Marzetti Co (MZTI) 2011 Q4 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation fourth-quarter and fiscal 2011 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 speakers' remarks, there will be a question and answer period.

(Operator Instructions)

Thank you and now, to begin your conference, here's Earle Brown, Lancaster Colony Investor Relations.

Good morning. Let me also say thank you for joining us today for the Lancaster Colony fourth-quarter and fiscal year 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 extended 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 I've 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 being with us. We're pleased to report fourth quarter sales growth of 3% driven by a 6% growth in specialty food sales and strong net income and earnings per share growth of 28% and 32%, respectively. The shift of Easter-related sales to the fourth quarter this year contributed about 50% the food sales growth rate and unexpected CDSOA distribution of $13.4 million pre-tax, or $0.33 per share after tax helped the quarter's net income. For the full year, sales were up 3%, with both segments contributing to the increase. Net income and EPS were off 7% and 6%, respectively, from fiscal '10's record levels.

During fiscal 2011, we invested $35 million in capital improvements, approximately $8 million in the fourth quarter, with our primary project, the Sister Schubert's capacity expansion, being about $4.5 million in the quarter. Share repurchases for the year totaled 810,000 for about $43 million, with fourth quarter repurchases of about 60,000 shares for $3.5 million. With 45,000 shares repurchased so far in fiscal '12, we have 1.573286 million shares available for repurchase and 27.340717 million actual shares outstanding.

Our glassware and candle segment reported a 16% decline in fourth-quarter sales due to weak consumer sell-through, and the exit of some low margin business in the quarter. This sales decline, plus further material cost increases, resulted in an operating loss for the segment in the quarter. Full year sales were up largely from a good fall season and operating income was off primarily due to higher raw material costs of about $8 million in the year. While specialty food sales in the quarter benefited from the later Easter, softer retail channel demand for the balance of the quarter and pretty good food service channel demand led to a slightly lower retail mix than last year's quarter; about 51% versus 53%. Our 6% sales increase was about 0.67 pricing and 0.33 volume.

We were particularly pleased with the continued growth of our Marzetti Simply Dressed line of refrigerated salad dressings. Our Otria greek yogurt-based dips also showed continued growth. Our Texas Toast brand of croutons were growing, but at a slower rate than earlier in the year. Sister Schubert's showed strong comparisons but mostly due to the Easter shift as the balance of the quarter was somewhat soft.

Current IRI data shows the following for our key categories and brands for the 12 weeks ended July 10 -- refrigerated dressings, including our Simply Dressed line, the category was up about 7%; Marzetti brands were up about 24%, we continue to have a number 2 position in the category; croutons, the category was up just under 5%, Marzetti was up just about 1% again, maintaining a number one share in the category; the veggie dip category, including our Otria dips saw the category up just over 4%, Marzetti brands, the same, again, maintaining a number one share; garlic bread category was up just under 1%, our New York brand up about 3.5%, maintaining a number one position; and dinner rolls category was up just under 28%, with our Sister Schubert brand up just over 25%, again, maintaining our number 1 share.

Our food service channel business was up as many of our chain customers saw improving trends and we enjoyed several new programs with existing customers. Operating income declined $4 million, resulting in a 14.8% operating margin for the quarter. The primary factor was about $13 million of higher input costs, offset by $9 million of pricing. The unfavorable mix shift and somewhat higher freight and promotional costs were also factors.

For the year, both segments contributed to the 3% consolidated sales growth, about 0.33 pricing and 0.67 volume mix. Unfavorable input costs for the full year totaled about 3% of net sales. For the year, within the specialty food segment, retail sales mix declined to 52% and a fraction from about 55%.

Let me ask John to make a few comments here before I'll talk about our outlook for next year.

