Marzetti Co (MZTI) 2010 Q1 法說會逐字稿

Good morning. My name is Chris and I will be your conference operator today. At this time I would like to welcome everyone to the Lancaster Colony Corporation first-quarter fiscal 2010 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). And now to begin your conference here is Earle Brown, Lancaster Colony Investor Relations.

Good morning. Let me also say thank you for joining us today for the Lancaster Colony first-quarter fiscal 2010 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's sales prospects, growth rates, expected future levels of profitability, as well as the extent of share purchases and business acquisitions to be made by the Company.

These forward-looking statements are based on numerous assumptions that 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. Jay?

Good morning. Thank you for joining us today. We are pleased to show another quarter of meaningful earnings growth and operating margin improvement. Almost 20% operating margins in our Specialty Foods segment, along with our Glassware and Candles segment delivering operating income, resulted in an EPS of $1.01 versus $0.39 last year. However, we are disappointed to not show overall sales growth for the first quarter.

Specialty Foods sales declined 2%, as the weaker economy particularly impacted our food-service channel. Solid 5% retail channel growth, which had little pricing and no acquisition help, benefited from growth in dressings, croutons and frozen bread.

Consumers eating more at home continue to benefit the retail channel. New product recently introduced, such as our Sister Schubert's Mini Pans and New York brand ciabatta loaf, had a small but positive impact on the quarter.

Our food-service channel saw soft demand across much of our customer base, and sales were further impacted by lower prices as key commodity cost reductions reduced pricing.

Segment operating margins stayed near levels reached in our fourth quarter and were helped by over $17 million of lower year-over-year ingredient costs. While pricing was down about $3.5 million in the quarter due to reductions in the food-service channel, trade spending in the quarter was down modestly and consumer spending up a bit. As you will recall, our plan has been to shift our promotional spending more to the consumer over time.

Operations continued to perform well in the quarter and we had some benefit from a higher retail sales mix. The quarter also included about $900,000 of expense for the closure of our Wilson, New York salad dressing plant announced in September.

Candle volumes were also impacted by the weak economy, although we saw some noticeable shift in sales from September to October, as our October shipping is way ahead of last year -- a timing issue, not necessarily recovering retail environment.

In spite of over $5 million less revenue, we were able to move into positive operating income as lower wax costs, better plant utilization and cost reduction efforts all played a part.

Let me ask John to go ahead with a few comments here.

Thanks, Jay. Let's first review some of the more notable line items within our September 30 balance sheet. At September 30 our consolidated accounts receivable totaled $78,195,000, which was approximately $17 million higher than at June 30, but actually $4 million less than our receivables as of last September.

With respect to the increase since June 30, as typically occurs in the first quarter, our receivable levels are strongly influenced by seasonal sales experienced within the Glassware and Candles segment. Relative to the year-over-year decline, the lower sales influenced this fluctuation.

With respect to our inventories, the September 30 total over $110 million compared to roughly $103 million at June and $125 million last September. Seasonal aspects contributed to the increase in the quarter, while lower material costs and the past year's focus in reducing our candle SKUs and overall inventory quantities helped to improve the year-over-year comparison.

Finally, on the other side of the balance sheet, our other accrued liabilities have increased, largely reflecting the higher level of accrued corporate income tax present as of September 2009.

Overall, the balance sheet retains its strength from this past June, as we continue to have no debt outstanding, and cash and equivalents have grown from approximately $38 million to over $52 million at September 30.

With shareholders equity at September totaling over $426 million, we believe our balance sheet posture provides 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 provided by operating activities for the quarter totaled approximately $18.9 million, which compares to cash used of $5.4 million in the year ago quarter. Our increased net income was the principal source of this improvement.

One specific component of the quarter's cash flows that you may find of interest is depreciation and amortization that totaled $5.4 million, which is similar to the $5.6 million reported a year ago.

And 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 $8.7 million under the Continued Dumping and Subsidy Offset Act. This income translated to approximately $0.20 per share after tax.

