department items growth and new item contribution of Texas Toast croutons and hummus. Foodservice demand actually grew faster than retail in the quarter on strong dressing, sauce and frozen product demand. In spite of the sales growth, we still couldn't quite get the segment's operating income up to last year's level coming about $400,000 short. We estimate the year-over-year impact of rising raw material and ingredient costs as roughly $10 million in the quarter.

In addition to ingredient costs we had the hurdle of startup costs and related depreciation of the new Sister Schubert's plant and somewhat more aggressive promotional spending in certain categories.

While pleased to see a 9% sales increase in our Glassware and Candles segment, the selling off of inventory from our closed industrial glass operations was a major piece of that increase. Candle sales were up in the quarter. The closure of our industrial glass operation also contributed to our operating income increase as last year's quarter was quite weak and this year sales had a little operating costs. Pricing and good operations helped candle contributions in spite of still high wax costs.

Our auto segment now comprised of just our Dee Zee aluminum truck accessory business had a much better quarter on very strong 18% sales growth driven by strong demand from several original equipment light truck programs. Also some increased pricing combined to show a much improved bottom line. Metal costs were still slightly unfavorable in the quarter.

Let me ask John to make a few comments at this point.

Thanks, Jay. Let's first review some of the more notable line items within our September 30th balance sheet. Please note, however, that I may reference several amounts relating to September 2006; as disclosed in our last conference call have been affected by reclassifications for the discontinued operations that were divested in fiscal 2007.

Our consolidated accounts receivable at September 30th totaled $114,610,000, which was approximately $22 million higher than at June 30th but only $7 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 Candles segment. Additionally, our other two segments achieved strong year-over-year sales increases in the current year's quarter.

With respect to our inventories, the September 30th total of over $153 million compared to roughly $150 million and $155 million last September. Our food segment has comparatively showed modest increases in part reflecting the higher sales volumes. Non-food inventories have declined and especially so when compared to levels of a year ago, the closure of our industrial glass manufacturing operations contributed to this decline.

Our net property plant and equipment increased less than $1 million since June 30th, although over $27 million since last September. The latter increase reflects the construction of our new frozen roll facility located in Kentucky, which as Jay mentioned was effectively placed in service early in the quarter. This new operation contributed to the food segment's depreciation and amortization increasing about $1.2 million in the quarter.

Our debt outstanding at quarter end rose to $87.5 million compared to $42.5 million at June 30th. Seasonal borrowing needs supporting our Glassware and Candles business as well as the continuation of our share repurchases have influenced this increase. As we disclosed earlier this month, we entered into a new five-year credit facility subsequent to quarter end that at $160 million is somewhat larger than our prior $100 million facility. With shareholders' equity at September still totaling over $427 million we believe our balance sheet [roster] 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 approximately $2.6 million, which compares to cash provided of $7.6 million in the year ago quarter. Relative changes in working capital components, especially the extent of increased accounts receivable resulting from higher sales, contributed to this decrease. One specific component of the quarter's cash flows that you may find of interest is depreciation and amortization that totaled $7.8 million, which compares to approximately $7 million recorded a year ago. As previously mentioned, other cash flows of note for the quarter included capital expenditures of $8,258,000 and share repurchases of $23,245,000.

In looking toward our upcoming second quarter results we want to remind you that the prior years comparable quarterly results reflected income recognition of the US governments' remittance to us of approximately $700,000 under the continued Dumping and Subsidy Offset Act. This income translated to approximately $0.01 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 a number of uncertainties associated with this program that do not allow us to estimate how much if any funding may be allocated to us this year.

On a closing note, I would like to briefly comment on a couple income statement matters. First, our corporate segment expenses were somewhat higher than usual in the quarter primarily as a result of increased project related professional fees. Additionally, with respect to our effective tax rate, we experienced a slight decline largely attributable to a statutory increase in the federal deduction we received for our domestic manufacturing activities. And we anticipate the current year's full-year rate to generally stay in the neighborhood of 36% or so.

