Marzetti Co (MZTI) 2009 Q1 法說會逐字稿

Good morning. My name is Enlee, and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the Lancaster Colony Corporation's first quarter fiscal year 2009 conference call. Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO, and John Boylan, Vice President, Treasurer and CFO. After speaker remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS) Now, to begin your conference, here's 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 2009 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 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, risk relating to the economy, competitive challenges, changes in raw materials costs, the success of new product introductions, the effect of any restructurings, and other factors as are discussed from time to time in more detail in the Company's filings with the SEC, including Lancaster Colony's report on Form 10-K. Please know that the cautionary statements contained in the Safe Harbor paragraph of today's news release also apply to this conference call. Now, here is Jay Gerlach. Jay?

Good morning, and thank you for joining us. Given the volatile and challenging period we're in today, we few our first quarter results as acceptable. Excellent sales growth almost of 20% in our Specialty Foods business, including pricing that almost equaled material cost increases, yielded operating income close to the prior year. Candle and Glass sales were off, primarily due to the Glass divestiture in last year's second quarter as candle sales were basically flat. Candle margin pressure was significant due to high wax cost, lower production levels and limited price relief.

Before more specific segment comments, here are a few updates. Share repurchases during the quarter totaled 296,000 shares for $10.1 million. Fiscal year-to-date, we have repurchased 496,000 shares for $16.9 million, and have 509,000 shares remaining on our authorization. Capital expenditures for the quarter totaled $3.7 million, virtually all in the Specialty Food segment, supporting primarily maintenance and efficiency driven projects. Our total employment at quarter end was approximately 3400, versus 4800 one year ago, reflecting our divestitures in the past 12 months.

Turning to our Specialty Foods segment, we saw a good growth in both our retail and food service channels. Our more recent product introductions, New York brand Texas Toast Croutons, Pizzeria Dip'n Sticks, and Ciabatta Cheese Rolls all contributed to our growth. Sister Schubert's brand frozen dinner rolls, and Marzetti refrigerated dressings also showed good sales growth. Food Service growth was helped by frozen dinner rolls, frozen pasta, and salad dressings and sauces. Year-over-year material cost increases for the quarter reach approximately $20 million, and we recovered roughly $18 million in pricing. Good operations, increased volume, and some operating expensed leverage let us get Specialty Foods' operating income almost to last year's level. Included in the segment's performance was about $800,000 of plant closing costs related to our Atlanta salad dressing operation that's now consolidated into our other plants. We expect to see annual savings of $1.5 to $2 million on this consolidation.

The Candle and Glassware segment sales decline was primarily due to our glass business divestiture last November, and again, candle sales were close to flat in the quarter. Wax costs increases had about a $2 million impact with our aggressive pricing action of high single to double digit not getting implemented as early in the quarter as we had planned. Lower production levels as we pushed to reduce our inventories in the segment also unfavorably impacted our costs. We did have approximately $800,000 of added corporate expense related to the demolition cost of the closed plant site we now have for sale. With those comments, let me ask John to review our balance sheet.

Thanks, Jay. Let's first review some of the more notable line items within our September 30th balance sheet. Our consolidated accounts receivable at September 30th, totaled $81,773,000, approximately $22 million higher than at June 30th, but actually $2 million less than the receivables from continuing operations as of last September. As typically occurs in the first quarter, our receivable levels are strongly influenced by seasonal sales experienced within the Glassware and Candles segment. Additionally, our Food Segment balances reflected the strong year-over-year sales increases of the current year's quarter.

