Marzetti Co (MZTI) 2010 Q4 法說會逐字稿

Good morning, my name is Kelly, 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 2010 earnings 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 background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). Thank you.

And now to begin your conference, here is Earle Brown, Lancaster Colony's Investor Relations.

Thank you. Good morning. Let me also say thank you for joining us today for the Lancaster Colony fiscal year and fourth quarter 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 cost, the success of new product introductions, the affect 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. We are pleased to report a record year in 2010 for operating income, net income and earnings per share, yet disappointed with our fourth quarter finish. While macroeconomic conditions were certainly a factor, a number of our own issues contributed to our results in the quarter, and I'll comment further when I review our two operating segments.

Overall sales for the quarter were down 2%, as off-season Candle growth was more than offset by softness in our Food business. Food operating margins for the quarter of almost 18% were down from last year's over 20% level, but nearly the same as our third quarter margins, and within our longer term range of mid to upper teens. Glassware and Candle segment's third quarter margins were close to break-even versus a 3% loss last year. Earnings per share of $0.81 was off last year's record $1.01. Sales for the year were up 0.5% to $1.57 billion, with all the growth from increased Candle sales. Food sales were down almost 2% in the year, our first Food sales decline.

For the year, and all in the fourth quarter, we repurchased 80,334 shares for $4.4 million, and have 344,000 shares authorized for repurchase after 84,000 shares repurchased so far in the first quarter. Capital expenditures in the quarter totaled $4.7 million, and for the full year, $12.8 million. With a need to expand our frozen dinner roll capacity to supply our fast growing Sister Schubert's brand, and some dressing and sauce-related projects, we estimate fiscal 2011 capital expense could reach $45 million.

Turning to our segments. Our Glass and Candle sales, as you know mostly candles, finished the year up over 15%, with a similar increase in the fourth quarter. While we benefited from some new programs and new products, I think the consumer was also looking more to the mass channel for their candle needs. Good operations, capacity utilization, and primarily lower wax costs were the factors improving this year's operating income to $9.4 million from last year's $5.7 million operating loss.

Our Specialties Food segment saw operating margins reach 19.7% for the year versus 16% last year. And operating income increased $30.3 million, despite an $8.6 million decline in year-over-year fourth quarter operating income.

The unfavorable aspects of the fourth quarter that I would highlight are continued volume and price weakness in the food service channel, Easter falling in the third quarter versus fourth quarter last year, perhaps about a $4 million sales impact, retail sales in the quarter were down 3%, food service sales were down 5%. Material costs were favorable by perhaps $4 million or so, our lowest quarter this year, although offset by about $4 million of price declines.

Promotional spending on frozen products was also up quarter-over-quarter. Operating efficiencies were not good in the quarter, as we struggled with some new item start-up, and the relocation of dressing production from our closed New York plant. Higher freight costs were also a low seven figure headwind.

Operating expenses rose from a variety of causes, including some costs we hope not to see repeated in fiscal 2011. Overall for the full year, our Food business saw a favorable material cost in excess of $40 million, unfavorable pricing of about $18 million, sales mix of 53.5% retail versus 51% last year, an increased investment in consumer brand marketing of about $6 million.

Reviewing our key category performance for the year ended July 11. In the refrigerated dressing category, we slipped slightly to number three by 0.2%. The category for that 52 week period grew 4%, our Marzetti brand was down about 0.5%. We definitely saw more aggressive promotional spending by competition.

In the vegetable, fruit and apple dip category, we remain the strong number one, 86% share, category performance was down 4% , our Marzetti brand was down 1.6%. We'll try to address needs in that category with some new product I'll comment on shortly.

The garlic bread category, we remain number one with a 29% share, the category was down 1%, our New York brand was up 1.7%. In the dinner roll category, again maintained our number one share, almost 43%, category was down 3%, our Sister Schubert's brand was up just under 22%. During the year, we saw Pillsbury exit the dinner roll category and create new distribution opportunities for us, as well as benefiting from some new product introduction. And then lastly, in the crouton category with our various brands, we are number one with a bit over 28% share, the category was up just under 4%, our brands collectively were up about 15%.

Let me ask John to make some comments

Thanks, Jay. I'll briefly cover several matters this morning regarding our June 30 balance sheet, and fiscal 2010 cash flows. Let's start by taking a look at several of our major year-end balance sheet components. Our accounts receivable at June 30 totaled over $67 million, which is an increase of over $6 million from a year ago. This growth primarily reflects a sales driven increase in Candle-related receivables, as well as stronger Food sales in June. Our account receivable agings remain in reasonably good shape.

