Marzetti Co (MZTI) 2013 Q1 法說會逐字稿

Good morning. My name is Dashana and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lancaster Colony Corporation First Quarter Fiscal 2013 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. You may now begin.

Thank you. Good morning, and let me also say thank you for joining us today for the Lancaster Colony First Quarter Fiscal 2013 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 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 factor 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. We're pleased to report a very good start to fiscal 2013, with first quarter sales up 6% and earnings per share reaching $0.98, up 26% from last year. We saw sales and operating income growth in both segments of our business.

During the quarter, we invested $5.4 million in capital expenditures, with the biggest project being the beginning of our crouton capacity expansion, which should have a total investment of approximately $11 million and be complete by March of next year.

We did not repurchase any shares during the quarter.

Candle sales for the quarter were up about 12%, with stronger fall season shipments driving the year-over-year improvement. There was no benefit from pricing in the quarter. Operating income improved due to greater sales, higher production levels, and slightly lower wax costs.

Turning to our specialty foods segment, sales grew by 5%, with pricing contributing about a third of that increase. The balance of the sales growth benefited from less promotional spending and improved volume and mix.

We saw our retail channel grow a bit faster than food service, making the total retail mix about 0.5% ahead of last year's quarter. Our newer retail items continue to contribute to our sales growth. Newer frozen products showing growth included New York brand Garlic Knots and Sister Schubert Pretzel Rolls. Sister Schubert's Mini-loaves and Sweet Hawaiian Rolls are just starting to reach store shelves.

In refrigerated salad dressings, our Simply Dressed line continued to deliver growth, helped by new West Coast distribution.

Our caramel dip has had a pretty good season, and croutons continue to show growth. Our New York Texas Toast line continues to be challenged by a very competitive category.

The latest IRI sell-through data showed the following for our key categories.

This 12 weeks ended October 7, refrigerated dressing -- the category was up 5.8%. Marzetti and Simply Dressed, up 2.1%. We remain No. 2 in the category.

Croutons -- the category was up 2%; our brands, up 11%. We remain No. 1 in the category.

Veggie dips -- the category was up just under 1%; Marzetti was up about 3.8%. We remain No. 1 in the category.

Garlic bread -- the category was down just under 1%, about 0.7%. The New York brand was down 1.1%. We remain No. 1 in the category.

Dinner rolls -- category was up 0.5%, the Sister Schubert's brand was up 8.5%. We remain No. 1 in the category.

Food service channel growth was helped by demand from many of our national chain account customers. Improved store volumes among certain chains, new items, and promotional activity all contributed.

Segment operating income and margin benefited from the growth in sales volume, improved pricing, and modestly lower raw material costs. Somewhat lower promotional spending, and a stronger retail mix were also factors.

Now, I'd like John to make a few comments.

Thanks, Jay, and good morning. I'll start by commenting on several of the more notable balance sheet fluctuations as of September 30. First, our accounts receivable totaled $96,053,000, which was approximately $23 million higher than at June 30. Generally similar to what we've experienced in past years, the majority of this increase reflected the first quarter's seasonally stronger candle sales.

Additionally, when compared to September 2011, our overall receivables increased about $11 million, largely reflecting the improved year-over-year sales in the GlassWorks candle segment.

Moving to inventories, the quarter-end balance of $121 million was about $11 million greater than the June 30 total. The majority of this growth related to the first quarter's seasonal build of certain frozen foods.

Our year-over-year inventories also increased, by approximately $10 million, which is primarily due to a build of candle products in anticipation of increased second quarter sales.

Of somewhat lesser note, you may also notice an increase in accrued liabilities over both June 30 and the year-ago levels. This increase is mostly due to the extent and timing of corporate income tax payments.

Our overall balance sheet continues to be strong in its capitalization as we remain debt-free, with cash and equivalents totaling over $192 million, and shareholders' equity in excess of $581 million.

