Marzetti Co (MZTI) 2008 Q2 法說會逐字稿

Good morning. My name is Cassandra. At this time I would like to welcome everyone to the Lancaster Colony Corporation's second 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 speaker's remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS)

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

Thank you. Good morning and let me also say thank you for joining us today for the Lancaster Colony second quarter fiscal year 2008 conference call. Now please bear with me for a moment 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 & 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 risks. Accordingly, investors are cautioned not 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 related 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. Know that the cautionary statements contained in the Safe Harbor paragraph of today's news release apply to this conference call. Now, here is Jay Gerlach. Jay?

Good morning and thank you for joining us.

Our second quarter ended December 31 was quite eventful with the sale of our remaining glass operation in late November. Strong sales growth in our food and remaining Dee Zee truck accessory lines, yet weak seasonal candle sales.. Of greatest significance, however, was the ongoing challenge of still climbing food ingredient costs. For the quarter, sales in total were up 5%. Earnings per share of $0.54 was helped by $0.05 from a CDSOA distribution, but hurt by $0.12 and $0.06 from the loss of our glass -- loss on our glass divestiture and a pension settlement charge, respectively.

From a capital use standpoint, we repurchased 675,718 shares during the quarter or $26,564,000 and year-to-date have repurchased 1,518,681 shares leaving 1,826,000 shares available for repurchase and 29,238,000 shares actual outstanding. Capital expenditures in the quarter totaled $4.2 million, much lower due to the completion of our major food related initiatives and our divestitures. Total employment at December 31 was 4,257, down from 5,532 the prior year.

Looking to our specialty food segment performance during the quarter, the positive news is strong sales growth of almost 12%. Benefiting from new capacity, particularly supporting our Sister Schubert's product line in the important fall season, the Marshall's acquisition, pricing, new products including the successful new product lines of New York brand Texas Toast Croutons and New York Pizzeria Dipping Sticks.

Both our retail and food service channels showed good sales growth in the quarter, operating income from the specialty food segment shows an 8% decline in spite of strong sales and good plant operations as ingredient costs were unfavorable year-over-year in excess of $10 million and our new product introductory costs of over $1 million unfavorably impacted the quarter. Ingredient costs continue at near record levels. Pricing is definitely lagging the impact of these costs increases throughout the quarter, food service pricing was being adjusted and our next set of retail price increases is due in early March.

Dee Zee automotive accessory volume had another strong quarter, up 24% as our product's fill rates remain strong plus the help of new programs. Volume and some pricing helped the segment record a 3% operating margin versus a loss last year. Glassware and candles was our only segment showing a sales decline and operating loss while the divestiture of our glass operation was a major factor impacting our sales and operating income including a $5.7 million loss on the sale. Candle sales were also quite soft during the key holiday season. A combination of a couple seasonal programs that did not repeat and weaker sell through were factors. We are pleased with success -- with the success of some of our new lines like our upscale essential elements yielding a somewhat more favorable sales mix.

Let me ask John now to make a few comments.

Thank you, Jay.

I will begin this morning by addressing the noteworthy changes in our consolidated balance sheet. First, as of this past December 31, our net accounts receivables totaled almost $94 million, which was in line with the $93 million total at June 30, but a $13 million decline from the December 2006 total compared to last December, the decrease reflected the weaker candle shipments we saw this quarter as well as the impact of the glass operations divested or closed in calendar 2007.

Turning to inventories, which totaled over $128 million at December 31. These declined about $22 million since this past June, and over $7 million since December 2006. Our exiting of various glass operations certainly contributed to these lower levels. The year-over-year reduction might have been even greater were it not for the slower than anticipated sales of candles in the second quarter having left us with higher than normal inventory levels. We will be appropriately adjusting some production schedules for these product lines moving into calendar 2008.

Over in liabilities, you will note that we reported long-term debt of $47.6 million as of December 31. This classification results from having entered into the new five year credit facility we disclosed this past October. At $160 million, this facility is somewhat larger than our prior $100 million facility. With shareholders equity of December totaling almost $410 million, we believe our balance sheet posture still provides us with considerable flexibilityin meeting various possible cash needs. Be they for dividends, share repurchases, business acquisitions or capital expenditures. As an aside, Cap Ex for the most recent six months totaled $12,430,000.

