Marzetti Co (MZTI) 2012 Q4 法說會逐字稿

Good morning. My name is Kalia and I will be your conference operator today. At this time, I would like to welcome everyone to the Lancaster Colony fiscal year fourth quarter 2012 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session.

(Operator Instructions)

I would now like to turn the call over to our host, Earle Brown. You may begin your conference.

Good morning and let me also say thank you for joining us today for the Lancaster Colony fiscal year and fourth quarter 2012 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 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 today. We are pleased to report a good fourth quarter finish to the year, in spite of seeing most of our Easter business fall in the third quarter. Earnings per share reached $0.95 versus $1.07 last year, which included $0.33 of CDSOA funds. Sales for the quarter were up 7%. I'll comment on some of the items impacting our results shortly. For the full fiscal year, sales grew almost 4% and EPS reached $3.51 versus last year's $3.84. CDSOA remittances were $0.06 and $0.34 for fiscal 2012 and 2011 respectively. Capital expenditures for the year totaled $16.3 million and we were able to return $38.5 million to shareholders in dividends and $8.3 million in the form of share repurchases.

Turning to segment performance. Specialty Foods had a very good quarter with sales up almost 8% and operating margins reaching 16.9%. Good food service channel demand was helped by good sell-through to some of our key chain account customers and the benefit of new programs with existing customers. In the retail channel, our new items, including New York garlic knots, Sister Schubert Pretzel Rolls and Mini Baguettes, Marzetti Simply Dressed and our Olive Garden licensed dressing program, helped more than offset the negative impact of the Easter timing shift. Sales mix for the quarter was just over 51% retail, about the same as last year. Also impacting net sales for the segment was improved pricing of about $6 million, which exceeded the impact of input cost increases of about $4 million. Sales were also affected by a lower level of consumer and trade spending that was partly due to the Easter sift and the planned timing and extent of certain other programs.

The quarter's results further benefited from lower marketing costs and the recovery of approximately $1 million for recall-related costs related to a fiscal 2010 incident. For the full year, segment sales were up over 7%, with about 4% from pricing and the balance volume mix. Sales mix for the full year was about 51.5% retail, down slightly from just over 52% a year ago. Our full-year pricing actions did not quite offset input cost increases of about $45 million, with higher diesel costs during the year being another challenge to results. New retail products were good contributors to our growth during the year, as were new product and programs at our chain account food service customers.

For the full year, our overall promotional spend was roughly flat with the prior year. Key category performance in the 12 weeks ended July 8 shows the following. Refrigerated dressings in the category was up 2%, our Marzetti brand was down 3%. We maintain a number two position in that category. The crouton category was down about 1%. We were up just over 1%, maintaining our number one share.

Produce [steps], the category was down about 1% and, again, we were up about 1% and maintaining a number one share position. Frozen garlic bread, down about 1% for the category, our brand up about 1%. Again, maintaining a number one share in the category. Frozen dinner rolls, category was down 17%, our Sister Schubert brand down 12%, maintaining a number one position in the category. The Easter timing had some impact on all categories, but particularly Sister Schubert's.

Looking at our Candle and Glassware segment, we saw flat sales for the quarter and close to break-even operating income versus a small loss last year. Low six-figure wax cost savings and a bit better sales mix helped the quarter. The segment for the year saw sales decline almost 15%, reflecting reduced seasonal sales of candles and the loss of some other lower margin business. Lower capacity utilization and higher wax costs of about $2 million helped push operating margins down to 1.5% in this segment. Let me now ask John to make a few comments.

Thank you, Jay, and good morning. I'll cover several matters this morning regarding our June 30 balance sheet and fiscal 2012 cash flows. We can start by taking a look at several of our major year-end balance sheet components. First, we saw accounts receivable total over $73 million at June 30, a 15% or nearly $10 million increase above the year-ago level. Our improved sales in the quarter certainly contributed to this increase. We're pleased that our accounts receivable agings have remained in reasonably good shape.

Turning to another significant component of our working capital, inventories. We saw June 30 total of nearly $110 million, slightly below the year-ago level of $112 million. Somewhat similarly, our net property balance declined about $1 million between years, as capital expenditures in fiscal 2012 totaled a relatively modest $16.347 million. As we anticipate likely adding some crouton manufacturing capacity by next spring, fiscal 2013 capital expenditures may increase a bit and range between $20 million and $25 million.

