Marzetti Co (MZTI) 2009 Q4 法說會逐字稿

Good morning, my name is Angelina and I will be your conference operator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation fiscal year and fourth-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. 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). Thank you. And now to begin your conference here is Earl Brown, Lancaster Colony Investor Relations.

Good morning. Let me also say thank you for joining us today for the Lancaster Colony fiscal year and fourth-quarter 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 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 cost; 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, we're pleased to report today a strong fourth-quarter finish to our 2009 fiscal year with sales up over 7% including increases from both segments of our business and good overall operating margins of 17%. We were able to report earnings per share of $1.01. For the year sales growth was over 7% driven by 12% growth in Specialty Foods and offset by a decline in Glassware and Candles. Operating margin for the year was over 12% and EPS reached $3.18 per share.

Shares repurchased during the year totaled 496,000 for $16.9 million and we paid $31.9 million in dividends. While approximately 500,000 shares remain authorized for repurchased we are not presently buying and have not repurchased shares since October of 2008. Capital expenditures for the year totaled $11.3 million, our lowest amount in years as fourth-quarter expenditures were only $2.4 million. We have been cautious in our use of capital in these uncertain times feeling a strong balance sheet is appropriate.

The fourth quarter saw over 7% sales growth from our Specialty Foods segment with about one-third from pricing and two-thirds from volume and mix. Good performance from our New York brand and Sister Schubert's frozen breads, our Texas Toast croutons and the Marzetti refrigerated salad dressings all contributed to that growth. Our food-service channel was challenged by slower demand as restaurant sales have weakened and some lower prices as commodity costs have fallen. The consumer is definitely eating at home more.

Operating margin showed further impact of lower material costs, good operations, favorable sales mix and lower freight cost. Candle sales increased modestly in a non-seasonal quarter and our reduced property loss in the segment was less than $1 million reflecting the benefits of an improving mix and higher pricing, although results were hurt by reduced plant utilization and unfavorable wax cost. Let me ask John to make a few comments at this point.

Thank you, Jay. I'll briefly cover several matters this morning regarding our June 30 balance sheet and fiscal 2009 cash flows. Let's begin by taking a look at several of our major year-end balance sheet components.

Accounts receivable at June 30 totaled $61.2 million which is an increase of about $2 million from a year ago. This growth primarily reflects a sales driven increase in candle-related receivables. All in all despite the obvious increase in macroeconomic financial challenges this past year, our account receivable agings remained in reasonably good shape and were fairly comparable to year-ago levels.

Turning to the largest component of our working capital inventories, we saw a June 30 total of $102.5 million that reflected a marked year-over-year decrease of over $17 million or 15%. Most of this decline was derived from lower candle inventories reflecting the particular focus we've had on these quantities over the last couple of years. As a result of this effort we believe we've modified certain of our production processes to help keep these levels in better balance in the future.

Moving on, other current assets declined by roughly $14 million reflecting a lower tax balance due us this year. Also, while on the subject of taxes, I'd note that our fourth-quarter's provision for taxes reflected a pretax credit of approximately $600,000 related to the settlement of a state and local tax position.

Another balance sheet change worth comment is net profit which declined about $9 million or 5%. Similar to a year ago, this year's total capital expenditures of $11,336,000 was less than our depreciation expense. As we look into fiscal 2010 we anticipate seeing capital expenditures perhaps totaling $15 million or so. The vast majority of these projected expenditures are food related.

Finally, in rapping up my balance sheet remarks I'd point out that we remain financially strong with no debt, cash and equivalents exceeding $38 million and shareholders equity of over $402 million.

Turning to this year's cash flows, cash flows from operating activities of continuing operations totaled $133,164,000 which compares to $70,932,000 for the prior year. Our higher level of net income drove this marked improvement, although we also experienced some favorable relative changes in our working capital components such as with our inventories. In arriving at this year's cash provided from operations the most prominent non-cash ad back remained depreciation and amortization which totaled $21,870,000.

