Marzetti Co (MZTI) 2011 Q2 法說會逐字稿

Good morning. My name is Rosita and I will be your conference operator today. At this time, I would like to welcome everyone to the Lancaster Colony second fiscal quarter 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 Earle Brown, Lancaster Colony, Investor Relations.

Good morning. Let me also thank you for joining us today for the Lancaster Colony second quarter fiscal 2011 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 repurchase 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 restructuring, 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 and thank you for joining us to discuss the second quarter of fiscal 2011. This is our seasonally strongest quarter, and we saw total sales up 4% on stronger unit volume.

Food segment sales led the way up 4.75% with candle sales up 1%. Earnings per share for the quarter was $1.25 versus $1.40 in last year's record quarter.

Before reviewing its segment, let me review our capital investment share repurchases during the quarter. Our $7.5 million capital investment in the quarter was primarily our Sister Schubert's facility expansion project, which is on schedule for a July start-up. Other projects included those related to enhanced-packaging capability and capacity and efficiency. Our candle related investment was low six figures, including equipment being replaced and productivity related investment. We estimate full-year capital investment to be approximately $40 million.

Share repurchases for the quarter were approximately 286,000 shares or $15.1 million and with 70,000 shares repurchased so far this quarter we have a total actual outstanding today of 27,599,000 shares. Also during the second quarter, we increased our quarterly cash dividend rate 10% to $0.33 per share.

Our specialty foods segment growth of almost 5% was helped by a growing food service channel, good retail branded frozen bread sales, and our new Marzetti dressings and dips. Offsetting these growth areas were the lack of shelf stable private label dressing volume after exiting this business with last year's plant closing. Also our traditional Marzetti brand veggie dip was off in the quarter. Our new Otria Greek yogurt dips are performing well but do not fully offset this category decline.

We are also pleased with the rollout of our Marzetti Simply Dressed refrigerated salad dressings both from a placement and initial sell-through standpoint. It has helped us to strengthen our number two position in the category.

Reviewing IRIS data for the 12 weeks ended December 26, we do see the following, in the refrigerated dressing category is up about 4%, our Marzetti with our new Simply Dressed is up 11.5%, we are number two in the category with our share in the 12-week period up 2 points in that period of time. Croutons, the category was up about 3%. The collective Marzetti brands were up just over 10%. We are number one in that category and up 2 share points. Our produce veggie dips, the category was down about 3%. We were down about 3%. Share points up just fractionally with the addition of Otria. In the garlic bread category up just about 0.5%. With our New York brand up 7%, number one in the category and again share point increase of about 1.5. And then frozen dinner rolls category up about 5%. Sister Schubert's brand up 9, and number one in that category and up just over 1 share point. Our Sister Schubert's season was very good with our bag dinner rolls including new soft dinner and multi grain rolls contributing to the success. Food service channel growth was up by new programs as well as some limited growth returning to the channel.

Our sales mix for the quarter was about 57% retail versus 58.5% last year. Operating income was down just short of $5 million from last year's record quarter. And operating margins reached 20.2%. Unfavorably impacting margins were roughly $3 million of increased ingredient costs, over $2 million in higher consumer marketing costs, and somewhat higher outside storage and freight costs. Candle sales were up about 1% of what was a bit softer season than we expected.

IRI data would show a category declining with Candle-lite declining last and maintaining their number one position in the category. Here you have to remember that IRI only captures a piece of total candle sales.

Operating income was off just under $2 million with volume mix, pricing and good operations offsetting about $3 million of higher wax costs.

Let me pause here and let John make a few comments.

Thank you, Jay. I will lead off this morning by addressing some of them more noteworthy changes in our consolidated balance sheet. First, our net accounts receivable as of December 31, totaled $88 million, which reflected a seasonal and volume driven increase from the $68 million total at June 30. Year-over-year the current year total was pretty much in line with the prior's year $85 million total. While economic conditions are challenging for certain of our customers, we see our accounts receivable aging, remaining in good shape.

