Marzetti Co (MZTI) 2009 Q2 法說會逐字稿

Good morning. My name is Arnetha, and I will be your conference operator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation's second fiscal quarter 2009 results conference call.

Conducting today's call will be Jay Gerlach, Lancaster Colony Chairman and CEO, and John Boylan, Vice President, Treasurer and CFO. (Operator Instructions).

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

Thanks to all of you for joining us. Let me also say thank you today for joining us for the Lancaster Colony second 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 and 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 here is Jay Gerlach.

Good morning and thank you for joining us this morning. We are pleased to report a much improved second quarter, as pricing finally got ahead of rising input costs, and margins moved to more historic levels. Good volume in our Specialty Foods segment, as well as a strong seasonal mix, new products and good operations were also contributors. The quarter was held by the previously announced receipt of a continuing Dumping Subsidy Offset Act distribution which contributed $0.20 per share.

Before some additional segment comments, let me update you on our capital uses. Due to the weak economy and difficult credit markets, we have been careful on both capital investment, which was $3.1 million in the quarter, and share repurchases, which totaled 200,000 shares for $6.8 million in the quarter. Share repurchases year-to-date are 496,000 shares for $16.9 million. And we have 27,970,000 shares outstanding and 509,000 shares available for repurchase.

We are continuing to invest in capital -- to invest capital in good return projects or where capacity or a new capability is needed. New product innovation is also a priority. We do think it is appropriate to maintain a strong balance sheet in these difficult times so that we are able to take advantage of growth opportunities, be they organic or acquisitions.

Turning to our Specialty Foods segment, the quarter saw pricing at about 10% to sales, which helped offset input cost increases from materials of over $10 million quarter over quarter. The 14% sales increase reflected growth in both our retail and foodservice channels, with new product and programs being a factor in each.

Our New York brand Ciabatta Cheese Rolls, Pizzeria Dip'n Sticks and Texas Toast Croutons continued to show good growth. We were very pleased with our Sister Schubert's brand growth in the important holiday season, helped by having good capacity available due to our new production facility that came on stream the previous fall.

Our new Marzetti and Sister Schubert's plants are both performing well and contribute to lower cost operations. The quarter also benefited from the consolidation of our former Atlanta plant done in the first quarter. And we also saw about a $500,000 pre-tax gain on the sale of that former plant in the second quarter. Also helping this quarter was the good job our sales and marketing team did in controlling promotional expenditures.

Looking at just candle sales in our Glassware and Candles segment, we saw sales off mid single digits in spite of favorable pricing. A better than expected December was not enough to offset a soft October/November as consumers sell-through for the category was off.

Our trade customers were cautious on their inventory levels throughout the season. Wax costs were up over $3 million in the quarter versus last year. And we continued to control production levels, allowing us to take about $10 million out of inventory versus the same time last year. High wax costs and less capacity utilization continues to unfavorably impact operating income for this segment.

Let me ask John to give us an update on the balance sheet.

I will begin this morning by addressing some of the more noteworthy changes in our consolidated balance sheet. First, as of this past December 31, our net accounts receivables totaled $75 million, which reflected a seasonal and volume driven increase from the $59 million total at June 30. The current year balance is $3 million or 5% higher than the December 2007 total from continuing operations, and reflects the stronger sales levels we have seen.

Our account receivable agings remain strong, although the existing economic uncertainties certainly require us to remain vigilant in the oversight of our customer accounts and collections.

Turning to inventories, which totaled over $95 million at December 31, these declined over $24 million since this past June, primarily due to seasonal factors, and also declined over $5 million among continuing operations since December 2007.

As Jay referenced and as was foreshadowed in our comments of a year ago, we have made strides in reducing our candle inventories over the last year, and we now appear to be better balanced with respect to our future needs.

Over in liabilities, you'll note that our long-term borrowings totaled $45 million as of December 31, and are comprised of balances outstanding under our $160 million revolving credit facility.

With shareholders equity at December totaling over $366 million, we believe our balance sheet posture still provides us with considerable flexibility in meeting various possible cash needs, be they for dividends, share repurchases, business acquisitions or capital expenditures.

For reference, CapEx for the most recent six months totaled $6,749,000.

Turning to other aspects of this year's cash flows, cash flows from operating activities of continuing operations totaled $62,893,000, which compares to $50,030,000 for the prior year.

Higher net income, along with some favorable changes in working capital components, contributed to this increase. Depreciation and amortization for the current six months totaled $10,970,000.

