Marzetti Co (MZTI) 2008 Q3 法說會逐字稿

Good morning. My name is Vanessa 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) Thank you.

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

Thank you. Good morning. Let me also say thank you for joining us today for the Lancaster Colony third 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 risks. Accordingly, investors are cautioned not to place undue reliance on such statements. Factors that might cause Lancaster's 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 product introductions, the effects of any restructuring and other factors that are discussed from time to time 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. While we were pleased with the strong sales in our Specialty Foods segment for the third quarter, commodity costs severely impacted our operating margins. Overall our food commodity costs were up over $18 million in the quarter, while we we recovered approximately $9 million in pricing. Two of our key ingredients, soybean oil and flour, saw second to third quarter average cost increases of approximately 25% each. Retail pricing, previously increased last July, was again increased on March 1st, with a further increase planned for the upcoming July 1st. Food service pricing among our larger restaurant chain accounts has also been subject to adjustment, although with some lag effect.

I'll come back to our segments, but first, here's an update on our capital uses. During the March quarter we repurchased 725,862 shares for $26.9 million, and year-to-date we have repurchased 2.070 million shares for $80.6 million, leaving 28.000723 (sic) shares currently outstanding and 1.275 million shares authorized for repurchase. Our capital expenditures for the quarter were $3.6 million, and totaled approximately $16 million for the nine months. For the year, capital expenditures will likely come in between $20 million and $23 million.

Touching briefly on our remaining non food operations, Glassware and Candles saw a sizable sales decline after our consumer glass divestiture in the second quarter. Candle sales were almost flat in the offseason third quarter. Earnings were off about $1 million in the segment, reflecting the loss contributions from the divested entities, and for candles, lower capacity utilization and higher wax costs. Our automotive segment now made up of just our Dee Zee aluminum truck accessory business, saw decent 6% sales growth in a slow market due to new and existing programs. Operating income was up about $900,000 from improved operations and some pricing.

In our primary business, Specialty Foods, net sales increased $19 million or almost 11% with nearly one half the growth from pricing and the other half from new products, the Marshalls acquisition and base business growth. Among our newer products, New York brand Texas Toast Croutons and Pizzeria Dip'N Sticks were good contributors. The early Easter likely helped volume a bit in the quarter as well. While pressured by unprecedented ingredient cost, we continued to support our key brand and product line through promotional spending, marketing and new product development investments. We were pleased to see sales improve in this challenging environment for the consumer. Let me ask John to give you a brief update and then I'll finish with some comments about the upcoming quarter and year.

Thank you, Jay. I thought I would start out by discussing several key components of our consolidated balance sheet. Lancaster's consolidated accounts receivable at March 31st, 2008 totaled $89.831 million. This amount represented a 3% decline since last June and 7% since last March. Our exiting of various glass manufacturing operations led to these declines although the strength of our food segment sales have somewhat offset this effect. With respect to our inventories, we have a somewhat similar story. Here our consolidated total of approximately $130 million at the end of this March decreased about $19 million or a 13% from the level of this past June. Year-over-year, our March inventories declined about $10 million or 7%. While we were pleased with progress made in reducing automotive segment inventories, the decline primarily reflected lower glass inventories. Higher volumes and costs contributed to increased food inventory levels as well.

Moving down the balance sheet to our net property balance at March 31st, I point out that this total also declined by over $14 million as last June as influenced by the actions involving our glass operations. However, total capital expenditures during the nine month period were $16.003 million, with the most significant project by far relating to the completion of our new frozen roll manufacturing facility in Kentucky. With respect to borrowings, our net debt of roughly $65 million has increased about $31 million since June 30th, in part reflecting the extent of cash returned to shareholders in the form of share repurchases, which totaled $76.759 million for the nine months ended March. Such repurchases contributed to the greater than 6% reduction in shares outstanding at March 31st compared to June 30th. Still, our gross debt outstanding remains a relatively modest 17% of total capitalization. Except for the items I've already discussed, I believe the other changes in our balance sheet components are relatively unremarkable.

Turning to cash flows, I would like to share a few items for your consideration. For the nine months ended March 31, 2008, Lancaster's consolidated cash flows provided by operating activities of continuing operations totaled approximately $72 million, which is somewhat above the $70 million level a year ago. Comparatively favorable changes in working capital components and non cash charges such as the loss on the glass divestitures more than offset the impact of the lower level of consolidated net income through March. Within the current fiscal year, depreciation and amortization for the first nine months totaled $22.276 million and shareholder dividends were $24.603 million.

In concluding my remarks, just a brief comment on our tax provision for the quarter. Our effective tax rate for the quarter of 33.9% was a lad tower than normal reflecting an estimation change relating to certain of our state and local provisions. We anticipate a fourth quarter rate closer to that of the effective year-to-date rate. I appreciate your attention this morning and I'll now turn the call back to Jay.