Turning to our income statement, I wanted to briefly touch on the three large items mentioned early in the press release we issued this morning. First, in the second quarter we did incur a pre-tax loss of approximately $5.7 million on the mid-November sale of most assets of two lass operations. Net proceeds on this sale just exceeded $20 million. Second charge of note relates to the accounting consequences of significant pension distributions recently occurring out of the collect bargained defined benefit plan associated with the automotive format operations we sold last June. This $3 million pre-tax charge is reported in our corporate segment and represents a non-cash writeoff of related deferred pension costs.

Finally, we also reported a current year distribution under the CDSOA program of approximately $2.5 million in this year's second quarter or $0.05 per share after taxes. This compares to last year's remittance of about $700,000 or $0.01 per share. Since October, the related anti-dumping duties being collected by the U.S. government are no longer subject to distribution to eligible effected companies. While there may be some future distributions of certain remaining amounts collected through the customs process prior to October, such potential distributions are not subject to reasonable estimation at this time. At the very best, we do not expect receive another payment before the last quarter of calendar 2008.

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

Thanks, John. Our strategic alternative work continues with no specific news today. Capital investment will remain modest for the balance of the year which we now estimate will total in the range of $20 to $25 million. Our share repurchase efforts are ongoing. While we continue to explore acquisitions in the food sector, new opportunities seem relatively few at the present time. Easily, our biggest challenge working through the balance of the fiscal year will continue to be food ingredient costs which are still moving up in some cases. Pricing will help, but there is still a lag effect likely of some significance in the third quarter. The slowing economy is likely to be a factor, perhaps affecting our food service channel more quickly. On the new product front, we continue to be excited about the items I mentioned earlier and also look forward to introducing three new Sister Schubert's items this spring. Sister Schubert's brand of bisquits, clover leaf rolls and wheat rolls with a honey glaze. Candle sales are hard to predict over the nonseasonal second half, but we know production will have to be adjusted to reduce inventories coming out of the soft holiday period. Aluminum truck accessory demand is holding up so far, but the economy is a big factor. While cautious as we look to our second half and monitoring our spending carefully, we will continue to support our key brands and product lines as appropriate. Cassandra, we are ready to take questions.

[Operator Instructions] Your first question comes comes from Mitchell Pinheiro.

Good morning Mitch.

Hey, good morning. I -- couple questions here. First, just if you could help us looking at your consolidated income statement, not via the segment but just normal line items. Where do we find a couple of these unusual items, the CDSOA, is that a revenue?

The CDSOA remittance is down in miscellaneous income and that is excluded from the operating results of the glassware and candle segment.

That's excluded from the -- all right. So it's in the -- so it's --

It's not in any of the individual segments as it's below operating income and miscellaneous income.

I see, okay. It's not even in an offset to corporate expense either.

That is correct.

I gotcha. Alright. In terms of top line on the specialty segment, nice performance there. I was wondering if you could -- I didn't know if I heard this -- but whether you could break down pricing, volume and mix.the pre-tax loss, where is that on your consolidated income statement both the pre-tax loss on sale and the pension settlement charge are included in cost to sales.

Well, the -- Mitch, what I think we can comment on there is, a little bit over half of that increase was coming out of just ordinary growth which would include mix, so a little less than half is coming from pricing and the Marshall's acquisition.

Okay. So how much did Marshall's add in the quarter?

We are probably low single digits, maybe a couple percent.

Okay, gotcha. And in terms of volume, have you seen a recovery of the packaged salad business?

Yes. I think we have seen pretty good performance of our produce category items through the second quarter which did have somewhat weaker comparisons to a year ago when we did have the negative impact going on.

If you look at where you are today versus let's say two years ago, is the category, is the category up?

I don't have those numbers in front of me. I would say it's -- if not up a little bit, it's not far from it.

Okay. So you think we have seen a full recovery there finally?

Yeah, I would say that's reasonably fair.

How about in the dips area? How, if you could separate it from the dressings, how the dips sales.

I think dips had a good fall season.

Is your hummus product gaining traction?

Modestly. It's been slow to ramp up. But we continue to push it forward.

In terms of your new products, I must have missed, but you did talk about some slotting expense?

That was particularly related to rolling out our New York brand, Pizzeria Dipping Sticks.

Is that -- generally slotting, is it one time in a region, but is there further slotting as you expand or is the slotting going to go away?

Between go away and greatly reduced is probably fair. It's mostly been slotting. Certainly there are still promotional expense supporting the introduction when we get over into FSIs, couponing and that kind of thing.

You had a -- so when I look at your commodity cost, I guess it's $10 million which looks like $0.20 per share, the incremental costs in the quarter.