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

Thanks John. Looking ahead, we are optimistic yet mindful of the unpredictable seasonal demand that could impact certain of our food and non-food productlines, as well as the usual automotive plant holiday downtimes. Food ingredient costs look to be at current or higher levels throughout the quarter. We may see some modestly lower aluminum costs.

Our most recent significant new product introduction New York brand pizzeria dippin' sticks are just now getting on store shelves and we are anxious to see the consumer reaction. Capital investment should decline as our Sister Schubert's project winds down. Share repurchases will be ongoing and we'll be taking a good look at our cash dividend in November mindful, of our 44-year history of annual increases. We continue to actively pursue our strategic alternative work, and while we are not making any announcements today we believe that we are progressing well in our efforts. While the acquisition efforts I commented on a couple of months ago are still active, they have not progressed as timely as I might have expected.

Thank you for joining us. John and I are now happy to take questions. Chateena, if you would like to queue those up, please.

(OPERATOR INSTRUCTIONS) Mitch Pinheiro, Janney Montgomery Scott.

Good morning John and Jay. A couple things. First, you talked about on the Specialty Foods sales comments that half came from Marshall Biscuit and pricing, and I assume the other half is just volume?

Yes, that's correct.

And can you talk about how the salad category has progressed? It was kind of weak year-to-date, and are you starting to see a pick-up there or what is driving the volume?

I think we are seeing a category that is still relatively flat, although we don't have real, real current IRI data right in front of us at the moment that might give us comps to last year when we did have E. coli starting to take effect. But a category that is flat to very slightly up.

What is driving the foodservice business? New customers?

I think it is more new items and just good mix, good sell-through with existing customers.

Do you have -- are you getting pricing in foodservice as well?

We have gotten some pricing there, yes.

Okay, and relative to Marshall Biscuit, have you since acquiring the company have your sales expanded? Are you seeing any distribution gains or was it sort of still tracking at the historical run rate?

Generally at the historical run rate at this point.

Moving on to sort of the margin side, Sister Schubert still had start-up -- you had startup costs in the quarter, but you seem I guess pleased. I forget what adjective you used but you seem pleased about the progress there. Is that -- how big were the startup costs in the quarter if you could quantify it or if you can sort of color that for us?

I think we are probably just in the cracking end of seven figures at startup costs.

Okay. Do you feel -- is that -- are we sloping up, or are we sloping down here if you few look into the second quarter?

From a startup cost standpoint, yes I would say sloping down. So hopefully the business is then sloping up, yes.

Okay. That's what I meant. And as far as commodity costs, obviously you are still challenged here -- are you -- do you hedge? Have you hedged at all?

We do make some forward buys primarily in soybean oil, but not significant at this point and probably not a significant benefit to us at this point either.

Okay. Do you anticipate needing further price increases to offset future inflation there?

Based on what we are seeing today I would say that is pretty likely, yes.

And how would you or when would something like that be implemented? Is there a set time, or is it just when you guys decide?

At this point there is not a set time but I think we will be evaluating different product categories currently and looking at not only the cost picture but also what the competitive market conditions are like. So I can't give you a real good sense of exact timing at this point, but again given the high costs which everybody in the industry is facing I think there's more pricing to come on a broad scale.

A couple other things that and especially food segment, do you see -- can you talk about either market share or however you could describe how you are doing within the refrigerated dressings (inaudible)?

The most recent IRI data that we have seen would suggest we continue to be the number two player in the category on refrigerated dressings behind Marie's who is the category leader.

Did the category grow in the quarter?

We don't have data that would match quarter, the specific quarter, but the most recent data we'd see would be flat to slightly down quarter -- down in sell-through, sorry, not quarters.

I gotcha. And in terms of -- that is slightly down unit volume or do you think that is slightly down sales?

That is dollars we are talking about.