As Jay alluded to, some other annual cash flow distributions to shareholders were $16,894,000 for share repurchases and $31,854,000 for the payment of dividends. As has been the case for a number of years now, our share repurchase activity served to more than just offset option exercises as we reduced shares outstanding in fiscal 2009 by more than 1% year over year at June 30 and greater than 20% over the last five years.

Given what I've shared this morning and our current expectations for fiscal 2010 we believe that we continue to be financially well positioned to address our anticipated cash needs whether it be for CapEx, share repurchases, dividends or business acquisitions. Thanks again for your participation with that this morning and I'll now turn the call back over to Jay for his concluding remarks.

Thank you, John. Looking to fiscal 2010 our food segment's biggest hurdle will be sales growth as our food service channel battles the slow restaurant business. However, we anticipate that our retail channel sales will benefit from the at-home dining trend, continued growth of recent new product introductions and new introductions during the year. At this time we see no increased pricing this year.

During the first half of the year we should see noticeably favorable ingredient cost versus last year, our operations team is very focused on improving productivity and reducing costs. New products on store shelves soon will be Sister Schubert's new mini pans, eight rolls versus 16 rolls, and a bag version of our Clover Leaf roll, both bringing added convenience to the consumer. Under the New York brand we're adding a Ciabatta garlic loaf. Further additions are planned for the second half of the year.

Also just starting to arrive in stores is new packaging for our Sister Schubert's frozen bread line and our Reames frozen noodle line which we hope will enhance consumer sell-through. Our efforts to enhance our brand marketing continue with ongoing investments in people, research and consumer promotions. We anticipate candle sales growth this year and somewhat moderating wax costs; inventory levels will remain a focus, although we do not expect a reduction of the size accomplished this past year.

Capital uses for acquisitions, share repurchase and cash dividend are visited regularly. The M&A market remains quiet and we are cautious on share repurchase. And while the cash dividend is reviewed quarterly, change usually occurs at our November meeting. We appreciate your interest and are now happy to take questions. Angelina?

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

Good morning. I wanted to know how much lower were raw material costs in the fourth quarter?

I think the fourth quarter was about $13 million roughly.

Okay. Does that include the food -- I'm sorry, does that include wax as well?

Wax was actually up a little bit. But together it's in the ballpark, $12 million to $13 million.

Okay. And then I guess could we get into the food service side? Are you seeing any difference between softness in casual dining versus quick serve? Could you expand on that a little bit?

Well, I think we are seeing the quick serve side be a little more sluggish in the last couple of months than we have been seeing. So the trend we saw earlier in the casual end seems to also be hitting a little bit more into the quick serve side today as well.

And then for candles -- for candles the volume was up in the quarter, is that correct?

Yes, it is.

Okay. Are you expecting raw materials cost to be down in the first quarter there?

They should be down a little bit, yes.

Okay.

Mitch Pinheiro, Janney Montgomery.

Good morning. That was a terrific quarter. I was surprised -- I'm just a touch surprised -- more than a touch -- on the margins and wanted to just talk about that for a little bit. With a 20.6% Specialty Foods margin, which if I look back historically it's one of your best performances as far back as I can see.

And so my question is, obviously as we look into 2010 now, as it relates to 2010, I understand you still have some commodity maybe tailwinds for the next two quarters. And with sales growth getting tough, would you anticipate spending some of the margin back in terms of marketing to help support and drive volumes in your Specialty Foods business?

You know, Mitch, I think our view is that we're not changing our promotional plans of any significance, but we are willing to react to competitive issues where need be. Having said that we're also continuing to invest on the consumer side, so we are spending some more money on research and other consumer marketing activities to hopefully build brand strength over the longer term, so we're not backing off of that.

So again, I think as you might want to think about our operating margin, I've commented in the past that over the longer term we'd like to think the food business is a mid to upper teens margin kind of business. Getting north of 20% is certainly on the high side. And we did have a quarter with favorable material cost, we had good mix, it was about 54% retail business in the quarter, as well as good operations plant utilization. So many or most of the stars were aligned to help us get to that good margin.

Sure. So if you look at 2010, excluding any unforeseen meaningful events, mid to upper teen margins in the Specialty Foods would be a fair assumption?