Yes.

You did a decent job obviously of managing that, operating income wasn't down that much. Are you seeing benefits out of the -- two horse [cave] Kentucky facilities. Can you talk about --

Yeah, think we've definitely seen what we anticipated there in the way of reduced overtime at other facilities. Greatly reduced outsourcing of product to meet demand that we were doing before those facilities came online as well as just good efficiencies as we have got really state of the art production line set up there.

So the new Sister Schubert's piece, would you characterize that as performing at or above your expectations?

Yes, I think we would today, sure.

And same with the dressings?

Yes.

Okay, so as you look at your second half with continued -- with pricing, you seem to be getting volume. The commodity cost is your primary issue.

Yes.

Is there -- can you talk about any -- whether your forward purchasing strategy, is it all spot buys at this point so how do you -- how are you handling this?

In the areas where we can make forward buys we have modest ones. But they are just that. They are not out very far at all. Of course, a lot of ingredients don't have that capability so we are subject to the spot market. And I think we are still continued to be challenged by these ingredients that have gone up since the second quarter.

So the pricing actions that you are taking in March on the retail side, based on where commodity costs are today, do you anticipate enough pricing to get back to some sort of equilibrium, or how would you color that?

We are hoping to get as close to that, but we actually seen commodity costs continue it to move since those increases were even announced. So the potential for still some further lag concern is there. And unfortunately, we don't have a better crystal ball than anyone else on what these ingredient costs will do from where they sit today, so there is obviously the potential for even further pressure should they still move up.

How about on the food service side? What type of -- where do -- I didn't really understand, where do you stand on your pricing actions --

Those prices are adjusted more routinely or frequently as ingredient costs change. So we're -- I wouldn't say totally current there, but we were closer to it than we were on the retail side.

And then finally, can you just talk about your market share, where you stand in the dressings business at the end of the quarter?

I don't know that we saw much change there. Again, our strength is in the refrigerated dressing category where we'd be number two to the category leader which is Marie's. But not really any significant change in that share at this point.

Okay. Thank you.

Thanks, Mitch.

Your next question comes from Oliver Wood.

Good morning Oliver.

Good morning. Just really, running through my questions and a lot of them have been asked by Mitch. I wanted to ask, I know you commented on new M&A opportunities and that sounds a little bit lean. But could you comment on conversations that you talked about previously. I think a couple quarters ago, there were maybe three potential deals. Are those conversations still ongoing?

A couple of those are ongoing at this point. Not at a pace that we might have hoped or anticipated at that point. But still very much active conversations.

Okay. Good to know. That's really it for me. Thank you.

You're welcome.

Your next question comes from David Leibowitz.

Good morning.

Good morning, David.

A few question, totally unrelated one to another. New product introductions for the second half overall, are they going to be greater or lesser than a year ago and would your anticipation be for a higher sales level of these products than a year ago?

David, we probably anticipate -- I don't have an exact comparison second half over second half. But at least as much if not a little bit more. Sales volume is, of course, hard to predict depending on what kind of acceptance we will get from the trade. We do have a lot of interest in these three new Sister Schubert's items. We haven't been able to bring much new to the Sister Schubert's product line due to capacity constraints since we obviously don't have those any more. We were able to do some new things. So we are excited to see how those play out.

Second question, you mentioned couponing in terms of slotting fees. Are you seeing a marked increase in couponing, vis-a-vis a year ago? Or do you anticipate half a significant increase?

Well, David, I think it's a competitive environment out there. And where we need to add consumer support for certain product lines or brands particularly from a competitive standpoint, we're -- we have been willing and continue to be willing to do that. As it relates to brand-new items, again, in the second quarter, the Pizzeria Dipping Sticks was a significant slotting investment but again, but we'd follow that with a reasonable amount of consumer support again. A lot of that with couponing that is going on as we speak. So that will continue on through the second half. Probably not dramatically different than the year ago period, but maybe up somewhat.

Okay. Turning to your buy-back program, as I recall you agreed to buy-back a minimum of two million shares this year. Is that --

That's correct, yes.

You seem to be running well ahead of that pace thus far this year. Does that mean you would be willing to borrow additional funds to keep the buy-back going at this rate?

Well, there is obviously a lot of variables there. But as you know, we have been long-term repurchasers and I would anticipate we would continue to repurchase. We are at a pace that probably gets us past that $2 million level, but again -- or two million share level. Other needs for capital ,particular acquisitions certainly could come into play as it relates to that pace over time. But we definitely anticipate we would continue to repurchase.

