Marzetti Co (MZTI) 2010 Q3 法說會逐字稿

Good morning. My name is Kimberly and I will be your conference operator today. At this time, I would like to welcome everybody to the Lancaster Colony Corporation third-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). Thank you, and now to begin your conference, here is Earle Brown, Lancaster Colony Investor Relations.

Thank you and good morning. Let me also say thank you for joining us today for the Lancaster Colony third-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 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 now 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 again for joining us. We are pleased to report overall sales growth in our non-seasonal third quarter of just under 2%.

While our Food segment sales were close to flat, the Glassware and Candles segment again provided all the sales growth.

Profitability improved in both segments, resulting in total earnings per share of $0.86 versus $0.76 last year. There were no share repurchases in the quarter. Capital expenditures reached $4.4 million and $8.1 million for the nine months. We anticipate somewhat less than $15 million for all of fiscal 2010.

Specialty Foods sales were close to flat, down $423,000, with retail channel sales up about 6% while food service channel sales were off just over 6%. Pricing was down about $6 million, mostly at food service and largely due to lower commodity costs. While difficult to estimate, the earlier Easter this year helped retail sales by perhaps $3 million to $4 million.

Year over year, the quarter's operating margins benefited from a higher retail sales mix, as well as lower material costs estimated at over $7 million. However, operating margins in the quarter of 17.9% were below the 23% second-quarter margins, as increased promotional spending both to the trade and consumer, higher marketing costs, and product recall costs all contributed to bringing down our operating margins from their peaks.

We did see a need to react to some competitive situations, which drove up our trade promotion spending. At the same time, we were increasing our consumer spending to support our key brands, especially during the Easter sales period.

Sales mix in the quarter was 53% retail, compared to roughly 50% a year ago. We saw growth in each of our key branded retail product lines -- Marzetti refrigerated salad dressings and veggie dips, Texas Toast brand croutons, and Sister Schubert's brand frozen dinner rolls, and New York brand Texas garlic toast.

Glassware and Candles segment sales were up 16% in the off-season quarter. The growth drivers included the benefit of recently introduced products, good candle sellthrough during the holidays creating postseason orders, and continued strong sellthrough in our key mass channel customers. Higher capacity utilization, good operations, and lower wax costs contributed to the earnings improvement.

Now let me ask John to make a few comments.

Thank you, Jay. Let's start out by discussing several key components of our consolidated balance sheet.

Accounts Receivable at March 31, 2010, totaled $80,011,000. This amount represented a 31% increase over last June's total and was 11% above the level of last March. The relative strength and timing of the quarter's sales, including that of March in particular, led to this growth.

With respect to our inventories, the consolidated total of approximately $97 million at the end of this March reflected a somewhat seasonal decrease of about $5 million, or 5%, from the level of this past June. On a year-over-year basis, our March inventories increased about $7 million, or 7%, as we'd begun building some candle inventories to meet anticipated increased demand.

As it relates to our capitalization, we continue to have no debt, and as of March 31, our shareholders' equity exceeded $475 million. With cash and equivalents on hand of over $95 million, we remain well positioned to meet our foreseeable cash needs and retain flexibility to consider business acquisition opportunities. Echoing the observations of others, at least compared to a year ago we do seem to be seeing more proposed transactions coming our way, which is encouraging.

Except for the items I've already discussed, and for a change in how the timing of our estimated federal income tax payments have affected our other current asset balances between last June and this March, I believe the other fluctuations on our balance sheet components are relatively unremarkable.

Turning to cash flows, I'd like to share a few items for your consideration. Within the current fiscal year, depreciation and amortization for the first nine months totaled $15,666,000 and shareholder dividends were $24,959,000. Lancaster's consolidated cash flows provided by operating activities for the nine months ended March 31, 2010, totaled approximately $86.9 million, compared to $92.8 million a year ago.

While the prior year's net income for the nine months was $31 million lower, cash flows of fiscal 2009 benefited from several comparatively favorable changes in working capital components, including a period of declining inventories resulting from both the planned reduction program for candles and from generally declining material costs compared to fiscal 2008.

Finally, one matter some of you may be wondering about is the impact of the recent product recall activities we conducted in the quarter. These efforts were required due to the potential for product contamination resulting from certain raw materials received from one ingredient supplier, Basic Food Flavors. Like the many other food processors affected by this issue, we diligently work with our customers in conducting a formal recall of a limited number of various finished goods, primarily certain flavors of vegetable dips. The financial pretax impacts to the quarter's results was less than $1 million.