Turning to cash flows for a moment, our cash flows provided by operating activities for the quarter totaled approximately $16.4 million, which compares to $17.6 million provided a year ago. Comparatively, the relative growth in inventories worked against us, although this impact was somewhat offset by the increases in net income and accrued liabilities.

One specific component of the quarter's cash flows that you may find of interest is depreciation and amortization that totaled approximately $5 million, which is similar in amount to a year ago.

Other items of note include capital expenditures that totaled $5,434,000, and regular dividends of $9,825,000.

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

Thanks, John. Looking ahead to our second quarter, generally the strongest seasonal quarter of the year, we are encouraged by the good first quarter start. We remain mindful, however, of the still unpredictable economy and its impact on the consumer. Food ingredient costs, while favorable to last year, will not be as much as originally expected as the drought impact becomes more apparent. Among the commodities we could see challenges within the back half of fiscal 2013 are eggs, dairy-related items, and flour.

We will likely see some increased investments in brand marketing and promotional support versus last year as well. We have some exciting new products we're introducing at this week's Produce Marketing Association trade show. For example, our updated and repackaged Marzetti Veggie Dip line will feature contemporary new packaging and smaller sizes.

Also being introduced is an extension of our Simply Dressed brand, six new vinaigrette flavors in a distinctive tall bottle. These new additions will begin shipping to customers in our third quarter.

The second quarter should be our seasonally strongest in the candle business.

We anticipate full-year capital expenditures to range between $20 million and $25 million, with our crouton capacity expansion project as our biggest project.

We continue to look for good-fitting food acquisitions. While there seems to be a bit more activity in the M&A area, finding the right fit and value remains challenging. We have recently made a greater commitment to external growth within our food segment by positioning a senior leader to become more focused on developing our future growth through acquisitions.

As many of you know, fiscal '13 could be our 50th consecutive year of annual cash dividend increases, and we look forward to considering a change in our upcoming November Board meeting.

With that, Dashana, we're ready to take questions.

(Operator Instructions) Alton Stump, Longbow Research.

Yes, good morning. This is actually Phil Terpolilli calling in for Alton.

Hi, Phil.

Good morning, Phil.

A couple of quick questions. First, on the cost coverage side -- you made it sound like second half of '13 is going to be difficult and I think you mentioned that last quarter, too. Any sense if you're going to have to take more pricing, come kind of that February-March-April time frame, or is just kind of too soon to tell?

Actually, it is too soon to tell, Phil. We have no plans right at the moment, but we do continue to watch that closely.

Okay. And then, just with retailers. Has there been any pressure over the last few months to lower pricing as kind of costs have fallen, here?

No, I don't think there's been any particular pressure there.

Okay, that's helpful. And just on the new product front, I think you mentioned there's going to be several new products shipping here in 3Q in the Simply Dressed line. Are a lot of those things -- are they going to take kind of incremental shelf space or will that cannibalize existing space you have?

Well, certainly our goal is to get some existing space with these new Simply Dressed vinaigrettes. The veggie dip changes actually initially are a packaging update, so that'll be just replacing existing product on the shelf with what we think is a much nicer, more contemporary package that hopefully will help us spur some sales growth there.

Sure. And just one last question. You mentioned in the press release kind of lower level of coupon redemptions; can you just elaborate on that a little bit more -- what happened in the quarter? Any reasons for that?

Well, I think part of it is we did a little less coupon activity as far as getting them out into the marketplace. So that was, I think, the primary factor there.

Okay. Good luck; thanks.

Thank you.

Michelle Pinheiro, Janney Capital Markets.

Hey, good morning.

Hi, Mitch.

Hey, Mitch.

Yes, a little change for me there. Jay, would you mind giving a little more detail on the retail versus food service segments? You said that retail grew faster. Any more detail around that? Was food service up?

Yes. They were both up so it was -- I don't have the exact number right in front of me, but I think retail grew maybe a point and a half or so faster than food service.