Well again, we're not quite going to giving guidance, but again, longer term we would think that's a range we think this segment of our business ought to perform in.

Okay, okay. Fair enough. Does -- could you talk a little bit about how Marzetti refrigerated dressings and dips did relative to the category? I don't see the category numbers. Is there anything you can share there with us?

Well, I guess first of all on the dip side, we're basically the category and that category has been soft. So while the category is down, we're down, our share really isn't changing there. On the refrigerated dressings side I think we've got a category that is showing very modest growth and we're showing a little bit of growth there. So again, share not really changing much.

Okay. So the category -- the dressings category, it's growing in dollars and units? I mean, I'm just trying to get a sense of the premium product of just trying to get a feel for whether the at-home trend is so strong that it's lifting not only value propositions but also some of the premium products.

Yes, I think there was growth in both unit volume as well as impacted by pricing.

How about Pfeiffer, how did that do?

Oh, gees. I don't have that off the top of my head. I think it did okay but --.

Are the portables doing okay in general, the category or --?

Well, the category -- I don't have that category number right in front of me, Mitch, so I'm not sure I can answer that with any certainty.

Okay. In the frozen bread side, same thing. Is the category growing and how is your share within the category?

Yes, there I think we've got both categories growing and our brands, our New York brand and Sister Schubert's growing with or better than the category. So I think we've got good performance on the frozen bread side.

Okay. A couple more questions. So, in the press release you talked about optimism about improved consolidated margins. And obviously you're not going to talk and give exact guidance, but with wax costs down a little bit and your volumes up in candles, is candles going to be a contributor to the improved consolidated margin outlook?

That's certainly our hope for this current year.

And how much visibility do you have on wax costs? How far out are you bought or are you committed or how can we think about that?

Well, not as far as -- not as good a visibility as we'd like. And you really can't go out and buy it forward like we do with some of the food ingredients. So that would be a major potential risk factor I think in the performance of the candle business is further volatility in wax cost.

As we've talked, I think, about in the past, we've worked hard at looking at alternate waxes, vegetable wax in particular, to offset some of the volatility in paraffin wax. But that's got its own volatility from time to time. So we work hard on developing blends that both give us performance and hopefully lower costs as well as greater variety of supply. But it still overall is a -- it's a raw material cost that we've got limited for the visibility of.

Three more questions. First is staying with the candle side. What percentage of your candle business volume is let's say value candles versus mid price and premium? Is there any way you can help?

Well, we don't necessarily break it down like that, but we're skewed very much to a value candle. I mean first of all we are selling into the mass channel and we're selling every day candle product. But we also do seasonal product including gift sets and other promotional items. So I'd say it's more than half to the value side of things.

Okay. In terms of capital spending, the $15 million, are there any discrete projects (multiple speakers)?

No. I mean, there are probably a couple projects in there that are north of a couple million dollars each, but nothing real huge in any one area.

Okay. Actually that's it. Thank you very much.

You're welcome.

Greg Halter, Great Lakes Review.

Good morning, guys. Congrats on the good results and it's good to see you use the word optimistic in your press release. I don't think I've seen that in at least nine years. (multiple speakers) covering you guys, so that's a good (multiple speakers).

We weren't counting, so I hope that wasn't bad timing.

Good results and the stock is certainly responding. So good job in terms of restructuring the Company as well.

Thank you.

Relative to the food margin at 20.6, I went back and your highest that I show going back to 2000 was 20 -- 22.9% in 2000, obviously a very high period back then. But relative to that margin, looking at food input costs can you comment on how far out you're bought and in what areas? I mean, is it soybean oil, wheat and dairy, eggs? If you could just run through that.

Well, where we primarily go out is in soybean oil and flour. Soybean oil we'd have a gradual level of coverage that trends down as we go out, but we'll go out as far as nine to 12 months. But our coverage is skewed more heavily to the first six months out. Flour we're covered out about nine months or so right now.

And that's a change in the strategy fairly recently, in the last year, is that correct?

Probably about a year or so ago, yes.