Turning to the largest component of our working capital, inventories. We saw a June 30 total of over $121 million, that reflected a significant year-over-year increase over the prior year total of $103 million. Most of this increase resulted from higher candle inventories, reflecting anticipated seasonal sales growth in the first half of fiscal 2011, as well as somewhat slower than expected fourth quarter sales. We also saw increased food inventories, primarily from a seasonal pre-build of frozen roll inventories.

Moving on, other current assets rose by roughly $7 million, reflecting a relative shift in current tax balances. Our net property balance declined about $5 million, or 3%. Similar to the last couple of years, this year's total capital expenditures of $12.833 million was less than our depreciation expense.

Finally, commenting on the other side of the balance sheet, I'd note that we continue to have no debt, and ended the year with shareholder's equity of nearly $485 million. Considering we also have just over $100 million in cash and equivalents, we retain considerable flexibility to meet most foreseeable needs.

Turning to this year's cash flows. Cash flows from operating activities totaled $107.691 million, which compares to $133.164 million for the prior year. This decline reflects cash utilized in the higher levels of inventory and receivables, being partially offset by the benefit of this year's record level of net income. And arriving at this year's cash provided from operations, the most prominent non-cash add-back remained depreciation and amortization, which totaled $20.533 million.

As Jay alluded to, total annual cash flow distributions to shareholders were $33.430 million for the payment of dividends, and $4.398 million for share repurchases.

Given what I've shared this morning, and our current expectations for fiscal 2011, 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 us this morning, and I'll now turn the call back over to Jay.

Thanks, John. Looking to 2011, we continue to see a very challenged consumer spending environment. While our Food Service channel business has some new programs starting up, the sector appears likely to stay soft for the foreseeable future. We're also not seeing any real encouraging signs from the consumer at retail.

We do have some new products we are excited about, including our new Marzetti Otria Greek Yogurt Veggie Dips including Omega 3. They're getting a strong reception from the trade, and just now reaching store shelves. Our New York brand, we'll introduce this Fall a garlic ciabatta roll to go with our successful ciabatta cheese roll. And our growing Sister Schubert brand will add a multigrain roll in the Fall with additional introductions as the year progresses. Couple of other concepts we're excited about, we're just a bit too early to be announced today.

We expect to continue to invest in our consumer marketing spend this year. At the same time, we are likely to see our trade promotions increase to meet competitive activity. We anticipate input costs will increase this year as dairy, sugar, eggs and packaging are all up at this time. If the recent run-up in grains continues, it could impact soybean oil and wheat costs as the year progresses. We will look for pricing opportunities, but that will likely be very difficult in this environment. Critical for us will be good sales execution with our new products and promotional programs, and consistently good operating efficiencies.

Regarding candles, we are looking for somewhat better volumes from new placements, but anticipate margin challenge from higher wax costs, especially in the first half of the fiscal year. We are in process of implementing price adjustments, which may serve to offset some of that impact. We continue to hunt for the right acquisition opportunity in a market that seems to be seeing more activity, although nothing is probable at this time.

Kelly, we're ready to take questions.

(Operator Instructions) Your first question comes from Alex Bisson of North Coast Research.

Good morning, everyone.

Good morning Alex.

First I missed what you said or what your guidance was for CapEx in 2011.

We're estimating close to $45 million.

Okay. And I know you mentioned that that's going to increase capacity in some rolls and dressing. Does that go -- will that increase capacity at existing plants or does that perhaps encompass a new plant as well?

No that is existing facilities, although a piece of it is an actual plant expansion, that being for our Sister Schubert's brand.

All right. This is the first quarter in sometime that we've seen you repurchase stock, and I was just wondering given what you're seeing in the acquisition environment, apparently a little bit more willingness to buy back stock, could you talk a little bit about uses of cash going in to 2011?

I think acquisitions continues to be our priority, in fact with a little more activity we've seen just in the last four to six weeks as far as opportunities to take a good look at, we might be a little more encouraged that and a little more inclined to continue to keep a strong balance sheet and focus on that particular use. However, we have bought back at a relatively modest pace starting kind of mid or late fourth quarter and I would think we will continue to do that again at a modest pace anyhow.

Can you talk a little bit more about the promotional environment and maybe what your plans are in the aggregate to increase promotional spending going forward given your new products and what appears to be going on in the environment?

We are largely from a promotional spend standpoint reacting to competitive activity and threats rather than the leading that effort, we're concerned that in this environment added promotional spending doesn't seem to be driving a lot of incremental volume. So we're pretty cautious on what we're doing there, but again don't want to give up position in share. We will add some spend with the new products we're rolling out, obviously there'll be some slotting involved and other activities around those introductions. So with a series of those as we work through the year that'll take a piece of our increased promotional spend.

All right. And I guess that's it, thank you very much.

You're welcome.

Your next question comes from (inaudible) of [Meritage].