Turning to the other side of the balance sheet, shareholders equity grew this past year to over $564 million at June 30. We've obviously retained considerable flexibility in our capital structure to support future growth, as we ended the fiscal year with over $191 million in cash and equivalents and no debt. Turning to this year's cash flows. Cash flows from operating activity totaled $122.447 million, which compares to $147.454 million for the prior year. This decline was influenced by this year's lower net income, as well as the higher receivables I mentioned earlier. In arriving at this year's cash provided from operations, the most prominent non-cash add-back remained depreciation and amortization, which totaled $20.266 million compared to last year's $18.940 million. As Jay alluded to, total annual cash flow distributions to shareholders were $38.464 million for the payment of dividends and $8.315 million for share repurchases.

Thanks again for your participation with us this morning. I'll now turn the call back over to Jay for his concluding comments.

Thank you, John. While we are beginning fiscal '13 somewhat optimistic, our outlook is tempered by a still-stressed consumer whose buying practices are unpredictable. We do have new product launches scheduled during the year, including Sister Schubert Sweet Hawaiian Rolls and Mini Loaves being shown to customers this month. We have more introductions planned for later this fall. New products and programs should also impact our food service channel sales. We do intend to increase moderately our marketing and promotional spend this year to continue to support our brands and, if necessary, counter competitive promotional activity. We have been pleased with some recent additional gains and distributions in the west with our Simply Dress line.

We have also seen further gains for our New York brand of frozen garlic breads in western markets as well. In our recent planning for the year ahead, we anticipated somewhat lower ingredient costs. While we still expect some modest overall savings, the drought will no doubt have an impact on our costs over time, possibly resulting in somewhat unfavorable comparisons as the year progresses. We are already seeing various signs of pressures on many key input costs, including soybean oil, dairy-related commodities, flour and eggs. While we have no specific retail pricing plans at this time, we are closely monitoring cost changes and market conditions. Further pricing on an already-stressed consumer is not something we are anxious to do.

We do expect a bit higher capital spending this year, as John mentioned, to add crouton capacity to support its growth and bring us some improved efficiencies. Other projects will largely be additional packaging capability and cost reduction initiatives. We continue to search for good-fitting branded food acquisition opportunities that could add to our organic growth. We would view the current deal market as somewhat slow, at least for businesses that we see as being a good fit with our operations. Share repurchases remain on our radar, with about 1.5 million shares authorized, although none repurchased since the first quarter of fiscal 2012. We look forward to reaching our 50th year of annual cash dividend increases this year, as we likely will consider a change at our November board and annual meeting.

With that, Kalia, we are ready to take questions.

(Operator Instructions)

Alton Stump, Longbow Research.

This is actually Phil Terpolilli on behalf of Alton. Just a couple of questions. First, just with marketing expenses. I know the second half of the year there was timing issues this year. Going forward, first quarter of next year, do you expect kind of more normalized run rate or is there some other things we should be thinking about?

No, I do think, Phil, we expect it to be normalized, certainly, as we've begun this year and probably throughout the year.

And then just with the top line, we noticed some weakness in the Marzetti category. And then I don't know if Sister Schubert's, you had that July price increase. Any commentary on those two categories?

I think on the Marzetti end of things, perhaps a little bit of impact on the reduced marketing spend. But also maybe a little bit more competitive activity in that category. Sister Schubert's was, I think, pretty much as expected given the Easter shift.

And then just last thing on commodities. We noticed kind of soybean oil maybe, definitely moving up, as I think you mentioned in your prepared remarks. So maybe not as much as some of the other key commodities. Any reason for that, that we should be aware of?

No, I couldn't tell you a specific reason for the differences, other than obviously corn has been the one that's most materially impacted by the drought and soybeans to a much lesser extent. But, certainly, I think a lot of the commodities tend to fall in line to some degree when you get a lead like corn moving like it is.

Thank you. I'll pass it on.

Chuck Cerankosky, Northcoast Research.

If we're looking at the fourth quarter, can you talk a little bit about the volume breakdown between specialty -- within Specialty Foods between retail and the food service channel? It sounds like volume was up a little in food service, but I wonder if you could give us a little more detail.