As Jay alluded to, some other cash flow amounts of note for the six months included $16,894,000 for share repurchases and $15,877,000 for the payment of dividends.

Turning to our income statement, I wanted to briefly point out the prior year charges mentioned in the press release we issues this morning. First, in last year's second quarter we did incur a pre-tax loss of approximately $5.7 million on the mid-November sale of most assets of two glass operations. Additionally, we also incurred a roughly $3 million pre-tax charge recorded in our corporate expenses that represented a non-cash write-off of deferred pension costs associated with previously discontinued automotive operations.

Just one more comment regarding our corporate expenses. We continue to incur holding costs within this line item related to several non key manufacturing facilities that have been idled over the last couple of years. Over time we would certainly hope to see these costs mitigated by sales proceeds.

For example, in this year's second quarter we were able to realize a gain of approximately $400,000 on the disposition of a limited portion of our holdings. Nonetheless, we would generally expect to see some level of additional corporate expenses during the carrying period of the remaining properties.

Finally, please note that in the current year second quarter we recorded a pre-tax distribution under the CDSOA program of approximately $8.7 million or $0.20 per share after taxes. This compares to last year's remittance of about $2.5 million or $0.05 per share.

As you are probably aware, these distributions are recorded within the income statement as other income, and as such are excluded from income of the Glassware and Candles segment.

While it is possible there may be some level of future distributions, such potential distributions are not subject to reasonable estimation at this time. At the very best, we do not expect to receive another payment before the last quarter of calendar 2009.

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

As we look to the second half of our year, our primary concern has to be the economy and its potential impact on our demand. While our food business overall is holding up well, we do see evidence of the consumer trading down, and see many of our foodservice customers experiencing reduced traffic. Candle sales will likely be a challenge for the balance of the year.

A couple of new food products being introduced in the third quarter, our New York brand Texas Toast Tortilla Strips for salad toppings, and three new flavors of Marzetti Humus, which continues to show steady growth.

Input costs for the balance of the year should trend favorable, as some food ingredients' lower costs work their way through our forward buying process. We're also finally seeing wax costs off their peaks, although not down near as much as oil.

In our food business it is worth pointing out that our second half is historically not as strong in terms of seasonality or mix as the second quarter, so margins are likely not to be as strong in the third and fourth quarters.

Capital spending for the full year looks to be around $15 million, perhaps less. While our balance sheets give us good flexibility for acquisitions, the opportunities we see today are few.

Overall we are encouraged by the first half of our year and cautiously optimistic as we begin the second half. We're ready to take questions please.

(Operator Instructions). Mitchell Pinheiro, Janney Montgomery.

That was a heck of a margin performances and recovery here in the Specialty Foods business. And what surprised me a little bit was you still included higher commodity costs. So my question around that is, of the -- Jay, you had mentioned $10 million -- you said quarter over quarter. That is year over year commodity costs, and that is part candle, part food. Is that correct?

I was referring to just food there.

Just food. So $10 million, that is year over year, that wasn't a sequential increase, correct?

That's right. That is year over year.

Year over year, okay. So it seems like you are at that inflection point on the margin with lower, or maybe even declining, input costs -- declining increases for sure, and pricing that has been taken. How much of your margin increase was just due to commodities? Have you offset by pricing? Is that -- you spoke of efficiencies in Horse Cave, so I was curious if you could break that out?

I don't know if we can break it out exactly for you right here, but pricing getting ahead of input costs would have been the biggest factor certainly in the quarter for the food business.

So the biggest factor -- so I'm just -- half of the gain maybe or much more than that?

This is John. I think within Jay's comments he indicated that pricing added about 10% in the quarter to sales. And so in general terms pricing was roughly double the impact of material costs. Does that help?

Yes. Okay, I got you. How does -- so you took pricing higher, and I imagine that generally sticks on the retail end of the business. What are the conversations like on the foodservice side? Is there going to be a give back at some point or how does that work?

I think as we work through our existing programs, and as our costs of key ingredients start to decline and work through the forward buying process, yes, there will be pricing adjustments that will be downward in that case.

Went does that -- how --?

I think we start seeing that maybe a little bit in the current quarter, the third quarter, and probably a little more so as we get into the fourth quarter.

In terms of looking at Specialty and breaking out retail in the foodservice, you had indicated in your prepared remarks that both showed growth. Can you be a little more specific or characterize that a little stronger on retail and foodservice growth?