With respect to our inventories, the September 30th total of over $125 million compared to roughly $120 million at June, and for continuing operations, $127 million last September. Our Food Segment has experienced comparative increases, in part reflecting the higher sales volumes, and with respect to the year ago balances, higher costs. Non-food inventories have declined, and especially so, when compared to levels of a year ago. The divestiture and closure of our glass manufacturing operation certainly contributed to the year-over-year decline. However, we've also been pleased to see a reduction in the dollar value of our candle inventories over the last year despite higher unit cost. Our net property, plant and equipment, decreased about $2 million since June 30th, and has declined about $19 million since last September. The latter reduction was influenced by the prior year sale of glass related manufacturing assets. Our net debt outstanding at quarter end rose to $64 million, compared to about $36 million at June 30th. Seasonal borrowing needs supporting our candle operations, as well as the continuation of our share repurchases, have influenced this increase. With shareholders' equity at September still totaling over $352 million, we believe our balance sheet posture continues to provide 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 used by operating activities from continuing operations for the quarter totaled approximately $5.4 million, which compares to cash provided of $2.4 million in the year ago quarter. The lower income, and relative changes in working capital components, especially the extent of increased accounts receivable resulting from this year's higher sales, contributed to the decrease. One specific component of the quarter's cash flows that you may find of interest is depreciation and amortization that totaled $5.6 million, which compares to $6.6 million recorded a year ago. As previously mentioned, other cash flows of note for the quarter included capital expenditures of $3,693,000, and share repurchases $10,088,000.

In looking toward our upcoming second quarter results, we want to remind you that the prior year's comparable quarterly results reflected income recognition of the US Government's remittance to us of approximately $2,533,000 under the continued Dumping and Subsidy Offset Act. This income translated to approximately $0.05 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 intentions sometime in November. However, there remain 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.

Other matters of note occuring in the prior year's second quarter included a $5.7 million charge related to the loss on sale of our glass manufacturing operation, as well as a $3 million pension settlement charge. Additionally, of the $269 million in sales during last year's second quarter, over $7 million related to glass lines involved in the mid quarter divestiture. I appreciate your attention this morning. I'll now turn the call back to Jay.

Thanks, John. Looking to our second quarter, we see food ingredient costs still unfavorable to last year, but to a lesser degree. While some ingredient costs have fallen noticeably in the past several weeks, our benefit is not immediate as we do have some forward buy commitments to work through. Demand is our biggest concern. While sales got off to a strong start in the first quarter, the second quarter needs good consumer sell-through, particularly on key seasonal items like Sister Schubert rolls and Marzetti apple and veggie dips. We are also mindful of store traffic concerns from many of our food service customers. Our focus is on controlling costs across the business, watching inventory levels closely and striving to maintain our sales growth momentum. Our newest product being introduced this quarter is our Disney branded Marzetti veggie dips, which just started shipping. Overall, sell-in for our seasonal products has been good.

Consumer sell-through will be a key factor for candles as our customers remain cautious in their plans and inventory levels. Our selling prices are definitely up and will help our second quarter, but so far, we are seeing little sign of weakness in wax costs, even with oil's dramatic decline. We're managing inventories closely as we work to improve our turns in spite of flat sales. Capacity utilization will continue to be an issue here. Potential acquisition activity is relatively quiet, but our interest is still there for good fitting, specialty foods opportunities. The state of the economy, and credit and equity market conditions will guide our future share repurchases. We're generally optimistic on our outlook for the remainer of fiscal '09, even with a stressed consumer. With that, Enlee, we're ready to take questions.

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

Hey, good morning.

Good morning, Mitch.

Hi, Mitch.

Jay, I wanted to talk about what you just sort of ended with in terms of demand being your biggest concern. First, as sort of background, how did the Marzetti business do in the quarter and how did that compare to the category, the refrigerated dressings and refrigerated dips?

Mitch, I think if we look at kind of 52 week data on the dressing and dip category, we're seeing actually slight declines in each of those categories. Being the predominant player in the dip side of things. We've seen a slight decline in that sell-through data as well. The opposite is true on the refrigerated dressing side where we're showing some positive comps to a category that's just slightly off. So, we've actually been gaining a little share in the dressing side of things, refrigerated dressing I'm talking about.

Right. So, this would be an area that, at least, one could expect to see a trade down to the lower price shelf stayable, the pourable side. I guess you're not seeing that? How about the latest data, the four week or 12 week? Are you seeing any kind of trade down trend?

I'm looking at real current data, recent data four to 12 week at the moment, Mitch, but that is where, I think, we see the greatest concern. If we look at our most premium products, which would get us into that refrigerated dips and dressings, and we've seen retails per unit get north of $4. With some consumer alternative, particularly on the grocery shelf for dressings, I would have to believe there's some trading down going on there.

Okay. We have seen, as we keep on trading down these channels from casual to quick serve, and from quick serve, perhaps, to maybe the eat at home, there are people that continue to want to have quality dressings and won't skimp there yet. Have you done any work on how the refrigerated category did in prior recessions?