Yes, that's right, Chuck. And I think, again, can't really get customer-specific there. But I think the benefit of both some new programs we had going on, but in general, I think, at least our mix of customers seemed to have a pretty good period there from a traffic count and volume standpoint.

Well, what I was getting at, Jay, was were we looking at something like 3% volume growth in food service and down 1% in retail? Is that directionally right or could you give us the numbers?

Well, Chuck, this is John. We did see our retail mix between quarters roughly flat with a year ago. Part of that was driven with lower trade promotional costs that we also saw modest volume growth on the retail side. Not as strong as on food service.

Does that -- any way to square that with the consumer being under stressed or is it just the mix of customers and the change you're dealing with in the restaurant side versus food retail?

Yes, Chuck, I think it is probably as much driven by the customer mix we're dealing with.

Now, looking at fiscal '13, what do you have in mind regarding trade and consumer promotions? You cut back or held them under control in this past fiscal year, but now you've got, I guess, some need to get the volumes going on the retail food side. Yet you've got some food inflation or cost inflation pressures.

Well, we're going into the year, I think, planning for probably pretty similar, for a full-year comparison, trade in consumer spend with maybe the caveat that we'll adjust perhaps on the one hand, if we see more competitive activity we feel we have to react to.

On the other hand, if we see more significant input cost increases as the year goes on, we might adjust a little bit the other way to try to account for that some. We do also anticipate a little bit greater marketing spend or more particularly advertising spend behind our key brands as we go into the year as well.

Now, hearing that answer, I'm wondering if this means another year where if you see cost inflation, you don't try to offset it with consumer promotions.

You mean from a -- if we see cost inflation, we might adjust downward consumer or trade promotions?

No, I actually try to blunt it a little, with a little more spending on consumer promotions, especially.

Well, I mean, I guess you potentially could do that if you jump ahead and think we're going to actually react with pricing to cost increases, which we likely would if the cost increases are significant enough. But at this point, we don't have any pricing planned during the year.

All right, thank you.

You're welcome.

Mitch Pinheiro, Janney Capital Markets.

So, where do you stand in terms of your input cost coverage at this point?

Well, the two primary things we buy forward on, as you know, Mitch, are soybean oil and flour. And in both cases, we've probably got pretty reasonable coverage into, if not almost through the March quarter. So we would have much more exposure as we get toward the end of the year.

So given the recent spike, are you just sort of playing it a little cautious in terms of coverage beyond March and seeing where things go? Is that sort of the plan right now?

Well, as you might recall, particularly with soybean oil, our biggest ingredient, we're adding coverage routinely and kind of ladder that coverage out 12 months with declining levels of coverage each month as we go out. So, we're not varying from that plan at the present time. So, we would be adding a little bit of coverage looking out into the fourth quarter months at current costs.

When it comes to, obviously you said earlier that given the state of the consumer, obviously, you would be somewhat reluctant to raise prices unless absolutely necessary. Does -- I mean, where are you seeing within your product category the most elasticity?

I can't tell you we're seeing any of our particular categories having a strong variance from that standpoint. On the other hand, we do see a little bit more competitive promotional activity in the crouton and frozen garlic bread categories.

Does -- has there been any change from, in the let's say some of your premium categories, particularly, let's say refrigerated dressings? Are you seeing any shifts to shelf stable? Are you seeing anything like that?

Not that we've identified, Mitch, no.

When you look at some of the growth in this past quarter, does -- how much -- what was the impact of new products? Was it the primary driver of the growth?

On the retail side of the business, yes, it was.

And it seems like you have a pretty full pipeline. A lot of the new products that you mentioned are still early days. Is that fair?

Yes, I think that is fair.

Was there any costs associated sort of with your new product initiatives? I mean, whether it's slotting or any -- higher promotional activity in the early days of the launches that may have depressed margins in the quarter?

Well, not in the quarter. Actually, probably a little benefit from that, in that a number of those products had been introduced earlier in the year, so the slotting actually was before the fourth quarter, which, again, as we enter into the first quarter, I mentioned a couple new Sister Schubert items that we're bringing to market and we'll have some other things later on in the fall as well. So slotting will be back in the mix of our trade spend as we begin the new year, more so than we saw in the fourth quarter.