For this year we have submitted an application for another annual remittance under the Act. We currently anticipate receiving notice of the government's intention 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 by the Customs and Border Protection Service this year.

I appreciate your attention this morning, and I will now turn the call back to Jay.

Thanks, John. Looking to the second quarter we currently see similar trends to the first. Retail food demand seems to be holding up well and we would expect some seasonal benefit to kick in as we enter November, particularly from our Sister Schubert's dinner rolls. Marzetti Apple Dip is also having a good season, and we are pleased with the continued expansion of Marzetti Hummus.

Food-service channel volumes continue to be soft, with no present forecast for improvement. Candle sales should benefit from the seasonal spike, more so than last year, if the consumer doesn't pull back too much.

Input costs will continue to be favorable for our food segment, and mix should be a bit favorable as well. The quarter will see perhaps $2 million of additional plant closing expenses. Our Wilson, New York plant actually ceases operations during the quarter. Glass and Candles margins could be helped by favorable wax costs and cost reduction initiatives, as well as better capacity utilization.

For the second half of our fiscal year we expect that growing sales will be our biggest challenge. Without an improvement in macroeconomic conditions, food-service channel sales are likely to stay soft. While consumer demand remains difficult to predict in the retail channel, we will continue our efforts to focus on our key brands and the consumer to further drive sales growth. As we anniversary lower ingredient costs we are likely to see much less favorable cost comparisons.

As John commented, our balance sheet remains strong. We did not repurchase any shares in the quarter, and our cash dividend, which has been increased for 46 consecutive years, will be considered at our upcoming November Board meeting.

We continue to search for potential acquisition opportunities, however nothing is close at this time.

Chris, we are ready to take questions.

(Operator Instructions). Mitch Pinheiro, Janney Montgomery Scott.

So looking at the quarter, and in particularly the food-service channel, is it a broad-based decline? Are you seeing weakness in any one particular channel?

It is pretty much across our customer base, be it the national account side of things or our branded distributor business.

So in your business is it -- it is obviously -- it is skewed towards QSR, is that correct?

It is a little bit heavier QSR, yes.

Is Sister Schubert heavily food-service -- or are not heavily, but have an impact?

They have some food-service business, but it is not the majority of the business, no.

Are you seeing similar trends in the Sister Schubert side?

No, we wouldn't say so. But it is probably masked by some new account acquisition there that has helped that product line more than what we see with existing business with existing customers.

Okay. Then in your think on food-service, I think last year you certainly benefited I think from increased distribution and some new product activity in the food-service side from your customers. Is there any visibility over the next six months as to any new products, new themes from your food-service customers?

There is a little bit of that going on, but at this point in time I don't think we would say there is anything as material as we saw happening in the previous fiscal year, which frankly probably dated back to later, even the prior fiscal year that was ramping up and getting going more in fiscal '09.

Okay. In terms of the food-service side, I suppose has sort of a cost plus type of feel to it. How low was pricing, or how much of an impact did pricing have in the quarter on food-service?

This is John. It had close to $4 million of price deflation on the food-service side.

Okay. Thank you, that's helpful. So despite those pressures it is one of the best operating margins that I have seen in the first quarter for quite some time. So clearly I understand some of the pressures, but is this -- you guys have operated this business quite well. Closing Wilson is certainly going to be a -- is a benefit to margins. How sustainable is this level, or even close to this level?

Again, I think as we have commented in the past, I guess over the longer term we would think this is a mid to an upper teen operating margin business, so we are clearly at the high end of that range right now. Historically it probably doesn't last a real long period of time. But we do think -- clearly we've got a much better relationship between selling prices and material costs than we have seen in recent periods, and at the present time think we can maintain the pricing on the retail side.

And your guess is probably as good as ours as to where commodity costs are headed.

Have you changed at all any of your commodity purchasing strategy, and where do you stand as far as your coverage?

No, we really haven't changed our approach. And we have -- on the key commodity of soybean oil, we've got roughly half our needs covered out about six months, and some smaller amounts a little bit further out than that. Flour is our next biggest commodity, and we've got that generally covered through the end of this current fiscal year.