Thank you, Jay, and good morning. I'll cover several matters this morning regarding our June 30 balance sheet and fiscal 2011 cash flows. We can start by taking a look at several of our major year-end balance sheet components. Our accounts receivable at June 30 totaled over $63 million, which is a decrease of over $3 million from a year ago. This contraction primarily reflects a sales-driven decline in candle-related receivables, as well as weaker 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 nearly $112 million that reflected a roughly $10 million, or 8% decline from the prior year total of $122 million. Despite the higher material cost in the current year, lower inventory levels were achieved at year-end due to reduced seasonal build to both candles and frozen rolls.

Moving on, our net property balance increased about $19 million, or 12%. This growth is largely attributable to the expansion of our frozen roll capacity. We were pleased that the startup of this facility commenced quite smoothly in June. As Jay mentioned, total capital expenditures for fiscal '11 reached approximately $35 million, the majority of which also related to this new expansion.

Finally, commenting on the other side of the balance sheet, I would note that we continue to have no debt and ended the year with shareholders equity of over $517 million. Considering we also have over $132 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 approximately $147 million which compares to $108 million for the prior year.

This increase was influenced by the cash provided by this year's lower levels of inventory and receivables, although partially offset by the lower level of this year's net income. Arriving at this year's cash provided from operations, the most prominent non-cash add-back remained depreciation and amortization, which totaled $18.94 million compared to the prior year's $20.533 million. As Jay alluded to, total annual cash flow distributions to shareholders were $35.696 million for the payment of dividends and $43.103 million for share repurchases. Given what I've shared this morning, in our current expectations for fiscal 2012, we believe that we continue to be financially well-positioned to address our anticipated cash needs, whether it be for CapEx, dividends, share repurchases, or business acquisitions.

Thank you for your attention this morning. I'll now turn the call back over to Jay for his concluding comments.

Thanks, John. Looking ahead to fiscal 2012, we are excited about our latest new product introductions. New York garlic knots are beginning to arrive on store shelves and just being introduced are Sister Schubert brand pretzel rolls and mini baguettes. Our efforts to expand our New York and Sister Schubert brands geographically will continue, helped by these new items. Simply Dressed and Otria should continue to help our growth. Our additional Sister Schubert's capacity will support growth and more flexible production planning for the peak holiday seasons.

Unfortunately, we also see a less-than-confident consumer who has been willing to trade down and buy less. That will continue to be a challenge. While our food service channel trends have been good the last couple of quarters, we are concerned if that will continue. Candle sales will be down on less holiday business due to poor margin opportunity. Our highest hurdle to overcome is the extent of ongoing input cost pressure in both segments that is not yet fully offset by price in an environment where further pricing may be problematic with the consumer.

We are focused on improving our supply chain efficiencies and getting the most out of our promotional spending, both consumer and trade. Overall, then, we see fiscal 2012 being a potentially difficult year to grow earnings with the glassware and candle segment presenting the greatest challenge. Additionally, our operating segment comparisons are currently expected to be stronger in the second half of the year than in the first.

Regarding capital investment, we estimate fiscal '12 at about $25 million with the bigger components being the wrap-up of the Sister Schubert's plant expansion and the beginning of crouton capacity expansion later in the year. Acquisitions remain a priority and deal flow has been a bit more active, but nothing to report this morning. Our focus remains branded retail products in category leading position. We anticipate share repurchases continuing at a moderate pace and of course we'll look hard at the dividend in November.

Stephanie, we're ready to take questions.

(Operator Instructions)

Your first question comes from the line of Alton Stump with Longbow Research.

Yes, good morning. This is actually Phil Terpolilli calling in for Alton. I just had a couple of quick questions for you. First off, in the quarter, just wanted to know the exact impact of the higher cost to the specialty food segment?

Well, the total cost impact in the fourth quarter was roughly $13 million.

Okay. Great. And just on a pricing front, obviously you've passed through a lot of pricing over the last quarter or so here. Any indication from either customers or consumers or retailers if you're getting any pushback in certain categories more than others?

No, I don't think we could differentiate one category to another, Phil. I think, the general concern is certainly the price inflation the consumer is seeing across the store in the environment we're in today. And the pushback is again probably the trade down and the willingness to try to buy less.

Okay. And then I guess given where costs are right now, would there be any initial indication we might have to take additional pricing during fiscal 2012?