Would these new products -- I mean, are you gaining net shelf space for or are you taking, let's just say, slower-moving products, some SKUs off and adding the new? How does that work?

Well, there's some of both, but, yes, I would think overall we are gaining some net shelf space.

In terms of on the food service side, in the past there's a lag, because of the contract length or what have you, there's a lag in your ability to implement pricing. Has anything changed? Have you changed any of your methods or contracts to limit the tail or limit the -- or improve your ability to price more in line with what you're seeing on input costs?

No, nothing's changed there, Mitch. And that lag in that channel is relatively short. For the most part, it might be 90 days, probably range is 90 to 180 days. So there's not really a lot of lag there.

And then last question is this. You talked about acquisition sort of being slow in the area that, the areas that most interest you. Does that -- are -- I guess would you consider broadening your potential new product categories? Would you look outside of your current core competencies in acquisitions to start to use your cash and balance sheet?

Well, I think in the sense of looking at different categories, sure, we would look at that. Right now, though, we do remain targeted on branded retail product lines that are in category-leading positions. But they wouldn't have to necessarily be, say, in the produce department or in the frozen bread case.

Any -- is it just -- any reason for like just the lack of enticing ideas? Is it targeted companies are just not for sale either because pricing's not strong enough or is there any color around why things aren't as robust on the acquisition pipeline as maybe you would expect?

Mitch, I don't know that I've got a great answer there. But, I think for people that do have branded food businesses, they may feel that now may not be the right time to think about doing something, because maybe they don't have an alternative to reinvest those proceeds that they find more attractive than the business they have today.

And then just, I guess, one last question. You talked about cost savings. What type of cost savings do you see happening in fiscal '13? What type of projects?

Well, these would be kind of the more routine things we do at the plant floor level to try to automate things in production lines that let us operate more efficiently, get higher speed, maybe less loss of product in the process somehow, those kind of things.

Okay. All right. Well, thank you very much.

Sure. You're welcome.

Michael Lavery, Sidoti & Company.

Really just had one left kind of following up on Mitch's acquisition question. Just given the growth of the natural organic space we're seeing across the industry, is that an area that you guys would consider, assuming it's branded retail in a category-leading position, of course? Or does it just not make sense from maybe an ingredient sourcing position?

No, we would consider that. It isn't a -- the only focus we have. But, yes, we would absolutely consider organic.

I mean, is that something in terms of whatever you have seen come through? I mean, I guess I'm just trying to -- it's not really -- you wouldn't turn it away, but it's not really a key focus of yours. I'm just speaking to the strong growth.

It's not a key focus in the sense that that's all we're looking for. But, yes, if we see a branded opportunity that's got a good position in its category and it's organic, absolutely we would be interested.

That's really all I had. Thanks, guys.

Thank you.

Jason Rodgers, Great Lake Review.

Just following up with the questions on the acquisitions. Given the slower deal flow and cash continuing to build nicely here, just wanted to get your thoughts on potentially being more aggressive with the share repurchase.

Jason, we continue to evaluate that very regularly and just look at overall market conditions and what our other alternative uses for cash may be, which, again, we would put a top priority on acquisition growth. So, we do evaluate that, wouldn't want to suggest to you a specific criteria or parameter that we would be more aggressive there. We haven't established one of those, but we do routinely talk about that.

And sorry, John, would you mind repeating the cash flow from operations for the year or quarter, whichever you gave out?

Sure, Jason. And this is cash flows from operating activities for the full year. $122.447 million.

Okay. Thank you very much.

You're welcome.

(Operator Instructions)

Chuck Cerankosky, Northcoast Research.

Looking at the retail landscape out there, you touched on this a little bit, John, but I just thought I would ask specifically, how do you feel about your receivables in light of some of the weaker retailers that have become more apparent in the last couple of months?

Well, I think, Chuck, that we do continue to watch the evolution of all our major customers. But, at this point, we don't anticipate a concern, at least in the near term and certainly the agings haven't shown any additional signs of stress. So I think at the moment, we're pretty pleased with what we're seeing and hopeful we don't see challenges down the road.

All right, thank you.

You're welcome.

And there are no further questions at this time.

Well, we do appreciate you joining us today. We'll look forward to talking to you late October with our first quarter results.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.