We have also recorded a somewhat greater than $1 million receivable from a recall insurance carrier from whom we expect to ultimately receive reimbursement of various incurred costs that exceed our deductible. In the end, while requiring the significant and timely involvement of a number of our employees, we were pleased that the recall process itself proceeded as smoothly as it did.

I appreciate your attention this morning and I'll now turn the call back over to Jay for his concluding remarks.

Thanks, John. We start our fourth quarter without the benefit of Easter-related sales volume versus last year, and knowing our food ingredient costs will likely be favorable but much less so than the previous quarters this year.

Specialty Foods sales will hopefully see some improving trends in the food service channel, while retail sales should continue to benefit from our marketing efforts. We have one new branded product introduction planned later in the quarter, which won't impact immediate sales much but could be of promise for fiscal 2011.

Candle sales growth momentum should continue in the quarter; however, wax costs may be inching up some in the quarter.

The acquisition environment in the food sector appears to be picking up and looks likely to continue as the year progresses. We have nothing to report as likely near-term, but we remain very interested in growing by acquisition.

Kimberly, we are ready to take questions.

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

First, Jay, you were moving kind of rapidly there at the beginning. And you said something about in the Specialty Foods segment, retail was up 6%. But you mentioned them at $3 million to $4 million of help due to something which I (multiple speakers)

Easter timing.

Due to Easter timing.

Versus last year, yes.

So, when you look at that, so as that relates to this quarter, so has it just pulled forward some of the sales that you had versus last year? Is that --

That's correct, yes.

When I look at the March IRI data, you do see you had very good unit growth, and I know IRI is limited, but from what I can use this for, unit growth, I mean, clearly, it looks like you had some -- there was some pricing as you kind of talked about some maybe aggressive competition in the salad dressing segment. Is this something -- is this -- how would you characterize the competition? Is it something to do with -- is this giving back some of the -- do you think it's giving back some of the margin expansion that you've had with the lower commodity costs or is there other, any other sort of strategy around the increase in promotion?

Yes, I do think we've seen some competitors probably taking advantage of a little lower cost to be a little more aggressive on the trade side, trying to certainly drive sales, and we've been expecting the need to react to that and we probably saw little bit more of it in the third quarter than we'd seen in the first half of the fiscal year. And it did revolve around our refrigerated dressings to a degree and probably more so in the garlic bread category.

So, are these like list price declines or is it just higher promotion?

It's not list price declines, so yes, it's more promotional spend.

On the food service side, we're beginning to see signs of a recovery. So, it was still down for you 6%. Is that a function -- that's not really a -- that's not a volume number, is that? That's more of a, in a way, a passthrough? Is that a function of, like, lower (multiple speakers)

Yes, we're talking dollars, first of all, rather than unit volume and, so the price declines are certainly a piece of that. And yes, I'd say we are seeing a little bit more optimism in the customer base out there and at least a few examples of some pickup with our customers. I don't know that it's widespread enough yet that we're getting confident that that's behind us and we should be on a longer-term upward trend, but there are signs of that potentially starting to happen.

So, of the down 6%, how would that compare to unit volumes in that? I'm just trying to get a sense. Is it flattish or are volumes still weak?

I will let John expand a little bit on that. I think the volumes are a little bit weak still. In that particular channel, frankly, unit volumes can be difficult to compare as products change and packaging quantities change over time. But I will let John see if he wants to add anything to that.

I think the way I'd look at it, Mitch, is more than half that decline was pricing related, again, primarily driven by lower commodity costs.

Okay, that's helpful. You talked about $7 million of material -- of your commodity costs, I guess, helped in the quarter in Specialty Foods. Was there -- what kind of impact helped on the candle side? You may have said that, but I missed it.

No, we didn't, but it was around $2 million.

How fast -- obviously I see oil up 60% year over year. How fast does that -- those costs tend to be pulled into your -- the candle business?

It doesn't necessarily follow oil directly all the time. It seems to always follow it up, never down (multiple speakers). But, I think relatively quick. I mean, we are seeing some uptick now in paraffin wax costs.

Okay. So, how do you handle that typically? Is that -- do you try and pass that through or is it something that you absorb? How do you --

We'd like to think we could pass it through, but frankly, it's a pretty competitive pricing environment so I don't think that's real likely near term. Over time, we may find opportunity, particularly as we bring out new products, to try to build in higher costs, but just raising the existing product line prices across the board is pretty challenging to do.