Okay. And what's driving -- you mentioned some chain account growth. Is this new product activity, is it traffic? What's driving the food service side?

The food service side, I think, at least with some of our customers -- we wouldn't say it's across the board, but I think some of them have seen pretty good store traffic increases. In some cases we've had a new item here or there; and specific to certain chains, some different promotional activity that would have impacted some of our items. So all those things contributed to that.

As you look into the balance of the year on the food service side, what should we expect? Is it macro-related issues or is there any visibility into new product programs, things like that?

Well, the visibility kind of across the board is always a little hazy. But yes, we think we've got things that we can impact relative to potential additional product or promotional activity, certainly on the horizon. And while we'd like to be optimistic about what the store traffic for our customers is going to be like, our outlook is as hazy as anybody else's, I think, as to what the future brings.

Okay. And then, it was interesting -- I noticed in IRI that it seems like your shelf-stable dressings have done quite well. Is there any strategic change there? Are you doing anything different? What's driving that growth in shelf-stable?

No, Mitch, we're not doing much different there. And as you know, that's not one of our key categories. To tell you the truth, I don't even have that data in front of me so I can't specifically comment on it. But there's nothing unusual that we're doing there.

Okay. And then, how about on the refrigerated side? Do you still see the Simply Dressed -- is that still gaining distribution for you? In the near term, have you settled into a certain distribution size, or could you talk about that a little bit?

In the quarter, yes, we did pick up some important new distribution out on the West Coast. So our distribution is definitely more established than it was six or nine months ago. Still some opportunities out there, but not as dramatic as what we saw when we initially rolled it out. We do continue to see, I think, solid sell-through and greater acceptance with the consumer.

What we are seeing, perhaps, is a little bit of cannibalization to our classic line of Marzetti refrigerated dressing. So nearer term, the growth has been skewed more heavily to Simply Dressed.

Okay. Just last question -- competitively speaking, have you seen any changes or -- strategic changes, I guess -- in Bolthouse or Naturally Fresh? Anything different competitively?

I don't know if we've seen anything different competitively. I do think we've seen particularly Bolthouse have pretty good success as it relates to consumer sell-through.

Okay. All right, thank you.

You're welcome.

Greg Halter, Great Lakes Review.

Good morning, Jay and John.

Hi, Greg.

Hi, Greg.

Congrats on the good numbers.

Thank you.

Just wanted to ask how the Olive Garden-branded dressing going into Sam's Club has been received, and how that's doing?

It does continue to perform well. Similar, I think, to what we've seen for the last six months or so. So yes, volume's holding up very well there.

And would those sales be counted in the IRI numbers, or not?

I think they would; I just don't have that in front of me to confirm that to you.

Okay. And I know when you mentioned in the categories, or segments, on the press release glassware and candles, but then in the verbiage, it's pretty much candles -- I'm just wondering, how much glass is left in dollars or percent of the total or something like that?

It's very, very little. On an annual basis, it's maybe a couple million dollars. So it's relatively -- it's quite insignificant, actually.

All right. And wondered if I could ask about how you're hedged out going forward in the soybean oil and wheat?

As we typically are at any point in time on soybean oil, we go out a total of 12 months. But the bulk of our coverage is out over the next six months or so. We're just a little bit north of half covered, I think, for that period of time. Flour, we're pretty much fully covered through the third quarter, but start to then get some exposure in our fourth quarter.

And I know in the past you've mentioned the impact of a $0.01 change in the delivered cost -- how that would impact the Company's operating income. I just wondered if there's been any updates on those figures for both soybean and flour or wheat?

Greg, there really isn't an update on the soybean oil side. It's sort of in that upper six-figure range, would be the impact. And we really don't have a good rule of thumb on flour because that is sort of a wheat-derived calculation that varies depending upon the type of wheat that's involved.