We actually in the quarter saw the mix shift a little bit to -- greater to foodservice. So actually saw a little bit greater dollar growth out of the foodservice side than the retail side in the quarter. Unit volume was again probably similar, a little greater unit volume out of the foodservice than what we saw on the retail end of things.

How has your -- how has Marzetti, the premium end of your business held up in the (multiple speakers)?

That would probably be the area that we're watching most closely. I think it is the most premium product we have, and we are seeing category weakness and our own unit volume weakness in the premium refrigerated dressings and veggie dip versus what we are seeing over in the frozen side, which is really where we are seeing unit volume growth, as well as dollar growth.

So frozen -- you would still think that a frozen bread would be more of a premium product as well, but you are not -- I guess that is not -- you are not seeing that?

As we at least think about price points, we have -- most of our frozen products are going to be in the low $3 or less per unit. We get over in that refrigerated case now it is not unusual to see unit cost, unit retail prices above $4.

How about -- have you seen any -- so you might lose a little on Marzetti but make it up on Pfeiffer? Or is Pfeiffer not that as strong of a player on the pourable side?

It is not that strong of a player, no, although it is a lower cost, lower retail price positioned brand, so yes, you might see a little bit of trade down into that, yes.

As you look at foodservice, and you talked about looking at the second half and obviously watching foodservice. You have done well in foodservice lately. You have had a bunch of new products. You had expanded distribution. When do you start lapping some of those initiatives and the distribution gains?

Again, we probably would start seeing that more noticeable in our fourth quarter. Of course, we are always working on the next new program to try to replace that.

Sure. As far as -- is there any -- I don't know if there is any let's say destocking, but have you seen any inventory declines, not on the candle side but on the food side?

I don't know that we have seen anything really noticeable on the food side, no.

When you look at the margins -- in your comments regarding the -- obviously, this quarter is a strong quarter for you and not so strong in the second half. That is a function of capacity utilization kind of leverage, is that what we are talking about or --?

It is more product mix, As we see the second quarter is a good quarter as it relates to a lot of our frozen products. Certainly the Sister Schubert's business is strong, with both the Thanksgiving and Christmas holidays in there. So those things really helped drive that quarter.

So mix shift. And then is there -- so foodservice takes over, is that what you are saying, takes over a larger percentage of the mix?

Yes, it would generally do that, yes, especially in this third quarter.

Do you -- have you changed any of your hedging or forward buying strategy or policies?

No, we have not at this point. No.

How far out roughly are you covered on your primary inputs?

This is John again. With respect to soybean oil we can go out as far as a year, roughly a year. And in general what we try and do is graduate our commitments so that perhaps we're roughly 50% committed for needs six months out. We also do some forward buying on flour that may go out one to three quarters.

And there are a lot of commodities that are really just are not ready forward buying or other hedging opportunities.

Have you guys -- you really hadn't -- I guess, have you seen any benefit on dairy in the quarter, or is that going to be more ahead of you?

Within the second quarter if there was one commodity grouping that might be characterized as favorable, it might be on the dairy side. We were still fighting year over year adverse comparisons in soybean oil and to a lesser extent on flour.

How about packaging?

I don't have that at my fingertips. I don't think that was a major impact year over year one way or the other.

Just a last question and then I will pass it on. But you talked about in light of the economy and just being cautious and managing your business little tighter, I think you had mentioned that maybe trade -- did you say trade or marketing expense you are tightening up there? Can you elaborate on that?

I think just in the quarter we were pleased to see the revenue growth we were able to get without really expanding our trade spending. We're not really backing off from it, but we are watching it closely and not wanting to increase it meaningfully anyhow at this point.

Thank you. Very nice quarter.

Jason Rodgers, Great Lakes Review.

I was wondering if you could talk a little bit more about this trade down effect on the Marzetti side of things. If that was pretty much steady during the quarter or have those conditions accelerated, as we are pretty much through January now?

I don't know that we can be very precise on the timing there. But we would think back to the premium products in the produce department, the refrigerated dressings and veggie dips, that there is likely trade down going on there, either over to the grocery shelf for dressings, perhaps even down to private-label dressings on the grocery shelf.

We perhaps see a little bit of it in the frozen bread arena, more over on the garlic bread side, the Texas Toast garlic bread, we've got a little visibility there as well. So those I think are the areas we are seeing.

I don't know that we can suggest to you that it has accelerated dramatically throughout the quarter, but I think it is probably growing some throughout the quarter and on into January.