Thanks, John. We began our fourth quarter with commodity costs remaining at high levels. Our forward buys on key ingredients plus price increases would suggest a better quarter for Specialty Foods than our third, but still a challenge versus last year. Our July 1 price increases should let us get to better comparisons in fiscal '09 if commodity costs are reasonably stable at current levels. Demand is the other big concern, with much speculation on what consumer spending will be like in coming months. We share that concern, as so much food and energy inflation is hitting the consumer. New product and marketing programs happening in the fourth quarter include under the Marzetti brand new light and refrigerated salad dressings and veggie dips. A new cinnamon caramel apple dip -- and we've begun a transition of our Marzetti refrigerated salad dressing to all natural, which should be complete by June. Also being introduced under the New York brand is a ciabatta cheese roll. We've also recently introduced 100-calorie pack versions of a couple of our veggie and fruit dip product lines.

Shortly, we'll be rolling out two co-branding relationships, one each in the food service and retail channels we're very excited about. The one we can talk about today is the new line of all natural, no preservative dressings for our long time customer Wendy's. The individual dressing packets in this program will be branded with the Marzetti and Wendy's names. Products should be reaching stores over the next several weeks.

Demand is at least as great of concern in our non food product lines with lower plant utilization levels likely to be with us through the quarter. We continue to focus on cost reductions throughout our operations, which include things like SKU reductions, tighter control of product weights, manning throughout the organization and automation and efficiency projects.

In our Specialty Foods group, we have also supplemented our internal efforts to improve our operational effectiveness and address escalating input cost by using some outside operational and system consultants to provide some objective insights. Having addressed our most pressing capacity needs with significant capital investment over the last couple of years, we're now anticipating a return to more historically-typical capital expenditures level for the foreseeable future. Our strategic alternative work is very much continuing, yet with no specific news this morning. Acquisitions are very much on our agenda and while still not seeing a lot of deal flow, we are finding at least a couple of new things to consider. Vanessa, with that we're prepared to take questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Mitchell Pinheiro.

Hello, good morning.

Good morning, Mitch.

A couple of things. In the Specialty Foods side, you had mentioned half the growth of the 11% was pricing, and half, let's just say new products, acquisitions, product mix. So, could you help me tie in, first of all, I thought the price increases in March were roughly 3%. I know that's not a full quarter, but where did you get the plus 6 or so in pricing? How's -- I didn't think it was going to be that strong.

I think year-over-year that includes some impact of pricing that was done earlier in the year, plus the March 1 pricing. And when we're talking about pricing, Mitch, we're typically talking about retail pricing at those particular points in time. There is food service pricing that goes on at various points in time as we're able to pass on increased commodity costs.

Okay. So if I recall about a -- well, maybe nine months ago I thought you were getting 2 or 3% on the retail side? Is that right? And then plus this March. Am I missing any price increases?

Again, I think that's it, other than -- and that's again when we're talking about retail, those were the two primary times we were doing that, but the other half of the business being food service would be going on throughout that whole period of time.

And so price increases in the non retail side were obviously a lot stronger?

Maybe a little bit stronger, yes.

Okay. Well, if half your business is getting maybe 3 or 4 and the other half -- okay. I'll do the math later. As far as -- so you had a $9 million sort of net incremental impact from the higher commodity cost if you had $18 million increases and $9 million in pricing, is that correct?

That's a fair ballpark, yes.

And is that number -- as you look into the fourth quarter, are we seeing an incremental improvement or a slowdown or is it going to remain that type of quarterly impact?

Well, I would say we're probably in that area anyhow of still that kind of impact.

And was that impact, was that net $9 million for Specialty Foods --

I'm sorry, Mitch. I'm not talking about the net number. I'm talking about the gross number of material cost impact. There will be greater benefit from pricing having, again, that March 1 price increase for the whole quarter and again some ongoing food service pricing throughout the quarter.

Okay. So -- and that $9 million net or the $18 million gross cost increase, was that Specialty Foods only?

Yes, we're just talking about the Specialty Foods, that's right.

I just wanted to make sure I was looking at that right. Okay. Can you quantify how much you think an early Easter may have helped this quarter?

Yes, I don't think we -- we don't have a specific number, Mitch. It had a little bit of an impact. I don't think it was huge. I'm not sure if it could have got to maybe seven figures but probably not much beyond that.

Okay. Okay. But I would have to pull that out of Q4? You would think, right?

Yes, that's probably fair because as you compare to last year, yes.

What was the growth of the category at retail, the refrigerated dressing category in the quarter?

Mitch, I don't have that right here. That's a number we can get for you, but I don't have that right now.

Okay. Did you gain share, lose share, maintain share?

The data we have suggests that we did gain share, although I don't think our data is specifically in line to March 31st, exactly. But I think that's the case -- actually we're looking here. We might get something -- category growth number for you.

Okay. Well, let me just keep going on the food service side.

Yes.

Could you color sort of demand trends that you anticipate looking out over the next three and six months?

You know, I think at least based on what we see happening in the business today, it's holding up really pretty good, better than we might have expected, but we remain concerned with a lot of our customers talking about their concerns on store traffic and stuff, but I think -- we're reasonably positive about what we see coming. Our business has maybe skewed a little bit to the quick service guys, and if there's a trading down going on and I know perhaps we're seeing a little bit of benefit from that.