Okay. And dairy, is dairy important?

Yes, it is not in the top two, obviously, but yes, it would be important, but without any real ability to make forward buys there.

Right. Okay. So you benefited a little bit here in dairy?

That's right, yes.

Okay. Then of the 5% retail channel, getting back to that growth, so on the dressing side, how did the category perform, and how were your market shares relative to that?

I think if we look at -- and again, our dressing is primarily in the refrigerated category, and there we would see a category that is up lower single digits -- low to mid. And we are close to keeping pace with the category. Our share is basically stable. We are in the number two position still in that category.

Okay. Then finally on the candle business, the upcoming holiday season -- I wasn't quite sure what you were saying as far as maybe it looks better than last year because of maybe channel mix if things hold up. Is that --?

I think going into it we feel like we've got a little bit greater share of that business than we had a year ago. But in the end sell-through will really dictate whether the dollars are really generated out of it to a greater degree than last year.

You are largely in the value end on the candle side, correct?

Yes, we are selling the mass channel.

Mass channel. So that -- so at least you are in the right channel relative to the macroeconomic backdrop.

Yes.

Paraffin wax, what is -- we are watching crude in the $80s, where does -- what happens to paraffin wax?

We benefited some from that in the quarter. It is still at levels obviously below prior year, but we are starting to hear just in the last couple days, I think, some indications of some upcoming price increases. So the vendors are certainly seeing what is going on with oil and not wasting any time starting to talk about it.

How do you handle -- is there any way that you hedge that exposure?

No, our primary efforts when it comes to trying to mitigate those fluctuations in paraffin wax is to find alternative waxes and the blends that may result from that. So that includes a greater and greater use of vegetable waxes.

This last question -- so here you are with terrific operating margins on the food, and it was nice to see that candles, the profitability in the quarter relative to losses a year ago.

So this business has struggled for a while. Do you see any turn in that? Do you see any ability to really move margins there, or can you just give us some color around that business?

Well, we are obviously encouraged by getting it into the black this quarter and would like to think that there is opportunity to continue to do that. But as we think about the business, and I think maybe I have commented in the past, it probably is a business that is mid-upper single-digit kind of operating margin. I really don't see likelihood of driving it to higher operating margins than that, at least as we see the business today.

All right, thank you for your time.

David Leibowitz, Horizon Asset Management.

Jay, at the end of your talk you spoke about one or two products that you were excited with. Are there any other new products coming out that we ought to be keeping an eye out for with the holiday season upon us?

I don't think so. We are working on some things for the spring, but not ready to talk about those. So the things that are really out there for the fall season that we are particularly interested in under the Sister Schubert brand are the Mini Pans that we have mentioned before and a bag version of the Cloverleaf roll, which used to be only available in a pan. So we are excited to be getting both of those to the market. And then our New York Texas Toast brand of a ciabatta loaf is also coming to market this fall.

Also, the fourth quarter of fiscal year just ended saw a major reduction in your raw material costs. Have you gone out on the futures market further out to maintain this, or is this something that was a one-time event and will be getting back to higher levels going forward?

We are still following the same forward buying plan we have been doing for maybe a year or so now, which the net result is about half of our needs covered out about six months or so on soybean or oil, and to a lesser degree out several months further than that. So we at least mitigate the impact of potential increases in that key commodity, and should that happen, give us a little bit of opportunity to try to implement pricing before it starts to impact our margins.

But really it is the same program that we were using in the fourth quarter in the first quarter as well and we continue with that.

On the individual packs in fast food do you have any new contracts to speak about? Are there any new chains you were in negotiations with?

We are always talking about new customers, but I can't tell you we have landed anything particularly significant recently that would impact that part of the business.

And couponing, is that becoming more of an issue with you -- or slotting fees?

We are probably doing, again, a little bit more spend toward the consumer, and some of that would be on the couponing side, as we try to shift from trade spend more to consumer spend. So that is primarily what we are doing. I wouldn't say it is significant, but somewhat more.