Turning to inventory, which totaled over $93 million at December 31. These declined over $27 million since this past June, primarily due to seasonal factors. Relative to December 2009, our inventories increased over $11 million. Part of this increase was planned, part was due to rising commodity costs, and a portion resulted from experiencing somewhat softer than anticipated December sales in certain product categories.

With respect to balance sheet capitalization, you'll note we remained debt-free as of December 31 with cash and equivalents on hand exceeding $119 million. Shareholders equity totaled over $500 million. We believe we remain financially well-positioned to take advantage of growth supporting investments in our existing operations and also consider appropriate business acquisition opportunities as they may arise.

Turning to some various cash flow amounts for the most recent six months, shareholder distributions consisted of $17,567,000 in dividends and share repurchase totaled $25,810,000. With respect to property, capital expenditures for the most recent six months totaled $14,223,000 and depreciation and amortization totaled $9,823,000.

Finally, somewhat similar to a year ago, please note that in the current year second quarter we recorded a pre-tax distribution under the CDSOA program of a little less than $1 million or $0.02 per share after taxes.

As we've indicated in the past, these distributions are recorded within our consolidated income statements as other income and as such are excluded from the operating income of the glassware candles segment. While it's possible there may be some level of future distributions, we do not believe that such potential distributions are subject to reasonable estimation at this time.

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

Thanks, John. Looking ahead to the balance of fiscal 2011, we see our biggest challenge in higher commodity costs which will be impacting us more as our lower cost forward buys runoff.

We are in the market implementing pricing on most of our branded retail product. We expect implementation timing to be late this quarter. Overall, we would anticipate an average of about 4% on the retail channel of our business.

Food service channel pricing is changing as soy oil costs inflate. The third quarter is almost volume seasonally, but we do have promotional activity going on around the Super Bowl with dips and garlic breads. Additionally, the distribution built for Simply Dressed and Otria continues with consumer marketing of FSIs , in-store, and online ads taking place.

This year's later Easter will likely push some seasonal volume from the third to the fourth quarter. While several new products and updates are in the works. We have no major introductions planned for the quarter.

Acquisition growth continues to be of interest with our focus on branded retail product lines, while we are actively searching for good fitting opportunities, nothing is close at this time. We are encouraged with overall demand through our first half, including the acceptance of Marzetti Simply Dressed refrigerated salad dressings and Otria dips and the better food service channel demand. However, consumer reaction to higher prices and the extent of future increases in ingredient costs remain significant concerns.

Rosita, we are happy to take questions

(Operator Instructions)

Alton Stump, Longbow Research.

This is actually Jarden Madlin calling in for Alton. On the pricing front, just a couple of quick questions. You mentioned a 4% increase going through the end of the quarter. Do you anticipate that fully offsetting the cost increases?

Well -- certainly not in the third quarter since implementation is late in the quarter and material costs due start moving up, and will continue likely to move up as some of these forward buys roll off during the quarter but as we get into the fourth quarter, we are not -- without a crystal ball, I guess, of where ingredient costs could go. At this point, we think, we should be able to offset it.

Great. Are you seeing your competitors follow similar actions?

Some of them at this time are, yes.

As far as wax increases, anything planned as far as increasing your prices on that front?

We are and we'll be continued to attempt to get price relief there but that is a very challenging environment to execute that on.

That's all, thank you.

Alex Bisson from Northcoast Research.

A couple questions for you, first -- kind of uses of cash. Are you seeing any pick up in acquisition activity or interest in folks selling?

I wouldn't say a material tick up, no. There are some opportunities that are out there, but I wouldn't say it's a lot bigger field than what we were seeing six months ago.

Okay. On the share repurchase front, is the year-to-date run rate -- kind of the right pace to think about for the second half or can we see that accelerate?

I doubt it's going to accelerate much, Alex. We could be opportunistic if the right situation presents itself but it's probably not a lot different than what you have seen year-to-date.

Okay. Finally on that front, are you seeing any opportunities to invest in the business from a capital standpoint in addition to the plant expansion of the new plant you're building in Kentucky?

We are seeing some, Alex, and continue to look for efficiency return base kind of projects and we're very much willing to invest in those.

Any opportunity for meaningful capacity additions, though?