Two more questions. As you look forward, and trying to -- looking at the sales growth in Specialty Foods, clearly you have a little momentum, sales momentum, in the retail side. Do you think food service might start -- it seems to be improving a little bit. Are we going to see -- is -- are we talking like a low single-digit kind of growth in Specialty Foods or -- can you frame it in any way?

Well, I would like to think if we could get the food service channel back to a little more typical growth rate we'd seen in the past, we could see the whole segment up in the close to mid-single digit growth area. But it's obviously dependent on getting that channel growing again, for one. In the fourth quarter, I guess, looking forward that short term, we do have this kind of hole we started in at the beginning of the quarter with that Easter business being in the third quarter.

Right. And then, second was related to margins. I mean, certainly you had some fantastic margins in the first half. I don't know if you'd call them peak margins, but certainly very healthy. They came down a little bit more than I thought they would, from near 24% to about 18%. Is that -- is there anything unusual that it was down that low or -- I wouldn't think it would fall that hard, is I guess what I'm looking at.

There was probably a little more spend on both the trade and the consumer promotion side in the same quarter than we might expect to see going forward, although, again, depending on the competitive nature of particular categories, that could certainly fluctuate.

We had a little bit of operational challenge in the quarter as we relocated production out of our Wilson, New York, plant we closed at the end of second quarter. So there were probably a couple of plants dealing with some inefficiencies that we'd like to think we've put behind us now. So, those are the things that would come to mind.

That's helpful. Thank you very much.

Greg Halter, Soleil - Great Lakes Review.

Can you discuss where you stand currently on your forward buys?

I think, as it's generally been the case in the past, Greg, with respect to soybean oil, we have some purchases as far out as a year from now, with about half our needs bought out six months forward. With respect to flour, we have coverage largely through the end of the calendar year.

Relative to the food service business, I know you mentioned the pricing side of things. What does that look like in the current quarter? Are you continuing to give back price or has that stabilized?

There will continue to be some giveback of food service pricing. We will see that diminish as the calendar year progresses.

And can you comment on how your capacity is currently looking, on both the food side and the candle side?

Greg, generally we are in pretty good shape, but we do have a couple areas, couple product lines that we're running pretty hard where we're seeing some pretty strong growth. But I think overall, we're in pretty good shape to service the business looking forward through this year. We actually probably will be expanding some capacity as we look into fiscal 2011, particularly in the frozen bread side of the business.

Would that appreciably increase the capital spending run right from the $15 million you're -- figure you're looking at for this year?

Yes, it probably would. Assuming we go forward with some of the initial plans we have right now, we could see that uptick maybe $15 million to $20 million.

Over the $15 million?

Yes.

So as much as maybe $30 million or so?

Or a little more, yes.

I picked up a pan of the Sister Schubert's yesterday, by the way, so.

Good. Thank you.

Relative to geographic expansion, are there any new distribution points or food service opportunities that you were able to capture in the quarter or any you think you'll have in the near term here?

On the food service channel, we did land some new things that really didn't have much sales dollar impact in the quarter but should start to generate some volume as we move into the fourth quarter. We also are picking up additional points of distribution. I don't have a count on that for you. Not dramatically new geographic distribution at this point, although some of it gets into some of our Western markets where we have a little bit less presence than we do back East. But yes, some growth there on the retail side.

And finally, on the recall, I think, John, you had mentioned it had less than $1 million impact. Can you frame that a little closer? Is it closer to $200,000 or closer to $900,000?

Greg, you can think of it in the neighborhood of $0.5 million. And that's pretax.

Okay. Pretax. And is that issue completed now where you won't -- believe to have any further costs?

We think it is completed. We still have to work our way through the insurance claim. We're fortunate in the respect that we don't believe it's had any consequence on the sale of those products.

Thank you. Oh, I had --

Greg, your line is open.

Thank you. Relative to the promotional activity side, as you commented you had increased spending on the trade and consumer spending, and I think you had signaled that would be the case for the quarter. Is that the same case for the fourth quarter or do you see that trailing off a little bit from what you had spent?

Actually, we do see it trailing off a little bit, partly because some of that spend was, again, around the timing of Easter that skewed that a little bit. So as we see it right now, yes, it probably trails off a bit, although, again, if we were to see some particular competitive situations that we had to react to on the trade promotion side, that could still develop in the quarter.

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

Thank you all for joining us this morning. We'll look forward to talking to you in August as we will release our fourth-quarter and full fiscal-year 2010 results.

At this time, that does conclude today's Lancaster Colony Corporation third-quarter fiscal 2010 conference call. You may now disconnect.