No. Mitch, I can't give any specifics on that. Although my recollection would be, in prior recessions, we didn't have this kind of double whammy of ingredient costs driving much higher at retails at the same point in time, this is a little bit different.

Largely speaking, you've taken pricing up about 3%. Is that correct?

We did 3% in July, that's right. As well as 3% last March.

Okay. So, roughly, 6% or so, in the refrigerated side?

Well, then there was another 3% the previous quarter.

Okay. And, is that how you get to nearly the 8%? I was reading your comments about half pricing, half volume in the overall sales mix, or in the specialty sales mix?

Yes, that plus pricing flowed through on the food service side of the business as well, which is not necessarily fallen exactly the exact same time frames, and the amounts can be different as well.

Right. So, when I look back in terms of strategy, you've put in place some pricing. Do you get a little more aggressive on promotion to offset any weakness, or are you going to try to hold pricing and just sort of take your lumps with volume?

I think right at the moment, our plans would not suggest any significant change in promotional expenditures. But, those plans can obviously change, dependent on market conditions. But we're not doing that at this point and don't have plans to do that right at the moment.

Is there any difference between the dressings and the dips in terms of category growth rates?

Yes. I think the dressing category is, probably, slightly better than the dip category at this point.

Okay. But, both are still slightly down on the 52 week basis?

Yes, that's right.

Okay. Again, on the demand side of the equation, Food Service. You've done quite well in Food Service with new products and some new distribution. Can you talk about some of those products and distribution a little more?

Yes, Mitch, it is hard to give specifics there because of all of the confidentiality we have with customers we deal with. But it does include again, frozen bread, frozen pasta, and the dressing and sauce side of the business, I think, is new product, new programs in all of the areas that are helping that grow.

So, is there an equal impact, or did one of those areas have a stronger impact in this quarter?

I don't know that I can really break that out for you, Mitch, at this point.

Okay. Let me ask you this. When I look at your sales mix, how much is quick serve versus casual on the Food Service side?

I don't have that percentage right here, Mitch, but it would be stronger to the quick serve, I think as we commented before, versus the casual.

Okay.

But, I don't have an exact percentage.

Okay. And, as it stands now, in the current environment, how would you characterize sales in the Food Service?

What we're seeing is holding up pretty well. But again, I think we are seeing the benefit of that mix to quick serve, as well as new programs and products that are helping demand, even with customers where other things might be a little softer.

Okay. When I look at price increases on the retail side, the very first price increase, that was in March of 2008?

Well, the first price increase goes back to July of '07, then March of '08 and July of '08.

Okay. Got it. Thank you. So, because you do buy forward, you talked about the second quarter not having the full impact of reduced commodity cost, certainly in the second half of the year, is that fair to assume?

I think given current commodity costs we're seeing, yes.

Okay. How far out do you typically buy forward, or hedge, for wheat and soybean oil?

Soybean oil, we generally go out, could be nine months, plus or minus a little bit, but it is kind of a declining amount of coverage the further out we go.

Right.

Flour, we tend to keep somewhat closer. It is probably, in most points in time, six months or less.

Okay. You had mentioned in the remarks that the net impact of input costs after pricing was about $2 million?

Right. Was that the total company? No, that was just the food segment.

Just the food. If I take an 8% pricing from last year, I come up with, maybe, having about a $15 million contribution, and was the $20 million just food as well, the $20 million commodity cost impact? In other words, I had 20 minus 15 giving me a net impact of $5 million. Am I adding both wax and food there?

No. Actually, what I said, about $20 million of food ingredient impact, and about $18 million of pricing related.

Right. So, if I did $18 million of pricing on last year's sales base of $184 million or so, that would give me a, excuse me, if I did it on $184 million, I thought about half of it was pricing, 8%. That would have given me about $15 million of higher sales this year. So, 15 off the 20 gives me a net impact of 5. I'm just trying to understand.

I think the difference, Mitch, again, is pricing and timing of pricing in the Food Service part of the business.

Okay. Then, last question, is, on CapEx. John, I guess did $3.7 million in the quarter, which is a run rate below, let's call it $15 million. Is that what we should be looking for for the year?