Not a lot we are undertaking right now.

Okay. I'm sorry if I missed this but did you mention what pricing contributed to the second quarter on the food business and what the change in costs were?

Alex, the pricing was a little bit deflationary on the food business in the quarter and the in terms of material costs -- if I've heard your question correctly, that tallied up to roughly 1% of segment sales in the neighborhood of about $3 million for the quarter.

Got you and just finally, could you talk about couponing in the second quarter, both by you guys and maybe just category wide?

We were definitely up a bit in the quarter as part of our overall focus on consumer marketing as well as some of our newer products and the support behind those and new distribution. I can't comment much about what we saw in the market. Generally, probably up a little bit but I wouldn't characterize it as dramatic.

Thank you very much.

Jason Rogers from Great Lakes Review.

Good morning. I was wondering how you are looking at forward buys for your food ingredient costs going forward if you're going to let them roll off or you plan on hedging?

We continue with our past practice we've had relative to soybean oil, which is laddering our coverage out over the future 12 months with most of that coverage in the next six months, but obviously as time goes on, we are layering those forward buys in at higher costs. Flour, we do a little bit differently. We extended our coverage a little bit further out into the summer but at higher prices than what our existing coverage has been which is largely through March.

Okay. And you've got some new products out there that seem to be doing well. I just wanted to know what your thoughts were as far as new product this year if there are any major themes that you're looking at or categories?

Well, with most of our product introduction year- to-date focus over on the dressing and dip side of the business, the next focus is going to be over on the frozen side but beyond that we really can't expand much at this point in time.

Okay. And finally, do you have a number for the cash flow of operations for the quarter?

At this point, we don't have a finalized number, Jason.

Thank you.

(Operator Instructions)[Michael Lavery, Sidoti and Company]

Good morning guys and congratulations on some good results in a tough operating environment. Just have a couple of real quick ones. As far as the fourth quarter with your pricing fully rolling in there, you mentioned that you thought it would hopefully offset the materials cost increases, do you mean that on a dollars basis or on the margin basis just for clarifications?

On a dollar basis.

Okay. Also on SG&A, you had some sharp increases for the promotions of the new products in the second half last year, do you kind of see that trending a little bit lower on a percentage basis in the second half this year?

I think it might be, Mike. I wouldn't want to say for sure it would play out that way but yes it may be.

Okay, fair enough. Thanks, guys.

[Rob Hill], (inaudible) Management

Good morning. Just a quick question, you called out in your press release that it seems like you continued to do well with your existing customers, I'm just curious if you have had any penetration to new regions or new customers within different regions for existing products or newly introduced products over the last couple of months?

Over the last couple months, I wouldn't say there's anything brand new in just that period of time. I'm sure there's a new customer or two but not a real major one. We have continued to try to support the expansion of our frozen bread products into newer markets, particularly moving west so this is both the New York brand and the Sister Schubert's brand and that's also part of where some of the consumer spend comes from to support that move.

I guess the question was maybe specifically on the Simply Dressed line that it may be appealing more to a West Coast to Western part of the United States region and things like that -- if that's a newly introduced product over the last few months, that's the nature of the question?

Yes. I'm sorry. Well, that is one of our goals to get further West Coast distribution. We think we've got a product line that has the capability to do that. We have had some success getting the product either implemented on store shelves or committed to on store shelves in the West Coast market. More to come there, but we've been pleased so far with the progress.

Great, look forward to seeing how that rolls out.

Likewise, thank you.

Our next question comes from the line of Seth Cohen from Valinor.

Quick question, you've said in the past to think about specialty food margins coming in the mid- to- high teens range or so, do you have any updates on that because I know the quarter came in ahead of that?

No, I think we still feel that range is reasonable and this quarter as you have seen historically is our highest margin quarter for the year so, no, I think that range is still fair.

Is there anything in the quarter inventory-wise or cost-wise that we should not think of as being recurring?

I don't think anything material, no.

Thank you very much.

You're welcome.

You have no further questions. Mr. Gerlach, do you have any concluding remarks?

Well, thank you all for joining us this morning. We look forward to talking with you with our third quarter results.

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