That's a great lead into my last question which is, in terms of acquisitions, you said there is still a couple that are ongoing. Can you give us some idea of their size in terms of dollar revenue with the companies you are talking with?

I just ballpark range of maybe $30 million to $75 million in revenue.

$75 million would be the largest you ever done, wouldn't it?

That's right, yes.

Thank you very much.

Sure, you're welcome.

Your next question comes from Greg Halter.

Hello, Greg.

You mentioned a price increase in -- coming from March in the retail side, I believe.

Right.

Can you provide any magnitude of what you are looking at there?

It's probably -- although it's going to vary by product line, but maybe in the area of 3% or so.

And I don't know if you provided the cash flow from operations for the quarter.

Greg, we did not. And we were actually still trying to polish that off to a number that we would be comfortable disclosing. I think relative to the $42.5 million of cash flow provided in the six months a year ago, we will see a $10 million or so increase largely driven by relative changes and working capital components. I don't have the precise number to share with you this morning.

Okay. It could be around $50 million, $52 million or something like that?

It could be $55 million, somewhere in that neighborhood.

Okay. And have you repurchased any shares in the current quarter?

Yes, we have. Which is part of that year to date update.

Oh, okay. That's included in the 1518681s. .

That's right, that includes, right through earlier this week.

Okay, and I'm looking at the corporate expense line and I'm coming up with an adjusted basis for the unusual items there, about $2.136 million. Does that sound about right?

Should be able to take the $3 million pension charge off the reported number. If that's what you have done, Greg. Let's take a quick look here. That's close to what you had. I don't know if you had a little something else you were doing there, Greg.

I will have to look at it, but -- And also on the candle and glass area, is there anything left in glass and should you be calling this candles down the road here?

At some point. And, yes, I would like to think we should. But as John reminds me, we will have glass in comparative number for a number of quarters yet. So exactly when we drop off the glass part of the segment description hasn't been decided but we probably will go out several quarters at this point.

Okay, but it is pretty much 100% candles now.

Yeah, well, 98% candles anyhow, yes.

Okay. On an adjusted basis it looks like your earnings per share came out to $0.67 if I take the 54 and adjust for those three items. Does that square with your thinking?

Well I sort of hate to go to the point of pro forma earnings per share but I think the AP would agree with your calculation.

Okay, and last question, you commented about the Cap Ex being only $4 million in the quarter, $12 million year-to-date with I think an expectation for 20 to 25 for the year which seems like a fairly large increase, at least given what you spent in the second quarter. Any thoughts on what would be included in that 20 to 25 for the remaining six months of the year?

Well, Greg, it looks like it's, again, it would be mostly food related projects and just assorted equipment. Of different sorts. Couple of boring things like roof repairs. But we do think it has the potential to add up into that -- get to that at least the low end of that range.

Okay. That sounds good. I presume we won't have to talk about furnace rebuilds any longer.

No, we won't.

That's a good thing.

We were out of that business. Which obviously helps on the capital investment side. The glass business was easily our most capital intense.

Right. Okay. And that is all I believe have I right now. Thank you.

You're welcome.

Thank you, Greg.

Your next question comes from Mitchell Pinheiro.

Hello, Mitch.

Hello, you hear me?

Yes.

Oh good, I'm having trouble operating my phone this morning. Just two follow-ups. One, with the price increase in March on the retail side, should we anticipate any buy-in in the quarter from modeling maybe borrowing the fourth quarter sales?

That's kind of hard to predict. We probably would get some. It's kind of -- hitting the early March it's mid-quarter more than right at the end. So I don't know there will be a lot of buy-in that would carry into the fourth quarter, but there could be some. The other factor that we haven't mentioned, of course, that's in there is we have got an unusually early Easter this year, versus prior years. So as that relates to some of our seasonal demand which includes things like Sister Schubert's particularly. It may be skewed a little bit more to third quarter this year than than last.

Last question is on the glassware. So the -- of the roughly $17 million in revenue decline, can you break that down as to what was sort of ongoing and versus what was sold?

I think of that amount the $17 million roughly, $7 million of that, Mitch, is attributable to the divested businesses.

Okay. Perfect. All right, thank you very much.

Sure, you're welcome.

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

Well, thank you for joining us morning, we appreciate your interest and will look forward to talking to you when we report our third quarter.

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