You had mentioned a $0.5 million pre-tax gain on the sale of the Atlanta plant. Was there another -- did you mention a $400,000 gain?

Yes, those were actually two different transactions. The Atlanta gain is in the segment numbers. What John was referring to on the $400,000 piece was one of our closed operations where we did sell some pieces of property there.

So that is in the discontinued?

Well, it is in the corporate expenses.

Just a few other housekeeping items here. Do you have the goodwill and intangibles number for the quarter?

By number, you are referring to just the balance sheet number?

Right.

The goodwill remains at $89,840,000. Other intangible assets net $11,259,000.

Your cash balances, where is that invested in, or what is it invested in?

In addition to bank deposits, it would include two or three money market funds.

Jeff Matthews, Ram Partners.

I had a question on acquisitions. I wondered if you are seeing any more potential deal pipeline out there that was of interest at prices that were possibly more favorable than the last couple of years? If so, do you have the ability to borrow in this credit environment at a reasonable price?

The pipeline that we see is quite slow, and nothing that has gone as far as testing the market on pricing for us to have firsthand experience there. I will let John comment on the credit markets.

I think we do have quite a bit of available borrowing under our existing revolver. And with respect to accessing additional sources of financing, I believe those would be available. It would certainly come at a much higher than historical normal level of spread to Treasuries. On the other hand, you look at where Treasuries are right now, and they are relatively low in a historical perspective.

So I think we've got quite a bit of dry powder just on out existing line for small to moderate acquisitions. And conceptually I think there is some available financing, if necessary, given our cash flows, if we were looking at larger transactions.

It sounds like you haven't lost your appetite if something potentially fits.

No, we are very much interested, and continue to look and knock on a few doors from a purely development standpoint. But nothing at this point we would describe as at all in the works or potential to happen in the near future.

(Operator Instructions). Sarah Lester, Sidoti & Co.

I wanted to ask about wax costs. I might have missed it. Did you talk about how much they have declined?

I think I would probably ballpark wax costs being down -- not necessarily in the quarter, but actual costs today versus where it had been a year ago, maybe down around 20% or so. We didn't have a wax cost decrease in the second quarter itself.

I think it is important to note that, as you think about our wax costs there is a pretty pronounced lag effect of between when a market cost decline occurs and when we actually get to realize it in our cost of goods sold.

year over year in the second quarter we would actually have had a wax cost increase adverse impact in excess of $3 million. So for us to get the benefit of the existing decline, it will be out into the fourth quarter, if not into the beginning of fiscal 2010.

And then I don't know if you can break it out, but the volume versus pricing in that Glassware and Candles segment?

That for us is extremely difficult to do. We did get some level of pricing, but there was quite a bit of turnover in the SKUs within that segment. So at this point I don't know that I could comfortably break out that impact.

Then going to foodservice, can you talk about just any sort of -- touched on this before, but what you are seeing in casual dining and quick serve, I guess, break out separately what you are seeing in each of those segments.

I think in general we are seeing stronger demand on the quick serve side, which certainly would follow everything you read about the consumer trading down. Although a number of our casual dining customers are still holding up quite well as it relates to their demand from us any how. Again, that can be impacted by new programs or new items we're doing with them. But overall I would say our quick serve component is somewhat stronger than the casual end.

Mitchell Pinheiro, Janney Montgomery.

Just as a quick follow-up. Did you say -- so the Atlanta gain is in the segment number, and that was $500,000 pre-tax?

That's right.

What was that $400,000?

$400,000 was flowing through the corporate expense, which was a sale of some of our non-food properties.

So that is just a pre-tax -- that is not a gain, but that is pre-tax -- or is that the pre-tax gain?

That is a pre-tax gain. And hopefully it is netted against corporate expenses.

Then, Jay, you also talked about you had some properties that are idle that are costing you each quarter. What is that cost?

It is going to vary quarter to quarter, but we would like to think it is in the low six figures. But it does depend on the time of year and certain things from a maintenance standpoint that could be going on. Utilities are obviously factor a in the winter, where we do have issues of maintaining facilities and keeping sprinkler systems active, that kind of stuff. So it is not likely just shut everything off and completely walk away and have no costs.

So dependent on utilities, maintenance needs that could pop up from time to time, low six figures per quarter, but could be higher than that in some quarters.

There are no further questions at this time. I would now like to turn the call back over to Mr. Gerlach for any concluding remarks.

Thank you for joining us this morning. And we will look forward to talking with you when we report our third quarter.

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