Is -- and if, will there be a -- like a channel fill with the new dressing products for Wendy's?

No, that's just a running change actually so no, there isn't a big channel fill there.

And then a final -- one more question on the food is you had mentioned earlier that outside consultants --

Yes.

How big of an expense was that in Q3?

It was a small six-figure expense, Mitch.

And same type of expense in Q4?

No. At this point I would say not. It should be less.

Okay.

Mitch, back to your previous question, the category number we would show is up about 4%, but that pretty much seems to be pricing on the refrigerated dressings and we definitely did grow share in that time.

Did you gain unit share?

Yes.

Okay, and then the last question, just looking at the glassware and candles -- what should I use as a comparative number from last year?

Generally what we've said for the full year, Mitch, is that candle sales made up roughly two-thirds of segment sales. What I would tell you in the fourth quarter since that's an offseason candle, the glass proportion of sales in the fourth quarter would have been higher than a third and approaching a half. I don't have the specific numbers with me, but I think it's not quite half, would have been glass sales a year ago in the fourth quarter.

Okay, and in the third quarter, it would have been again, roughly? As you sort of said in your comments, candles were flat in the quarter.

That's correct.

So last year's numbers on a sales line were basically flat. I mean it's all candles now, right?

There's a small amount of glass distribution that is left, not glass manufacturing, but by far the preponderance of the sales left would be candle sales.

Okay. Final question is just concerning the Horse Cave facilities. So is that still -- are margins still improving in those facilities? Are you getting the benefit you expected in terms of cost efficiencies?

I think we are seeing that, Mitch. I think the one thing to keep in mind is we built two facilities. One on the dressing side and the other one on the frozen bread end. And while they're both there to support and drive growth in the business, the bread side of it created more growth capacity than what we saw in the dressing end. So on the dressing side we were able to bring a lot of co-pack product and overtime production at other plants inhouse and fill that plant up to greater utilization level quicker than we did on the bread side. Because while there was a little bit of that overtime we could bring in there, a lot of that capacity is going to be used for future growth which we're seeing. But it isn't getting absorbed as fast as we were on the dressing side.

Okay, thank you.

Sure.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of David Leibowitz.

Good morning.

Hello, David.

Good morning, David.

Briefly, Jay, you indicated something to the effect that if you your raw material costs do not increase appreciably from current levels, your price increases will bring you back to the appropriate profit margin for next year? Or did I miss a fiscal year or did I misunderstand what you were saying there?

I wouldn't necessarily say appropriate profit margins at this point but we think should let us get to favorable comparisons as we get into first quarter of fiscal '09.

And would you anticipate further increases at your selling price even if raw materials costs do not go up from current levels?

I would say that's not necessarily likely. We'd certainly be evaluating our entire cost component as well as market conditions, but I would say that's unlikely if they're not commodity cost driven. I think we, like virtually anybody in the food business these days, is concerned about what these higher retail prices are going to do to consumer take away. And I don't think the consumer yet has seen the full impact of all of the increases that are happening out there. So we'll definitely be sensitive to that aspect as well.

And what about the mix between food service and the retail channels? Is there going to be much change in that percentage going forward?

I think if any change probably modest as we currently see it, David. Market conditions could obviously drive something more significant, but as we look out longer term, we would like to think we would see a little bit of movement mix to the retail side, but I would emphasize a little bit it isn't going to change by 5 or 10 points in a short period of time.

And on the last quarter conference call, you indicated that there were two potential acquisitions you were still looking at. Is there anything further to report? Is that dead now?

Not dead. Still alive but not moving as fast as we'd hoped by any means.

And are both of them still alive or only one of the two?

Actually both of them right now.

Okay, and are there any others on the horizon, in preliminary stages with or is it simply these two?

Yes, we've got at least one other one that we're taking a hard look at right now.

Is it also in the $75 million range or the $25 million range?

At the lower end of that, I guess.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Corey Amon.

I'm new to the story and was wondering if you ever provided in general terms how much of your food segments cost of goods sold is comprised of the food commodity such as wheat and soybean oil?

We've not talked just about those two, but more broadly. All the raw material input on the food side, I think we've talked about a range of 65 to 70% of cost of sales, probably the higher end of that range at least right now.

Okay. In terms -- is it more heavily weighted towards wheat or soybean oil specifically?

It's probably still more heavily weighted to soybean oil today.

Are corn sweeteners a component as well? That is, a material portion of the cost of goods sold?

Yes, they're in there. I wouldn't say a huge portion but they're one of many ingredients, yes.

That was my only question. Thank you.

You're welcome.

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

Thank you, Vanessa, and we appreciate your joining us this morning. Please, if you have any followup questions, don't hesitate to give either John or I a call. Thank you and we look forward to talking with you about our year-end results in August.

Thank you for your participation in today's Lancaster Colony Corporation conference call. You may now disconnect.