Okay. And relative to the November time frame, with the potential for a dividend increase, which again, I can't imagine you guys are going to break a 49-year-old record, but is there any sort of payout ratio that's being targeted by the Board?

Actually, we do not have a specific target, Greg. And that's kind of been our long-term view. Obviously over that many years of increase in dividends, we've had higher and lower payout ratios, dependent on some of the fluctuation in earnings we've seen, where we've consistently tried to increase the dividend.

Having said that, I think as we've transitioned the business to primarily a food business, we are a little more comfortable with consistency of earnings. And so while still not targeting a payout ratio, I think we're pretty comfortable in the ballpark of where we are, and you could probably tolerate a little bit more. So I guess that's the best thinking I could leave you with.

Okay; well, that's helpful. I know usually about this time, or over the next month, the CDSOA payment announcements are made. Do you expect anything from that this year?

Greg, I don't know that there's any change in expectation this year compared to what we would have had the same time a year ago. So we will wait till around Thanksgiving and see whether or not there is a notice of distribution this year.

And any expectation for a special, like they did last year -- a catch-up or whatever you want to call it?

At this point, Greg, there really is not such an expectation.

Okay. And any thoughts on candle profitability and/or margin for this year -- your outlook for that business?

Well, Greg, we got a little bit better start to the year than last year. This second quarter is obviously, as it always is, the key quarter in the business. We've got a little bit more seasonal demand expected. If that materializes and we can continue to keep wax costs in check, and good operations, hopefully it's a little bit better than what we've been seeing. We've clearly been focused a lot on improving margins in that business and we hope we'll be able to accomplish that.

And after years of wax costs rising, it appears maybe they've stabilized, maybe coming down -- who knows? What are your thoughts there?

Maybe a little bit stabilized. I don't know that we expect them to come down much. We've perhaps benefited from continued work on developing blends of waxes that help us mitigate the high costs we've been dealing with, but I don't see dramatic savings there.

All right; one last quick one. The crouton plant -- where's that located?

It's in Wareham, Massachusetts. It's the original Chatham Village plant we acquired a number of years ago that we're doing an expansion on.

Okay, great. Thank you.

You're welcome. Thank you.

As there are no further questions, we will turn the call back over to Mr. Gerlach for any concluding remarks.

Well, thank you again for joining us today. We appreciate your time; look forward to talking to you in late January with our second quarter results.

We do have a question in queue; would you like to take that?

Sure, we'll do one more.

Okay. Mike Lavery, Sidoti and Company.

Hey, good morning, guys. Sorry for jumping in there late.

No problem, Mike.

Just a clarification because I got on a couple of minutes late. When you were talking about the dressing category, did you say it was up 5% and Marzetti was up 2.5%?

Yes, that's right. That's refrigerated dressings; correct.

Okay. Now, is that -- I forget exactly when an extension of the line was done. Is that something related to aniversarying a launch? I was just kind of surprised by that number; I thought it might have been a little bit stronger.

Well, we continue to see good Simply Dressed growth, Mike, with the classic line actually showing a modest decline impacting us. And then, the other grower in the category that is performing pretty well, I think, is the Bolthouse brand. So I think those are the primary things going on right now in that category.

Okay. And just one question -- as I'm sure you've become accustomed to, I want to pin you down a little bit more on commodity costs. I know, obviously, costs have come up and there's going to be some impact in the second half, but just if you look at it on a relative basis, considering you kind of had a trow (ph) in terms of gross margin. I know you don't give guidance, but you kind of had that trow in the March quarter last year. On a relative basis, is really -- you're talking about the fourth quarter being more challenging. And the third quarter, I can't imagine would be that challenging.

That's fair, certainly, Mike. With the caveat that on some of these ingredients, things can change on pretty short notice. But that's probably a fair assumption.

Sure. Okay, that's all I had. Thanks, guys.

You're welcome; thank you.

There are no further questions.

Well, thanks, Dashana. And again, thank you all for joining us this morning.

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.