Your final words had to do with acquisitions, that you have nothing to report in terms of a success. Are you, in fact, in negotiations with anybody right now?

No, we are not at this point.

Okay. Thank you very much.

Greg Halter, Great Lakes Review.

Can you provide the breakdown in terms of percentage on the food side between retail and the food-service?

As far as a sales mix?

Yes, 55%, 45% or whatever.

I think as we look at the business, and again, thinking about it on a net sales basis, it was just a little bit over half -- right around 51%, I think, retail.

Okay. Obviously, I know you have the facility there down in Horse Cave, Kentucky, which looks like a very nice facility. Can you talk about capacity utilization coming out of there, and what you're seeing in terms of labor availability and cost and so forth?

From a labor availability standpoint, I think that has definitely been available. Nothing really dramatic happening there on the cost front. From a utilization standpoint, we are certainly busy in the Sister Schubert's plant with the season right now. So it is -- I wouldn't maybe say fully utilized, it is at a pretty high level of capacity utilization right now.

The dressing plant, a little bit impacted more by the softer food-service business, has got a little bit less utilization going on. I don't have an exact percentage rate in front of me, but I would probably ballpark it in the 70% range or thereabouts right at the moment.

What was your capital spending in the quarter and what do you anticipate for the full year?

The quarter was right about $1.9 million, just under $2 million, and we are thinking about $15 million for the full year.

So there would be a ramp up, but maybe you are high on that $15 million?

Well, we could be, although we do have a few more projects that are in the early stages than we would have say a year ago at this time, if that is what you would be comparing it to. So I would say a little more likelihood we will get close to that $15 million rather than what we saw in '09.

Okay. And your balance sheet obviously is in great shape with about $2 a share in cash and no debt. I am just wondering how you balance out the uses of that cash -- from M&A, which obviously you have commented on that there is nothing imminent; from a standpoint of share repurchases; and the dividend, which we would presume you would increase -- or the Board would increase in November when it comes up. If you could just comment on that.

We would particularly like to find some acquisition opportunities to grow the food business, and our focus is very much on the branded retail channel. And would like to have a balance sheet that is well positioned when those opportunities come around. It still seems like an awful quiet deal market today. There just don't seem to be sellers that are real excited about doing anything right now.

So we won't necessarily sit on that indefinitely, but hopefully the acquisition opportunity is where we will really be able to use that balance sheet strength.

What kind of prices would you be willing to pay, either in terms of price to sales or price to EBITDA or price to cash flow, or however you want to characterize it?

I think that is really hard to predict, certainly to the specific opportunity and what we may think we can do with it, and how would fit with our business. And of course the -- kind of what the overall market conditions are like too. There is certainly some speculation that those kind of multiples would be coming down from what we saw before we got into this recession. But I think there's so far so few deals to look at, it is hard to really get a feel for how much change may actually happen there.

Would you accept dilution for a transaction, a M&A transaction?

I think longer-term we have felt that we would like acquisition opportunities to be accretive in year one, unless we had a real high degree of confidence that we would be there in year two, and it was a very compelling fit.

Okay. One last one for you relative to the soybean oil and flour and so forth. Do you have any kind of figures on what the cost of those hedges are relative to cost of goods sold?

No particular number to attach to that. Again, we do our buys by forward buy. So as you go out over time there is a little bit higher cost for future months than there is current months. But I couldn't quote you a number on that.

Okay, great. Thank you.

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

Just a couple questions here. You noted that raw material costs were $17 million lower in the quarter. Could you split that up between candles and food?

That actually was particularly a food number. I think on the candle side we were down about another $1 million, $1.5 million.

Okay. Then you talked about retail sales were up 5%, was there any pricing in that or was that all volume?

There was a very little bit of pricing, probably lower mid 6% figures.

Okay. That's all I have. Thank you.

At this time you have no further questions. I will now turn the floor back over to Jay Gerlach for closing remarks.

Well, thank you for joining us today. We are looking forward to talking to you again late January when we report our second quarter.

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