I was wondering if you could talk a little bit about the sales potential from some of the new products that are in the pipeline?

Well they're always hard to predict, but I think as we look at what I mentioned this morning, probably the thing that we might identify as having the biggest single potential is our Otria Greek Yogurt Veggie Dips. And we're probably looking on an annual basis there we think at maybe an upper seven, low eight figure kind of sales opportunity on a full year basis. But that's again just getting introduced. So other than good trade acceptance, we don't have any consumer data yet to look at to really support that yet.

The other question that I had is if you look at your margin you peaked out at 24%, 23%, 24% in the Food segment.

Right.

A couple of quarters ago and now you're running mid 17s this quarter. And historically you've been kind of around the 16% range, at least if I just take a long-term average. And I'm curious if you think you can hold the level kind of at this level, mid 17's or do you think that the level going forward would be higher or lower? I mean it seems on one hand you're talking about a promotional environment and costs being higher but on the other hand it sounds like there was one-time costs in the quarter this quarter that brought the margin down. So I'm thinking-- the question is, is where do you see that settling out over the next year or so and then longer term?

Yes, I think we'd be uncomfortable to pin anything down to as close as mid 17's or something like that. I think again longer term kind of the mid to upper teens range is what we think is realistic. We do go into this year with some ingredient cost headwinds which we haven't had for the last four to five quarters. Don't know whether we can offset those with some modest pricing adjustments, we'll certainly try to implement some things as the year progresses and the need gets clarified. And we do anticipate again a little more promotional activity both from a competitive standpoint and to rollout these new products. Yes, there are some one-time costs that hopefully we can get and keep behind us. So that could be an added plus. So that's I think as much as I'd be comfortable commenting on this morning.

Okay, thanks.

You're welcome.

Your next question is coming from Mitchell Pinheiro of Janney Scott Montgomery.

Good morning, everyone, this is actually Brian stepping in for Mitch this morning.

Hi, Brian.

Want to ask you guys just quickly about the Candle segment. In the past that's a segment you talked about maybe that that's something that could be paired from the portfolio at some point and you talked a little bit about the M&A environment and sort of what it looks like. I'm wondering where you sort of stand on our strategy with the Candle segment and if that's something that maybe given the better M&A environment is that something that's still is something you consider selling at this point or-- and I'll step back and let you guys talk about that.

Yes, we're continuing to evaluate all the factors relative to that and you certainly touched on one of them, another major one is our concern about the wax costs headwinds we're looking at. But we are continuing to evaluate that but have not made any decisions as of today.

Okay. And then moving over looking at the Food Service side, you guys talked last quarter about seeing small signs of a recovery in maybe certain pockets nothing widespread and we see volume again down this quarter. Is that a product still of cost passthrough and sort of if you could just talk about the attitude of your food service customer right now, or sort of-- or how they're holding up and have you seen any acceleration in negative trends, are we still kind of holding steady to where we were last quarter, or whatever color you can give there?

I don't know that I'd say acceleration in negative trends but certainly after what seemed like a spring time expectation that maybe things were going to start getting a little bit better and an attitude that seemed to be somewhat in the industry that doesn't seem to be there anymore today. So I'd say it's just a sluggish environment, it's not terrible, it's just not showing growth in too many parts of the channel and overall just generally soft.

Okay, guys thanks for your time.

You're welcome.

Your next question comes from Greg Halter of Great Lakes Review.

Yes, good morning, guys.

Hi, Greg.

Hi, Greg.

Know you had a recall either a quarter or so ago, wonder if there were any costs in the quarter, in the fourth quarter related to that?

There were no costs, Greg in the quarter related to the recall.

And I think I noticed in your release there was a restructuring impairment charge of $179,000, very small, but what segment did that relate to?

That would actually be in the corporate expense category related to some closed operations.

Okay. And wax cost, Jay I think you had mentioned, do-- can you elaborate on how much that was a headwind for you in the fourth quarter?

In the quarter I think it was right around $1 million.

Okay. And you continue to see costs go higher as we sit here in fiscal 2011?

Yes, they've up tick a little bit from what we saw in that quarter, yes.

Okay. And relative to the soybean oil sides of things as well as wheat, it would be helpful if you could elaborate on your philosophy and current standing in terms of forward contracts.

Well from a flower standpoint we're 100% covered out through March. So our primary exposure to the volatility you're seeing in the market today comes late in this current fiscal year. Soybean oil is-- I think you appreciate Greg we buy on a, kind of a laddered basis with declining amount of coverage going out as far as 12 months but the heavier part of that coverage in the next six months. So as we work through the next three to four months we'll start to see less coverage available to shield us from the up tick we've recently seen in soybean oil. So as-- if and when those costs stay up, we will start to see some impact I think maybe noticeably even late in this first half.