We're looking at that. We have a little bit of selective pricing that probably will happen in the first half of the fiscal year, but certainly looking at whether broader pricing may be necessary a little later on in the year. Okay, and just one last question. On the food service side, obviously pretty good results this year. You mentioned a new program lift this quarter. Is that something that would be ongoing for the coming year? Well, we would like to think so. We do have some new things in the works. So if they play out, yes. Hopefully that can continue to be some benefit in the coming year.

Okay. Great. Good luck.

Thank you.

Thank you.

Your next question comes from the line of David Leibowitz with Horizon Capital Kinetics.

Hello.

Hello, David.

Hi, David.

Good morning. A couple of things. John, could you run us through the payments from the government on the anti-dumping and why there were two this year and the size of them? How does this come about in any given year?

Well, the typical annual distribution, David, occurs in late November, early December. In this particular case, the government was able to work through a number of disputed claims this spring and there were some judicial rulings that allowed them to go ahead and then release these funds and instead of waiting until December, they decided that this group of funds for us and many other companies was sizable enough that they allowed that to be released earlier than normal.

Does that imply, then, that this November-December you will not be receiving any distribution?

I think it's uncertain as to whether there might be an additional distribution in December. What we would not expect is a special distribution next spring such that we received this past spring.

Thank you on that point. Second of all, in terms of your cost structure, are there any products that can be either less expensively packaged or other savings that might present themselves so that the cost squeeze can be mitigated, even if modestly?

Yes, David, we're always looking for opportunities to do that. So, yes, there are select ones. I wouldn't suggest there's a major cost savings windfall we anticipate from that kind of effort, but it is something that we're always looking at and tweaking as we see the opportunities to do that.

And in terms of your acquisition policy, are you willing to let a competitor go into Chapter 11 or possibly even Chapter 7 rather than overpay to keep somebody's distribution and product line for yourselves?

David, we haven't really looked at a situation like that and with our criteria being branded retail category leading position, it's pretty unlikely we would see somebody that would be in that condition.

Okay, and the last thing, in terms of new product introductions, will you be entering any new categories of product this fiscal year?

At this point, I wouldn't anticipate that. Our primary focus is on the three items I just mentioned, being these two new Sister Schubert's items that we're just starting to get to market here in August and the New York garlic knots that started to come to market in late May and June. So that's the primary focus as we look at this current year.

Thank you very much. I'll put myself back in queue.

You're welcome.

Thank you.

(Operator Instructions)

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

Yes, good morning, and thanks for taking the questions.

You're welcome, Greg.

Good morning, Greg.

Relative to your position on the soybean oil and wheat and so forth, just wondered if we could get a sense on where your forward buys are positioned in the Company currently and obviously the outlook is always fuzzy in regard to pricing but -- in terms of the commodities at least -- but what you guys see going forward?

I think with respect to soybean oil, Greg, our approach currently is similar to what we've been employing over the last couple of years. We are more than half bought out for the current fiscal year, but again, it's through a pattern of graduated forward buys. In terms of the outlook on soybean oil, as you've referenced, very difficult to predict. Soybean oil has been generally fairly stable since the beginning of the calendar year, generally in the mid to upper $0.50 per pound. Relative to flour, obviously wheat-based, there we have also bought out more than half our needs for the current fiscal year, a little bit more opportunistic in our process. I think similar to soybean oil, wheat is also very difficult to predict, but hopefully the extent of our forward buys will at least mitigate the volatility to operating income for the balance of the fiscal year.

And I realize those are important on the food input side, but I also realize that packaging costs are probably a higher percentage or higher dollar amount in total. Just wondered what the situation was like there for fiscal '11 and what you see going forward for '12, given the drop from highs in oil prices and so forth?

I think with respect to resin-based packaging, we're hopeful about the future, but I think over the foreseeable few months ahead of us, we would expect those costs to remain at elevated levels -- corrugated is less of an issue for us and that's remained relatively stable. I think just broadly speaking what we're seeing are higher commodity costs, almost across the board. More often than not, as of late, they have been staying at relatively stable, but again, higher than year-ago levels.