Okay. Well, obviously it's worked out well. If you could comment on your -- the plants in Kentucky, how those things are operating. And based on the numbers they must be doing quite well and you must be pleased. But I just wanted to get your sense there, if you're moving any different product lines there or -- just give us an update on Kentucky.

We've been real happy with the performance of both those plants. And while we haven't moved any different product lines there, we have moved to take advantage of the efficiencies those facilities give us. So we've worked to utilize those as heavily as possible.

I don't know if you measure this way, but is there any return metric you look at versus your cost or capitalized cost or based on an annual figure versus what you're getting in terms of operating income out of that plant or those plants?

Greg, this is John. As we go through the planning process for investments that size, we do look at projected ROI. And while we haven't done a reverse audit on the return of either of those facilities here, I think it's fair to say that their performance would at least meet if not exceed our expectations in terms of throughput and operational efficiencies.

Okay. And any management changes down in the plant there? Is that still Jim I think?

Actually we've given Jim added responsibility; he's now responsible operationally for all of our dressing plants. So that would still include Horse Cave. But he's overseeing all of our dressing plants today.

Okay. And John, one for you on the tax rate going forward, should it revert back to a more normal 36'ish area?

For internal purposes, Greg, we're looking at 35% to 36% for fiscal '10.

Okay. And I know you don't grant a whole lot of options, but just wondered if you could comment on the plans there for fiscal '10?

I can't give you any specifics at all, but we would typically look at equity grants in February of '10. But I wouldn't anticipate anything out of our -- anything much different from our past pattern.

I think that's every other year is when you look at that?

We do some on an annual basis, a somewhat bigger group on an every other year basis.

Okay. And relative to wax, I know there were some earlier questions, but are you using anything currently as an alternative to paraffin? Are you using vegetable wax now?

Oh, yes, we are. Actually we've been using particularly soy wax for several years, maybe more initially for some of the perceived green aspects of using vegetable wax versus paraffin wax. But more recently it's also become important to mitigate some of the higher cost of the paraffin wax.

But obviously soy has its own issues (multiple speakers).

Definitely.

(multiple speakers) soybeans. Is that a 50-50 split there or --?

No, I don't know that it would be quite that strong, but it might be getting close to it today.

Okay. And relative to the Continued Dumping Subsidy Offset Act, I know there have been challenges and so forth, but what's your current outlook on whether or not there will be one more distribution there?

I think, Greg, at this point the last notice from the customs folks was issued in early May and it suggested that there would be some small amount of -- I should say smaller amount of funding available for distribution toward calendar year end. We have submitted our annual application as we typically would and then we just wait and see how the process evolves between now and the end of November or first part of December.

And one last balance sheet item. Do you have the figure for goodwill and other intangibles as of year end?

Goodwill essentially has remained unchanged and still approximates $90 million. And the other amortizing intangibles would be just in excess of $10 million.

Okay, great. Thank you.

Chris Brown, [Aristides] Capital.

Great quarter, gentlemen. I'm sorry; my question had actually been answered in regards to margin. But while I have you, great job with the Cardini Light Caesar, that's delicious. Thanks.

(Operator Instructions). David Leibowitz, Horizon Asset Management.

Good morning. A few brief unrelated issues. One, if we leave out Candle and Glass what is your plant capacity utilization at right now?

David, that obviously is going to vary --

Understood.

-- between product lines. But probably overall in the food business we're probably in the mid to upper 70's I'd ballpark it.

So there are no facilities right now where you're bumping against theoretical capacity?

We think we've got adequate capacity for all of our current business product lines as we look out for at least the next one to two years.

Very good. Second of all, looking at the food business again -- let's leave out gas Glass and Candle for all the questions that follow -- do you think you have too many brands?

No, we don't think so today or we'd probably be doing something about that. But no, I think we're comfortable with the brands we have today. Clearly our focus is on our Marzetti brand, our New York brand of frozen breads, our Sister Schubert brand of frozen breads and our Texas Toast croutons.

And that leads to the next question. As we go through the brands do you feel you have too many SKUs either companywide or within several -- any of these brands?