Obviously it's a spike there and we don't know whether or not that will be maintained in both wheat and the soybean oil.

That's right.

And the other areas that you mentioned I think it was sugar and dairy, eggs and so forth, there's really not much you can do there in regard to protecting yourself in terms of hedging or forwards or anything like that?

That's right, we pretty much buy all that at the market and all those are staying at higher levels than a year ago right now.

Okay. Relative to geographic expansion, I think that was a comment in the fiscal 2011 commentary, can you give some concrete examples or some examples on geographic penetration that you're currently working on or where you expect to be more involved in fiscal 2011?

Well we're particularly trying to move the Sister Schubert's brand out geographically including some into select western markets, we got started on that during fiscal 2010 and will anticipate continuing that in fiscal 2011. We also, with the introduction of some new products, think we have some opportunity to strengthen our geographic position via Marzetti Otria Greek Yogurt Veggie Dips for example we think might have an added appeal to perhaps the more health conscious consumers that you see on both Coasts.

Okay. And would that-- on that Sister Schubert's side, the select moves there, would that be directly translating in to the as much as $45 million figure you talked about on the capital spending side being used to serve some of that expansion?

Well a little bit but a lot of that is just coming from strong growth out of still the core markets for Sister Schubert's.

Okay. And I presume that's the facility down there in Kentucky?

That's right. Yes.

Any plans to open a facility that would serve the West Coast markets?

No, not at this time we've got a long way to go to build enough volume to warrant that for Sister Schubert's.

Okay. One last one for you, I think last conference call, within the Food Service segment, you had indicated that you had gained some new customers in the last quarter, just wondering how those are doing and if there is any new gain for this quarter or this year as well?

Greg, I'm trying-- I guess maybe we've picked up maybe one key customer on the Food Service channel in the last, this being a chain account customer, in the last couple of quarters. And they are one of the encouraging signs in our look at the Food Service channel for 2011, but obviously it's because it's new business for us. And we do have a new program or two going on with existing customers but we also see some opportunities for increased volume in that channel.

Okay. Thank you.

You're welcome.

(Operator Instructions) And your next question comes from A.J. Strasser, Cooper Creek Partners.

Hey, guys, thanks for taking my call. You guys talked a lot about increasing costs and I just wanted to understand how much of that actually hit Q4? Did it happen at the beginning of the quarter, did it happen in the middle of the quarter? You guys had a 17.6% I think operating margin in Specialty Foods and I'm just basing on the commentary, should we be conservative and expect that to be, the margin to be less so in the near term?

Well actually I think in the quarters in the Food business in particular still saw a decline actually in input costs of about $4 million. Our increase in the quarter was actually on the wax side of things. Now some of the specifics we were touching on like dairy and eggs they were going up during the quarter but it was being offset by particularly still soybean oil costs coming down year-over-year in that period of time. So it was happening during the quarter, and is probably I guess particularly on the grain side although not having as an immediate impact, it certainly had a pretty good spike here in the month of July and on into August.

Okay, so just to be clear, the full impact of the higher input costs on the Food side actually hasn't hit you yet?

Yes, that's fair.

So is it safe to say then that 17.6% margin is still benefiting from lower costs and therefore just we should be conservative on in the near term? Thanks.

It did benefit from lower costs, yes.

Your next question comes from Alan Bisson of North Coast Research.

Yes, thanks for taking the follow up.

Sure.

You mentioned the possibility of a pricing action. I guess two questions, what would you need to see to go after higher prices? And then two, what would it take to make higher prices stick in the marketplace?

Well, I think I guess two things, Alex. One on the Candle side of things, much smaller component of the business obviously, but we've been out with pricing actually starting probably in late June and into July, so we've been working to get pricing implemented and having some success there. The Food side of things on the retail end, we would likely anticipate doing that I think a little bit later in the fiscal year or at least a little bit later in the calendar year. It will be selective where we think we have opportunity versus what's going on in the category from a sales standpoint, from a competitive stand point, what retail price points are, what kind of story we've got around the input costs. And I do think if these gain costs hold up, there will be a universal story for many suppliers of food products perhaps needing pricing. So that would be the environment I think that would make it most likely for us to implement pricing that'll stick.

Okay. And then secondly, you noted some operational inefficiencies between moving some dressing capacity around and starting up some new products, could you quantify that and how much of that shouldn't repeat?

I don't know that we can give you a real good quantification there right this morning, but it's certainly in to somewhere in to the low or maybe approaching mid seven figures.

All right. Well thank you very much.

You're welcome.

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

Thank you all for joining us today and we'll look forward to reviewing our first quarter with you in early October. Thank you. Or late October.

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