Okay. That's good color there. And there was a reference in the press release I believe to higher levels of trade promotions. Just wondered if you could provide an outlook there on what you're doing to I guess compete in this environment?

Well, as we kind of referenced higher trade in the fourth quarter, Greg, that is driven by some competitive reactions, largely in the frozen bread category. As we look forward to fiscal '12, we're trying to hopefully dial back our trade a little bit with the exception of slotting that we'll be spending to get the new items that we've talked about in the marketplace. Net-net, maybe about a flat trade spend for the full fiscal year. But we're mindful that we could see competitive activity in certain categories that could have us veer from our plan.

Okay, and one last one for you. I'm not sure I heard this, but on the candle segment, or in the candle segment, in the quarter, did you provide the cost inflation, the raw material cost inflation? As in, there was an $8 million number that was referenced, but I'm not sure if that was for the year or the quarter?

That number was for the year, Greg. For the quarter, the impact was a little bit more than $1 million.

Okay, thank you.

You're welcome.

Your next question comes from the line of Rob Helf with FMI.

Good morning. My questions actually just were answered, similar to Greg's question. Thanks.

Okay, thanks, Rob.

(Operator Instructions)

Your next question is a follow-up from David Leibowitz with Horizon Capital Kinetics.

Briefly, the four quarters of the fiscal year this year versus a year ago, if we X out the government payments on the dumping, where are your toughest comparisons going to be? You indicated, Jay, you found it difficult to perceive of a scenario that would give you higher earnings this year. But which quarters do you think are going to make the most difficult comparisons?

Well, right now, we would say it's in the first half of the year, David, just because we've probably got the better outlook on material cost impact in that period of time. And obviously, we start, as we get in the second half, start to anniversary some higher costs from a year ago as well. So we would say it's more in the first half of the year.

And is this going to be the challenge of the top line or the challenge of your middle of the income statement -- cost to goods sold and other expenses?

Well, certainly both. I mean, if we can find some top line volume growth to a greater degree than we've been seeing, that obviously can help solve some of the challenges, but, yes, the cost picture is a key factor as well and with the more likely outlook of challenging top line growth, we'll be very focused on the cost side of the business.

And your two basic channels of retail and food distribution, which of those two sides do you see the greatest difficulty surmounting this year?

Well, right now, it appears to be more on the retail end of the business. But that's just looking at recent history. It's just hard to get comfortable and confident that we'll continue to see some pretty strong food service channel growth, but think that has got potential. The retail side has been sluggish and, you know, we're not seeing anything yet to suggest that that's going to change.

Thank you very much.

You're welcome.

(Operator Instructions)

Your next question comes from the line of Seth Cohen with Valinor.

Hello. Thanks very much. A few quick questions. I missed the early part of the call. Did you break down on the food side, volume and pricing in the quarter?

Yes, in the quarter, we were about a third volume, two-thirds pricing.

Got it, and then the second question is, G&A, or unallocated corporate segment EBIT what came in much lower than I would have thought. It looked like it was the lowest dollar amount you've had in sort of 10, 12 quarters or so, and Q4 is generally a higher quarter. Is there anything that's changed there? Is it timing? Is it structural? Is it cost cuts?

Seth, are you referring to corporate expenses?

Yes.

That was in roughly $700,000.

No, no, I was talking the $2.3 million.

Versus roughly $3 million a year ago?

Yes, just because, I mean, the $2.3 million was much lower than it's been historically.

Well, the comparative issue is more to the prior year number than it is the current year. The prior year number included some nonrecurring costs related to some idle property that was being held for sale, or that is still held for sale.

Yes, okay. Thank you very much.

You're welcome.

You're welcome.

(Operator Instructions)

At this time, there are no additional questions. I would like to turn the conference back over to Mr. Gerlach for closing remarks.

Well, thank you again for joining us this morning. We'll look forward to talking to you late October with our first quarter results.

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