Sure, you probably always have too many SKUs; that's an every day exercise and challenge is weeding out the stuff that shouldn't be there. So, I don't think it's grossly so, but we could always probably [pare] a few SKUs.

Well, do you find the retailer is pushing back on you and saying, look, you want to introduce a new product to the refrigerated case or the shelf you're going to have to eliminate another SKU that we're taking from you?

Well, they're definitely monitoring shelf space and utilization of that space very closely. So, yes, you can see that scenario certainly from time to time.

And what about your slotting fees and your use of couponing in the current environment?

We don't right at the moment see anything materially different than what we've been doing in the past on either front.

Good. And are there any new products -- product categories, excuse me, that you're entering via various brands you have out there right now?

Not with what we're doing at the present time. We probably have a couple things in development that could get us there, but we're not in a position to really talk about those yet.

Will any of them be out before the end of the calendar year?

No.

Okay. And as usual there wasn't a heck of a lot said about acquisitions on the conference call in the text. Is there anything you can tell us either by acquiring a brand, a product or manufacturing facilities? Any conversations going on anywhere?

Nothing that's real serious at this point. We continue to evaluate potential fits with us, but at the present time it's just such a quiet environment that very little dialogue actually going on.

And the last thing, on the consumer side, are you discovering that some of your retailers may not be as good a credit risk as they were six months ago and you're having to shorten up what you deliver them?

I don't think we've seen that to any extent that we've highlighted anybody we've got to do that with, David, but certainly in this environment are very mindful of the credit risk that's out of there. And we'd like to think we're monitoring it closely, but certainly, as you've seen, things can happen fast in that arena and surprise. But we've been fortunate so far not to have any of those kind of surprises of any significance.

Would that answer also apply to the institutional and food service side of the business?

Yes.

And the last thing, over the next three to six months given what you've already spoken to and also answered in former questions, is there anything on the short-term horizon that does give you pause? In other words, you've locked in your commodities for the next three to six months. As people try to model the outlook for the first half of the new fiscal year what sort of untold surprises might there be?

Well, I think it would absolutely have to be just sales volume, David. I think we're still in such a difficult economy and environment that we just have trouble having a high degree of confidence on the top-line number. I think we're actually more confident on what we see coming in material costs over the next, as you said, six months or so. But the topline will definitely be the variable that's hard to get comfortable with.

Following up then, and this will be my last question. If the topline comes in 10% higher than your internal budget or 10% lower than your internal budget what would the impact be on the after-tax line percentagewise?

I don't think we'd have a specific like that for you, David. But obviously if it were to go down 10% you would get into some issues relative to capacity utilization and just overall fixed cost absorption. So it would be a negative impact, but I couldn't quantify that for you.

And on the upside, likewise since you still have the plant capacity to utilize?

Yes, I think on the upside, all other things being equal, it should be a positive.

Okay, thank you very much.

Greg Halter, Great Lakes Review.

Thank you for letting me back on. Two quick ones. One is on inventory; you've done a good job of reducing the level there so far. I just wondered how much you think there is to go, I guess especially on the candle side?

I think, Greg, we've taken out the lion's share of what we believe was excess inventory. There's always some incremental improvement that can be made, but for the most part the reduction that we've accomplished this past year has taken out the greatest concern we had in that inventory. So I wouldn't expect to see a significant reduction in year over year as we speak again next August.

And last one is on the food input cost again. In the quarter just completed you said there were somewhere between $12 million to $13 million of lower raw material costs. Is that -- if the costs stay where they are now, is that approximately the types of levels you expect for the next three or six months or so, relative to where the costs were last year?

I think as we look out toward the next six months we can see reductions in most of our raw material costs that will yield enhanced operating margins. And I'd prefer not to quantify the estimated amount, but still we see reasonable year-over-year improvement from operating margins coming about from these cost reductions.

Okay, great. Thank you.

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. Again, we appreciate your interest and we'll look forward to talking to you when we release our first-quarter numbers here only really a couple months out now. Thank you.

Thank you. This concludes today's conference call. The you may now disconnect.