I think our earlier guidance, Mitch, was for $20 million for the full year. I think we're going to reaffirm that, recognizing that, at the moment, that run rate is a little weaker than the $20 million. There are a couple of projects we're evaluating that could get us to that $20 million. So, that $15 million to $20 million range may not be too bad of guesstimate based upon the projects that we're looking at right now, but it could get to $20 million in total.

Ok, I will yield the floor. Thank you.

Your next question comes from Sarah Lester.

Good morning.

Good morning.

Hi, Sarah.

I had a question about the Candle segment. I think you had said candle sales were up slightly in the quarter, about flat. I guess you put in a price increase, so are you seeing some volume declines there? I'm not sure if you can break out volume versus pricing, but, are volume sales softer this year than last year?

You know, we really didn't see a lot of pricing impact, actually, in the quarter. While we were moving on some significant price increases, a combination of when those got implemented, coupled with some of the seasonal shipping that goes on in that quarter that was based on pricing that was already committed, that really mitigated much help from pricing in the quarter. Unit volumes are probably a little hard to comment on because there's always mix issues. But, I would kind of ballpark those, probably, as relatively flat as well.

So, for the pricing, we should start to see that in the second quarter then?

That's what we're counting on, yes.

Okay. That's all I have, thank you.

Sure.

Your next question comes from David Leibowitz.

Good morning.

Hello, David.

Hello, David.

Are there any special competitive pressures that are existent today that you did not see a year ago?

David, I don't think there's anything new or different in either the food or the candle business at this point.

Okay. And in terms of your relationships with the trade, have you put out any special promotions in the last few months?

I mean, nothing that I would call special. We do routine promotions, of course, in the food business, but nothing unusual.

And has your inventory in the specialty food area improved over a year ago at this time?

Actually, David, the food inventories have grown year- over- year in part due to higher volume; in part, just due to higher unit cost because of the increased commodity component. So, food inventories have grown.

So the turn has been pretty constant year-over-year?

It slowed down a bit, but it is not significantly different year-over-year.

And lastly, as we look at the year as a whole, are there any categories you would expect to see some meaningful market share gains?

Well, David, I think that overall, in the frozen bread category we continue to see good sales, benefiting from some of the new product introductions that I mentioned. Yes, I would hope we'd see some continued growth in share there. That probably would be the primary place at retail right at the moment.

Okay. Thank you very much.

Sure.

Your next question comes from Mitchell Pinheiro. Yes, actually, I have a follow-up question, two follow-ups. One was asked and answered. When I get back to looking on the sales line for Specialty Food, your comments regarding the category and sort of the cautionary statement, is the caution just something that you're seeing, or just general observations that, obviously, we all see in the marketplace? Is there something specific in your business that you're starting to see a trend that would cause you to pause a little bit, in Specialty Food?

I think we got to go to the latter, primarily, Mitch. I think anybody in this environment is going to be real cautionary. We're also mindful that high teens kind of revenue growth is pretty strong performance. We have, again, have had the benefit of good success on some new products that, as time moves on, you start to lose some of those comparisons a little bit. that kind of stuff.

Right.

But, I wouldn't suggest we've got real time data that says the consumer isn't buying today. But, again, I think anybody's got to be concerned as to where we are going with the consumer.

Yes. Then, I actually have two more questions. In the channels, on the retail side, we're seeing the down channeling from grocery, down to mass, down to dollar. How does that impact your business, the mix? Is that negative, or do you feel that you're well represented in the value channels?

Yes. I think we are pretty well represented, Mitch. We're also represented pretty well in the traditional supermarket channel as well. So, I don't think we can really forecast what that impact may be like. We'd like to see them all, certainly, doing well.

Right. Last question is, you did seem to have a very good new product year over the last 12 months. Can you quantify on the food side, what percentage of sales have come from new products that may have been developed over the last year or two, or however you want to define it?

Can't quantify that for you right now, Mitch.

Okay.

But we'll see if we can follow up and get you something on that.

Okay, thank you very much.

Okay, thank you.

At this time, there's no further questions. Mr. Gerlach, are they any concluding remarks?

Well, thank you, all, for joining us this morning, and we'll look forward to talking about our second quarter results in late January.

This concludes today's conference call. Thank you.