Dollars, okay. Thank you. And one last question. When you talked about your overall sales growth in specialty, is it -- were frozen bread and rolls stronger than dressings, or how would you -- or new product -- how would you color that for us?

I would probably say that yes, the frozen non garlic bread in particular would be stronger than the dressing side.

All right. I will yield the floor. Thank you.

(OPERATOR INSTRUCTIONS) Greg Halter, Great Lakes Review.

Good results in the face of challenging material costs. John, I missed your comment on the receivables on the year-over-year basis. I know you are about 115 for the current period September; but what was it last year?

If you will wait just one second and that has been restated, Greg, for the divested Automotive operations that are now in discontinued operations. A year ago it was roughly $107 million.

107?

Yes.

Are those restatements available or will they be under your 10-Q?

I guess at this point we would only intend to present a September to June comparison, but we will take that under advisement.

And I know you have talked about looking at alternatives to paraffin wax and so forth. Has anything happened in that regard relative to other formulations or vegetable wax or whatever is out there?

At the present time, Greg, actually the vegetable wax costs have shot up pretty dramatically. And we've actually been reformulating a little bit more recently back to more paraffin content because of that.

Okay, well can't win there.

Don't seem to right at the moment, no.

In looking at your candle and glassware segment, is it still about a 70/30 mix favoring candles?

Yes, that's a pretty fair mix, yes.

And when would your next glass furnace rebuild be needed?

At this point we are probably out almost two years.

And on the Sister Schubert's plant I presume with your commentary that you are just about complete there in terms of the capital spending.

That's right.

What do you envision for the year now on CapEx and then I would presume that would be more of a go forward basis as well given these two projects rolled into one, if you will, now complete or just about complete.

I think we've commented on about 30 million, and I think we would stick pretty close to that although we might have a little more likelihood of coming up a little bit shy of that at this point.

Okay, and John I think on the corporate expense you indicated they are up somewhat on a year-over-year basis due to certain project related professional fees.

That is correct, Greg.

Can you elaborate a little more on what that is related to?

I think as you look at the corporate segment expense last year, it averaged about $1.8 million, a little over that, so the prior year first quarter was light to the average. And the current years quarter does include an unusual amount of professional fees. I would prefer not to get into the exact background but a variety of third party fees have been incurred.

And will those be ongoing?

I think those are somewhat difficult to predict. I might expect the average of the corporate expenses in the year to run somewhat above the year ago levels; hopefully not quite to the extent that we've seen here in the first quarter but that could depend upon various projects we decide to undertake.

Moving over to the food side besides soybean oil, which we know is up there, what other costs are really having a detrimental impact in the quarter?

Just about all of them, frankly. Flour, dairy, eggs, it just kind of goes on and on; virtually everything is up and in many cases up noticeably.

1Okay, and John I think in the past you had provided a sensitivity on some of the food costs like soybean oil. Is that still holding true or has that changed any?

I think what we indicated in the past is a $0.01 change and soybean oil at market would run in the neighborhood of $1 million or so. It is probably just a tad higher than that. What we are seeing, obviously, is a significant increase in basically the four buckets of cost that Jay just outlined. It is oil, dairy, wheat-driven essentially flour and eggs. And historically we might see any one of those costs go up in a bad crop year or issues affecting the dairy herd and the like. What we are seeing is this year is just a broad comprehensive set of increases in all those buckets.

Okay, and one last one on the food side relative to the price increases; Jay, based on your commentary with food price and Marshall adding about half the growth, would that seem to indicate that price was about 1% to 2% on a favorable side for the quarter?

Yes, you are probably hovering right around that 2% area.

Thank you very much.

(OPERATOR INSTRUCTIONS) At this time there are no further questions. We will now turn the call back to Mr. Gerlach for any closing remarks.

Thank you for joining us this morning. We look forward to talking to you in late January as we report our second-quarter results.

Thank you for participating in today's Lancaster Colony Corporation first-quarter fiscal year 2008 conference call. You may now disconnect.